The Four Most Dangerous Words To Your Portfolio

by Manisha Thakor

How Should I Invest?

As we head into the New Year, media outlets ranging from CNBC to The Washington Post are full of financial commentary addressing this question. On the surface it seems like a logical query.

But if you were getting ready to go out, would you ask "What Should I Wear?"... without describing where you are heading?  Of course not. The clothes you'd wear to shovel snow in will be very different from the clothes you'd wear to a wedding.

That's why "How Should I Invest?" are the four most dangerous words to your portfolio.  The answer to that question is often given as if one size fits all, when it's anything but. To protect yourself, here are 5 things to think about to make sure your hard earned money is invested in a way that is appropriate for your specific situation.

  1. When do you need to spend that money? If it's in the next 5 years you typically want to protect that money against inflation in savings accounts, money market funds/accounts or CDS rather than take market risk in stocks or bonds.
  2. Do you have any outstanding high-interest debt? If so, paying off that debt may be the best investment you can make as it gives a "guaranteed" return - especially when interest rates on savings vehicles are so low.
  3. How steady is your income?  A professor with tenure may feel more comfortable taking higher short-run risk than an entrepreneur with variable cash flow.
  4. How old are you?  The older you are, the less time you have on your side to bounce back from volatile markets and thus the more conservative you'll want your portfolio to be.  For women, a rough rule of thumb is to take 110 minus your age to arrive at the ideal maximum percentage of your portfolio in stocks.  For example, if you are a 40-year old woman... 110 minus 40 equals 70.  So up to 70% of your portfolio could be in stocks and 30% in bonds (for men, who have shorter life spans, use John Bogle's oft quoted 100 minus your age).
  5. How interested are you in investing to begin with?  Unless you are inherently passionate about picking individual stocks or studying active money managers, I love target date retirement funds and/or utilizing low cost index funds and ETFs.  My favorite "basic portfolio recipe" comes from Boglehead Mel Lindauer. His recommendation: for the percentage of your portfolio devoted to stocks, put 1/2 in a total US stock market index and 1/2 in a total international index. For the portion that goes into bonds, put 1/2 in a total US bond market index and 1/2 into Treasury Inflation Protected Securities ("TIPs") via funds, ETFs, or direct purchase. From there you can add some additional investment spice in the form of REITS or commodities, but for most people this core recipe will do just dandy.

Bottom line, always remember that before anyone can give you meaningful investment guidance they need to understand where it is that you specifically want to go.

So, where are you headed, financially? 

Want more financial love? You can follow Women's Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor, sign up to get her email updates delivered right to your inbox here.

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Manisha Thakor

From Manisha's linkedin profile page:

Manisha Thakor is the Director of Wealth Strategies for Women at Buckingham Strategic Wealth and The BAM Alliance. 

Manisha and her colleagues provide both evidence-based wealth advisory services for high-net-worth households and core asset management solutions for women and families nationwide with $80,000 or more in investible assets. 

An ardent financial literacy advocate for women, Manisha is the co-author of two critically acclaimed personal finance books: ON MY OWN TWO FEET: a modern girl’s guide to personal finance and GET FINANCIALLY NAKED: how to talk money with your honey. She is on Faculty at The Omega Institute and serves as a Financial Fellow at Wellesley College. Manisha is also a member of The Wall Street Journal’s Wealth Experts Panel, a member of the 2015 CNBC Financial Advisor’s Council, and wearing her financial educator’s hat serves as a part of TIAA-CREF’s Women’s Initiative. 

Manisha's financial advice has been featured in a wide range of national media outlets including CNN, PBS, NPR, The Today Show, Rachel Ray, The New York Times, The Boston Globe, The LA Times, Real Simple, Women’s Day, Glamour, Essence, and MORE magazine.

Prior to joining the Buckingham team, Manisha spent over twenty years working in financial services. On the institutional side she worked as an analyst, portfolio manager and client relations executive at SG Warburg, Atalanta/Sosnoff Capital, Fayez Sarofim & Co., and Sands Capital Management. After this she moved to the retail side and ran her own independent registered investment advisory firm, MoneyZen Wealth Management. 

Manisha earned her MBA from Harvard Business School in 1997, her BA from Wellesley College in 1992 and is a CFA charterholder. She lives in Portland, OR where she delights in the amazing Third Wave coffee scene and stunning natural beauty of the Pacific NorthWest. Manisha’s website is MoneyZen.com.