Age Ratio for Stocks and Bonds

Age Ratio for Stocks and Bonds
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Keeping a mix of stocks and bonds in your investment portfolio is a wise, time-tested strategy that allows you to maximize your earnings while protecting all or a portion of your capital in calmer waters. While young investors often choose to put all or most of their investment dollars entirely in stocks, older investors frequently prefer the steady returns of bonds. Deciding your route depends upon how much risk you're willing to accept.

We're Living Longer -- What Now?

According to CNN Money, the old rule that prescribed subtracting your age from 100 to determine your stock and bond asset allocation is outdated. Because many Americans are living well into their 90s and beyond, CNN Money suggests using a higher starting number to take advantage of the bigger returns that stocks provide. For example, a 45-year-old who subtracted her age from 120 would find that she should have 75 percent of her portfolio in stocks, instead of 55 percent.

Your Age in Bonds

A similar approach, according to Forbes columnist Laura Dogu, is to use your current age as the percentage of bonds in your portfolio. For example, an investor who is 35 years old would have 35 percent of his portfolio in bonds and 65 percent in stocks. Generally speaking, this is a more conservative approach, because a greater percentage of your assets will be in bonds, which are safer investments. Keep in mind, however, that even though bonds are "safer," no investment is foolproof.

Your Adjusted Allocation Age

A third approach requires considering the interest of those who have a stake in your portfolio -- meaning, your spouse. For example, if your spouse if significantly younger than you are, it may be wise to average your ages and use that as your "allocated" age; if you're 50 and your spouse is 30, then your allocated age is 40. Then, use the allocated age to calculate your new asset mix via the equity or bond method.

What, Me Worry?

Many investors don't have the nerve to stomach the ups and downs of the stock market, especially in a volatile environment. If this describes you, you'll need to assess how much in future returns you're willing to sacrifice for peace of mind, because over the very long term stocks consistently outperform bonds. Nevertheless, if you like the certainty of knowing your money is safer, you can put more money into bonds at an early age. The greater percentage you put into top-quality bonds, as opposed to low-rated junk bonds, the safer your money will be. However, you increase the risk that your returns won't outpace inflation.