The Perfect Portfolio for You

If only you had the perfect portfolio … one that grew 12% a year like clockwork — without a losing year — then you’d be set for life. But just what is the perfect portfolio for you? And what’s the easiest way to get there from where you are now? It’s easy. You just … My friend, I wish I could just snap my fingers and give you 12% a year while you sleep. But it’s not that easy. Like one-size-fits-all shoes, the idea of the perfect portfolio simply doesn’t make sense. Everyone’s feet, ahem, financial situation is different.

For starters, when you’re young, you need growth. You can afford to take risks, because even if you completely blow it, you’ve still got years to make up that money you lose. And when you’re older, you don’t want to have to go back to work. So you’ve got to be much safer with your investments. A Simple Rule of Thumb That Could Save You Big $$$ The simplest rule of thumb I use to account for these different investment needs is this: 100 minus your age is the percentage you should have in stocks.

100 MINUS YOUR AGE IS THE PERCENTAGE YOU SHOULD HAVE IN STOCKS. (Particularly in a “set-it-and-forget-it” portfolio.) So if you’re 30, you should have 70% of your investable funds in stocks. And if you’re 70, you should have 30% in stocks. This is because stocks are less safe than the alternatives, so the older you get, the less you should have in them. This rule of thumb is very rough, I know, but it’s not just pulled out of the sky. It comes from studying nearly 80 years of stock market returns. Now let’s take it to the next level here.

And using all this homework I’ve done, let’s get closer to the perfect portfolio for you: What History Tells Us About Asset Allocation Take a look at how the three particular portfolios listed below have performed over the last 76 years. While you look at them, consider which one is most appropriate for you. Consider things like, “Is it worth it to take more risks to improve my investment returns from a ‘safe’ 7% a year to a ‘risky’ 10%?” This does make a big difference over the long run. But I can’t answer that question for you. You are the only one who knows what level of risk lets you sleep at night. All I can do is arm you with the facts, to know whether you should choose a safe or a risky portfolio.

Here are the facts, as history tells us:

* SAFE PORTFOLIO — 20% stocks, 80% bonds: Throughout history, this portfolio has averaged 7.0% a year. Its worst year was a loss of 10.1%. It lost money 17% of the years.

* BALANCED PORTFOLIO — 50% stocks, 50% bonds: Throughout history, this portfolio has averaged 8.7% a year. Its worst year was a loss of 22.5%. It lost money 22% of the years.

* RISKY PORTFOLIO — 80% stocks, 20% bonds: Throughout history, this portfolio has averaged 10.0% a year. Its worst year was a loss of 34.9%. It lost money 28% of the years.

So what’s appropriate for you? To find out, you’ve got to answer tough questions, like, “Can I handle a 35% loss in a year if I held the risky portfolio?” or “Do I really need to risk it all, when the difference between being safe and being risky is only 3%?” Let’s keep digging, to get you even closer to what’s appropriate for you … You’ve Got to Diversify — Really Diversify Along these lines, I talked with longtime friend, financial consultant, and Oxford Club Pillar One Partner Jeff Winn ( this week to get his input, and he had a great suggestion … As longtime friend and financial consultant Jeff Winn recently reminded me, to really get the most return for the least risk, you must diversify within each investment class.

For example, Jeff told me that a lot of his clients came to him with what they thought was a diversified portfolio of stocks and bonds. But the reality is that those people weren’t properly diversified; they only held tech stocks, instead of stocks from all sectors. Another colleague, C.A. Green, breaks it this down even further. His general recommendation is: 30% U.S. stocks, 30% foreign stocks, 10% high-quality corporate bonds, 10% high-yyield bonds, 10% U.S. Treasury bonds (TIPS), 5% real estate stocks, and 5% gold and precious metals.

This is really starting to get specific now! That’s OK. You’re now armed with a lot of information, which can help you better decide what path to take to allow you to sleep at night. You’ll of course need to tweak this a little based on your age and risk tolerance. Consider Market Conditions I also like to use my knowledge to make adjustments to my perfect portfolio based on market conditions. For example, I think the stock market is extremely expensive right now. So my current recommendation is to lower your exposure to the stock market, as I think stock market returns will not be very good in the coming years.

Never Forget These Basics

My friends, the more you read about this topic of asset allocation, the more confusing it often gets. Different “scientific” studies on this topic give strikingly different results. (In fact, many studies based on only the last 10 years of data said you should be 100% in stocks… but you would have been clobbered in recent years on that advice.)

So while I of course recommend doing all the homework on this topic you can, never forget the basics I’ve laid out here:

1. The “100 minus your age rule” is a great starting point for how much you should have in stocks.

2. As you do more homework and see different recommended allocations, don’t forget the numbers I presented to you … they’re based on 80 years of data and include the 1929 crash, so they are a true representation of what to expect.

3. The 60/40 mix as recommended by C.A. Green is a good mix of risk and return for many — “set-it-and-forget-it” portfolios.

4. As both C.A. Green and Jeff Winn recommend, for best results you’ve got to diversify among different types of stocks and bonds as well as among asset classes. It bears repeating, the truth is that there is no one “perfect portfolio.”

It’s different for everyone based on age and risk tolerance. However, if you stick with these four basic suggestions, you should be more than capable of finding the perfect portfolio for you. For more details on how you can subscribe to Dr. Sjuggerud’s True Wealth, please follow this link: