Author Topic: Asset allocation - do you follow % in bonds = age?  (Read 11019 times)

G-dog

  • Senior Mustachian
  • ********
  • Posts: 13795
Asset allocation - do you follow % in bonds = age?
« on: June 25, 2014, 10:00:23 PM »
I went to a local bogleheads group meet-up.  I was surprised at how conservatively some of the folks were investing (65% bonds at age 56), and the several disparaging remarks about having a high % in stocks (e.g., target retirement fipund options in 401k).

I haven't read a lot on the bogleheads site, and I am still working my way through this and other sites - but I am wondering.......

What's your asset allocation and why?

Right now I am 54 yo and heavy (>80%) in stocks.  I hope to FIRE soon and I guess I am trying to sprint the rest of the way.  I am also wondering how far to pull back after I leave my current job when I turn 55. I plan to work PT and not touch my stache for several years and let the stocks keep on keepin' on - and now I am 2nd guessing that plan.

Joel

  • Pencil Stache
  • ****
  • Posts: 774
  • Location: California
Re: Asset allocation - do you follow % in bonds = age?
« Reply #1 on: June 25, 2014, 11:37:25 PM »
half my age in bonds.

Burgis81

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: Asset allocation - do you follow % in bonds = age?
« Reply #2 on: June 26, 2014, 01:05:31 AM »
This is roughly my set-up:

60% index funds
10% bonds
10% own property & real estate investments
10% gold
10% in my own business (cash and eventually other assets)

I'm in my early 30ies

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Asset allocation - do you follow % in bonds = age?
« Reply #3 on: June 26, 2014, 02:54:55 AM »
I posted this in another post about bond allocation. Why have any there the market beats bonds historically hands down. I have a hard time wrapping my head around why you would want anything in bonds.

Brian Fellows

  • 5 O'Clock Shadow
  • *
  • Posts: 36
Re: Asset allocation - do you follow % in bonds = age?
« Reply #4 on: June 26, 2014, 06:47:33 AM »
You want bonds if you want less risk.  The market outperforms them historically yes, but they're less volatile.  Your stocks can lose 30% of their value over a week.  Bonds will only drop a little bit when they drop.  So as you get older and retire, a giant loss will be catastrophic.  By using bonds, you're basically saying you're OK with capping your possible gains because you'll actually need the money soon.

I've been going by a bond allocation of 120-(my age).  I'm 30 now, so I'm at 90% stocks 10% bonds, and even then I'm only using that for a little bit of diversification.  Since I'm ignoring my retirement funds for a long time (I figure 10-15 years is the LEAST I'll continue working), all I are about is long term growth. 

Having that 10% allows me to annually rebalance, so it'll force me to sell high and buy low.  If stocks continue to drastically outperform bonds this year (bonds have lost me money, stocks have had a small gain), then I'll finish the year at something like 93% stocks and 7% bonds.  I'll be 31 when I rebalance, so I'd sell 4% of the stocks to buy bonds.  That'll be "locking in" the gain I made, because stocks will be at a high point and bonds a low point.

Realistically I'll have even a higher percentage in stocks, because my 401k right now is currently thrown 100% at stocks and bonds just make up a tiny chunk of my IRA.  So my year-end percentage will probably be maybe 96% stocks, 4% bonds just based on my contributions throughout the year before rebalance.

Bourbon

  • Stubble
  • **
  • Posts: 234
Re: Asset allocation - do you follow % in bonds = age?
« Reply #5 on: June 26, 2014, 07:11:00 AM »
I'm 32 and still accumulating.  At this point I am 100% in stocks.  I will likely pick up 10% bonds down the road and may be dumb enough to try and market time with my allocation to switch to 100% stocks again after a "crash".

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Asset allocation - do you follow % in bonds = age?
« Reply #6 on: June 26, 2014, 07:14:40 AM »
Eh tons of AA discussion on this and other forums.

Do what will prevent you from reacting to events. Do what you are comfortable with given your knowledge of risks and potential returns. Try to learn more about those risks.

frugalnacho

  • Magnum Stache
  • ******
  • Posts: 3335
  • Age: 36
  • Location: Madison Heights, Michigan
Re: Asset allocation - do you follow % in bonds = age?
« Reply #7 on: June 26, 2014, 07:19:46 AM »
I'm 32 and still accumulating.  At this point I am 100% in stocks.  I will likely pick up 10% bonds down the road and may be dumb enough to try and market time with my allocation to switch to 100% stocks again after a "crash".

Pretty much this.  I'm gonna ride that volatile roller coaster of stocks. 

Emilyngh

  • Pencil Stache
  • ****
  • Posts: 892
Re: Asset allocation - do you follow % in bonds = age?
« Reply #8 on: June 26, 2014, 07:29:07 AM »
I'm 33 and 25% bonds.   One day, when I'm feeling riskier, I'll probably change this to 15%, but for now, it's where I'm comfortable.

bo_knows

  • Pencil Stache
  • ****
  • Posts: 814
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Re: Asset allocation - do you follow % in bonds = age?
« Reply #9 on: June 26, 2014, 07:36:56 AM »
You want bonds if you want less risk.  The market outperforms them historically yes, but they're less volatile.  Your stocks can lose 30% of their value over a week.  Bonds will only drop a little bit when they drop.  So as you get older and retire, a giant loss will be catastrophic.  By using bonds, you're basically saying you're OK with capping your possible gains because you'll actually need the money soon.


Pretty much this, OP.  Bonds are just there to decrease the volatility of your portfolio. Paraphrasing a quote I've heard about this topic: "Once you've won the game, why continue playing?"   Basically, once you've accumulated enough, if decreasing your risk (and decreasing your overall return potential) is going to make you sleep better at night... do it.  If you can, in good conscience, tell yourself that you won't panic during a big market swing, then by all means stick with 80/20.

GGNoob

  • Pencil Stache
  • ****
  • Posts: 725
  • Age: 32
  • Location: Colorado
Re: Asset allocation - do you follow % in bonds = age?
« Reply #10 on: June 26, 2014, 07:43:14 AM »
It depends...

My wife and I have our taxable account and Roth IRAs with Betterment. Our Roth IRAs are 100% stocks and will probably remain there until age 40. Our taxable investment account will follow Betterment's advice and stick to the highest side of their "Moderate" risk allocation. With an estimated early retirement age of 50, our taxable account is 90% stocks/10% bonds. At age 31, Betterment will have me start lowering my stock allocation until I am at about 65% stocks/35% bonds at age 50 (which I may or may not follow over time). I thought about going with the 120-age rule for the Roth IRAs, but eventually that would put me at less stocks than I'd want, so I'll just go with more risk in those for now.

Our other stock investments (wife's 401k and an HSA) are in Vanguard mutual funds...Target Date 2055 (about 90/10) and Lifestrategy Growth (80/20). I'd be comfortable with each at 100% stocks, but the 401k didn't offer any other cheap Vanguard funds and I figured its easiest with the HSA to have 1 balanced fund to withdraw from if needed.
« Last Edit: June 26, 2014, 07:45:08 AM by logant1337 »

T-Rex

  • Bristles
  • ***
  • Posts: 414
  • Location: SF
  • Thirtysomething woman, military vet
Re: Asset allocation - do you follow % in bonds = age?
« Reply #11 on: June 26, 2014, 07:46:14 AM »
That is a really high percentage for almost any age. Hell no!

frugalnacho

  • Magnum Stache
  • ******
  • Posts: 3335
  • Age: 36
  • Location: Madison Heights, Michigan
Re: Asset allocation - do you follow % in bonds = age?
« Reply #12 on: June 26, 2014, 09:46:39 AM »
Why is that high for any age?  If you are accumulating money for FIRE, and won't be FIRE for 10+ years, then why is it high?  Seems silly to reduce volatility at the cost of returns when you are in it for the long haul.

Bourbon

  • Stubble
  • **
  • Posts: 234
Re: Asset allocation - do you follow % in bonds = age?
« Reply #13 on: June 26, 2014, 09:49:52 AM »
Why is that high for any age?  If you are accumulating money for FIRE, and won't be FIRE for 10+ years, then why is it high?  Seems silly to reduce volatility at the cost of returns when you are in it for the long haul.

I could be wrong but I think he meant % of age in bonds would be too high of a percentage in bonds at any age.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27892
  • Age: -999
  • Location: Traveling the World
Re: Asset allocation - do you follow % in bonds = age?
« Reply #14 on: June 26, 2014, 10:29:32 AM »
I like half your age in bonds, personally.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: Asset allocation - do you follow % in bonds = age?
« Reply #15 on: June 26, 2014, 10:43:15 AM »
I like half your age in bonds, personally.

I think this is a fair estimate. For a 70 year old, this would put you at around 35% bonds, which seems about right (you can add a few if you want even less risk).

The only thing I would change to this would be to not start adding bonds (or keep it minimal < 5%) until you're in the last decade of work before you begin drawing down your assets as you can accept the volatility of stocks while you're still working.

PloddingInsight

  • Bristles
  • ***
  • Posts: 308
Re: Asset allocation - do you follow % in bonds = age?
« Reply #16 on: June 26, 2014, 10:59:17 AM »
I'm 32 and I have 39% in bonds, so I'm more conservative than the rule of thumb.

My equities are split 55/45 US vs international, which is riskier than most bogleheads' equity mix, so maybe it averages out.

frugalnacho

  • Magnum Stache
  • ******
  • Posts: 3335
  • Age: 36
  • Location: Madison Heights, Michigan
Re: Asset allocation - do you follow % in bonds = age?
« Reply #17 on: June 26, 2014, 11:01:43 AM »
Why is that high for any age?  If you are accumulating money for FIRE, and won't be FIRE for 10+ years, then why is it high?  Seems silly to reduce volatility at the cost of returns when you are in it for the long haul.

I could be wrong but I think he meant % of age in bonds would be too high of a percentage in bonds at any age.

gotcha.  I think i'm in complete agreement with him.

T-Rex

  • Bristles
  • ***
  • Posts: 414
  • Location: SF
  • Thirtysomething woman, military vet
Re: Asset allocation - do you follow % in bonds = age?
« Reply #18 on: June 26, 2014, 11:18:35 AM »
Why is that high for any age?  If you are accumulating money for FIRE, and won't be FIRE for 10+ years, then why is it high?  Seems silly to reduce volatility at the cost of returns when you are in it for the long haul.

I could be wrong but I think he meant % of age in bonds would be too high of a percentage in bonds at any age.

gotcha.  I think i'm in complete agreement with him.

Yep, that's what I meant. Gotta give it a chance to grow. The stock market ain't always bad.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Asset allocation - do you follow % in bonds = age?
« Reply #19 on: June 26, 2014, 11:22:08 AM »
I'm 30. My liquid portfolio is 100% stocks. Said portfolio makes up about 15% of my total assets; the other 85% is real estate (my primary residence).

However, I also still have a lot of mortgage and student loan debt, and if such debt is considered like a "negative bond" then I'm very highly leveraged.

PloddingInsight

  • Bristles
  • ***
  • Posts: 308
Re: Asset allocation - do you follow % in bonds = age?
« Reply #20 on: June 26, 2014, 11:32:33 AM »
I think the point of age in bonds is that you should be approaching 2/3 bonds as you approach retirement.  If you're three years away from retirement and you're in 100% equities, you're at a distinct risk of being suddenly a lot more than 3 years away from retirement due to a downturn.  This is obviously a much bigger deal if you're in your 60s.  Mustachians don't want to work another ten years, but then again, mustachians can work another 10 years if they have to.  A 65 year old may not have that option.

That said, once you actually retire, it's probably a good idea to be more conservatively invested.  Why expose yourself to more risk when you don't need the extra return?  Once you win the game, why keep playing?

ivyhedge

  • Bristles
  • ***
  • Posts: 290
  • Location: United States of Farse
Re: Asset allocation - do you follow % in bonds = age?
« Reply #21 on: June 26, 2014, 11:38:25 AM »
I do not, if you're informally polling. But then I don't really follow an AA typical for this site, either.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Asset allocation - do you follow % in bonds = age?
« Reply #22 on: June 26, 2014, 11:50:31 AM »
That said, once you actually retire, it's probably a good idea to be more conservatively invested.  Why expose yourself to more risk when you don't need the extra return?  Once you win the game, why keep playing?

That depends on your time horizon, even in retirement. For a 30-year retirement ($750k portfolio, $30k spending), firecalc seems to think ~60% stocks has the highest chance of success. But for a longer, 50-year retirement ($800k portfolio, $30k spending), firecalc thinks 100% stocks has the highest chance of success. For a shorter, 20-year retirement ($610k portfolio, $30k spending) firecalc thinks 35% stocks has the highest chance of success.

The moral is, retirement isn't the end of the game. You don't stop playing until you're dead.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27892
  • Age: -999
  • Location: Traveling the World
Re: Asset allocation - do you follow % in bonds = age?
« Reply #23 on: June 26, 2014, 11:54:13 AM »
That said, once you actually retire, it's probably a good idea to be more conservatively invested.  Why expose yourself to more risk when you don't need the extra return?  Once you win the game, why keep playing?

That depends on your time horizon, even in retirement. For a 30-year retirement ($750k portfolio, $30k spending), firecalc seems to think ~60% stocks has the highest chance of success. But for a longer, 50-year retirement ($800k portfolio, $30k spending), firecalc thinks 100% stocks has the highest chance of success. For a shorter, 20-year retirement ($610k portfolio, $30k spending) firecalc thinks 35% stocks has the highest chance of success.

The moral is, retirement isn't the end of the game. You don't stop playing until you're dead.

Great post.

Your investment time frame isn't "years until I retire," it's the rest of your life.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

bogart

  • Handlebar Stache
  • *****
  • Posts: 1047
Re: Asset allocation - do you follow % in bonds = age?
« Reply #24 on: June 26, 2014, 12:38:23 PM »
My DH collects a pension that appears likely to continue (as opposed to that particular pension system going bankrupt) and in which I have 100% survivorship.  An annuity providing a similar payout purchased today would cost more than the entire balance of my retirement savings accounts.

I'm all in in stocks, for what I assume are obvious reasons.