Asset allocation, or the percentage of stocks and bonds in an investment portfolio, is one of the most important decisions an investor makes. Some financial experts believe that it is THE most important factor.
Many financial magazines/websites I’ve read have given increasingly aggressive advice to investors, due to the fact that most people are living longer (i.e., longer retirement) and stocks provide a better return over time. For a person my age (22), most magazines recommend 90%-100% stocks.
My current stock/bond allocation is 90% stocks/10% bonds.
For me, the most important factors in selecting an asset allocation is my need to take risk and my ability to take risk. Everyone’s risk tolerance is different – I’d rather choose an allocation that might be a little more conservative than what experts recommend (80% stocks, 20% bonds, for example) but that I know I can stick with for the long-run. Selling in panic during a market downturn is rarely a good strategy.
My need to take risks is high: I don’t have much investable assets and no inheritance or lottery winnings in sight. If I put my money in “safe” investments such as money market funds or all-bond funds, I won’t have enough after-inflation returns to support a comfortable retirement.
My ability to take risks is also high: I have six to seven decades in the market (assuming I live to 90, not an unlikely assumption for a healthy female in the U.S.). I can ride out the exhilarating highs and dismal lows that the market tosses my way. I believe that in the long run the market will provide real returns, and am committed to staying in the market through the peaks and valleys.
I have never had money in a bear market (think the late 1970s and 2000-2002), however, so my “stay the course” mentality haven’t been tested by a 50% drop in portfolio value.
So, for now, I went with 10% bonds in my portfolio. As I add money to my investment portfolio in the upcoming months, I may lower my bond allocation a bit.
“Well-heeled: twentysomething life & money ” follows my journey as a soon-to-be college graduate with almost $20,000 in student loans. I started this blog last year after realizing that I can’t stay in the warm financial cocoon of college forever and need to get in touch with my inner money maker/manager. I’m learning about investing, insurance, tax planning, etc., as I go along – hopefully other twentysomethings will find interesting or useful information in my stories (non-twentysomething readers also welcome).