How to Choose Your Investment Style
What does the Rule of 20 have to do with your choice of investments and the wisdom of holding bonds? Simple: The further away you are from achieving that financial goal, the higher the rate of savings you need or the higher the rate of return you require from your portfolio — or both.
People who need a higher rate of return generally don’t want too bond-laden a portfolio. A heavy position in bonds is more appropriate for investors who don’t need a lot of immediate growth but, rather, can sit back and enjoy the steady, slow growth their portfolio offers.
Say you’re 55 or 60 years old and, thanks to your good savings habits, you are now on the cusp of having your “20x” portfolio. If much of that portfolio is now in stocks or stock mutual funds, it may be time for you to start shifting a good chunk of your portfolio into bonds. Why take much risk with things like stocks or commodities if you don’t need to?
You should know, however, that simple portfolio-construction formulas (that typically use age as a main determinant) often don’t work! These are some very rough rules just to get you thinking about how you should think in terms of investment allocation.