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Stocks vs. bonds: There is no magic formula
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Q: I'm retiring in a few years and still have 85% of my nest egg in stocks. Should I reduce my stock exposure and move to bonds or an annuity?

A: Everyone wants that magic number. That easy rule of thumb. A percentage that determines, at each age, how much money they should have in bonds and in stocks.

If that appeals to you, there's no shortage of bromides. The most common is that you should have a portion of your portfolio in bonds corresponding to your age. If you're 30 years old, for instance, 30% of your portfolio should be in bonds. If you're 80 years old, 80% of your portfolio should be in bonds. Most financial experts these days believe that's too conservative. But take it for what's it's worth.

Another approach is to buy a mutual fund that changes the asset allocation for you. Most mutual fund companies have life-cycle funds, in which money is allocated among stocks and bonds based on when you plan to retire.

These rule of thumb and life-cycle fund approaches to the stock vs. bond question have simplicity going for them. But they're both blunt instruments. And in the case of the mutual funds, you're handing control of your money to someone else.

Generally speaking, it's probably better to focus less on your age, and more on your capacity for risk. For instance, an 50-year-old with a pension that's adequate to cover monthly expenses probably could afford to put a higher percentage of assets in stocks than a 35-year-old with a shaky job, kids to take care of and a big mortgage.

My point is, when deciding what percentage of your money to put into bonds, age is one consideration. But how much risk you can tolerate and still meet your goals is most important. If you have a low threshold for risk, no matter your age, then a bigger portion of your portfolio belongs in bonds.


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