I hate to begin an answer with the wishy-washy phrase "that depends," but the truth is that no single number is right for all 55-year-olds, or for anyone of any age. The percentage of stocks you should own can vary widely depending on a number of factors.
The key, though, is homing in on the right factors. Many investors get caught up in issues that aren't very helpful in creating a long-term investing strategy, such as the speculation about whether we're going over the fiscal cliff and how the interminable spending and tax negotiations between the White House and Congress will turn out.
But when it comes to the fundamental question of how to divvy up your money between stocks and bonds, these are distractions. What really matters are your personal financial circumstances -- specifically, the length of time you plan to keep this money invested, what other resources are available to you and, perhaps most important, how much risk you're comfortable taking with this money.
So let's go through each of these factors, starting with your investment time horizon, or how long you think it will be before you tap your investments.
If you're planning to use this dough as a reserve fund that you would dip into for emergencies and such, or you know you'll need it in a relatively short period of time -- say, two to three years to pay for a down payment on a house or school tuition -- then you can't afford to take much risk. Your first priority is to be sure the money will be available when you need it. So you want to invest it someplace secure where neither the principal nor any earnings are going to lose value.
That rules out stocks (and bonds) altogether. You're pretty much limited to cash equivalents like FDIC-insured money market accounts and short-term CDs. (Money market funds are also a possibility, but given the regulatory uncertainty surrounding them and the fact that they now pay considerably less, I think money-market accounts are a better place to stash cash.)
None of these options is going to pay much -- maybe 1% or so a year if you really shop around. But return isn't your main concern; safety is. The low return is what you accept for the higher level of security.
As your time horizon expands beyond three years or so, you can begin to add some bonds and perhaps even some stocks to your portfolio in pursuit of higher gains. But be careful. Stocks can suffer some pretty devastating short-term setbacks. From late 2007 to early 2009, stock prices dropped almost 60%. And although bonds are much more stable than stocks, they too can suffer losses if interest rates climb from their current low levels. (For a guide to how much you might want to devote to stocks and bonds over different time horizons, you can check out our Fix Your Mix tool.)
If you're investing for retirement, on the other hand, you've got to think about this time horizon issue a little differently.
Yes, at age 55, your money is likely to be invested a good 25 to 35 years, if not longer. At the same time, though, you'll be drawing on it for regular income once you retire in ten years or so. So ideally you want to have enough in stocks today so your retirement kitty will continue to grow for the next decade, but not so much that a severe market downturn could wipe out a big chunk of your savings near the end of your career and derail your retirement plans.
For an example of how this trade-off between long-term growth and protection over the nearer term translates to the percentage of stocks in your portfolio, I suggest you check out the stocks-bonds mix in target-date retirement funds designed for someone your age -- namely, 2020 or 2025 funds. If you do that, you'll find that today such funds typically have anywhere from 55% to 75% of their assets in stocks, a percentage that gradually declines as the target date approaches.
Of course, that's a pretty wide range. To get a sense of whether you might want to be at the high or low end of it, you can consider the second factor: the amount of assets or other financial resources you have available beyond your investment portfolio.
If, in addition to your retirement savings, you've got a traditional defined-benefit pension that will pay you a monthly income for life or you have a sizable equity cushion in your home that you could convert to a reverse mortgage or turn into a nice sum of cash by downsizing, then you may prefer to stick to the higher end of that range, say, 70% or more. After all, with more income or wealth to fall back on, you're better prepared to handle the greater ups and downs of a more stock-heavy portfolio.
Conversely, if your retirement nest egg represents all or nearly all the money you have, other than what you'll receive from Social Security, then you may want to play it more conservatively and limit your stock holdings to 55% or even less.
That brings us to the third factor I mentioned: risk. Before committing to any mix, you need to do a gut check. If ample resources and a relatively long time horizon suggest you might invest upwards of 75% of your money in stocks, doing so would make no sense if a high-octane blend gives you agita every time the market heads south.
To get a sense of how your mix might perform in a market downturn -- and whether you'd hang in or bail and take a loss -- you can check out Morningstar's Asset Allocator tool.
Or you could do a quick back-of-the-envelope calculation to see how different holdings of stocks and bonds performed in a down year. In 2008, for example, the Standard & Poor's index lost 37%, while a diversified portfolio of U.S. investment-grade bonds gained just over 5%. Thus, a 75% stocks-25% bonds portfolio would have lost roughly 26% that year, while one split 50-50 between stocks and bonds would have lost a more manageable 16%.
If you follow the steps I've outlined, you should come away with a decent idea of how much stock exposure makes sense for you. Just remember that as you get older and as your financial situations changes, so may your willingness to see your portfolio's value bounce around. Indeed, that's why target-date funds morph more toward bonds as they get nearer their target date.
Walter Updegrave is the editor of RealDealRetirement.com, a site that offers easy-to-understand advice on retirement planning. Walter was previously an editor at MONEY Magazine and wrote the Ask the Expert column for CNNMoney.com. Walter has written four books on retirement planning and investing, including We’re Not in Kansas Anymore: How to Retire Rich in a Totally Changed World.