A large part of my work involves helping people determine how to invest whatever money they have, be that in a 401(k) plan, IRA or non-retirement investment portfolio. The ideal allocation is a result of considering your goal (what you want to eat), time horizon (when you want to eat), and how much risk you’re comfortable taking (how much hot pepper to add to the dish).
The resulting asset allocation (recipe) is a combination of different asset classes (ingredients) that complement one another. Sure, you could just eat plain rice, but a dish of rice, beans, vegetables, herbs and spices and maybe some broth will be healthier, more attractive, more enjoyable and more satisfying. So, an asset allocation generally includes some combination of stocks (high risk), bonds (medium risk) and cash (low risk) assets in proportion to the criteria listed above (goal, time horizon, risk tolerance). For example, the more risk you’re comfortable taking and the longer your time horizon, the greater the stock portion of the recipe.
Conservative investors needn’t feel concerned that there’s no room for them in the investment world like someone who hates spicy food trying to read a menu at an Indian restaurant; there are portfolios for you! But, in general, if you’re conservative, your investments won’t grow as much or as quickly as someone with more risk (stock) in their recipe, so you may have to save more to achieve your goals but conservative folks generally are good savers. The behavior goes hand in hand with their desire for the “slow and steady wins the race” method.
So where do you go to get your ingredients? This is a very important question because there is no shortage of financial professionals (and some not so professional) who are more than willing to help you in this regard. My advice is just like it would be for a new person to the area looking for a grocery store, look for quality products and excellent customer service. In the investment world, I’d suggest you go to someone who is licensed, who has at least one credential (such as the CERTIFIED FINANCIAL PLANNER TM designation or Chartered Financial Analyst) and, preferably, someone who is a registered investment advisor with the state or the Securities Exchange Commission (this is easy to look up). If someone has this much education, experience and – perhaps most importantly – ethics, they’d be at least a good start in your search. You can also do the investments yourself, but be honest about your knowledge, desire and time. (And whether or not you could be truly objective about your own choices. Frankly it’s easier to blame your investment advisor for a bad pick than yourself. Just sayin’.)
So don’t stay out of the kitchen out of fear. The more you learn, the more empowered you will be to make beneficial choices with your resources regardless of how small or large they may be.
