Easy Asset Allocation: How Much To Invest In Stocks Vs. Bonds
Asset allocation is the composition of your investment portfolio across different asset types and ... More classes, such as stocks and bonds.
Stocks and bonds are two headlining ingredients in a successful investment account. Most investors should have both, but determining the right amounts to invest in stocks vs. bonds can be confusing.
Investing experts will say your asset allocation strategy defines how much you invest in different categories—advice that can also be confusing if you're new to the lingo. Fortunately, asset allocation is easy to understand and, with the right resources, you can quickly define a stock-to-bond mix that works for you.
Asset allocation is the composition of your portfolio across different types of investments, such as stocks, bonds, real estate and precious metals. It is normally expressed in percentages that add up to 100, such as 50% stocks and 50% bonds. The percentages represent the dollar value of each asset type relative to the dollar value of the whole portfolio.
Being strategic about your asset allocation has several benefits:
Consulting with a financial advisor is the most thorough way to determine how much you should invest in stocks vs. bonds. An experienced advisor can talk through your investment goals, risk tolerance and timeline to determine an appropriate allocation strategy.
However, if you prefer the DIY approach, you still have options. You can use your age to set your asset allocation with the rule of 110, you can copy a lazy portfolio or you can invest in an asset allocation fund.
The rule of 110 is a simple math problem that defines much to invest in stocks vs. bonds. To us the rule, subtract your age from 110. The answer is your age-based stock allocation. If you are 35, the rule of 110 recommends investing 75% of your portfolio's value in stocks and 25% in bonds. As you age, the rule of 110 advises a gradual decrease in your stock holdings to lower your risk over time.
The advantages of the rule of 110 are:
The disadvantages of the rule of 110 are:
Lazy portfolios are defined allocations you can implement with low-cost funds. There are many lazy portfolio, ranging from simple to complex. Here are some examples:
The advantages of lazy portfolios are:
Lazy portfolios have similar disadvantages to age-based allocations:
Asset allocation funds follow a stated composition strategy, such as 80% stocks and 20% bonds. The fund managers decide which investments will fulfill that strategy, so you don't have to. Your job is to choose a fund with an allocation, strategy and management team you like—and then invest.
Three popular asset allocation mutual funds are:
The advantages of asset allocation funds are:
The disadvantages of asset allocation portfolios are:
Following a strategic asset allocation plan can support higher returns over time, because you are managing risk and minimizing emotional decision-making. Remember that stocks provide growth potential but they can lose value quickly, while bonds deliver income with more stable pricing.
The rule of 110 provides an easy guideline on a stock-t0-bond mix that's age-appropriate. Alternatively, if you expect your risk tolerance to remain unchanged over time, implement a lazy portfolio or invest in an asset allocation fund. The important thing is to invest in some mix of stocks and bonds, starting now. You can always adjust your allocation slightly as you gain confidence with your investing practice.
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