Your asset allocation should change as you get older.
A balanced investment portfolio is important to have throughout your life.
But depending on how old you are, that balance will change.
According to Manisha Thakor and Sharon Kedar, authors of “On My Own Two Feet,” “stocks are where the action is” for people in their 20s, 30s, and 40s.
Having stock refers to investing in a corporation, and therefore having ownership in that corporation.
You can then claim a piece of that corporation’s earnings and assets.
A bond refers to when an investor loans money to a corporate or government entity for a fixed period of time. During that time period, the entity pays interest to the investor.
Stocks are a considered a riskier form of investment, but also hold the potential for greater growth than more conservative bonds.
Thakor and Kedar – who don’t get into the weeds discussing products like mutual funds and ETFs – advise investing mostly in stocks up until your 50s, then switching more of your money to bonds.
Once you hit age 50, you are typically at a stage in your life and career where preserving your money for retirement starts to become more important than trying to grow it faster than inflation.
So just how much money should you be switching to bonds?
According to Thakor and Kedar, that amount is different for men and women, since women have a longer life span than men. Here’s the equation Thakor and Kedar give for men to figure out the percentage of their portfolio that should be invested in stocks. The rest should be invested in bonds.
110 – [your age] = percentage of money you should have invested in stocks
Let’s say an investor is 50 years old. 110 minus 50 is 60. According to this rule, 60% of your money that investor’s portfolio should be invested in stocks, which means 40% should be invested in bonds.
Here’s the formula for women:
120 – [your age] = percentage of money you should have invested in stocks
Like any benchmark, this equation might not work perfectly for everyone, all the time. For instance, some people that say bonds aren’t actually that useful when it comes to retirement savings, since they almost guarantee lower-than-average returns. A financial planner or investment adviser would be best able to advise you on your individual situation, but if you’re looking for guidance on how to allocate your investments, this is one approach to keep in mind.
Source: Business Insider