The sooner you start investing, the more time your investments have to grow, and the longer your portfolio has to recover if you make a really bad investment. As you get closer to retirement age, you have less time to overcome investment losses, which could prompt you to rebalance your portfolio to be more heavily weighted in less risky securities, such as investment-grade bonds or bond mutual funds.
The U.S. Securities and Exchange Commission refers to asset allocation as the means of dividing your investments into specific categories. It doesn't really matter what those categories are, as long as you know what they are, and they serve your investment goals. For example, you might have 25 percent of your money in growth stocks, 25 percent in blue-chip stocks, 25 percent in international stocks, 15 percent in real estate investment trusts and 10 percent in high-quality corporate bonds. Each category of investments should play a specific role in growing your portfolio.
The securities in each of your investment categories will likely perform differently. Your growth stocks might explode while your international stocks plummet and your other investments remain the same. To maintain your desired asset allocation, you'll periodically have to rebalance your portfolio. If your growth stocks now account for 35 percent of your portfolio, and international stocks account for only 15 percent, you'll need to sell off some of your growth stocks and invest in additional international stocks to maintain your desired level of ownership.
As you experience life changes, your investment needs change as well. For example, your investment objectives will likely be different when you get married, have a child, get a big promotion at work or lose your job. Aging is a major life change that should prompt you to examine how your investments are performing at that stage of your life. Your investment objectives might change from capital accumulation and appreciation to capital preservation. As your investment strategy moves from more aggressive to more conservative, your portfolio will likely include an increasing percentage of debt securities, such as bonds and bond funds, and a decreasing percentage of equity securities, like stocks and stock mutual funds.
Portfolio at 50
Whether you should hold individual bonds or bond funds in your investment portfolio at age 50 depends on your individual financial situation, your investment objectives and your aversion to risk. The old rule of thumb was to subtract your age from 100, and the result is the percentage of your portfolio that should be in stocks, with the remainder in bonds. At age 50 that formula would give you a 50/50 split between stocks and bonds. The American Association of Individual Investors asset allocation model recommends 30 percent of a 50-year-old investor's assets be in intermediate-term bonds. CNN Money's asset allocation calculator suggests 50-year-old investors who can tolerate moderate risk hold only 25 percent of their portfolio in bonds.
Bonds are typically considered less volatile than stocks, but that doesn't mean they are without risk. If the company or municipality that issued the bond goes bust, you could lose some or all of your investment. The SEC recommends diversifying your investments to reduce your risk. That's one of the primary benefits of bond funds. With a single investment you gain access to an immediately diversified portfolio of bonds.
- Securities and Exchange Commission: Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
- CNN Money: Asset allocation: Fix Your Mix
- Wells Fargo: Your Assets: Allocate and Diversify
- CNN Money: What's a Bond Fund?
- American Association of Individual Investors: AAII Asset Allocation Models
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.