Poll: how did you decide on stock/bond allocation?

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How did you decide on stock/bond allocation?

Calculation based on expected returns (historical, p/e, etc)
10
7%
Age in bonds or a variant
24
18%
Risk tolerance (sleep well)
39
29%
Combination
38
28%
Other
23
17%
 
Total votes: 134

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richard
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Poll: how did you decide on stock/bond allocation?

Post by richard » Sun Mar 30, 2014 8:11 am

How did you decide on stock/bond allocation?

If other, please explain
Last edited by richard on Sun Mar 30, 2014 8:22 am, edited 1 time in total.

livesoft
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Re: Poll: how did you decide on stock/bond allocation?

Post by livesoft » Sun Mar 30, 2014 8:19 am

I used Larry Swedroe's adage about need, ability, and willingness to accept risk combined with years and years of my own personal investing behavior which has demonstrated a need for me to use prime numbers.

I just don't see how new investors can do any better than an initial ballpark estimate and then modify from there.
Last edited by livesoft on Sun Mar 30, 2014 8:22 am, edited 1 time in total.
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Re: Poll: how did you decide on stock/bond allocation?

Post by Johm221122 » Sun Mar 30, 2014 8:22 am

Read every book I could find at library and came up with what felt right.Then Bogleheads helped me write a plan a couple years later
John

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Re: Poll: how did you decide on stock/bond allocation?

Post by jfn111 » Sun Mar 30, 2014 8:22 am

Once I had a year into retirement and realized that we were not going to need anywhere near a 4% withdrawal rate I started getting more conservative and went to a 50/50 AA.

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Re: Poll: how did you decide on stock/bond allocation?

Post by peppers » Sun Mar 30, 2014 8:38 am

Reading "The Intelligent Investor" was a big influence.
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Re: Poll: how did you decide on stock/bond allocation?

Post by cheese_breath » Sun Mar 30, 2014 8:40 am

Variant of age in bonds using TIAA Traditional 3% guarantee instead of bonds. With recent rebalancing I ended up with more in cash than I'd like, but at age 73 I figure I'm too old to wait for bond funds to recover from a long term interest rate creep.
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Re: Poll: how did you decide on stock/bond allocation?

Post by cfs » Sun Mar 30, 2014 8:56 am

Good conversation.

In our side of the house we have a boring SWAN (sleep well at night) portfolio.

- We have followed Larry's advice.
- We no longer have the willingness, ability, or need to take extra risk.
- We don’t have the stomach to trade or invest aggressively.
- We plan to maintain a conservative, tax minimizing portfolio.
- We don't have a perfect plan, perfection is not part of the goal.
- We don't have perfect asset allocation, perfection is not part of the goal.

Again, our plan and asset allocations are not perfect, but we have not failed to plan, and so far this is working for us and we sleep well at night with our boring SWAN.

Thanks for reading this note.
~ Member of the Active Retired Force since 2014 ~

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Re: Poll: how did you decide on stock/bond allocation?

Post by pennstater2005 » Sun Mar 30, 2014 9:10 am

I selected my current AA based on my need to take risk.
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Re: Poll: how did you decide on stock/bond allocation?

Post by Clever_Username » Sun Mar 30, 2014 9:14 am

I'm not sure which option this falls under.

I was just shy of 30 when I started taking this seriously (finishing graduate school in my late 20s may have been part of it). In Scott Adams' The Way of the Weasel, he suggests 30% bonds / 70% stocks (no longer a constant he stands by, I believe) and, coupled with hearing "age in bonds" as a starting point, I went with that. For what I've learned since then, I think I made the right decision, but for what may have been a bad reason.

I'm going to be adjusting that this June (my re-balance date) as I've realized I own a lot more EE bonds than I previously thought, and I'm going to account for them as part of my 30% bonds (the number isn't changing). So part of what I'm having trouble deciding about is what counts as bonds :-)
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Re: Poll: how did you decide on stock/bond allocation?

Post by siamond » Sun Mar 30, 2014 9:23 am

Primary input was reading the "Four Pillars" from Dr Bernstein. Then I refined it based on risk tolerance vs plotting an array of possible trajectories (good and bad).I guess Mr Pfau would call it a "probability-based" approach.

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Re: Poll: how did you decide on stock/bond allocation?

Post by jimkinny » Sun Mar 30, 2014 9:24 am

Experience helps but...

I try to remember what 2008/2009 was like

With time, I change though, so I know what it was like in the past but as to the future I can only hope I have my need, ability, willingness accurately assessed.

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Re: Poll: how did you decide on stock/bond allocation?

Post by Rodc » Sun Mar 30, 2014 9:35 am

Other

Originally, many years ago I knew very little other than stocks had higher expected returns and risk than bonds, and being young I could take more risk than someone older. 100% stocks seemed too high and under diversified in some vague sense so I picked 70/30 and stayed more or less there for many years (drifted higher in the 90s tech boom, but that self-corrected. :) )

Later as I started to get smarter, looking at historical data and theory, and the context of a stable job, wife and I with growing pensions, that still seemed reasonable.

As I grew older and our pensions and saving grew I became a little less interested in risk and "winning". And I became a little more mindful of stock risk and the marginal utility of money, but also mindful of the risk long term in nominal bonds, especially given some likelihood of a rising interest rate and possibly future rising inflation rate environment. So, I moved to 60/40 and starting buying some long term TIPS. Given emergency fund cash which as I get closer and closer to retirement becomes more and more just a part of the retirement portfolio I might more accurately say we are 55/45. (and yes one could certainly consider emergency fund cash part of the portfolio all along)

By retirement I may go to a straight 50/50. I have never seen any evidence for either a rising allocation to stocks in retirements or a declining allocation to stocks in retirement. While there are advocates for both (and frequent threads on both), when one looks closely at the actual evidence, there really is no sound basis for either, so I expect I'll gravitate to a fixed allocation (though I reserve the right to change my mind, for example if I buy an annuity I might rise stock allocation due to change risk profile).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Poll: how did you decide on stock/bond allocation?

Post by gkaplan » Sun Mar 30, 2014 9:39 am

I read authors I respected and who wrote books on asset allocation and creating a portfolio. I then came up with something I could live with based on my risk tolerance and my need, willingness, and ability to take risk.

(Edited for clarity.)
Last edited by gkaplan on Sun Mar 30, 2014 9:51 am, edited 2 times in total.
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Re: Poll: how did you decide on stock/bond allocation?

Post by nedsaid » Sun Mar 30, 2014 9:44 am

I wish I could say I had a precise process to figure out my stock/bond allocation. I start with age in bonds minus 10. At age 54, I should have 44% bonds in my portfolio. In my investment policy statement, I have a Target Allocation of 60% stocks and 40% bonds. In reality, I have 69% stocks and 31% bonds and cash. What happened?

First, I am pretty much a stock guy. My first mutual fund was purchased in 1984 and I invested through the bull markets of the 1980's and 1990's. That got me hooked. I watched Wall Street Week starting in the mid 1970's and sometime in the mid 1980's, I started listening to Bob Brinker. My investing experiences and listening to people I respected led me to realize that stocks over long periods of time were the best way to grow the purchasing power of my investments over time.

Second, I am not excited about 2% and 3% yields on my bonds. I believe bonds to be pretty richly valued now, though less so than a year ago. My perception is that stocks are a bit more reasonably valued than bonds. I am concerned that bonds will be "dead money" for a while. If inflation stays really low, bonds would still work great. I don't think we are going to keep seeing 1 1/2 percent inflation. So I have concerns about bonds.

Third, maybe I am in a bit of denial that I am getting older. Still feel good and have good energy. Don't feel old. But still my rational self tells me that I need to de-risk. I have continued my program of mild rebalancing that I started in July of 2013.
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Re: Poll: how did you decide on stock/bond allocation?

Post by Saving$ » Sun Mar 30, 2014 11:39 am

I read this board, and the Wiki, and started out thinking Age -10 in bonds, balance in stocks.
Then I tried to figure out how rental real estate should affect that asset allocation. Finally decided rental real estate probably acts about 60-70% like a bond, and 30-40% like a stock, but as a rather non-liquid version of each.
Then I've been reading comments, such as Jack Bogle's recent comment along the lines of traditional bond allocation may have been too high, and the comments that bond values are likely to decrease.

So I took my Age-10 in bonds, subtracted another 10 to account for real estate, subtracted another 10 for changing expectations on bonds. I also count cash over and above my emergency fund as bonds.

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Re: Poll: how did you decide on stock/bond allocation?

Post by steve_14 » Sun Mar 30, 2014 11:45 am

Expected returns + long time horizon = big bet on stocks. This will surely change over time, however. At retirement I'll have a minimum 40% bonds.

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Re: Poll: how did you decide on stock/bond allocation?

Post by columbia » Sun Mar 30, 2014 11:48 am

25% bonds.

20 seemed like too little and 30 like too much. There's nothing rational about the decision, but something i feel like i can stick with for another 20 years; will re-evaluate at age 65.

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Re: Poll: how did you decide on stock/bond allocation?

Post by sscritic » Sun Mar 30, 2014 11:50 am

I just buy stuff. I always had TIAA Traditional. In fact, when I started out, half my money went into Traditional and half went into CREF Stock. The standard choices were 50-50 or 25-75. Note that this was a contribution allocation, not an asset allocation. While I later bought other stuff, all my money going to T/C always went in 50-50. I later reallocated within T/C, but my contribution mix never changed.

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Re: Poll: how did you decide on stock/bond allocation?

Post by pjstack » Sun Mar 30, 2014 11:56 am

Other: I guessed. I'm not sure if it was the right guess. I'm planning on changing my allocation slowly to see if I like it better.

I could call that "rebalancing", but it's still a guess .
pjstack

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Re: Poll: how did you decide on stock/bond allocation?

Post by LynnC » Sun Mar 30, 2014 12:00 pm

cfs wrote:Good conversation.

In our side of the house we have a boring SWAN (sleep well at night) portfolio.

- We have followed Larry's advice.
- We no longer have the willingness, ability, or need to take extra risk.
- We don’t have the stomach to trade or invest aggressively.
- We plan to maintain a conservative, tax minimizing portfolio.
- We don't have a perfect plan, perfection is not part of the goal.
- We don't have perfect asset allocation, perfection is not part of the goal.

Again, our plan and asset allocations are not perfect, but we have not failed to plan, and so far this is working for us and we sleep well at night with our
boring SWAN.

Thanks for reading this note.

I shall never forget what Larry said years ago, "If you don't need the risk, don't take it." My husband reminds me of this often. :happy

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Re: Poll: how did you decide on stock/bond allocation?

Post by JW-Retired » Sun Mar 30, 2014 12:04 pm

I voted other because I don't really know "how" I decided on my 60/40 AA. I could make a claim I followed Bogle's Rule because it gives the same answer as the AA I use, but if it didn't I doubt I would change.

Also, I can't really tell how anybody else answering this thread "decided" on their AA. Certainly not well enough to apply any of the processes to myself. With 1 or 2 exceptions the descriptions are all of the form: I thought about X, Y, Z, applied some personal Kentucky windage, and picked an AA = Q. But how did you pick it? :?

Too bad there isn't some science to this.
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Re: Poll: how did you decide on stock/bond allocation?

Post by zaboomafoozarg » Sun Mar 30, 2014 12:06 pm

Age in bonds - 5. Plus I am shooting for early retirement, so I invest a little older than I really am. (I also feel older than I really am).
Last edited by zaboomafoozarg on Sun Mar 30, 2014 1:29 pm, edited 1 time in total.

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Re: Poll: how did you decide on stock/bond allocation?

Post by Rodc » Sun Mar 30, 2014 12:16 pm

Added to the above:

I would say it might be more accurate that I currently use a mix of history and theory, with a mind on the fact that we can only really understand these things to at best one significant figure and maybe more like half a significant figure (if you will allow me to invent such a thing as half a significant figure).

So a little bit of option one is there, but "calculation" seems to imply to me rather more precision than I think is warranted.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Poll: how did you decide on stock/bond allocation?

Post by iceport » Sun Mar 30, 2014 12:25 pm

Rodc wrote:Other

Originally, many years ago I knew very little other than stocks had higher expected returns and risk than bonds, and being young I could take more risk than someone older. 100% stocks seemed too high and under diversified in some vague sense so I picked 70/30 and stayed more or less there for many years (drifted higher in the 90s tech boom, but that self-corrected. :) )

Later as I started to get smarter, looking at historical data and theory, and the context of a stable job, wife and I with growing pensions, that still seemed reasonable.

As I grew older and our pensions and saving grew I became a little less interested in risk and "winning". And I became a little more mindful of stock risk and the marginal utility of money, but also mindful of the risk long term in nominal bonds, especially given some likelihood of a rising interest rate and possibly future rising inflation rate environment. So, I moved to 60/40 and starting buying some long term TIPS. Given emergency fund cash which as I get closer and closer to retirement becomes more and more just a part of the retirement portfolio I might more accurately say we are 55/45. (and yes one could certainly consider emergency fund cash part of the portfolio all along)

By retirement I may go to a straight 50/50. I have never seen any evidence for either a rising allocation to stocks in retirements or a declining allocation to stocks in retirement. While there are advocates for both (and frequent threads on both), when one looks closely at the actual evidence, there really is no sound basis for either, so I expect I'll gravitate to a fixed allocation (though I reserve the right to change my mind, for example if I buy an annuity I might rise stock allocation due to change risk profile).
"Other" here as well.

My progression loosely follows Rodc's. I started out on my own with little knowledge at ~90-95% stocks, just in time for the the dot.com bust. After wising up a bit, finding the Diehards/Bogleheads, and listening to Taylor's advice, I moved to ~75% stocks.

After more reading, and coming through the Great Recession just fine ( and very thankful for the 25% fixed income allocation), I needed to figure out how I would handle the transition towards and into retirement. Like Rodc, I was not comfortable with a continuously changing AA. Becoming ever more conservative through retirement just seemed incongruous with the Trinity study and it's static AA assumptions.

So I finally settled on a strategy based on Swensen's recommendations. I transitioned to a static 30% fixed income AA first. Then, on the approach to retirement I began a Swensen-inspired transition to holding about 5 years worth of withdrawals in "risk-free" assets, about 20% of the total portfolio. By the time I'm two years away from retirement. I will hold 20% of the total in risk-free assets, and the other 80% in a static 70/30 "risky" portfolio.

This produces and overall AA of 56/44. That's what I plan to hold indefinitely. I see no justification for continued AA shifts.

--Peter
"Discipline matters more than allocation.” ─William Bernstein

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age in stocks?

Post by Digger » Sun Mar 30, 2014 12:31 pm

Risk tolerance. I had much lower risk tolerance in my early 20s. Twice the tolerable % drop in portfolio value in stocks looks about right. Now I have gone through a couple of -50% episodes 100% stocks. For me age in bonds would never work.

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Re: Poll: how did you decide on stock/bond allocation?

Post by Iorek » Sun Mar 30, 2014 1:02 pm

livesoft wrote:I used Larry Swedroe's adage about need, ability, and willingness to accept risk combined with years and years of my own personal investing behavior which has demonstrated a need for me to use prime numbers.
So did you end up with 71/29, or 83/17?

I'm not sure I could describe it precisely-- I'd say it was basically a process of looking at various benchmarks/recommendations and considering how comfortable we were with different allocations/risks in light of our age and savings, etc.

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Re: Poll: how did you decide on stock/bond allocation?

Post by stlutz » Sun Mar 30, 2014 1:45 pm

In my younger days I used 75/25 because I read a book that called that "moderate" which sounded good to me. I've moved to 60/40 over time as my need to take risk has gone down some. But I'm actually an advocate of 60/40 as really being a great default starting point for everyone.

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Re: Poll: how did you decide on stock/bond allocation?

Post by WallyBird » Sun Mar 30, 2014 2:14 pm

A few years ago I got to pondering how to allocate my various Roth's, rollover IRAs, and 401k, most of which were heavy with blended funds, actively managed funds, etc. I had some domestic vs international diversification, and a helping of bonds thanks to the blends, but it was all pretty sloppy, and I didn't really know what I had -- or why.

About the same time I got a trial of Financial Engines. I entered my data and got some recommendations for a very Bogleheadish allocation, and pretty much ran with it.

I reviewed a few times later with FE, but started getting recommendations that seemed to contradict what I'd been told earlier. So I took the allocation I had and sifted it down to sectors that made sense to me, cooked up my own spreadsheet, and have been running with that ever since. I did make some tweaks to my allocation (didn't have enough bonds, probably still don't, but I'll get there) and added a sliver of REIT.

And there it stands. I may yet go all-in and do 3 or 4 fund, but doing my own rebalancing lets me futz around with my portfolio without any danger of doing anything really stupid.
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Re: Poll: how did you decide on stock/bond allocation?

Post by Jeff7 » Sun Mar 30, 2014 4:50 pm

(Age in bonds) - 5


- I understand that I'm not an expert in these things.
- I needed to start somewhere.
- Most things said that 0% bonds is not a terribly good idea, and that no less than 25% should be bonds.
- I'm still not entirely clear on exactly how the "include Social Security as a 'bond' when determining allocation" thing is supposed to work, or even if that's accepted wisdom.
- It's sort of like what the Target Retirement funds do, albeit a slight bit more linear.
- Yes, I just really needed to start somewhere.


Yes, there's talk of "need, ability, and willingness" to take on more risk as a way of determining your allocation. "Risk" itself seems to be a tough thing to define; it's typically described as an investment's statistical or peak volatility. Or on occasion it is described as "Assume your stocks may suddenly be worth $0. Are you ok with that?"

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Re: Poll: how did you decide on stock/bond allocation?

Post by Kevin M » Sun Mar 30, 2014 10:14 pm

Other: Ability, willingness and need to take risk ("sleep well" is only willingness). Lower need dominates higher ability, and based on experience in 2008/2009, willingness is in the same ballpark as need.

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Re: Poll: how did you decide on stock/bond allocation?

Post by max12377 » Mon Mar 31, 2014 4:54 am

I was woefully under invested for quite a while outside of my 403b. I had built up a sizeable amount of cash because I didn't know what to do with it.. Upon the advent of the 2008 crash I was still nervous but I knew I had to get in at some rational comfort level. I just used 60/40 as a starting point. I bought stocks in taxable and sold the equivalent amount of stocks to buy bonds in my 403b. At the time I figured stocks were going to tank so I'd take advantage of tax loss harvesting when they did and buy them back in the 403b. Of course they haven't tanked (yet :shock: ) so I now have decent long term taxable gains in my taxable account. I'm thinking of re-balancing by paying off house but I'd have to pay Federal and NY State Taxes. However, the alternative is to just throw new money at the 4% 30 yr mortgage or perhaps by NY Long Term Muni's. There are worse problems to have.

In sum, 60/40 allowed me to reach a comfort level to go all in.

Max

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Re: Poll: how did you decide on stock/bond allocation?

Post by IlliniDave » Mon Mar 31, 2014 7:28 am

I said combination. I invest to make money (rather than just trying to preserve it), driving a higher stock allocation than what is often discussed as appropriate. I'm aware of my age, but don't use it in a formula (years until retirement is a more useful surrogate for that in my view). Valuations aren't an issue right now, but I am sensitive to them, and would probably adjust should they reach extremes.
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Re: Poll: how did you decide on stock/bond allocation?

Post by Garco » Mon Mar 31, 2014 7:49 am

I put "other" b/c I've been in the market ("retirement investing") for so long that I've handled this allocation decision differently in different eras. Because I'm approaching retirement soon, I have taken risk off but I am not at "age in bonds." Equities is about 50%, even though I'm in my late 60's. At the same time, I'm not capable of making precise risk assessments, yet I don't hand things over to a CFA/CFP. My portfolio has evolved, however. I've learned what I am comfortable with, and stick to a baseline allocation that feels right, using a "method" of Fingerspitzengefühl. My holdings are well balanced across several classes, including equities, bonds, real estate, and stable value funds. Any changes in the allocation from year to year are at the margin, unless we hit a big crash.

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Re: Poll: how did you decide on stock/bond allocation?

Post by nisiprius » Mon Mar 31, 2014 1:42 pm

I used books by experts to understand as best I could how much risk there was in stocks, in bonds, and in combination. I looked into myself as best I could to judge how much risk I personally could tolerate. And I took into account what I could judge about my wife's tolerance. I matched them up.
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Re: Poll: how did you decide on stock/bond allocation?

Post by dickenjb » Mon Mar 31, 2014 3:44 pm

I voted "other". As a retired 58 year old, I would probably be 50/50, except I have a substantial DB pension which is non Cola'd. My wife will also draw a non-Cola'd DB pension at 65. Accordingly I went 60/40 to look for some inflation protection for our DB pensions.

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Re: Poll: how did you decide on stock/bond allocation?

Post by berntson » Mon Mar 31, 2014 4:02 pm

I use age in bonds minus my age. :D

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