The Big Boomer Theory

The baby boom generation has had a long time to accumulate wealth and income. Now it's time for them to reevaluate their portfolios.

turned to municipal bonds to provide a bit more stability in his portfolio. What makes munis, as investment pros call them, so attractive is their tax-free status on the local, state and federal levels.

But don’t let munis’ low yield — or interest rate — fool you. A municipal yielding 4% is actually earning you more when viewed in tax- adjusted terms. To figure out just how a given muni compares to a treasury bond, do this simple calculation. Divide the municipal bond’s yield by 1 and minus your federal tax rate — 28%, 31%, 36% or 39.6%. If your rate is 31%, for instance, your tax-adjusted yield on a 4% muni amounts to about 5.8%. Munis and Treasuries aren’t the only fixed-income investments around. You’ve no doubt heard of corporate bonds and bond mutual funds, although we’d advise caution with regard to both. While corporate bonds are issued by a wide variety of companies, buying individual corporate issues can be expensive, not to mention a bit difficult given how small the market is. Bond funds seem to be logically sound, but can be problematic, as well. Individual treasury bonds guarantee your principal should you hold the bond until maturity; bond funds can’t make the same promise. Yes, you have an investment pro guiding the portfolio of any given bond fund, but if your goal is a steady anchorage for your portfolio, we’d suggest you stick to treasuries, and look at bond funds only as a substitute for stock funds.

Just how do all the pieces of the investment puzzle fit together in your portfolio? Asset allocation starts to make sense around the time you’ve got around $10,000 in your portfolio, says Daniel Lamaute, CEO of Lamaute Capital Inc., a Washington, D.C., broker-dealer. Up until that point, you should still be building a base in mutual funds, according to the type of investor you are. As an initial step, it’s good to consider how much you should have in stocks, bonds and then cash.

One rule of thumb to follow, say many financial planners, is to have the amount of your portfolio set aside in bonds or fixed income that roughly matches your age. or A 30-year-old who’s just starting out with a full 35 years to go until retirement needs to be in stocks to rev up his or her portfolio and motor it toward real gains. Setting aside 30% in bonds and 70% in stocks is a rough yardstick that makes sense. But for a 60 year-old who has to rely on whatever nest egg he or she has gathered thus far for the years ahead, protecting 60% of the portfolio in bonds seems like a solid strategy.

Remember also that within the portion of your portfolio held in mutual funds, there’s a lot of leeway to tailor your investments to your personal style, as we pointed out in Part II.

Our third worksheet, as simple as it may seem, walks you through a few of the asset choices you have at

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