Suggested Stock Allocation By Bond Yield For Logical Investors

With interest rates rising across Treasury bonds, municipal bonds, and corporate bonds, there comes a point where owning bonds becomes more attractive than owning stocks. The objective of this article is to figure out an appropriate stock allocation by bond yield for a better risk-appropriate return.

With the 10-year Treasury bond yield rising to as high as 5% in 2023, Treasury bonds look relatively more attractive. This is especially true given inflation is below 3.5% again.

In a research report written by Savita Subramanian, Head of US Equity & Quant Strategy at Bank of America Merrill Lynch, she believes the 10-year bond yield has to reach 4.5% – 5% before US equities start to look less appealing than bonds.

But I say after a nice rebound in stocks in 2023, bonds are already now looking more attractive than stocks.

Historical Stock Allocation By Bond Yield

Below is an interesting chart that shows the average allocation to stocks during different rate regimes. When the 10-year bond yield is between 4% to 4.5%, the average stock allocation is roughly 63%. But when the 10-year bond yield is between 4.5% to 5%, the average stock allocation actually goes up to 65% before declining.

Average allocation to stocks by interest rate

Subramanian says, “based on several tested frameworks, 5% is the level of the 10-yr Treasury bond yield at which Wall Street’s average allocations to stocks peaked, and so is their expected return of the S&P 500 over the next decade.”

I get why the bar charts would fall (lower stock allocation) after the 5% level. But it's interesting to see how the stock allocation is lower when rates are between 1% – 4.5%. It's also interesting to see how there is an uptick in stock allocation once the 10-year bond yield surpasses 9.5%.

My guess is that at several points between 1985 – 2018, despite low risk-free rates, investors were simply too afraid to invest aggressively in the stock market because there was some type of financial catastrophe going on. During the start of the pandemic, the 10-year bond yield dropped to 1% due to a flight to safety. In other words, investors preferred holding a bond that yielded just >1% versus potentially losing 10% – 50% of their money holding stocks.

The Bond Yield Level Where I'd Switch

It has generally been OK to invest in stocks in a rising interest rate environment up to a point. A rising interest rate environment means there is inflationary pressure due to a tight labor market and strong corporate profits. Given corporate profits are the foundation for stock performance, a rising interest rate environment is an epiphenomenon.

Stock performance in a rising interest rate environment

At a 4.5% 10-year Treasury bond yield, I would go 50 stocks / 50 bonds. At 5%, I would go 40 stocks / 60 bonds. If yields rise to 5.5% I would go 30 stocks / 70 bonds. And at 6%, I would go 20 stocks /80 bonds. I stop at 6% since it's unlikely the 10-year bond yield will get there.

We know that based on history, a 50/50 weighting has provided a decent ~8.3% compounded annual return. A 60/40 stocks/bonds allocation provides a slightly higher historical compound return. Not bad, even if the returns are slightly lower going forward.

Bond Allocation Depends On Your Age And Stage In Life

But remember, you're not me.

I'm more conservative than the average 46-year-old because both my wife and I are both unemployed in expensive San Francisco with two young children. I cannot afford to lose a lot of money in our investments because I'm determined to be an SAHD until our daughter goes to kindergarten.

At a ~4.2% 10-year bond yield, we're now at the popularly espoused retirement withdrawal rate where you will maximize your take and minimize your risk of running out of money in retirement. 

If you can earn 4.2% risk-free, that means you can withdraw 4.2% a year and never touch principal. Therefore, perhaps you want to have an even lower stock allocation than 50%.

A 40% equities / 60% fixed income portfolio that has returned a historical 7.8% compound annual return since 1926 sounds quite reasonable. Of course, past performance is no guarantee of future performance.

Balanced portfolio historical performance

See: Historical Investment Portfolio Returns For Retirement

Suggested Stock Allocation By Bond Yield

Eventually, higher rates will slow down borrowing because it makes borrowing more expensive. As a result, corporate profits and the stock market will decline, all else being equal. There is generally a 12-24-month lag after the Fed is done hiking where the economy begins to obviously slow down.

Based on historical Wall Street stock allocation data, historical inflation rates, and historical returns, here is my suggested stock allocation by bond yield to consider.

The suggested allocation percentages are for steady-state portfolios that planned to be invested for years as opposed to a house downpayment fund. Preferences will obviously vary, so use the chart as a gut check and make your own decision.

The goal is to always balance risk and reward. You should try and invest as congruently as possible with your risk tolerance. The investor who tends to blow themselves up generally underestimates their true risk tolerance.

Suggested Stock Allocation By Bond Yield For Logical Investors Chart by Financial Samurai

Of course, in a rapidly changing interest rate environment, changing your stock and bond asset allocation so quickly may not be prudent. There are tax consequences if you're rebalancing in a taxable portfolio. Hence, you must try to anticipate where interest rates are going and asset allocate accordingly.

For example, let’s say the 10-year Treasury bond yield is at 4.2%. If you believe it is going to 3.5% in one year, you may want to shift your stock allocation from 45% to 60%. The thing is, bonds will likely perform well if rates move down as well. Finally, don’t forget to pay attention to inflation and real interest rates.

Much Higher Bond Yields Are Unlikely

Inflation peaked at 9.1% in mid-2022 and there are plenty of signs the economy is slowing. Therefore, I don't think the 10-year bond yield will reach 5%. It may hit 4.5%, but that's about the upper limit given we've already gone through 11 rate hikes.

The more likely scenario is that the 10-year Treasury bond yield starts to fade within 12 months. In the process, the yield curve begins to steepen as the Fed finally starts cutting rates.

I still think there will likely be another recession, but another shallow one that doesn't last longer than one year.

The majority of you have likely seen your net worths double or more since the 2008 financial crisis. As a result, the return on your larger net worth no longer needs to be as great to return the same absolute dollar amount.

Hence, I think it's worth following staying disciplined with your stock allocation based on bond yields.

Asset Allocation Depends On Net Worth Growth Targets

Your asset allocation also depends on your net worth growth targets. The lower your net worth growth target, the more conservative your asset allocation can be.

When I left my day job in 2012, I decided to aim for a 5% annual rate of return on my after-tax investment portfolio. It sounds low now, but back then, the risk-free rate was closer to 2.5%.

With a larger net worth today due to the bull market, luck, and some hustle, all I need is a 1% annual return to match the absolute dollar amount I desired in 2012. But by the Power of Grayskull, I can now get 4.2% – 5.4% risk-free return. This is a huge boon in this high interest rate environment. It is only logical I reduce my stock exposure.

All of you should go through the exercise of figuring out your asset allocation at different 10-year bond yield levels. Run your investments through an Investment Checkup tool to see what your current asset allocation is compared to what you want. Asset allocations can shift dramatically over time.

Free investment checkup tool to ascertain proper asset allocation

Good-enough investing is all about understanding different scenarios and managing your risk. You might like conservative returns with lower risk because you're retired. Or you might be fine with a higher allocation to stocks because you're still in the capital accumulation phase.

Everybody's financial situation is different. Make sure your stock and bond allocation make sense based on your goals and the current economic environment we're in!

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88 thoughts on “Suggested Stock Allocation By Bond Yield For Logical Investors”

  1. Hello Would really appreciate a reply, on this personal note. I am age 60s, have $1.75M, and no debts other than a low-interest mortgage (2.4%). With a pension and Social Security, I still need about $50K a year to maintain the budget. However, with CDs in the 5+% range, I put most of my money on a ladder spread across Roth, Traditional IRAs, and Rollover IRAs. Even cash is at 4.97% for now. The CDs are a short-term investment with some coming due at 3mo, 6mo, 1 yr (5.4%), and 2 yr (5.01%). For most of them, I am flipping to monthly coupons where I then move the interest payments to High Yield Dividend stocks (ET), ETFs (FALN), or Mutual Funds (FFRHX). If I can get income to $100K annually, I can beat inflation, cover my budget and have some serious money left over, without touching the principal balance. (unless I need a new roof, operation or other emergency). Am I playing with fire on these investments like JEPI, etc? I check the technical, and history of payment and deal with some losses/volatility. I read your newsletters and value your opinions/thoughts. Note, I was invested in a diversified portfolio and made some money in semiconductors in a 60/40 split. I am not in any growth stocks now, as income is my focus now. Do you think I am going too far away from equities? I am modeling the CD, Dividend investments, and cash to balance and ~6% is all I need to maintain. In the long term, it will be a challenge, but I can’t take the equity rollercoaster anymore just to average 7% over the years. Rick

  2. Hi Sam. I’m interested in long term municipal bonds (10-20 year term) as opposed to Treasurys as it will equate to a better return in my tax bracket. I know you’ve previously reported on the unlikelihood of default in these assets by credit rating but does that length of term add more risk even if it’s a highly rated bond? Or do you recommend a better strategy for someone looking to lock in these high tax free interest rates for the long term? Thanks

  3. I am attempting to digest and sync this advice with your recommendations for those in the capital accumulation phase. I am 34 years old and like to be hands off as much as I can with investing so I stay focused with index funds. I am extremely concentrated in stocks (95%+) across taxable and tax advantage accounts but I do have a full year emergency fund for a rental property mortgage and 6 months emergency fund (both in MMFs and CDs) if something were to happen. Currently only have about $11K in iBonds and a CD.

    No kids, dual income in a HCOL area (renting), and roughly $1.2M in assets. Should I be thinking about having more bonds at my age/situation or keep focused on long term investing with high stock exposure given a long term horizon?

    Love your work. Thanks!

  4. Are you planning to sell some of your iBonds now that those yields are starting to come down? Or are you taking the position that inflation will stay elevated longer term and / or holding them as a hedge to that?

  5. Sam
    Question- I plan on buying longer duration bonds once the yields are 4.75 and higher.
    My plan is to sell them when interest rates drop in several yrs to get capital appreciation on the bonds as they will be in a tax free Roth acct.
    My question is, to get the max appreciation I was thinking of buying 30yr bonds.
    Are there any downsides that I am not seeing in this vs buying 10 yr bonds? Everyone talks 10 yrs. Seems 30 yr would be much higher return (assuming rates don’t go much higher). I don’t have an issue with keeping them to maturity as my ballast to my tech allocation.

    1. Yes, longer duration bonds will rise more in principal value if rates drop. But they will fall more if rates rise. Powell just signaled a potential 12th rate hike in December 2023.

      So I would allocate a percentage to 30-year bonds, but not all. It does feel like 2023 is the end of higher rates, and buying more bonds now could pay off.

      But nobody knows! Hence why we invest based on probabilities and diversify accordingly.

    2. I’ve been buying a lot of the 20 year treasuries. It seems like the yield is in the sweet spot compared to the 30 year. I’m a bond novice however, so maybe there are things I’m not seeing/aware of.

      Either way, good luck. I’ve largely been doing the same things as you (buying longer dated treasuries)

  6. I love this article but get confused about how to allocate stocks/bonds in my personal holdings.

    As a business owner, I have restricted stock. It is very illiquid so not like a regular stock. However, it is an extremely well run business and it consistently distributes 20-30% dividend for 10+ years now. So in that way it acts like a great bond. It also appreciates about 5-10% in principal. Would you all view it as a stock or a bond, or an “Alternative”? Maybe like a junk bond since it is tied to a business that could have a rough patch? If I identify it as a stock it appears that I am way overweighted in stocks – when combined with my other stock funds in taxable and retirement accounts.

    Also, my vanguard money market is yielding 5.27% so it is loaded up, but of course Empower identifies that at “cash.” My treasuries yield 5.25% but they identify as a bond. Seems to me they both could be considered bond holdings?

    1. I like viewing it as a bond plus. A greater principal growth component with steady income.

      As a business owner, you know that very few other investments can compare to the value you can create yourself.

      Cash at same yield as treasuries are like bonds. Just have to hold bonds to maturity to eliminate principal loss risk.

  7. What is your approach with zero coupon bonds such as the treasuries sold at auction on Vanguard? I too have been taking advantage of the higher yield by purchasing these treasuries but not sure I like getting paid all the interest up front with zero coupon bonds (if I was retired and living on the interest of bonds I think being paid monthly would be better).

    And your advice on getting higher bond percentages in your portfolio in higher interest rate settings makes sense but only with individual bonds and not bond funds, correct? (the latter would have potential for loss in value depending on direction of interest rates)

  8. Good enough investing should be the mantra for the remainder of the decade. The hangover from too low too long will take a while to work through, likely in weird and unpredictable ways. Why have all your money ride the waves when you can get guaranteed income?

    I like bonds. Individual bonds. Treasuries. 18-36 months right now. No CA tax, pays 5%, as close to zero risk as you can get. With inflation falling and our family inflation lower than the printed, it’s even better.

    Every couple of months some of my previous 6-12 months bonds mature and I just can’t find a better risk/return right now. I don’t have it all in bonds, but it’s just easy money for now. Thanks for writing about them!

  9. I have a large position in Vanguard Wellesley Income (IRA). Last year it had one of its worst years ever-down 9%. Its allocation is roughly 40/60 stocks/bonds. Hoping for better over the next few years.

  10. Sam
    Question- I plan on buying longer duration bonds once the yields are 4.75 and higher.
    My plan is to sell them when interest rates drop in several yrs to get capital appreciation on the bonds as they will be in a tax free Roth acct.
    My question is, to get the max appreciation I was thinking of buying 30yr bonds.
    Are there any downsides that I am not seeing in this vs buying 10 yr bonds? Everyone talks 10 yrs. Seems 30 yr would be much higher return (assuming rates don’t go much higher). I don’t have an issue with keeping them to maturity as my ballast to my tech allocation.

  11. My stock allocation has grown in comparison to my bond exposure. I’m due for a rebalance from the performance and also change in the markets. Off the top of my head I should increase my bond exposure by roughly 10%. Time for me to go check in detail now. Thanks for the impetus!

  12. I refer back to this post regularly as rates continue to rise. We are now at 4.6% on 20 year treasuries. I’m a big believer of individual municipal bonds in my taxable accounts (I’ve steadily increased my allocation in taxable) but now these treasury yields are attractive for my tax deferred. Have your asset allocations changed or are you more heavy bonds/treasuries as you suggested?

  13. I found the historical risk/return data for the different asset allocations to be very informative. I’d love to see some additional data in that regard, specifically something like best/worst 5-yr, 10-yr, 15-yr, and 20-yr returns for those same allocations. I think this data could be very helpful for folks age 40 and up who may have to start thinking about tapering down their equity exposure.

    If you have a data source and can provide a link, that would be fantastic.

  14. What are your thoughts in keeping your bond allocation in a money market yielding 5% instead? That way you don’t lose principal when interest rates rise. Or is there something else I am missing here?

    1. Read Sam’s articles on individual bonds.

      Better than money market if you have state income tax, and principle is guaranteed (or as close to 0 risk as you can get) if you keep to maturity.

      I like 18-36 months right now. All close to 5%.

  15. I bookmarked this post because I expect to lean back on this information as the rates change. I have started to do that more often with your posts. The reason is simple, the advice is clear and makes sense. It also saves me the time in doing the math for a lot of these. The trick for me is doing the periodic assessments of my risk tolerance, and adjusting my portfolio when that changes due to my evaluation of the economic indicators.

  16. I’ve always been surprised by such a high bond allocation. If your business is generating enough income to cover your expenses, wouldn’t your investment timeline theoretically be forever? Or at least until you sold your business or it declined.

    I run an Internet business and have about 80% of my investments in stocks, 15% in real estate, and 5% in high interest savings accounts. My business produces way more than I need to live on. But even if that wasn’t the case, my passive investments also produce enough income. That makes my investment timeline very long so I wouldn’t have to sell in a crash.

    Couldn’t the same be said for retirees with social security and government pensions that cover their expenses? My parents have both so they will probably never need their investment money, unless they decide to splurge.

    1. It depends on how much you had and how much you lost during the 2000 and 2008 downturns? How did you do?

      Eventually you want to use your money for something. Otherwise, there’s no point in investing and saving all these years.

      1. I lost a lot during the market downturns, but since my time horizon is so long, I didn’t sell. In fact, I bought a lot more.

        It would be a different story if I needed the money within a few years.

  17. Ricardo Ribeiro

    At current Yield level, things start to get interesting. People can build reasonable portfolios based on their preferences and risk tolerance. Your suggestion presents a good starting point. Thanks for sharing!

    Here in Switzerland, we have a much worse situation. Yields are still very low, even negative… so… there is not much one can do to build a reasonable portfolio. To make things worse, the SMI itself is not really diversified (a few companies hold half the allocation).

  18. Thanks- super helpful. AND… although I am positioning myself with an after-tax account that could sustain early retirement, I know that my wife will work for a lot longer than me and likely into her 50s. AND, thankfully, we can support our lifestyle with only her income. Therefore, does it still make sense to structure my after-tax account as you mention in the short term, or can I leave it in a much more aggressive stock-focused portfolio for maximum long-term returns knowing it likely won’t be touched. If it helps, I am 39. Thank you.

  19. Good day, Sam,
    I’m a huge fan. I have scoured the site and can’t find what funds you hold your pre and post bond allocations? Can you please update me with your suggestions in 2018?

    1. Hi George, b/c I’m based on California, I’ve bought individual California muni bonds, and the California muni bond ETF, CMF. There’s MUB for the national muni bond fund.

      When I go to Hawaii, I’ll be looking to support Hawaii with Hawaii muni bond funds.

      1. Okay, I did read that. Sorry to waste your time. I should have been more specific with my question: I live in VA- for those of us that don’t have muni state ETF (don’t know if any VA muni ETF) what would you do? A lot of blogggers recommendation the Vanguard total bond funds for the bond allocation.

  20. What is the easiest way to get into 3.25 bonds without using the treasury direct account? any good etfs?

  21. Where is my option:
    I’ll always have the majority of my investment portfolio in BONDS no matter how high the market goes

  22. I think it depends on your time horizon. It also depends on how you want to adjust your portfolios of taxable/retirement accounts.

    I sense this bull market is somewhat similar to the one of late 1990s. We have high flier new-tech stocks in artificial intelligence (AI), cloud computing and Internet of Things – these companies carry P/E multiple north of 200. Likewise, in late nineties, we had internet stocks with P/E north of 100. Since trees will not growing into sky forever, when music stops say 2020, we may experience a bear market that lasts very long. Mindful that we lost a decade of no-return of S&P from 2000 to 2010, I am not sure the long term projection of 7% return might not be applicable for the next 10 years.

    For me, since I do not plan to touch retirement accounts for at least 12 -15 years, I am comfortable to keep 70/30 to ride out the potential “lost decade.” But I will definitely reduce stock holdings in my after-tax account when treasury rate hits 5%. I might have 40/60 allocation (40 into mostly growth/dividend stocks, 60 into muni and treasury).

    BTW, treasury rate hit 5% in 2007. And we know what happened afterwards.

    1. Retirees will LOVE a 5% 10-year bond yield. I know I would!

      Know that my investments are earning a guaranteed 5% every year would be amazing. I’d just focus on generating active income for a fun supplement.

      Too bad we ain’t going back to 5% ever again IMO.

  23. Damn Millennial

    Why not use the tax advantaged space for bonds?

    Maybe you have said why in the past, not enough room?

    Bonds are important if volatility is a big worry and you are banking on that income.

    Seems to me that you have the ability to take more risk but no need…good for you!

  24. Sam, what do you consider the most helpful texts on learning more advanced philosophies and tactics regarding investing? I apologize if you have already written a post on this. Thank you for the insights and for stimulating a lot of thought!

  25. Loved this article- thanks for writing.

    You’ve always had a spot for bonds, Sam. I haven’t the same, Although I live in Australia with a slightly different financial market and tax structures.

    I hold paying down debt is similar to investing in bonds, and hold your FSDAIR (think that’s what it was called) with high regard.

    In your view could this strategy be used as an alternative in a rising rate environment?

    1. Hi Mo – FS-DAIR is for investing or paying down debt, and this strategy is 100% on investing. So you can take this strategy for the investing portion of FS-DAIR if you wish. I think you should always follow FS-DAIR if you have debt to pay down, no matter what.

  26. I skipped other comments because I don’t have much time but answered 5%.
    I need 4% and I could live off of that but need some sort of hedge against further inflation.
    I agree with lower for longer and I think if we hit 5% it will be so brief that it’ll be an almost “all in moment” where it’ll decimate the stock market and follow with a recession. Rates will drop and you could ride it out with a small buffer incase you’re a bit off on timing.
    I’m waiting, hoping, praying for the fed to overshoot and they seem to be doing a bang up job of it.

  27. I’m a fan if bonds now bht didn’t have any bond exposure at all in my 20s. I started slow into bonds in my early 30s and have worked up to a rough 60/40 stock/bond ratio across most of my accounts. I try to keep it roughly 60/40 to 55/45 for the most part. Not sure when I’d go 50/50, perhaps in one or two accounts if rates went above 4.5%.

  28. Sam, what is the exact instrument you are buying to protect against future rate hikes while taking advantage of the current environment while also avoiding CA taxes? I looked at various options but couldn’t land on one.

  29. Simple Money Man

    I know Mr. Buffett says to ride out a recession and be patient. But as you stated, “net worths double or more since the financial crisis”, it’s so tempting to move most of your assets into bonds for locking in gains and letting a recession take its course.

    How do we decide when that shift in mindset from accumulation to preservation should begin? Could it be that we are somewhere in the middle and what does that sub-group do?

  30. > I’ll stop at 5% since there is no way we’re getting above 5% again in my humble opinion. America is too smart and too efficient to allow inflation to runaway.

    I think it’s a possibility: If the U.S. has to sell a lot of U.S. Treasuries over the coming years (mainly to fund its retirement and health care obligations), foreign investors may push the 10-year yield above 5%.

    It may not be inflation, but supply and demand of U.S. dollars, that does the trick.

  31. How would you adjust this if you were in your early-to-mid 20s, with a 30 year retirement horizon.

    At current rates, even 20% feels like too much for me. But I’ve never lived through a serious downturn (opened my portfolios in 2014), so I might just be over optimistic here.

  32. TBH I’ve never looked at bond rates to determine my allocations. Perhaps when I’m closer to FI and working on a decumulation strategy I’ll pay more attention. It seems more relevant at that time.

  33. Can you explain how you invest in bonds? It sounds like you are purchasing directly, because bond funds can lose money in a rising interest rate environment due to duration risk.

    As an early retiree and a “stocks for the long run” investor, bonds are an area I want to get into but I’m not sure how.

    1. Christine Minasian

      I would agree. Bonds to me are a bit confusing. A basic lesson in bonds and how to buy bonds would be great Sam!

        1. Another vote for this. Are these bond funds or are you picking specific ones through a brokerage?

  34. Ms. Conviviality

    I was somewhat surprised to see that most votes were to keep money in the stock market regardless of how high the bond yield goes, even though this is how I voted. My reason is that my retirement will not be dependent on the money invested in stocks since I’ll have a pension and rental income so I’m not worried if there should be a recession by the time I want to retire. I have the luxury of holding out until the market rebounds to cash out stocks. Since the S&P has been returning 10% over the long term the gains are much greater to keep invested with stocks.

    1. You’re looking at a select subset of the population with greater assets than your typical american

  35. I tend to lean toward alternative investments like REITs and MLPs for my income investing. Both categories tend to provide more income than bonds currently do. In the case of MLPs there are also tax advantages that I find very attractive.

    Outside of the tiny allocations in my index funds, I actually don’t own any bonds directly. The volatility of stocks have never bothered me enough to reduced the percentages that I hold in them.

    I hold approximately 15% of my portfolio in REITS, 10% in MLPs and the remaining 75% in more traditional equities and index funds. It’s always interesting to read about different investing methods being employed.

    1. Same. Adding to MLP, Reits, and BDCs right now. Adding some schd, vym, and dgro as well. Looking to retire in 10 years and have income coming in every month. Probably need to add some bonds and muni

  36. Honestly it has no impact on my stock allocation for one specific reason. Once the bonds adjust its already too late to sell stocks. The impact of the bond price is already in stocks.

  37. Hi, any suggestions on the best ways to go about purchasing Treasury bonds? I use Vanguard for my mutual fund, Fideltiy for 401(k), Betterment for Roth IRA, & Ally Savings for e-fund & extra cash. Can you combine with any of those spots? Or you have to go through TreasuryDirect?
    Thanks — love the blog!

    1. Don’t use a mutual bond fund. If fellow investors get the willies the fund might have to sell bonds at a discount and the NAV will suffer even more.

      Just use Treasury Direct and stay on the short end. Also build a physical gold allocation for the eventual sovereign defaults that will likely manifest as devaluations of debt against gold.

      1. Anytime someone tells you to hold physical gold, you can toss out their investment recommendations.

        1. Gee, then why have central banks been stepping up gold purchases and trimming back USTs?

          What do they see coming?

          It will be a binary event. Just like 1933. When we last had sovereign defaults.

        2. Their is some merit in an asset allocation featuring ‘alternatives’ like gold, RE, PE, art, etc.

    2. Another Reader

      You can buy treasuries at the auction through Fidelity and the other major discount brokers with no commission. At Fidelity, under the Investment Products tab, click on Fixed Income, then Individual Bonds, then U.S. Treasury. Then click on Find Bonds. You will see a small tab for Auction under U.S. Treasury. Click on that. Auctions are Monday and Tuesday. Four week bills are auctioned on Tuesdays, longer duration on Mondays. Anticipated yields are posted Friday and Monday.

      As of today, Friday, October 12, the anticipated annual yield on 13 week treasury bills is 2.24 percent. 26 week bills are anticipated to yield 2.42 percent. Interest on treasuries is exempt from state and local taxation, unlike interest on a savings account or CD.

    3. Financial Samurai

      For Fixed Income – this is where managed funds work very well. Dollar for dollar, trading bonds is much more expensive than trading stock. Lack of exchanges, basic electronic trading and a lot of the market still being traded over voice (for sizeable trades) are key deterrents.

      Outside of government bonds, and particular for corporate bonds/credit using a fund manager makes a lot of sense. New issue bonds (which occurs much more frequently than IPOs for stocks due to fixed vs indefinite maturities) generally carry new issue premiums, and these bonds are allocated almost exclusively to professional/non-retail investors. This makes it easy for bond funds to outperform the index, and outperform an individual trying to build the same portfolio.

      For US treasuries – best way to buy them is direct. However, there aren’t many cases where it really makes more sense to buy treasuries than invest in a high yielding bank CD- particularly as banks are much more sound now than 10 years ago.

  38. Dr. Remoulak

    Good article Sam. Would be interested to know how/if adding another variable, namely expected years to retirement, might change your analysis?

    1. Sure, it’s definitely logical to be more conservative in retirement or when you’re close to retirement, say within the next 3 to 5 years.

      Maybe lower the stock waiting down by 5 to 10% as well. But I’m on employed right now, and have been for the past six years, and I’m comfortable following this guide.

  39. Interesting thoughts on your allocations between stocks and bonds stratified by the 10-year Treasury rate. I see your logic and agree with switching more to bonds as interest rates rise because this locks in a guaranteed return virtually risk-free. I think your spectrum is slightly simplified given it doesn’t mention the effects of inflation besides confidence in America preventing it. However, I think it’s a nifty guide for thinking about investment allocations.

    Your conservative allocation makes sense given your lifestyle situation and why you prize lower returns for much lower risk. I can dig that. For my retirement holdings, I’m currently close to 90% equities and 10% debt or alternative investments (LendingClub notes). For those accounts, I want long-term price appreciation and still think stocks offer that in the current environment. However, as interest rates move up, I may consider switching more of those funds into debt to lock in more guaranteed returns and also setting up for the inevitable recession and reduction of rates by the Fed. I’m also moving my after-tax accounts more toward debt in the coming months in anticipation of buying a house in the coming couple of years.

    Overall, I think you’re logic is sound. Thanks for sharing.

    And one nit – being an economist, I should say your use of the word “unemployed” isn’t accurate. Unemployed implies you are out of work but currently looking for employment. I don’t believe that to be your case as you are out of the labor force and not looking. It would be correct to say “retired”, “out of the labor force” or “self-employed” since you have a small business (Financial Samurai).

    1. It’s not risk free. These things bond pay you back with are central bank liabilities. They will devalue those liabilities to save themselves at all costs.

    2. I was going to mention Lending Club as well. I find diversified p2p lending to be an excellent asset class sitting between the bond/stock risk/reward curve. It’s not very tax efficient though at basically ordinary income the whole time. Even in a doubling of expected loss ratios, you are still sitting at about the bond yield rate.

      1. I agree about Lending Club and the tax efficiency. I held a large percentage of my portfolio with them in an after-tax account when their original CEO was forced out. Many note investors thought the company would go under and the notes platform would go bust. What many didn’t realize in the case of Lending Club going bankrupt, however, is the platform would transfer to a third-party to manage. The solvency of Lending Club had no bearing on the existing notes, only on new ones being issued.

        Seeing a large number of notes investors wanting to sell their notes at extreme discounts, I chose to ease their burden and take them off their hands. The alpha from those notes have provided me roughly 5% of excess returns in the two years since above what my primary market notes returned me. I’ve let those notes mature in my after-tax account and still fund notes in my Roth IRA account where I don’t suffer from a tax hit.

        I think the service has a great diversification effect and is a great passive income vehicle for after-tax accounts. It also adds fixed-income exposure to your portfolio.

    3. I’m definitely unemployed and proud to be a stay at home dad. There’s nothing more important to me right now.

      But I have looked for jobs online and I have never received a response. I’m preparing to work a vacation job once my boy turns two years old.

  40. Be mindful once you buy a long term bond in this environment you are married to it until maturation. Bonds with duration risk lose market value on principal as rates rise.

    Plus there is another risk…currency risk. At some point all indebted countries will hold hands together and devalue en masse against gold. So even if you getting 5% on a UST you’ll be getting paid back in devalued currency.

    1. Deflating a strong dollar could actually help corporate profits. Further most Americans don’t have a passport and don’t even speak a second language. Therefore, even if the US dollar to values, it’s all the same since most people just stay in America.

      It’s all about buying locally produced goods anyway. Go USA!

  41. Maybe I’m missing something, but isn’t looking at bond yields without looking inflation kind of pointless?

    ” If you can earn 4% risk-free, that means you can withdraw 4% a year and never touch principal. ”
    In your example, if the inflation is at 2%, you can only withdraw 2% a year.

      1. Yes- totally understand that bond yields take inflation into account. And that there’s a correlation between bond yields and stock market/real estate market performance. But I think that was the point of the question– a 4% bond yield might not be any better than 1-2% yield of several years ago when you subtract out inflation. In your article, it sounds like you are excited about moving into bonds because of the higher nominal yield they offer now, thus the confusion (since both scenarios probably offered roughly the same 1% real return rate). Sounds like you may have meant that higher yields are signal that diversifying out of stocks/ real estate is a good idea?

        1. Inflation affects the real return on dividend yields in stock as well.

          Everything is baked in, Although you can make a forecast on where you think inflation will go, and invest in bonds or stocks accordingly.

      2. Dumb question alert by me, but this would really help me:
        How do bond yields take inflation into account?
        The current yield 10-year treasury yield is around 2.8%. Assuming a 2.2% rate of inflation, this translates to a real yield of 0.6%, right?

  42. Great table Sam, thx. I like it. Im a 55/45 split. Totally agree that you must take risk off the table as rates rise, and primary goal is the protect your portfolio.

    You ever think about buying SPY puts as insurance against a downturn?

    I know some folks that have done this and they are looking pretty smart right now.

  43. 5% is my magic number. I’d go with 50/50 at that point.
    We’ll probably become more conservative as we age, though.
    By the time the interest rate reaches 5%, I might be conservative enough to put a lot more weight in bond. For now, I’m okay with 75/25.
    Great job with your investment. 1% annual return is a very easy target to hit.

  44. I noticed you specifically referred to your after tax investment a couple times for this article. Would this same bond/stock ratio logic apply to pre-tax retirement holdings as well?

    1. It should be relatively consistent across pre and post tax investments if the withdrawal time is the same.

      But usually, you can afford to be more aggressive with your pretax investments if you are investing past the age of 60. So perhaps you can increase the stock allocation by 5% -10% at each bond yield.

      It’s really up to you and your risk tolerance and objectives.

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