Newbie question about allocation

[wirednuke83]

Good Morning all!

I'm out of debt, and new to the concept of investing. I've been participating in my 401k plan, a Roth IRA, a 529 for the kids, and now I have a taxable account. They're all allocated into low cost index funds.

I don't like going into things blind, or even based off the recommendations of an influential blog writer. So I've been reading everything I can about finances/investing. I started with MMM, and worked my way back through his mentors and their reading list, Collins, Bogle, Buffet, Graham etc. So i'm feeling pretty comfortable that index funds are the way to go.

I currently have my assets allocated 86% stock/14% bonds, I've even felt tempted to bump it up to 20% bonds. I'm 34, I have plenty of time to make up for losses, but I feel the market is overvalued right now. I've even read a book or two that suggested that in the long haul a similar allocation tends to fare better. I recognize that bonds hedge against deflation and typically do better when stocks are in the toilet. So if the market took a dive, and bonds started doing better would the appropriate strategy be to rebalance the allocation and maintain my split and buy cheap shares of stock with the profits from the bonds? I just wanted to make sure I understood this correctly.

Thanks for the help,

Wired.

[SeattleCPA]

So if the market took a dive, and bonds started doing better would the appropriate strategy be to rebalance the allocation and maintain my split and buy cheap shares of stock with the profits from the bonds? I just wanted to make sure I understood this correctly.

Yes. You would rebalance to maintain your asset allocation...

[MustacheAndaHalf]

I like leaning on Vanguard's expertise, weight of assets under management, and legal obligations by simply viewing their target date allocations.  As you mention, it can be hard to know who to rely on - but a company with billions of retirement assets is a good place to start.

Vanguard 2045 allocates 10% bonds
Vanguard 2040 allocates 15% bonds
Vanguard 2035 allocates 20% bonds

If you plan on retiring in 17 years, when you'll be (34+17) age 51, then a 20% bond allocation makes sense.  But if you plan to keep working into your 60s, a 10% bond allocation is more suitable according to Vanguard's target date funds.

You mentioned "I feel the market is overvalued right now", which suggests you want to make investment decisions based on gut feel.  But "gut feel" tends to be fueled by media information, and is not novel information.  Anything you see on the news has long ago been digested into stock market prices.  You might read about high-frequency trading (HFT) to appreciate your chances of acting on public information before the market does (0%!).  You could read "Flash Boys", which is probably the most famous book about it.