There is no "right" answer; even the word "allocation" has different meanings, but...
Not to confuse the question but, there is no "right" answer to this. It depends on your risk tolerance and whether you';re asking an investment advisor or an insurance professional because we all have different agendas
Even the word "allocation" has different meanings depending on who you ask but, for the sake of this article, we are focusing specifically on how much of your total portfolio should be invested in the stock market versus how much should be invested in safer investments like money market funds and annuities. How you allocate your stock portfolio is between you and your financial advisor.
The stock market can be a great place to plant money that has decades to grow because the market fluctuates from year to year (and minute to minute) but on the whole, the S&P 500 has, for example, grown 8% each year since 1957. That's great, except we all remember 2007-2008 when millions lost nearly everything in the Great Recession.
For those of us who were still in our 30's at that dark time, it was a shock, but we have had plenty of time to recover. In fact, my own portfolio is much better than it was in 2008 - but I wasn't counting on that money to live on (and won't touch my retirement until 2042). If you were living on there income from that portfolio in 2007, you may have found yourself broke with no time to "let the market recover" before you had to pay the next mortgage or buy groceries.
Because you are literally running out of time (for your money to grow) as you get older, it's important that you protect a portion of your total portfolio from the volatility of the market.
As a rule of thumb, this is a formula you can use to estimate the amount of money you can risk in the market:
This formula gives you a way to estimate how the maximum amount of your total portfolio that should be exposed to market risk. I am 44 years old, so 100 - 44 = 56% of my portfolio could possibly be left in the market because when it crashes, I have around 26 years to recover before I plan to retire.
100
- your age
= "Risky" Investments
There is nothing scientific about this formula though, because our own personal tolerance for risk plays heavily into our investing decisions. My emphasis is on protecting assets, so I tend to be conservative in my own savings. While I could possibly risk about 55% of my portfolio in the market, I choose about a 30/70 mix and use annuities and money market funds to give my money a chance to grow without losing any of the principal when the market crashes again.
Another thing to keep in mind is that you have to be very careful who you take advice from. Ask the right experts and ignore the others. My expertise is Annuities, not stocks or mutual funds. That's why I never give investment advice - other than helping you choose where to park the money that you don't want to risk in the market.
Once you decide how much you're comfortable risking in the stock market. use a properly licensed professional for that: an advisor with a "Series 6" license can advise you on mutual funds while an advisor with a Series 7 can do this and advise on individual stocks. These are the experts to listen to with the money you want to invest in the stock market.
Leave the insurance and annuities to your insurance advisor too. We're trained and licensed to protect your assets, not invest them. Don't take insurance advice from anyone other than a licensed broker.
If you'd like to see how your money can grow safely, call or email the office to schedule a consultation.
