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The Proper Asset Allocation Of Stocks And Bonds By Age

Updated: 01/04/2023 by Financial Samurai 91 Comments

The proper asset allocation of stocks and bonds by age is important to achieve financial freedom. If you allocate too much to stocks the year before you want to retire and the stock market collapses, then you’re screwed. If you allocate too much to bonds over your career, you might not be able to build enough capital to retire at all.

Just know the proper asset allocation is different for everyone. There is no “correct” asset allocation because everybody has different earnings power, different risk tolerances, and different needs. We are all at different stages of our financial lives. Therefore, know thyself!

Although there might not be a proper asset allocation, there is, however, an optimal asset allocation by age I’d like to share in this post. An optimal asset allocation is where you have greater than a 70% chance of achieving your financial objectives. My recommended asset allocation should be relevant for most financial circumstances.

As someone who worked in finance for 13 years, got my MBA, and has written over 2,500 personal finance articles on Financial Samurai since 2009, the topic of asset allocation is one of the most important.

Those who do not have a risk-appropriate asset allocation often lose more than they should. And when you lose too much money, you ultimately lose time, the most valuable asset of all.

Proper Asset Allocation And Risk Tolerance

Your asset allocation between stocks and bonds first depends on your risk tolerance. Are you risk averse, moderate, or risk loving? Are young and full of energy? Or are you old and tired as hell?

I’m personally extremely tired due to raising two kids during a pandemic. Therefore, I’m relatively conservative. Besides, after such a huge run in the stock market, I’d like to keep most of the gains during the next correction.

Your asset allocation also depends on the importance of your specific market portfolio. For example, most would probably treat their 401K or IRA as a vital part of their retirement strategy. For most, these retirement accounts will become their largest investment portfolios.

However, those who have taxable investment accounts, rental properties, and alternative assets may not find their stock and bond portfolio as important.

For example, I have roughly 50% of my net worth in real estate because I prefer owning a hard asset that is less volatile, provides shelter, and produces rental income. I then have roughly 30% of my net worth in equities. Volatility is something I do not like.

Finally, the proper asset allocation of stocks and bonds depends on your overall net worth composition. The smaller your stocks and bonds portfolio as a percentage of your overall net worth, the more aggressive your portfolio can be in stocks.

The Proper Asset Allocation Of Stocks And Bonds Analyzed

I ran my current 401K through Personal Capital to see what they thought about what my proper asset allocation is. You should do the same thing since it’s free. To no surprise, the below chart is what they came back with.

I essentially have too much concentration risk in stocks and am underinvested in bonds based on the “conventional” asset allocation model for someone my age. To run the same analysis on Personal Capital, simply click the “Investment Checkup” link under the “Investing” tab.

portfolio-analysis

I am going to provide you with five recommended asset allocation models to fit everyone’s investment risk profile: Conventional, New Life, Survival, Nothing To Lose, and Financial Samurai.

We will talk through each model to see whether it fits your present financial situation. The proper asset allocation will switch over time of course.

Before we look into each asset allocation model, we must first look at the historical returns for stocks and bonds. The goal of the charts is to give you basis for how to think about returns from both asset classes.

Stocks have outperformed bonds in the long run as you will see. However, stocks are also much more volatile. Armed with historical knowledge, we can then make logical assumptions about the future.

Historical Return For Stocks

To determine the proper asset allocation, take a look at the historical returns for stocks. Stocks generally return around 10% since 1926. Below is a chart that shows the historical returns per year for the S&P 500.

Historical stock market returns by year

Notes On Stocks

  • The 10-year historical average return for the S&P 500 index is roughly 10%. The 60-year average is also about 10%, even after the 38.5% drubbing in 2008. However, there are forecasts for much lower returns going forward mostly due to high valuations.
  • The S&P 500 has been volatile over the past 20 years. The golden age was between 1995-1999.  2000-2002 saw three years of double digit declines followed by four years of gains until the economic crisis.
  • 2020 was another banner year in the stock market, closing up 18%. 2021 saw the S&P 500 increase by 27%. However, 2022 closed down about 20%.
  • The 32% correction and rebound in March 2020 was the fastest in history.

Historical Return For Bonds

The proper asset allocation must take into consideration bond returns. The average return for long-term U.S. government bonds is between 5% – 6%.

Bonds and interest rate performance is inversely correlated. Since July 1, 1981, the 10-year bond yield has essentially been going down thanks to technology, information efficiency, and globalization. As a result, the 10-year bond has performed well during this same time period.

However, 2022 saw the worst year for bonds in history with the aggregate bond market down about 14%. Therefore, know that even bonds aren’t always a low-risk investment either. Take a look at the historical bond market returns.

Historical bond market returns by year

Below is a chart that shows asset class real returns by decade.

Asset Class Returns By Decade (Stocks, Bonds)
Asset class returns by decade

Notes On Bonds:

* Bonds have never returned more than 20% in one year. The two times the BarCap US Aggregate index came close was in 1991 and in 1995 when inflation was in the high single digits. Inflation is now around 2% and is expected to go higher with so much fiscal stimulus under the Biden administration.

* As of 2023, the 10-year bond yield is hovering at around 3.8%, up from a record-low of 0.51% in August 2020, and down from a high of 4.25% reached on November 7, 2022.

Below is another chart from Vanguard that shows the historical returns of a 100% bond portfolio, 20% / 80% stocks / bonds portfolio, and a 30% stocks / 70% bonds portfolio.

Historical Performance Of Bonds - proper asset allocation of stocks and bonds by age

See: Historical Returns Of Different Stock And Bond Weightings

Example Of Bonds Outperforming

Take a look at the performance of the Vanguard Long-Term Bond Index Fund (VBLTX) versus the S&P 500 ETF (SPY) since 1999. VBLTX has thoroughly outperformed SPY by an impressive 62%. This chart is obviously pre-pandemic. But it serves to demonstrate the power of bonds when interest rates are declining.

The Case For Bonds: Stocks versus Bonds Performance 1999 - 2000

Now of course, not all bond funds are the same. Although VBLTX is considered a reasonable proxy for bonds, other bond funds may not perform as well.

Here is another chart showing the performance of the VBMFX, another Vanguard bond ETF versus VTSMX, a Vanguard S&P 500 ETF. In this scenario, bonds outperformed the stock market from 2001 to about 2013, or 12 years. Since 2013, stocks have outperformed.

Stocks versus bond performance

Bonds don’t get as much love as stocks because they are considered boring. It’s hard to get rich quick off a bond. But it is possible to see a quick windfall if you pick the right high-flying stock.

Despite the lack of sexiness in bonds, if you’re serious about achieving financial independence or are already financially independent, bonds are an integral part of your portfolio.

Not only do bonds provide solid returns, bonds also offer defensive characteristics when stocks are selling off.

Conventional Asset Allocation Model For Stocks And Bonds

The proper asset allocation of stocks and bonds generally follows the conventional model.

The classic recommendation for asset allocation is to subtract your age from 100 to find out how much you should allocate towards stocks. The basic premise is that we become risk averse as we age given we have less of an ability to generate income.

We also don’t want to spend our older years working. We are willing to trade lower returns for higher certainty. The following chart demonstrates the conventional asset allocation by age.

Candidates For The Conventional Asset Allocation:

  • Believe in conventional wisdom and don’t want to overcomplicate things.
  • Expect to live to the median age of 78 for men and 82 for women.
  • Are not very interested in the stock market, bond market, or economics and would rather have someone manage your money instead.

Proper Asset Allocation Of Stocks And Bonds - Conventional Model

New Life Asset Allocation Model For Stocks And Bonds 

The New Life asset allocation recommendation is to subtract your age by 120 to figure out how much of your portfolio should be allocated towards stocks. Studies show we are living longer due to advancements in science and better awareness about how we should eat.

Given stocks have shown to outperform bonds over the long run, we need a greater allocation towards stocks to take care of our longer lives. Our risk tolerance still decreases as we get older, just at a later stage. While in retirement, ideally, returns are conservative, demonstrate low volatility, and generate steady passive income.

Candidates For The New Life Asset Allocation:

  • You plan to live longer than the median age of 79 for men and 82 for women.
  • Not that interested in actively managing your own money, but depend on your portfolio to live a comfortable retirement.
  • Plan to work until the conventional retirement age of 65, plus or minus 5 years.
  • Are a health fanatic who works out regularly and eats in a healthy manner. Sugar is synonymous with poison, while raw is synonymous with utopia.

Proper Asset Allocation Of Stocks And Bonds - NEW LIFE MODEL

Survival Asset Allocation Model For Stocks And Bonds

The Survival Asset Allocation model is for those who are risk averse. The 50/50 asset allocation increases the chances your overall portfolio will outperform during a stock market collapse because your bonds will be increasing in value as investors flee towards safety.

Bonds can also rise when stocks rise as you’ve seen in the historical chart above. During the 2008 Global Financial Crisis, a bond index fund only fell by about 1.5%, while stocks declined by 38%. The worst year ever for bonds was in 1994 when bonds fell 2.9%.

Bonds have performed like a champ during the 2020 recession compared to stocks.

Worst Year for Stocks And Bonds

Candidates For Survival Asset Allocation:

  • Believe the stock market has a higher chance of underperforming bonds, but are not sure given historical data points to the contrary.
  • Are within 10 years of full retirement and do not want to risk losing your nest egg.
  • Depend on your portfolio to be there for you in retirement due to a lack of alternative income streams.
  • Are very wary of the stock market because of all the volatility, scams, and downturns.
  • Are an entrepreneur who needs some financial safety just in case your business goes bust.
The proper asset allocation of stocks and bonds by age - Survival

Nothing-To-Lose Asset Allocation Model Of Stocks And Bonds 

Given stocks have shown to outperform bonds since 1926, the Nothing-To-Lose Asset Allocation model is for those who want to go all-in on stocks. If you have a long enough time horizon, this strategy might suite you well.

Candidates For The Nothing-To-Lose Asset Allocation:

  • You are rich and don’t count on your stock portfolio to survive now or in retirement.
  • Are poor and are willing to risk it all because you don’t have much to risk.
  • Have tremendous earnings power that will continue to go up for decades.
  • Are young or have an investment horizon of at least 20 more years.
  • Believe you are smarter than the market and can therefore choose sectors and stocks which will consistently outperform.
The proper asset allocation of stocks and bonds by age - nothing to lose

Financial Samurai Asset Allocation Model Of Stocks And Bonds 

The Financial Samurai model is a hybrid between the Nothing-To-Lose model and the New Life model. I believe stocks will outperform bonds over the long run, but we’ll see continued volatility over our lifetimes. I also believe this is the most proper asset allocation if you consistently read my site.

Specifically, I’m preparing for a new normal of between 7% – 8% returns for stocks (from 8-10% historically). I also expect 2%-4% return on bonds from 4-7% historically. In other words, I believe bonds and stocks are expensive and returns will be structurally lower going forward.

Candidates For The Financial Samurai Asset Allocation:

  • Have multiple income streams.
  • Are a personal finance enthusiast who gets a kick out of reading finance literature and managing your money.
  • Not dependent on your 401k or IRA portfoliso in retirement, but would like it to be there as a nice bonus.
  • Enjoys studying macroeconomic policy to understand how it may affect your finances.
  • Is an early retiree who won’t be contributing as much to their portfolios as before.
  • Also invests in real estate to diversify and smooth out the volatility of stocks. Real estate is actually my favorite asset class to build wealth because it is easy to understand, is tangible, provides utility, and has a solid income stream.
  • Given a Financial Samurai is a real estate investor, real estate acts as a Bonds Plus type of investment. In other words, real estate is defensive during a downturn as more capital goes towards real assets. Real estate also tends to do well as more investors buy bonds, resulting in lower interest rates. At the same time, real estate tends to do well during strong economic growth due to rising rents and rising real estate prices.
Financial Samurai proper asset allocation model of stocks and bonds by age

The Right Asset Allocation Depends On Your Risk-Tolerance 

By providing five different asset allocation models, I hope you are able to identify one that fits your needs and risk tolerance. Don’t let anybody force you into an uncomfortable situation.

Ideally, your asset allocation should let you sleep well at night and wake up every morning with vigor. When it comes to investing, you need to calculate your existing investment exposure and invest accordingly.

I encourage everyone to take a proactive approach to their retirement portfolios. Ask yourself the following questions to determine which asset allocation model is right for you:

  • What is my risk tolerance on a scale of 0-10?
  • If my portfolio dropped 50% in one year, will I be financially OK?
  • How stable is my primary income source?
  • How many income streams do I have?
  • Do I have an X Factor (ways to make alternative income)?
  • What is my Money Strength?
  • What is my knowledge about stocks and bonds?
  • How long is my investment horizon?
  • Where do I get my investment advice and what is the quality of such advice?
Bonds and Stocks Historical Performance Since 2000

Once you’ve answered these questions, sit down with a loved one to discuss whether there is congruency with your answers and how you are currently investing.

Further, it’s important to understand the right order of contributions between your tax-advantaged and taxable investments. You want to take full advantage of your tax-advantaged accounts, while also building up your taxable investments as large as possible. The sooner you want to retire early, the larger your taxable investments should be.

It’s important not to overestimate your abilities when it comes to investing. We all lose money eventually, it’s just a matter of when and how much. Having a proper asset allocation will improve your odds of building wealth in a risk-appropriate manner over the long term.

Recommendation To Build Wealth

The best ways to build wealth and have the proper asset allocation is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize.

Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.

Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. The tool allows you to easily determine the proper asset allocation.

Aggregate all your financial accounts in order to get a good over view of your net worth and start building those passive income streams! It only takes a minute to sign up.

Retirement Planning Calculator
Personal Capital’s amazing Retirement Planning Calculator. How are your results?

Invest In Real Estate To Build Wealth

In addition to investing in stocks and bonds, I’m a big proponent of real estate investing. Real estate is a core asset class that has proven to build long-term wealth for Americans. Real estate is a tangible asset that provides utility and a steady stream of income if you own rental properties.

Given interest rates have come way down, the value of rental income has gone way up. The reason is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Further, in an inflationary environment, rents and property prices tend to go up.

You can think about real estate as a bonds plus asset class. Real estate acts very much like bonds with its income generating ability and defensive characteristics. However, real estate can often do much better than bonds in a bull market.

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. For the average investor, investing in a eREIT for real estate exposure and stability is one of the easiest ways to go.

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. For investors who like to buy individual properties or build their own select real estate fund, CrowdStreet is my favorite choice.

Both platforms are free to sign up and explore. I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. There is a strong demographic shift towards lower cost areas of the country thanks to technology and the pandemic.

About the Author:

Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. His favorite investment today is in real estate crowdfunding.

He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009. It is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month. Pick up a hard copy of my new WSJ bestseller, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. It’s the best personal finance book you’ll ever read.

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Filed Under: Investments

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.

2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.

Financial Samurai has a partnership with Fundrise and is an investor in private real estate. Financial Samurai earns a commission for each sign up at no cost to you. 

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Comments

  1. Severely Independent says

    February 26, 2023 at 12:44 pm

    Is it rational to consider Pension and SS as the fixed components of a portfolio? If yes, how do you !) account for it in asset allocation 2) allocate retirement funds to stocks – 80 to100%?

    Reply
  2. Gary says

    June 25, 2022 at 12:24 pm

    I stumbled on your Financial Samurai by accident and was impressed by the amount of great information. It’s a very good read.

    Reply
  3. pat says

    January 17, 2022 at 8:48 am

    if you use dividend stocks instead of just using a s&p500 etf or fund for your equity allocation would that allow you to increase your percentage in stocks? Since dividend stocks are more stable and tend to hold up better in a downturn wouldn`t that allow you to go to say 65 or 70 percent equity ? Im 63 years old retired and have a pension and social security so I dont need to dip into my retirement money to much maybe a 4% withdraw rate at 65. Any thoughts or advice on this would be appreciated.I may consider a combination of total stock market etf and dividend stocks for my allocation.

    Reply
  4. AA says

    April 18, 2021 at 12:48 pm

    Just wondering – why not you have YT channel? Your posts are great but timely to read.

    Reply
    • Financial Samurai says

      April 18, 2021 at 1:04 pm

      Retiring. Definitely an opportunity, but it just takes more time and I’m trying to do less, not more. Do you have a YouTube channel?

      Can you watch faster than you can read? I can’t.

      Reply
  5. Beau W. says

    February 26, 2021 at 9:58 am

    Awesome job on the breakdown of the bonds! Im definitely more knowledgeable about the mix of bonds and stocks now. Thank you sir.

    Reply
  6. David says

    January 25, 2020 at 7:34 pm

    Hi Sam-

    Long time reader and genuinely attribute my success to following a lot of your advice. I am now “struggling” with a “problem” I would love your take on. Simply put, I am 30 years old, married, and we have a $1.5M net worth ($1M investment account, $500K retirement accounts).

    Asset allocation:

    US Equity Large Cap: $1M
    International Equity: $400K
    Cash: $100K

    After Tax Income: $250k
    Expenses: $90K

    Although I am doing well, I am worried about a downturn (although I would just keep buying) and am concerned I’m being a “naive millennial” who thinks markets only go up and am taking too much risk.

    However, I really see no reason to buy bonds and make 2%.

    Should I just keep buying stocks and see where I am in 3-5 years? I don’t plan on having a family or buying a home until 35.

    Thanks!

    David

    Reply
    • Keyshia wiods says

      April 22, 2021 at 12:06 pm

      For one do your wife no anything about it or no whatever the case might be always talk to your wife about anything cuz if anything happened she would be your backbone she will back you up in anything don’t be selfish and trying to take measures on your own hand the things will not never turn out right

      Reply
  7. Robert Snelgrove says

    December 31, 2019 at 9:43 pm

    How do we invest or mirror the Vanguard VBTLX Bond index? thx.

    Reply
    • Robert Snelgrove says

      January 29, 2020 at 6:53 pm

      No one is home here.

      Reply
  8. Jim Swanson says

    July 18, 2019 at 10:51 pm

    Before you can consider retiring…you need a budget. Only then can you really determine things like “risk tolerance”. Figure at least 2-3% inflation and living until 90. Figure your budget today will double by then. Figure your Social Security will be cut by 10% or more in 2035. Figure your spouse is going to die and take their social security with them. Figure your money will run out if you don’t have at least 1 million in savings and IRAs…minimum. Otherwise, figure your 80s will be spent living in a 10′ x 10′ room staring at a wall where a big screen tv use to be.

    Reply
  9. David R says

    July 10, 2019 at 12:17 pm

    Interested in your thoughts on asset allocation for my 83 in-laws. Until very recently, they had 100% of their retirement in equities. We finally convinced my mom-in-law to shift to some value-preserving funds… but their total mix is still over 90% (!) equities. My father-in-law wouldn’t consider anything but aggressive growth equities.

    They have modest teacher retirement payments, and Social Security, but are otherwise depending on their IRA savings for continued retirement and ongoing medical care. They’ve been saving using the stock market since the late 70’s in both IRAs and 403(b) plans at various times.

    They survived the plunge in 2008 with great angst, and the good fortune of living much longer than average. Unfortunately, my father-in-law has recently gone into memory care for dementia and my mother-in-law has just had a mild heart attack. Even though they seem to have the “Nothing-to-lose” model in mind, they definitely DO have much to lose.

    Their children (all are CPAs and two are CFOs for decent sized corporations) are trying to convince my mom-in-law that a mix of no more than 60% equity funds and 40% bond funds or other capital preserving assets would still satisfy their aggressive earning desires but at least keep them away from losses that they don’t have long enough to to live and recover from a big loss. Personally, if I were 83, with nearly 1M in assets, I would have all my assets in something that I would preserve value for my living AND to transfer to the grandkids when I was gone. Not for them, though.

    Any suggestions on how we can present a (to me at least) more sane asset allocation for very senior adults?

    Reply
  10. multimega says

    June 2, 2019 at 7:39 am

    The asset allocation is all good as bonds are negatively correlated with stocks in general. The correlation could change as the market condition changes. The bonds will reduce the beta weighted delta of your stocks. One could even reduce the volatility or so called standard deviation of the P/L of the stocks/bonds portfolio by adding some negative delta via options to reduce the cost base of your assets. Why not more retirees or would-be retirees are doing that? Wall street’s self-serving and widely perpetuated myths that options are risky is probably the answer.

    Reply
  11. Surya says

    December 28, 2018 at 7:45 pm

    Hi there,
    I am 48, working full time and used to be 100% in stocks/mutual funds. Start investing since 2003, managed 2008 and hold on during the storm, but now at my age, my obligations (has a daughter at univeriaty & son to prepare within 8 years time), I am chicken out with current market turmoil.
    Intend to restructure my investing strategy next year. I live in Indonesia where interest rate at 6%, 10 yrs government bonds at 8% and average 20 yrs stock market index at 20%.
    Seeking your advice. Thank you

    Reply
  12. Sean says

    October 30, 2018 at 11:11 am

    Haha, very true!

    This whole conversation started out as you can see, where I have a good friend and daytrader who is trying to time the market downturn using all these principles like Elliot Wave, etc.

    Sure, people have made money timing the market but a lot also haven’t! Basically, this is what led to me to the question of whether I should change my allocation (from 100/0 to maybe 80/20) based on my retirement year, etc. and also whether I am still gambling in doing so based on the recent downturns in the market these past few months… It is very hard to predict the market, even if you’re REALLY REALLY GOOD AT IT.

    I prefer to keep my money in mostly stock since I have had a good amount of exposure therapy to volatility and the ups and downs. I only rebalance once a year and this is when I typically look at the market :)

    -Sean

    Reply
    • Financial Samurai says

      October 30, 2018 at 12:03 pm

      Cool. So what are the answers to my questions for you?

      Reply
      • Sean T says

        October 31, 2018 at 8:48 pm

        The answers to your questions :) Sorry for the delayed reply!

        1. Working
        2. 28 years
        3. 2 different streams of revenue, in addition to my market investments of course.
        4. Single and no family as of now; if I do decide to have a family it will be around 40-45!

        Reply
  13. Sean T says

    October 29, 2018 at 9:08 pm

    Hello Financial Samurai!

    GCC mentions in his path to 100% equities article that in all honesty, as an early retiree ages, almost independent of the market, it is best to have 90/10 or 100/0 stocks as this will help one’s portfolio grow the most (as long as they can withstand the volatility, which is not too hard if you only look at it once a year :) ).

    What are your thoughts on this compared to the 80/20 or 70/30 split that you recommend in your portfolio allocation model? When you get up there in age, I can see the portfolio being shifted slightly more to bonds due to healthcare costs and also because you have less years to live… but other than that, I see no reason why 90/10 split shouldn’t be a thing!

    Curious as to your thoughts, thanks so much.

    -Sean

    Reply
    • Financial Samurai says

      October 30, 2018 at 6:22 am

      Hi Sean, I wish GCC and others 100% in equities the best of luck. If they have the risk tolerance to stomach the volatility, go for it. This recent 10% correction in October 2018 is a nice test.

      I’ve found that the more you accumulate and the more you don’t want to ever go back to work, the less risk tolerant you will be.

      For me, it would be a disaster if I or my wife had to go back to work with our 18 month old boy now. We are committed to being full-time parents until he goes to kindergarten (age 5.5-6) at least.

      See: Investment Risk And Return Portfolios For Early Retirees to see the returns

      Also, here’s our story on how a jobless family of three survives in San Francisco.

      We really don’t want to return to work. Nor do we want to be forced to live overseas to save money. We want as many options as possible!

      GL!

      Reply
      • Sean T says

        October 30, 2018 at 10:32 am

        Thanks GL!

        I totally understand where you’re coming from; typically, for me to avoid volatility I just don’t look at my portfolio :)

        But I understand that a 50% crash like in 2008 can sometimes cause people to sell unnecessarily (even though I believe this was a “rare” recession with a crash this large, and from what I know, the market hadn’t dropped this low for that long since Depression era times…).

        Regardless of whether 2008 was an outlier or not, it’s true though that even though you accumulate more responsibility, you also accumulate more in terms of wealth? For example, even if you lose 50% of your wealth during a recession, eventually the market comes back up, and an early retiree should still have more than enough in a brokerage account and also in dividends to last him during that period in time without worry? Since you have more years to ride out the volatility too, this is a much different portfolio allocation than someone retiring at 65 of course who has less years and maybe would be content with a 70/30 split.

        The more years you ride out your retirement funds, the more they will grow with only nominal market performance. Investing in more stocks (90/10) will be more volatile, but will also increase your returns exponentially compared to a 70/30 split, so it should lessen your worries even more about money!

        Again, I ran all of this data in the FireCalc Sim (and accounted for taxes), so this is where I am coming up with the numbers :) For me, I can hedge against the volatility although I can understand not doing so with a family as it will be tougher. I can understand too that if someone early retired at the beginning of a sustained bear market and not a bull, they will need to spend less and save more to ensure that they don’t outlive their funds.

        Reply
        • Financial Samurai says

          October 30, 2018 at 11:04 am

          Some pertinent questions to ask you are:

          * retired or working
          * age
          * abilities to make money elsewhere
          * number of kids/people to support

          I’ve found that everybody 35 and under tend to think they are warren buffet!

          Reply
          • Michael J. Miller says

            June 4, 2019 at 8:51 am

            I’m 34 and can confirm.

            Reply
  14. GenX FIRE says

    October 28, 2018 at 10:36 am

    This article is one I will be sharing with my wife. While she is a great saver, she is not patient to have these allocation conversations. I was planning on having another one of these conversations with her soon, and this page saved me a ton of work. Thank you for posting it.

    Reply
  15. Scott Zaleski says

    May 18, 2018 at 9:22 am

    Hi Sam,

    Love your blog, super insightful and very helpful. A little about me, just moved back to my Seattle rental from the Bay Area – relevant to your last few blog posts. Anyway, I have a fairly simple retirement strategy, healthy mix of index funds. I was curious from your perspective – the right allocation between US and International. I like your 80% Stocks and 20% Bonds mix above, but I am curious … how would you break up:

    Larg Cap
    Mid Cap
    Small Cap

    International

    Thoughts?

    Reply
    • Neal says

      April 21, 2020 at 9:34 am

      J.L. Collins would recommend investing 80% in VTSAX (Vanguard Total Stock Market Index Fund) & 20% in VBTLX (Vanguard Total Bond Market Index Fund). Happy investing!!!

      Reply
      • Sticks49 says

        December 11, 2022 at 1:54 pm

        Or VT and BIL in the particular percentages based on your own risk profile and age.

        Reply
  16. Frank says

    March 30, 2018 at 4:54 am

    Very good article and comments, thank you.
    Readying to retire in 1-2 years, I have become very fond of Wade Pfau’s theories and alternatives.
    That is …. in its most distilled form, 1-2 years before retirement, decrease your stock allocation to approx. 30% .
    Thereafter, increase by 1% per year.
    He suggests this so as to not be so stock heav close to retirement in case we run into a down market, thus leaving an investor with limited ability to catch up.
    Thanks again,
    Frank

    Reply
  17. Jonathan Levi says

    August 10, 2017 at 12:39 am

    Hey Sam
    Heard you on my buddy Noah Kagan’s show and decided to come check out your blog. So far, I love it. The only thing I wanted to suggest was that many of us reading have other investments outside of stocks/bonds. I would’ve loved if this post had addressed how much each of these frameworks carry in assets like Real Estate, cryptocurrencies, fiat currencies, etc. In any case, my assistant will be dropping you an email to invite you to come onto our show, Becoming SuperHuman, so hopefully we’ll get a chance to talk more

    Reply
    • Financial Samurai says

      August 10, 2017 at 7:26 am

      Hi Jonathan, nice to meet you. I actually go the deepest in real estate on my side, and also talk about private equity and venture debt.

      My real estate category for you to check out : https://www.financialsamurai.com/category/real-estate/

      Sam

      Reply
  18. Natalie says

    February 9, 2017 at 6:14 pm

    Hi Sam – Where do you see cash fitting into the allocation strategy? I’m a fairly active investor turning 50 this year and unable to continue to contribute to my IRA, but with all of my accounts considered, I should be OK in retirement. Currently I’m 50% stock, 25% cash, 25% bonds. I’d go down to 10% cash and up to 65% stock if the market takes a dive. Thoughts?

    Also, something that’s always confused me about the bond ratio is whether it matters what type of bond it is. I have several different types of bond funds in the interest of diversification. Munis in taxable accounts, corporate debt, mortgage/asset backed securities, and treasuries in my IRAs. It seems like whenever anyone is talking about the bond ratio they are assuming a full allocation into treasuries. Can you comment on that for me please?
    Thanks!

    Reply
    • Financial Samurai says

      February 10, 2017 at 5:52 am

      See Recommended Net Worth Allocation. I like having around 5% of my net worth in cash or CDs.

      You should also read: The Case For Bonds: Living For Free And Other Benefits

      AFter the Trump victory, I built up a sizaable municipal bond position.

      Reply
      • Natalie says

        February 10, 2017 at 10:15 am

        Thank you! :)

        Reply
  19. Christine says

    October 29, 2015 at 5:47 pm

    Hi Sam – Thank you for taking the time to create such a comprehensive and thoughtful website. It’s been inspiring and motivating, and I’ve been rethinking my portfolio.

    What allocation would you recommend for a 40 year old that does not own real estate? I live in NYC and renting is a better option for me than buying, especially with pricing right now. I’m currently Cash 55%, Equities 43%, and Bonds 2%.

    I want to stay liquid just in case there may be buying opportunities in the coming years. With that said, I think that a greater exposure to bonds would make sense. But I don’t know how I feel about a such significant increase in bonds given the market today. And I’m unsure about putting more money in an equity index since the broader market has been performing well over the past years.

    What you suggest for someone who most likely won’t be able to invest in real estate for at least another three to five years?

    Thanks in advance, C

    Reply
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