How much of your portfolio should you allocate to stocks?

Sometimes investors want to reduce their exposure to shares as they age – but not too quickly. Photo: Andrew Quilty

Many nearing retirement discovered the risks of being overexposed to equities when markets tumbled in 2008. So how many stocks should older investors own? Here are three simple formulas:

1. Own your age in bonds

Implied strategy for a 60-year-old investor: 40 per cent in “growth” assets such as shares and property; 60 per cent in “defensive” assets such as cash and bonds.

Suits investors who value peace of mind over eking out every last possible cent of return.

Downside: Opportunities to invest directly in Australian bonds (as opposed to through managed funds) are limited.

2. Put 120 minus your age in shares

Implied strategy for a 60-year-old investor: 60 per cent in growth assets; 40 per cent in defensive assets.

Suits investors who want to reduce their exposure to shares as they age – just not too quickly.

Downside: Assumes shares will come good in the end – as they have in the past 60 years but not in the past 200.

3. Put five to seven years of retirement income in cash

Implied strategy for a 60-year-old investor: 65 to 70 per cent in growth assets; 30 to 35 per cent in defensive assets.

Suits investors who want to sweat the fruits of a working life’s toil while making sure they are not forced to sell shares in a market dip.

Downside: Requires nerves of steel in periods of high market volatility.

Smart Investor

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