stock:bonds ratio -bogleheads equation taking age into account?

[Snydley]

I can't find it anywhere. Its how much stocks:bonds you should have by subtracting your age by 100 or something?

thanks

[Jluke]

Age in bonds.

Or 110-age in equities.

Good ballpark.

https://www.bogleheads.org/forum/viewtopic.php?t=194408

[disneysteve]

The rule of thumb used to be 100 minus your age in stocks, so a 40-year-old would be 60% stocks, 40% bonds. However, as people started living longer, many felt that was too conservative to support an extended retirement. So a modified rule came along saying 110 minus your age in stocks giving that 40-year-old a 70/30 portfolio instead.

I've never quite followed that rule. As of 12/31/17, we were 81% stock and I'm 53. The above would have us at 57 or 47%.

[Snydley]

Great thanks for that info.

I just checked our accounts and we are currently 30% bonds, 61% US stocks, 9% international stocks. Also, 37% of our portfolio is in large cap US stocks. I'm 43, DH is 49.

Based on my calculations we need to average 5% growth per year for the next 20 years or so. Should I rebalance? If so, to what? thanks

[Snydley]

I've never quite followed that rule. As of 12/31/17, we were 81% stock and I'm 53. The above would have us at 57 or 47%.

Steve- are you going with more risk because you have $$ in savings, home equity, etc? Just curious why you are going with that allocation.

[Jluke]

Ive heard good things about being 60:40 (S:B) when you are near your goal. A good, conservative portfolio that still captures increases in equities but also protects against a huge drop in equities.

You know the crash that everyone has been waiting for since at least 2014

I am 40 and have 75% S, 25% B

[disneysteve]

Steve- are you going with more risk because you have $$ in savings, home equity, etc? Just curious why you are going with that allocation.

I've always tilted more aggressive. Just my personality and risk tolerance.

That said, I am starting to scale it back some partly because we're getting older and partly because that crash Jluke mentioned is going to happen eventually and we don't have as much time to recover as we used to.

[corn18]

Great thanks for that info.

I just checked our accounts and we are currently 30% bonds, 61% US stocks, 9% international stocks. Also, 37% of our portfolio is in large cap US stocks. I'm 43, DH is 49.

Based on my calculations we need to average 5% growth per year for the next 20 years or so. Should I rebalance? If so, to what? thanks

Only you can decide your AA. It is based on risk tolerance. I have a lower risk tolerance, so I am at 60/40. That AA resulted in a 15% return in 2017. My buddy was 100% stock and he got 22%. I gave up 7% return for insurance on the downside. When the correction comes, he could lose 40% of his portfolio value, while I should be limited to a 20% loss. I am older, so I don't have as much time to recover, so I am ok with that.

There really isn't a right answer to AA. But there are wrong answers. And only you can decide.

I use this chart to help me sleep at night:



At 60/40, I am not optimized for risk vs. reward (that's at about 80/20). But I will spas and do stupid things if my portfolio drops 40% this year. So I chose 60/40.

[scfr]

Are you trying to come up with a target asset allocation? If so, what about assets other than stocks & bonds (cash, other)?

[Fishindude77]

We're at about 32% stocks, 39% real estate, the balance pretty liquid.

[corn18]

Are you trying to come up with a target asset allocation? If so, what about assets other than stocks & bonds (cash, other)?

This plays into how much risk you are willing to accept which then drives your AA.

For example:

Age 65, married, no debt, $1M savings

Income:

$30,000 pension, COLA, US Government with survivor benefits and health care for life
$40,000 SS

$70,000

Expenses:

$70,000

Maybe you decide that 80/20 is right for your portfolio because you have 100% of your expenses covered by reliable, COLA'd sources and your $1M is just play money and inheritance.

Age 50, married, still owe on house, no other debt, $2M savings

Income:

$80,000 4% withdrawal rate from Portfolio only

Expenses:

$70,000

Yeahhaww!!! Set for life, right? Well, I would feel a lot less comfortable with the second scenario vs. the first. So I would lean towards a 50/50 AA to protect capital.

For people with alternate incomes, just use the math above and apply the rental income. If you have $70,000 / year of rental income and $70,000 a year expenses, you technically don't need any savings. So any savings you do have could be 100% equity. But if you are a nervous Nellie like me, maybe you want to be 60/40 because you'll sell like a wimp if you see your nest egg drop 50% in one year even though you don't technically need any of it.

Then there are a million scenarios in between.

Set an AA allocation based on how much risk you will accept. I am kindof the first scenario and don't really need any savings in retirement, but yet I still sit at 60/40. The math says 80/20. But yet, here I sit at 60/40. Heck, I am so paranoid, I might annuitize some of my portfolio when I retire just to have a floor with cushion. But that's just me and my demons. Your demons may be less vocal.

[Snydley]

Thanks everyone for your replies. Sounds like there isn't a clear cut answer.

Right now we have ~400K in retirement accounts, ~350K in home equity, 70K in savings accounts. By retirement I was planning for 2million in retirement, 1million in home equity, and being debt-free. We will have to live off our retirement accounts (including paying for health insurance) and I see the home equity as extra cash we could tap into if needed.

Maybe I'll stay the course for the next year with 70% stocks 30% bonds. Does anyone think I should be invested more in international and less in US stocks, or does it not matter so much? I just feel like the international market is so shaky..

[Benderz]

I'm in my 40s and have been investing into retirement since mid 20s in stock mutual funds only. I don't plan to invest into bonds for at least 10 years if ever. Although I may shift to more large cap growth with dividends at some point.

[Like2Plan]

Thanks everyone for your replies. Sounds like there isn't a clear cut answer.

Right now we have ~400K in retirement accounts, ~350K in home equity, 70K in savings accounts. By retirement I was planning for 2million in retirement, 1million in home equity, and being debt-free. We will have to live off our retirement accounts (including paying for health insurance) and I see the home equity as extra cash we could tap into if needed.

Maybe I'll stay the course for the next year with 70% stocks 30% bonds. Does anyone think I should be invested more in international and less in US stocks, or does it not matter so much? I just feel like the international market is so shaky..

The underlying reason for your asset allocation has to do with your overall risk tolerance and how long will you have to recover from a downturn in the market. I would also add--maybe the size of your portfolio is a factor because Warren Buffet thinks 90/10 would be fine for his wife after he is gone. I figure she probably would be able to live off the bonds for a while if there was a downturn in the market. So, there isn't a one size fits all. The same goes with the international market.

It is all an academic exercise until there is a drastic downturn in the market. Your asset allocation will have a bearing on this. The bonds are supposed to attenuate the ups and downs so you are not on an emotional roller coaster and you are better able to stay with your plan during a market correction.

I have seen a formula on the bogleheads board on asset allocation applied to some of the downturns in the market https://www.bogleheads.org/wiki/Asset_allocation. Applied to your allocation of 70% stocks and 30% bonds-- it would be -25.81% cumulative return after inflation from 2000-to-2002 bear market in a period of time that was marked by falling prices.
So, the question is--would you stay the course in this scenario or would you make adjustments?

[disneysteve]

I would also add--maybe the size of your portfolio is a factor

Portfolio size does matter. Suze Orman has her wealth entirely or almost entirely in bonds from what I recall. She has no need to take the risks that come with stock ownership (not that there aren't also risks with bonds). If her bond portfolio generates sufficient income for her, she can be super conservative. But most of us don't have that much wealth. We need the growth of the equities to sustain us, even in retirement.