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When should I add bonds to my retirement portfolio?
Posted on 4/2/17 at 3:51 pm
Posted on 4/2/17 at 3:51 pm
Right now I'm 36 and all stocks in my sep ira. All contributions are split evenly between 5 growth heavy index mutual funds (through vanguard).
At what point should I add a bond fund?
Which one?
What percent of my contributions should I allocate to this fund?
TIA
At what point should I add a bond fund?
Which one?
What percent of my contributions should I allocate to this fund?
TIA
5
Posted on 4/2/17 at 3:52 pm to white perch
I'm 30 and I have around 5% in bonds
Posted on 4/2/17 at 3:58 pm to white perch
You're likely to get as many opinions on the subject as you get responses, but here's mine:
As far as I'm aware, the longest period of time it has ever taken the markets to retrace a loss once inflation is taken into account is a decade. As such, I see absolutely no reason to go anywhere near bonds until about a decade before retirement. At that point, I plan to move into bonds at a consistent rate until I hit about 35% bond exposure leading into "retirement".
As far as I'm aware, the longest period of time it has ever taken the markets to retrace a loss once inflation is taken into account is a decade. As such, I see absolutely no reason to go anywhere near bonds until about a decade before retirement. At that point, I plan to move into bonds at a consistent rate until I hit about 35% bond exposure leading into "retirement".
This post was edited on 4/2/17 at 3:59 pm
Posted on 4/2/17 at 6:20 pm to Joshjrn
quote:
As far as I'm aware, the longest period of time it has ever taken the markets to retrace a loss once inflation is taken into account is a decade. As such, I see absolutely no reason to go anywhere near bonds until about a decade before retirement. At that point, I plan to move into bonds at a consistent rate until I hit about 35% bond exposure leading into "retirement".
Same. Not thinking bonds until 10-12 years away from retirement.
Posted on 4/2/17 at 9:50 pm to white perch
Alot of people follow the rule "age in bonds" or some version of it like age - 10. I'm early 40s and 25% of my portfolio is in bonds. This smooths out the volatility and gives me funds to re-balance on significant dips. You can use new money to re-balance too, but may not be as easy if contributing monthly or be able to afford it.
If you haven't been through a 50% market crash like in 2008-2009 then you may overestimate your fortitude to not panic and sell.
Also, if your portfolio is on the smaller side then losing 50% may not have a big emotional impact, but it still might. If your portfolio is mid 6 figures or more, that same 50% decline can be a very tough pill to swallow.
If you haven't been through a 50% market crash like in 2008-2009 then you may overestimate your fortitude to not panic and sell.
Also, if your portfolio is on the smaller side then losing 50% may not have a big emotional impact, but it still might. If your portfolio is mid 6 figures or more, that same 50% decline can be a very tough pill to swallow.
This post was edited on 4/3/17 at 1:55 pm
Posted on 4/2/17 at 10:43 pm to gpburdell
I'm about 3 years away from retiring. I have never liked bonds. I just received a pension buyout and I am letting Vanguard handle it. I'm at 70/30 stocks to bonds ratio. I still don't like it but I've decided to take their advice and that's what they advise. If you're young, I'd play hard stocks and don't worry about the fluctuations. During the dip in 08, I didn't sell but kept investing heavily. That dip and stay is where I made most of my portfolio. You've got to keep the mindset that when the stocks go down, that's the time to buy it while "it's on sale".
Posted on 4/3/17 at 12:58 pm to white perch
you should have some bond exposure the day you open an account.
Posted on 4/3/17 at 2:23 pm to Popths
quote:
. You've got to keep the mindset that when the stocks go down, that's the time to buy it while "it's on sale".
What do you buy with if everything is in stocks? One other poster said to keep some in bonds for such an event.
Posted on 4/3/17 at 2:32 pm to notsince98
quote:
you should have some bond exposure the day you open an account.
And why is that?
Posted on 4/3/17 at 11:07 pm to Joshjrn
No one under 35 needs bonds.
My bonds are contained in my Vanguard MF's: Wellington and Wellesley.
My bonds are contained in my Vanguard MF's: Wellington and Wellesley.
Posted on 4/4/17 at 5:37 am to white perch
"The worst 30 year return — using rolling monthly performance — occurred at the height of the market just before the Great Depression and stocks still returned almost 8% per year over the ensuing three decades."
There have been some pretty dismal 20 year returns (2.5%), but those are VERY rare and the risk of losing capital to inflation while investing in bonds is significant.
No reason to have any bonds at your age, unless you already have enough capital to retire on.
Bonds are fine if you don't need any return on your investments and only want to preserve capital. If you expect or want a return on your investments, bonds won't do it.
There have been some pretty dismal 20 year returns (2.5%), but those are VERY rare and the risk of losing capital to inflation while investing in bonds is significant.
No reason to have any bonds at your age, unless you already have enough capital to retire on.
Bonds are fine if you don't need any return on your investments and only want to preserve capital. If you expect or want a return on your investments, bonds won't do it.
Posted on 4/4/17 at 10:36 am to Joshjrn
quote:
And why is that?
Diversification. People should be exposed to everything from all stock types to bonds, futures, real estate, natural resources, precious metals, etc. You can diversify and still have an aggressive portfolio if max growth is the goal but you should always have at least a small chunk of everything.
Posted on 4/4/17 at 10:47 am to notsince98
quote:
Diversification. People should be exposed to everything from all stock types to bonds, futures, real estate, natural resources, precious metals, etc. You can diversify and still have an aggressive portfolio if max growth is the goal but you should always have at least a small chunk of everything.
The purpose of diversification is to reduce risk and maximize gains. I'm certainly not maximizing gains with bonds, so how am I reducing risk by holding bonds decades before retirement?
Diversification simply for the sake of diversification is financial masturbation.
Posted on 4/5/17 at 10:44 am to Joshjrn
quote:
The purpose of diversification is to reduce risk and maximize gains. I'm certainly not maximizing gains with bonds, so how am I reducing risk by holding bonds decades before retirement?
You would be incorrect. You can't reduce risk and maximize gains.
You should really talk to your financial planning professional to get the details on diversification.
One small note about diversification is it allows you to capture gains in areas while other areas are falling. If you arent exposed to different sectors/types, you might be missing out on growth potential. There are times when bonds are the maximizing gains choice, especially in market downturns. If you have none, you missed out.
Posted on 4/5/17 at 10:47 am to notsince98
I'll play ball for a second, for the sake of argument. You say that there should be bond exposure the moment an account is opened. What percentage of a 25 year old's portfolio should be in bonds?
Posted on 4/5/17 at 11:07 am to Joshjrn
quote:
You say that there should be bond exposure the moment an account is opened. What percentage of a 25 year old's portfolio should be in bonds?
<5%.
there are pretty standard benchmarks on how to diversify one's portfolio, based on how aggressive you want to be and your age.
But bond's should be a part of everyone's portfolio, assuming they have more than a small nestegg. Bonds help to reduce volatility. And if a scenario like 2008/9 transpires having a bit in bonds will help if you lose your job and your portfolio goes to shite.
Municipal bonds are also useful as a tax avoidance strategy.
Posted on 4/5/17 at 11:14 am to Joshjrn
quote:
What percentage of a 25 year old's portfolio should be in bonds?
2%
Posted on 4/5/17 at 11:25 am to Hawkeye95
quote:
But bond's should be a part of everyone's portfolio, assuming they have more than a small nestegg. Bonds help to reduce volatility. And if a scenario like 2008/9 transpires having a bit in bonds will help if you lose your job and your portfolio goes to shite.
Municipal bonds are also useful as a tax avoidance strategy.
While I can appreciate the job loss scenario, it's simply a rewording of the approaching retirement scenario. Sure, if you don't have an emergency fund and your job is volatile and hard to replace, fine, carry bonds.
But the bulk of advice I've read on the subject of carrying bonds boils down to this: you don't have enough self control to resist liquidating your equity portfolio if it loses 50% a la 2008, so you need to carry bonds to save you from yourself. And that's certainly possible for some people. I just wish people selling the bond idea would be honest if that's what they are selling.
As far as tax avoidance, I imagine it's the extremely rare 25-30 year old that is investing more than the maximum ROTH contribution plus whatever they might have available at work. If there's a 25 year old on this board making six figures and putting away tens of thousands a year in taxable accounts, I might give them different advice.
But for the average person? I just don't see it. But even still, I'm open to being persuaded.
Posted on 4/5/17 at 12:39 pm to Joshjrn
quote:
While I can appreciate the job loss scenario, it's simply a rewording of the approaching retirement scenario. Sure, if you don't have an emergency fund and your job is volatile and hard to replace, fine, carry bonds.
But the bulk of advice I've read on the subject of carrying bonds boils down to this: you don't have enough self control to resist liquidating your equity portfolio if it loses 50% a la 2008, so you need to carry bonds to save you from yourself. And that's certainly possible for some people. I just wish people selling the bond idea would be honest if that's what they are selling.
Well that is what reducing volatility is about. To keep value of the portfolio from gyrating too much. So if the worst case scenario happens, you have something that you can pull out. I knew several people who had a 6 month emergency fund, and lost their job and had to liquidate retirement funds as they couldn't find something in a year.
Also a lot of advisors recommend putting your emergency fund in a roth! These are real scenarios.
Also, putting your emergency funds in bonds isn't a terrible idea either, depending on your risk tolerance.
quote:
As far as tax avoidance, I imagine it's the extremely rare 25-30 year old that is investing more than the maximum ROTH contribution plus whatever they might have available at work. If there's a 25 year old on this board making six figures and putting away tens of thousands a year in taxable accounts, I might give them different advice.
Well I certainly had money outside of roth/401k.
quote:
But for the average person? I just don't see it. But even still, I'm open to being persuaded.
This is the thing - you are not average. You are clearly better informed, and could establish a lifestyle/savings to protect yourself against a crash/job loss. Not to mention, you would have the fortitude to stay the course if the portfolio went down by 50%+.
The reality is that most people aren't as well informed as you and thus might need more downside risk protection.
This post was edited on 4/5/17 at 12:40 pm
Posted on 4/5/17 at 3:12 pm to Joshjrn
quote:
I'll play ball for a second, for the sake of argument. You say that there should be bond exposure the moment an account is opened. What percentage of a 25 year old's portfolio should be in bonds?
There is no specific answer for that. Everyone's investment tastes (percentage breakdown) will likely be different but not having any presence doesn't sound like a great strategy, IMO.
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