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You Need an Asset Allocation Plan Even More in a Bull Market

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Stocks are on a tear, and it’s tempting to run full-speed-ahead with them, but that could get you in trouble. Markets can turn on a dime. That’s why you need an asset allocation plan — and possibly some fixed annuities.

An asset allocation plan means that you set the percentages you put in equities (stocks or stock funds) and fixed income, which includes savings accounts, money markets, CDs, bonds and fixed annuities. Your asset allocation should not change in the short term, but it will change over the years. As you approach retirement, you’ll normally decrease the percentage in stocks and boost your share in safe investments. Once you’re retired and begin withdrawing your savings, you’ll likely want to become even more conservative.

Sticking to your asset allocation decreases excessive stock market risk and prevents you from buying high and selling low. When the market falls, you’ll be less tempted to sell everything because you’ll also have a solid cushion of fixed assets. Many people without a plan panic and sell their stock funds at exactly the wrong time, when the market is at a low point.

You’ll also be able to resist overinvesting in the market when it’s reaching new all-time highs, as it’s been doing. When there’s a bull market, it’s easy to get too excited and forget that what goes up will come down eventually.

The right asset allocation is individual. Besides your age and expected income in retirement, your psychology is important. Some people are very risk-averse. Others don’t mind the ups and downs of the stock market too much.

Most people’s financial lives fall into two distinct phases: accumulation and distribution, sometimes called decumulation. When you’re working, you’re in the accumulation phase. You’re........

© Kiplinger