Wealthier people in America do not follow the conventional asset allocation model of buying bonds, i.e. age equals your bond percentage allocation or a 60/40 equities/fixed income split. How do I know this? Personal Capital has over 800,000 users of their free financial dashboard to help manage your money and I’m a consultant who is privy to some of their data to share with all of you. Data geeks, rejoice!
Out of 800,000+ Personal Capital financial dashboard users, roughly 165,000 of them have linked investable assets of between $100,000 to $2 million. We call this the mass affluent class, or upper middle class if you’re so inclined. The mass affluent are generally regular folks with mainly W2 income. They save and invest in order to provide for their family, pay for expensive tuition bills, take a couple nice vacations a year, and hopefully achieve a comfortable retirement when all is said and done.
Let’s do a quick review of my proposed stocks and bonds asset allocation model before moving on to the big data.
FINANCIAL SAMURAI ASSET ALLOCATION MODEL
If you read my article about the proper asset allocation of stocks and bonds by age, I’ve proposed five different types of asset allocation models:
1) Conventional Asset Allocation Model (Age = percentage allocation in bonds)
2) New Life Asset Allocation Model (A more aggressive blend than conventional)
3) Survival Asset Allocation Model (50/50)
4) Nothing To Lose Asset Allocation Model (100% equities until 65)
5) Financial Samurai Asset Allocation Model (hybrid between Nothing To Lose & New Life)
The Financial Samurai Asset Allocation Model shuns bonds until age 35, and begins with a 20% bond allocation until reaching a 50/50 split by age 75.
The Financial Samurai asset allocation model is based on the following assumptions:
* You have multiple income streams.
* You are a personal finance enthusiast who gets a kick out of reading finance literature and managing your money.
* You are not dependent on your 401k or IRA in retirement, but would like it to be there as a nice bonus.
* You are not dependent on Social Security.
* You are an early retiree or one who is shooting to be an early retiree who won’t be contributing as much to your pre-tax portfolios as before.
* You have average genetics and plan to live between the ages of 80-90.
In other words, my model is relatively aggressive. What’s interesting is that according to the data analysis of the ~165,000 mass affluent users of Personal Capital’s financial dashboard (most of whom are not paying clients, but free dashboard users), their bond allocation is also very minimal, much like the Financial Samurai Asset Allocation Model!
Let’s explore the data in a little more detail.
BOND ALLOCATION BY AGE FOR THE MASS AFFLUENT
Study these six charts from Personal Capital’s demographics carefully. The easiest way to analyze the charts is to compare the age range with the bond allocation in red. The higher the difference, the higher the investment risk compared to conventional wisdom.
At the end of the asset allocation charts, I’ll share with you five key takeaways.
KEY TAKEAWAYS FROM THE BOND DATA BY AGE
1) Young people aren’t taking the most risk, older people are. Not even in my most aggressive “Nothing To Lose Asset Allocation Model” or “FS Asset Allocation Model,” where there’s lots of alternative income streams, would I ever recommend a 65+ year old to only have 18-19% of their investment portfolio in bonds. 65+ year olds are likely no longer interested in working 40+ hours a week. I certainly don’t know any 75-89 year olds who are working steady day jobs. A 20% or less bond + cash allocation for people under 44 seems more digestible, since people under 44 have at least 20 years to make up for any massive losses.
2) The data is showing that the mass affluent are extremely bullish about the economy and the stock market, or they are extremely bearish about the bond market, which has been rising for 30+ years in a row. I get a sense that after five years of a bull market in stocks, investors are overly confident about their investing prowess and have forgotten what financial pain feels like. Investment bloggers with zero financial work experience or formal education have gained tremendous popularity. Robo-advisors have raised a tremendous amount of new funding because they can do no wrong when stocks keep going up. Don’t confuse brains with a bull market. As Warren Buffet said, “After all, you only find out who is swimming naked when the tide goes out.”
3) Even in a downturn, things aren’t so bad. Let’s say there is a 50% correction in the stock market for a 75-89 year old who displays the exact same asset allocation profile above with a 62% allocation in stocks. With bonds and cash equaling 32%, his/her entire portfolio will probably only be down by ~30%. Now let’s say that the average net worth for 75-89 year olds is $800,000 based on dashboard data; the 75-89 year old still has $560,000 left over after a 30% decline. Surely $560,000 is enough to last a 75-89 year old for the rest of his or her life since the median life expectancy is roughly 81-84. The chances of another financial crisis like 2008-2010 in our lifetimes is small.
4) Alternative investing is a decent percentage of every asset allocation. For every age range, alternative investing comprises 5-7% of an investor’s total allocation. That’s a pretty decent allocation given private wealth managers who manage $5 million+ often have 10% alternative investing allocations recommendations (I was just at a JP Morgan Chase Private Wealth meeting doing some research). I think the alternative asset allocation is structurally lower than it could be due to access being still quite limited to the majority of Americans.
5) Maybe the mass affluent are much more diversified than the average person. The median household has a large majority of their net worth in their primary residence – a scary proposition when the housing market crashed. The PC data only reflects linked investable assets. Not everybody links all their assets like real estate, coin collection, etc like I do. In other words, the overall net worth pie is likely much bigger with different slices and slice sizes.
My investments in stocks and bonds make up roughly 35% of my overall net worth, if I don’t count my online business. If I count my online business, stocks and bonds would make up less than 20% of my net worth. I’ve got 35-40% of my net worth in property and 10% of my net worth in risk free CDs. If the market takes a dump, I will still suffer on paper due to my real estate investments, but my cash flow will stay sticky because rents, CD interest income, dividend income, and online income are relatively sticky. Furthermore, I strongly believe in my ability to hustle and make more money if necessary because I’ve made money from nothing before. Overconfidence in one’s ability to make money may be the key reason why every single mass affluent demographic above is under allocated in bonds. I’m sure I’m being overconfident right now.
HOW DO I BUY BONDS?
Just like stocks, there are plenty of different types of bonds to buy. I personally just buy bond ETFs like I bought MUB, the iShares National AMT-Free Muni Bond in my after tax brokerage account. I view bonds, cash, and some commodities as defensive positions in a portfolio.
Below are some other popular bond ETFs.
- iShares iBoxx Investment Grade Corporate Bond symbol “LQD”
- iShares 20+ Year Treasury Bond ETF symbol “TLT”
- iShares iBoxx $ Investment Grade Corporate Bond Fund symbol “LQD”
- iShares 7-10 Year Treasury Bond ETF symbol “IEF”
- iShares Core U.S. Aggregate Bond ETF symbol “AGG”
- iShares iBoxx $ High Yield Corporate Bond Fund symbol “HYG”
- PIMCO 25+ Year Zero Coupon U.S. Treasury ETF symbol “ZROZ”
- SPDR Barclays Capital High Yield Bond ETF symbol “JNK”
- Vanguard Short-Term Bond ETF symbol “BSV”
- Vanguard Extended Duration Treasury ETF symbol “EDV”
THERE’S A PLACE FOR BONDS
From a top down point of view, I understand why investors are shunning bonds for equities. If you can earn a 2.5% or greater dividend yield in a decently valued company that also has the potential for capital appreciation, why buy a 2.5% bond that only pays you back the principal if held to maturity? Interest rates are close to all time lows and there’s this underlying fear that interest rates will rise and bond prices will collapse when the Federal Reserve finally starts doing away with quantitative easing.
But bond investors aren’t stupid, and the bond market isn’t inefficient. Much of the interest rate expectations are already baked in. In fact, a strong government bond market (~2% on the 10-year), and collapsing crude oil prices could very well signal that economic weakness might be on the horizon, or that stocks are overvalued.
If you’re over 45 and have been enjoying a fantastic equity run by being heavily overweight equities, I suggest rebalancing your portfolio to be more in-line with the New Life or Financial Samurai Asset Allocation model. We’re six years into a recovery and we all feel like investment geniuses. Even if you have a Survival Asset Allocation Model of a 50/50 split, you’ll still probably make a high single digit return if the bull market continues.
The Personal Capital data is very telling about mass affluent investor sentiment given the 165,000 samples. As the company grows, there will be further insightful data points to share. The key is making an educated guess as to what all the data means. That’s where you make or save a lot of money.
RECOMMENDATIONS TO BUILD WEALTH
* Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
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About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $175,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2019 and beyond. The 10-year bond yield is over 3% now and buying bonds and buying short-term CDs is becoming more attractive.