What percentage of your portfolio should be dedicated to stocks? This question is one of the most common questions asked by new investors. The percentage of your portfolio dedicated to stocks is a function of two main factors: your investing time frame and your level of risk tolerance.
If you do not need the money in your investment account for five to ten years, then my personal view is that 100 percent of your portfolio should be dedicated to stocks. This is because stocks generally have potential for greater investment returns than other investment types such as bonds and cash funds. However, stocks also carry a greater degree of risk, especially in the short term due to market conditions and fluctuations.
As you get closer to needing money in your investment account, it is best to dedicate an increasing percentage of your investment portfolio to more conservative investments such as bonds, bond funds, cash, or cash equivalent funds. This is because you do no not want to risk losing your investment capital due to short-term market fluctuations as you grow closer to needing the money (whether for your retirement or for some other purpose such as your child's college education).
A common rule of thumb, the 120 rule, tells you that you can determine the percentage of your portfolio that should be dedicated to stocks by subtracting your age from 120. For example, I am 33 years old at present, which means that I (theoretically) should dedicate 87 percent of my portfolio to stocks (120 − 33 = 87 percent). However, I find that the 120 rule of thumbs is far too conservative for my purposes. Given that I do not plan to retire for at least another 25 to 30 years, it is wiser for me to keep 100 percent of my portfolio invested in stocks, in order to take maximum advantage of the growth of the anticipated growth of the market over the next several decades.
Of course, you may have specific reasons for needing to be more conservative with your investments. For example, you may be saving money to purchase a home within the next two to three years, or you may be saving for your children's college educations within the next few years. If you need your money in the short-to-mid term, you should dedicate a much greater percentage of your portfolio to bonds or bond funds so you preserve as much of your money as possible.
But if you are investing solely for the long-term, and if you do not need your investment capital for at least five to ten years, then the wisest choice is to allocate 100 percent of your portfolio to stocks, despite the 120 rule of thumb.
