The passage of time feels like it creeps, then pounces: Suddenly, party conversation focuses on real estate, how we are going to bed earlier and our realisation that we have no idea what type of jeans to wear.
For years, millennials have been the target of financial jokes: “They spend all their money on lattes and avocado toast!” and “Why don’t they get a minimum wage job to pay for college like I did?” But the cliches got old quickly.
And now, as millennials move deeper into their thirties and forties, there are some things to consider changing up. Most notably, their investments.
Your portfolio might need to chill
For those lucky enough to invest early on, the advice was pretty standard: Invest often, and invest in aggressive assets to take advantage of long-term growth.
Maybe the most aggressive of us dipped our toes in cryptocurrency and meme stocks at some point. After all, you have got all the time in the world to ride out the highs and lows of the market when you are 24.
But now, we are more mature. And with that wisdom comes new responsibilities, such as adjusting our asset allocation.
Asset allocation is simply a fancy phrase for what percentage of your portfolio is in each investment.
For example, a 20 year old’s investment portfolio of $100 (for easy maths), might be 90 per cent in stocks and 10 per cent in bonds, or $90 and $10, respectively.
As you get closer to retirement, it is a good rule of thumb to shift that allocation to a less risky position, such as 60 per cent stocks and 40 per cent bonds, although the exact percentages will depend on your personal financial situation.
“In general, as we get older we tend to take fewer risks,” says Aaron Hatch, a certified financial planner and founder of Woven Capital in California.
“In your early twenties, when you have nothing to lose and time on your side, you can afford to take all kinds of risks. However, as we millennials accumulate assets and we inch towards retirement, it might be worth considering taking a little risk off the table by slightly decreasing exposure to stocks or other risky investments.”
Shifting strategies
One easy way to figure out if it is time to shift your asset allocation is to look at model portfolios. You can consider these illustrations and adjust yours accordingly.
For example, if you are 30 and planning to retire when you are 65, you could check out portfolios that show what a target-date fund looks like for those retiring in 2060.
You may see a majority of stock-based funds with about 10 per cent in bonds. If you are in your forties, that recommended portfolio may be closer to 15 per cent in bonds.
Model portfolios can be helpful, but they are not perfect. Maybe you own a chunk of cryptocurrency or some property. These kinds of investments should be considered when shifting your assets.
What happens now matters in retirement
When you are shifting your asset allocation now, it pays to think strategically about your future.
“The types of accounts an individual has when they retire, along with their cash needs, should determine their withdrawal strategy in retirement. It is important to keep taxes in mind when deciding from which account types to pull money for living expenses in retirement,” Mr Hatch says.
Think ahead to retirement. When you sell your investments so you can have spending money in retirement, you will likely have to pay capital gains tax on those earnings.
But if you know you will need to pay taxes on that money, it is worth calculating what you will owe and setting it aside.
And you may still need to be invested throughout retirement, says Marigny deMauriac, a financial planner and founder of deMauriac, a financial planning company in New Orleans.
“Since you might live to be in your nineties, chances are you can’t just shift everything to cash and call it a day,” Ms deMauriac says.
“Most people need to plan for growth in their accounts to outpace inflation, even in retirement.”
Asset allocation, like many of the chores of millennial middle age, may not feel glamorous, but it may help us pay for all that avocado toast we will enjoy in retirement.
