How Much of Your Money Should Be in Stocks Vs. Bonds

How much money should you invest in stocks vs bonds? This is among the first questions that you have to ask yourself when building your portfolio. But there is no direct answer. It all depends on your age, the investment philosophy of your choice and your experience, among many other things. A long-term investment strategy is the best option for many people. 

With a long-term viewpoint, a strategic asset allocation will help you determine the percentage that should go to bonds and stocks. This approach involves choosing an investment combination based on volatility of various asset classes and rates of return over time. 

Stocks, for instance, have shown to be volatile in the short-term but over the long-term, have a higher return rate compared to bonds. 

Here are four allocation samples, all drawn using the strategic approach (period of 15+ years). In life, don’t measure the success of your investment on a yearly, monthly, weekly or daily basis, but over multiple-year periods. 

Ultra Aggressive

If you are aiming at a 9% return rate or higher, 100% of your portfolio should go to stocks. When you decide to use this approach, expect your portfolio to lose about 30% in a calendar quarter at some point. Sometimes, your portfolio may lose value by 60% in the whole calendar year. This means that if you invested $10,000, the value will go down to $4000. Historically, however, the positive years always offset the negative ones. 

Moderately Aggressive

If you would like a return rate of 8% or higher over the long-term, assign 20% to bonds and cash then the remaining 80% to stocks. Expect a 20% value drop in a calendar quarter and, maybe a 40% value drop in a year. But over the long term, it will recover and gain value. Every once a year, try to rebalance the allocation. 

Moderate Growth

For a return rate of 7% or more over the long term, assign 40% to cash and bonds then the remaining 60% to stocks. In a year or single quarter, you may witness a 20% drop. Like the other allocation above, you should try to rebalance this allocation every year.

Conservative

If preserving capital is more important to you that high returns, don’t allocate more than 50% to stocks. These allocations are still a little volatile and, in a year or calendar quarter, the value may drop by 10%. 

To avoid risks completely, stick to bonds, CDs, money markets and other safer investments. 

Retirement Considerations

All the models discussed above are more suitable for people who haven’t retired. But after retirement, you will need a different approach since you will be withdrawing regularly from your investments and savings. 

When you get to that phase, your main goal is a reliable income and not high returns. So, a portfolio that seeks to maximize returns might be too volatile to offer you consistent income. 

If you are close to retirement, find other allocation approaches.