If you're investing for your retirement, you'll have to keep a close eye on your investments and periodically re-balance your portfolio in anticipation of market movements. Before you determine how to "weight" your portfolio, you'll need to lay out some practical investment goals. Many long-term investors use out-year benchmarks to gauge the performance of their portfolios relative to that of the broader market. Ultimately, your allocation decisions will be based on a number of quantitative factors as well as your own personal tolerance for risk.
In general, stock-based mutual funds are substantially riskier than bond-based mutual funds. The reason for this is simple: Over the long term, stocks tend to more volatile than bonds. In fact, most "safe" bonds produce steady rates of return and offer negligible amounts of risk. By contrast, even the most stable stocks can sustain sudden falls that might wipe out an investor's gains. Riskier stocks can permanently lose substantial amounts of value. In the worst case, the value of bankrupt companies' stocks can approach zero and force investors to take catastrophic losses.
However, stock-based mutual funds are far less risky than most individual stocks. This is because these funds are made up of between 30 and 40 individual stocks. While it's possible for one or two of these investment vehicles to decline precipitously, it's unlikely that all of them will do so simultaneously. If you do suspect that one of your stock-based mutual funds is about to lose a significant amount of its value, you should cash it out and move your money to a safer investment vehicle.
If you're wondering how to allocate your assets between stock-based mutual funds and bond-based mutual funds, you should pay close attention to your so-called time horizon. If you're in your 20s or 30s, you should put the bulk of your investment funds into stock-based mutual funds. Although these vehicles can experience volatility over short periods of time, they tend to appreciate steadily over longer time frames. Over the past century, stocks have appreciated at an average annual rate of 10 percent.
If you're in your 40s or 50s, you should allocate at least 50 percent of your portfolio to bond-based mutual funds. As you age, this proportion should steadily increase. By the time you turn 65, at least 75 percent of your portfolio should be made up of bond-based investments. This will preserve your savings in anticipation of your retirement.