"Age in bonds" or "110 minus age = equities"?

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catdude
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"Age in bonds" or "110 minus age = equities"?

Post by catdude »

OK, which is it? As I understand it, Jack Bogle says one should have a bond allocation equal to their age. I'm 60, so that would mean an AA of 40% stocks / 60% bonds. But Jane Bryant Quinn says a good guideline is to have a stock allocation of 110 minus one's age; in my case, that would be a 50 / 50 split. Anyone care to weigh in on who's right? Or does it not make a whole lot of difference?
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9-5 Suited
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Re: "Age in bonds" or "110 minus age = equities"?

Post by 9-5 Suited »

Both are right, and neither is right. They are handy rules of thumb that will both place you on an eased path toward fewer equities as you age.

How much any of us allocate to bonds is a matter of personal preference based on risk tolerance and time horizon of when money is needed. Those two rules yield a 10% difference in bond allocation. I'm not sure that will really make much difference to your goals in the long run.

Good luck with making your final choice!
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Re: "Age in bonds" or "110 minus age = equities"?

Post by luckeye »

There's no "right" answer. These are just rules of thumb. You need to consider your need, willingness and ability to take risk and decide for yourself.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by saltycaper »

Neither is "correct". The use of age as a determination of stock/bond allocation makes many implicit assumptions about income, net worth, estate planning, health, risk tolerance and myriad other factors. You should evaluate your own personal situation instead. This can take some time, but it is time well spent IMO. I'd start with the Bogleheads Wiki and some books recommended therein, and ask the forum about any specific questions.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by selters »

When markets go well, people tend to recommend 120 minus age in stocks. This tends to be the advice nowadays. Ofte, when posters suggest age in bonds, some people on this forum will comment "that is quite conservative."

Most people's risk tolerance is lower than they think. William Bernstein is cited in a recent Wall Street Journal blog post: “You don’t get bargain prices anywhere without the presence of really bad news.” (http://blogs.wsj.com/moneybeat/2016/06/ ... er-brexit/) Some investors tend to think that there will be wild fluctuations in the stock market without the accompaniment of really bad news. That is just not gonna happen. If you think you can tolerate stock market volatility, you have to be able to tolerate constant bad news from the media for months or years on end, too. And Brexit? That's not even bad news. That's noise.

Unless you have the need, risk tolerance and desire to be more aggressive than age in bonds, then there is no need to be more aggressive than age in bonds, I think.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Rodc »

I would argue no one knows their own right allocation to better than plus or minus 10%. So if this sort of rule appeals to you just pick one. The difference is likely modest in practice.
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: "Age in bonds" or "110 minus age = equities"?

Post by Jack FFR1846 »

These are all different rules of thumb but they're neglecting your own risk tolerance. I'm at 50/50 plus or minus 10 at this point. I'm not very tolerant of ups and downs but want some exposure to equities. I started at age minus 10 for a starting point. I also started at 70/30 US/int equities and have decided that my int exposure is going to stay where it is from a dollar perspective. I'm not selling but I'm going to let the % drop as time goes by as I am comfortable with less international exposure.

This is MY perspective. You may want more risk or less or add REITs or int bonds or gold or park a few train cars of coal or oil in your yard. Think about it......live with it for a while. Do you sleep ok with your AA? Do you feel you're missing out on equity climbs? It's a balance you have to figure out for yourself. Don't get caught in the trap of "I only want 10% per year with zero risk" kind of thinking. Your returns will be relative to the market. There's no "wrong" answer.

Did Brexit freak you out? If it did, maybe you have too much equity exposure. Did you not even look at your account (this would be me)? Then perhaps your AA is where you want it.
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stemikger
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Re: "Age in bonds" or "110 minus age = equities"?

Post by stemikger »

You have been given all good replies.

John Bogle has often said use this as a starting point just to think about it. He also says (however, not so often) that one should include what they get from social security and count that as part of their fixed income allocation). Many disagree when it comes to that advice.

Warren Buffett recently said we are in uncharted waters with negative interest rates and no one really knows how it is going to play out. His advice is 10% in bonds and 90% in equities (all index funds) for the average person. No matter what their age.

I do think this time it may be different but not in a dramatic way. If you were holding 60/40, maybe hold 70/30. If it fits your risk tolerance. My feeling is bonds are still going to be needed for behavioral mistakes when stocks do what they do over time, but not much in the way of income and maybe not so much in the way of safety like they did in the past. Who knows? I don't, but time will tell.

I still believe and feel age in bonds, 110 or 120 minus age are all good asset allocations but it really is a personal choice your goals and risk tolerance.

Good Luck!
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Jags4186 »

A higher percentage in equities is thought to be needed nowadays because bonds are offering very low returns.

Vanguard Total Bond fund has return just shy of 6% over the past 25 years. Over the past 10 years it has returned shyd of 5%. Over the past 5 years about 3.5%.

With interest rates so low the thought is that they can only proceed in 1 of 2 directions. Remain flat (bad for bond yields) or increase (bad for bond values).

That said, no one knows what would really happen. Cheers and good luck! :sharebeer
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Re: "Age in bonds" or "110 minus age = equities"?

Post by galeno »

Wife and I are 59 y/o. Retired using a 3.5% AWR. I would like to be at 80/20. Wife prefers 40/60. So we're at 60/40.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by jf89 »

I'm a little more aggressive than the wife. She wanted to be around Age - 10 in bonds, I wanted Age - 20. We compromised and went with Age - 15 in bonds with a cap when we hit 40% bonds to ride off into the sunset from there. All in all, not a very big difference at all... just gives me a target to rebalance to.

Whatever helps you sleep at night is really the correct answer. And my wife being comfortable means she allows me to sleep at night.

You don't even really need to do an age-based model. You're either in or near retirement (sorry, I made an assumption based on your age). At your point in my plan, I'd be at my final asset allocation. Maybe find that happy spot and stick with it. That's going to depend greatly though on your need and ability to take risk. Are you comfortable in retirement with more money than you'll know what to do with over the next 50 years? Hike up the bonds to 60% or 70%. Are you comfortable in retirement and want to build that extra cash into a legacy? Hike up the equity to something you can live with. Trying to accumulate that last little bit before you retire? You'd probably be better to be somewhere in the middle to continue to help it grow but protect what you've got. It's ultimately up to you.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Dottie57 »

galeno wrote:Wife and I are 59 y/o. Retired using a 3.5% AWR. I would like to be at 80/20. Wife prefers 40/60. So we're at 60/40.
I am currently at 60/40 stock/bonds. With bonds returning so little I feel a need to be a bit more agressive.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Rodc »

Vanguard Total Bond fund has return just shy of 6% over the past 25 years. Over the past 10 years it has returned shyd of 5%. Over the past 5 years about 3.5%.
Those are nominal.

Real 25 years is about 3.8%
Real 10 years is about 3.3%
Real 5 years is about 2.2%

The long term average for treasuries, not sure about TBM, is a little under 2% real so the last 5 years while not great are not that far off.
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: "Age in bonds" or "110 minus age = equities"?

Post by dbr »

Rodc wrote:I would argue no one knows their own right allocation to better than plus or minus 10%. So if this sort of rule appeals to you just pick one. The difference is likely modest in practice.
Yes. They are both wrong because nobody has a "right" asset allocation and if there were one it wouldn't be the same for everyone nor determined only by their age.

On the other hand, they are both right in that those rules sum up a discussion which contains a certain amount of wisdom about how most people might invest, but the exact difference between the two does not matter.

Rules of thumb should not be followed but rather taken as references to a larger discussion. In this case the discussion is why people are well advised to moderate the risk in stocks taking into account their own personal situation, judgement, and preferences and how those change as life goes on.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by catdude »

Hi, OP here. Thanks y'all for your replies. I'm retired and my pension pretty much covers my monthly expenses, so I look at my portfolio as being insurance. I don't need it for current income... it's there for major unexpected expenses.

No way [(removed) --admin LadyGeek] that I would have a 80/20 or even 70/30 AA. If my portfolio lost half its value I'd be [upset --admin LadyGeek]. My current AA is 47% stocks / 50% bonds / 3% cash. That more or less splits the difference between "age in bonds" and "110 minus age for stocks". I do sometimes think that I'm missing out on stock market gains, and feel some temptation to go with a 60/40 AA. But I really don't need to take on much risk, so my thinking is I'll probably just leave things as is...
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Re: "Age in bonds" or "110 minus age = equities"?

Post by J295 »

Mostly retired 4 years ago and are now age 57.

We use 110 - Age = "Equities" (which for us "equities" means index funds and some "alternatives" ).

So, 110 - 57 = 53% "equities" (and of that 49% are index funds and 4% "alternatives").
47% is combination of cash, bonds, TIPS, etc.

We do not include paid for home, vehicles, etc., and we don't include Social Security (to be paid in the future, and I made maximum contributions during my full time life). We do include in the cash portion a modest promissory note that I receive payments on relating to the partnership interest I sold.

I spent a few years settling in on something that "fit" us, and have a short IPS that doesn't permit deviation unless we decide to deviate then sit on that decision for a designated cooling off time.

We only review performance quarterly then adjust if there is a deviation that fits the IPS (5% for equities). My spouse is very very capable and can handle all this when I pass, but doesn't pay much attention and glances at our quarterly reviews and moves on.

Interestingly, I was a day to day market watcher pre-retirement, and since transitioning just take an occasional glance from time to time. That could change the next time we have a 40% or more drop in a short period of time .... we'll see .....

Hope this helps.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by joebh »

johnny wrote:OK, which is it? As I understand it, Jack Bogle says one should have a bond allocation equal to their age. I'm 60, so that would mean an AA of 40% stocks / 60% bonds. But Jane Bryant Quinn says a good guideline is to have a stock allocation of 110 minus one's age; in my case, that would be a 50 / 50 split. Anyone care to weigh in on who's right? Or does it not make a whole lot of difference?
For my situation, neither is right. I'm 61 and have almost 70% in equities.
For you, you get to choose any magic formula you prefer, then declare someone who advocates it as "right".

It doesn't matter if Bogle or Quinn or neither are right.
Find an asset allocation that makes you comfortable enough to stay the course. Then you will be "right".
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Hector »

I do not see any issue with going form age or age-10 rule.

I personally think that AA should be based on individual's circumstances and goals rather than based on age.

Lets say person A and person B both have 10 millions in investment. Person A thinks he won the game and does not want to take any risk and put everything in bonds to preserver the capital. Person B thinks he won the game and he will be fine even if he is left with 5 million and puts everything in stock because he wants capital gain and would like give a lot away to charity and/or to grand kids.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by tennisplyr »

I'm 66, retired for 5 years and am at an AA of 50/50. I do need my portfolio to live on in addition to our SS, no pension. I've been at 50/50 for a while and plan to stay there, for me it's a decent balance. I actually have a larger portfolio that when I first retired after significant withdrawals.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by jay22 »

There is no right or wrong answer for this question. All depends on the individual.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by nisiprius »

There are two issues here. One is that in my personal opinion, the important categories are "stocks" and "lower-risk investments" which includes investment-grade bonds, but also includes savings bonds, bank CDs, money market funds, cash, and so forth. So, a rule "100 - age = equities" is better than "age in bonds" because it doesn't contain an implicit suggestion that the lower-risk investments must necessarily be bonds.

The second is a 10% difference in how aggressive the stock allocation should be. The truth of the matter is that it is false precision to suppose that you can gauge your personal risk tolerance so precisely that you can say "60/40 is too aggressive for me, 40/60 is too conservative, 50/50 is just right."

For what it's worth, the current thinking on "glide paths" is that they shouldn't be a straight line, like "age in bonds" or "110 minus age in equities," but that most of the de-risking should be concentrated into the age period 40 to 60. That is, stock allocation should stay fairly level up to age 40, should decline so as to get most of the allocation change done between 40 and 60, and then be fairly level from then on.

The real lesson here is that you are mostly looking at taste and opinion, not science. You probably can't taste the difference between using six or seven drops of tabasco in a recipe, and you probably can't tell the difference in risk between 60% stock and 70%.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Peter Foley »

The Trinity study would incline one to select the higher equities allocation. On the other hand, recent work by Wade Pfau suggests that a "rising equity glide path" may be preferable in retirement.

If one does not have a lot of room for error, I think Dr. Pfau's approach makes sense. Keep a slightly higher AA until one nears retirement - retirement being a point in time when one's maximum retirement savings is at its peak. Stay relatively conservative for a few years and then moderate a bit.

So perhaps 110 - age until a few years before retirement, then age in bonds for 5 years, then return to the 110 - age rule of thumb.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Rodc »

nisiprius wrote:There are two issues here. One is that in my personal opinion, the important categories are "stocks" and "lower-risk investments" which includes investment-grade bonds, but also includes savings bonds, bank CDs, money market funds, cash, and so forth. So, a rule "100 - age = equities" is better than "age in bonds" because it doesn't contain an implicit suggestion that the lower-risk investments must necessarily be bonds.

The second is a 10% difference in how aggressive the stock allocation should be. The truth of the matter is that it is false precision to suppose that you can gauge your personal risk tolerance so precisely that you can say "60/40 is too aggressive for me, 40/60 is too conservative, 50/50 is just right."

For what it's worth, the current thinking on "glide paths" is that they shouldn't be a straight line, like "age in bonds" or "110 minus age in equities," but that most of the de-risking should be concentrated into the age period 40 to 60. That is, stock allocation should stay fairly level up to age 40, should decline so as to get most of the allocation change done between 40 and 60, and then be fairly level from then on.

The real lesson here is that you are mostly looking at taste and opinion, not science. You probably can't taste the difference between using six or seven drops of tabasco in a recipe, and you probably can't tell the difference in risk between 60% stock and 70%.
I like the analogy!
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: "Age in bonds" or "110 minus age = equities"?

Post by azanon »

johnny wrote:OK, which is it? As I understand it, Jack Bogle says one should have a bond allocation equal to their age. I'm 60, so that would mean an AA of 40% stocks / 60% bonds. But Jane Bryant Quinn says a good guideline is to have a stock allocation of 110 minus one's age; in my case, that would be a 50 / 50 split. Anyone care to weigh in on who's right? Or does it not make a whole lot of difference?
In my unlicensed opinion, one's age, and nothing else, isn't even scratching the surface as to appropriately determining an appropriate allocation to equities. I'd also want to know if you anticipate other guaranteed sources of income (e.g. pension), risk tolerance, ability and need to take risk, desired level of income vs. portfolio size, minimum acceptable income from the portfolio, current portfolio size vs. desired/required size, and I'm probably forgetting a few more things since i do this thing for fun and am not a CPA/CFA.

Oh, and if you hire a CPA/CFA, and all they ask is your age before they set your portfolio allocation and you see them do the 100/110-x math in their head, fire them immediately. Yeah, it's really that bad if that's all that's considered before they set your portfolio!
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Dandy »

These people don't know you or your financial situation or risk tolerance etc. They make general statements that apply to many people but not for everyone. You need to decide how much risk you want to take or need to take not Bogle or anyone else.
There isn't a whole lot of difference between the two suggestions. Both are considered reasonable. So if you are a bit more aggressive go for the higher equity allocation if not take the other. No one knows which is going to be better.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by trueblueky »

I've bought into "never less than 25% in equities" as a rule of thumb. That would make age in bond stop at age 75 with a constant 25/75. For 110 minus age, the declining AA would stop at age 85. Either way, I don't see a point in continuing to reduce percentage in equities after a certain point.

I've also bought into never less than 25% in bonds (or equivalent). That would say 75/25 until you're past 35 or so. That's probably good in the early years when contributions are more important than gains, and until one has been through a Really Bad Year to see their actual risk tolerance.

We're retired. The first rule is more applicable to us; the second, to someone still accumulating.
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Clive »

Peter Foley wrote:recent work by Wade Pfau suggests that a "rising equity glide path" may be preferable in retirement.
Whilst you might fear higher stock amounts in retirement, if those shares have been held for 20+ years then even if share prices halve likely the gains over the prior 20+ years would have been higher than had the amount been invested in bonds.

At the start of retirement you might target a 3.3% SWR that if the amount paces inflation would last 30 years. On the basis that over 20+ years stock total returns tend to outpace inflation then you might construct a 30 year ladder and load rungs 1 to 19 with bonds and rungs 20 to 30 with stocks. Spending bonds first over the 30 years averages 72.4% stock

3.3% SWR Year start rungs loading
Year Bonds Stock Stock %

Code: Select all

1	19	11	36.7%
2	18	11	37.9%
3	17	11	39.3%
4	16	11	40.7%
5	15	11	42.3%
6	14	11	44.0%
7	13	11	45.8%
8	12	11	47.8%
9	11	11	50.0%
10	10	11	52.4%
11	9	11	55.0%
12	8	11	57.9%
13	7	11	61.1%
14	6	11	64.7%
15	5	11	68.8%
16	4	11	73.3%
17	3	11	78.6%
18	2	11	84.6%
19	1	11	91.7%
20	0	11	100%
21	0	10	100%
22	0	9	100%
23	0	8	100%
24	0	7	100%
25	0	6	100%
26	0	5	100%
27	0	4	100%
28	0	3	100%
29	0	2	100%
30	0	1	100%
			
		Average	72.4%
Such a ladder is similar to a constant 72.4/27.6 stock/bond yearly rebalanced, one averages in to relatively higher stock weighting over time (time cost averages), the other cost averages via rebalancing. Historically (UK since 1896) such a constant weighted allocation 3.3% SWR survived all 30 year periods and in the average case ended the 30 years with 2.6 times the inflation adjusted start date amount. In the worst case it ended with 70% of the inflation adjusted start date amount. Reduce the withdrawal rate down from 3.3% to 3% SWR and the average = 2.9 times, worst = 92%. i.e. in the worst case 30 year period a 3% SWR still had nearly all (8% less) of the original inflation adjusted start date amount available after 30 years.

From the above table for a ladder arrangement after 19 years (start of the 20th year) the portfolio had transitioned from 36.7% start date stock exposure to 100% stock exposure, such that a 60 year old at the start that was 80 years old at that 20th year, sitting on 100% stock might seem crazy. However those stocks had been held for 20+ years and might have risen to 2, 3 or more times their inflation adjusted start date value, such that even a 50% drop in share price (or more) could be sustained without overall ill effect.

Worth having a read of that work : Reducing Retirement Risk with a Rising Equity Glide Path by Wade D. Pfau and Michael E. Kitces
https://www.onefpa.org/journal/Pages/Re ... 0Path.aspx
Executive Summary

This study explores the issue of what is an appropriate default equity glide path for client portfolios during the retirement phase of the lifecycle.
Results show, surprisingly, that rising equity glide paths in retirement—where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon—have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios.
Overall, the results show that rising equity glide paths from conservative starting points can achieve superior results, even with lower average lifetime equity exposure. For instance, a portfolio that starts at 30 percent in equities and finishes at 60 percent performs better than a portfolio that starts and finishes at 60 percent equities. A steady or rising glide path provides superior results compared to starting at 60 percent equities and declining to 30 percent over time.
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The results are more consistent in showing an optimal retirement glide path that begins at 30 percent equities and rises to 70 percent equities by the end in terms of probability and magnitude of failure
Rodc
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Re: "Age in bonds" or "110 minus age = equities"?

Post by Rodc »

Peter Foley wrote:The Trinity study would incline one to select the higher equities allocation. On the other hand, recent work by Wade Pfau suggests that a "rising equity glide path" may be preferable in retirement.

If one does not have a lot of room for error, I think Dr. Pfau's approach makes sense. Keep a slightly higher AA until one nears retirement - retirement being a point in time when one's maximum retirement savings is at its peak. Stay relatively conservative for a few years and then moderate a bit.

So perhaps 110 - age until a few years before retirement, then age in bonds for 5 years, then return to the 110 - age rule of thumb.

That is actually not true. That study showed there was no meaningful difference, at all, between a rising allocation and a static allocation. It is true the "headline" said one thing but the actual results in the paper were very clear - a rising glide path neither helped or hurt.
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: "Age in bonds" or "110 minus age = equities"?

Post by kolea »

johnny wrote: No way [(removed) --admin LadyGeek] that I would have a 80/20 or even 70/30 AA. If my portfolio lost half its value I'd be [upset --admin LadyGeek]. My current AA is 47% stocks / 50% bonds / 3% cash. That more or less splits the difference between "age in bonds" and "110 minus age for stocks". I do sometimes think that I'm missing out on stock market gains, and feel some temptation to go with a 60/40 AA. But I really don't need to take on much risk, so my thinking is I'll probably just leave things as is...
Sounds like you have reasoned it out, which is far better than some ad hoc formula. Those "age in bonds..." recommendations are really for those who cannot reason out an AA.
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