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  • Writer's pictureDr. Andy Lawson Ph.D.

Is your portfolio on track to fund the retirement you want?

Updated: Feb 2, 2023

By far the most important determinants of a retirement portfolio reaching its goal are (1) asset allocation, (2) diversification, (3) contributions and (4) investment costs.

1. Asset Allocation

Asset allocation is the division of a portfolio’s capital to different asset classes. For example, a 45/15/40 asset allocation allocates 45% to stocks, 15% to real assets and 40% to bonds. Asset allocation is the single most important determinant of a portfolio’s risk and return.[1] It aligns the overall risk and return of a portfolio with the goals and requirements of the investor.

For example, a 65-year-old investor is retiring next year. She has adequate insurance coverage and a cash reserve. Her earning power from employment will soon be ending and hence she will not be able to recover any investment losses from her paycheck meaning she needs relatively low risk exposure in her portfolio. Depending on her income from social security and a pension plan, she may need her portfolio to produce current income and therefore she should hold bonds. And given she is expected to live on average another 20 years she will need protection against inflation suggesting she will need an equity component. These three requirements mean she must select a relatively conservative asset allocation with the majority invested in bonds and real assets but with a significant stock component. A suitable portfolio may be 25% in stocks, 15% in real assets and 60% in bonds.

Consider now a 25-year-old who holds a steady job, and likewise has adequate insurance and a cash reserve. Let’s assume his investment goal is to build a retirement fund. And that his income stream will grow over time. He has the time and income to recover from any investment losses and so can afford relatively high risk, and he does not need his portfolio to produce income and so does not need to hold bonds. A relatively aggressive asset allocation with the majority invested in stocks, such as 75% in stocks and 25% in bonds and real assets may be suitable.

The importance of the correct asset allocation for an investor to reach their goal cannot be overstated. Let’s illustrate it with extreme but feasible examples. Imagine our 65-year-old holding a 100% stock portfolio. It is not impossible for her portfolio to lose 20% in the year before she plans to retire. She would have no real opportunity to recover and it would have a significant impact on her life in retirement.

Next, imagine our young investor held only U.S. government bonds. He would have a lower probability of attaining his retirement goal than if he held stocks and so his portfolio of low-risk bonds would in fact be riskier than a portfolio of stocks.

2. Portfolio Diversification

Let’s assume an investor has selected an appropriate asset allocation. And let’s say it is 60% in stocks and 40% in bonds. Within each asset class, we must diversify across firms. Let’s look at the stock allocation: we need to hold stocks from a large number of firms to diversify away firm-specific risk and to diversify away influences which affect groups of firms such as industries. Imagine if your stock allocation was all in the stock of a single firm and the firm’s latest product bombed. Similarly, imagine if your stock portion was all invested in the insurance industry and a giant hurricane hit. Other group-specific effects which should be immunized against include, but are not limited to, firm size and country. Similarly, we want diversify bond holdings too to eliminate firm-specific risk and minimize group risk.

Diversification reduces the risk of the retirement portfolio. This in turn makes the portfolio more robust to volatility. And hence increases the portfolio’s likelihood of reaching its goal.

3. Maximize Contributions

An investor should contribute as much as they reasonably can to their retirement portfolio. There are two benefits: the obvious one is that greater contributions result in a larger amount of capital at retirement—less spent now means more is available to spend later. The other is compounding; the more that is contributed, the more that grows at a compounded (accelerating) rate. And an investor should contribute the legal maximum to tax-qualified accounts such as 401K and IRA accounts; in addition to the above-discussed benefits, contributions grow unencumbered by taxes.

4. Minimize Investment Costs

It is difficult to exaggerate the affect investment costs can have on a portfolio’s growth rate and thus its probability of reaching its goal. Let’s illustrate this with a simple but realistic example. The average annual expense ratio of a large blend mutual fund is around 1%. And the average fee for a professional financial advisor is around 1% for the 1st $1 million.[2] So the average investor pays 2% of the value of their account per year. On a $100k account with a 20-year investment horizon with an assumed annual average rate of return of 7%, the account would grow to $260k with a whopping $125k, or 32%, paid in fees. In other words, instead of the portfolio growing to $385k, it grows to $260k. So a fee of 2% per year reduces the value of the portfolio by 32% over 20 years. And there are many different types of fees and expenses in addition to the expense ratio and portfolio advisory fee illustrated above.[3].

It is critical to minimize investment costs, not least because costs compound. And they are one of the few things in portfolio management directly under the investor’s control.

For a more complete illustration of how investment costs turn dramatically reduce a portfolio's future value, please see this article.

Putting It All Together

A suitable asset allocation, diversification within the asset allocation, the maximization of contributions and the minimization of costs maximize the likelihood of a retirement portfolio reaching its goal.


Dr. Andy Lawson is the principal of Freshfield Investments, a Registered Investment Advisory firm in Plano, Texas serving clients locally and nationwide. Freshfield provides investment management and financial planning as a fee-only, fiduciary. To book a virtual or in-person complimentary consultation, please visit our Contact page.


I am grateful to Steve Ellet, EMA Inc. and Alexandra Sukhoverko, Bank of Texas for their suggestions and advice. Any errors are my own.

[1] Ibbotson and Kaplan (2000)

[2] Ibbotson mutual fund database 12/2018 and Investopedia 10/2018

[3] Including transaction costs, markups, sales loads and surrender fees


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