Posted by Tim Stobbs on October 28, 2008
I’ve got an idea. One that I would appreciate some feedback on. For lack of a better title I’m calling it the backward portfolio.
What if instead of the traditional portfolio where you put some money in stocks, bonds and cash during your entire investing life. Then just adjust the amount of each type to be more conservative over time. That you instead build your portfolio instead from highest risk to lowest risk over time. So in the beginning you mostly pick your individual dividend paying stocks with some index funds with just a little bit of cash between purchases. Then towards the middle you focus more on index funds. Then in the last 10 years you start to pick up some bonds and during your last three to five years you focus on making a pile of cash.
So overall it would look something like this:
30+ years to retirement: 85% individual stocks, 10% index funds, 5% cash
15 year to retirement: 50% individual stocks, 45% index funds, 5% cash
10 years to retirement: 40% individual stocks, 35% index funds, 20% bonds, 5% cash
5 years to retirement:20% individual stocks, 20% index funds, 50% bonds, 10% cash
At retirement: 15% individual stocks, 15 % index funds, 60% bonds, 10% cash
The idea of this would be to maximize your equity portion of your portfolio when your young at 95% and so if you do make mistakes in individual stock picking you can recover from your mistakes. This would also prevent people from having too much equity exposure towards the start of your retirement as you would be more focused on stabilizing and locking in your gains at the end than taking on more risk. Obviously some equity is required in retirement to combat inflation concerns, but I’ve the overall rather small in retirement when you want to sleep well knowing your not going back to work because of a market drop.
Yet despite the positives of this idea I see a few holes. First off, 95% equities can mean a not so good sleep at night factor for young people. I’m not sure most people could handle that well. Another issue that occurred to me was your investment knowledge when your young is often more geared to buying an index fund in the beginning (because we all started off clueless at one point) until you have learned enough about stocks to be comfortable picking your own dividend paying portfolio.
I’m not planning on doing this tomorrow or anything, but rather it was just an idea in my head I wanted to see what others think about. So would you ever try something like this? Feel free to suggest other breakdowns.