You have money but aren’t sure how much to invest in stocks vs. bond. You also need to decide how much cash you want to keep. Maybe you have been investing for years but aren’t young anymore. Are you considering reducing the stock portfolio?What’s the best asset allocation for my age?
A balanced asset allocation is the best. You should be able to both take advantage of the stock market’s upside while still protecting some of your capital with fixed-income bonds. This will ensure that you have the best asset allocation possible. You should invest more in stocks if you are comfortable with risk. If you are hesitant about putting too much stock in, you can lower your risk tolerance and still have a portfolio with good performance.
Common Asset Allocation Formulas
The 100 Minus
This was the formula that was suggested in the past for deciding how much money to invest in the stock market.
100 – Your current year = % in stocks
Or, to put it another way:
100-25 = 75% of your stock portfolio
If you were 55:
100 – 55 = 45 % of your portfolio in stocks
So you have some money but don’t know how to invest it. Are you considering reducing the stock portfolio?
An asset allocation that is optimal for any age is to balance being aggressive enough to take advantage of the stock market and protecting your money with fixed-income assets like bonds.
Common Asset Allocation Formulas
The 100 Minus
In past times, this formula was used to calculate how much money you should invest in the stock market:
100 – your current age = % in stocks
In other terms, if you were 25
100- 25 = 75% in stocks
If you were 55:
100-55 = 45% of your portfolio is in stocks
Do not leave your portfolio and do a reassessment every 5 years.
These markers are the 5s, and 0s that we have in our ages. You can invest 100% in stocks up to the age of 25, then reassess. You might consider switching to the 120Minus formula if you feel the market has performed well to lock in the gains. You would then have a 90/10 stock/bond ratio at the age of 30. If the stock market has been performing poorly, you could stick to 100% stocks or just keep the 125 Minus strategy and only 5% into bonds. Even though you are just 30 years old, you still have a long way to go. Therefore, it is okay to be more risky and keep most of your investment dollars in a diversified portfolio (such an S&P Index fund).
Let’s say that our 55-year old is an example. However, your assessment of this age is more complex. It is important to calculate how much money your retirement fund will require and compare it with your current portfolio. You can find many retirement calculators online to help you calculate how big your portfolio should become based upon how much you want to live on in retirement.
If your portfolio is already close to what you believe you will need in retirement, it’s a good idea to alter your asset allocation. If your portfolio is still very short, you will want to remain more aggressive in your allocation.
Check your allocation more often as retirement nears
Your retirement date is closer so you need to be on top of your investments. You will likely need that money quickly, so it is important to be more vigilant and make any necessary changes.
Asset allocation for retirement
After you are actually retired, you can still invest in the stock exchange. You can still use the same formulas. Although you might feel more comfortable using the 100 Minus method, that still means that you would have 30% of your portfolio invested in stocks at 70. It’s okay because 70% of your portfolio is in safer investments. The 30% you have in stocks gives you slightly higher potential gains. The current life expectancy tables show that you can live an additional 14-17 years if your age is 70. Your money should not run out before your time.
These are rules of thumb – your mileage may vary
There is no right or wrong asset allocation at any age. Any formula that you use is based solely on historical data from the stock and bond market. Although it is likely that the future will be similar to the past, that is not a guarantee. You need to evaluate your current situation at all times. Consider whether you should make any changes based not only on the performance and wealth of your investments. The more money you have the better you will be able to preserve it rather than trying to grow it.
While this article is focused on asset allocation, it would be remiss to not mention the importance of diversifying your portfolio across all asset classes. Do not invest 70% of your entire life savings in stocks. A majority of people should invest in mutual funds. ETFs have hundreds of stocks or bonds. That way, a large downturn in one stock or bond won’t affect your entire portfolio. Due to their low fees and diversification, index funds are the best choice. Vanguard is perhaps the best-known index fund provider, but there are other options.
What about cash?
You should invest most of your money, and not wait for the “right” time to get in. History has demonstrated that it is nearly impossible to “time” markets. People who trade in and out often have lower returns than those who stay put. They also pay transaction fees. Trading fees are not as high now as they once were, in fact, many trades have no transaction fees.
Only keep excess cash in an emergency fund. Calculate your monthly expenses, then save 3-6 months in a cash account (savings, or money market accounts) that you can access quickly in the event of a job loss, health issue, etc. A small amount will be kept in an everyday checking account for paying your bills and living your day to day life.
There is no one right answer to asset allocation. You can start by following one of these general rules-of-thumb guidelines. Don’t wait or think, “Oh, that’s something I should do with that money, but I don’t know my options.” Instead, make a decision to invest now and start.
Don’t stress. Don’t stress.
Blah Blah Disclaimer: This information is not meant to be used as investment advice. Investing comes with risk. Your decisions are made based upon your personal financial situation. The author does not accept responsibility for investment decisions made based on this article.