If the decision is a simple one, you might remember the logic behind it during a market crisis, and that may stop you from doing something really dumb and really harmful to your portfolio. When asked these questions, most people have three common answers. First, we want financial security, meaning we don t want to worry about running out of money while we are alive. Second, we want to live comfortably in retirement, which basically means living at a lifestyle that we have grown accustom too. Third, we want to help our children and grandchildren get ahead in life.
Most people have no idea.
The process of asset allocation begins by putting dollar figures on subjective goals like financial security, a comfortable retirement, and helping the children. When large corporations invest money in a defined benefit pension plan, they often use a process called liability matching. This procedure matches the investment mix in a portfolio to the expected cash outflows of a plan over the years. Personal retirement accounts are no different. If you design the portfolio to achieve your long-term investment objective based on future cash needs and risk control, then there is a strong likelihood that you will meet liabilities when they come due.