How should you split your investment portfolio between stocks and bonds?

Answer 1

Your portfolio is made up of two parts:

1. Risky Assets (stocks)
2. Risk-free asset (AAA bonds, t-bills)

Assuming your risky assets are diversified, it makes no difference how you allocate between #1 and #2 other than your own personal preference.

If you have a strong adversion to risk, go heavier in #2 or vice versa if you don't mind risk.

If you're not sure what your risk adversion is, then here's a general guideline to follow based on your age:

0-25 (80%, 20%)
25-35 (70%, 30%)
35-45 (60%, 40%)
45-55 (50%, 50%)
55-65 (40%, 60%)
65+ (30%, 70%)

Answer 2

Its basically a question of choice and preferences.
based on risk perception and the desired level of returns expected or aspired

But, as a principle

Investment in well rated bonds are the stable income earning assets.

Investment in stocks, is the income subject to high volatility or speculative. They may earn high return or sometimes they may earn nothing and rather will end you up in loss.

If I am allowed to make a choice

I will go for an investment mix of 75% in well rated bonds and 25% in blue chips.

I will recommend you to read modern portfolio theory, to know more on the subject.

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Answer 3

Stocks(S) Bonds(B)
Low Risk S 25% B 75% Low Returns
Medium Risk S 50% B 50% Medium Returns
High Risk S 75-85% B 25-15% High Returns

Depends on your risk taking capacity and desire for higher returns.

Answer 4

The mathematics for splitiing is slightly complicated to explain, though I will make it like this. You get the covariance of return between the stock, bond and cash. You get a covariance matrix. Consider each portion of the portfolio to be x1, x2 and x3. Now transpose of covariance matrix multiplied by covariance matrix multiplied by matrix x of x1, x2, x3 will give a quadratic function, with constraint functions. Solve this quadratic with constraints and you will get the values of x1 x2 and x3 the different portions of stocks bonds and cash to be in portfolio. The constraint function you can fix the minimum return required from the portfolio and the corpus of the portfolio. Solution is by the usuall quadratic function solution which is also little complicated to explain. It is done through something called a Hessiam matrix or through partial derivatives which ultimately form a matrix and checking the matrix for positive definitness which optimises the portfolio.

Answer 5

Your age is a definite factor. The younger you are, the more time you have for equities to prove their worth and eliminate market variables. The older you are, the less you can suffer the risk that equities in general may suffer a sever market downturn. Generally speaking over a long period of time equities will outperform bonds. But over a short period of time, less than about 5 years, the much greater variance in stock returns might mean that ones investments in equites might underperform investments in bonds.

Consequently, the answer relates to the amount of risk one is willing to assume. The more bonds you add to your portfolio, the less variance you have in your return but the less return you will also have over a long period of time.

Actually, the answer is even more complicated than that because of the tax situation. Interest on bonds is 100% taxed. Capital accumulation of equites is not taxed at all so long as it is not realized. Dividends in general at taxed at about 1/2 that of interest. Long term realized capital gains also.

Answer 6

I'm with Frank on this one. 100% stocks, 0% bonds. Reason being that, hey, over the long run, stocks are a much better investment than, well, other investment vehicles. You are investing for the long run, right?

Answer 7

I depends on your age and risk appetite.
If you are in the begining of your career, and chances of your income growing from the present levels, you may increase your investment towards stocks by opting for more riterns and with more risk.
If you are reaching the age of retirement, reduce the exposure to stocks and increase investments in bonds and fixed income instruments.

Answer 8

It purely depends on what RETURN u need from it. If u need a high return , u have to face high Risk. So SHARE will give u high return based on u r high risk. Bonds literally provide u low return , but its purely risk less. So consider it. It is the portfolio of shares and bonds in a simple way.

Answer 9

This depends on your age and risk profile. An ideal portfolio will be as follows;
Age Proportion(Equity: Debt)
upto 25 years 75:25
25 to 40 between 70;30 to 40;60
40 to 55 35;65
above 55 max in debt, 15 to 20% in equity

Answer 10

I am always amused by the notion that retired people must be more cautious with their investments. Well, their nest egg is all they have for sure, but for those still on the treadmill, do you really like losing money? No? Well, then you are the same as retired. Risk is risk and profit is profit.