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Answer:
Dear
Sandy,
Yes.
There is indeed a fairly popular formula that purports
to tell one how to allocate their investments. You'll
find it mentioned on personal finance programs, in
popular newspaper columns and in many "how to" books.
A
word of caution
But
before we go any further, I must point out that this
often cited formula is like a "rule of thumb." And
by that I mean it is simply a guideline, nothing more.
Under no circumstances should you follow it blindly.
Instead, discuss your investments with a financial
advisor who is aware of your age, health, income,
net worth and family responsibilities.
The
formula
The
formula is quite simple -- you don't need to be a
number cruncher for this one!
Subtract
your age from 100. That gives you the percentage of
your assets that theoretically should be in stocks.
The
rest would be in more conservative investments, such
as Treasuries, high-rated corporate and/or municipal
bonds, bank CDs and money market funds.
If
you are 50 years old, according to the formula, about
half of your holdings would be in stocks. As you get
older, that percentage is less -- at age 60 for example,
the amount drops to 40%, and so on.
The
logic
The
theory behind the formula is that upon retirement
you will need a steady stream of income from bonds,
Treasuries and cash accounts -- all lower in risk
than stocks.
However,
this formula has been around for some time and was
devised before Americans started living so long. Generally
speaking, I think many older people today need to
have a slightly higher percentage in growth stocks
and in dividend-paying stocks, especially if they
have sizeable savings.
But
again, this depends upon one's personal situation.
An
important factor
The
key point to keep in mind, whether or not you wish
to use the formula, is that your investments must
be diversified -- that is spread out among various
options. Keeping all your eggs in one basket is not
fiscally wise.
Let's
say you are 60 and therefore according to the formula,
40% of your portfolio is in stocks. That 40% likewise
should be diversified and placed in blue chips, growth
stocks and dividend paying stocks. And within those
three categories, you want to own different stocks
within different industries.
Note:
You may want to read a prior column I wrote on
the importance of various industries. Click HERE.
Bottom
Line
If
you have any doubt about the wisdom of diversification,
just think back to those Enron employees who put much
or all of their 401(k)'s in the company's stock!
Good
luck!
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