What percentage of my savings, I invest in stocks? And what percentage should I invest in bonds or hold cash or other types of investment such as real estate?
Questions where to invest and how much to invest their savings are on top of mind for all investors. Let 's look at an oft-quoted rule of thumb on this issue and what tools are available for this on the web.
An oft-quoted rule
An oft-quoted rule of gold and a simplified guide to asset allocation of the amount to invest in stocks and bonds is the age-related rule:
Allocate a percentage of its portfolio equal to 100 minus your age in equity stocks, and invest the rest in bonds. For example, if you were 45 years of age, then you would have capacity for 100 - 45 = 55 or 55% of its investments in stocks or funds, and 65% percent of its assets in bonds or bond funds.
The substantive argument of this model is that when large-cap stocks are held for periods of 15 years or more, which generally perform better than bonds. However, due to fluctuations in the stock price higher than the prices of bonds, stocks offer a higher risk and should be a smaller portion of your investments when you are approaching retirement. The assumption is that you need money when you retire and can not afford after their shares have lost much value.
The following issues are frequently mentioned on this simplified model:
- Only takes into account two asset classes: stocks and bonds. You do not need cash, real estate funds and the difference between large-cap stocks and small account?
- You see it in bonds and bond funds as part of the same class, while both have considerably different features, more on that later.
- It ignores how rich is the investor and what level of risk he or she feels comfortable. Wealthy investors are often willing to invest more of their wealth into riskier investments, but also more rewarding than less wealthy investors.
- It renounces the idea that young people have more time not only to compensate for earlier losses, but also have more time to lose even more than older people because they have more time until normal retirement age.
- Does not take into account that in case of death of the owner of the assets, which could be from a fiscal point of view, more favorable to the heritage ate holdings of cash values.
In short, this rule of thumb is cited as a highly simplified model that could be clearly wrong for a lot of people.
Online, you can find easily automated asset allocation advisers like this in the CNN Money website. Based on their input on time horizon, risk tolerance and flexibility, providing you with a proposed asset allocation for bonds, small-cap stocks, large cap stocks and foreign stocks.
A good aspect of the availability of tools like this is that it can prevent people who do not have better information to put all their savings in a single asset. Now following this model, which in any case, the diversification of their investments. But this does not mean they are only taking the risk you are comfortable. The problem is that you may not know or understand the risks they are taking.
The problem for me with the following advice like this would be more than a black box tool. You know what to put on and see what's outside, but come to understand how the tool came to results. For me, good night's sleep, I understand why invest in a certain way. Only by following the advice of a web application won 't do it for me, because I do not provide clarity on what kind of assumptions behind the advice that I'm doing and if these assumptions are valid even for me.
When you answer questions like "what the assets to invest" or "how much of our savings to invest," we believe that stock investing in the trend of the following:
- There are two different types of "risk"
- Your risk tolerance
- Inflation and Interest Rate
- Bonds, options and other assets
- Its presence in the market
Do you want to consider these aspects as well?
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