What asset mix should I choose?


the roadmap for 401k investingOne could argue all day about this subject, so, for the sake of being simple I will provide you a peak into my portfolio ( what types of stocks and bonds and such make up my investments), and how I decided upon my current mix. But before that, here are some general rules you can use to figure out your mix:

There is a general rule you can use to determine what mix of stocks and bonds you should have and it is as follows: 100 less your age = % Stock / Bonds. So, let’s say you are 20. 100-20= 80 or 80% of your mix should be stocks, and the other %20 should be bonds. This is a conservative rule. The rule I use, which is quite a bit more liberal, is 120 less your age. So, for me, 120-30 = 90. So, around 90% of my portfolio is invested in stocks, the other 10% is in bonds. Keep in mind that stocks, over the long haul, will beat the heck out of bonds.

I would suggest using somewhere in between, but you should consult a liscensed professional before you make a mistake on your own. This is only to show you what I have done and what others have, not necessarily what you should do – as your situation may be different than mine.

Now, for my portfolio:

First, I must provide you a background of myself:

  • I will be 30 this Sept. 6, 2008.
  • I want to retire comfortably by the time I am 55. So, I have 30 years to invest and generate a stream of cash for my retirement (even though my investments will still generate money when I go into retirement).
  • I plan on living until I am 85 (to play it safe), if I die earlier someone else will get my free loot (I have 3 kids, so this wont be an issue)
  • My house will be paid off by then. The only bills I anticipate are normal living expenses and helping the kids out if needed.

I want to have $4,166 or so per month to support my wife and myself (I need my damn golf money) or I need $50,000 per year for 25 years (1.25 Million dollars) to live comfortably after retirement (I am not even considering inflation here).

I would need to invest (assuming I am starting today) about 10,000 per year until I retire (If I were earning 11% return on my investments. Now, the stock market over time has netted investors around 10% return, so, I don’t think my assumptions are too unreasonable. How did I calculate this? You can either do it manually, which would look like this (10,000 x 1.11) = 11,100 X 1.11 = 12,321 X 1.11 …. and so on until you are up to year 25 in this case and you will come back to 1,144,133 after 25 years of compund interest, which meets my goal. Or, you can use a nifty tool in Microsoft Excel. The tool in excel is called the FV (future value) function. With this tool, you simply enter the interest rate you are earning, the amount of time you will be investing, and the annual payment or contribution you would make. Voila, excel is much faster. If you need more help with using this tool let me know in the forums.

Now, my current portfolio is 91% stocks and 9% bonds. I would be considered an extremely agressive investor by some, and others would just say I’m aggressive. I would think I’m somewhere in between those two descriptions. In future lessons, I will be more specific as to what I invest in and why.


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