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Mid thirties bond allocation
Old 09-12-2012, 01:35 PM   #1
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Mid thirties bond allocation

About four years ago I had ZERO allocated to bonds. I did have alot of cash kicking around that was maybe about 15% of total portfolio. After the market crash I obviously learned lessons and started directing new funds to bonds and also selling off equities when I thought they were overvalued. I now have 20% allocated to bonds and have about 12% cash. I am wondering if I should continue on with allocating more to bonds or if to hold at 20% and allocate cash to equities. I personally believe equities are abit overvalued now so likely will continue stuff into bonds to a 30% weighting. I am planning retirement at 50.

Just wondering what others in my age group are doing......
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Old 09-12-2012, 02:10 PM   #2
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I had no bonds in my mid thirties, actually didn't do much in fixed income other than emergency fund until I turned 50.

Where I kick myself is not having and AA and rebalancing. It cost me in the early 2000s where if I rebalanced I would have avoided the downturn and it cost me again in 2008 when I should have sold bonds and bought equities but didn't have the courage to do so (was frozen like a deer in the headlights).
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Old 09-12-2012, 06:05 PM   #3
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I think that the size of your portfolio matters too. If your portfolio is quite large already, you may not need to take as much risk as a typical 35 year old.
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Old 09-12-2012, 06:38 PM   #4
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I have become more fiscally conservative than I ever thought I would be. I currently have over 50% in bond funds(counting Wellesley as bonds) as I really don't like the volatility of equities. I think 30% bonds is perfectly fine if that's where your risk tolerance is.
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Old 09-12-2012, 06:42 PM   #5
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I stayed all equities right into retirement, though I raised a few years of cash when I retired (in 2007). That worked fine for me, and you do get some rebalancing with different equity segments. With the volatility we've seen, it may actually be to your advantage to have 20% bonds if you can aggressively rebalance. In the studies I've seen 15% bonds is really close to all equities in total return. The rebalancing gain is enough to nearly compensate for the lower average return on bonds. However, bonds are looking pretty risky whenever interest rates start to rise.
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Old 09-12-2012, 06:56 PM   #6
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Originally Posted by accountingsucks View Post
About four years ago I had ZERO allocated to bonds. I did have alot of cash kicking around that was maybe about 15% of total portfolio. After the market crash I obviously learned lessons and started directing new funds to bonds and also selling off equities when I thought they were overvalued. I now have 20% allocated to bonds and have about 12% cash. I am wondering if I should continue on with allocating more to bonds or if to hold at 20% and allocate cash to equities. I personally believe equities are abit overvalued now so likely will continue stuff into bonds to a 30% weighting. I am planning retirement at 50.

Just wondering what others in my age group are doing......
Am 35, and changed my ID a few years ago to this one for a reason. (much farther along on my quest for FI, and don't need as much equity exposure).

A good chunk of my FI allocation is in the form of:

6.5% EE bonds (will be used to mostly pay off my house in the next few years as they mature)
7.5% I-bonds
7.5% preferred stocks
1.7% domestic junk/floating bank loan CEFs
1.7% foreign bond CEFs
0.7% a few muni CEFs

I also have a little in a few funds that have some FI exposure like Wellesley, but not much beyond the above.

I won't specifically be replacing the EE bonds with more FI as they mature. As time passes, I might put more into balanced funds like Wellesley, but it sure is fun watching the various stocks DRIP and slowly grow.
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Old 09-13-2012, 09:45 AM   #7
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No matter how old you are, if by bonds you mean something longer than 1-2 year duration, you are likely making a mistake.

If you allocate 30% to bonds, and by accepting considerable interest rate risk and some credit risk you are able to get 2% after expenses, isn't that going to throw a huge load on the other 70% of your portfolio?

I would guess that the only people here who would be retired at age 60 would be people with very good government pensions, if we were getting 2% on 30-50% of our portfolios during our saving years. After all, 2% returns are after inflation negative, and after tax even worse, and would have been so almost any time in US history other than the '30s.

So if you are attracted to 2% returns, do the really sensible thing and spend all your free time trying to get on a government payroll. Otherwise, it is going to take a long career and abstemious living to eke out even moderate savings, or a lightning strike like big options in the money, or a even bigger lightning strike like marrying a truly wealthy mate.

This retirement thing gets easy to uderstand with a little arithmetic.

Ha
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Old 09-13-2012, 09:40 PM   #8
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I'm similar in age and in 2009 I had 20% allocated to bonds/cash. Currently I'm close to 30% (which is my target). A large chunk of this is cash due to uncertainty/instability in my employment situation. The increase in bond percentage came solely from new earnings and not rebalancing.

I expect returns from equities to be better than bonds going forward. But I have no plans to increase my stock allocation percentage. I have bonds for stability not return. I'm very close to FIRE, maybe could even swing it now, but plan to work a for a little bit more. If my FIRE date was 10 years away, and my portfolio was not close to 25-30 times expenses, I would probably go 90% equity (10% cash / short-term bond for liquidity purposes).
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Old 09-13-2012, 10:40 PM   #9
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We're mid thirties and have about 20% in bond funds.
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Old 09-14-2012, 04:21 AM   #10
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No matter how old you are, if by bonds you mean something longer than 1-2 year duration, you are likely making a mistake.

If you allocate 30% to bonds, and by accepting considerable interest rate risk and some credit risk you are able to get 2% after expenses, isn't that going to throw a huge load on the other 70% of your portfolio?

I would guess that the only people here who would be retired at age 60 would be people with very good government pensions, if we were getting 2% on 30-50% of our portfolios during our saving years. After all, 2% returns are after inflation negative, and after tax even worse, and would have been so almost any time in US history other than the '30s.

So if you are attracted to 2% returns, do the really sensible thing and spend all your free time trying to get on a government payroll. Otherwise, it is going to take a long career and abstemious living to eke out even moderate savings, or a lightning strike like big options in the money, or a even bigger lightning strike like marrying a truly wealthy mate.

This retirement thing gets easy to uderstand with a little arithmetic.

Ha

here is my thoughts on it and i guess i go against the grain.

to me investing allocations are all about pucker factor, NOT AGE AT ALL..age may be last on my list.

PUCKER FACTOR FIRST, GOAL 2ND.

wall street telling a 25 year old to go heavy into equities and have them panic, bail and run each time there is a downturn and lose money will do them no good.

bonds and cash are away of tempering the volatility into ones comfort zone.

the worst mistake advisors make is having someones allocations based on age.

even at 65 we have long term money that we wont need to eat with for 30 years.

no reason a 65 year old has to have a very conservative portfolio for that long term money unless thats their comfort zone .

2008 -2009 taught folks that age based is not the way to put an allocation together.

sometimes tempering the volatility with bonds or cash is whats needed to keep someone in the game .

i cringe every time i see someone say your young , you dont need bonds yet or you dont need a big cash position.

yes, they just may, and the quicker wall street realizes investing is a whole lot more then your age and trying to squeak out every penny of gains the better most folks will do.


the big issue is that volatility has changed since 2000. .In the past, if you had a 60/40 portfolio you had a range in mind that you were going to be getting something like , ten or 11% volatility .

what we’re seeing since 2000 is even with a 60/40 stock/bond allocation, there are periods of time when your portfolio can have a 30/40 percent volatility swing , which are swings that no investor thought they would see.

thats far more then anyone signed on for or more then they could stand in pucker factor.

as andrew lo said the future of investing may be about protecting against the volatility of volatility.

MANY TIMES LESS EQUALS MORE.
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Old 09-14-2012, 07:01 AM   #11
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As conservative as I am now at the old age of 58, not so much in my 30's. I was right at 100% equities, maybe 90/10 in my late 30's. I think if I were to do anything with your AA I would put some in a commodity fund. A little more diversification never hurt.

But don't go by recommendations. I know nothing about nothing.
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Old 09-14-2012, 08:09 AM   #12
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Originally Posted by mathjak107 View Post
.....wall street telling a 25 year old to go heavy into equities and have them panic, bail and run each time there is a downturn and lose money will do them no good.................

what we’re seeing since 2000 is even with a 60/40 stock/bond allocation, there are periods of time when your portfolio can have a 30/40 percent volatility swing , which are swings that no investor thought they would see.
.....
I don't think that many on these boards would be in the panic, bail and run category (which I agree is wealth destroying) but if one stays the course then equities are great. I am sure that I would not be retired today if I had not been a heavy (and consistent) investor in low cost, index equity mutual funds over the last 30 years.

While I agree that volatility is higher the only 30-40% swing that I remember is 2008, which in my view was an anomaly. I think 10-20% would be more likely.
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Old 09-14-2012, 08:27 AM   #13
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I think mid-30s is exactly the time you should begin to think about some bonds in your portfolio. Dave Ramsey is against bonds at any time, but that's a bit too risky for me. At about age 35 for me, I added 13% bonds to my portfolio. Now at age 46, it is the same. I will probably up it to 20% when I turn 50, and then maybe 30% by age 55 if I think I'm still on track to retire by age 60. In retirement, I will either leave it at 30% bonds or maybe go up to 40% depending on many factors (the size of my portfolio then, whether my wife wants to continue working for a little bit (she's a year younger than me), how I feel about the stock market at the time, what SS looks like for me in the future, etc.).
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Old 09-14-2012, 08:40 AM   #14
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I don't think that many on these boards would be in the panic, bail and run category (which I agree is wealth destroying) but if one stays the course then equities are great. I am sure that I would not be retired today if I had not been a heavy (and consistent) investor in low cost, index equity mutual funds over the last 30 years.

While I agree that volatility is higher the only 30-40% swing that I remember is 2008, which in my view was an anomaly. I think 10-20% would be more likely.
This forum is only a tiny piece of the overall picture...

if only folks acted like most in this forum they would be in great shape..

according to a study done on barclays aggregate 60/40 model 30-40% was what it showed.
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Old 09-14-2012, 08:41 AM   #15
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Originally Posted by haha View Post
No matter how old you are, if by bonds you mean something longer than 1-2 year duration, you are likely making a mistake.

If you allocate 30% to bonds, and by accepting considerable interest rate risk and some credit risk you are able to get 2% after expenses, isn't that going to throw a huge load on the other 70% of your portfolio?

I would guess that the only people here who would be retired at age 60 would be people with very good government pensions, if we were getting 2% on 30-50% of our portfolios during our saving years. After all, 2% returns are after inflation negative, and after tax even worse, and would have been so almost any time in US history other than the '30s.

So if you are attracted to 2% returns, do the really sensible thing and spend all your free time trying to get on a government payroll. Otherwise, it is going to take a long career and abstemious living to eke out even moderate savings, or a lightning strike like big options in the money, or a even bigger lightning strike like marrying a truly wealthy mate.

This retirement thing gets easy to uderstand with a little arithmetic.

Ha


Ha,

If only 15% of income is saved for retirement then you have a valid point.

If on the other hand both DH and DW each save north of 50% of income via LBYM, then it should be possible to reach FI at a reasonably early age.

In my case we got much more conservative with investments after reaching a major milestone in financial wealth at age 41 (6 years ago).

But to your point, DW does have a fairly generous megacorp pension awaiting her 5 years from now.

gauss
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Old 09-14-2012, 08:43 AM   #16
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here is my thoughts on it and i guess i go against the grain.

to me investing allocations are all about pucker factor, NOT AGE AT ALL..age may be last on my list.

PUCKER FACTOR FIRST, GOAL 2ND.

wall street telling a 25 year old to go heavy into equities and have them panic, bail and run each time there is a downturn and lose money will do them no good.

bonds and cash are away of tempering the volatility into ones comfort zone.

the worst mistake advisors make is having someones allocations based on age.

even at 65 we have long term money that we wont need to eat with for 30 years.

no reason a 65 year old has to have a very conservative portfolio for that long term money unless thats their comfort zone .

2008 -2009 taught folks that age based is not the way to put an allocation together.

sometimes tempering the volatility with bonds or cash is whats needed to keep someone in the game .

i cringe every time i see someone say your young , you dont need bonds yet or you dont need a big cash position.

yes, they just may, and the quicker wall street realizes investing is a whole lot more then your age and trying to squeak out every penny of gains the better most folks will do.


the big issue is that volatility has changed since 2000. .In the past, if you had a 60/40 portfolio you had a range in mind that you were going to be getting something like , ten or 11% volatility .

what we’re seeing since 2000 is even with a 60/40 stock/bond allocation, there are periods of time when your portfolio can have a 30/40 percent volatility swing , which are swings that no investor thought they would see.

thats far more then anyone signed on for or more then they could stand in pucker factor.

as andrew lo said the future of investing may be about protecting against the volatility of volatility.

MANY TIMES LESS EQUALS MORE.
Yours is definitely "against the grain" as you said. I agree that we all need to invest within our comfort zones. The reason, of course, that the common advice for younger people is to not have money in bonds is that stocks typically have a bigger return and that if there is a big dip in the market, there is time to rebuild it. That is solid advice, IF you have the patience to keep those shrunken shares there and let them rebuild later...if you sell trying to catch the best deal, then most of the time you lose.

I lost 39% in 2008, but I just kept buying all the way down to a Dow of 6400, and with the really low market came great deals. In 2009 I gained 34% and then another 20% in 2010 before a small return of just 4% in 2011 and now in 2012, I'm up 17.7% YTD as of this morning. I didn't sell in 2008 because I don't believe anyone can time the market (certainly not me).
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Old 09-14-2012, 09:16 AM   #17
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i think what 2008-2009 taught us is those words may contain risk really do mean something.

most season investors i think hung in there and did just fine. it was the general public though that got creamed as they got scared and bailed.

i know here in our own company i saw many of the youngins flee just at the point us seasoned guys were thinking what can we buy? or should we rebalance again.?


today because of volatility folks have a different view of their own pucker factor and have to invest accordingly whether they are young or old.

you cant assume folks are going to stay the course like we did.

to tell you the truth i do agree the future of investing may start to include managed futures and hedging stratagies to protect against the volatility of volatility since it has increased drastically.

even looking at myself ,i will be retiring in less then 2 years.

projections tell me less the other sources of income we have ill need about a 2% withdrawal rate from our portfolo inflation adjusted .

i was 80-90% equities my entire life up until 5 years ago.

now i switched to the fidelity insight income model.

we are about 10% equities at the moment but it fits right in my plan well.

retirement is no longer about growing richer for me.

now its about not growing poorer and having our money last through retirement and inflation.

my feeling is while i can up the volatility of my portfolio i can meet my income needs as is so if i already won the game why keep playing?

the answer would be greed and wanting more if i upped the risk since the plan works as is..

perhaps i may up the volatility and learn to hedge it going forward.

ill see when the time comes but i guess the bottom line is the increased

volatility we have has certainly changed my investment stratagies as well as

being more aware that i cant assume others should be investing like i did when i was their age.

.
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Old 09-14-2012, 09:56 AM   #18
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I am working on seeing how much I need, and investing to meet that goal. My choice will be the least risk needed to reach my goal.

I just turned 46 and have 50% bonds (well, the G fund in the TSP). I just made some payouts due to a divorce and I wanted to stabilize the value of my TSP.

I think I will cut back to 35 or 40% bonds, but am still crunching numbers and trying to figure out what my target savings goal is.
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Old 09-14-2012, 10:43 AM   #19
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fwiw, I have 0% in bonds and I'm 30... my plan is to start transitioning 2% a year over to bonds at the age of 40. That'll put me on course to have a 50-50 bond to equity allocation by 65...

I plan to retire mid-50's

(I also agree that the market is overvalued... I'm looking to hedge that with shorts however, not bonds)
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