Financial advisers stress the importance of not putting all your funds in one financial basket, asserting that a well-allocated, diverse portfolio is better than one focused on just a few investments. Deciding how to split the portfolio between stocks and bonds is very important. Although there are some suggestions about what the split should be, you must determine for yourself how to invest based on your personal situation. Examining your records, considering your goals, talking to experts and doing basic research can point you in the right direction.
1. Gather all the financial records you have that pertain to your assets, including real estate and your wages. Review the information from these records and think critically about the financial goals you have. For example, if you want to travel during retirement and put money toward your grandchildren, you'll need more money than if you plan to stay put and never had any kids. If you need a better return, stocks usually is better because they generally outperform bonds over the long term. However, they carry more risk than investing in bonds.
2. Consult the Internal Revenue Service's life expectancy charts it uses with individual retirement accounts. Some investors follow an old rule of thumb and subtract their age from 100 to figure out how much of their portfolio should be in stock. This means that the amount of stock you have in your portfolio should decrease gradually as you age to accommodate the fact you do not have as much time to make up investment losses. Some investors apply this slightly more aggressively and subtract from 110 to 120 to determine the percentage that should be in stock. If you will need your money in five years or less, bonds usually are better.
3. Check your personal balance sheet, cash flow statement, general budget and account records to determine the debt you have. Bonds are a fairly safe investment that often pay interest. However, the interest you have on debt can negate the interest you earn from the bonds. That's why in some cases, such as when the interest payment on debt is higher than your return on investment in a stock, it makes more sense to pay off your debt first. You can also invest more heavily in stocks to try to get a better return, but this will increase your risk.
4. Look at the trends for the stock market in general and for individual stocks, and examine the value of particular bonds. Assess your reaction to the risk associated with the market and each investment option. If you can stomach higher risk, then it may be better to invest more aggressively in stock.
5. Talk to a certified financial planner (CFP) or certified public accountant (CPA). Show your documentation and seek recommendations. A traditional split between stocks and bonds in a portfolio is 60-40, but this split does not suit every investor. A CFP or CPA can tell you how far to deviate from this recommendation and provide a rationale, which may help you make a more objective, less emotional decision.
Items you will need
- Financial records
- Life expectancy charts
- The New York Times; In Wrecking Your Portfolio, Timing Can Be Everything; Conrad de Aenille; January 2011
- Sharetipsinfo.com; How Should You Split Your Investment Portfolio Between Stocks and Bonds?; 2005
- Citibank; Doing the Splits: How to Divide Your Money Between Stocks and Bonds; Jonathan Clements; 2011
- Comstock Images/Comstock/Getty Images