Professor Charles D. Ellis of the Rebalance Investment Committee breaks down the stocks vs. bonds equation and how to adjust those ratios for your personal investment time horizon. Learn about stocks vs. bonds and diversification.
Asset allocation is the big decisions that you make: How much will you have in stocks? How much will you have in bonds? How much, if you do, will you have in real estate? Those decisions really make a major difference. How much will you have in a money market fund? And one of the sad realities is many people who are investing their 401(k) start off with such a small amount of money the first few days that they’re employed they say, “Well, it’s so small. I don’t think I’ll do anything about investing. I’ll just put it in a money market fund.”
And then they leave it there, over the years accumulate more and more and more and keep putting it in a money market fund. That may be saving. But it sure as the dickens is not investing. The really important question about asset allocation has to do with how long is the money going to stay invested. And if it’s going to stay invested for more than 10 or 15 years, it should be very definitely in equities.
If it’s going to be invested for less than a year, it should be in a money market fund. Going to be invested for less than three years, most of it should be in bonds. Because that’s the trade-off between risk and return that you ought to be making.