I had said I would post on rebalancing and I realized I didn’t write about having a balanced portfolio for savings. I know what you are thinking “portfolio” ha, I can barely save, never mind have a portfolio. Well if you have a job, and that job offers you a 401K, then you should be putting at least 2% of your income into it. There is a good likelihood your employer matches up to 3%, so you should be putting at least 3% away then. Why give away 3% of your pay every year? Because that’s what you are doing if you aren’t getting that employer match.

When you save in a tax deferred account, the government gives you at least 15% tax break toward that saving. Whether it’s in an IRA or 401K. If you are married and both making average US salaries, then you get 25% toward that saving. So for every $100 you put in, you only have a $75 reduction in your take home pay or a $25 reduction in your taxes due if an IRA. Your taxable income is reduced by every dollar you put into your IRA or 401K. Also the employer match is tax deferred too. (meaning you don’t pay taxes on it until you use it)

OK, lecture over, how to have a balanced portfolio. A balanced portfolio has money into a diverse set of funds. That means funds like US stocks, foreign stocks, US bonds, foreign bonds, Real Estate, etc. And don’t forget you’ll want to have some in cash, money markets, CDs, standard savings. Eventually those should start paying some kind of interest.

This is when the decision gets made about how much you are willing to risk, how conservative an investor you are, etc. If I were 40 years old, I’d have my retirement money invested like this:

40% US Stocks
20% Foreign Stocks
10% US bonds
10% Foreign bonds
10% Real Estate
7% CDs
3% Bank savings account

If I were younger, I’d have even more in stocks.

So what makes that “balanced?” It is balanced because the funds all cover different areas of risk/reward in the investment arena. US stocks and foreign stocks will not track gains and losses the same. They are for different companies, different economies, and thus protect a little against each other’s losses. Same with the bonds those are considered “fixed income” although they have gains and losses as the interest rates change. Real estate is again a different area completely from other investments. Finally having some longer term cash that’s got a guaranteed value is good planning. Having some ready cash you can just use is important for “a rainy day.”

Remember in 2009 the stock market crash caused short-term losses of approximately 50%, thus you need to have the tolerance to wait out the recovery. If you did, you would have seen a 5% gain year over year even with that 50% loss. So think of your reaction to seeing your savings dissolve like that, you need to hold steady, or better yet keep putting money in even if it loses value for a while. If that kind of loss will unnerve you and you think you might withdraw the funds from the stocks during a severe downturn, then seriously consider a much smaller allocation to stocks, more in bonds and real estate.

Everyone is different, my numbers won’t be your numbers, but you may make yours higher in stock, or much lower. There is no right answer except don’t invest in only one type of fund.

Truly the next post will be on rebalancing your portfolio.