Some experts say the percent of your investments that should be invested in the stock market should
be no more than the number 100, minus your age. Some say 120 minus your age, and others use the
number 125. I agree that this will protect your money, but I guarantee that if you listen to such
nonsense, you will never reach anything but very modest investment goals.
I'll bet you didn't know that bonds have bear markets too. In the past 28 years, 8 have been losing
years for bonds, and from Dec '76 to March '80, even U.S. treasuries dropped 33%. As recently as
1994 and 1995, the average bond fund lost money.
You see, when interest rates go up, nobody wants existing bonds, even government bonds, because
they pay the old, low interest rates. To sell a low interest rate bond, the price of the bond has
to be cut to a discounted price that gives an investor the same effective percent return that a new
But I'm drifting away from our discussion on asset allocation. Let me give an example of how much
money you may be throwing away by following the expert's advice on asset allocation.
If you had put $10,000 into an S&P index fund on Dec 31, 1980, it grew at an average 18.5% to
$295,883 over 20 years.
If you had been more conservative and put 3/4 of your money in an S&P fund and 1/4 in a
government bond fund, your average 14.8% grew to only $152,000, passing up $143,000 in profit.
If you had invested $10,000 in the S&P 500 in 1974, in 15 years it would have grown to
$612,543. If you had been conservative and placed half of your money in a government bond fund,
your investment would only be worth $353,251 in 1999.
As we saw in this book's introduction, from 1926 to 2000, T-Bills returned 1.67% (total $3.46 on $1
invested) long term government bonds 4.28% ($23.17), corporate bonds 6.05% ($81.90), and $1 in
stocks grew to $2,845 (with dividends reinvested). If your time horizon, which is the number of
years before you need your money, is less than 10 years, then asset allocation does make sense.
Otherwise asset allocation is for fuddy-duddies, not smart investors.
10 Largest Funds
Vanguard 500 Index
Investment Company of America
Fidelity Growth and Income
Growth Fund of America
Fidelity Contra Fund
Other Stock Market Basics Topics:
Mutual Fund Advantages
- History of Mutual Funds
- Dollar Cost Averaging
- General advice about choosing a fund
- Mutual Fund Ratings
- Evaluating Mutual Fund Investment Risk
- Mutual Fund Share Classes
- Mutual Fund Fees
- The Mutual Fund Prospectus
- How important is the manager's length of experience?
- Why is the prospectus hard to understand?
- Mutual Fund Annual Report
- Comparing your fund to the competition
- Comparing funds on an after-tax basis
- Average Return on Investment
- How Not to Pick a Mutual Fund
- Cashing in Your Fund
- When to Sell Your Fund
- Mutual Funds and Asset Allocation
- When to get started with a mutual fund
- Types of Mutual Funds
- Value Stock Funds
- Growth Stock Funds
- Small and Micro-cap Stocks
- Mid Cap
- Large Cap Companies
- Income Stock Funds
- Mutual Fund Index
- Enhanced Index Funds
- Sector Mutual Funds
- Stock Market Sectors
- Defensive Stocks
- International Funds
- Real Estate Mutual Funds
- Socially Responsible Funds
- Balanced Funds
- Tax-Efficient Funds
- Bond Convertible Funds
- Junk Bond Funds
- Mixtures of stock types
- Closed End Funds
- Exchange Traded Funds (ETFs)
- Stock Picking Strategy - Picking your own stocks?
- Fund names, and what they really invest in
- How to get started
- Where can I start investing with no money?
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