Financial advisors have long stood by the golden rule of having a portfolio of 60% stocks and 40% bonds, but Suze Orman says the rule no longer applies.
“Actually, 60-40 is dead,” Orman, founder of the Suze Orman Financial Group, said on Yahoo Finance’s On the Move.“It should probably be 75-25 stocks, believe it or not, stocks, if you also have enough cash to get you by.”
Orman explained that with interest rates have been low, bonds are now a less enticing diversification option for investors.
“Bonds will probably keep going down,” Orman said. “So why not put your money in a high-yield savings account, where it’s liquid, that’s actually paying you more right now than 10-year treasury that’s at 1.3%.”
Asked about stock volatility, Orman recommended dollar-cost averaging. Dollar-cost averaging is when you invest a consistent dollar amount in a security but at regular intervals. This could mean buying fewer shares when a stock soars and buying more shares when a stock declines. The costs during these both scenarios would amount to about the same.
“The truth is, if you have 10, 20, or 30 years till you need this money — you should wish and pray and hope that these markets go down,” Orman said. “These are the best things that could possibly happen to you if you are dollar-cost averaging, which means you take a specific amount of money every single month and you invest it.”
In a volatile market, it isn’t only diversifying that matters
While Orman says age shouldn’t deter one from participating in the stock market or buying exchange traded funds — baskets of securities similar to mutual funds but traded on exchanges, she says expenses matter too. High expenses fan the fire when it comes to market-induced anxiety.
Her advice comes at a time where the Federal Reserve states that one in 10 adults have struggled to pay their bills due to monthly changes in income. An eye on day-to-day expenses can provide a cushion against unpredictability.
“Make sure you pay off the mortgage on that home,” Orman said. “Make sure you don’t have any debt [and] stop leasing cars, all of these things you need to know.