How Much of Your Money Should Be in Stocks vs. Bonds

Welcome back!

This article is about the balance that you need to be aware of in your investment portfolio.

When you build a portfolio, one of the first decisions to make is choosing how much of your money you want to invest in stocks vs. bonds. The right answer depends on many things, including your experience as an investor, your age, and the investment philosophy you plan on using. Most people will benefit from a long-term investing strategy.

When adopting a long-term viewpoint, you can use something called strategic asset allocation to determine what percentage of your investments should be in stocks vs. bonds. With this approach, you choose your investment mix based on historical measures of the rates of return and levels of volatility (risk as measured by short-term ups and downs) of different asset classes.1 For example, stocks have historically had a higher rate of return than bonds when measured over the long-term, but have more volatility in the short-term.2

The four allocation samples below are based on a strategic approach, meaning you are looking at the outcome over 15 years or more. When investing for life, you don’t measure success by looking at returns daily, weekly, monthly, or even yearly. Instead, you look at the results over multiple-year periods.

Ultra Aggressive

If your goal is to achieve returns of 9% or more, you should allocate 100% of your portfolio to stocks. You must expect that at some point with this approach you will experience a calendar quarter where your portfolio loses as much as 30%, and perhaps even an entire calendar year where your portfolio is down as much as 60%. That means for every $10,000 invested, the value could drop to $4,000. Over many, many years, the down years (which, in historical measures, happened about 30% of the time) should be offset by the positive years (which historically occurred about 68% of the time)

The Stock Market Level in Historical Perspective

Moderately Aggressive

If you want to target a long-term rate of return of 8% or more, allocate 80% of your portfolio to stocks and 20% to cash and bonds. With this approach, expect that at some point you could experience a single calendar quarter where your portfolio drops 20% in value, and perhaps even an entire year where your portfolio drops by as much as 40%. But the idea is that it will recover (and then some) over the long term. It is best to rebalance this type of allocation about once a year.

Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing

Moderate Growth

If you want to target a long-term rate of return of 7% or more, allocate 60% of your portfolio to stocks and 40% to cash and bonds. With this allocation, a single quarter or year could see a 20% drop in value. It is best to rebalance this type of allocation about once a year

Conservative

If you are more concerned with preserving your capital than achieving higher returns, then invest no more than 50% of your portfolio in stocks. You may still have volatility with this approach and could see a calendar quarter or a year where your portfolio falls by 10%.

Investors who want to avoid risk entirely should consider sticking with safer investments like money markets, CDs, and bonds, avoiding stocks altogether.

Retirement Considerations

The allocation models above provide a guideline for investors who haven’t retired yet, they aim to maximize returns while keeping the portfolio from exceeding a certain level of risk. That may not suit you when you shift to retirement when you will need to take regular withdrawals from your savings and investments.

At that phase of life, your investment goal changes from maximizing returns to delivering reliable income. A portfolio built to maximize returns may not be as effective at generating consistent income due to its volatility.

If you are near retirement, check out some alternative approaches to allocation. For example, in retirement, you might calculate the amount you need to withdraw over the next five to 10 years, and decide that’s the portion of your portfolio to allocate to bonds, with the remainder invested in stocks. With that strategy, your immediate needs are safely invested but you allow some room for growth. However, the portion invested in stocks is still subject to volatility, which you should monitor carefully.

Thinking about what you entered……..
You are in!

I hope this will give you a few pointers in the right direction for you.

How does this go in the current financial situation?

What Exactly do I do with this information?

Lockdown or not,our financial situation does not really have to be complicated.You need to have an emergency fund,a small fund to keep you going regarding food,shelter a.s.o ,which are different elements,by the way,and you can find more info about this in the website.

After that,you need to constantly invest small sums of money and to show your ability to buy when others are scared ,and to be cautious when everybody is buying -Like in the case before the Chinease “Illness” from 2020.

There are a lot of tips and tricks that you need to be aware of, but it can be as simple as regular investing,learning and developing your talents to maintain your current income at least,and never selling because of panic.

I do hope to see you around, because there is a lot of information that you need to know before you start to really make good money.

David,

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