Of the three main asset classes, bonds often appear the least exciting. Perhaps the combination of their stable and seemingly turtle-paced growth decreases their likelihood of crossing investors’ minds when it comes to any goal, including retirement. However, bonds can be an important piece of any retirement portfolio, particularly as you age into your 40s and beyond. As a general rule, your bond allocation should increase as you near retirement.
When you’re young, bonds will likely be of little importance to you. History shows that bond returns are typically lower on the aggregate than stocks, so an investor who’s 30-50 years away from retirement might be understandably less interested in bonds. Investing predominately in bonds in your youth might keep you from some panicked moments during temporary bear markets, since the stock market is arguably more volatile than the bond market. But, depending on your tolerance to a few downturns throughout the course of your working life, stocks’ average return rate has historically been significantly higher than that of bonds: over the past 90 years, government bonds have earned an annual average return of 5.5% while stocks have grown at an average of nearly 10% annually (Source: Stocks, Bonds, Bills, and Inflation, 2018).
As you move closer to retirement, however, your vulnerability to risk increases, as you no longer have as much time to ride out and recover from a sudden stock decline. Increasing your bond allocation slightly as you age can offer a buffer should you encounter a sharp decline in stocks, allowing you to hold on to more of your investments and stick to retirement goals regardless of the market. Keep in mind, however, that some of the age-based bond-to-stock ratio investment theories you’ve heard could be outdated guidance — it may not be realistic to tweak your allocation ratios based on advice born in times when bond yields were much higher, the cost-of-living-to-income ratio was less, and employer-sponsored pensions were more popular. Considering modern-day realities, along with the likelihood that you’ll live a longer life than your parents or grandparents, it may not be as prudent to increase your bond investments at the exact rate at which you’re aging.
Of course, your retirement portfolio should align with your individual retirement goals and risk tolerance, which is why stock and bond allocations often vary from person to person even within the same age category. While bonds, like any investment, come with a modicum of uncertainty, they typically carry less risk than stocks. Therefore, a more conservative investor, regardless of age, might choose a larger portion of his/her asset allocation to represent bonds. On the other hand, because stocks outperform bonds when it comes to long-term growth, a younger, more aggressive investor might choose to start out with no bond investments at all, focusing on stocks until retirement is more visibly on the horizon.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by Randall Wealth Management Group or Vanderbilt Financial Group. Material presented is believed to be from reliable sources and PSEC makes no representation as to its accuracy or completeness.