Accumulation Trumps Allocation in Your Retirement Portfolio

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A lot of millennials don't always realize that simply increasing the amount of money they are saving and investing could have a huge impact on their net worth and overall financial situation.

Bo Hanson, co-host of The Money-Guy Show, is a certified financial planner like myself, and we had the pleasure of hanging out at FinCon Expo in September. We both learned a lot from the financial bloggers we met. He gave this great example about accumulation vs. allocation: "If you have $250,000 invested and you experience a 10 percent loss, then you've lost $25,000." This is half a year's salary to the average American. "However, if you only have $10,000 invested and you experience a 10 percent loss, you've only lost $1,000." A $1,000 loss won't have nearly as big of an impact.

Sticking with the $10,000 example, he explained how if you make $50,000 a year and invest 10 percent of your income, you're saving $5,000. This would increase your portfolio by 50 percent, therefore having a much bigger impact than the 10 percent that investment returns alone would produce.

Hanson emphasized that people should focus more on their savings rate and less on their rate of return in the early stages of investing of their retirement plan. This is especially important for members of Gen Y, who are generally new to investing.

I totally agree, and I think these examples illustrate this issue of investing for millennials perfectly. It's so easy to get caught up in what the stock market is doing instead of getting in the habit of consistently investing each month through dollar cost averaging.

Focus On What You Can Control

You can't control the stock market, but you can control how much you're saving, so the best way to secure your financial future is to simply save more. It's not sexy, it's not glamorous, but it's the truth.

When we had this conversation about savings rates, Hanson and I discussed how we both recommend that people take full advantage of the company match if their employers offer one and then invest in Roth individual retirement accounts if they qualify. On how to invest those funds? Hanson explains that "for people just starting out, index funds are your friends."

For people who don't know a lot about asset classes and asset allocation, Hanson suggests target date retirement funds. These portfolios get more conservative as you get closer to the target date, so they don't require you to rebalance each year. The mutual fund manager does that for you.

"People look at investing as the solution. The key solution to financial independence is saving," says Hanson.

When to Hire a Financial Planner

How do you know when you're ready for more financial guidance? "When your financial situation becomes more complex, when you have over $300,000 in investable assets, or when you don't have time to handle your financial situation," suggests Hanson.

At that point, it's a great time to bring a fee-only financial planner. He directs many young accumulators to the XY Planning Network to find a planner that specializes in working with Gen X or Gen Y clients.

Hanson said many Money-Guy podcast listeners need professional help to "optimize their portfolios, develop a consistent savings plan, as well as control costs and tax planning." If this sounds like you, it could be a great time to find a financial planner.

If you're new to investing: just start. Start a Roth IRA, increase your 401(k) contributions by 1 percent or open your first brokerage account. When you look back in 10 years, regardless of what you're investment returns have been, you'll be glad that you started your portfolio 10 years ago and have consistently invested through the ups and downs of the stock market.

Sophia Bera is a virtual financial planner for millennials and the founder of Gen Y Planning. She is location-independent but calls Minneapolis home. She offers a free Gen Y Planning newsletter.

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