The latest “rule of thumb” is to subtract your age from 120. The resulting number is the percentage of your allocation that should be invested in stocks, optimally through index fund investing. This was rule #6 in Money Magazine’s 25 Rules to Grow Rich By.
In The Bogleheads’ Guide to Investing (asset allocation chapter reviewed here), the authors say an allocation of 100% offers no more long-term performance, but significantly more risk than a mix of 90% stocks and 10% bonds.
Fortune Magazine’s Rules for Building Wealth take the long-term view:
If you’re just starting out, 80 percent to 100 percent of your assets ought to be in stocks. “If you have, say, 30 or 40 years, what happens over the next three months or even three years doesn’t matter. If you need the money in two years and it drops 40 percent in one year, that’s a problem,” says Stuart Ritter, a certified financial planner with T. Rowe Price.
I’m in the process of helping my mother re-balance her investments. She plans on retiring soon, but I will suggest staying mostly in stock funds so the money continues to last, even when she starts taking distributions.
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The only issue with being that stock heavy is that if the market or market segment you’ve invested in takes a dive (say another bubble occurs) you’re likely to end up loosing a lot of cash. Granted if you’re young and heavily invested in the stock market this isn’t likely to cause you much grief down the road.
With that said I think that this rule of thumb should take into account the amount of money you’re investing with. If at 30 I had 2 or 3 million to work with I would invest it far differently than if I only had 50 thousand.