When you have money that you are looking to invest, you are going to be asking yourself “How much should I invest in stock and bonds?”
There are many different ways that someone can invest their money, and stocks and bonds are only two ways. Bonds and stocks are often considered together by investors due to many similarities.
There are differences between the two that should be considered that depend upon your investment style and risk and profile.
In a general sense, bonds are less volatile than stocks so it is often recommended that as you get closer to retirement, you should shift the majority of your investments into bonds in order to secure a steady, reliable income.
This means that when you are younger, stocks may be a good option. Now, remember, there are no hard and fast rules to guide people into investing in certain ways. It is important to do what feels best for you and is in line with your own goals and willingness to take on risk.
There is a known rule of thumb in investing that is good to know about. As a loose guide, it says that if you subtract your age from 110, you will know what percentage of your portfolio should be invested in stocks.
If you are 35 years old, it is reasonable to have about 85% of your portfolio invested in stocks. If you are 70 years old, it makes more sense to have closer to 40% invested in stocks.
If you feel as though you have a higher appetite for risk, then, you can increase the number from 110 to 120 or however would be appropriate.
Likewise, do the opposite if you are more risk averse. This may be the case if you would like to retire early for example as you would hate to blow your nest egg on risky loans and compromise your plans.
Within stocks and bonds you have many options as to how you will load your portfolio.
As far as stocks go, many advisers recommend investing in 15-20 companies across multiple sectors. Grounding your portfolio in large established companies is wise, but diversification is the most important principle to live by.
With the bond portion of the portfolio, there is also an incredibly large number of choices that you have.
Firstly, you have different categories of bonds such as government, municipal, and corporate bonds. After this, you have multiple maturities to chose from.
The way that most people invest in bonds is to purchase bond mutual or ETF funds. These packages are designed to fit within a certain risk profile so are convenient for inserting into your portfolio to help offset some of the volatility risk that comes with the stock portion of your profile.
In determining your personal asset allocation, you need to determine where you are in our life and how you prioritize growth and income. It is important to determine the time frame with which you are working as well as the amount that you are investing.
It is also important to remember that bonds and stocks are not your only option in investments, but they are two of the most popular that everyone perhaps should consider first.