Stock Portfolio Rule-of-Thumb
How much should you have invested in the stock market? According to Money magazine, the rule-of-thumb has changed.
One hundred minus your age used to be the rule, and in fact the basic concept still makes sense: As you get closer to retirement (and go beyond it), you want to increase the percentage of stable fixed-income investments in your portfolio and cut back on higher-returning yet riskier stocks. But the old formula now appears to be overly conservative.
Today’s longer life spans mean you have to keep your money growing to last through a far longer retirement than previous generations enjoyed. Plus, it’s less likely than it would have been in the past that you will have a pension making a big contribution to your retirement income. What would be a better guide? Subtract your age from 120. That more aggressive formula should help you maintain your living standard through your retirement years.
I am nearly 38 years old. According to this formula, I should be 82% invested in stocks. (According to the old formula, I should be 62% invested in stocks. I agree — that seems conservative.) My concern is that while this formula seems to work fine for younger people, it’s rather aggressive for people in retirement. Even a person at age 70 would have 50% of her portfolio in stocks using the new rule-of-thumb. I think 30% seems much more reasonable.
[Money: Five rules of thumb]
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Duane Gran said,
February 12, 2007 @ 1:03 pm
Like many rules of thumb, context is everything. The unspoken part is that not all stocks are considered equal risk and not all bonds are safe havens for your money. If one wishes to follow this rule it would also make sense to gradually shift to less speculative asset classes of stock. While a youngster may feel content to invest in speculative oil ventures I doubt many retirees would find such stock to be suitable.
Like so many things financial, the answer is “it depends.”
Russell Heimlich said,
February 12, 2007 @ 1:52 pm
What will all of the 19 year olds do?
Enough Wealth said,
February 12, 2007 @ 5:00 pm
I have my six year old son’s retirement account invested 100% in a geared stock fund - so he’s effectively 150% invested in stocks. Perhaps the rule should be 150-2x your age? This would have the twenty-somethings using gearing, and the 70 year old down to only 10% stocks.
Then again, everyone’s thumbs are different sizes, so there’s no one “rule of thumb” that fit all…
Regards
http://enoughwealth.blogspot.com
Andrea >> Become a Consultant Blog said,
February 15, 2007 @ 4:10 pm
From about 2000 to 2003, my stocks/funds dropped about 40%. That wiped out all the gains I’d ever made in my young life — and I had 10 or 20% in CDs. I’ve only just regained my position in the past year or so. (Note that a 40% drop requires a 66% gain to come back to where you were.)
Now I closely adhere to the 40% bonds/CDs rule. Even though the market may average 11%, you have to understand that there have been 10-year periods in history where you would have actually lost money. The market is booming now, so it’s easy to forget that the market can have a sharp correction.