Question: Is it true you should change your asset allocation every decade?

A BuyandHolder

Answer:

Dear A BuyandHolder,

Well, it's definitely smart to adjust one's allocation when life's events change and aging can be one of those events. I would not, however, insist that one's asset allocation must be adjusted hitting age 30, 40, 50 or 60 or any other age. You should look at your allocation percentages when you get your first and second job, get married, have a child, start your own business, come into an inheritance, land a big pay raise, and, if you should become disabled or have a long-term illness.

For those unfamiliar with the concept of asset allocation, let's take a closer look.

Asset allocation involves distributing (or allocating) your portfolio among the three major classes of assets. Those assets are: stocks, bonds and cash. Cash includes savings accounts, Bank CDs, money market funds, money market accounts and travelers checks.

The key to successful investing, of course, is having the right mix of the three classes. And this varies from investor to investor. As you might guess, the right asset allocation mix for a 30 year old is not the same for a 70 year old.

One factor that contributes to the right mix is your tolerance for risk. Generally, younger investors can afford to take more risk and be more aggressive while older people generally need to be more conservative.

While there are no written-in-stone percentages, the following overall guidelines will help you make a decision about how much you should have in stocks, bonds and cash.

Ages 20 to 30

At this point in your life, you can afford to take some risks, to be aggressive. Why you might ask? Because you have time to correct any mistakes and to sit still while the market self corrects, should it need to do so.

• Stocks: 75% to 85%
• Bonds: 5% to 10%
• Cash: 10% to 15%

Ages 30 to 45

Time to be slightly more conservative.

• Stocks: 65% to 75%
• Bonds: 10% to 30%
• Cash: 10% to 15%

Ages 45 to 60

During these years, you will probably be at your highest salary. You should try to save as much as possible.

• Stocks: 45% to 65%
• Bonds: 30% to 55%
• Cash: 10% to 20%

Ages 60 and over

As you approach retirement, you want to preserve as much capital as possible and to pay off your mortgage.

• Stocks: 25% to 45%
• Bonds 50% to 60%
• Cash: 25% or more

It's important to realize that the above percentages are just guidelines...you will find other percentages recommended by other sources of information. The key point of asset allocation is not so much to get the percentages precisely accurate - in fact there is no such thing - but rather to keep alert about the contents of your portfolio and how it is performing.

As you know, stocks offer the greatest opportunity for growth while carrying the greatest amount of risk. On the other hand, bonds are not considered as risky as stocks, with the exception of junk bonds. Nor do they offer the same potential for profit. Cash is almost risk-free, but the returns are small in comparison.

Good luck!