Chapter 14 A Life-Cycle Guide to Investing
Basics: age & income & specific responsibilities in life matter in the mix of assets in one’s portfolio.
Five principles to allocate assets:
1. Risk & Reward
Higher risk is the price for more returns
2. Actual risk in stocks & bonds depends on the length of time you hold them – staying power.
The longer time you can hold, the greater should be the share of common stocks.
3. Dollar-cost averaging
- Periodic investments of equal dollar amounts
Drawback: (a). commission fee is high
(b). unlikely to provide highest return
4. Rebalancing can help reduce investment risk and increase returns
- Bringing the proportions of your assets devoted to different asset classes back into the proportions suited to your age and your attitude toward and capacity for risk.
5. Distinguish between attitude toward and capacity for risk
- usually related to age
Three Guidelines for a Life-Cycle Investment Plan:
1. Specific assets for specific needs – set aside certain amount of money in a safe security
2. Know your tolerance for risk – the risk in equities is reduced the longer time period you hold them.
3. Persistent saving – accumulate your savings, no matter how small.
The life-Cycle Investment Guide:
- More aggressive investment portfolio is recommended as the age of a person decreases.
- Broad-based, total stock-market index funds rather than individual stocks for portfolio formation is recommended.
Resons: 1. most people do not have suffici ...