A reply to a financial question


I recently received a comment on my post “A peek into my stock portfolio,” so I figure I’d try to answer the questions with my thoughts:

“Thanks so much for this, you make investment sound so do-able, even for me. Got a couple of q’s (1)How should the portfolio adjust the older we get – am in my mid 40s? Why do some people not recommend stocks and bonds the older we get. (2) Liquidity is key the older we get, but got to ensure it beats inflation kill out,so what’s the best way to do this. Thanks.”

First of all, the disclaimer: I am not a professional, all I can offer is my thoughts based off of my background and experience. And, of course a lot of the answer depends on one’s exact situation, so I can only give a general answer with what my philosophy is. I also am based in the US, so I’m only talking from a US perspective.

To answer your first question about how to adjust your portfolio as you get older, I believe all money should be in more aggressive (but smart) investments, such as stocks and index funds, EXCEPT for money you might need in the next 4-5 years. Someone in his/her mid 40’s in the middle of a career, with a year’s worth of savings, and not looking at retirement soon would probably fall into this category. So I wouldn’t change my aggressive but smart strategy at all until I would need the money in the next 5 years.

The second question about liquidity… I would argue stocks and bonds are VERY liquid. You can always sell them and get the cash. The risk is if you need the cash and the market happens to have just crashed, then you’re forced to sell low. Hence keeping about 5 years worth of cash outside of the market. One thing that’s not liquid at all? Houses. Houses you live in not investments, they’re hard and expensive to sell and quite a disruption in your life if you do.

I think by liquidity you mean more stable investments that wouldn’t crash when you needed the money. I have about a year’s worth of expenses in these kind of investments since I’m in a situation where I’m trying to launch my own business and need the cashflow. I put half of that money in a utilities ETF ($XLU) that pays about 4% in dividends, and the rest in a CapitalOne360 online savings account that gets almost 1% (see “Resources” on my investing blog, investinggm.com). I also have looked at $TLT, which is an ETF of long term treasury bonds that gives about a 3.6% return, but it’s a bit more volatile than I’d like in a “stable” investment. I wouldn’t worry about trying to beat inflation in this case, I’d just want the best return I can get while making sure my cash is there when I need it.

Thanks for the question! As I mentioned, I’m not a professional and I don’t have specific schooling on this. If there are others out there who have thoughts, please feel free to comment!



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