August 2008
Deep-six the ‘rule of 110’
Here's a common bit of investment advice: To determine the appropriate percentage of stocks in your portfolio, subtract your
age from 110. If you're 35, you can invest 75 percent in stocks and stock mutual funds. If you're 65, cut back to 45 percent.
(Years ago financial planners used 100 instead of 110.)
"We used to use it as a talking point, a way of thinking about asset allocation," says Robert Glovsky, president of Mintz Levin Financial Advisors, a fee-only financial-planning company in Boston. But he and other experts now say that applying such an approach to real-life investing is too simplistic. It's also too conservative at a time when many Americans will live well into their 90s, and inflation is a growing threat. Investing too little in stocks, which have historically outperformed bonds, may leave retirees open to running out of money. And inflation threatens bond-heavy portfolios.
A healthy person retiring at 65 may not be able to afford to put just 45 percent of his or her investments into stocks, Glovsky says. A better balance of risk and reward would boost stocks to 50 to 70 percent of total assets. For a more exact ratio, you'll need to consider your goals and risk tolerance—that is, how well you'll sleep at night knowing how much of your money is tied up in potentially more-volatile stocks.
You might want to hire a financial planner to help with the details of asset allocation. For die-hard do-it-yourselfers, a good resource is Financial Engines. The Web site lets you aggregate your cash-asset, investment, and pension information, and suggests allocations based on your risk tolerance, goals, and age. The service takes into account potential changes in the stock market, inflation, and the general economy.
The basic service costs $40 a quarter or $150 a year. Your mutual fund or broker might offer Financial Engines or a similar service free.
"We used to use it as a talking point, a way of thinking about asset allocation," says Robert Glovsky, president of Mintz Levin Financial Advisors, a fee-only financial-planning company in Boston. But he and other experts now say that applying such an approach to real-life investing is too simplistic. It's also too conservative at a time when many Americans will live well into their 90s, and inflation is a growing threat. Investing too little in stocks, which have historically outperformed bonds, may leave retirees open to running out of money. And inflation threatens bond-heavy portfolios.
A healthy person retiring at 65 may not be able to afford to put just 45 percent of his or her investments into stocks, Glovsky says. A better balance of risk and reward would boost stocks to 50 to 70 percent of total assets. For a more exact ratio, you'll need to consider your goals and risk tolerance—that is, how well you'll sleep at night knowing how much of your money is tied up in potentially more-volatile stocks.
You might want to hire a financial planner to help with the details of asset allocation. For die-hard do-it-yourselfers, a good resource is Financial Engines. The Web site lets you aggregate your cash-asset, investment, and pension information, and suggests allocations based on your risk tolerance, goals, and age. The service takes into account potential changes in the stock market, inflation, and the general economy.
The basic service costs $40 a quarter or $150 a year. Your mutual fund or broker might offer Financial Engines or a similar service free.
