Lenders & Advisors

Segmenting your Financial Portfolio

January 7th, 2013 , Last Modified: January 10th, 2013
The goal of any investment portfolio is to achieve financial security for its owner.

The goal of any investment portfolio is to achieve financial security for its owner. However, financial security is not the same for everyone. That is why not everyone has the same set up in their investment portfolio. Most investors know that diversity is an important characteristic of any set of holdings. However, the nature of that diversity depends on many factors.

Stocks and Bonds Ratios

Most beginning investors learn that they should maintain a ratio of some sort between their stock investments and their bonds. The recommendations for that ratio vary from broker to broker. The basic idea is that you should invest heavily in stocks when you are younger. Younger investors should invest in the most aggressive stocks possible. As they age, they should alter the aggressiveness of their underlying assets and move into more conservative stocks.

The same rule should apply to the bonds that you keep in your portfolio. A younger investor should keep fewer bonds because these are by nature conservative and low in potential for gains. However, as the investor ages, he or she wants to lock in the gains achieved through a long life of investment. Therefore, it makes sense for the portfolio to convert stocks into bonds.

The Age Method for Investment

An easy rule of thumb for determining this ratio is the age method. When deciding how much of your portfolio to allocate to bonds, look at your age. If you are 25 years old, no more than 25% of your portfolio should consist of bonds. A 50-year old investor should, therefore, have a portfolio that contains 50% bonds. These percentages refer to the dollar amounts, not to the individual securities.

This rule becomes more important after you pass the age of 40. An investor in his or her 20s may not want to adhere to this rule and instead devote much more space to stocks. At such a young age, it may be wise to put no more than 10% of the portfolio into bonds.

It would be a good idea to also consider the nature of the bonds as well. Some bonds are more aggressive than others. As you age, you should be increasing the overall number of bonds in your portfolio while you decrease the aggressive nature of those investments. This preserves gains and eliminates chances of losing significant portions of your holdings to unexpected setbacks among your stocks.

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