After reading 100’s of articles and discussing with various brokers and investment bankers, I’m convinced that the perfect mix for an investment portfolio will be a never ending debate. After this many years of stocks, bonds, real estate, etc., one would think a universal equation would have been derived that would take into account one’s asset amount, age, risk tolerance and investment timeframe. In the absence of such an equation, I’ve decided to publish yet another proposed “magic formula” to simplify the thought process of diversified investing. While none of the individual rules are original, they do represent a mix of various opinions and suggestions on the topic.
Rule 1: Percentage invested in stocks: 100 minus current age.
Rule 2: Percentage invested in fixed income: everything else not invested in stocks.
Rule 3: Use future investments to keep the first two rules in check and avoid transferring money to and from investments as much as possible.
Rule 4: Point at which readjustment should be made: when the first two rules are off by 5% or greater.
Some FAQs for the equation:
- An example for a 35 year old: 100-35=65% invested in stocks. 35% would be in bonds and/or other fixed income investments.
- The equation does not account for investments one might have in their primary residence. A future post will discuss this matter.
- The stock mix could (and most likely should) include mutual funds and individual stocks in a variety of sectors.
- An additional method for keeping the first two rules in check is to use money from the fixed income and/or dividends to fund the lagging area.