Perhaps you have already completed the job of understanding investment fundamentals such as asset allocation, diversification and risk capacity and tolerance.
Now what are you supposed to do about it?
While there is no formula per se, there are some fairly well established concepts. Your starting point is your capacity to take on investment risk (based on the timeline of your investing goal) and your tolerance to withstand investment risk (based on your emotions). If your risk capacity and/or tolerance is quite low, you will favor investing in assets that do not fluctuate wildly in price. Bonds are usually a good example of this. On the other hand, if your capacity and/or tolerance for risk is quite high, you will tend to favor investing in stocks (aka equity) where changes in value can be more extreme.
Obviously, more risk comes with more reward and less risk with less reward. And so it is likely that you will want to invest in a mix of assets…some bonds and some stocks…to balance out that equation. But don’t forget that your preferences will change over time. In your 20s or 30s, you may have quite a lot of capacity and tolerance for risk; in your 50s or 60s, not so much. You will need to re-balance that assortment of stocks and bonds over time as your risk preferences change.
So-called “robo-advisors” recommend an asset allocation mix for investors based on the responses that you give to a questionnaire designed to ferret out your risk preference.
And there are a few popular rules of thumb for determining the right balance that can offer you a useful starting point (such as “100 or 110 minus your age = percentage to hold in stocks”). However, you should approach these axioms with some caution. The right mix for you is a highly personal decision and what may be comfortable for the “average investor” may not sit right with you.
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