Investing 100% in stocks

Your age isn't the only thing that will determine your asset allocation. Your 'human capital' will also affect how much you invest in stocks and bonds.

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By Walter Updegrave, Money Magazine senior editor

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

NEW YORK (Money) -- Question: I'm a 31-year-old doctor. I contribute the maximum to one retirement savings plans at work and I've just increased my contribution to another. At my age, I figure I should invest virtually all my money in stocks, especially because they're real cheap right now. Does this approach make sense, or am I completely wrong? --Wesley Lieving, New Haven, West Virginia

Answer: Your basic diagnosis is correct, doc, up to a point.

With the Dow hovering somewhere around 8,000 or so, equities are certainly a lot more attractively priced than they were back in October 2007 when the Dow closed at nearly 14,300.

And since your retirement savings will likely remain invested for 30 or more years, you can afford to ride the ups and downs of the stock market to reap the capital growth equities have historically provided over the long term.

There's another reason it makes sense for you to focus primarily on equities: In addition to being a doctor, you, my friend are also a bond.

Let me explain. Although most of us think of our wealth in terms of the financial assets or real estate we own, the truth is that much of our wealth is also tied up in our human capital, or our earning power.

You can think of that human capital as having the characteristics mostly of a stock or a bond. If you work in an industry or profession that provides lots of job security, then you can count on steady income throughout your career, much like the interest payments on a bond.

If, on the other hand, you work in an area where job security is low, then your earnings are likely to be erratic. Which would make you more like a stock.

As finance professor Moshe Milevsky explains in his book "Are You A Stock or Bond", the more "bond-like" your human capital is, the more you might want to shade your holdings of financial assets toward stocks. And the more "stock-like" your human capital, the more you might want to consider bonds.

That said, however, you don't want to go too ga-ga over stocks. Yes, they're cheaper today than they were a year and a half ago, but that doesn't mean they can't get cheaper still. So your decision to invest in stocks shouldn't hinge solely on the expectation of picking up incredible bargains.

And while history shows that stocks generate superior gains over the very long run (i.e., 20 or more years), it also shows that you can go through some pretty rough patches (like the last 10 years) enroute to those gains.

As for the "Are You a Stock or Bond?" question, you don't want to go too far in factoring the answer into your investing strategy. No one is completely a bond, especially in an economy like today's when almost everyone is vulnerable to cutbacks and layoffs. So someone who's a bond still needs actual bonds in his or her portfolio, just as someone who's a stock still needs actual stocks.

All of which is to say that even at your tender age, I don't think you should put your entire retirement portfolio into stocks. I'm hesitant to give you a precise percentage of equities to shoot for because the right figure can vary considerably depending on what sort of other resources you have, how anxious you get when your portfolio's value takes a dive and how confident you are that you won't need to dip into your retirement until you actually retire.

As a general guide, though, you can check out the stocks-bonds mix for the target-date retirement funds for someone your age offered by T. Rowe Price and Vanguard, the two fund families whose target-date funds are on our Money 70 list of recommended funds.

If you'd like to get a sense of how a particular stocks-bonds mix might perform over both the short- and long-term, check out the Asset Allocator in the Morningstar Tools section of T. Rowe's site.

One final note. I'm sure that, as a physician, you would never prescribe a radical treatment when a more moderate therapy with a successful track record is available.

Well, the same applies to investing for retirement. So avoid extreme stock-bond allocations and keep plowing as much new savings into your workplace plans as possible. As in medicine, there are no guarantees. But if you do those two things, you'll definitely increase your chances of having a nice healthy nest egg when you retire.

Got a question for the expert? We want to hear from you. Post your video or typed question to Walter Updegrave's iReport page and your question could be answered in the next Ask the Expert column or video.  To top of page

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