When it comes to investing in a retirement plan or a brokerage account, you usually have three options: bonds, stocks and of course, cash. So the biggest question is, how much of your assets should be in stocks, bonds and how much in cash?

 

Unsurprisingly, there’s no universal solution in this case. The answer to this question largely depends on factors like your age, risk lenience, and how much time you have before your retirement. In this article, we’ll try to help you achieve best asset balance in your portfolio.

Bonds and Stocks

The first thing you should determine is how much assets you should own in bonds and stocks. Now, the biggest factor here is your age: young people should hold more of their assets in stocks, while older people should shift some of their assets into bonds.

 

If you want to find out your stock allocation, you should just take the number 110 and subtract your age. So for instance, if you’re 30-years old, roughly 80% of your assets should be in stocks. Obviously, this is just a rule of thumb, there are different formats, depending on how much you’re comfortable with risk.

Cash Assets

When talking about cash assets, things are a little simpler. In short, while you should have a nice amount of cash stashed away in easily accessible places, you shouldn’t keep too much money in cash accounts. Most financial experts recommend that you keep around six months’ worth of living expenses in cash.

 

You should always have an emergency fund on hand, however, we recommend that you keep somewhere between 90% and 100% of your investments in bonds and stocks. And just to point out, when we’re saying “cash” we refer to real cash investments.

Investing in Stocks

As you probably know, whether you want to buy mutual funds or select individual bonds, you have a ton of choices out there. If you’re not too familiar with different types of stocks, here’s a quick rundown that will help you figure out your allocation:

• Growth stocks: These are the companies that grow faster than others. This type of investing is riskier than ordinary value investing.
• Value stocks: The main objective here is to find companies with undervalued stocks and produce larger returns over time.
• Large-cap: Although definitions vary, in general, large-cap stocks are ones with a market capitalization of five billion dollars or even more.
• Mid-cap: Here we have stocks from companies that have a market capitalization anywhere between one and five billion dollars.
• Small-cap: Lastly, we have small-cap stocks – these are the companies that have a market capitalization less than one billion dollars.

Lifecycle Funds

Lifecycle funds, more commonly referred to as target-date retirement funds, are mutual funds that invest in a combination of bonds and stocks. These funds slowly shift their asset allocation from stocks to bonds as it’s moving to the target date.

 

Let’s explain this in more detail. For example, a fund intended for people retiring in 2050 will have around 80% of assets in stocks and around 20% in bonds. On the other hand, a fund for people who are retiring in 2025 will have a 50-50 balance of assets. This balance varies from company to company, but the idea is basically the same.

Final Thoughts

In order to determine the best asset allocation for you, you have to go back and reassess your particular, personal situation. This will help you get the right mix of growth and income and allow you to relax knowing that your future is being taken care of.

 

The main idea behind value investing is fairly straightforward. When the market lowers the stock price for one company, an investor would see this as an opportunity to make a profit. However, he only assumes that there will be a correction in the valuation soon.

 

Why are there contradictions?

Value investing has a contradictory trait when compared to EMH. The efficient market hypothesis states that all stocks trade at their fair value. In addition, if there are fluctuations in the price, the reason behind it is the overreaction of the market to relevant data. However, many argue that value investing is a fantastic way of stock-picking. People like Warren Buffett, and even Benjamin Graham, have proved everyone wrong by delving into this method.

 

Investors are not buying junk stocks

 

Even though value investing means that you are searching for a bargain, the stocks you get do not have to be bad. Whatsmore, it means that you are getting a deal for a stock that has strong fundamentals and fantastic historical performance.

For example: let’s say we have two companies that are trading their shares for $25. Suddenly, the prices drop, and you can get a share for $10. But, how do you choose? You have to research both companies and decide which one has better fundamentals. If company A has strong management and great performance, then it is a bargain, and you should buy the share. However, if it is plagued by poor performance and weak leaders, then it’s not a good choice.

 

The main idea behind it is the assumption that the drop in price is just temporary.

 

Owning the company

 

How the value investor views the company he’s buying stocks from is vital for this method. Unlike other investors, he doesn’t care about external factors like market volatility. Instead, he aims to invest in companies that are worth the trouble – those that have powerful fundamentals. Because of that, he doesn’t buy shares just to trade them – he is actually looking for ownership and profit.

Factors to consider

Value stocks are trading on NYSE, Nasdaq, and all other stock exchanges. Furthermore, you can find them in all sectors – utilities, energy, healthcare, etc. However, there are certain factors you should consider before deciding on a particular company:

 

• The share price should be about two-thirds of the intrinsic value. If the value is $30, then the price should be $20 or less.
• The stocks should have less than 40% P/E ratio. That ratio evaluates the current share prices in comparison to the per-share earnings.
• They should also have a low P/B ratio. This is a comparison of the stock market value to its book value. Usually, investors try to find those that have a below industry average ratio.
• Low price/earnings to growth. The PEG ratio determines the stock’s value while evaluating the earnings growth as well. Value investors typically search for stocks that have a below one PEG ratio.
• Low debt/equity ratio. This metric defines the company’s leverage. However, you should be careful when comparing companies that are in different industries. In some sectors, the D/E ratio is high, while in others, it is common to have a lower one.
• The dividend yield percentage. It should be a bit lower than the long-term AAA bond yield – at least two-thirds.
• The earnings growth. It should be at least 7% or higher. In addition to that, during the past ten years, the company should not have had more than two years of decline.

Stay on the safe side

It is difficult to determine the intrinsic value of a stock on your own. You can always use online resources as a guide or calculate the number yourself. However, when doing the analysis, always use a lower number. For example, if you think that a certain share is $25, then put $21 instead. That way, you will have a margin of safety which will help you avoid overpaying the stock.

 

If you want to have a worry-free retirement, you should start making bigger investments as soon as possible. When it comes to investing, the biggest advantage you can have your side is time. This means, the earlier you start investing, the more time your initial investment has to grow.

 

The question, of course, is how should you invest your money? This largely depends on where you are in your life. In fact, your portfolio will look considerably different at different points in your life. And now, let’s take a look how your portfolio is going to look during every decade of your investment career.

How Should Your Portfolio Look at 30?

When your investment career is just starting, you have almost three decades to profit from various investment markets before you retire. As they say, you have all the time in the world at this point.

 

Even if stock prices plummet at a certain point, this won’t hurt your portfolio too much, because you can easily recoup your losses. If you can deal with the volatility of the stock market, you should invest aggressively in your 30s. Here are some of the options you have:

 

• Investing in your 401K or 403K: During this period, you should try to contribute at least 10% of your income to your 401K or 403K fund. This will allow you to have a financially secure future.
• Investing in a Roth IRA: In case you don’t want to give extra cash to your retirement fund, you should take a look at Roth IRA. And if you can meet their income guidelines, you’ll be able to invest more than 5K in after-tax money.
• Investing in Stock Funds: Although bonds are clearly more stable, if you’re looking for a way to increase your money in the long run, you can’t really beat stocks. If you’re a risk-tolerant investor, you should invest around 70% in stock funds.

How Should Your Portfolio Look at 40?

Now, if you’re in your 40s and you still haven’t started investing, you might feel like you’re a little bit late to the party. However, you shouldn’t worry too much, because there are still some options for you.

 

For instance, even if you haven’t saved anything in your workplace retirement plan, you can still start. You just need to invest 18K every year. With a 6% annual returns, you’ll be able to reach a million by your 67th birthday. One more option is asset allocation.

 

In your 40s, asset allocation should lean towards fixed investments and bonds. While the ratio of stock to bond investments differentiates depending on how much risk you’re willing to take. If you’re a conservative investor, you should be fine with 60-40 stock to bond allocation.

 

On the other hand, if you still want to make more aggressive investments, go with an 80% stock allocation. Keep in mind, the more holdings you possess, the more unstable your portfolio is.

How Should Your Portfolio Look at 50?

Once you reach the tail-end of your investment career, it’s the time to look at your goals and re-examine your future lifestyle. Take a good look at your current tax situation, current and projected income. By analyzing this, you’ll be able to guide your investments in your 50s.

Needless to say, if you’re on the right track, you should just keep doing what you did during the first two decades of your career. During this time, however, you are probably going to dial back your stock fund exposure and increase cash allocation.

The Bottom Line

At the end of the day, your investments will be dictated by your progress toward personal financial goals. As we said at the beginning of the article, start investing at an early age if you want to have financial security once you finally retire.