Expert: Paul Henneman - 12/11/2008

Question
QUESTION: Hello,

I'm 31 years old and have had an IRA for 5 years.  My question is how should my IRA be allocated for the long term (30 plus years)

100% mutual funds ?

100% stocks ?

50% stocks, 50% mutual funds?

Just wondering what you think a good percentage for a 30 year growth plan would be?

ANSWER: Chad,
   Thank you for your question!
The answer to this question is a bit different for everyone. The basic rule of thumb is that the more stocks you have the riskier the portfolio. Owning mutual funds is really owning stocks, it is just that a single mutual fund generally holds multiple stocks in its portfolio so is much less risky than owning a single stock.
   The general consensus is that younger people should can take more risk, as that pays out better in the long run, but as you age the investments should be shifted into safer things. The exact ratio is up to you, but keep in mind that if you do hold stocks, you should hold at least 10, possibly more. Any fewer and your risk will be sky high.
   Mutual funds are also really baskets of stocks, so if there is a bond fund, or money market, or some other very safe investment option it may be a good idea to park at least a portion of your funds there. Again the amount is up to you, depending on if you value security and lower volatility, or are trying to absolutely maximize returns going forward (much more risky).
   If your company offers its own stock as an option, be careful. Some small percentage there is good, but many investors have worked all their lives, put all of their investments into the company stock, only to have the company fall apart (there are many examples of this, Enron is the most famous).  Only a handful of companies do well for an entire generation, which is what you need it to do until you retire. Most have their life cycle, then are merged, acquired, or simply fade away.
   "Investing for Dummies" is a great introduction to this and other investment topics. There is information on how to properly choose the mutual funds and stocks that you do choose as well. Investing should become a hobby of yours, at 31 you are young enough to have a real head start. If you pay even a small amount of attention to your investments, it will pay off with a very financially secure second half of life. Investments take time to grow, it makes a huge difference if you start now, or wait 10 years.

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com


---------- FOLLOW-UP ----------

QUESTION: Thanks Paul,

There is currently about $13,000 in the IRA right now, and I'm down about 40% overall after this big mess we have been dealing with.

Right now I'm in 5 diffrent types of growth mutual funds that cover large growth, foreign large blend, large value, mid cap blend, target date,  and have a small poistion in cash.  I'm looking at adding another mutual fund in the next year to two.

At this point I am also invested in two single stocks but plan on adding to my single stocks,  I like the idea of having about 6-8 single stocks that have healthy large yields whose divends will be reinvested automatically.  That is one of the main things I like about the single stocks, the dividends seem to be much higher compared to mutual funds, and this will add up over 30 years, but at the same time they are more risky by far.

I'm thinking:
60% mutual funds
35% single stocks
5% cash

for the time being, and as I get older and farther down the road adjust things accordingly.

What do you think?  Any suggestions?

Answer
Thank you Chad for your follow up question! I have no real additional input to offer you, it looks to me like you have done your homework, and thought things through. Your diversity is good enough given the amount that currently have left in the retirement account.
Don't worry too much about the 40% loss. This is no testament to your ability to manage your retirement account. EVERYONE has experienced this type of loss, most have lost even more. Instead, consider yourself very blessed that this has happened to your portfolio while you are so young, there is a huge amount of time going forward for you to make this back up. Imagine you were nearing retirement with hundreds of thousands or even a few million and to have lost that!
It sounds like you would agree, the main thing is to not lose your long term vision. The mistake would be to give up on investing and pull all money out into cash, which is what many have done.

I wish you the best, it sounds like you are on track to me, don't sweat any additional losses too much. We may have hit the bottom, but we may not have. Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com