CDs, Bonds, Index Funds, Stocks... Ratio Question

[toss]

I've read in the Intelligent Investor (at least I think I did) that a good starting ratio for a begining defensive investor is 70% Bonds and CDs and 30% Stocks. I have around 5k set aside in a Savings Account. Should I keep it in there for now or is it enough to start buying bonds and investing in an index fund? I also hear that dollar cost averaging programs into mutual funds is another popular choice.

My goal is to become a defensive investor earning something like a 7% yield . Thanks for your help and I apologize if my questions are too vague.

[Sniper]

The gold standard for portfolio allocation is based on age... the percentage you have in bonds should equal your age, the rest in stocks.

This is a rather conservative investment approach.

[toss]

I don't mean any offense, but from what I've read in the Intelligent Investor using your age to determine how much money you should have in bonds is generally a bad idea.

[Sniper]

[ QUOTE ]
I don't mean any offense, but from what I've read in the Intelligent Investor using your age to determine how much money you should have in bonds is generally a bad idea.

[/ QUOTE ]

I agree, I was just noting that was the standard.

Personally, I think most people should be fully invested in the stock market. (until they approach retirement and then they should make allocations based on their specific situation)

There are always stocks going up, even in the worst bear market. And, you can always short stocks and make money when the stock market is going down.

[vindikation]

[ QUOTE ]
And, you can always short stocks and make money when the stock market is going down.


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I saw this in the ETF post, what do you mean by "shorting a stock"?

[wiseheart]

Sniper,

I disagree. Unless I am missing something
you CANNOT always short stocks. That requires
a good amount of money, assets, or income. I
only have $3k invested and make about $12k a
year. I don't think Ameritrade would let me
start shorting stocks on a margin. Unless there
is something you know that I do not?

To the other guy, shorting stocks is when you
borrow someone elses shares and sell them to
buyers for a certain price. You then buy these
stocks back that you have sold at some later
date. The point is you expect the price to go
down, so if you sell a share for $20, and the
price of the share drops to $15, you could buy
it back and make $5.

[Sniper]

Hi Vind,

Shorting a stock is essentially borrowing and selling stock that you don't own, in the expectation that you will profit when the price falls.

http://www.swingtradingtips.com/shorting.html

[Sniper]

[ QUOTE ]
I disagree. Unless I am missing something you CANNOT always short stocks. That requires a good amount of money, assets, or income. I only have $3k invested and make about $12k a year. I don't think Ameritrade would let me
start shorting stocks on a margin. Unless there is something you know that I do not?

[/ QUOTE ]

Fill out Ameritrade's margin/options upgrade account form [img]/images/graemlins/wink.gif[/img]

The reason they will loan you money is because the money they are loaning is secured by the value of your portfolio, and they have safeguards in place to reduce their risk.

You do not need to have any more money to short a stock than to purchase a stock, once you are above the usually 2K minimum most brokers use for margin accounts.

[toss]

Thanks for the replies guys but these terms are starting to fly over my head. I think I'll start with index funds as they seem to meet all my requirements and more.

And is it really possible to consistently make 12k off 3k a year through stocks? 400% annual yield sounds kinda improbable to me.

its very doable but don't expect to compound 400% yearly, one of my accounts i opened mid april is up a little over 200%