I was logging into my Vanguard account when it told me that my current mix of investments differed from my target by more than 5%. A few years ago, sometime shortly after I opened the account, I set the target asset allocation based on the classic “120 minus your age” rule of thumb for your investment mix of stocks and bonds. I’ve seen the rule expressed as 120 minus your age, 110 minus your age, or a nice round 100 minus your age. The higher the first number, the more aggressive the investment mix.
Rules of thumb work well when you need an answer quickly. They are a terrible idea when you have the time to do a more rigorous analysis and you decide to use the rule of thumb because it’s easier. They’re also bad because they make you feel like you did the work when you didn’t. The best way to figure out your asset allocation, at least in my non-financial planner opinion, is to separate your money into “goal buckets” and then decide the rate of growth you need for each and then determine your allocation that way.
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