Third-Quarter Review of Investments and Personal Finance : Portfolio Checkup: : Here's how to put the year's market gains in perspective and maintain a portfolio that's healthy for you.

Diagnosis: A Need for Balance

Sometimes a simple approach is best--especially when it comes to managing your money.

This page is designed to provide some basic guidelines for investors of all ages, regardless of portfolio size. The underlying premise is that asset allocation--how you divide your savings among stocks, bonds and cash (money market securities)--is the most important decision you must make and stick with.

Asset allocation sounds complicated, but it needn't be. The first set of pie charts, for example, shows recommended portfolio allocations by age group, according to simple yet time-tested formulas. The goal: healthy long-term returns commensurate with a level of risk considered reasonable for your age.

For investors between ages 20 and 59, the allocations here assume that you are keeping a separate cash reserve set aside for emergency use, in whatever sum is most comfortable for you.

For all investors, the bond element of the portfolios recommended here is in intermediate-term Treasury securities, i.e., bonds maturing in five to 10 years, generally. Over time, bonds (or bond mutual funds) in that maturity range provide a yield close to that of longer-term bonds, without the extreme price volatility of longer-term bonds.

The allocations in the second set of pie charts apply to the stock portion of your asset mix. Your desired stock mix may differ, of course, but the essential idea is to have adequate diversification among stock sectors.

Naturally, your retirement-account investments should be included in the appropriate categories as you calculate your portfolio mix. But there's one caveat: If you own a significant number of shares in your employer, your remaining portfolio should be allocated as if that stock didn't exist--to avoid the danger of being under-diversified.

How closely should you adhere to an asset allocation plan? Obviously, there's no need to monitor your stock/bond/cash mix on a daily basis. But in a year like this one, when stocks and bonds have racked up big gains, this is a good time to look at your portfolio and consider whether it needs "rebalancing" to maintain the proper asset mix.

The real beauty of asset allocation is that it imposes discipline on investors--something many lack. When one piece of the allocation pie grows too large because of market appreciation, rebalancing forces you to add to other pieces of the pie that are either performing less well or have fallen in value.

To put it another way, asset allocation helps you buy low and sell high, when your instincts might steer you to do the opposite.

The Treatment: Proper Asset Allocation

Age group / Suggested Overall Asset Mix

20 to 49: 75% stocks, 25% bonds

50 to 59: 60% stocks, 40% bonds

60 to 74: 40% stocks, 40% bonds, 20% cash

75+: 30% stocks, 50% bonds, 20% cash


20 to 49 PORTFOLIO

1995 return: +21.3%

Historical return: +9.3%

50 to 59 PORTFOLIO

1995 return: +19.3%

Historical return: +8.6%

60 to 74 PORTFOLIO

1995 return: +15.1%

Historical return: +7.3%


1995 return: +13.9%

Historical return: +6.8%

Age group / Suggested Stock Mix

20 to 49: 25% intl., 40% growth, 35% small company

50 to 59: 25% intl., 35% growth & income, 25% growth, 15% small company

60 to 74: 10% intl., 50% growth & income, 25% growth, 15% small company

75+: 10% intl., 60% growth & income, 30% growth


20 to 49 PORTFOLIO

Avg. 1995 return: +23.0%

Best year in last 10: +35.9%

Worst year in last 10: -8.3%

50 to 59 PORTFOLIO

Avg. 1995 return: +21.9%

Best year in last 10: +33.2%

Worst year in last 10: -7.0%

60 to 74 PORTFOLIO

Avg. 1995 return: +24.6%

Best year in last 10: +36.7%

Worst year in last 10: -6.9%


Avg. 1995 return: +24.2%

Best year in last 10: +30.0%

Worst year in last 10: -5.0%

FOOTNOTES: 1995 returns for first set of pie charts are through August. Historical returns are annualized averages for each portfolio from 1926 through 1994, as calculated by Ibbotson Associates. 1995 returns for second set of pie charts are through Sept. 21, as calculated by Lipper Analytical Services using average mutual fund performance by category.

Staying Healthy: What to Do Now

* Should you rebalance by shifting money to bonds or cash, from stocks? Stocks have performed much better than bonds this year, which may have skewed your portfolio too far toward stocks. Note that this year's returns already are double the historic averages in every portfolio, mainly because of stocks. That suggests lower returns ahead.

* Think about your asset mix in the context of a market "correction": If the U.S. stock market plunged by 10% or 15%, are you comfortable that you have enough of your money in other assets to psychologically weather that slide, or could such a decline cause you to sell stocks in a panic--exactly the wrong reaction?

* If you currently don't own bonds or bond funds--perhaps because you're younger and don't want interest income--remember that bonds' primary role is to add an element of stability to your portfolio while yielding more than cash assets. Stocks could lose 50% of their value in a bear market; bonds are unlikely to ever lose more than 10% of their value even in a bad year.

* Intermediate-term U.S. Treasury bond mutual funds, the type of bonds used in the asset allocation models in these examples, generally yield 5% to 6% currently. You can earn higher yields on corporate or municipal bond funds, or on longer-term Treasury funds, but those categories entail additional risks. For many investors, intermediate-term Treasuries are a simple and relatively low-risk way to own bonds.

* If your employer's shares are by far the bulk of your stock holdings, think about how you can add savings to diversified stock mutual funds as a way of reducing your dependence on that single asset.

* If your portfolio needs rebalancing, don't feel compelled to do it all at once. Make a plan to shift assets over a period of months, giving yourself the benefit of "dollar-cost averaging."

* Remember that there can be tax consequences in rebalancing, if assets aren't in retirement accouts. If you incur taxable capital gains you may want to sell money-losing assets to create offsetting losses. But also remember that all investment decisions should be made primarily on their own merits; taxes are a secondary issue and shouldn't stop you from taking steps necessary for your portfolio's long-term health.

* Older investors who are tempted to boost stock holdings in the wake of this year's bull run should focus on the downside risk. Especially for the 60-and-over group, capital preservation must remain an important focus of asset allocation. Chasing higher returns will bring you much greater volatility in the long run.

* On the other hand, older investors who have no stock investments should realize that, at almost any age, you should have some money in the market. Only stocks can provide long-term growth, reducing the likelihood that you will outlive your assets.

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