Two engines of growth power an investment portfolio-contributions from the investor and asset growth produced by the performance of the investment portfolio. Contributions are largely controllable by the investor, while performance (particularly in the short run) is not. As a result, investors who rely on the portfolio performance to do the heavy lifting (that is, to make up for insufficient contributions during their working years) will usually fall into the trap of having too much equity exposure and therefore be exposed to too much risk.

The performance or return of an investment portfolio should accomplish two primary goals-preserve and protect the contributions of the investor and provide a modest rate of return. Understandably, in an era of supersize meals, drinks, vehicles, houses and egos, the notion of a modest rate of return may sound rather unsophisticated. Nevertheless I'm suggesting that portfolio performance should never be expected to make up for under-saving on the part of the investor.

It is our job as investors to contribute adequately to our retirement investment accounts. A contribution rate of 3% to 4% of our income into our 401(k) accounts or IRAs is simply inadequate. When contributions are inadequate, portfolio performance is unable to compensate for the shortfall, as the following analysis will show.

A LOSER'S GAME

Sadly, many investors view the performance of their investment portfolio as the primary engine of growth rather than their own contributions. With that incorrect mind-set, investors tend to focus on hot stock tips, are more prone to jump in and out of mutual funds based on short-term performance and select asset allocation models that are overly aggressive. There is no investing plan, only erratic emotionally driven buy-and- sell decisions. Such behavior is commonly referred to as chasing returns. It's expensive, and it's a loser's game.

Why would otherwise rational individuals develop irrational performance expectations for their retirement portfolios? A 2009 retirement study by T. Rowe Price (Revisiting T. Rowe Price's Asset Allocation Glide-Path Strategy) said it best: "Relatively few retirees have saved enough... because many investors under-save and overspend, they tend to need help from their portfolios."

Disappointing outcomes are likely when investors "need help" from their portfolios. Indeed, the phrase "need help" is a significant understatement. The blunt truth is that far too many investors expect their retirement portfolio to generate heroic performance that will save them from years of under-contributing to their retirement accounts. This misguided hope leads to portfolio allocations that are far too equity-heavy close to retirement age. Indeed, the meltdown in 2008 of millions of retirement accounts held by individuals over the age of 60 is all the evidence we need.

People who have saved adequately throughout their working career don't need an aggressive portfolio when they are over 60 years old. They have already done all the heavy lifting throughout their working career. At that point, the portfolio's main task is to keep all the contributions safe while providing a modest return.

HOW UNDERFUNDING HURTS

Consider this sobering fact. As of June 2009, the median balance in a defined contribution plan (such as a 401(k) account) among people 65 years old and older was $56,212, according to the Employee Benefits Research Institute. The median is the midpoint. That means that half of all the defined contribution plans in the United States owned by people 65 or older have a balance of less than $56,212.

Why are so many retirement account balances so small? The answer (to reiterate the point made by T. Rowe Price's study) is insufficient contributions-which has nothing to do with asset allocation or portfolio performance. It's like trying to drive from New York to Los Angeles on one gallon of gas. It's not possible because the gas tank is underfunded.

Consider a simplistic, but illustrative, example. A 25-year-old worker begins her career earning $35,000 per year. Her salary increases 3% annually over the next 40 years. If she invests 10% of her income (which could represent a 10% savings rate by her alone or a 6% savings rate by her and a 4% match from the employer) into a 401(k) each year, she will have a nominal balance of $275,000 accumulated by age 65 assuming a rate of return of 0%. She has over a quarter of a million dollars entirely as a result of her own contributions-representing the first engine of growth.

Now let's consider the second engine of growth, namely portfolio performance. If her 401(k) account averages an annualized return of 6% per year, her account value at age 65 will be $880,000 (of which $275,000 was her contributions). Clearly the return of the portfolio is a significant part of the ending account value, but so are her contributions.