Since 2009, both the S&P 500 and the US aggregate bond market have performed well. This article will look at the best asset allocation of stocks and bonds by age in detail. I’ve been asset allocation since 1995 and used to work in investment banking from 1999 – 2012. Today, I’m an early retiree who is trying to help as many people as possible reach financial freedom sooner, rather than later.

To determine the best asset allocation of stocks and bonds by age, you should ask yourself the following three questions:

1) What do I think comes next for stocks and bonds?

2) Why are both stocks and bonds at near record highs?

3) As I age, what should my asset allocation be to match my risk tolerance?

In this article, I want to not only show you recommendations of different asset allocations. I want to also teach you the why. The more you can understand why these asset allocations makes sense, the more you can invest with confidence.

Don’t blindly do something without understanding the logic, especially when it comes to investing your money.

With the S&P 500 close to a record-high you might wisely be thinking more about portfolio diversification. Portfolio diversification can help smooth out volatility. Further, you may be able to find investments that zig when your stocks zag.

Diversifying through bonds is the most common way to gain portfolio diversification. However, with the 10-year bond yield under 1% and the Fed Funds rate at 0% – 0.25%, bond performance seems limited. Another growing way to diversify is through alternative investments.

An alternative investment is an investment in any asset class excluding stocks, bonds, and cash. Alternative investments include tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as real estate, commodities, private equity, distressed securities, hedge funds, venture capital, film production and more.

This is a joint sponsored post by FarmTogether, Masterworks, and Vinovest. They’ve helped keep the lights on all year here at Financial Samurai.

You’ve heard the recommendations of always having an emergency fund. Just in case something comes up, your emergency fund will be there to bail you out. Personally, I’ve always got at least six months worth of living expenses in cash. However, perhaps the need for liquidity is overrated.

Not only may we not need as much cash as we think, we may also not need our investments to be highly liquid as well. After all, the last thing we want to do is constantly go in and out of our investments. It’s usually better to invest for the long term.

If you are financially competent, there will rarely be a case where you’ll ever run out of money in an emergency. Further, there are plenty of instances where the lack of liquidity has saved many real estate investors in the past.

The Need For Liquidity Is Overrated

As someone who believes it’s best to invest in stocks and real estate for as long as possible, having an investment that can be easily sold could be a detrimental.

Think about all the folks who wigged out between 2008-2012 and sold equities or real estate back then. Or more recently, what about the people who sold anything in March, April, and May of 2020? They’re all kicking themselves now!

In 2012, I tried to sell my old rental house for $1,700,000. The worst of the downturn was behind us. I had recently engineered my layoff. And I figured it was better to downsize rather than hold a ~$1,100,000 mortgage.

As a result, I signed a 30-day exclusive listing contract with a real estate agent friend. He and his wife came over to stage our house. We got a standard inspection done and pulled a 3R report for our disclosure statement for about $500. My agent ended up hosting three open houses and around 10 private showings.

Our best offer was a verbal offer with no number, just an indication they were willing to offer “much less than asking.” I told them to bugger off and pulled the listing after 29 days.

Thank Goodness For Illiquidity

In retrospect, if I could have just pressed a button to sell for $1,700,000, I probably would have. Thankfully, the real estate market was so illiquid that I saved myself from myself.

Instead, I sold the property for over a million more five years later. At the time, I felt selling the property for ~30X annual rent was too good to pass up. Further, I no longer wanted to deal with tenants and maintenance issues as a fist-time father. Thank goodness real estate was so illiquid! 

I then reinvested $550,000 of the proceeds into real estate crowdfunding, $500,000 into various stocks, and $500,000 into various municipal bonds. It was great to earn income 100% passively. 

However, I did end up selling a municipal bond fund after it recovered about 80% of its losses in June 2020. If I had held on, I would be up for the year. Oh yeah, and I sold about $50,000 in Tesla stock during the summer as well. If I held on, it would be worth over $150,000! Damn the liquidity! 

Have you ever wondered how the rich invest? Well, look no further than seeing how the ~$31 billion Yale endowment fund invests its money.

Endowments invest like many of the world’s wealthiest people and retirees. Both want income to fund their operations or lifestyles indefinitely. Both want to outperform their peers. And ultimately, both want consistently strong absolute returns, regardless of what the markets are doing.

After all, the first rule of financial independence is to never lose money. The second rule of financial independence is to never forget the first rule. As soon as you start losing money consistently, your dreams of living a life of freedom dissipate.

If you want to know how the rich invest, then analyzing university endowments makes sense. If you plan on retiring and living off your investments, studying university endowments is also insightful. At the end of the day, you want your investments to outlast you and provide for generations to come.

Dollar-cost averaging is the act of consistently investing in a particularly security over a set interval of time. Whether you know it or not, you are likely dollar-cost averaging every time you get a bi-weekly or monthly paycheck.

For example, at the beginning of the year, you may elect a fixed percentage of your pre-tax salary to go to various investments in your 401(k). That’s a form of dollar-cost averaging.

But what if you’ve got $2,000 left a month after you contribute to your 401k and pay your basic living expenses? You could invest an additional $1,000 every month into an S&P 500 ETF, regardless of whether it’s reaching record highs or going into the crapper. That’s dollar-cost averaging too.

The great thing about dollar-cost averaging is that you don’t have to think too much. All you have to do is not forget to invest.

To do so, you make investing a certain amount or percentage of income automatic. Eventually your financial nut will grow so large you’ll achieve make it rain status.

But what if you consistently have excess cash flow after maxing out your tax-advantageous retirement accounts? You also realize that the key to retiring early is being able to amass a large enough passive income portfolio to pay for your living expenses.

In such a scenario, we must think about a more appropriate dollar-cost averaging strategy to build maximum wealth. Let’s think things through and lay out a foundation first in this very expensive market.

With the Federal Reserve promising to keep the Fed Funds rate at 0% or close to 0% for years, it’s good to think about potential inflation on the horizon. Specifically, we should learn about investments that can hedge against inflation and also benefit from inflation.

If our income and our investment returns are not beating inflation each year, on a relative basis, we are losing. Therefore, it is up to each of us to at least keep up with inflation.

My annual net worth growth target is 10%, which is on average, 5X higher than inflation. 10% was relatively easy to beat when I had a day job before 2012. Now, it’s relatively harder to beat with similar risk exposure. But I won’t stop trying because I’ve now got a family.

The following is a post about investing as a hedge against inflation by FarmTogether, a leading farmland investing platform and dedicated Financial Samurai sponsor.

A bullish indicator gives investors more confidence to buy or hold a position. There are many variables to track when making an investment decision. However, this bullish indicator has been flashing green since 2Q2020 and is still flashing green today in 2021.

As I was updating my post on helping people decide whether to pay down debt or invest, I was reminded about the S&P 500 dividend yield versus the 10-year Treasury bond yield.

Take a look at the chart below that shows the ratio of the S&P 500 dividend yield to the 10-year treasury yield. The ratio skyrocketed because the 10-year bond yield has plummeted, yet the S&P 500 dividend yield has remained relatively steady between 1.8% – 2%.