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Question for the Money Doctors

Question submitted on Sep 26, 2011.

Question

Is there a recommended portfolio allocation for someone in their early 40s?

Answer

I usually recommend that someone in their early 40''s invest aggressively, however, it would depend upon your risk tolerance - in other words, how much can you tolerate in losses in any single year. Growth portfolios have performed very well over time but in the short term, they may have some significant losses - see below.

The most popular portfolio that I recommend to clients in your age bracket is a 60% equity, 40% bond/cash portfolio, consisting of the following asset classes:

<span style="text-decoration: underline">STOCKS:</span>
US Large Company: 15%
US Small Company: 10%
US REITs: 15%
Foreign Developed Markets: 12%
Foreign Emerging Markets: 8%

<span style="text-decoration: underline">Fixed Income:
</span>Treasury Inflation Protected Securities: 15%
High Grade Corporate or US Gov''t Mid-Term Bonds: 10%
High Grade Corporate or US Gov''t Short-Term Bonds: 10%
Money Market/CDs other cash investments: 5%

The historical long term return for this portfolio is about 9% per year, the greatest one year loss was about 35%. Younger workers should be willing to accept short-term losses to realize higher long term returns.


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