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Stocks, Bonds, and Cash -- How Should You Allocate Your Portfolio?

By Matthew Frankel, CFP® - Jun 30, 2021 at 7:18AM

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Here's how two certified financial planners think about asset allocation.

What percentage of your investment portfolio should be in stocks? Should you keep a significant amount of cash on the sidelines? In this Fool Live video clip, recorded on June 16, Certified Financial Planners Matt Frankel and Robert Brokamp discusses their general rules for asset allocation. 

Matt Frankel: Okay, so here's one that's a little tougher to answer, and I'd love for Bro to weigh in on this when I'm done talking. "Foofoofooling who, thank you for all your questions, you keep the shows very lively. How would you break down in percentages of portfolio, cash, stocks, bonds, dividends, etc. I've read subtract your age from 110 for your stock portion of your portfolio. I've read keep 3-5 years of cash, what do you suggest for the remaining funds?" I don't know about the 3-5 years of cash. That's generally not what I advise. I like the rule of 110 as a starting point. For example, I'm 40, so that would imply that I would put roughly 70% of my portfolio in stocks and stock-based mutual funds, things like that. Adjust that up or down for your personal risk tolerance and goals. I tend to be more of a risk taker than the average bear, I'd say, so I tend to have a little bit more than 70% that that rule would dictate in stocks. As far as the rest of it, I'm generally a fan of fixed income and adjusting your fixed income holdings in terms of risk level depending on how much cash you need. It's definitely a good idea to keep your immediate needs in cash. I'm not talking about your emergency fund, that should be somewhere else. If you're not talking about emergency savings, I'm generally a fan of fixed income for most of the rest of it. For example, if you wanted to tone down the risk on some of your fixed income, you could do a short-term treasury fund or something to that effect. It lets you get some level of yield out of your investments without just leaving them sitting there in cash. I don't know what TD Ameritrade pays me for cash right now, but it's not much I can promise you that. It's less than any treasury security would pay me. I'm a fan of having that using the role of 110 as a starting point, and keeping most of the rest of your portfolio in fixed income with an emergency fund on the side in a completely separate account.

Robert Brokamp: Provide my own thoughts. I mean, the 3-5 years, I think comes from generally what we say at the Fool is any money you need in the next 3-5 year shouldn't be in stocks so then you would think like cash or bonds. As I said before on the show that for retirees, I think that any money you need in the next three, maybe even five years should be in cash, short-term bonds, diversified bond fund, what I call an income cushion. Beyond that, I will just give you some broad ranges from what we've had in earlier retirement. For retirees, a moderate risk retiree 60% stocks, 49% stocks for more aggressive retiree 75% stock, and that's the current allocation for early retirement because the typical early retirement subscriber is pretty aggressive. But I realized that, that's spicy so 60%, 40% might be better. For those who were within a decade of retirement, I think it makes sense to have 20%-25%, at least out of the stock market as you're closing in retirement. But that also depends on your situation. If you're going to retire with a pension that covers all your expenses, if you have the risk tolerance, you could have almost all in the stock market. But I will say, that generally speaking here at The Motley Fool, we generally recommend that everyone have at least 5%-10% out of the stock market. Part of that is to reduce volatility, but part of that is also to take advantage of opportunities. Especially if you belong to Motley Fool service where you're getting a regular stream of investment ideas, it's always a good process to have some money on the side so that you can buy investments as they become recommended or as you see them opportunistically. But what that also means is you might get to a point where you to look at your other investments to determine what to sell and I think that's actually a good discipline as well to manage the risk and how much you have in one sector and how much you have in one stock and those types of things.

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