On August 2, 2018, from A. A. PhD., Columbia U. Professor Emeritus
Why did you choose to invest half of your money in an index exchange-traded fund rather than some other percentage?
Monday Morning Millionaire Program Answer:
This is a personal asset allocation issue. The importance of having a well-thought-out personal asset allocation in place cannot be overestimated. We blogged about it at the beginning of the year and then again on July 16.
Vanguard has a 91-year asset allocation comparison among three income, three balanced and three growth portfolios. These look at varying allocations between stocks and bonds. Here is a summary.
This table is a summary of the relationship between risk and potential reward. The greater the potential reward that we seek the greater the risk that we must assume.
Risk is easy to quantify. It is simply the amount of money you have invested. Potential reward, and the emphasis is on the word “potential”, is always an estimate.
Until recently, my wife and I had 80% of our investments in an exchange-traded fund (ETF) which tracks the S&P 500. (SPY, in our case.) The present bull market is close to being the longest in history and, sometime in the future, it will revert to the mean. Namely, it will drop. We want to have more in cash to allow us to buy the bargains which the reversion to the mean will present.
Also, like the rest of us, we are getting older. A more conservative asset allocation regime is appropriate.
Concerning bonds, their value will drop as interest rates rise. Retired investors taking 4% annually from their portfolios will take a beating. To avoid that, we are presently in cash instead of in bonds.
John Bogle, the father of the idea of investing in an exchange-traded ETF which tracks the S&P 500, personally maintains a 50-50 asset allocation. Investors, in consultation with their partners, must choose an asset allocation on which they can agree.