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How Much of My Money Should Be In Stocks vs. Bonds?

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When you are building a portfolio, and trying to determine how much should be in stocks vs. bonds, you must first remember that investing is for life, and your time horizon is life expectancy. The allocations below only work if your concern is the outcome of the portfolio as a whole, over long periods of time (15+ years).

Once you understand how different asset classes perform over long periods of time, you will have an understanding of what rate of return to expect, and how much risk, or volatility, you will have to live through to achieve that rate of return.

The biggest factor that will determine your long term rate of return, and the level of risk you are exposed to, will be your allocation to stocks vs. bonds.

Ultra Aggressive Allocation: 100% Stocks

If your goal is to achieve returns of 9% or more, you will allocate 100% of your portfolio to stocks. You must expect that at some point you will experience a single calendar quarter where your portfolio is down as much as -20%, and perhaps even an entire calendar year where your portfolio is down as much as -60%. That means for every $10,000 invested, the value would drop to $4,000. Over the course of many, many years, the down years (which occur about 28% of the time) will be offset by the positive years (which occur about 72% of the time).

Moderately Aggressive Allocation: 80% Stocks, 20% Bonds

If you want to target a long-term rate of return of 8% or more, you will allocate 80% of your portfolio to stocks and 20% to cash and bonds. You must expect that at some point you will experience a single calendar quarter where your portfolio is down as much as -20%, and perhaps even an entire calendar year where your portfolio is down as much as -40%. That means for every $10,000 invested, the value would drop to $6,000. You must rebalance this type of allocation about once a year.

Moderate Growth Allocation: 60% Stocks, 40% Bonds

If you want to target a long-term rate of return of 7% or more, you will allocate 60% of your portfolio to stocks and 40% to cash and bonds. You must expect that at some point you will experience a single calendar quarter and an entire calendar year where your portfolio is down as much as -20% in value. That means for every $10,000 invested, the value would drop to $8,000. You must rebalance this type of allocation about once a year.

Conservative Allocations: Less Than 50% in Stocks

If you are more concerned with capital preservation than achieving higher returns, then invest no more than 50% of your portfolio in stocks. Investors who want to avoid risk need to stick with safe investments.

Learn more: What Is a Laddered Bond Portfolio?
Or if you are near retirement read The Right Asset Allocation For Retirement Income

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