Алексей Житков

How much money should there be in stocks versus bonds?

When you create a portfolio, one of the first decisions you need to make is to choose how much of your money you want to invest in stocks rather than bonds.

The correct answer depends on many factors, including your experience as an investor, your age, and the investment strategy you plan to use. Most people will benefit from a long term investment strategy. With a long-term perspective, you can use what is called strategic asset allocation to determine what percentage of your investment should be in stocks versus bonds. With this approach, you choose your portfolio structure based on historical returns and volatility levels (risk measured by short-term ups and downs) of various asset classes.

For example, stocks have historically performed better than bonds when measured in the long term, but have greater volatility in the short term. The four allocation methods below are based on a strategic approach, that is, you are looking at the result over 15 years or more. When investing over a lifetime, you don't measure success by looking at returns on a daily, weekly, monthly, or even yearly basis. Instead, you are looking at results over many years.

Ultra aggressive growth

If your goal is to achieve a return of 30% or more, you should allocate 100% of your portfolio to stocks. You should expect that at some point with this approach, your stocks might sink as your portfolio loses as much as 30%. This means that for every 100,000 rubles invested, the cost may drop to 70,000 rubles. Over the years, periods of decline (which, by historical standards, occurred in about 30% of cases) must be offset by positive years (which have historically occurred in about 68% of cases).

Moderately aggressive growth

If you want to achieve long-term returns of 20% or more, allocate 80% of your portfolio to stocks and 20% to cash and bonds. With this approach, expect that at some point you may experience one stock drawdown when your portfolio is down 20% in value. But the idea is that it will recover in the long run. It is best to rebalance this type of distribution about once a year.

Moderate growth

If you want to aim for long-term returns of 10-15% or more, allocate 60% of your portfolio to stocks and 40% to cash and bonds. With this distribution, the value of the portfolio can fall by 15%. It is best to rebalance this type of distribution about once a year.

Conservative growth

If you are more concerned with preserving your capital than achieving higher returns, then invest no more than 50% of your portfolio in stocks. With this approach, you can still have volatility, and you can see the calendar quarter or year when your portfolio falls by 10%.

Investors looking to avoid risk altogether should consider sticking to safer investments such as money markets, gold and bonds, while avoiding stocks altogether.

Investing in retirement

The allocation models above are a guide for non-retired investors seeking to maximize returns by not allowing the portfolio to exceed a certain level of risk. This may not be suitable for you when you retire, when you need to regularly withdraw funds from your savings and investments.

At this stage in your life, your investment goal changes from maximizing profit to generating a reliable income. A portfolio built to maximize returns may not be as effective at generating stable income due to its volatility.

If you are approaching retirement, check out some alternative approaches to distribution. For example, when you retire, you can calculate the amount you need to withdraw over the next five to ten years, and decide that that part of your portfolio will be allocated to bonds and the rest will be invested in stocks. With this strategy, your needs are safely invested, but you leave room for growth. However, the portion invested in stocks is still subject to volatility, which should be monitored closely.