Daily Press (Sunday)

Stocks, bonds or CDs?

- Motley Fool

Q. When investing for my kids, is it better to put the money in stocks, bonds or CDs? — B.P., Knoxville, Tennessee


It depends on how old they are and your goals. For example, are they still quite young and not heading to college for many years? Or are they 16 and heading to college in a year or two? Or are they older, perhaps in their late 20s, and aiming to buy a home in a few years?

For long-term dollars that you can leave invested for at least five to 10 years, consider stocks, which have outperform­ed just about all alternativ­es over long periods. You can invest in stocks easily via a low-fee, broad-market index fund, such as one based on the S&P

500. It can also be good to invest in the stocks of a few companies your kids know and like. If you then follow them together, they’ll learn more about investing.

With shorter-term dollars that you’ll need within a few years, favor less-volatile investment­s, such as bonds, CDs or money market accounts.

Q. What’s “front-running”? — R.A., Columbus, Ohio


It’s when someone invests with the aim of profiting from inside informatio­n that can affect the investment’s price. For instance, a mutual fund manager might buy a stock for her personal portfolio and then buy lots of it for her fund, which could drive the price up, giving her shares a boost. Alternativ­ely, a broker who knows that his firm will soon recommend a company might buy shares of it for himself.

Some, but not all, kinds of front-running are illegal.

Asset allocation

The term “asset allocation” refers to how your money is spread across asset types such as stocks, bonds and cash. It matters because certain allocation mixes are better than others — especially as we go through different stages of life.

For example, if you’re 30, having all your investment­s in government bonds is likely not serving you well, as stocks tend to outperform bonds over long periods. There’s no one-size-fitsall asset allocation, but a common suggested rule is to subtract your age from 100, with the result being the percentage of your investment­s to hold in stocks. So if you’re 30, your long-term investment­s would be 70% in stocks — with perhaps 20% to 25% in bonds and the rest in cash. With many people living longer these days, some have revised that rule, having you subtract your age from 110.

Those with money they won’t need for decades might consider having close to all their long-term investment­s in stocks — as the stock market has been such a great wealth-builder over long periods.

One or more low-fee, broad-market index funds can be all you need for this. Consider funds that track the S&P 500 or the entire U.S. or world stock market.

Your asset allocation should probably be adjusted over time as you approach and enter retirement. It can also need adjustment­s whenever it gets out of balance. For instance, imagine that you allocate 85% of your portfolio to stocks and 10% to bonds (with 5% in cash).

If, over some years, your stocks grow faster than your bond investment­s and you end up with a 90-5 stock-bond split, you’ll likely want to sell some stocks and invest in some bonds in order to maintain your desired 85-10 ratio.

Over time, you might also move some assets from high-growth stocks to solid dividend payers, as they can be less volatile and can generate income for you.

Spend some time reading up on asset allocation to see what mix of assets seems most likely to help you reach your goals.

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