or impact what they leave their children or use to support charitable causes.
Traditional portfolio management views stocks as being risky and bonds as being safe. As such, you should increase the amount you have in bonds and decrease the amount you have in stocks as you get closer to retirement. The rule of thumb is that you should have roughly your age in bonds, so if you are fifty your portfolio should be 50% bonds, 30% stocks and 20% cash. That's crazy!
Along with that view is the philosophy that you should buy an investment and hang on to it--buy and hold. Investors that lost 30-50% between 2000 and 2002 know that buy and hold can be a risky proposition. We all know that there is the potential for stocks AND bonds to lose value. This is referred to as market risk and interest rate risk. Since the industry believes that you should buy and hold, the only way to minimize the overall risk to your portfolio is by changing the allocation between stocks, bonds and cash.
It all sounds great--but by believing it you may be forgoing tens (or even hundreds) of thousands of dollars. I don't accept their underlying assumptions and neither should you. There are other, more effective ways to manage portfolio risk that may dramatically increase your returns.
Think about it. Interest rates the last several years have been at historic lows. That didn't change the traditional allocations provided by the industry. They still said you should have 50% of your nest egg in bonds if you were 50 years old. The return on bonds wasn't even enough to keep place with inflation and you were supposed to put half your money in them? Ridiculous.
It's possible to grow your money faster with less risk. It's possible to draw out more than 4% without the fear of running out of money. And it's done by adjusting conventional wisdom to the realities of the markets. Next week I will share specific strategies and methods to do just that.
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