How much of my portfolio should I keep in stocks?
Financial professionals advise that if you are saving for retirement, the younger you are, the more money you should put in stocks. Though past performance is no guarantee of future results, over the long term, stocks have historically provided higher returns and capital appreciation than other commonly held securities. As you age, you have less time to recover from downturns in the stock market. Therefore, many planners suggest that as you approach and enter retirement, you should begin converting more of your volatile growth-oriented investments to fixed-income securities such as bonds.
A simple rule of thumb is to subtract your age from 100. The difference represents the percentage of stocks you should keep in your portfolio. For example, if you followed this rule at age 40, 60 percent (100 minus 40) of your portfolio would consist of stock. However, this estimate is not a substitute for a comprehensive investment plan, and many experts suggest modifying the result after considering other factors, such as your age, risk tolerance, financial goals, and the fact that individuals are now living longer and may have fewer safety nets to rely on than in the past.
For example, if you accept an early retirement package at age 57, it's feasible that you'll be living off your retirement fund for as long as 30 years or more. That long time frame gives your portfolio greater potential to recover from any unexpected downturns in the markets. And with inflation and the rising costs of medical care, you are likely to need more growth over that 30 years than most fixed-income securities typically deliver. You may want to keep a portion of your portfolio invested in stocks well into your retirement years.
If you're investing for something other than retirement, the simple rule of thumb probably doesn't apply. If you'll need access to your investment dollars within a few years (e.g., to purchase a home or to pay your child's tuition), you should consider investing more of your portfolio in less volatile securities that focus on capital preservation. If your investment goals are short term (e.g., two to five years), you won't have time to recover from a downward swing in the markets, and you run the risk that money invested in volatile assets may not be there when you need it.