Today’s uncertain world of low interest rates and crazy markets are making it harder to get a clear vision of where you will be financially in 5, 10, and 15 years, let alone 30 years from now.
That sense of uncertainty has caused more and more retiring professionals and business owners to question the wisdom of keeping all their money on Wall Street in mutual funds and ETFs, without a single guarantee of cash flow.
Your advisor may show you charts of the stock market over thirty-year periods that “prove” that stocks are the best place to be for the “long run.” But if you are 55, 60, or 65, is your goal really to be OK by the time you are 85, 90, or 95?
This preoccupation with the “long run” by advisors who want YOU to pay THEM for the next thirty years can certainly help their financial security, but may put yours in jeopardy. Beware of anyone who says you don’t income guarantees. There is nothing wrong with paying a professional a reasonable fee to manage investments. What can be a problem however, is when Wall Street becomes the ONLY solution. What works for a 30 or 40 year old on Wall Street, should be trimmed back for a person of 50, 60, or 70.
John Bogle, and the Rule of 100
John Bogle, founder of Vanguard and successful money manager over five decades always had this recommendation for investors when it came to managing risk and choosing a ratio for stocks versus fixed income: “Your age in bonds”. Mr. Bogle didn’t use the term “Rule of 100” but it is the same principle. Subtract your age from the number 100. The remainder is the maximum percent of your investment portfolio that should be dedicate to risk in the market. If you are 60, no more than 40 percent of your portfolio should be at risk in the market.
The Rule of 100 is not one of the 10 Commandments. In other words, it’s not carved in stone. But absent another well calculated approach to your money in retirement, realize that Target Date Funds, which are quite popular, are based on the same premise.
The idea is simple: every year you get older, pare your risk by 1%. Hard to go wrong there.
You can adjust this formula to suit your own risk tolerance of course. If you have all the income you need and a fifty percent market decline lasting for five years wouldn’t affect your lifestyle, by all means feel free to invest more (prudently.)
Allocating your portfolio to suit your risk tolerance and time horizon in retirement is the single most important thing you can do for yourself and your financial peace of mind. You don’t need three calculators and complicated formulas. Just remember the Rule of 100. Start there and adjust according to your appetite for risk.