By JLP | November 13, 2007
Are you as tired as I am of hearing about what percentage of your portfolio should be in bonds? It seems like lately there has been a plethora of articles outlining guidelines and suggestions on the allocation of stocks vs. bonds, especially in the wake of a huge focus on relatively new Target Retirement Date funds. These funds allocate your portfolio between stocks and bonds based on your estimated retirement date.
First of all, every investor has a unique time horizen and risk tolerance, so any rule of thumb is hardly adequate. Secondly, I think the typical rules of thumb are too conservative anyway. Many people are now living well into their 90s–and a recent article in Time suggests that some women in their 20s today may live to be over 120. Additionally, careers and aspirations are changing. Few folks can or want to quit earning income and live totally off of their retirement funds at 65.
So the method of “subtract your age from 100” or even from 115 to get the percentage of your portfolio that should be in bonds seems rather outdated. Target Retirement Date funds that allocate half of a middle aged person’s portfolio to bonds can actually be much too conservative, especially if that person has significant short-term assets outside of their retirement portfolio or if they expect to have other sources of income past age 65 such as pensions, passive income, earned income, or social security.
And yet funds that allocate smaller percentages to bonds are labled “aggressive” or even “very aggressive” which can confuse and scare away investors who wouldn’t categorize themselves with those lables. Words like “balanced” describe funds with upwards of 35% in bonds–which can actually be very conservative if you’re investing for the long haul.
I’m also particularly tired of all the articles that seem to come out of the woodwork when the market is “unstable” which ask, imply, or suggest that one should shift a larger percentage of their portfolio to bonds. Just yesterday a commenter suggested that I shift a third of my stock holdings into bonds.
Last time I checked, selling stocks when the market goes down is NOT the best way to maximize your return. Isn’t “buy low, sell high” supposed to be the goal? Besides, your allocation decision shouldn’t have anything to do with what’s going on in the market in the short term. Or perhaps I just missed the memo announcing that the media has suddenly gotten really good at predicting the market.
Personally, I don’t think ANY significant percentage of my retirement portfolio should be in bonds. I have almost 4 decades before I am legally supposed to touch my 401k or IRA. And even then, I plan to have enough “passive” income to keep me from having to totally live off my retirement funds. Plus, basically all of my non-retirement funds are in cash or bonds.
What’s your view on the stocks vs. bonds debate? What factors should determine your asset allocation?
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