It is awfully common to hear clients talk about what they read or heard about investing, particularly the old “rule of thumb” about keeping equity exposure equal to 100 percent minus your age. So, if you are 70 years old 30 percent of the portfolio would be in stocks and 70 percent in bonds. My response to this is always, it depends on the client, your needs, and how you wish your assets to work for you.

A recent New York Times article challenges this “rule of thumb” and suggests that investors tend to live longer than expected and should consider their time horizon for investing not just their lifetime but through the lifetime of their heirs. If you adopt the idea that your investments aren’t just working for you but for your family then the old rule of thumb should not apply. While it is reasonable to expect your assets to help produce income in retirement, if you are 70 years old a 70/30 bond to stock portfolio may not be suitable and it is highly likely that if you were to keep your portfolio allocated as the rule suggests, you may not leave the legacy you would expect.

The stock market is not something to be afraid of, rather, it can be used as a tool to help you accomplish your goals. If an investment strategy is implemented properly, one need not shy away from owning stocks.

Based on a Wells Fargo study, hypothetically, if you invested $1 in stock in 1926, let all dividends reinvest, and cashed in today it would have grown on an average of 10% annually. Whereas over the same 90 year period corporate and government bonds grew only 6% and T-bills by 3%.

Now if we take it a step further, you may ask how often over that 90 year period did equities outperform fixed income (bonds)? The chart below shows that in periods of five years and longer, equities outperformed fixed income more than 70% of the time and only posted negative returns 12 times.

However this does not mean that you should expect a smooth ride over the long term with equities. They are not immune from volatility in the market and will likely fluctuate in price while you hold them. On the other hand fixed income typically is a smoother more stable ride as bonds only function is to pay interest, mature, and return your principal, thus the return can be less.

I recommend working with an advisor to see what mix is right for you based on your lifestyle and how you wish your assets to work for you. There is no single right answer yet there is merit to the idea that aiming for the horizon and not just your lifetime is a worthwhile aspiration.

Caroline Hill, Financial Advisor

Caroline Hill, Financial Advisor


Phone: 585.340.2236

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).