Today’s rule of thumb is:
“100 minus your age equals the allocation you should have to equities in your portfolio”
The Upperline: It’s far more important to know how much risk you’re comfortable with, than to use this as a guideline.
This rule of thumb is dangerous not because it’s generally untrue, as I think that this is often a reasonably appropriate guideline for many investors. The problem is, if it’s not right for you, it could have huge consequences. I often hear from investors that they’re taking more risk in their 401k because they’re younger. Conversely I hear from investors nearing retirement that they’re moving their entire portfolio into bonds and Certificates of Deposit.
That may be exactly what they should be doing, but the problem is that those strategies don’t have value on their own. Those strategies only make sense within the context of your personal risk tolerance and your family’s financial goals. [Read more…]