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I have a mid-sized portfolio (under $100K). And am currently in 100% stocks. I have seen some advice being given that states 80/20 bonds will yield similar returns as 100% stocks with less volatility.

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    I suggest reading the answers in this question. – George Marian Sep 29 '10 at 3:35
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    is this for a retirement portfolio, or another purpose? – justkt Sep 29 '10 at 18:22
  • Optimal asset allocation is a function of the time horizon and risk tolerance of the investor. If you want to liquidate the portfolio and buy a house in a year, the optimal asset allocation is much different than if this is a retirement portfolio. If this is a retirement portfolio, your time horizon is 40+ years (very long) and the assets should be invested aggressively if you can tolerate the volatility. – Powers Dec 17 '13 at 4:52
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Check out some common portfolios compared:

Note that all these portfolios are loosely based on Modern Portfolio Theory, a theory of how to maximize reward given a risk tolerance introduced by Harry Markowitz.

The theory behind the Gone Fishin' Portfolio and the Couch Potato Portfolio (more info) is that you can make money by rebalancing once a year or less. You can take a look at 8 Lazy ETF Portfolios to see other lazy allocation percentages.

One big thing to remember - the expense ratio of the funds you invest in is a major contributor to the return you get. If they're taking 1% of all of your gains, you're not. If they're only taking .2%, that's an automatic .8% you get. The reason Vanguard is so often used in these model portfolios is that they have the lowest expense ratios around. If you are talking about an IRA or a mutual fund account where you get to choose who you go with (as opposed to a 401K with company match), conventional wisdom says go with Vanguard for the lowest expense ratios.

  • Ben Stein is nothing more than a pundit, and his advice should be taken with a grain of salt. Furthermore, it's worth nothing that he was spectacularly wrong about the most recent recession; in short, he's not someone you want to take investing advice from. – John Bensin Jul 3 '13 at 19:17
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The standard advice is that stocks are all over the place, and bonds are stable. Not necessarily true. Magazines have to write for the lowest common denominator reader, so sometimes the advice given is fortune-cookie like. And like mbhunter pointed out, the advertisers influence the advice. When you read about the wonders of Index funds, and see a full page ad for Vanguard or the Nasdaq SPDR fund, you need to consider the motivation behind the advice.

If I were you, I would take advantage of current market conditions and take some profits. Put as much as 20% in cash.

If you're going to buy bonds, look for US Government or Municipal security bond funds for about 10% of your portfolio. You're not at an age where investment income matters, you're just looking for some safety, so look for bond funds or ETFs with low durations. Low duration protects your principal value against rate swings. The Vanguard GNMA fund is a good example.

$100k is a great pot of money for building wealth, but it's a job that requires you to be active, informed and engaged. Plan on spending 4-8 hours a week researching your investments and looking for new opportunities. If you can't spend that time, think about getting a professional, fee-based advisor.

Always keep cash so that you can take advantage of opportunities without creating a taxable event or make a rash decision to sell something because you're excited about a new opportunity.

  • would you suggest doing the same 4-8 hour research with a portfolio mostly invested in (stock-based) mutual funds and index funds? – justkt Sep 29 '10 at 18:21
  • @justkt: At first, I think it does, because its hard with a mix of equity and index funds (particularly with the typical menu of a 401k) to determine if you're truly diversified. Keep in mind that I'm an active investor, and don't care to much for index funds. Given the wild swings in the economy over the last decade, I think you need active management. That's just my opinion, and many smart people disagree with me. – duffbeer703 Sep 29 '10 at 23:01
  • "Put as much as 20% in cash." Bad, bad advice... – RonJohn Aug 20 '18 at 16:02
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First, I'd recommend that you separate "short-term" assets from "long-term" assets in your head. Short-term assets are earmarked for spending on something specific in the near future or are part of your emergency fund. These should be kept in cash or short bond funds.

Long-term assets are assets that you can take some risks with and aren't going to spend in the next few years. Under normal circumstances, I'd recommend 80% stocks/20% bonds or even 70/30 for someone your age, assuming you're saving mainly for retirement and thus have a correspondingly long time horizon. These portfolios historically are much less risky than 100% stock and only return slightly less.

Right now, though, I think that anyone who doesn't absolutely need safety keep 100% of their long-term assets in stocks. I'm 26 and this is my asset allocation. Bond yields are absolutely pathetic by historical standards. Even ten year treasury yields are comparable to S&P 500 dividend yields and likely won't outperform inflation if held to maturity. The stock market is modestly undervalued when measured by difference between current P/E ratio and the historical average and more severely undervalued when you account for the effects of reduced inflation, transaction costs and capital gains taxes on fair valuation. Therefore, the potential reward for taking risk is much higher now than it usually is.

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    While you're right yields are low, particularly on cash, there is one reason I still like an allocation of some kind to cash or equivalent, even without a great need for safety: I like to have some cash available to take advantage of crises. If I am fully invested, a market crisis would work against me, not for me. Keeping some powder dry may save me from the temptation to borrow to invest at perceived lows -- instead, I can deploy some of that waiting cash. – Chris W. Rea Sep 17 '11 at 14:09
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Those are all predictions. To the core.

With anything, I'd consider the source carefully before taking any kind of advice. If it's from a financial magazine, who advertises with them? What are they selling? How well do they recognize which side of the bread is buttered?

That, and I'd get a lot of advice, see how it matches with your goals, and choose.

All of that being said, you do have time to recover should you blow it.

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In my opinion, the key variable for you (and others) is not age, but "vintage."

Your "age" suggests that you were born in the mid-1980s, in the middle of a bull market. The most remunerative investing periods for you are likely to be in your childhood (past) and middle age (forties and early fifties). Also your, "old-old" period (around age 80, in the 2060s), if you live that long.

For now, you can, and perhaps should invest cautiously, like today's 40-year olds, with a heavy emphasis on bonds. The main difference between you and them is that you can shift to stocks in about ten years, in your mid to late 30s, while they will find it harder to do so when approaching old age.

  • According to finance 101 theory, you can invest in riskier assets when you are young because you have a longer time horizon. I don't understand your "vintage" theory, but I think age is critical factor in determining asset allocation because age is highly correlated with time horizon. Telling a 25-year old to have a "heavy emphasis on bonds" seems off unless the time horizon is short (i.e. they are using the funds to buy a house in a couple years). – Powers Dec 17 '13 at 4:48
  • @Powers: Investors Warren Buffett and Vitaliy Katsenelson have pointed out that the U.S. stock market actually has "stretches" of 17-18 good years at a time, followed by 17-18 years of zeroish returns, the latter from 2000-2017. More to the point, employment prospects for 25 year-olds are the worst they've been since the 1930s. Your "Finance 101" is only true, "all other things being equal." But the status of a 25- year old born 1985, is vastly different from one born 1965 or one born 2005. "Unemployment" really shortens a time horizon. – Tom Au Dec 18 '13 at 15:22
  • marketwatch.com/story/…. Millennials aren't investing in stocks, because they are emulating 40-ish Gen Xers. Which is the right thing to do for now. But they should invest heavily in stocks when THEY get to forty. – Tom Au Apr 9 '15 at 23:32

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