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Resolution 2: Invest smarter
Get the perfect stock allocation; gauge your risk; all you need to put your portfolio in order.
December 13, 2005: 11:33 AM EST
By Tara Kalwarski, MONEY Magazine
Do it now: 10 resolutions
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NEW YORK (MONEY Magazine) - The critical determinant of how well your portfolio performs over time is not the specific stocks or funds you pick; study after study shows that it's your mix of stocks, bonds and cash. The good news: Getting the right mix is not rocket science.

1. Lay the groundwork

First ask yourself these questions:

How far away is the goal? Over the long run, stocks will probably be your biggest winners (13 percent average annual returns over the past 20 years vs. 9 percent for bonds). But they're riskier in the short run (biggest one-year decline: 22 percent vs. 3 percent for bonds). The sooner you'll need the money, the less you should hold in stocks.

How much risk can I handle? Conversely, bumping up the percentage you hold in fixedincome investments will smooth out short-term ups and downs, at the cost of lower returns over time.

What else do I own? Look at the total mix of investments you hold, not just, say, your 401(k).

2. Follow the formula

Use these rules of thumb to determine what percentage of your portfolio should be in stocks.

Conservative Subtract your age from 100.

Moderate 110 less your age

Aggressive 120 less your age

Then adjust your mix for when you plan to retire: The longer you can wait to tap your savings, the more aggressive you can be. So increase your stock allocation by one percentage point for every year you expect to work past 65.

3. Apply the rules

The simplest way to divvy up your assets: Use index funds, like Vanguard's Total Stock Market Index (VTSMX) and Total Bond Market Index (VBMFX), that track a particular investment category.

Or choose a life-cycle fund, which maintains a stock/bond mix based on a time horizon and adjusts as your target date gets closer.

4. Take it further

To reduce risk and boost returns, diversify within asset classes.

In the stock portion of your portfolio, you might divide your money among funds that invest in big, small and foreign companies.

For help with this, use an online asset allocation calculator.  Top of page

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