The Best Asset Allocation Of Stocks And Bonds By Age

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. The best asset allocation is subjective in that it depends on your financial goals, risk tolerance, and existing financial health.

I used to work in investment banking in the equities department 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.

The best asset allocation of stocks and bonds by age depends on your financial goals and risk tolerance.

If you are in your 20s or 30s, your risk tolerance should be pretty high. You have plenty of time to recover from any losses. Further, you likely have more enthusiasm and energy to work.

As you get older, your risk tolerance will naturally fade. For example, as someone with two kids in my mid-40s, I'm just interested in beating inflation by 2X – 3X. Therefore, the best asset allocation of stocks and bonds will tend to become more conservative.

Questions To Ask To Determine The Best Asset Allocation Of Stocks And Bonds

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.

The Best Asset Allocation Of Stocks And Bonds By Age

Let's first discuss what's next for the stock market.

The Future Of Stocks

Nobody knows for sure what's next. What we do know for the stock market, as represented by the S&P 500 index, is that the long term trend is up and to the right. The stock market has historically returned between 8% – 10% since 1926. Although, there are now forecasts for investment returns to be much lower due to higher valuations.

We also know there are bear cycles to watch out for every 10 years. For example, if you invested all your money at the top of the market in 2000, it would have taken 10 years until you got your money back if you held on. But if you bought at the bottom in 2009, you're up well over 250%.

Given it's extremely difficult to time the market, it's a good idea to deploy a consistent dollar cost average strategy throughout your life. In the beginning, because they make up a larger portion of your overall investment amount, contributions are extremely important.

However, over time, contributions become less important compared to investment returns. Below is a sample chart the shows the wall of worry. The biggest wall of worry was the pandemic that began in 2020. The S&P 500 corrected by 32%. But here we are, back to all-time highs.

Reasons to sell stocks chart, wall of worry - The Best Asset Allocation Of Stocks And Bonds By Age

What About Bonds?

The bond market, as represented by the Barclays Aggregate Bond Fund ETF, acts a little differently. Whereas the S&P 500 declined by roughly 50% during the last downturn, the Barclays Aggregate Bond Fund only declined about ~15%. In other words, during times of despair, bonds are much more defensive. On the flip side, since its 2009 lows, the Barclays aggregate bond index is only up about 25%.

During times of uncertainty, investors rush to the safety of bonds, pushing down interest rates. Savvy borrowers will take advantage by refinancing their debt to lower their costs. Credible is my favorite lending marketplace to get pre-qualified lenders competing for your business for free in under three months.

Given we're near all-time highs and the stock market moves much more violently than the bond market, the logical conclusion is to shift some of our investments out of stocks and into bonds.

If we are wrong, then we simply make less than we could have. If we are right about a downturn, then we will either make more or lose less than we could have. Although many are warning we are in a bond bubble, in finance, everything is relative.

Calculate The Yields

It's also important to observe the dividend yield for both asset classes. Consider the annual dividend yield as the income you'll earn while waiting for things to play out.

The dividend yield of the S&P 500 at ~1.5% is higher than the dividend yield of the Barclays aggregate bond fund at ~1.3%. When this occurs, there's a tendency for money to flow towards equities given the opportunity cost to invest in bonds is so low.

The dividend yield can also be considered a performance buffer. For example, if the S&P 500 declines by 10%, your total return is really -8% if you hold for one year (-10% + 2%). When investing in either stocks or bonds, always think about the total return = principal performance + dividends.

Inflation Is Important To Understand

To determine the best asset allocation of stocks and bonds by age, you must also get a good understanding of inflation.

Just like how inflation is a natural tailwind for real estate investors, inflation is also a natural tailwind for stock market investors. The stock market performs based off corporate earnings growth, which inflation helps.

The more corporate earnings grow, the higher the stock market if valuation multiples stay the same. The stronger the expectations for earnings growth, the higher the stock market tends to climb as well as valuations expand.

Between 1926 and today, the annualized total return for a portfolio composed exclusively of stocks in Standard & Poor's Composite Index of 500 Stocks was ~10%. The average inflation rate for the same period was 2.93%. Therefore, the real rate of return was 10% – 2.93% = 7.07%.

Meanwhile, during the same period, the average annual return for investment-grade government bonds was 5.72% for a real rate of return of 5.72% – 2.93% = 2.79%.

Given we all want to beat inflation by as wide a margin as possible without taking undue risk, we tend to favor stocks over bonds, but hold both because we don't know the future. Take a look below at the historical performance of stocks and bonds versus inflation.

inflation and the proper asset allocation of stocks and bonds

There's also something else worth mentioning. One of the key reasons for the widening wealth gap is because the rich invest their savings, while the not rich tend to spend.

If you combine consistent savings with compound investment growth, it's easy to see how huge the wealth gap becomes over an extended period of time.

Inflation is why you real estate is my favorite asset class to build wealth. You want to be a beneficiary of inflation by collection higher rents and seeing higher real estate prices. I'm bullish on housing for years to come.

Why Are Stocks And Bonds Both Near Record Highs?

The S&P 500 is at or close to a record high because of high earnings rebound expectations.

The historical mean and median S&P 500 P/E multiple is around 15X. Therefore, at 33X, stocks are very expensive, but not yet as outrageously expensive as they were in 2001 and 2009.

The bond interest rates are still very low because of the Fed and the amount of liquidity in the system. The belief is that the inflation spike we're seeing post pandemic is temporary.

When inflation is low, investors buy bonds to gain yield. But as investors bid up bond prices, the yields come down e.g. $10 dividend payment on a $100 bond = 10% dividend yield, but if the bond gets bid up to $200, the dividend yield is only 5%. Remember we are looking at snapshots in time. The markets are fluid.

Notice how the 10-year bond yield has been coming down since it reached 15.8% back in 1980. We're at only ~1/.2% for the 10-year bond yield, which is absolutely absurd! This is one of the reasons why paying a higher mortgage rate for a 30-year fixed is a suboptimal choice. Why pay more when you can pay less with an ARM?

Unless you think coordination among global central banks will become weaker, technology will become slower, and there will be no more global upheavals like Brexit, it's unlikely that inflation in the US will spike higher. Think about how much technology is displacing jobs. Think about how globalization is creating cheaper labor and goods.

Low inflation and low interest rates are here to stay.

As a well-rounded investor, you must look at this collapse in interest rates as an opportunity to invest in rate sensitive sectors like real estate. I think there's a golden opportunity to buy real estate due to a rise in affordability.

Given what we know about the stock and bond market, we should conclude the following:

1) If we want to beat inflation, it's wise to invest in both the stock and bond market. Cash loses its purchasing power over time given money market returns are minuscule. But cash is also a fantastic temporary store of value during times of uncertainty.

2) Time in the market is better than timing the market. The longer we can invest, the higher the probability we will make money. Employ a disciplined dollar cost average strategy.

3) Market cycles force us to diversify between stocks and bonds. We never know for sure when we will retire, when we will need our funds, and what our future cash flow will look like.

Conventional Best Asset Allocation Model Of Stocks And Bonds

Below is my updated recommendation of stocks and bonds by age for most investors. It is the best asset allocation of stocks and bonds by age for most people in my opinion.

The formula simply takes 120 minus an investor's age to calculate the stock allocation percentage e.g. 120 – 40 year old = 80% in stocks. I use 120 because we live longer. The “New Life Model” is the base case asset allocation for the general public.

Proper Asset Allocation Of Stocks And Bonds - NEW LIFE MODEL

Age Analysis For The Best Asset Allocation Of Stocks And Bonds

Age 0 – 25: You've got nothing to lose. Your earnings potential is high and your energy is strong. Perhaps you're paying back student loans. Do so with vigor, but make sure you are at least contributing to your IRA or 401k up to your company's match. If you don't have a company match, then try and save and invest as much as possible until you feel financial pain.

Age 26 – 40: You've still got a lot of energy and earnings potential, but you've got to start thinking about others as well. Large purchases such as a house or vehicle will significantly draw down investable assets. Perhaps there's a marriage to pay for or a partner's debt to assume. Despite additional financial responsibilities, you're now maxing out your 401k and investing whatever is left in real estate to get neutral inflation.

Age 41 – 60: Your prime earning years should allow you to aggressively save and invest. All those net worth target charts a younger you scorned now make a whole lot of sense due to compound returns. At the same time, there may be growing bills to pay such as private school tuition for high school and college. Burnout risk at your job is now highest.

Age 61 – unknown: Hopefully you've achieved financial independence. Your investment income from stocks, bonds, real estate, and alternative investments should be covering 100% of living expenses. Your main goal is principal protection rather than principal growth.

The above chart assumes that you live and work a more traditional lifecycle.

Best Asset Allocation Of Stocks And Bonds By Age – FS Model

But what if you're a little more unorthodox than the general public? Here's the Financial Samurai stocks and bonds asset allocation model, which is appropriate for folks who build multiple income streams and get out of the rate race sooner due to an aggressive accumulation of capital.

Financial Samurai Asset Allocation Model Of Stocks And Bonds

Age Analysis For Asset Allocation

Age 0 – 30: You've also got nothing to lose. This is the period where to get ahead you are working way more than the conventional 40 hours a week. Due to your strong performance at work, your pay and promotion schedule is accelerated. You're maxing out your 401k and investing an additional 20%+ of after tax, after 401k money through a digital wealth advisor or DIY broker. Even if the stock market craters by 20%, your contributions continue to buoy your investment portfolio as you buy during bad times times.

Age 31 – 40: After firmly cementing your position as a valuable employee, you begin to use your free time to build additional income streams beyond the stock market: bonds, rental properties, crowdsourcing investments, structured notes, venture debt, venture capital, private equity.

Your goal is to diversify your net worth by making public equity investments equal to no more than 50% of your net worth because you realize the value of various asset classes. You also long to be more independent after working diligently for the past 15 – 20 years. Therefore, the only way is to really create multiple income streams.

Age 41 – 60: Not only do you lower your exposure to stocks to 60%, you also increase your exposure to dividend paying stocks with less volatility. Your main goal is to extract income from your investments instead of shooting for the next multi-bagger growth stock.

By this time, you've broadened your net worth into at least five different asset classes. Further, you've developed your side-hustle into a stand alone business where you can be your own boss, pay less taxes, and generate a powerful income stream. If you can get a guaranteed 5% annual return, you'll take it.

Age 61 – unknown: Your main goal is to protect your assets so they can provide for your friends and family indefinitely. With a 50/50 ratio, your investments are playing both offense and defensive. You're aiming for a 4% annual return. 

You have more than enough, which means you have a greater ability to donate your time and money to others. Any wealth accumulated over the estate tax level will be aggressively given away because the government is inefficient.

Point of clarification: These asset allocation recommendations are pertinent for those who have a majority of their net worth in stocks and bonds. However, my sincere hope is that everybody diversifies their net worth so that public equities makes up no more than 50% of their net worth. Hence, if you are 40 years old and follow my 70%/30% stocks/bonds allocation, stocks and bonds actually may only make up 35%/15% of your entire net worth.

Invest Early And Often

Technology has made investing easier and cheaper. In the old days, you had to call your broker to make a trade and pay a $100+ commission for each trade. Can you imagine spending $1,000 to build a portfolio? It's no wonder the buy and hold principle was established.

Today, you can build a portfolio by simply owning SPY (the low cost S&P 500 ETF) and AGG (the low cost Barclays Aggregate Bond ETF) in the above ratios through any online brokerage. Commissions are now free. If you have a smaller portfolio or if you really enjoy following the markets, I recommend this route.

If you aren't really interested in following the markets and find that you can spend your time making money elsewhere more efficiently, I recommend this route. You can always just use Personal Capital's free tools to manage your investments and net worth as well.

If you haven't already, max out your 401k and your IRA. Keep your portfolio simple and invest in the lowest cost index ETFs possible. Follow a recommended asset allocation model as you age. Feel free to take 5% – 10% of your portfolio and swing for the fences too, especially before age 40.

If you need liquidity and can't max out your 401k, then consider contributing at least up to the company match and investing in an after-tax account. If you keep up your investing schedule, in 10 years you'll be surprised at how much you can accumulate.

Manage Your Money In One Place 

Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool. You will see exactly how much you're paying in fees.I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible. Definitely run your numbers to see how you’re doing. 

I’ve been using Personal Capital since 2012. As a result, I have seen my net worth skyrocket during this time thanks to better money management.

Personal Capital Retirement Planner
Is your retirement plan on track? Find out for free after you link your accounts.

Invest In Real Estate

In addition to investing in stocks and bonds, I strongly encourage you to invest in real estate. Consider real estate as a bonds+ type of investment. Real estate is less volatile, generates income, and provides utility.

If you're interested in a hands off approach to real estate investing, consider investing in a publicly traded REIT or in real estate crowdfunding. Once I had my son in 2017, I decided to sell my PITA rental house and reinvest $550,000 of the proceeds into real estate crowdfunding. My favorite two real estate crowdfunding platforms are:

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. Investing in a real estate fund is the easiest way to gain exposure.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. You can build your own select real estate fund with CrowdStreet.

Both platforms are free to sign up and explore. I've personally invested $954,000 in real estate crowdfunding to diversify and capitalize on the heartland of America. The spreading out of America is real thanks to technology.

Invest In Private Growth Companies

In addition, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

The Best Asset Allocation Of Stocks And Bonds By Age is a Financial Samurai original post. I've been helping people reach financial freedom since starting this site in 2009.

69 thoughts on “The Best Asset Allocation Of Stocks And Bonds By Age”

  1. For older folk (>55 in my definition), I’m not sure the inflation boogieman can be so easily written off. Bond ETFs seem to be all the rage for that slice of a portfolio. What I don’t see is using I-bonds as an autopilot tool for unforeseen inflation issues. As their rates automatically adjust biannually to inflation — even with their $10k/yr purchase cap — wouldn’t this be a worthwhile fraction of the ‘bond’ portion of a portfolio?

  2. The year 2020 has shown us that events that are outside your control like the global pandemic can shatter all predictions and forecasts to pieces. In March-2020 when the stock market reached record low levels, no one expected the year to end with a 67% improvement in S&P 500 index.

  3. That logscale chart really understates the difference between stocks and inflation, they’re like 10x (bonds, although ’82 was scary) and 100x (S&P) returns for what looks like a line.

    Even if inflation cuts into your yearly percentage, the key is that anything being over that consistently still compounds exponentially.

  4. Hi Sam, I have been reading your blog and enjoy learning your perspective. Thanks for the excellent content!

    I am in my 30’s and track just under your “Avg net worth of the above avg person”.

    I have started to increase my bond% in my portfolio and have a few questions:
    1. How do you suggest someone to invest in bonds? I invest in bond funds VBLTX and VWEHX for the higher long term yields. Your thoughts?
    2. I don’t think I’ve read what you do with dividends. Do you reinvest, if so how? I use the dividends from the bond funds and use them to automatically invest in the s&p 500 fund, so I am working to increase the amount I put in the bond funds for “safety” and using the yields to buy the stock fund. Your thoughts?

    Thanks again for the excellent content!

  5. Nice article, always appreciate your articles with this level of specifics. I’m especially looking forward to the upcoming post you mentioned on RE acting as bonds – I’ve had that thought and bc we are so heavy in RE (75%) don’t have any bond exposure. Anticipating you’ll have some great food for thought to consider.

  6. I think a super important point that you mention, but only briefly at the end of the article is that the true exposure to public equities and bonds should be lower than what your total net worth / income streams are. Hard physical assets, land, rentals, private company ownership, etc. are where the real wealth is usually created. Public equities are a parking place that is equally important to for a balanced net worth allocation.

    Here is my real question/comment though: I hate Bond Funds. Admittedly I do have some in my portfolio along with owning the actual bonds. My question is for individuals that have achieved FIRE with a significant net worth, why would you buy a bond fund vs. creating a portfolio of the actual bonds themselves that you would hold to maturity? If interest rates rise bond funds get slammed and you’ll be a loser (it has happened to me before, ouch)…but if you hold the bond nothing (other than the scenario of a default) happens & your principle is returned. A high quality muni-bond portfolio can yield close to 4% tax free, with inflation essentially not existent and equities at an all time high I’m curious if there is a flaw in my logic? All bond durations 4 years or less and held to maturity.

  7. valuetradeblog

    Hello Sam,

    you wrote:
    “Age 41 – 60: Not only do you lower your exposure to stocks to 60%, you also increase your exposure to dividend paying stocks with less volatility.”

    Ben Graham proposed that the average investor should have at least 25% in Bonds (max 75% in Bonds) – I found and find bonds are not atractive, at least to me.
    I think the average Investor (when he is not to risk averse) could replace bonds with an dividend-searching-ETF.


  8. Finance Solver

    Love your guide for the 0-25 year olds. We have nothing to lose with endless energy so time to put in 40+ hours to prove ourselves and increase our earnings potential! I am following this guide correctly and have 100% invested in equities :)

    Hoping nothing else breaks down the stock market.. let the bull market rage on!

  9. I love how everytime I read one of your blog posts I actually learn something. You rock! I am clueless when its comes to stock investing. I was lucky enough to get on the precious metal industry in December when it was at its bottom but at the end of the day, I just got lucky with the timing.

    Im so scared to invest in traditional stocks right now. In my opinion it has no where to go but down. I never really understood how bonds worked but you explained it nicely. Thanks

    I should really consider diversifying into some bonds but I really dont have any normal stocks so I dont know if it would do me any good.

  10. While not directly related to this article – I would be interested in hearing your thoughts on HSA accounts and how it can also be used as a vehicle to lower your taxable income while it can also be leveraged to supplement your pretax savings and growing your retirement nestegg.. why wouldn’t you take advantage of another $3300 (single) to $6600 (Family) in pretax savings if you have the option to contribute to HSA…

      1. Def max out HSA! Medical is always increasing, and most of us will use it at some point, especially early retirees. HSA funds are allowed to be used for medical premiums. Most custodians allow investments of one’s HSA in the meantime.

        1. There yah go. Thanks for sharing! I’ve been out of the corporate world too long to deal with HSAs. I basically had a small one based on my anticipated health costs for the year and used it all each year.

          1. – Lower your taxable income. HSA is funded in Pretax dollars, so it will lower you AGI and help shelter a little more money from Uncle Sam.
            – Can be leveraged as Investment and grow your money tax free. if you’re young and can build the account to accommodate any unforeseen medical emergency while leaving unneeded cash invested in the market long term.
            – Treated like an IRA, you can withdraw money without penalty after age 59 1/2 and only pay regular income tax (Possibly time the withdrawals when in much lower tax bracket)…..

            I dont see any negative in these points.

  11. Visionary Money

    Stocks only stay at their high for a little bit of time. So you are usually buying while you are gaining more returns or while they are on sale. When the market is at least 10% below the low I like to increase my dollar cost averaging which has greatly improved my return on investment. Once it goes with-in 5% of the high I go back to normal. You only learn by being in the game. Staying on the sidelines like I did early on at my first job only means I’m still at work watching Wimbledon on TV instead of overseas with Sam watching it. Come on Willis you can….nope you’re out.

  12. Great in-depth article. I’m comfortable with 20% bonds at 42 because I have a pretty high risk tolerance. We also have 10+ years before we draw down our retirement portfolio.
    You’re right about the high valuation, though. It would be safer to load up on bonds until the market is more in line with historical value. Investors are very nervous.
    We are saving as much cash as we can and it’s creeping closer to 5%.

    1. You are interesting Joe! On the one hand, you say you have a high risk tolerance, on the other hand you say you are very frugal. The question is: what if your wife no longer wants to work? I really suggest becoming more conservative in equities in your situation. But it is up to you of course.

      Bonds are at all time highs, but even at 1.5% on the 10-year yield, we are so much higher than Germany, Sweden, Japan bond yields. Everything is relative!

  13. Stefan - The Millennial Budget

    Being a young investor I love how you say you have nothing to lose. I have centered my portfolio 100% in stocks (bonds are too safe for me right now) and have about 5% of them in higher risk sectors. Only need 1 to take off and it can cover the rest… One thing about the 401(k) is that you need to know your employer’s match and also when their match becomes effective. In my case my employer has a one year probation period where they do not match anything so for the first year I am better off with an IRA. Also, as an international student I am waiting on my work visa, boy is it hard to stay in America, to know if I can work here for an extended period of time which makes me hesitant towards any retirement planning except for potentially a ROTH incase I need to withdraw the funds without penalty.

  14. Another fantastic article. My ideal allocation to equities is 60 percent. However, I decreased that to 50 percent a while ago on the belief that the equity markets are over valued, at least US equities. I still hold that belief.

    For the 50% that is not in equites, I have, 10% in real estate and 5% in high yield bonds and the rest in cash/cash equivalents. 60% of my cash is a GIC in a 401k earnings 2 percent and the rest earns 1 percent in an online FDIC insured mm. It is hard to sell me in treasuries. Yes, rates have stayed low and may stay low for some time.

    Still, I don’t think they are worth the potential magnitude of a negative surprise.

    Also, I recently stepped out of the rat race and find having cash allows me to sleep at night. I should also mention that I use 10% of the equity allocation for income purposes and that write calls and sell outs as well.

    I think the above allocations make sense but I get concerned when people think they should not pay any attention to what is happening around them.

    1. Sounds like a good allocation. If you have successfully stepped out of the rate race, a 60/40 or 50/50 allocation is good. Stability, protecting your nut, and cash flow are most important. Secondary is principal appreciation.

  15. Just signed up for Vanguard for a Roth IRA and now I’m second guessing myself. Should I invest $3k into their S&P 500 Index Fund or their S&P 500 ETF? Any advice?

    1. The exact same index is being tracked in the exact same way with both investments, as I’m sure you know.

      On the one hand, the expense ratio is lower on the ETFs–their ratio tracks the Admiral class costs ($10K+ invested) rather than the Investor class costs ($3K to $9,999 invested).

      On the other hand, at $3K, the expenses are neither here nor there, really, as we are talking a difference of a few bucks at most. And investing in the fund allows you to buy partial shares (you don’t get to buy partial ETFs). And to easily make ongoing contributions.

      So, I would pick the fund, not the ETF. But really you won’t be wrong whichever you do. Since you are at Vanguard, you will be able to purchase the ETFs without trading fees, so one of the biggest traditional advantages of investing in a fund over purchasing a stock is nothing you need to worry about.

      1. David, thanks so much for your insight to a novice investor. I’ve gone ahead and invested my $3k into VFINX. I know there may be some hesitance about investing in the stock market currently due to certain global events (Trump’s possible presidency, Brexit etc.) but I’m in for the long haul.

  16. I turned 50 this year – just two weeks after early retiring! :-)

    I use a 55% equities/45% bonds investment mix in addition to carrying 3 years spending in cash (to weather any potential market downturns). I feel pretty good about the mix. I think your early retirement date is an important time to look at your mix. By that point, you should have all of the $$$ you need and probably want to play a little more defensive.

    1. I really like the 50/50 mix, the older and hopefully wealthier I get. If you are retired at say 40 yo, then I would go straight to the traditional 60-65 age asset allocation.

  17. I like your approach. It is interesting how many PF bloggers hound on gold/precious metals as an asset class, but it does not come up here. Most of the people who write about gold do not seem to understand as much as you do.

    I’m in my early 30s, but just started investing. I’m going aggressive. I’m 94% stocks. I intend to stick to 90+ stocks until I pay off my student loan debt. After that, I will adjust and include more bonds. I am in a Target Date Retirement Account, but I used the advice of another blogger and increased the timeline with them so that my stock percentage would be high enough. My real goal is FIRE and I don’t want too many bonds too early gumming up my works.

    1. Ah, but bonds are wonderfully defensive with income properties. Having 94% stocks in a downturn in your 30s can put you in FIRE REVERSE. Hence, if you want to be all-in stocks with your net worth, you’ve got to be all-in side hustling as well for extra income.

      This bull market has given all of us a lot of confidence in our investing abilities. Beware.

  18. Great post, I have question regarding purchasing a second home in incline village NV, looking around 350,000$, live a hour away so it will get used and would rent out 10/20 weeks a year. i know you can’t time the market just worried market might be at a high . Thanks

  19. Any recommendations for maxing out a partner’s retirement account? I am in a position to max mine (and have already) but my fiancé just moved to the Bay area with me and doesn’t have access to a 401k at his new job. He has an LLC so may be able to do solo 401k.

  20. Hello,

    This is my first comment left on FS and I have to say I enjoy the site very much!
    my current scenario: 60k annual + bonus of 15k-50k
    Live in Texas (very low cost of living)
    age: 26
    Have 50k in equity in my home, prices continue to soar where I purchased as well as for the next half decade. (Google, Toyota, Facebook, etc are all moving major parts or the entire HQ my way)
    Roth: Maxed
    401k: have ability to max
    Emergency fund: 8 Months
    The goal is to live off of half my salary invest the rest and bonus into smart options.
    The Problem: Eggshell economy, Yo-Yo Stock Market, Blue chip stocks are no longer necessarily paying out like they use to.

    solution: thats where you guys come in! Im looking at saving more in a high interest savings/checkings account until things get worse (Brexit, U.S. Presidential race, South America in Turmoil) before investing heavily. I’ll still do the minimum but it is starting to look clear, in my opinion, that things are going to become more unstable before they get better.

    Any Thoughts on smart investments or the amount (in %’s) we/I should be investing with our present market?

    1. What you are asking boils down to our feelings on market timing. While I’ve personally given up attempting to do so, I can see many signs in the global economy that seem to favor accumulating cash. (Unfortunately, many of these signs have been with us since 2008, thus the problem with market timing.)

      If you feel strongly about staying mostly out of the present market:

      1. Bring your emergency fund to 12 months.
      2. Open checking and savings accounts at Ally Bank or similar online FDIC insured bank.
      3. Consider making the “bond” portion of your investments 5 year FDIC bank issued CDs rather than bonds. This keeps you in even more cash and is a reasonable–some argue superior–substitute for bonds.
      4. Max out your 401(k). Being able to invest without the drag of taxes for decades is extremely beneficial.

  21. I was pretty much 100% in stocks for most of my 20s. I started getting into fixed income slowly in my late 20s and the ramped up in my 30s. I usually have around 20-30% in fixed income. I’ve been buying stock the last few days due to the dips and plan to sit tight now and keep the rest of my cash liquid.

  22. It’s almost possible for investment grade bonds to repeat positive 2.79% real returns in the next 20 years. In fact, I’d argue it’s almost certain that you will earn a below inflation return because the bond math is so horrible.

    That said, what do you think Sam about replacing at least half the bond holdings in traditional portfolios with short term TIPS? I get that bonds are supposed to be volatility reducers, but they shouldn’t just be dead weight either. At least in an inflationary environment, with a heavy short term tips allocation you wouldn’t take as bad a beating. In a deflationary environment you’d still have portfolio stability with the bonds being there

    1. There’s little to no REPORTED inflation. Therefore, TIPS would be an unnecessary and suboptimal bond investment IMO. Instead, bond investors need to be chasing yield. And hopefully high quality, high yield. Just check out the performances of TIPS versus high yield over the past decade. Let me know what you find out!

  23. Chris @ Sleepy Capital


    Really great post. You obviously have a lot of investing experience and a fine understanding on the markets. You distilled this down well and explained so that everyone could understand, thanks!

    As an active investor, I am seeking the highest after-tax return on my capital with low risk to permanent loss of capital. I am 100% in equities, and focus my portfolio in what I believe to be undervalued securities that I can hold for a long period of time. My blog focuses on value investing and would be in line for your readers that are looking to allocate a portion of their portfolio to individual securities. For those sticking to your portfolio allocation strategy based on age, ages 0 – 30 have ample opportunity to allocate capital to individual securities.

    What are your thoughts on a focus portfolio strategy? Have you used this strategy before?

    P.S. How do I get a user image next to my name when I post on your site? Thanks!

  24. Great article Sam I will be sure to share it with some of my colleagues in the medical world who are scared to death of stocks. A couple of them (in their 30’s) even said they will move to 100% money market in their 401k until things “settle down” because of Brexit! Inflation is a beast that should not be messed with.

  25. Simple Money Man

    Hi Sam, I’m enrolled in a Target Retirement Fund as my 401k plan at work. The allocation is based on the year you input for retirement and reallocates from aggressive to more conservative as you come closer to the target date e.g. TRRDX. What are your thoughts on these types of funds?

    1. T. Rowe expense ratios are unfortunately higher than necessary, but nothing you can likely do about that (other than look through the plan’s funds and search for similar funds by Schwab or Vanguard). I don’t do target fund investing because I’m too much of a tinkerer and actually enjoy rebalancing myself, as well as considering other tilts when it’s time to rebalance. But they are great “set it and forget it” funds that automatically rebalance and reallocate over time. If you are concerned that your allocation is not aggressive enough to make you a Samurai, just pick a target fund with a longer time horizon (e.g., 2050 instead of 2040).

      Anyone new to “traditional” investing (equities and bonds), and who is interested in learning more, should become familiar with the Boglehead forum. Some of the brightest minds in investing post there, and happily answer questions.

    2. I recently went through my 401k composition because like you, I had 100% of my contributions going into a TRR target fund (2055). When comparing how it performed vs a SP500 mirror fund over the life of my portfolio as well as the higher fees for TRR, I realized I’d missed out on about 1.5% each year over the last 4 years. The T. Rowe target fund did alright, but it under-performed the market and I paid more for it so I re-allocated out of it completely.

    3. My thoughts are you have to understand the asset allocation of these target date funds and how they change. IF you understand and are comfortable, then fine. Just watch out for the FEES they charge, as they are heftier than normal.

      It is so cheap now to invest online.

  26. Financial Canadian


    Another splendid article as usual.

    Since you’re a pure-play real estate investor (ie landlord) I’m sure that REITs likely don’t play a huge role in your portfolio. I personally have REITs in my portfolio instead of bonds. They definitely have higher volatility, but I still view them as low-risk. Their low beta also provides attractive diversification in a portfolio that is mostly bonds such as my own.

    What are your thoughts on the REIT sector?


    1. My thoughts are REITs are a great fixed income substitute (part, not all) for investors, especially those who don’t own physical property. Just depends on what type of REIT you will buy.

      REITs hold up like champs during market chaos.

  27. Great post. I like that you have decided to increase people’s life expectancy. Would definitely prefer leaving a little extra money behind to having to spent the last years of my life struggling.
    The breakdown of why to invest in bonds was ever better than your earlier posts.
    One thing though – how do we get people interested in bonds. Maybe it is because I’m young but never do I hear ‘guess what, I invested X in bonds and just beat inflation’ it’s always the
    ‘I bought Apple when it traded at its lowest’.

    1. Good question! So much sexier to say you bought XYZ stock than a sovereign bond (Except for a sovereign British bond :O)).

      The solution is actually increase education about the sexiness of the 10-year treasury bond (IEF), or tax free municipal bonds (MUB) etc. The interest will naturally come as we age b/c we want more stability and income.

      I’ll write a post about perhaps the ultimate bond: rental property.

      1. have you written about the best way an average joe can get into rental property? I guess REIT is the easiest way to get into real estate. Does rental property even make sense for the average joe?

        1. Property is probably one of the most average things for the average joe. Easy to understand. There’s nothing special or sophisticated about rental property. Look at all first generation immigrants come to America and accumulate huge wealth because they saved like crazy and kept on buying property through their lives.

          Rental property / real estate often acts as a HEDGE against global destruction. Look at the REITs hold up relatively FLAT after Brexit versus a 3% – 12% decline in global equities. Why? People want to own real assets instead of paper nothing. Interest rates also plummeted, buoying demand.


  28. PhysicianOnFIRE

    I like “Age – 20” in bonds, which you’ve recommended here. Excellent breakdown of the history; I like it! I’m a little more aggressive (10% bonds at age 40), but will scale back before retiring in the next 5 years or so.

    My RE plan is to invest the 25x annual expenses that is the oft-cited magic number for a “safe” retirement, and invest according your Rule (i.e. 75 / 25 at age 45).

    With any extra money (planning on another 15x to 25x) I can be as aggressive as I wanna be. That could be 100% stocks, small business investments, real estate, etc…

    Over time, it’s likely that my bond allocation will decrease as the nest egg presumably grows, a glidepath opposite of the traditional increasing bond allocation, but one that makes sense in my case.

  29. I’m interested to see how you place rental properties into the mix. I feel it takes only the positives of both asset classes, and adds additional tax savings! I’m really curious to see your target asset allocation to include rental properties for someone who is very comfortable investing in them.

    1. Indeed. I do see rental properties more like a bond, where you can control and benefit directly through tax savings and utility.

      I like to focus on individual BUCKETS of my net worth, in order to fully optimize. Public investments accounts for about 25% of my net worth at the moment.

  30. Good article. As someone who plans to retire around 50 or earlier, I have been using 100 – Age rather than 120 – age for bonds (or equivs), due to less time to let equities do there thing due to the early retirement. I keep calculating real estate rentals in my area as the best investment I can do currently on a yield basis, though, so may continue to allocate more that way and keep bonds at 120 – age.

  31. Great advice for “normal” times, but these days are far from normal.

    Given the global market dependencies on the local central bank, investing in any manner is riskier than it has been on the past. Eventually the bank pulls the plug or the economy implodes under its own debt load / currency crisis.

    I prefer your advice about real estate or other physical assets. Less liquid, but at least there’s a floor for any correction.

    1. It’s the new normal: permanently lower rates, globalization, terrorism, volatility.

      Control what you can control by owning assets where you are the majority owner and can positively affect change w/ action.

  32. Great explanation of why asset allocation matters. I especially like the graphs (I’m a data nerd).

    The one thing I am concerned about with investing a larger chunk of my money in stocks as a young person is the risk of a downturn. I’d be curious to see some similar numbers and example trajectories of best-case and worst-case scenarios on long-term outcomes, compared to a more conservative approach.

    Not sure if you already have something like that, but it’d be cool to see if you haven’t done it yet.

    1. That’s the irony. As a young person, you’ll realize when you’re old, that you really didn’t have too much to lose. But as a younger person, it’s harder for you to see it because you just don’t have as much and every dollar matters more! What a paradox, right?

      Since you have debt, I suggest checking this post out: Pay Down Debt Or Invest? Implement FS-DAIR

      I’d also check out a Retirement Planner and play around with the growth forecasts, expenses, and income to get a guesstimate of your future financial self. It’s pretty fun!

  33. Apathy Ends

    We are in the zones you suggest for our age group and are definitely staying on the aggressive side.

    I need to set some time aside to check out Motif and wealthfront, got to love the tech companies making everything easier

  34. Hi Sam,
    You mentionned Dollar Cost Averaging method to invest regularly.
    ( each month, you invest the same amount)

    What about the Dollar Value averaging?
    ( each month, you invest to achieve the same value)
    ie : First month, you invest 1000$. At the end of the month, value decrease and you have 900$
    So the second month, you invest to acheive 2000$, then you buy 1100$ of EFT ( more etf at lower price). End of the second month, market increased, then you have 2100$. So you invest to get 3000$, thus only 900$ of higher price eft

    ( This method can be extended by applying an expected return rate, like 6,5%. The value is increased each month by a certain level, including interest rate applying on previous invested value )

    Whats is your view

    1. Sure, that works. It requires a little more monitoring and thinking, which is great if you have the time and interest. Things don’t really have to be that exact because over a long enough period, investing one big large chunk each year versus 12 smaller chunks each month starts equaling out. It’s just that in the first half of your investing career, contributions matter much more, therefore, following a steady contribution method is important.

      In my hybrid dollar cost average method, I use performance breakpoints and a steady contribution range to figure out how much I should deploy within my range. Check out the article.

    2. I think the problem with that method is you end up buying more shares when the market is up and fewer shares when the market is down, vs. traditional DCA. One of the nice things about DCA is when the market falls, you are actually buying more shares for the same dollar amount as the previous month.

      1. I disagree with your assertion as to WHY the method is bad. Based on his example, the market dips after month 1 by 10%, so while the market is down, you invest 100% of month 2 plus the 10% that was lost in month 1, thus buying more shares while the market is lower than the initial buy-in. Inversely, if the market returns to normal after month 2, as the example states, and your principle has now already accumulated 10% of month 3 before investing, you are only putting in the remaining 90% of month 3 and thus throw less money at a more expensive market with the same end result.

        Why I still think it is a bad strategy is the strain you would feel when variable or unexpected costs rear their ugly head. With DCA you set-and-forget an amount that you feel comfortable with removing from your liquidity, no matter what. This other method takes more active management and in months when the A/C shoots craps or you have expensive car repairs AND the value of your investments have dipped the last two months, your liquidity takes a major uppercut as you now have to address the new A/C and make up the market difference or you just don’t following the plan that month. Maybe you have emergency savings set aside, but then you still have to rebuild your emergency savings after the fact. Neither option feels good.

        Gotta buffer for the unexpected.

    3. Yeah, Sam’s point about this requiring more time and effort is probably the main deterrent here. With dollar cost averaging you’re already buying more shares when prices fall, because your dollar amount is fixed but the shares are cheaper. Your proposed strategy just amplifies that. I don’t see a real issue with it, but obviously it requires you to monitor price level each period and adjust your investment accordingly.

      It also may prove more challenging down the road. Say, you’re investing 1k per month and reach a balance of 100k. Next month the portfolios falls 5% to 95k. Now you have to come up with 6k to reach your goal, which may be too much. Likewise, in some instances your required deposit to follow the strategy exactly could be negative.

  35. We’ve gone even more conservative in our portfolio thank you suggest here. We are in that place (due to pensions) where we are using this money to “fund the gap” years of FIRE. We have one pension and a gap of five years until the other starts. We may not be aggressive enough in the market right now but having to start spending this money this year creates some stress for sure! Once we start and get more comfortable, we are likely to move into the zones you suggest in the post.

  36. The Green Swan

    Very important point that “time in the market is better than timing the market.” Great guideline to keep in mind for the different age groups and investment options.

    1. Millionaire Confidential

      As a self-made Ultra High Networth Individual >25M,

      I have hardly ever invested in the stock market. Too easy to earn greater than >10% returns. @10%, your investment doubles ever 7.2 years. @35% return, your money doubles every 2 years.

      1. The square root of 2 is 1.414.
        In other words to double your money in two years you need a return of 41.4%/year., not 35% or 36%. The 72 rule has its limitations, most noticeably at high interest rates or short terms. Congratulations with your non stock market investments, you are a truly Trumpian.

  37. Matt @ Distilled Dollar

    I started reading this article expecting to challenge one or two of my fundamental beliefs on investing. I wasn’t surprised with the results as this was a great article, as always Sam!

    Bonds have never been a part of my portfolio given the historical lower yield when compared with equities. I see your points about maximizing return with a lower risk portfolio along the efficient frontier, but I’m happier taking on a larger portion of risk to pull myself up the curve when it comes to equities. I have a high risk tolerance and a long investment horizon, which follows along with your asset allocation strategy up until 30 (I’m 27 now).

    As you suggest, I follow a strong dollar cost average approach, but I feel bonds will not make up a portion of my portfolio until my 50s. Then again, I’m also considering rental properties, which you also described as a form of bond, so I might be lying to myself.

    Outside of the bond allocation, I do follow every other step including investing into my IRA/401k and an additional amount after this. We’ll see if my asset allocation model changes once larger $ amounts are involved and I have more time on my hands after I reach financial independence.

    I agree the stock market can be measured as overvalued by a few metrics, but it is another thing to say the market will see a correction or long term bear market. Another possibility is similar to what we have seen over the previous 18 months where volatility is a concern but there is relatively little or no overall growth.

    Using Brexit as an example, if the logical conclusion is a pull back on corporate earnings, then that is already priced into today’s market. I agree with your view and expect a pullback, but knowing when or how long, and especially knowing when to buy back in, are enough risk factors that make me decide to buy and hold instead of sell and wait to buy back in. This goes back to that core belief of time in the market instead of timing the market as you and Buffett discuss.

    Thanks for the great read this morning!

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