The following is an excerpt from Allan Roth | July 2, 2012 | cbsnews.com |
(MoneyWatch) That we human beings experience different seasons or chapters in our lives is a theme that has been explored everywhere from literature to psychology self-help books to the Bible. Now prolific writer and investing expert William Bernstein also weighs in with his just published eBook on investing throughout your life. The Ages of the Investor takes a critical look at lifecycle investing. This isn’t a book for beginners, but rather is one for investors who have given up the fairy tale of getting rich quick or getting market returns without risk.
Bernstein’s book begins with the common investing rule of thumb which dictates that the percentage of your portfolio in safe assets should equal your age. Thus, a 25 year old should be 75 percent in stocks and reduce stock exposure by one percentage point a year so that by age 75, he will be 25 percent in stocks. As far as rules of thumb go, Bernstein notes this isn’t a bad one, and adds that target date retirement funds take similar approaches.
Fresh out of the gate, young adults have most of their net worth in human capital, which is the ability to earn an income over the next few decades. As we age, however, we find ourselves with less human capital and more of the financial capital that comes from savings. Bernstein states that any hope of retiring early rests with saving at least 20 percent of your income starting at age 25.
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