Junior has just arrived home from the maternity ward, and like the model parent you are, you want to start investing to send the little nipper to Harvard. What should your asset allocation strategy be for this investment goal?
Unless you are wealthy, you will need to generate lots of capital to fund an Ivy League education. Fortunately, you have a fairly generous investment time horizon of 18 years or so. You might well consider placing most of your investment capital in stocks to generate as much growth as possible—keeping in mind that you might have to endure the occasional dip or even a couple of bear market years. If you are concerned about exposing all of your capital to the market, you might want to place a small portion of it—say 20 percent—in safer investments such as bonds.
As Junior makes it to his mid-teens, your investment time horizon has shrunk to a few years. Naturally, you still want to generate capital for Junior's education expenses, but you want to make sure you don't lose too much of the earnings your investments have built. You may want to consider shifting your capital more heavily into bonds, while maintaining as much as half of it in the stock market.
Finally, it's almost time for the kid to move to the dorms. You will need to start spending your capital, but it still has to last for at least four years. Now is not the time for a temporary market correction to take a chunk out of Junior's nest egg. You will need to begin moving capital into cash equivalents for easy liquidity, while protecting the majority in bonds and keeping enough in stocks to protect against a few years of inflation.
As you can see, as you make progress toward your investment goal, your investment time horizon also changes, and the degree to which you allocate your capital to volatile investments will also change.
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