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How much money should you put into stocks?
A popularasset allocationby age model invites investors to let their age guide their investments.
This guide will explore common stock allocation rules and what to consider before constructing your investment portfolio.
As you get older, thistraditional stock allocation rulerequires that an investor puts more of their money into bonds.
This shift reflects investors wanting to generate steady cash flow when they retire.
Furthermore, older investors have less time to recover fromstock market corrections and crashes.
Although its not known when the rule was introduced, it existed in the 1950s.
Asset allocation by age worked well when the average life expectancy was 68 years in the United States.
Now, the average U.S. citizen is expected to reach their 77th birthday.
While bonds offer more security than stocks, equities tend to outperform bonds in the long run.
If people are still working, bonds dont make as much sense since interest is treated as ordinary income.
Youll get more favorable tax rates if you receive qualified dividends or realizelong-term capital gains.
Current bond yields are another sign that this 100 minus your age rule needs an update.
Rampant inflation in the1970s and 80sgave investors the opportunity to accumulate bonds with double-digit yields.
Now, you cant find U.S. Treasuries with yields above 5%.
Low bond yieldsdont suggest much of a payoff, especially considering the tax disadvantages.
Meanwhile, investors can finddividend stockswith similar yields that can generate meaningful returns.
120 minus your age requires a higher risk tolerance since more of your cash will go into stocks.
However, it also exposes the investor to a higher potential downside if the stock market enters a correction.
For instance, the Vanguard Target Retirement 2070 Fund (VSVNX) caters to young investors.
It requires a $1,000 minimum investment and has a 30-day SEC yield of 2.15%.
The fund currently allocates 89.90% of its capital in stocks and 9.94% of its funds in bonds.
The fund will gradually adjust its holdings over time to reflect that older investors tend to havelower risk tolerances.
Eventually, VSVNX will consist of more bonds than stocks.
TRRCX presents itself as an optimal choice for people who may retire within a few years.
The investments you make now will have a significant impact on your long-term wealth.
However, the stock market doesnt always go up.
Investors who plan to work for as long as they can may want to put more capital into stocks.
Retirement Goals
Some people want to have a $1 million portfolio by the time they retire.
Others can set the benchmark higher based on their current portfolio sizes and how much they contribute each month.
Knowing your goal can influence asset allocation based on age and net worth.
Moving into a smaller house will reduce your monthly expenses, making it easier to stretch your funds.
However, youll also find people in their 50s and 60s who only have equities.
Investors should assess their financial situations,long-term goalsand path to retirement before deciding how to allocate their funds.
FAQ
Data is accurate as of Nov. 13, 2024, and is subject to change.
Takeaway
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