I’ve just finished Jean Chatzky’s You Don’t Have to be Rich and I loved it. It gets at some of the psychological issues people have with money that I find fascinating! She cleverly wraps in relevant personal finance advice in order to help everyone enact good money management practices.
One of my favorite nuggets of information that she gives it this:
A quick estimate of how to construct your asset allocation is “roughly, 100 percent minus your average age is the amount you want in stocks, with the rest split between bonds and cash”.
So for us it would be:
100-25.5=74.5 (oh heck I’ll round up- it’s only four months until my birthday)
So 75% in stocks, 12.5% in bonds, and 12.5% in cash.
Granted, this is a rough estimate.
I feel like we should have more stocks and cash in part because I just don’t get bonds. I understand that they help reduce risk in a portfolio, but it seems that they (at least the safe AA rated ones) don’t give that much more return than money-market accounts. Are they really worth it?
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2 comments:
There are a great many people who like to come up with silly little calculations as to how money should be allocated in investment accounts. The truth of the matter is that there is no real formula. It all depends on how experienced you are at investing and how risk averse you are.
Being that you are in your mid-20's it is a generalization that you should have most of your money in stocks with a healthy exposure to small- and mid-caps as well as international issues with some bonds mixed in for inflation purposes. As you get older (and therefore closer to retirement) you should be transitioning from an equity portfolio to a more bond-concentrated allocation to preserve capital. It is universal that everyone should hold some sort of cash position in their portfolio, regardless of age. The problem is that you may not be willing to take on much risk right now, and as you near retirement you may be more inclined to increase your risk exposure, which goes against most of the so-called "experts'" teachings.
What it comes down to is that you should do your research, and put your money where you feel comfortable, not just where someone who doesn't know you from Eve thinks you should allocate it.
I just finished reading her book also and sort of disagree on the allocation. But like Eric said - do what's comfortable for you.
I prefer an 80/20 mix (stocks/bonds ratio) with about 30% tied to small and international funds and the rest among mid cap and large cap.
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