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Originally Posted by smartatmoney
If you follow the rule of thumb that you should be invested 120-your age in stock, then you should be 97% stocks. I would lower your bond fund to 5% and put that extra in International. But that's just me.
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I forget what author it is that studied this (I'm lending out my copy of the book right now) but it's been shown that having up to 10% or even 20% in bonds substantially decreases volatility in a portfolio, without decreasing returns very much at all.
Having some money in bonds (I don't know if 3% is enough, maybe it is) also gives you an opportunity to capture the rebalancing bonus that lets you buy low and sell high. Take a $10,000 portfolio, invested 90% in stocks, 10% in bonds. Let's say stocks have a really, really bad year and drop by 50%, while bonds return an average of 6%. If you've added nothing new during the year (I know a false assumption but the math's starting to get tricky) your portfolio might be at, say, $5,560 ($4500 stocks, $1060 bonds). At the end of the year you get to rebalance back to 90/10- leaving $554 in bonds and buying $504 of now-cheap stocks. If you were 100% invested in stocks, your portfolio value would be $5000, and you'd have no new money (at least from rebalancing) to be buying cheap stocks with.
Though I use the 120-age formula, my 'floor' for bonds is 10%, because of those facts. Even though I'm 24, I have 10% invested in bonds. When I hit 31, that number will start decreasing along the 120-age guideline.