Bogleheads

caklim00 · Joined: 26 May 2008 Posts: 1205

I'm interested in hearing what others would do if they were (are) in their late 20s from an asset allocation standpoint between Equity and Bonds.

100/0? (Larry Swedroe upper limit)
90/10?
80/20? (Upper Limit from William Bernstein's Four Pillars book)

This is a question that I am struggeling with as I know I'm about 30 years till retirement, and am moving from an active strategy (how I got introduced in my early 20s to the investing world) to a long term passive strategy.

Thoughts? This should be such a simple question, but I'm finding this to be the most difficult question to answer (from a Long Term Return vs. SD reduction standpoint)

Thanks for the help.

NYCPete · Posted: Tue Jul 01, 2008 1:08 pm Post subject:

Hi Caklim,

For what it is worth, I am 28 years old and I am sticking with 110 minus my age in stocks. Here is how I'm broken down:

Target of 82% stocks 18% fixed income.

Equity portion (82% of portfolio)
60% in U.S. total market index fund
30% in Total Int'l market index fund
10% in REIT Index

Fixed Income (18% of portfolio)
100% U.S. Bond Index fund

I chose to include the REIT fund to lower SD, but don't really expect it to increase returns (if it does, great). I've never bothered to see how a portfolio did like this in the past, but tried Simba's spreadsheet and here is what I got:

1972-2006
11.70% CAGR
13.59% SD

Regardless of what this (or any) allocation did in the past, the future is unknown and uncertain.

Best,
Peter

P.S. Full disclosure, this allocation will be drastically changing for me in the coming months as I utilize Vanguard's new Total World Stock Index Fund.
_________________
To the extent that a fool knows his foolishness,
He may be deemed wise
A fool who considers himself wise
Is indeed a fool.

Buddha

mike_slc · Joined: 17 May 2008 Posts: 716 Location: The Big Salty

Let's say you log in to your brokerage account and see $100,000 in there. Then you log in a few months later and there's only $65,000 in there. How would you feel about that? Could you stay the course and leave the money invested?

Your bond allocation should reflect your need and your ability to take risk. You are young which should increase your ability to take risk, since your time horizon is long. However if you make tons of money then you might not need to take a lot of risk to meet your goals.

Personally I am slightly more conservative than 110 minus age in stocks - I go for the old "age in bonds" method. This reflects my personal need and ability to take risk.

Taylor Larimore

caklim00 wrote:

I'm interested in hearing what others would do if they were (are) in their late 20s from an asset allocation standpoint between Equity and Bonds.

100/0? (Larry Swedroe upper limit)
90/10?
80/20? (Upper Limit from William Bernstein's Four Pillars book)

This is a question that I am struggeling with as I know I'm about 30 years till retirement, and am moving from an active strategy (how I got introduced in my early 20s to the investing world) to a long term passive strategy.

Thoughts? This should be such a simple question, but I'm finding this to be the most difficult question to answer (from a Long Term Return vs. SD reduction standpoint)

Thanks for the help.

Hi C:

Our stock/bond allocation is our most important portfolio decision and one of the most difficult (it's not just "age"). Only you can make that decision and it depends on:

Your goals
Your time-frame
Your risk-tolerance
Your personal financial situation.

To help make this decision, Vanguard has an excellent web-page, "How to Create Your Investment Plan." Use this link:

https://personal.vanguard.com/....ontent.jsp

Best wishes.
Taylor

Easy Rhino · Joined: 05 Aug 2007 Posts: 1255 Location: San Diego

I tend to recommend at least 10%, so at least there's the psychological benefit in a bear market of having SOME part of your portfolio that's still making money. Although with 10%, the benefit is mainly psychological, not financial.

caklim00 · Joined: 26 May 2008 Posts: 1205

[
Hi C:

Our stock/bond allocation is our most important portfolio decision and one of the most difficult (it's not just "age"). Only you can make that decision and it depends on:

Your goals
Your time-frame
Your risk-tolerance
Your personal financial situation.

To help make this decision, Vanguard has an excellent web-page, "How to Create Your Investment Plan." Use this link:

https://personal.vanguard.com/....ontent.jsp

Best wishes.
Taylor[/quote]

Thanks for the link. I took the survey and it said I should be 100% equity/ 0% bonds. Guess I have some more thinking to do...

Taylor Larimore · Posted: Tue Jul 01, 2008 2:17 pm Post subject: Bond allocation?

Quote:

I took the survey and it said I should be 100% equity/ 0% bonds. Guess I have some more thinking to do...

I have found that most investors overweight their risk tolerance. Personally, I think 10%-20% is a minimum bond allocation (if for no other reason than to learn about bonds).

Regarding "risk tolerance," I like Adrian's forumula:

"Maximum tolerable Loss X 2 = maximum equity allocation"

In other words, figure that during the next big bear market your portfolio may decline about half its stock allocation.

Best wishes.
Taylor

caklim00 · Joined: 26 May 2008 Posts: 1205

tat2ng · Joined: 20 Feb 2007 Posts: 348 Location: Michigan

As Taylor mentioned, it is YOUR decision, but if you're just looking for examples....

My wife and I are both 28 years old. I'm in the process of fine-tuning all of my retirement accounts to work in unison, but my goal is 85/15 stock/bonds, but I would probably be willing to go up to 90/10. As you said, you have 30+ years to go.

We are all in index funds, except my wife has some money in Vanguard Explorer Admiral through her 401k.

Thad

dumbmoney · Joined: 16 Mar 2008 Posts: 1587

caklim00 · Joined: 26 May 2008 Posts: 1205

YDNAL · Joined: 10 Apr 2007 Posts: 5778 Location: Biscayne Bay

CyberBob

caklim00 · Joined: 26 May 2008 Posts: 1205

waitforit · Joined: 23 May 2007 Posts: 249

I am also 28 - this topic hits close to home for me.

renditt · Joined: 25 Apr 2008 Posts: 395

I am 36 and until last fall, I was almost 100% in Equities (and most of it in single stocks). The market made me nervous and I changed fairly quickly

a) to almost a 50/50 allocation of stocks and bonds
b) from single stocks to index funds / ETFs

...and both of which made me sleep much better during the last 6 months.

I guess the point I am trying to make is that your capability to accept risk can change fairly quickly, at least it has for me. Also, in this market I don't see you giving up a lot of extra returns by moving a bit more money into bonds, however it might make you feel/sleep much better by reducing volatility. In your situation I would probably go with 30/70.

good luck

caklim00 · Joined: 26 May 2008 Posts: 1205

waitforit · Joined: 23 May 2007 Posts: 249

Larry Swedroe made a really good case for TIPS dominating the fixed income portion of a portfolio - search for that here.

The reason I split 50:50 TIPS : IT are the following:

1) TIPS are a separate asset class from nominal bonds and have different expected correlations to equities.
2) I use IT instead of ST treasuries to gain a bit more return. Having stable job / commodity exposure allows that.

Nothing wrong with ST:IT mix as well, or even bond index:TIPS. I suspect it doesn't matter all that much.

caklim00 · Joined: 26 May 2008 Posts: 1205

Curtis Lowe · Joined: 27 Apr 2008 Posts: 99

jh · Joined: 14 May 2007 Posts: 1323

arbogast777 · Joined: 02 Mar 2007 Posts: 155 Location: Minneapolis, MN

I'm 30 and am at 80/20 (plan to adjust it by 10% every decade). My bonds are 1/2 Intermediate and 1/2 TIPS.

Don't look at bonds as a drag on your portfolio. Since 1997, the Total Stock Market Index has averaged 3.54% a year while the Intermediate Bond Index has averaged 5.99% a year.

LHerr · Joined: 17 May 2008 Posts: 234 Location: Portland, OR

"I'm interested in hearing what others would do if they were (are) in their late 20s from an asset allocation standpoint between Equity and Bonds."

I would go with 100% equities. But before making that move, I would spend $14 on Mark Hebner's book, "Index Funds: The 12-Step Program for Active Investors" or read it on line. Check out this link.

http://www.ifa.com/

On this site you will find a questionnaire you can take that will help you determine what risk you are willing to take as you plan your portfolio.

LHerr

http://www.lherr.org/blog/

Trev H · Joined: 02 Mar 2007 Posts: 1573

.
Bonds will reduce the risk of your portfolio, reduce volatility, and reduce bear market losses.

They will also reduce your longterm return.

I think Bernstein put it this way, don't expect safety without correspondingly low returns.

Most often Bonds are viewed as the safety net to reduce BEAR market losses (ie) the Formula that Adrian came up with that was stated by Taylor earlier (shown again below).

===

Regarding "risk tolerance," I like Adrian's forumula:

"Maximum tolerable Loss X 2 = maximum equity allocation"

===

The goal of that is basically to make sure that you can stick to your AA in the worst of times.

But what about the BEST of times ?

What is your Maximum tollerable portfolio performance drag ?

If you allocate too much to bonds, and the market goes into a RAGING BULL string of years, how would you react to the drag that bonds put on your portfolio performance ?

Could you stand it ? or would you bail out and change to a more agressive mix near the end of the BULL ?

This is just thinking outside the box a bit, but it does make just as much sense as the other side of the issue.

Most folks suggest you "test" your bond allocation thru a 1973-1974 type BEAR market.

It would be just as important to "test" your bond allocation thru a 1995-1999 type BULL market (IMO).

Ok... a backtest or two comming up Wink

3 Portfolio's tested thru 1973-1974 and 1995-1999.

Total change in portfolio value listed from Year End 1972 to Year End 1974 and again from Year End 1994 thru Year End 1999.

P1 = 70% US Market, 30% Intl Market
P2 = 55% US Market, 25% Intl Market, 20% Total Bond
P3 = 40% US Market, 20% Intl Market, 40% Total Bond

Yearly Rebalancing

Year End 1972 thru Year End 1974

P1 = -39.00%
P2 = -30.11%
P3 = -20.67%

Year End 1994 thru Year End 1999

P1 = +176.20%
P2 = +142.98%
P3 = +112.94%

Holding 20% Bonds reduced your losses by 8.89% in the 1973-1974 BEAR
Holding 40% Bonds reduced your losses by 18.33% in the 1973-1974 BEAR

Holding 20% Bonds reduced your gains by 33.22% in the 1995-1999 BULL.
Holding 40% Bonds reduced your gains by 63.26% in the 1995-1999 BULL.

Just trying to show both sides of the Bond Allocation issue. One side is usually clearly stated (reducing losses), the other side is not.

Trev H

caklim00 · Joined: 26 May 2008 Posts: 1205

waitforit · Joined: 23 May 2007 Posts: 249

Trev,

Good point on the 95-99 test. I guess it really depends where the market has been at in the few years leading up to retirement, doesn't it?

Big picture to me though is what CAGR can I expect during my years of investing. I'd rather have a CAGR of 14 with deviation of 30 than 10 with deviation of 8, but I cannot know that in advance - so the prudent thing is to include some bonds and shoot for a CAGR of 10 with deviation of 12.

CAGR = Compound Average Growth Rate

Joypog · Joined: 30 Jun 2008 Posts: 27

I've been reading Jack Brennan's "Straight Talk on Investing". His statement on page 60 made me much more comfortable with my 70/30 split (it seems that I'm just not as aggressive as other 28 year old compatriots).