Recs

4

4 Rules for Asset Allocation

It's one of the biggest questions in investing: "How do I divide up my money between all the different kinds of investments out there?" There are stocks, bonds, and real estate. Gold, pork bellies, and even mayonnaise jars. What to do?

Robert Brokamp, author of the Motley Fool Rule Your Retirement newsletter service, has some simple advice that nearly everyone can follow:

Rule No. 1: If you need the money in the next year, it should be in an interest-bearing savings or money market account.
It's extremely hard to predict short-term movements, especially in the stock market. For instance, I own stalwarts such as Procter & Gamble (NYSE: PG  ) and Anheuser-Busch (NYSE: BUD  ) . I'm pretty confident these are sound long-term investments. But it would be irresponsible for me to "invest" money in them that I'll need for next month's rent or next semester's tuition payment. Why? Anheuser-Busch could continue its two-year slump. Procter & Gamble could precipitously drop, much like it did in 2000 because of profit warnings and poor management.

When even seemingly solid companies like Merck (NYSE: MRK  ) can lose 30% to 50% over a short period of time, it's not really investing -- it's gambling.

Rule No. 2: If you need the money in the next one to five (or even seven) years, choose safe, income-producing investments such as Treasuries, certificates of deposit (CDs), or bonds.
Now, with a little more time on our hands, we'll move slightly up the risk ladder. In order of "safest" to "still safe but technically riskier," we have Treasury notes and bills, CDs, and corporate bonds -- each providing a bit higher yield than the one before it.

Rule No. 3: Any money you don't need for more than seven years is a candidate for the stock market.
We believe the stock market is the best choice for your long-term money, and so does Jeremy Siegel. As he explains in Stocks for the Long Run, not only have stocks easily outperformed bonds over the past 100-plus years, they've also beaten bonds in 80% of all rolling five-year investing periods since 1802 (i.e., 1802-1807, 1803-1808, etc.). Stocks also won in 90% of all rolling 10-year periods, and essentially 100% of all rolling 30-year periods.

To further illustrate the power of time on good companies, here are four stocks that dropped at least 30% in the past seven years, along with their seven-year total return:

Stock How much it dropped What it returned
Royal Dutch Shell (NYSE: RDS-A  ) 40% 34%
Altria (NYSE: MO  ) 65% 36%
PepsiCo (NYSE: PEP  ) 32% 42%
eBay (Nasdaq: EBAY  ) 77% 332%


Rule No. 4: Always own stocks.
Even if you're at or near retirement age, stocks can help your portfolio beat the debilitating effects of inflation. Sure, at that point you'll have plenty of short-term money in safer Treasuries or CDs. But these days, the average 55-year-old still has another quarter-century of life ahead of her!

But ... which stocks?
There's still much to consider, including which money market accounts, bonds, CDs, and stocks are best for you. We have a free report called Perfect Your Portfolio With Asset Allocation that gives specific recommendations in each of these categories. It's available to anyone taking a free trial to Rule Your Retirement.

Rex Moore has 0.00014% of his portfolio in baseball cards. Of the companies mentioned in this article, he owns shares of Procter & Gamble, eBay, and Anheuser-Busch. eBay is a Stock Advisor pick. Merck is an Income Investor pick. Anheuser-Busch is an Inside Value pick. The Fool'sdisclosure policysponsored this message.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 501062, ~/Articles/ArticleHandler.aspx, 10/25/2014 5:04:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rex Moore
TMFOrangeblood

Rex Moore spent his formative years in Texas, and fought beside Davy Crockett at the Alamo. He currently travels the globe for TMF, bringing back video reports on conferences and companies that matter for investors.

Today's Market

updated 7 hours ago Sponsored by:
DOW 16,805.41 127.51 0.76%
S&P 500 1,964.58 13.76 0.71%
NASD 4,483.72 30.92 0.69%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2014 4:03 PM
BUD $108.75 Up +1.00 +0.93%
Anheuser-Busch InB… CAPS Rating: ****
EBAY $51.12 Up +0.33 +0.65%
eBay CAPS Rating: ****
MO $47.49 Up +0.36 +0.76%
Altria Group, Inc. CAPS Rating: ****
MRK $57.61 Up +0.98 +1.73%
Merck & Co., Inc. CAPS Rating: ****
PEP $94.60 Up +0.84 +0.90%
PepsiCo CAPS Rating: ****
PG $85.16 Up +1.93 +2.32%
Procter & Gamble CAPS Rating: ****
RDS-A $70.90 Up +0.07 +0.10%
Royal Dutch Shell… CAPS Rating: ****

Advertisement