Net Gains: Where to Put Your Retirement Funds
Retiring rich means having the right balance of stocks, bonds and cash.
March 12, 2008 — -- Quick, what's your stock allocation?
Not sure? Then it's time to find out.
Knowing what percentage of your investment portfolio is allocated to stocks is essential to achieving your financial goals.
You may think you're a conservative investor, but if 80 percent of your portfolio is invested in stocks, then you're not and you may be in for some unpleasant surprises.
On the flip side, you may consider yourself an aggressive investor hoping to retire by age 55. But you're likely to be working a lot longer if just 35 percent of your retirement savings is dedicated to stocks.
Either way, knowing what percentage of your long-term savings is invested in stocks — compared to bonds and cash — is critical to achieving your goals.
I know the average 401(k) investor may not be interested in the finer points of their asset allocation: How much in international small caps compared to the energy sector? But they need to know at least the big picture — stocks, bonds and cash.
When I talk about your stock allocation, I do not simply mean the money you have invested in individual stocks. For most individual investors, I mean money invested in stock mutual funds as well as the few individual stocks you might own.
To figure out your stock allocation, pull out your latest statements from your 401(k), IRA, brokerage or other investment accounts. For each, look at the total account balance and then add up those figures. That's your overall portfolio.
Next, try to categorize each individual investment: stocks, bonds or cash. You might even need an "other" category. Once done with the categorizing, add up the totals for each category. Divide each category amount by the total portfolio and then multiply by 100. Those are your allocation percentages for the major asset classes.
But what do the numbers mean? And what should your stock allocation be?
At its most basic level, the stock allocation figure tells you how aggressive your portfolio is and its risk level. The higher the number, the more aggressive the portfolio and the more subject it is to volatility.
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