Regarding being overinvested in equities:
I have always disagreed with the old formulas of 100-age in stocks,
the rest in fixed income. This ignores taking into account what the
money is for.
I believe if the money won't be needed within 7-10 years, it should
be in equities. This means, if you're younger than 50, your 401k, IRA,
etc, should be 100% equities. For non-deferred savings, it will
depend in each situation, mostly dependent on portfolio size relative
to income and lifestyle. A family with a portfolio 5 times annual
income and a modest lifestyle could probably afford to be 90% equities
while another family the same age with a portfolio of 1/2 annual income and similar lifestyle needs might be only 30-50% equities.
I read a great column by Humberto Cruz in the Chicago Tribune last year that had a great approach based on this idea. Divide all your
savings into three classes or baskets. The first basket is money
needed in the next 2-3 years, and it's in cash (MMF, possibly ultra-short-term bond fund). This would also likely include your emergency fund of 6-12 mos. living expenses (we all have that set
aside, right?). The 2nd basket is money needed in the next 3-7 years,
and it's in various fixed income investments (CDs, bonds, bond funds).
The 3rd basket isn't needed for at least 7-8 years, and is in the
market. The choice of equities depends, of course, on your risk
tolerance.
So, to say you're in 90% equities is not necessarily a bad thing. For
your particular situation, it may be totally appropriate.
Bob Martin |
