Fin320IP2

.docx

School

Colorado Technical University *

*We aren’t endorsed by this school

Course

FINC320

Subject

Finance

Date

Apr 3, 2024

Type

docx

Pages

Uploaded by justinsteagall

Justin Steagall Colorado Technical University Individual Project 2 Professor Strafaci 02/18/2024

Asset allocation per person varies as there are a multitude of different factors to that influence how an individual assigns their assets. Before getting into asset allocation, it is important to understand asset classification and how people place their capital. Not including real estate, the three main asset classes are stocks, bonds, and cash. This paper will be focused on stocks and bonds as the main assets, focusing on how these assets are allocated by a 25-year-old who is beginning saving for retirement compared to a 67-year-old who is beginning retirement. There are multiple influences that cause the portfolios of these two to differentiate, these factors include, asset allocation, time horizon, ability to assume risk, earning capacity, and income needs. There are multiple factors that go into asset allocation. A popular tool used for simple asset allocation is the “rule of 100”, which today with greater life expectancy, has increased to “rule of 110 or even 120”. This rule basically states that you take your age subject 100 or 110 and the sum you get as your result should be the percentage of your assets that are allocated to stocks. Using this rule, subtracting 25 from 110 leaves 85, which would mean a 25-year-old should have portfolio 85 percent stocks and 15 percent in bonds. When considering risk profiles this could be considered an aggressive approach which is appropriate for the age of the investor. Being 25 and investing in retirement, which will not occur for at least another 40 years, means that this investor has a greater ability to assume risk. They should not be worried about a dip in the market as their funds will be in the market for a prolonged period and it will recover. As a young investor, a dip in the market could be a good time to increase the amount of money invested in stocks. Another reason the 25-year-old has a greater ability to assume risk is because their money will have a long-time horizon. The stocks bought at 25 will be held for over 40 years if left untouched, which also gives the investor a high earning capacity. As they are saving for

retirement there should be no need to touch this money invested for a long period of time as stated. That also means that they will not need this money as needed income until retirement. A typical 67-year-old portfolio will certainly differ when compared to a typical 25-year- olds portfolio. Asset allocation differs for different age groups, let alone comparing 25 to 67, comparing 25 to 45 there will be clear differences when comparing the two. Following the rule of 110 that was explained earlier, a 67-year-olds portfolio would consist of 43 percent invested in stocks and 67 percent planted in safer investments such as treasury bonds. It is standard practice to reduce the amount of risk exposure as the investor grows older in age. Safer asset investments are vital to the portfolio as they offer a safer, lower income source that becomes necessary in retirement. The earning capacity for a 67-year-old in retirement is low compared to a 25-year-old who is working a full-time career. Income needs should also be clearer for a person in retirement. The time horizon for investments for the 67-year-old are also shorter, which is another reason safer investment vehicles such as certificates of deposits which tend to have different, shorter maturation periods are good for a person in retirement. These two hypothetical portfolios of a 25-year-old and a 67-year-old are based on the assumption that they both have the standard risk profile that is appropriate for their age. It is certainly possible that the 25-year-old has a conservative risk profile and instead of having an asset allocation of 85 percent in stocks, they could have an asset allocation of 60 percent in stocks. Vice versa, it is possible but unlikely that the 67-year-old could still have an aggressive risk profile and instead of having a stock ratio of 43 percent, they could have 70 percent of their assets in stocks still. In conclusion, following normal reasoning, a 25-year-old’s portfolio will look to be stock heavy as they should have a higher risk tolerance. When reflecting upon the portfolio of the 67-

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version