To get started, you need to do two things:

(1) Decide how much to will invest in equi­ties ver­sus bonds

(2) Decide on an asset allo­ca­tion for equities

(1) Decide how much you will invest in equi­ties ver­sus bonds

These two tables can help you deter­mine how much you should invest in equi­ties– or at least give you a rea­son­able start­ing point. The first table, “Risk tol­er­ance,” pro­vides a guide­line of how much to invest in equi­ties based on when you will need the money. But even if you don’t need the money for many years, your “Risk appetite,” addressed in the sec­ond table, may be less. This pro­vides you two esti­mates of how much to invest in equi­ties: one from each table. The amount you should con­sider invest­ing in equi­ties is the lower of the two percentages.

The above tables have been adapted from “The Only Guide to a Win­ning Invest­ment Strat­egy You’ll Ever Need” by Larry Swe­droe. This is not per­sonal invest­ing advice and should be con­sid­ered an illus­tra­tion of possibilities.

Here is a sim­ple exam­ple. Say you are 45 years old and would like to retire when you are 60. Based on the risk tol­er­ance table, your max­i­mum equity expo­sure should be 90% of your assets, since you have 15 years to go, which puts you into the 15 – 19 slot and a 90% max­i­mum stock expo­sure. But, when you reflect back on the mar­ket crash of 2008 – 2009, when the equity mar­ket declined 50%, you feel that you would only be com­fort­able with a 20% loss in a sin­gle year. The risk appetite table says you should have no more than 50% in stocks. Instead of 90% stocks, you are now think­ing 50% would be most appro­pri­ate, given your per­sonal feel­ing about risk. But remem­ber: will­ing­ness to tol­er­ate short term losses can improve long term returns. This is no easy deci­sion. But it is your deci­sion, not some advisor’s.

(2) Decide on an asset allo­ca­tion for equities
The next thing you need to do is deter­mine how to allo­cate the equity por­tion of your port­fo­lio. There is no per­fect way to do this. See our analy­sis of the asset allo­ca­tions of a num­ber of expert investors. The returns are all fairly sim­i­lar. If you pick one of the asset allo­ca­tions listed there, you should do about as well as the experts do (remem­ber these asset allo­ca­tions focus only on the equity por­tion of your port­fo­lio, not the bond por­tion you deter­mined in step 1). Then you just need to find low cost index funds to imple­ment the asset allocation.