If you are in your 60s, well, reverse that. Be heavier on bonds and light on stocks, which can be volatile.
The numbers vary. Often you hear of a 60/40 stocks bonds mix, which implies that the younger saver should have between 60% and 80% stocks and the difference in bonds, while the older person might be more comfortable with the equation flipped, at 60% bonds early on and maybe 80% at some point late in retirement.
There’s plenty of reasonably good experience behind these rule-of-thumb measures. But where does that leave the mid-career worker? Fifty-fifty? What about bond risk, or times when the stock market simply gives way and falls like a rock?
The truth is, rules of thumb are good only as conversation starters. When it comes to actual investments, the research shows that the better course for any age is not two asset classes but six.
You are still mostly in stocks and bonds, but there are a couple of categories and even subcategories added. Here’s a breakdown:
Here you might own a total bond market fund that covers the breadth of the U.S. Treasury market, but also emerging market bonds and even high-yield corporate bonds. The idea is to have a base of solid income while adding extra yield to compensate for lower interest rates today.
Many long-term investors fear the volatility of commodity funds. Yet a small slice of that risk offers an effective counterweight for those times when the market dips south for emotional reasons. Often, those same, panicked investors pump up commodities as a defensive move.
Emerging market stocks
Yes, they’re in the doghouse now. But that’s often the best moment to buy. Over time, experience shows, most of the real growth in the world happens in the emerging economies.
Foreign developed stocks
As a counterweight to U.S. stocks, developed-country firms bring you solidity with better growth characteristics. Think Toyota, Danone and HSBC. Global brands, just not necessarily American brands.
Often considered solely an income play, the total return on real estate investment trusts (REITs) really trounces the pack. Their volatility can be a problem, but keeping your holding reasonably low will help.
Yes, stocks, and probably more when you are younger and less when you are older. But not just the Dow or even the S&P 500. You should also own small-cap stocks for their growth record.
A well-considered portfolio will own all of these asset classes, largely through exchange-traded funds (ETFs). Keeping gains via rebalancing then allows you to harness the wealth-building power of compounding.