While stock market investing can bring huge rewards, it also comes with the caveat of higher risk in comparison with more ‘conservative’ routes. If you are strategic about the risks that you are taking (i.e. you invest in high-quality companies for the long term), there is not much you have to worry about. However, it is also wise NOT to have 100% of your money solely on stocks. As much as I absolutely love individual stocks, I also understand that the market is volatile and unpredictable. Hence, it is very important to have money outside of the stock market for those “just in case” times, because we just never know.
There is a general rule of thumb for investing and it involves your age and the time horizon your money has to grow and compound. To find what percentage of your investment money should be allocated to individual stocks, simply subtract your current age from 100.
For example, if you are 32 years old, approximately 68% of your money should be in stocks (100-32=68). The rest should be in more liquid/safer kinds of investments ‒ including cash or a money market account ‒ that you can tap into when needed. The general rule of thumb is that the younger you are, the more you should have invested in individual stocks and vice versa.
So, in other words, let’s say you have an investing account with $5,000 in it and you are 32 years old. According to the rule, approximately $3,400 out of that $5,000 should be in stocks and “riskier” assets while the rest ($1,600) should be in cash or more liquid assets. This also depends on a person’s risk tolerance. So, basically, if you are okay with higher risks (and the possibility of larger rewards over time), you can choose to have a larger percentage of your money in stocks. If your risk tolerance is a bit lower, you can have less in stocks. You get the idea!
The noted theory is based on the time horizon that someone has to be able to tolerate any roller-coaster moments that the stock market decides to have. The closer you are to your retirement years, the less of your money that should be in stocks because, as we get older, we want our money to be as stable and as safe as possible. The farthest you are from retirement, the more time you have for your money to compound over time and the less you have to worry about if anything unpredictable happens in the market.
Tell me – do these percentages make sense to you and/or would you take a different approach when it comes to your investment allocations? Let me know in the comments!
Cheers to Health & Profits,
Resources & Upcoming Courses:
New to investing and looking for a guide that’ll explain all your options? Check out this one.
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