Should Your Bonds Allocation Match Your Age?

Bonds AllocationThis is a topic and a saying I have ignored in my investment strategy. It’s obvious when you look at my holdings that bonds are not matching my age. It’s very far from it. The only bonds I have are through an income mutual funds purchase in my defined contribution plan. It’s one of the 4 mutual funds I have in my defined contribution plan where I follow index investing. My ratio is mostly about stocks too with 70% in stocks between US and Canada. No international exposure as I rely on my conglomerates to give me international exposure. I don’t understand the social economic outside of North America to even bother.

Related: International Diversification Through Conglomerates

Should Your Bonds Allocation Match Your Age?

Many financial writers, book writers and advisors recommend to have an amount of bonds in your portfolio that matches your age. For example, if you are 25 years old, they say you should have 25% in bonds. If your age is 50, then you should have 50% in bonds. Unfortunately, in these day and age, I don’t believe in it. I respected it and believed it made sense but I never applied it and I am almost 40. It’s time I seriously decide what I am going to do about it. I just plainly feel that it’s too conservative and geared towards a portfolio that you plan to withdraw from. My dividend strategy is about not touching my principal portfolio and to rely on the income my portfolio generates. Stay with me while I go over my thoughts on the bonds and age matching topic.

Related: Dividend Investing Strategy

Just like My Own Advisor is rethinking his bond allocation, I too am defining what my bond allocation should be. There are a couple of reasons that I want to highlight for not following the bond saying.

  • First, I believe it is too conservative. The purpose of the strategy is to protect your portfolio from major market swing when you are getting ready to need the money. It might just be the markets that we are in but I much prefer the performance of my conglomerate stocks from a yield perspective. The value might swing but the yields remained unchanged for the most part.
  • Second, life expectancy is much higher than when the saying was established. Actuaries screwed up estimating how long we will live for and admitted it. The life expectancy has not been adjusted properly over the past years and has caused major issues with pension funds as many are now underfunded.

What I like about the saying and portfolio rebalancing is that it provides a very easy way to buy low and sell high. To that extend, I believe you need to have a bond allocation so that you can shift money from one side to the other. After compound growth, I believe that portfolio rebalancing is the second most powerful investing concept as it allows you to simply sell high and buy low without being a stock picker. Don’t shift your bond allocation target because of how the markets are performing, you need to stick to your strategy as Couch Potato explains.

The New Bond Ratio Thought

Here is where I am at in terms of beliefs in the bonds matching your age strategy.

  • Do I believe in holding bonds? Yes
  • Do I believe in having an allocation matching your age? No
  • Do I believe in diversification? Yes
  • Do I believe in rebalancing? Yes

As you can see the age ratio is the only issue I have. I feel that I just lose too much in performance. It’s not like the other part of my portfolio is in high risk stocks either. It’s actually quite conservative and boring (almost like watching paint dry).

  • Imagine you are 20, does holding 20% of your relatively small portfolio in bonds make sense? You have 30 to 50 years of compound growth ahead of you. I think your holding in bonds should be either 0% or 5%. Again, it doesn’t mean you should hold high risk stock. You want a good diversification across sector and across equities (REITs, Common Stocks, Preferred Stocks, …).
  • Imagine you are 30, what should your bond allocation be? You still have 20 to 40 years now. That’s a very long time. You might be paying for a mortgage and kids so your hard earned money should work for you. I would say that maybe 10 or 15% in bonds is appropriate.

Bonds Ratio

There are no right or wrong bonds ratio in my opinion. As such, I have created a few scenarios above to help anyone with their decision. In my next reader portfolio review, I will be going over a portfolio of a couple in their 70’s retired  since the early 30’s and their portfolio is much closer to the income bonds ratio than anything else.

Define Your Plan

What’s your strategy?

What is important is that you assess how bonds fits in your plan. Will you be earning a pension from a pension plan? Will you withdraw the money at a 4% rate? How will you retire is the big question. It’s pretty daunting when you are in your 20’s trying to assess. Usually, you can look at our parents and relative to get insight into their retirement cost and revenue stream. It’s really important that you do that to get some point of reference. Robb @ Boomer & Echo has a pension plans but because of uncertainties in the underfunded pension plans, he is planning on saving on top of his pension plan.

Related: How To Define Your Retirement Cost

Stick To Your Plan

It’s fine to make adjustments to your plan and refine it but don’t drastically flip it over. Just like I recommend doing partial trade and sell (add to your positions slowly when appropriate and take profits when appropriate), you should only doing small adjustments at a time. The plan and the ratios are what allows you to make objective non-emotional decisions.

My Bonds Strategy

My plan is to follow the income allocation strategy. It’s true that bonds can help you during market crisis as it soften the blows. On the other hand, my dividend investing strategy to generate income has many indicators unique to dividends that I can rely on to see if my portfolio is affected negatively for income. Since I don’t plan to withdraw from my portfolio but rather use the income, the fluctuation in value of the portfolio is not as much a risk compared with a reduction in income. It means I can ignore the market and focus on the income as I have been doing if you follow my Dividend Income.

  • No dividend increase – are the fundamentals affected by the company? Dividend Mantra recently sold Intel due to this point.
  • Dividend reduction – definitely an adjustment. I usually sell.
  • Dividend cut – probably overdue and the market condition force their hand. I usually sell.

Readers: What’s your take on the bond allocation matching the age?

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14 Responses to "Should Your Bonds Allocation Match Your Age?"

  1. I like your income strategy. It’s a smart play long-term.

    “Actuaries screwed up estimating how long we will live for and admitted it. The life expectancy has not been adjusted properly over the past years and has caused major issues with pension funds as many are now underfunded.”

    For sure.

    The death of the DB pension plan is coming, definitely in the private industry and eventually in the public sector, although it will take a generation or more for it to happen because the ego-centric unions.

    Thanks for the reference to my post, great minds think alike my friend.


    1. Adjustments are definitely on the way.

      Even with the Canadian government adjusting the retirement age, I think the old saying of using your age for a bonds ratio needs to change. Even if it’s your age minus 5 or something like that. I was a really simple saying and I hate to complicate it but a 20 years old with 20% in bonds ?!? I think that once you reach a certain age, the bonds ratio should kick in actively.

      Cheers to a retirement based on income!

  2. Not to be forgotten, taxes. One of the driving forces for me to invest in dividend stocks would be the tax treatment of such income. Bonds being interesting income are more heavily taxed.

    Highlighting not only a diversified portfolio is important. Where to hold various investments is just as important. As tax avoidance is a powerful way to insure your wealth grows.

  3. I think matching bond % with age is too conservative too.
    How did your dividend portfolio do during the last bear market?
    Having some bonds will soften the blow and it will let you purchase more shares during the down years.
    I’m 40 and I have about 20% in bonds.

    Also, did you sell a lot of stocks in 2007-2009? A lot of companies cut/freeze their dividend then, right?

    1. @RetireBy40

      I did not have a dividend portfolio in 2008. I was unfortunately fooling with stock picking and did not do so good…

      After 2008, and reading The Lazy Investor, I started to focus on companies that increase dividends – Dividend Aristocrats. Many continued to increased them considering the requirements is to have increased dividends for 25 consecutive years in the US. It’s a pretty good historical benchmark 🙂 To this date, these companies are my core holdings.

  4. 110 minus your age for an equities position (e.g. 110-40 = 70% equities). The 30% fixed income, I break out fixed in come as 2/3 bonds, and 1/3 quasi-fixed income instruments like REITS and Preferreds.

    Really it is a bunch of crock. What is your time horizon (when you go to heaven- LOL)?
    If we know that we can put it all in GIC’s with certainty a few years ahead. Naturally we need to know when the market will pull back so we can time it right.
    SO, I am 63 and will retire very soon and I am 99% in equities. Am I a fool? Maybe, maybe not. But I do know that the amount I am receiving is accelerating every year on the dividends. 16K – 24K – 34K – 40K
    In four years I have received over 100K in dividends which get re-invested. And there has been progression in the portfolio value as well due to stock appreciation as well as the re-investment. Will the market pull back? Without a doubt. But if the dividends keep appreciating then I should not be that bad off as long as I do not have to touch the principle (stocks) right away. I have sufficient non-registered monies that I can draw on to cover several years just in case. Once I have to convert to a RIF (71) I will probably take a different view but for now I want the dividend pay out to keep growing.
    I have made some bad calls but overall I am ahead. The really bad calls were stocks that were not paying me anything, think Nortel.
    So, as far as I am concerned, dividends rule.

    1. @Ricardo

      Thanks for sharing your experience. It’s much appreciated!

      You are definitely proving this theory wrong. My parents as well and they are 76. I am not sure why this theory was setup and if it was only valuable when interest rates were higher.

  6. I think when you are younger, you should always keep a portion of your saving in available funds. It’s the old adage of having emergency money, say 3 to 6 months of expenses. I would not consider this money your investment funds.

    Retirement investment funds should be almost untouchable money. For those funds I would say:

    Do I believe in holding bonds? No
    Do I believe in having an allocation matching your age? No
    Do I believe in diversification? To some degree
    Do I believe in rebalancing? No

    Invest for future income by buying companies that have a long history of paying and increasing their dividends. Exclude bonds and preferred as they do not grow the dividend.

  7. One thing to keep in mind regarding having bonds is that you can sell some of your bonds after a large market correction to buy more equities.
    Let’s say you have a 60/40 split. When equities drop by 40% and bonds hold firm, you can sell 15% of your bonds and buy equities to get back to the 60/40 split.

    ps> Nice blog, I’m a first time visitor.

    1. @James

      I agree that having some cash or equivalent is useful. Bonds have a secondary market so you don’t have to wait for the maturity. The other thing with bonds is to have them setup in a ladder so that you have some expiring every year. Of course, if you buy a bond ETF, then it’s totally different.


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