A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THE LIFE-CYCLE INVESTMENT
GUIDE
The charts below present a summary of the life-cycle
investment guide. In the Talmud, Rabbi Isaac said that one
should always divide one’s wealth into three parts: a third in
land, a third in merchandise (business), and a third ready at
hand (in liquid form). Such an asset allocation is hardly
unreasonable, but we can improve on this ancient advice
because we have more refined instruments and a greater
appreciation of the considerations that make different asset
allocations appropriate for different people. The general ideas
behind the recommendations have been spelled out in detail
above. For those in their twenties, a very aggressive
investment portfolio is recommended. At this age, there is
lots of time to ride out the peaks and valleys of investment
cycles, and you have a lifetime of earnings from employment
ahead of you. The portfolio is not only heavy in common
stocks but also contains a substantial proportion of
international stocks, including the higher-risk emerging

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markets. As mentioned in chapter 8, one important advantage
of international diversification is risk reduction. Plus,
international diversification enables an investor to gain
exposure to other growth areas in the world even as world
markets become more closely correlated.
As investors age, they should start cutting back on riskier
investments and start increasing the proportion of the
portfolio committed to bonds and stocks that pay generous
dividends such as REITs. By the age of fifty-five, investors
should start thinking about the transition to retirement and
moving the portfolio toward income production. The
proportion of bonds increases and the stock portfolio
becomes more conservative and income-producing and less
growth-oriented. In retirement, a portfolio heavily weighted
in a variety of bonds is recommended. A general rule of
thumb used to be that the proportion of bonds in one’s
portfolio should equal one’s age. Nevertheless, even in one’s
late sixties, I suggest that 40 percent of the portfolio be
committed to ordinary common stocks and 15 percent to real
estate equities (REITs) to give some income growth to cope
with inflation. Indeed, since life expectancies have increased
significantly since I first presented these asset allocations

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during the 1980s, I have increased the proportion of equities
accordingly.

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For most people, I recommend broad-based, Total Stock
Market index funds rather than individual stocks for portfolio
formation. I do so for two reasons. First, most people do not
have sufficient capital to buy properly diversified portfolios
themselves. Second, I recognize that most younger people
will not have substantial assets and will be accumulating
portfolios by monthly investments. This makes mutual funds
almost a necessity. You don’t have to use the index funds I

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suggest, but do make sure that any mutual funds you buy are
truly “no-load” and low cost. You will also see that I have
included real estate explicitly in my recommendations. I said
earlier that everyone should attempt to own his or her own
home. I believe that everyone should have substantial real
estate holdings and some part of one’s equity holdings should
be in real estate investment trust (REIT) index mutual funds
described in chapter 12. With respect to your bond holdings,
the guide recommends taxable bonds. If, however, you are in
the highest tax bracket and live in a high-tax state such as
New York and your bonds are held outside of your retirement
plan, I recommend that you use tax-exempt money funds and
bond funds tailored to your state so that they are exempt
from both federal and state taxes.