how much bonds should i have in my portfolio

[elmoslanz]

Hey folks. Im 38 have about 400k in the market. Im hoping to call it quits in another year or two. Planning to travel and spend time in south east asia and mexico. I think i need around 600k to be comfortable. almost all of my money  is in an S&P index fund. So my question is How much of my portfolio should be in bonds if any at all. I was thinking i would have like 40k in cash in case of a prolonged market crash. MY first thought is to have as much mony in equities as im gonna need that money to grow. I would love to hear your thoughts

[RedmondStash]

Kinda depends on when you're going to need the money, and your philosophy about bonds.

I've been disappointed by bond performance over the last couple of years and am considering shifting into CDs or a money market account. But hey, low performance now could easily herald improved performance next year. You never know.

If you're 10+ years out from retirement, there's time to ride the stock-market roller coaster, so having money in more stable investments is less important. But if you're looking to use money in the next 5 years or so, probably bonds or another stable investment is a better bet.

You might consider mapping out a Investment Policy Statement (https://www.bogleheads.org/wiki/Investment_policy_statement) to set an asset allocation that works for you. Basically, you want to figure out something you can stick with, because churn when you change your mind or panic due to market fluctuations costs you more than just staying the course. That means picking a course you feel comfortable with under all conditions.

Good luck with your plans.

[Monkey Uncle]

If you believe that the past is instructive of the future, then you should be aware that simulations have shown an 80/20 stock/bond mix to have generated somewhat better safe withdrawal rates than either a 60/40 or 100/0 allocation over 30 and 40 year time periods.  But with your 50+ year time horizon, you may be better off with 90/10 or 100/0.

You may also want to check into some of the research on rising equity glidepaths, which suggests that SWR may get a modest boost from having a bond component early in FIRE that slowly transitions to a higher stock allocation after a few years.  https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

[SwitchActiveDWG]

At 38 I’d be sticking with a 100% equities allocation.

Slight comment that S&P is basically a large cap index and lacks some diversity compared to a broader index. Not necessarily a bad thing just throwing it out there.

[Milizard]

If you believe that the past is instructive of the future, then you should be aware that simulations have shown an 80/20 stock/bond mix to have generated somewhat better safe withdrawal rates than either a 60/40 or 100/0 allocation over 30 and 40 year time periods.  But with your 50+ year time horizon, you may be better off with 90/10 or 100/0.

You may also want to check into some of the research on rising equity glidepaths, which suggests that SWR may get a modest boost from having a bond component early in FIRE that slowly transitions to a higher stock allocation after a few years.  https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

+1

[DreamFIRE]

So, you're needing a 50% increase in your current stache so that you can retire in 1 to 2 years.  Good luck.  Stocks had been on a run, but things are looking shaky lately.  So, how much money are you actually adding to your stash in addition to the growth to help get you the 50% increase in stash?  I would not recommend 100% stocks for someone within 1 to 2 years of FIRE, but it looks like you have your work cut out for you to reach your target stache in that short time frame the way things are looking.

[grantmeaname]

You might consider mapping out a Investment Policy Statement (https://www.bogleheads.org/wiki/Investment_policy_statement) to set an asset allocation that works for you. Basically, you want to figure out something you can stick with, because churn when you change your mind or panic due to market fluctuations costs you more than just staying the course. That means picking a course you feel comfortable with under all conditions.

Agreed. Get yourself an IPS and follow it.

I've been disappointed by bond performance over the last couple of years and am considering shifting into CDs or a money market account. But hey, low performance now could easily herald improved performance next year. You never know.

If you're 10+ years out from retirement, there's time to ride the stock-market roller coaster, so having money in more stable investments is less important. But if you're looking to use money in the next 5 years or so, probably bonds or another stable investment is a better bet.

The point of bonds isn't that they perform higher than stocks. The point is they're relatively uncorrelated with stocks, so that a blended portfolio of the two outperforms a portfolio of pure stocks on a risk-adjusted basis. For example, this (unfortunately citationless) image shows that an 80/20 portfolio underperforms a pure equity portfolio by less than half of a percent in expectation while the pure equity portfolio offers a third more volatility for the miniscule increase in returns.

If you believe that the past is instructive of the future, then you should be aware that simulations have shown an 80/20 stock/bond mix to have generated somewhat better safe withdrawal rates than either a 60/40 or 100/0 allocation over 30 and 40 year time periods.  But with your 50+ year time horizon, you may be better off with 90/10 or 100/0.

You may also want to check into some of the research on rising equity glidepaths, which suggests that SWR may get a modest boost from having a bond component early in FIRE that slowly transitions to a higher stock allocation after a few years.  https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

I'm not categorically opposed to the idea that a rate of return should change dynamically over time in response to age and the demands on a portfolio. But this article doesn't provide much evidence for what it asserts and I think the author fundamentally misunderstands the point of asset allocations. Not to insult anyone's intelligence, but the notion of a diversified portfolio is that you get a bit of 'free' return by rebalancing between asset classes that behave differently. The story depends on the fact that the asset classes move apart from each other at least a little bit. But the extrapolations he is making are based on undisclosed assumptions about future portfolio performance based on asset allocations:

with extrapolations using conservative return forecasts for bonds and stocks beyond July 2017

If you assume constant future returns, you've just meaninglessly garbled everything and you are going to overstate the case for a single-item portfolio as opposed to a diversified one. This means a portfolio with no diversification is going to look falsely good in at least the subset of the test cases that fall in future years.

Even given this assumption, he finds almost no effect! His glidepath takes the "failsafe" SWR from 3.25% to 3.42%, which is only a 5% increase and well below the level of noise. Ugh.

[Monkey Uncle]

Yeah, the ERN article was just the one that I could remember well enough to find it online.  I know there have also been some published works in academic journals - maybe by Kitces?  IIRC, that work also found a pretty small increase in SWR.  Personally, I do not use the rising equity glidepath because I'm not convinced that the effect that has been found is substantial enough to justify a conclusion that it will be beneficial in the future.  I'm a re-balancer, like you.  But I thought the OP should at least be aware of the glidepath strategy since it has gotten some traction in the early retirement community in the last few years.  Hopefully OP can judge the studies on their merits and make a decision for him/herself.