We were asked: "I've heard that investors should keep a third of their investments in stocks, a third in bonds and a third in cash. Do you recommend this?"
Our answer: There are many "portfolio allocation" formulas out there, and some Wall Street brokerages make headlines and incite the market when they announce changes to their recommended mix of stocks, bonds, and cash. We chuckle when financial advisors announce they're changing the ideal portfolio mix from something like 47% stocks to 49% stocks. Such tweaking seems utterly un-Foolish -- and somewhat self-serving, too, to the financial industry. After all, for portfolios to be continually adjusted means that various holdings will continually be sold and bought, generating commission expenses (and often, capital gains taxes to be paid).
A more sensible approach is to consider investment timeframes and, of course, what you can tolerate in terms of market volatility. In general, money that you don't expect to need for five years (ideally 10 years or longer) might be invested 100% in stocks. Stocks can be volatile in the short term, but they have performed well in the long term over many time periods. (Investing in stocks can simply mean that you buy shares of an index fund that tracks the overall stock market. It doesn't mean you have to become a expert stock analyst.)
Any funds that you'll need to use in the near future (emergency money or money needed within five years) should be in something safe, such as CDs, money market funds, or perhaps bonds. (Get tips on short-term savings (and some special interest-rate deals).) Whatever's left over is likely to grow most quickly in stocks, though bonds can be effective, too, especially as investors near retirement.
That said, even this kind of thinking can be a bit simplistic, since everyone's situation is different. This is exactly the kind of topic that a financial advisor can help you with. Learn how to find one at our Advisor Center -- and perhaps check out our TMF Money Advisor service, which features customized independent advice from a variety of objective financial experts.
