Who’s Counting?

I am counting – but only to five. Here are five simple rules for asset allocation (The jargon for not putting all your eggs/investments in one basket).

Rule 1: If you need money in the next 12 months keep it on term deposit or in a savings account.

Rule 2: If you need money in the next 5 years put it in a safe investment like government stock or corporate bonds. If you can’t do this directly use a managed fund.

Rule 3: Any money you don’t need for the next 5+ years should be invested in the share market. Shares, on average, have returned over 10% annually from 1926 to 2007 so try not be frightened.

Rule 4: Always own shares. Over the long term equities are the best hedge against inflation.

How much should I invest in shares you say - use the following guide from William Bernstein’s The Intelligent Asset Allocator:

For example if you can tolerate losing 35% of your portfolio in the course of earning higher returns, 80% of your portfolio should be invested in stocks; 30% loss = an exposure of 70% to shares; 25% loss = an exposure of 60% to shares; 20% loss = an exposure of 50% to shares; 15% loss = an exposure of 40% to shares; 10% loss = an exposure of 30% to shares; 5% loss = an exposure of 20% to shares; 0% loss = an exposure of 10% to shares.

Rule 5: Don’t hide in a cave (even if your gut is instructing you to do so) until someone sounds the all clear on the economy – it won't happen and you’ll miss out on the profits a recovery will bring.