Should you put your money in stocks or bonds? How about investing a windfall all at once…or spreading it out in regular fixed amounts over a longer period?
When top advisor, Allan S. Roth, CFP, CPA, advises on important investment decisions such as these, he often winds up using the magic 50% rule. How it works: You split the difference, allocating half your investment money in question to one choice…half to the other. Among the benefits is that it minimizes your regrets in the future because you’ll always be partially right no matter what the outcome. Two common scenarios he encounters…
Lump sum vs. dollar-cost averaging (DCA)? Example: A client built a business for two decades and then decided to sell it for $10 million. Understandably, she is reluctant to invest all the proceeds at once in the stock market since the pain of a market plunge and seeing all she worked for evaporate may cause her to sell. But if she invested the money monthly over a three-year period and we had a bull market, she would miss out on a lot of capital appreciation. So you guessed it—the solution could be to invest half right away and half using DCA.
Stocks vs. bonds? When a client is at or near retirement, I sometimes recommend a balanced portfolio of about 50% stocks and 50% bonds. Reason: It often maximizes the annual amount he/she is able to withdraw safely in retirement without running out of money. It also maximizes the returns from rebalancing the portfolio by buying low and selling high.
Caveat: Treat the 50% rule as a starting point for decision-making, not a one-size-fits-all solution, since everyone’s circumstances, needs and time horizons are unique.
