One of you writes: “I find very little advice available on how to select the most efficient mix of bonds and stocks. And once that has been determined, what % should be put into the various categories of Morningstar boxes, i.e.: Large, Mid, Small Cap Value, Growth, Blend. The same for the categories of bonds? Your Personal Fund site is wonderful for the next step of selecting the particular fund product in those categories — but how do you know how much to put in each category?”

Well, I think you have them ranked properly: the percentage allocation among stocks, bonds, and cash is probably the single most important factor in determining your results. How your money is then allocated in general terms within the universe of stocks and the universe of bonds is second. Choosing the right specific funds (or individual stocks) is probably the least important issue (though costs do matter).

This is too big for one column, but let’s see how far we can get. (The rousing conclusion, Friday, will be Treasury Inflation Protected Securities, followed by Series I Savings Bonds next Monday. But bear with me.)

Deciding how much to put into equities and how much in fixed dollar investments is a very personal decision based on both rational and emotional considerations.

I’m not too fond of the popular shortcut that suggests you keep 100% minus your age in the equity markets — e.g., 79% in stocks if you’re 21 — because it’s obviously too simplistic. (If you’re married with children, whose age are you supposed to use? Does it matter whether you’re employed? Disabled? The granddaughter of doting, aging, billionaire grandparents?) But how do you go about making this decision? Where do you even start?

Easy: START WHERE YOU ARE. It says something about you that shouldn’t be ignored. You won’t stick with any strategy if it doesn’t fit your personality. Also, big changes in asset allocations are normally made for the wrong reason. If you have nothing at all in the stock market and you are thinking of diving in now just because everyone you know is getting rich daytrading (by the way, everyone is lying to you), or because you think you need to make big money quick, then you’re about to make a really stupid mistake. If you’re 100% in the market and you’re thinking of selling everything, you’re probably not making a rational asset allocation decision but attempting to time the market (and, as my friend and sage Less Antman says, “the next inductee into the Market Timing Hall of Fame will be the very first”).

No decision that has to be made immediately is going to be a good one. So wait at least 24 hours to decide. Isn’t that a convenient excuse for ending today’s column.

Tomorrow: How should you allocate that 401(k)?



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