For many people, sitting down to allocate your retirement or investment account is about as much fun as getting your teeth cleaned at the dentist.
At Wela, we’re interested in making investing a simpler piece of your financial plan. That’s why we suggest investors try using the “Own Your Age” philosophy, or as we call it, OYA. It’s a longstanding rule of thumb in the investment world and one that John Bogle, the founder of Vanguard, continues to push.
The idea behind this philosophy is that you “own your age” in bonds. This essentially means that if you’re 40 years old, you’ll have 40% of your portfolio in bonds and 60% in stocks. If your mother is 70 years old, then she’d have 70% of her portfolio in bonds.
The strategy behind this rule of thumb is that as investors get closer to retirement, they should begin positioning their portfolios to a more conservative allocation. The more conservative the investor’s allocation, the higher the percentage of fixed income investments they should hold.
A fixed income investment generally pays a return on a fixed schedule. (Fun fact, individual bonds are the best-known type of fixed income security.) These investments are designed to pay interest at a certain rate. This allows an investor in retirement to focus on enjoying their golden years rather than how the stock market is performing that day. It also gives younger investors some safety when growing their nest egg for retirement.
For some people, this allocation might sound too conservative while for others it might sound too risky. For these people, the issue isn’t a matter of age but of risk tolerance. If you cannot handle a market loss, you won’t be comfortable in a stock-heavy portfolio regardless of your age. On the other hand, you might consider the return on a bond too insignificant to properly grow your investments in which case you’ll be more comfortable with the risk of investing more in the stock market.
At Wela, we’ve created ETF model portfolios named: All Growth, OYA 20, OYA 30, OYA 40, OYA 50, OYA 60, OYA 70 and Conservative Yield. By utilizing ETFs to build these portfolios, investors can achieve a diversified mix of stocks and bonds based on their age and risk tolerance levels. Don't worry, we don't make anyone act or invest in their age if they don't want to. You can learn more about how we manage these ETFs here.
Every person has a unique financial picture, so, like many rules of thumb, use this as a starting point when deciding on your investment strategy. It's always best to work with your trusted advisor to decide on the appropriate allocation for your situation. If you’re want to learn more about Wela's OYA models or speak with an advisor about your investment strategy, you can do so by signing up for a free Wela account.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.