David Swensen’s book Unconventional Success mentioned that investors should construct a portfolio with monies allocated to the core asset classes below, keeping a bias towards equities:
- 30% Domestic Equity (VTI)
- 15% Foreign Developed Equity (VEA)
- 5% Emerging Markets (VWO)
- 20% REITs (Real Estate Investment Trusts) (VNQ)
- 15% U.S. Treasury Bonds (SHY)
- 15% TIPS (Treasury Inflation Protection Securities)
Add up bonds and treasuries and that’s 30% fixed income folks. I actually disagreed with David Swensen’s model here.
Many financial experts including a famous one, John Bogle, have stated as you age you should consider this rule of thumb: ”roughly your age in bonds”. So, that means if you’re 45 today then roughly 45% of your portfolio should be in high-quality bonds. Although Mr. Bogle has described this idea as “a crude starting point” it remains a rule of thumb for many investors.
Here’s my (revised) desired allocation:
- 60% equities (now includes up to 30% foreign assets)
- 10% REITs (mostly domestic REITs)
- 30% bonds (
comprised of individual bond ETFs…read on for revised thinking below)
I used to hold many bonds in my individual portfolio using bond ETFs but I’ve significantly reduced my bond holdings across registered accounts over the last couple of years. I’m almost 100% equities now within my individual portfolio. I’ve decided to go this way for two key reasons:
- One, although dividend paying stocks should never be considered bonds (because they’re not) they can provide bond-like income. The basket of 30+ stocks I own from Canada and the U.S. should provide some healthy reliable retirement income.
- Two, I’m fortunate enough to have a defined benefit pension plan at work and because of this, this is my bond asset outside my individual accounts. If you’re lucky to have a defined benefit pension plan you might want to consider more equities in your portfolio.
There is of course no one-size-fits-all-investing-recipe and because of that I’m not suggesting you sell your fixed-income assets. On the contrary, bonds are an important asset class and are critical to investors that don’t have any sort of pension plan or similar fixed income component to rely on. Further to that, bonds help level-out portfolios when stock markets tank. As I mature my financial acumen and learn to treat all assets as one (broad) portfolio I’m rethinking many financial rules. Every financial rule requires a personal interpretation.
What about you? What’s your take on the bond-allocation-should-match-your-age formula? Follow it? Don’t care? Never heard of it?