Rebalancing the portfolio by age / goals

Rebalancing the portfolio by age / goals

Portfolio rebalancing by itself is not really a function of your age or what you are trying to achieve with your portfolio. But since choosing to allocate assets is a precursor to portfolio rebalancing, let's talk about how you can allocate your portfolio at various key times in your life.

Age 25

You've probably read that young investors should put a high percentage of their money into stocks because they have a long horizon and because stocks tend to perform better in the long term. But the ideal asset allocation depends not only on your age but also on your risk tolerance. If a 10% drop in the stock market causes you to panic and start selling stocks, your risk tolerance is lower than for anyone seeing a market drop itself as a buying opportunity. Something with this short Vanguard Risk Tolerance Test can help you assess your risk tolerance and get an idea of how your portfolio is allocated. A simplified formula like 100 minus your age to get the percentage of your portfolio to allocate to stocks (75% for a 25-year-old) might be a useful starting point, but you'll need to adjust that percentage to fit your personal investment. You can invest 100% in stocks if you have a very high risk tolerance and long time horizon, for example.

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The Vanguard study we talked about earlier found that with a hypothetical portfolio invested from 1926 through 2009, average annual returns after inflation would be as low as 2.4% for someone who invests 100% in bonds and as high as 6.7% for someone who invests 100% in stocks. But the difference between investing in stocks of 100% versus 80% in stocks and 20% in bonds was only half a percentage point, with the latter having an average real annual return of 6.2%. Whoever invests 70% in stocks and 30% in bonds would have earned 5.9%, while the 60/40 investor would have earned 5.5%.

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What we can conclude from these results is that the most important thing is to invest in something tried and true; You probably wouldn't invest 100% or even 20% of your portfolio in Bitcoin, which is still very speculative. Since most people feel more upset when they lose money in the stock market than they are happy when they are making money in the stock market, this strategy makes you comfortable with the amount of risk you are taking and helps you stay on the path through the market corrections is the best strategy for you. So even if you are 25 years old and keep hearing that you should invest 80% in stocks, if you are comfortable with only 50% in stocks and want to keep the other 50% in bonds, that's fine.

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Age 45

At this point in your life, you may have received an inheritance from a parent or grandparent and are wondering what to do with the money and how windfall profits should affect your investment strategy. (Or, you might not get an inheritance at all, or you might not get an inheritance until you're in your 60s, 70s, or 80s.) Another scenario that many people face around the age of 45 is needing money to send a child to college - tens of thousands of dollars, Or maybe hundreds of thousands, if you have multiple children or a child committed to a private school who has not received any financial aid.

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If you inherit assets, such as stocks, you need to decide how to match your overall portfolio and rebalance accordingly. Having more money may mean that you prefer a more conservative allocation because you do not need to take the same amount of risk to achieve the growth you need. Inheritance of too many shares may eliminate the targeted allocation method; You may need to sell a lot of it and buy bonds. Or, you may have inherited a lot of bonds and want to own more shares. You will also need to consider whether the specific assets that you inherit are things you would buy if you were choosing investments with your own money. And if you inherit the cash, well, you can only use the money to buy the stocks and bonds that you want for a perfect asset allocation.

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