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and international stocks have similar risk profiles and have similar long-term returns. This is a much less critical decision because U.S. (domestic) and what should be international. The second decision is what percentage of your stock allocation should be U.S. This is a conservative rule, and leads to smaller percentages of stocks than Vanguard chooses for its Target Retirement series. One traditional rough rule-of-thumb is "age in bonds," or percentage of stocks = 100 - age.
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Even if you are going to use a single LifeStrategy fund, you need to decide which of them to use, based on the percentage of stocks each you hold. There are no shortcuts and and it needs to be done no matter what investment approach you are using.Įven if you are going to use a single Target Retirement fund, you should not take the shortcut implied by the use of a retirement year in the name you need to decide for yourself what percentage of your portfolio you want to invest in stocks, and choose the fund that matches it. You must decide for yourself what percentage of stocks to hold, based in part on your personal risk tolerance. Choose where to hold each of these asset classes, and finally choose a mutual fund to use for each asset class. The task, then, is to take these three basic non-cash assets - domestic stocks, international stocks, and bonds - decide how much of each to hold (your asset allocation). On the other hand, it is assumed that every investor should hold both domestic and international stocks. It is assumed that cash is not counted within the investment portfolio, so it is not included.
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Taylor Larimore, co-author, The Bogleheads' Guide To InvestingĪ three-fund portfolio is based on the fundamental asset classes, stocks and bonds.