Today I discuss how asset allocation differs for those in the FIRE community. The big takeaways are: you’re planning for a longer time horizon so you may need to be more aggressive with your investments, weighing out the upside of an allocation versus the downside risk, how real estate could play a role in your portfolio and how expected cash needs impact your overall allocation.
One of the main considerations when thinking about your asset allocation for an early retirement is that you will likely need to live off of your portfolio for an incredibly long time. With life expectancies increasing for those with educations and wealth (most of the FIRE community), its likely that you will be living into your 90s or maybe your 100s. That means you could need your portfolio to sustain your lifestyle for upwards of 70 years! Therefore, you probably can’t go with too conservative of a portfolio, as you’ll need growth from stocks to help the portfolio last so long.
As you’re thinking about the impact of your asset allocation, it’s important to think about the upside potential and downside risk of differing mixes of stocks and bonds. Additionally, considering other types of investments such as real estate could provide additional sources of income and further diversification to your portfolio.
Finally, I speak about maintaining some funds in safety assets, cash and bonds, for those known cash needs over the next eight years. It doesn’t make sense to take more risk than you have to with those assets, it would be terrible to have to push off a home purchase because your investments are down, or have to work for an additional two years because you invested your portfolio aggressively and a bear market hit right as you were set to retire!
I hope this is a helpful take on how asset allocation differs for those in the FIRE community. Please schedule some time to chat if any of these points resonated with you.