The proper allocation for your investments will change over the course of your life. When you're 50 years old, you're much closer to retirement than you were in your 20s, and your investment allocation should reflect that. However, there's no "one-size-fits-all" way to diversify a portfolio, regardless of your age. You should take into account your own personal needs, experience and personality when coming up with an investment allocation that's right for you.
Most investors want to grow the value of their investment portfolio as much as possible. However, as you approach retirement, you might shift your thinking. Since you'll likely make less money in retirement, you may want to consider allocating more of your portfolio to income-generating investments, like bonds and certificates of deposit, rather than stocks. This is particularly true if you're already retired at the age of 50. In either case, you're close enough to retirement at age 50 that you likely don't have time to recover from a massive market sell-off. To protect your retirement nest egg, at age 50 you should consider shifting at least part of your portfolio from riskier investments like stocks to more stable option, like bonds and CDs.
Your risk tolerance should play an important role in the creation of your portfolio. If you can't handle the ups and downs of a volatile market, you're likely to make bad decisions regarding the timing of your investments. When the value of your account is down, you may sell out in panic if you have a low risk tolerance, only to watch values skyrocket once you are sold out of the market. Similarly, you might be reluctant to sell a winning position in good times. At age 50, you don't have a lot of time to recover from bad investment decisions, so you should maintain a portfolio that falls in line with your tolerance for risk.
Investments and Allocation
One general rule of thumb when it comes to portfolio allocation is to subtract your age from either 100 or 110. The resulting number is the approximate percentage you should allocate to stocks. At age 50, this would leave you with 50 to 60 percent in equities. From there, you can modify this sample allocation depending on your investment objective and risk tolerance. For example, if you want your portfolio to start funding your lifestyle immediately, you'd want to convert a good portion to bonds, CDs and high dividend-paying stocks, even if you have a high risk tolerance. If you already have a solid income source and don't imagine using your retirement funds for 10 or 20 years, an increased stock allocation may be more appropriate.
As you age, you should revisit your portfolio allocation at least annually, if not more often. The closer you get to retirement, the more you'll want to protect your funds, generally by shifting to a more conservative allocation. However, the longer you work, the more you can afford to take risks with your portfolio. In addition to funding your lifestyle with current income, you're also reducing the number of years in retirement that you'll need your savings to last. All of these factors should play a role in determining your allocation from age 50.
Video of the Day
- Photos.com/Photos.com/Getty Images