Zaxon
The voice of reason
- Joined
- 5 August 2011
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I raised this question in another thread, but it deserves a dedicated thread to flesh it out more. You have to take risk to get good returns: share market. But due to market fluctuations, any money you need in the short term should be risk free: high interest bank account, term deposit. Bucket three is medium risk, lower return assets: bonds, p2p lending, etc.
The question is, do we need medium risk assets at all? The argument goes: if you're going to risk your money, then do it properly and get maximum returns (stock market). If there's some money you're not prepared to put in the market, then don't risk it at all (saving accounts, TDs). Personally, I can go either way on whether a medium risk class is required.
So here are your options. For this exercise, let's assume you're just retired (so no income), but 30+ years to live. This percentages I've chosen are arbitrary, and are just used to illustrate the three options:
1. 90% shares, 10% cash (earning interest, but zero risk)
2. 70% shares, 20% bonds/p2p, 10% cash
3. 100% shares, 1 months bills in cash.
Option 3 needs some explaining. Since stocks outperform all else, in theory, you could keep everything in stocks. Sell off what you need for expenses each month. Sure, the market will crash 50% every 20 years, but you're more than compensated for that by the excellent returns over the longer term.
Buffett espouses option 1. Financial planners use option 2.
The question is, do we need medium risk assets at all? The argument goes: if you're going to risk your money, then do it properly and get maximum returns (stock market). If there's some money you're not prepared to put in the market, then don't risk it at all (saving accounts, TDs). Personally, I can go either way on whether a medium risk class is required.
So here are your options. For this exercise, let's assume you're just retired (so no income), but 30+ years to live. This percentages I've chosen are arbitrary, and are just used to illustrate the three options:
1. 90% shares, 10% cash (earning interest, but zero risk)
2. 70% shares, 20% bonds/p2p, 10% cash
3. 100% shares, 1 months bills in cash.
Option 3 needs some explaining. Since stocks outperform all else, in theory, you could keep everything in stocks. Sell off what you need for expenses each month. Sure, the market will crash 50% every 20 years, but you're more than compensated for that by the excellent returns over the longer term.
Buffett espouses option 1. Financial planners use option 2.