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By Jason Stipp | 04-20-2011 11:32 AM

Fine-Tuning Your Stock-Bond Mix

Morningstar's Christine Benz highlights situations that call for ratcheting your equity exposure up or down.

Jason Stipp: I'm Jason Stipp for Morningstar.

Investors looking to get going on their asset allocation have a few places to start. They could look at the asset allocation of target-date funds, use online calculators; they could rely on some simple rules of thumb.

But customizing and personalizing the asset allocation to your specific situation is where the pencils really need to get sharpened.

Here with me talk about some of those swing factors in asset allocation is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, there are several potential swing factors you might want to consider in how you're customizing your asset allocation. Today, we're going to talk about deciding whether you should hold fewer equities or more equities. We divided it into some different life stages.

So, let's start with some of the younger investors, the accumulators. What things should they think about as they are deciding whether they should bump up their equity exposure a little bit or hold off on it a little bit?

Benz: Well I think for those folks, they want to think hard about the chances of income disruption in their lives. So, of course, there is that standard prescription that we should all have the three to six months worth of living expenses set aside in an emergency fund, and that's great advice, but if you are someone with a realistic chance of income disruption or maybe you're one of the many people who's already been laid off, you definitely want to make sure that you have additional assets set aside to meet your living expenses if you quickly cycle through those three to six months, and you find you still need more.

So, if you are a tenured college professor, probably not as much of a need to worry about that income disruption, but if you are a freelancer or someone who works on a commission-only basis, it's all the more important to think about making sure that you have relatively more in bonds than that person who is really relying on quite a safe stream of income while they are working.

Stipp: So, I know some experts have talked about thinking [in terms] of [whether] you are a stock or a bond, based on your job. So, the college professor is probably more like a bond…

Benz: ... Exactly ...

Stipp: ... Who's got a fixed salary that they know is going to be there, whereas the freelancer might be more like a stock; they could have great times or they might have times where the market has just really dried up for them.

Benz: Right, that's the Ibbotson concept and it so useful really in terms of evaluating this decision of what you need your pre-retirement asset allocation to look like.

Stipp: Okay, so let's fast forward a little bit, and let's say that you've been saving for retirement for a little while, and you're kind of moving into that pre-retirement mode, where you're assessing how much you have saved and whether that's going to work for you or not.

When I'm looking at those bottom-line numbers and gauging, "do I have enough to retire?" how should that affect my willingness to maybe add more equities or the need to maybe subtract some equities.

Benz: It's a really important question and here, I would definitely urge people to look at a variety of retirement income calculators, well in advance of retirement, to see "well, how am I looking, in terms of my income needs during retirement."

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