How much should an 18 year old keep in bonds?

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fung
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How much should an 18 year old keep in bonds?

Post by fung » Wed Oct 04, 2017 11:07 am

Image

Here is my current portfolio - I'm maxing out my Roth IRA using the VLXVX fund (2065 TD fund).

Someone told me at my age, I should get rid of the bonds and instead buy "Vanguard Total Stock Market Index Fund Investor Shares" and "Vanguard Total International Stock Index Fund Investor Shares".

What are the pros and cons to doing this? Should I transfer my money to those two funds in a 50/50 split?

mhalley
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Re: How much should an 18 year old keep in bonds?

Post by mhalley » Wed Oct 04, 2017 11:19 am

This is a personal decision based on risk tolerance. At a young age, anything between 100 % to 80% is reasonable. The target retirement funds pick 90%. 50/50 us/international is a little high on the international side. Most bogleheads would recommend between 20 to 40% of equities in international.
The bonds provide some ballast in the portfolio, so if there is a market crash you can rebalance to help mitigate the loss.
Check out wci article on bonds for some reasons to have them.

http://www.mdmag.com/physicians-money-d ... e-of-bonds
Making investment decisions because someone told you to will not end well. There is always someone that will tell you about this great stock idea, or how whole life is great, or how you can get rich quick in real estate.I recommend getting a financial education so you can take control of your finances. Start with the wiki, and read these articles or watch the videos.

https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Investm ... _statement
https://www.bogleheads.org/wiki/Video:B ... philosophy

retiredjg
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Re: How much should an 18 year old keep in bonds?

Post by retiredjg » Wed Oct 04, 2017 11:33 am

I like to see 20% bonds minimum. I just think it makes for a more well rounded portfolio. The 10% bond allocation in the target funds is probably ok.

In the end, it really boils down to your risk tolerance, not your age. But you cannot know your risk tolerance till you've had it tested. And the first test may result in doing something stupid because so many people think they are aggressive investors when they are not.

For this reason, the suggestion has been made to start out with a conservative allocation - maybe 60% stock and 40% bonds and then increase to something more aggressive if you want after you see how the first real crash feels. Some people are afraid this will ruin their portfolio growth but it hardly affects portfolio growth at all when the portfolio is small. This is because a small portfolio grows by contributions more than investment return.

I personally think this is a great idea - start conservative and move more aggressive - but it seems that few are interested in trying it out. This bull market has gone on so long that many new investors think that is the norm, not just part of the cycle. Many have no concept of what a real crash is and how it can feel.

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Watty
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Re: How much should an 18 year old keep in bonds?

Post by Watty » Wed Oct 04, 2017 11:40 am

When figuring out your asset allocation you also need to consider what the money will likely be used for. At 18 you likely have a lot of financial goals other than retirement like;

1) building up an emergency fund
2) saving up to pay cash for your next car
3) educational expenses, even if you are not in college investing in yourself and learning new skills may be one of the best investments you can make.
4) saving up for a house downpayment someday, but there is no hurry and lots of good reasons to wait.

and you can likely think up more.

Retirement savings at an early age is great but you need to build a strong financial foundation too since getting into financial problems like credit card debt can be very hard to recover from.

It is important to understand that having ten or twenty percent of your retirement portfolio in bonds only reduces the expected return by a trivial amount but it reduces the volatility of your portfolio a lot. This is because as the portfolio is rebalanced when the stock market is down some of the bonds will be sold and you will be buying stocks at a lower price.

You have not experienced it but it is normal for the stock market to periodically dip by 30% or more and one risk if you are too aggressive is that seeing your hard earned savings of $10,000 drop to $7,000 could scare you and cause you to avoid investing in the stock market for the long term. With some bonds in your portfolio the drop would be less severe and following a long term plan will be easier.

A lot of how to invest also depends on your overall situation and there is a lot we don't know about that. If you post in this suggested format you will get a lot better responses.

viewtopic.php?f=1&t=6212

This is more of a guideline and you don't need to follow it exactly.

Just FYI the Vanguard 2060 fund has 10% stocks so you can use that as a benchmark to compare to your retirement asset allocation.
https://personal.vanguard.com/us/funds/ ... undId=1691

You aldo need to consider the amounts you are dealing with. If you are starting out with $5,000 then putting $500 into bonds will not make a huge difference so if you have any trading costs like commissions it might not be worthwhile to buy multiple mutual funds. That could make a Target date fund like the 2060 fund a good choice.
Last edited by Watty on Wed Oct 04, 2017 11:48 am, edited 1 time in total.

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ruralavalon
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Re: How much should an 18 year old keep in bonds?

Post by ruralavalon » Wed Oct 04, 2017 11:48 am

fung wrote:
Wed Oct 04, 2017 11:07 am
Image

Here is my current portfolio - I'm maxing out my Roth IRA using the VLXVX fund (2065 TD fund).

Someone told me at my age, I should get rid of the bonds and instead buy "Vanguard Total Stock Market Index Fund Investor Shares" and "Vanguard Total International Stock Index Fund Investor Shares".

What are the pros and cons to doing this? Should I transfer my money to those two funds in a 50/50 split?
What type of account is this in, an IRA, 401k, etc.? About how much are you contributing annually to investing?

I usually suggest 20% bonds as a minimum. The 10% bonds in the target date fund is probably OK. I think it's probably better for you to stay with the target date fund at age 18. Research has indicated that investors who use balanced funds, such as target date funds, as less likely to trade frequently or sell in a panic when the stock market crashes. I see this as an advantage of target date funds, especially for novice investors.

By far more important at age 18 is your savings rate, contributes much as practical for you. Keep your savings rate as high as you can comfortably sustain.

At age 18 that is far more important than the details of your asset allocation.
Last edited by ruralavalon on Thu Oct 05, 2017 10:07 am, edited 2 times in total.
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Hyperborea
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Re: How much should an 18 year old keep in bonds?

Post by Hyperborea » Wed Oct 04, 2017 11:49 am

A no bonds 50/50 (US/non-US) split is a fine choice if you are reasonably sure that you will leave the money invested for a long time. You have with this post opened up two of the biggest cans of worms. All you need now is to ask about mortgage payoff and engine oil (oops wrong site).

Over the long time to retirement (even if you are retiring very early that's still 20 years) the drag of bonds will not be made up by any rebalancing bonus. You can stay 100% stock in your retirement accounts and taxable retirement investing for a long time and move to bonds as you get closer to actually retiring. You will want more stable assets outside of retirement accounts for an emergency fund and for short term savings (car, home, grad school, etc.).

The split of stocks between US and non-US is a contentious one and there are proponents along a broad range. The current market capitalization split of the markets is roughly 50/50 and it seems that the prudent passive investor would go with market capitalization unless there is some compelling reason to do otherwise.

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Re: How much should an 18 year old keep in bonds?

Post by midareff » Wed Oct 04, 2017 11:50 am

I believe it was Graham who wrote never more than 75/25 and never less than 25/75.

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triceratop
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Re: How much should an 18 year old keep in bonds?

Post by triceratop » Wed Oct 04, 2017 11:52 am

mhalley wrote:
Wed Oct 04, 2017 11:19 am
This is a personal decision based on risk tolerance. At a young age, anything between 100 % to 80% is reasonable. The target retirement funds pick 90%. 50/50 us/international is a little high on the international side. Most bogleheads would recommend between 20 to 40% of equities in international.
The bonds provide some ballast in the portfolio, so if there is a market crash you can rebalance to help mitigate the loss.
Check out wci article on bonds for some reasons to have them.

http://www.mdmag.com/physicians-money-d ... e-of-bonds
Making investment decisions because someone told you to will not end well. There is always someone that will tell you about this great stock idea, or how whole life is great, or how you can get rich quick in real estate.I recommend getting a financial education so you can take control of your finances. Start with the wiki, and read these articles or watch the videos.

https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Investm ... _statement
https://www.bogleheads.org/wiki/Video:B ... philosophy
"50/50 us/international is a little high on the international side. Most bogleheads would recommend between 20 to 40% of equities in international."


"Most Bogleheads" (if that is indeed even the case, how can you claim that to be true?) are then making an active decision rather than passively holding the total market at market weights. In other words, they're not following Jack Bogle's advice on passive total market investing. Ironically, you subsequently state "Making investment decisions because someone told you to will not end well," which could apply to advice based on what the majority of any subgroup of people do as well.

By the way, the Vanguard Total World Index fund is 52% US so 50/50 US/Intl is closer to the market weightings than anything that you recommend (or that you claim most Bogleheads recommend).

OP, I would go even simpler and hold Vanguard Total World Index fund. Or, if you like, using Total Stock Market & Total International as you indicated will also be fine.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: How much should an 18 year old keep in bonds?

Post by rbaldini » Wed Oct 04, 2017 12:07 pm

"should" is a tricky word. But as another data point, I'm 30 and I have about 10% in bonds. Ultimately the question is: how bad would it be for you if we hit a big recession at some point in the next few years, and you were only invested in stock? If this would be a very bad thing for you, then own some bonds. I'd say no more than 20%, but that's just me.

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Re: How much should an 18 year old keep in bonds?

Post by mhalley » Wed Oct 04, 2017 12:18 pm

I haven’t taken every boglehead post that mentioned their international stock percentage and ran it through a spreadsheet, but after many years of reading the site that is my overall impression. Vanguard has increased their recommendations for international stocks over the years, plus added international bonds. Their current recommendation is between 30-50% I believe.
Anyway, let’s change my post to read “some” bogleheads recommend 20-40% international. :happy

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Re: How much should an 18 year old keep in bonds?

Post by whodidntante » Wed Oct 04, 2017 12:31 pm

Asset allocation matters once your portfolio gets large. You're just starting out so use the allocation that you want. 100% stock is fine. A more significant factor is how much you invest.

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Re: How much should an 18 year old keep in bonds?

Post by onthecusp » Wed Oct 04, 2017 12:49 pm

I like that you have some in bonds, just to see how they work. You have a long time to use the results to inform your future AA. Great start!

I have not heard a great case for international bonds, for short term swings, I expect they will be partially correlated to the international stock, due to currency effects and the "ideal" is no correlation. If you pay attention to it you will know a lot more than me in 10 years.

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Re: How much should an 18 year old keep in bonds?

Post by triceratop » Wed Oct 04, 2017 12:51 pm

mhalley wrote:
Wed Oct 04, 2017 12:18 pm
I haven’t taken every boglehead post that mentioned their international stock percentage and ran it through a spreadsheet, but after many years of reading the site that is my overall impression. Vanguard has increased their recommendations for international stocks over the years, plus added international bonds. Their current recommendation is between 30-50% I believe.
Anyway, let’s change my post to read “some” bogleheads recommend 20-40% international. :happy
What Bogleheads do isn't restricted to what you see posted on the forum (that is why we do not have polls, biased sampling). Even so, supposing you are correct, a wise person once said:
Making investment decisions because someone told you to will not end well
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: How much should an 18 year old keep in bonds?

Post by ThrustVectoring » Wed Oct 04, 2017 1:26 pm

For your Roth IRA and at your age, it really doesn't matter. The target date fund is plenty fine. What's important is to start getting into the habit of living below your means early and figure out how to make your independent adult life work well for you.

If you don't expect to need the money until retirement, 100% equity is fine. Anything below 80% equity is probably not aggressive enough.

If you expect to have major expenses in the next 5 years or so, you should probably be saving for them in a FDIC insured savings account with as good of a yield as you can find. I think 1.20% is about the best that's around. And at 18 years old, you probably have expenses to handle soon - apartment security deposit, furniture, possibly a wedding, first car, college, down payment for a house, etc.

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Re: How much should an 18 year old keep in bonds?

Post by Spirit Rider » Wed Oct 04, 2017 1:27 pm

Surprise, surprise, I am going to suggest a contrarian view.

I believe new investors should start out with a 60/40 portfolio and then decrease their bond holdings by 5%/year until they reach their asset allocation comfort zone. The contribution amounts are going to dwarf earnings for the first few years. Any reduced earnings are not going to be material in the long term.

First impressions can carry a lot of permanent weight on someone's investment life. Most Bogleheads did not arrive there on day one. My observation is that little caution for the neophyte until they get there investing legs makes sense.

I have seen several cases where new investors with 80%-100% AA, panicked and sold during significant downturns and then were too scared to get back in until they had missed significant parts of the market recovery.

Don't project your decades of experience on the ability of someone else's tolerance for risk.

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Re: How much should an 18 year old keep in bonds?

Post by goingup » Wed Oct 04, 2017 1:43 pm

I don't consider myself enough of an expert to second guess a Target Fund composition. At your age I'd just use the TR fund and try to fully fund the IRA. If you have access to a 401K, a Target Fund would probably be a good choice there too. You are visiting a forum with a bunch of DIY'ers. Of course many can't just be content to recommend with a Target Fund. :shock:

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Re: How much should an 18 year old keep in bonds?

Post by gowest » Wed Oct 04, 2017 1:49 pm

fung wrote:
Wed Oct 04, 2017 11:07 am
Here is my current portfolio - I'm maxing out my Roth IRA using the VLXVX fund (2065 TD fund).
Congratulations on an excellent start, and on an excellent choice in the VLXVX fund (target retirement 2065). As you've noted, that fund has 10% of the asset allocation in bonds. I would stick with this fund, just as you are currently doing.

Think about it this way: the professionals over at Vanguard believe that people looking to retire in 2065 should currently have 10% in bonds. That is why they picked 10% for VLXVX. That is free professional advice right there, and it's solid advice. I'd stick with what you have, feel comfortable that you have made a very solid choice, and keep contributing as you are able. Best of luck, and congrats again on your excellent start.

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Re: How much should an 18 year old keep in bonds?

Post by beehappy » Wed Oct 04, 2017 1:57 pm

fung wrote:
Wed Oct 04, 2017 11:07 am
Image

Here is my current portfolio - I'm maxing out my Roth IRA using the VLXVX fund (2065 TD fund).

Someone told me at my age, I should get rid of the bonds and instead buy "Vanguard Total Stock Market Index Fund Investor Shares" and "Vanguard Total International Stock Index Fund Investor Shares".

What are the pros and cons to doing this? Should I transfer my money to those two funds in a 50/50 split?
At your age, I'd get rid of the bond funds, and focus on getting the lowest fees. Invest enough in each fund to get the lower-cost admiral shares. If you have less than $10k, throw everything into Total Stock Market and add to it until you reach the Admiral minimum limit. Then consider adding the international stock fund, again building up to the Admiral minimum. Then invest all funds beyond that according to your desired asset allocation in those 2 funds. Alternatively, you can opt for Etfs if you can resist the temptation to make unnecessary trades.

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Re: How much should an 18 year old keep in bonds?

Post by beehappy » Wed Oct 04, 2017 2:26 pm

gowest wrote:
Wed Oct 04, 2017 1:49 pm
fung wrote:
Wed Oct 04, 2017 11:07 am
Here is my current portfolio - I'm maxing out my Roth IRA using the VLXVX fund (2065 TD fund).
Congratulations on an excellent start, and on an excellent choice in the VLXVX fund (target retirement 2065). As you've noted, that fund has 10% of the asset allocation in bonds. I would stick with this fund, just as you are currently doing.

Think about it this way: the professionals over at Vanguard believe that people looking to retire in 2065 should currently have 10% in bonds. That is why they picked 10% for VLXVX. That is free professional advice right there, and it's solid advice. I'd stick with what you have, feel comfortable that you have made a very solid choice, and keep contributing as you are able. Best of luck, and congrats again on your excellent start.
The target fund is an excellent choice, but I'm not sure that the "professionals are that single-minded about this one. For example, Vanguard's aggressive age-based 529 fund option for 2033 currently doesn't include any bonds. And those funds would be needed several decades before OP's target retirement date. It obviously depends on OP's risk tolerance...that's why they provide conservative, moderate, and aggressive growth options. The only wrong answer is the one that doesn't match your risk tolerance.

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Re: How much should an 18 year old keep in bonds?

Post by texaspapas » Wed Oct 04, 2017 2:48 pm

You're likely a "financial virgin" to borrow a phrase from one of my favorite financial authors, William Bernstein. And so, according to that author, you should go 50/50 until you've experience some calamity and have tested yourself under stress. You likely have more than enough time to invest this way, i.e., you shouldn't be in a hurry. I like Bernstein's writings and advice a lot. Check out some of his books for common sense advice for young investors if you're interested. I particularly liked "Investor's Manifesto", though it is slightly dated in todays market.

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Re: How much should an 18 year old keep in bonds?

Post by Luke Duke » Thu Oct 05, 2017 6:47 am

0-10%

tigermilk
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Re: How much should an 18 year old keep in bonds?

Post by tigermilk » Thu Oct 05, 2017 7:02 am

Zero.

The cash you use to buy equities is a bond-like instrument at the beginning. That is, your weekly/monthly/yearly contributions have way ,ore buying power than if you rebalance. Go all-in for the next 15-20 years and then start thinking about bonds.

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Re: How much should an 18 year old keep in bonds?

Post by jadd806 » Thu Oct 05, 2017 8:36 am

tigermilk wrote:
Thu Oct 05, 2017 7:02 am
Zero.

The cash you use to buy equities is a bond-like instrument at the beginning. That is, your weekly/monthly/yearly contributions have way ,ore buying power than if you rebalance. Go all-in for the next 15-20 years and then start thinking about bonds.
You could use the same line of thinking to justify including a healthy portion of bonds in the OP's portfolio. If portfolio growth due to returns is much smaller than growth due to new contributions, then the performance drag caused by bonds is minimal. The takeaway here being that OP's asset allocation at this point in time is largely irrelevant.

It would be most beneficial for the OP to then establish an asset allocation that they can "grow into." I will echo the other posters who have suggested holding 20-25% bonds. Our young investor can begin learning about the role of bonds in a portfolio and get used to rebalancing. Additionally, it is much less likely that he will get "scared away" from investing with a more moderate allocation. Consider the cost of potentially sacrificing contributions during his prime earning years because he got turned off by the volatility of a 100% equities asset allocation during a bear market.

For what it's worth, I am 24 years old and I hold a 75/25 asset allocation. I do not have the need to take the risk of 100% equities. Neither does anybody else who is starting their journey so early, with decades of compounding returns ahead of them.

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Re: How much should an 18 year old keep in bonds?

Post by JPH » Thu Oct 05, 2017 8:50 am

Your age should be a consideration, but maybe not the most important one. The usual reason for being more aggressive when young is that if you lose a lot you have time to recover during your remaining lifetime. I suppose that often assumes that retirement is the reason for investing. However, if you have shorter term goals and need the money sooner, then perhaps you would be more intolerant of a big loss at your age. Or maybe you are a little like me and just hate to ever lose money. Another reason to keep some money in bonds or cash is for rebalancing. The asset allocation is all about managing the amount of risk you are willing to put your money at. Maybe be a little more conservative than you plan, at least until you go through your first major loss. Just try to imagine how you would feel if you lost 40 or 50% of your money and had to start over. I agree with others that your contributions are much more important than your earnings now. But it's a good time to begin struggling with your asset allocation decisions. Really think it through considering your own situation and personality, and don't let yourself become formula driven.
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Re: How much should an 18 year old keep in bonds?

Post by KyleAAA » Thu Oct 05, 2017 8:52 am

It's only a 10% bond allocation. While they do add a tiiiiiiiny bit of diversification, honestly, it won't make a significant difference in the long run. Flip a coin.

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Re: How much should an 18 year old keep in bonds?

Post by Toons » Thu Oct 05, 2017 9:05 am

0.
To keep zero though it more than likely would take the mind of a more seasoned investor.
A long extended bear market would probably force an 18 year old to make irrational financial moves. :happy
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Re: How much should an 18 year old keep in bonds?

Post by stemikger » Thu Oct 05, 2017 9:11 am

First let me say, it is very impressive that you are saving at 18. You will be good no matter what you do.

I didn't start saving until 30.

I would keep it the way you have it, with less international.

Good Luck!
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Re: How much should an 18 year old keep in bonds?

Post by lostdog » Thu Oct 05, 2017 9:58 am

Go with Vanguard Total World Index. At 18 that is all you need for the next 20 or 30 years. Add bonds when you get closer to your retirement whenever that may be. It really is that simple. Don't get caught up with the international debates on this board. Don't fall for the all U.S. home country bias and speculation. Automate your contributions and maybe look at it once a year. Whatever you choose stay the course through good and bad times. When you're older you'll thank your 18 year old self.
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Re: How much should an 18 year old keep in bonds?

Post by BigMoneyNoWhammies » Thu Oct 05, 2017 12:19 pm

fung wrote:
Wed Oct 04, 2017 11:07 am
Image

Here is my current portfolio - I'm maxing out my Roth IRA using the VLXVX fund (2065 TD fund).

Someone told me at my age, I should get rid of the bonds and instead buy "Vanguard Total Stock Market Index Fund Investor Shares" and "Vanguard Total International Stock Index Fund Investor Shares".

What are the pros and cons to doing this? Should I transfer my money to those two funds in a 50/50 split?
As others have said, it depends on your personal risk tolerance more so than your age. I'm a decade older than you and I am okay with zero bond holdings in my investment portfolio, but that is because I can tolerate the risk if/when the market has a correction or recession. There are others I know the same age as me who prefer up to 50% in bonds because they can't stomach potentially losing 40 or 50% of their investment in a particularly bad stretch like 2008/2009. It's also important to keep in mind that, at 18, your time horizon for investing is roughly 45 years at the minimum, and likely longer. That is a long time to be in the market, and theoretically allows you to be tilted towards higher risk options with potentially higher returns than bonds because you have far more time to gain back any potential losses than someone who is say, 35 or 40. The fact that you're maxing our your IRA at such a young age will matter far more in the long run than the type of investment. Pumping thousands of dollars into your accounts to accrue value in your late teens and early 20s will pay off far more regardless of your allocation than waiting even 5 or 10 years to do the same. Compound interest is a wonderful thing, and 40 or 50 years worth of it on the money you're putting in now will set you up for a high chance of meeting your retirement goals in the future, so kudos for beginning so early. I wish I had.

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