Tuesday, June 2, 2009

The Simplest Investment Formula of All

I love listening to the big marketing arms of financial and investing companies and their advertisements that they create. If you read between the lines closely, it is very obvious that they are trying to appeal to individual investor's sense of fear and unknowing when it comes to the investment process and the building of a portfolio. In one sentence, here is the gist of all investment company advertisement out there: "You individual investors are not smart enough, or have enough education to invests on your own and there for you should be scared - invest with us and we will take care of it for you!" Oh yeah, and it will cost you a lot in investment fees as well. In my opinion, investing does not need to be super complicated and one specific formula really highlights this for me.

It is the asset allocation formula presented by John Bogle, the founder of Vanguard. In this book, and in many others articles around the web, Bogle describes his formula for asset allocation as this:

Fixed Income Component = Your Age

Simple as that - to determine your asset allocation you simply use your age as the fixed income percentage you should have in your portfolio and the remainder is what percentage you need in equities. For example, if you are 35 then you should hold 35% in fixed income (short-term bonds) and 65% in equities (stocks, stock index funds). Nothing scary about that.

Of course you can make it much more sophisticated if you want by dividing your equities into sub-classes. They key point is that you need to be diversified. So the next time you are listening to a investing advertisement, listen for the fear component in there and remember that it is not as complicated as they would like you to believe.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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