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May 19, 2010

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I'm 27 and invest 90% in equities. I do think these ratios are crazy low risk. I have 25 years before retirement and will replace stocks with bonds as we get closer. I don't understand why there's a list if he thinks it should be 50/50 until 60 and 40/60 after that...why even bother with a list? LOL

I also have a short-term and long-term disability policy through work that covers 65% of my salary, but it would be untaxed, so it would actually cover about 85%. Both policies together cost about $260 a year ($10 a paycheck) since we get huge group policy discounts and I'm considered low risk.

This was an excellent book I read a few months ago. Glad to see others are posting about it! I particularly liked the investment and education ratio. Excellent ways to keep your finances in check.

60/40 stock/bond mix. I'm 31 years old. The potential for overall gain in a higher mix is small compared to the potential risk. money magazine had an article on this that nicely laid out risk/reward ratios for 50/50, 60/40, 70/30 and 80/20...I'll post a link if I can find it

Investors need to understand their true risk tolerance. Creating portfolios based on age are bunk. I know 70 year olds who have the tolerance (and the means) for heavily weighted equity portfolios and 25 years olds who need to be 40% equity/60% bonds. If you are risk averse, you should invest more conservatively. It may require you to save more or work longer (or it might not based on the past ten years), but if you get too aggressive, you may avoid equities all together after a year like 2008.

Of course, one does have to look at resources. Even if a 70 year old has a high tolerance for risk, he or she may not want to invest that way if they must withdraw 5% to afford retirement. A large downturn would devastate them.

I think the conventional wisdom that young folks should be in equity portfolios and older folks in bonds is bunk. Match your risk tolerance and means to develop a portfolio that is right for you. If you aren't sure how to invest, then error on the side of conservatism and add more bonds than you otherwise would have.

FMF,

If you're 75% in stocks, do you use any formula for stocks/bonds?

I'm a fan of the very simple "age in bonds."

segfault --

What, you don't think I'm 25? ;-)

I use the "aggressive age" formula which is roughly age - 15 years. I say "roughly" because I'm way over that and I need to peel back a bit.

These are ridiculously conservative.

Equity, in the long run, is where real money is made. I'm 26 and am 100% invested in equity. I plan to be 100% until at least 50-55. Look at any long term window (15+ years) in the equities market, there are few, if any down windows. Also, if during any recessions, you increased your equity investments, you are doing very, very well right now. I'll be an example of this. I didn't have much going into the "crisis", about $60K total in retirement. As soon as the market started dropping, I started buying, doubling my 401(k) contributions. Now I'm sitting pretty hovering around $90K.

With due respect to the author, you can tell he's a lawyer and not a CFP or CFA, his justifications have little substance and backup. Just saying "bonds reduce risk, buy a lot of bonds" is a complete fallacy. Where is the data, not just data from this past crisis, but long term data?

Creating and publishing ratios like this is irresponsible, especially without posting a complete analysis and backup data.

Aside from my emergency fund and cash holdings that are slated for a down payment, I'm 100% in stocks. I'm 29 years old.

At present I have a high level of risk tolerance. My newborn son has caused my savings rate to drop to 55%, but I expect it back over 60% by mid-summer. Even if I lose all of my stocks, it wouldn't take that long to replace them (or to buy an equal amount of bonds) just from raw savings. My wife has skills that are in very high demand (and will remain so), so we're remarkably secure on the career front. We have a solid amount of disability insurance. All that means I'm not really worried about the downside all that much.

When we get into our forties, we'll revisit the stock-bond mix. (Or if the market seems to be in another big-time bubble, we'll make some moves to hedge against it.) Until then, it's all stocks.

"Also, if during any recessions, you increased your equity investments, you are doing very, very well right now."

Well that all depends on how much you had going in. If you were 10-15 years older, I think you'd view what happened over the past 18 months a little differently, had you simply stayed in the market and "doubled down" with another 5K in 401(k) investments.

FMF profiled Old Limey and his (over-the-top) investment philosophy, but he left out possibly the biggest reason he has many millions today- he got 100% out of the market in 2000. I did the same thing in 2006, shorted things on the way down and, since I missed 6000 points of the drop, it was pretty easy psychologically to convince myself to get back in (at what turned out to be pretty close to the bottom) when the VIX was off the charts. I think Old Limey would agree that getting out is much more important than choosing which mutual fund to invest in. I don't think it's very hard, especially with the Internets.

I looked at short term disability insurance, but I felt is was too expensive for me. I had long term disability provided at no cost through my work, but it didn't start until after 6 months of disability. I decided to self insure, with a little help from my employer. I began saving every bit of annual leave, sick leave and comp-time I could. Recognizing that most disability events are only 4-8 weeks, I made that my short term goal, which I met within about 6-9 months (I already had some leave). Thereafter, I was a little less stingy with my leave but in several years did reach my 6 month target. I realize many employers are not as liberal in accumulating leave and some people change jobs frequently (voluntarily or not) but such a plan can save a ton of money over time. As an alternative, a person could accumulate an emergency fund of 6 months of living expenses and buy long term disability coverage, which would be less expensive. Crunch the numbers, see what works for you. In my working life I believe I saved tens of thousands of dollars.

I've been 80% in equities for ages 25-39 (now). Guess its time to become more conservative, but I gotta admit I'm disappointed dollar cost averaging into the total market over all my early years was pretty much a bust.

This is about the only part of the book that I do not agree with. This ratio is way too conservative! I'm 30 years-old and decades away from retirement. I am 90% invested in stocks and stock mutual funds.

Today the S&P 500 closed at 1117.51 or 71.4% of the all-time high of 1565.2 reached on 10/9/2007. Within the next several years as the mess in Europe is resolved, the nation's banks get on a more solid footing, and capital markets function more normally the index will blow through the high. Young people should see this as an opportunity and (as many posters recognize) get more aggressively invested than the recommended ratio. When the S&P 500 reaches a new high and investors are euphoric that is the time to begin to slowly reduce equity exposure.
Set your decision making ahead of time and follow through. Don't make the mistake of the student who second guesses himself and continually changes the initially correct answers.
These ratios are really interesting because they get people to think concretely about important personal finance issues.

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