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.
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 reduced our bond holdings to zero over the last couple of years. We’re 100% equities now. 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 steady income. The basket of 40+ 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 I consider this pension “a big bond”. 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 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?