What Ever Happened to "Your Age In Bonds"?

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Somethingwitty92912
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Somethingwitty92912 »

LMK5 wrote: Sat May 08, 2021 9:07 am It wasn't all that long ago that "your age in bonds" was a widely-followed rule of thumb for knowledgeable investors. I remember when a friend of mine retired and had a 30/70 portfolio at the time, which seemed prudent. But today, I almost never hear of someone--or hear advice from someone--that advises less than 60% stocks. What happened over the years that has relegated "your age in bonds" to the investing trash heap? Is the main reason that we've become a little too comfortable with equity risk? Is there any data out there that shows that even knowledgeable investors tend to drift towards, and advocate for, a higher allocation to stocks during periods of positive stock market returns?

Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?
Age in bonds was always a good place holder for someone who is getting their feet wet. Once you have a stronger grasp on investment fundamentals, risk tolerance, and a overall greater understanding of markets; this standard advice becomes passé.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by steve r »

climber2020 wrote: Sat May 08, 2021 9:15 am Recency bias.

I recall in March and April 2020 there were zero “why bonds?” posts.
Yes for some, but not for others. Some wanted out of bonds pretty quickly after yields tanked.

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Re: What Ever Happened to "Your Age In Bonds"?

Post by Blue456 »

LMK5 wrote: Sat May 08, 2021 9:07 am It wasn't all that long ago that "your age in bonds" was a widely-followed rule of thumb for knowledgeable investors.
I just pick an anticipated date of retirement and target date fund for such date. I just checked. For a 40 year old my TDF has 28% bonds and 72% stocks. Pretty close to age in bonds. That 10% probably does not make much difference. On that other hand the set it and forget it set up is priceless.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by tibbitts »

jginseattle wrote: Sat May 08, 2021 1:46 pm Shouldn't one also consider the nature of the equity allocation? Stocks with higher expected returns would allow for a larger bond allocation.
That would seem to have always been the theory - more SCV should be accompanied by more bonds. Although I'm not sure most people actually follow that in their allocations.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by tibbitts »

Blue456 wrote: Sat May 08, 2021 2:17 pm
LMK5 wrote: Sat May 08, 2021 9:07 am It wasn't all that long ago that "your age in bonds" was a widely-followed rule of thumb for knowledgeable investors.
I just pick an anticipated date of retirement and target date fund for such date. I just checked. For a 40 year old my TDF has 28% bonds and 72% stocks. Pretty close to age in bonds. That 10% probably does not make much difference. On that other hand the set it and forget it set up is priceless.
But a criticism of target funds is that not so long ago, your target fund would have been much closer to age-in-bonds, without having to ignore that 10%. So target fund allocations have been a moving target.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Blue456 »

tibbitts wrote: Sat May 08, 2021 2:19 pm
Blue456 wrote: Sat May 08, 2021 2:17 pm
LMK5 wrote: Sat May 08, 2021 9:07 am It wasn't all that long ago that "your age in bonds" was a widely-followed rule of thumb for knowledgeable investors.
I just pick an anticipated date of retirement and target date fund for such date. I just checked. For a 40 year old my TDF has 28% bonds and 72% stocks. Pretty close to age in bonds. That 10% probably does not make much difference. On that other hand the set it and forget it set up is priceless.
But a criticism of target funds is that not so long ago, your target fund would have been much closer to age-in-bonds, without having to ignore that 10%. So target fund allocations have been a moving target.
I think the changes over the years have been subtle enough to not make much difference. On the other hand individual investors tend to be their worst enemies due to constant tinkering with their portfolios.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by reln »

LMK5 wrote: Sat May 08, 2021 9:07 am It wasn't all that long ago that "your age in bonds" was a widely-followed rule of thumb for knowledgeable investors. I remember when a friend of mine retired and had a 30/70 portfolio at the time, which seemed prudent. But today, I almost never hear of someone--or hear advice from someone--that advises less than 60% stocks. What happened over the years that has relegated "your age in bonds" to the investing trash heap? Is the main reason that we've become a little too comfortable with equity risk? Is there any data out there that shows that even knowledgeable investors tend to drift towards, and advocate for, a higher allocation to stocks during periods of positive stock market returns?

Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?

Few reasons come to mind...
Static allocations are superior to drifting allocations.
It was often difficult to implement, the original advice required you to include the present value of all your fixed income (SS, pension, annuities, and bonds etc) into your "bonds".
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Thesaints »

"Age in bonds" assumes that a person's age pretty much defines their financial situation.
Would you advise Warren Buffet to follow this rule ?
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Re: What Ever Happened to "Your Age In Bonds"?

Post by mrspock »

whereskyle wrote: Sat May 08, 2021 9:29 am ...
Even Burton Malkiel has jumped ship, because investors never learn. He now thinks holding dividend-growth stocks is preferable to holding bonds for safety. The suggestion is atrocious, if you ask me.

...
Based on his advice (and the fact that a ~3.8% yield was irresistible) I bought myself some SCHD (dividend fund), in short the data says otherwise -- he was right. After just 5 months it's up some 37%, I could sell the entire thing and sit on cash for years -- maybe a decade and yield more than a bond fund.

Think about that. Risk for 5 months, 0 risk for the rest....end up with more money. The guy wasn't wrong. You could even sell it all and hold cash, now having 0 risk and still end up with more $$$ than a bond fund....maybe even risk adjusted (since the dividend fund doesn't need to be held in perpetuity to achieve the result).

On the larger point here, I'm pretty sure sticking to a standard AA will do just fine. There's probably no real need to do what I did, as what you are losing on bonds, you are likely gaining in equity appreciation. The two assets aren't in separate universes, so the premiums have an impact on one another.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by JackoC »

nisiprius wrote: Sat May 08, 2021 12:58 pm I think the S-shaped curves used by target-date funds came from financial economics theory that made some kind of quantitative assessment of the effect of declining "human capital," and seemed to show that instead of the straight line implied by "age in bonds," it was better to get most of the de-risking accomplished over a narrow period of time, e.g. age 40-60:
That would make sense. And in general a sensible answer to 'what ever happened to your age in bonds' would be, IMO, something along the lines of a more sophisticated analysis of total lifespan risk including the key factor of rate of decline of human capital available to make up for unexpected investment losses.

Less sensible answers, again just IMO, would talk about bond yields being lower. By what immutable law of finance have stock expected returns declined any less than bond expected returns (their real yields are the best proxy)? And who says you'll get even as much extra return per unit risk from stocks over bonds now as you did in the past? If anything I would expect that relationship to also be less favorable (IOW I tend to think the expected equity risk premium now is lower than the past historical average realized premium, rather than an being an immutable constant added to a now lower risk free rate to get the expected return of stocks).

Or at least I think 'bonds yield less' is a doubtful reason to tell people they *should* take more stock risk. It could well be a reason why some people *do* take more stock risk. In fact that's part of the idea of central banks keeping rates low, to divert investment into risk assets, creating a 'wealth effect' in spending from the limited term boost it gives to stock prices, and it also further cuts the cost of capital for companies to expand, hire new people and so forth. But the flip side of the latter effect is stock investors settling for lower expected return in a pricier stock market.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by TheDDC »

Bonds are return killers. That’s why. I’ve never followed that advice because it’s STUPID and I’d rather beat the S&P, not cruise up underneath. Age has little to do with the calculation. When you retire you still have 20-30 years worth of returns, and you don’t want to deplete principle. With those parameters in place, that’s why we don’t advocate bonds at DDC “wealth management strategies.”

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Re: What Ever Happened to "Your Age In Bonds"?

Post by reln »

TheDDC wrote: Sat May 08, 2021 2:44 pm Bonds are return killers. That’s why. I’ve never followed that advice because it’s STUPID and I’d rather beat the S&P, not cruise up underneath. Age has little to do with the calculation. When you retire you still have 20-30 years worth of returns, and you don’t want to deplete principle. With those parameters in place, that’s why we don’t advocate bonds at DDC “wealth management strategies.”

-TheDDC
Agreed.

There is also an extreme bias to the common view of returns and risk. We often just look at annual measurements of return and risk (drawdown etc). If you do the same analysis at a different intervals, you'd get different efficient frontier portfolios.

For example, the longer you set the interval of measurement, the more stocks you need to be "efficient". Eventually, at very long term measurement intervals, even 10% in bonds is "inefficient".
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Thesaints »

Things are a little different when one is spending...
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Re: What Ever Happened to "Your Age In Bonds"?

Post by climber2020 »

TheDDC wrote: Sat May 08, 2021 2:44 pm Bonds are return killers. That’s why. I’ve never followed that advice because it’s STUPID and I’d rather beat the S&P, not cruise up underneath. Age has little to do with the calculation. When you retire you still have 20-30 years worth of returns, and you don’t want to deplete principle. With those parameters in place, that’s why we don’t advocate bonds at DDC “wealth management strategies.”

-TheDDC
There have been certain periods of time where retiring with a more conservative portfolio resulted in a higher balance than going 100% stocks. Consider the unfortunate retiree who decides to quit/is fired at the very beginning of 2000:

Image

Direct link here

21+ years later, and the 100% stock portfolio still hasn't caught up. Not even close.

I'm not a proponent of being overly conservative, especially during early/mid accumulation where I think 100% stocks is the way to go (provided the individual in question can stomach the volatility), but I believe there is still a place for bonds, especially during the handful of years surrounding the "financial independence" portfolio value.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by absolute zero »

climber2020 wrote: Sat May 08, 2021 4:07 pm
TheDDC wrote: Sat May 08, 2021 2:44 pm Bonds are return killers. That’s why. I’ve never followed that advice because it’s STUPID and I’d rather beat the S&P, not cruise up underneath. Age has little to do with the calculation. When you retire you still have 20-30 years worth of returns, and you don’t want to deplete principle. With those parameters in place, that’s why we don’t advocate bonds at DDC “wealth management strategies.”

-TheDDC
There have been certain periods of time where retiring with a more conservative portfolio resulted in a higher balance than going 100% stocks. Consider the unfortunate retiree who decides to quit/is fired at the very beginning of 2000:

Image

Direct link here

21+ years later, and the 100% stock portfolio still hasn't caught up. Not even close.

I'm not a proponent of being overly conservative, especially during early/mid accumulation where I think 100% stocks is the way to go (provided the individual in question can stomach the volatility), but I believe there is still a place for bonds, especially during the handful of years surrounding the "financial independence" portfolio value.
Agree with this. I don’t have any papers or articles to cite, but if I recall most studies indicate that the maximum SWR over 30 year retirements is NOT obtained with 100% equities (perhaps not surprising to some), but rather somewhere around 80-85% stocks. So even an investor with maximum risk tolerance may still be well served with at least a splash of bonds in retirement.

For longer than 30 year retirements, the optimum AA moves closer to 100%.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by dbr »

climber2020 wrote: Sat May 08, 2021 4:07 pm
TheDDC wrote: Sat May 08, 2021 2:44 pm Bonds are return killers. That’s why. I’ve never followed that advice because it’s STUPID and I’d rather beat the S&P, not cruise up underneath. Age has little to do with the calculation. When you retire you still have 20-30 years worth of returns, and you don’t want to deplete principle. With those parameters in place, that’s why we don’t advocate bonds at DDC “wealth management strategies.”

-TheDDC
There have been certain periods of time where retiring with a more conservative portfolio resulted in a higher balance than going 100% stocks. Consider the unfortunate retiree who decides to quit/is fired at the very beginning of 2000:

Image

Direct link here

21+ years later, and the 100% stock portfolio still hasn't caught up. Not even close.

I'm not a proponent of being overly conservative, especially during early/mid accumulation where I think 100% stocks is the way to go (provided the individual in question can stomach the volatility), but I believe there is still a place for bonds, especially during the handful of years surrounding the "financial independence" portfolio value.
So, in general a less volatile and lower returning portfolio returns a possible distribution of outcomes for end-point wealth that is lower and narrower than that provided by the higher stock portfolio. But the two distributions overlap. The better outcomes for more bonds exceed the worse outcomes for all stocks. The best outcomes for all stocks far exceed the best outcomes for less volatile choices, but the worst outcomes for all stocks could even be worse than the worst outcomes for less aggressive portfolios.

The expected return comes from the average of the returns over time. But the catch is that you can't invest in the expected return. The actual result will just be one single path through all the possibilities. That is why risk defined as volatility of periodic returns also amounts to risk in long term results.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by whereskyle »

mrspock wrote: Sat May 08, 2021 2:39 pm
whereskyle wrote: Sat May 08, 2021 9:29 am ...
Even Burton Malkiel has jumped ship, because investors never learn. He now thinks holding dividend-growth stocks is preferable to holding bonds for safety. The suggestion is atrocious, if you ask me.

...
Based on his advice (and the fact that a ~3.8% yield was irresistible) I bought myself some SCHD (dividend fund), in short the data says otherwise -- he was right. After just 5 months it's up some 37%, I could sell the entire thing and sit on cash for years -- maybe a decade and yield more than a bond fund.

Think about that. Risk for 5 months, 0 risk for the rest....end up with more money. The guy wasn't wrong. You could even sell it all and hold cash, now having 0 risk and still end up with more $$$ than a bond fund....maybe even risk adjusted (since the dividend fund doesn't need to be held in perpetuity to achieve the result).

On the larger point here, I'm pretty sure sticking to a standard AA will do just fine. There's probably no real need to do what I did, as what you are losing on bonds, you are likely gaining in equity appreciation. The two assets aren't in separate universes, so the premiums have an impact on one another.
This is preposterous. It's an equity fund behaving like equities. What in the world is special about that? Anyone who upped their equity allocation could have seen a similar return. This does not make it a bond substitute. It will go down like the stock market when the stock market goes down. If the market had crashed, we would be saying that Malkiel told everyone to take on a ton of risk that they shouldn't have taken on. It's the fact he recommended that people could substitute dividend growth for bonds that I think is malpractice.
Last edited by whereskyle on Sat May 08, 2021 5:32 pm, edited 3 times in total.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Soon2BXProgrammer »

nedsaid wrote: Sat May 08, 2021 9:12 am
jebmke wrote: Sat May 08, 2021 9:10 am Negative (real) interest rates probably a factor.
You beat me to it, I was going to say very low interest rates.
This is a misnomer, after taxes and inflation, rates have mostly been negative for a very long time including then "age in bonds" was popular.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by NYC_Guy »

JD2775 wrote: Sat May 08, 2021 10:51 am
willthrill81 wrote: Sat May 08, 2021 10:06 am Over the next decade at least, bonds are likely to lose out to inflation.

Even in the past, 'age in bonds' has been overly conservative.

In this thread, vineviz lays out a different, likely better, rule of thumb: bonds = 2 * (age - 40). Following this would mean that an investor would have no bond exposure at all until age 41.
That's an interesting way to approach it. I'd have 12% bonds right now given that formula. I have about 20-25% currently. I was 70/30 but have let it slide and haven't rebalanced for a while.
So at 95, this says that I should be at 110% bonds and shorting the equity markets with 10% of my portfolio… There is no perfect AA. For me, I plan a classic U shape. Zero bond allocation until 50. Reaching 40% FI by 60. And reducing my bonds as I approach the time my heirs will be taking my estate. At 90 (should I live that long), I’ll likely be back above 80% equities.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Karamatsu »

Are there more substantive reasons for the decline of "your age in bonds" or should we be revisiting this mantra?
Personally I still use age-in-bonds as a benchmark. I like it because it's simple and unequivocal. A person can rationalize and fool themselves into believing just about anything, but one's own age is hard to deny. I don't want to speculate on what motivates others to take on additional risk because there are many different levels of sophistication, and many different kinds of cognitive biases that come into play. I just know that after more than four decades of investing, the simple age-in-bonds rule captures my own risk tolerance and experience surprisingly well.

That said, if I don't die first, my plan is to continue with that policy until I'm 80. At that point I'll switch to a static 20/80 allocation and rebalance when necessary only to keep the allocation at that level. If I lived in the US, and my portfolio mushroomed to the point where I could cover our needs, I would also consider a portfolio of 100% inflation-indexed government bonds (cf. Zvi Bodie), but as an expat exposed to a volatile currency, that doesn't seem like a good idea.

Still, "age in bonds" remains my go-to whenever anybody (under 80!) asks me what they should do.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by TropikThunder »

whereskyle wrote: Sat May 08, 2021 5:28 pm
mrspock wrote: Sat May 08, 2021 2:39 pm
whereskyle wrote: Sat May 08, 2021 9:29 am ...
Even Burton Malkiel has jumped ship, because investors never learn. He now thinks holding dividend-growth stocks is preferable to holding bonds for safety. The suggestion is atrocious, if you ask me.

...
Based on his advice (and the fact that a ~3.8% yield was irresistible) I bought myself some SCHD (dividend fund), in short the data says otherwise -- he was right. After just 5 months it's up some 37%, I could sell the entire thing and sit on cash for years -- maybe a decade and yield more than a bond fund.

Think about that. Risk for 5 months, 0 risk for the rest....end up with more money. The guy wasn't wrong. You could even sell it all and hold cash, now having 0 risk and still end up with more $$$ than a bond fund....maybe even risk adjusted (since the dividend fund doesn't need to be held in perpetuity to achieve the result).

On the larger point here, I'm pretty sure sticking to a standard AA will do just fine. There's probably no real need to do what I did, as what you are losing on bonds, you are likely gaining in equity appreciation. The two assets aren't in separate universes, so the premiums have an impact on one another.
This is preposterous. It's an equity fund behaving like equities. What in the world is special about that? Anyone who upped their equity allocation could have seen a similar return. This does not make it a bond substitute. It will go down like the stock market when the stock market goes down. If the market had crashed, we would be saying that Malkiel told everyone to take on a ton of risk that they shouldn't have taken on. It's the fact he recommended that people could substitute dividend growth for bonds that I think is malpractice.
Exactly. Per Portfolio Visualizer, $10,000 invested in Nov 2011 when SCHD launched:
  • 70/30 VTI/BND had grown to $29,542 for 12.08% CAGR, 9.54% Stdev, 1.18 Sharpe Ratio, -14.40% max drawdown
  • 70/15/15 VTI/BND/SCHD had grown to $34,448 for 13.91% CAGR, 11.33% Stdev, and 1.15 Sharpe Ratio, -17.49% max drawdown
  • 85/15 VTI/BND had grown to $34,668 for 13.98% CAGR, 11.53% Stdev, and 1.14 Sharpe Ratio, -17.59% max drawdown
For periodic contributions, starting with zero and adding $1,000/month:
  • 70/30 VTI/BND had grown to $221,103
  • 70/15/15 VTI/BND/SCHD had grown to $241,796
  • 85/15 VTI/BND had grown to $242,354
There was no magic to the dividend; SCHD did nothing that just increasing VTI couldn't do. No additional return, no additional safety.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by dukeblue219 »

All rules of thumb are useful guidance and rarely optimal for anyone. This one gives people the sense that they should start mostly equities and finish mostly bonds. That's still valid.

But also, people are working and living longer. Someone who is 55 nowadays is probably expecting to work 15 more years and is thus still in an accumulation phase. They are more likely to have kids about to enter college than have self-supporting children. Those are both very different than the world of 1960.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by windaar »

I still do "age in fixed." In my TIAA accounts it is in TIAA Traditional paying 4%+. In other accounts bond funds. For me it is easy to follow and has prevented mischief that could have cost me $$.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by stan1 »

KyleAAA wrote: Sat May 08, 2021 9:46 am Age in bonds was never great advice to begin with.
Likely true for a broad part of the population. Those that retire with 15X annual expenses and no pension need different advice than those who retire with 50X annual expenses plus a pension. All comes down to the assumptions.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by stan1 »

windaar wrote: Sat May 08, 2021 6:59 pm I still do "age in fixed." In my TIAA accounts it is in TIAA Traditional paying 4%+. In other accounts bond funds. For me it is easy to follow and has prevented mischief that could have cost me $$.
Right, that's a special case you are fortunate to have but most people do not have access to an investment like that.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by DB2 »

NYC_Guy wrote: Sat May 08, 2021 5:40 pm
So at 95, this says that I should be at 110% bonds and shorting the equity markets with 10% of my portfolio… There is no perfect AA. For me, I plan a classic U shape. Zero bond allocation until 50. Reaching 40% FI by 60. And reducing my bonds as I approach the time my heirs will be taking my estate. At 90 (should I live that long), I’ll likely be back above 80% equities.
Just curious. Do you plan on having this in writing for someone to execute as you realize potential or likely cognitive decline later in years? How do you have this managed later in life to achieve this U shape?
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Re: What Ever Happened to "Your Age In Bonds"?

Post by tibbitts »

stan1 wrote: Sat May 08, 2021 7:07 pm
windaar wrote: Sat May 08, 2021 6:59 pm I still do "age in fixed." In my TIAA accounts it is in TIAA Traditional paying 4%+. In other accounts bond funds. For me it is easy to follow and has prevented mischief that could have cost me $$.
Right, that's a special case you are fortunate to have but most people do not have access to an investment like that.
I'm not sure anybody has access to 4%+ in a TIAA accumulation account now. My previously 4%+ (well, just over 4%) vintages dropped like a rock this year. Of course payout rates are higher.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by DangerDad »

Maybe part of the reason why “your age in bonds” is no longer common/good advice relates to the growing duration of retirement. The trend toward earlier retirement (FIRE) combined with longer life expectancy leads to a substantially longer expected retirement. I think this longer duration of retirement explains some of the trend toward higher equity allocation.

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Re: What Ever Happened to "Your Age In Bonds"?

Post by NYC_Guy »

DB2 wrote: Sun May 09, 2021 1:43 pm
NYC_Guy wrote: Sat May 08, 2021 5:40 pm
So at 95, this says that I should be at 110% bonds and shorting the equity markets with 10% of my portfolio… There is no perfect AA. For me, I plan a classic U shape. Zero bond allocation until 50. Reaching 40% FI by 60. And reducing my bonds as I approach the time my heirs will be taking my estate. At 90 (should I live that long), I’ll likely be back above 80% equities.
Just curious. Do you plan on having this in writing for someone to execute as you realize potential or likely cognitive decline later in years? How do you have this managed later in life to achieve this U shape?
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

tibbitts wrote: Sun May 09, 2021 2:11 pm
stan1 wrote: Sat May 08, 2021 7:07 pm
windaar wrote: Sat May 08, 2021 6:59 pm I still do "age in fixed." In my TIAA accounts it is in TIAA Traditional paying 4%+. In other accounts bond funds. For me it is easy to follow and has prevented mischief that could have cost me $$.
Right, that's a special case you are fortunate to have but most people do not have access to an investment like that.
I'm not sure anybody has access to 4%+ in a TIAA accumulation account now. My previously 4%+ (well, just over 4%) vintages dropped like a rock this year. Of course payout rates are higher.
All of the versions of TIAA Trad I have access to are paying 3% right now, but that beats about any bond fund out there right now and without their volatility either.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Orthodoc1. »

I am guessing that if we have a big prolonged stock market selloff, people close to retirement age will wish they had their age in short term bonds
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Re: What Ever Happened to "Your Age In Bonds"?

Post by WillRetire »

Orthodoc1. wrote: Mon May 10, 2021 3:57 pm I am guessing that if we have a big prolonged stock market selloff, people close to retirement age will wish they had their age in short term bonds
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Re: What Ever Happened to "Your Age In Bonds"?

Post by WillRetire »

Age in Bonds is still appropriate for anyone who plans to live off of their investments during retirement. Things are not different now, life expectancies have not increased much (and have actually declined), more risk is not warranted.

Some folks on this board invest for their heirs only. A prolonged stock crash won't impact THEIR ability to pay bills in retirement. For those people, the only reason to hold bonds or cash is to buy the dips.

To the rest of us who do plan to live off investments during retirement & during prolonged stock market down-turns: Follow traditional advice and be prudent.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

WillRetire wrote: Mon May 10, 2021 4:12 pm Age in Bonds is still appropriate for anyone who plans to live off of their investments during retirement. Things are not different now, life expectancies have not increased much (and have actually declined), more risk is not warranted.
The life expectancy of 70 year olds has increased by approximately 1 year every decade since the 1950s. That's not earth shattering, but it's not nothing.

Bond yields are very much different now than they were 30 years ago. 10 year Treasuries were yielding 8.12% on May 6th, 1991. Today, they are yielding 1.60%.

Therefore, if retirees want to get anything remotely close to the same return as they would have gotten through much of the last 40 years, they have virtually no other choice than to increase their stock allocation.

'Age in bonds' made more sense when bonds were yielding 8% than it does today when they aren't even yielding 2%.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by billthecat »

I charted out Schwab's target date funds glide path, and settled upon age-11, with a bond tent.

Note, I am including my home equity as part of my FI because I'm going to sell it and rent when I retire. Without my home equity, I'm 67/33. With it, I'm 59/41.
Last edited by billthecat on Mon May 10, 2021 6:00 pm, edited 1 time in total.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by secondopinion »

willthrill81 wrote: Mon May 10, 2021 4:28 pm
WillRetire wrote: Mon May 10, 2021 4:12 pm Age in Bonds is still appropriate for anyone who plans to live off of their investments during retirement. Things are not different now, life expectancies have not increased much (and have actually declined), more risk is not warranted.
The life expectancy of 70 year olds has increased by approximately 1 year every decade since the 1950s. That's not earth shattering, but it's not nothing.

Bond yields are very much different now than they were 30 years ago. 10 year Treasuries were yielding 8.12% on May 6th, 1991. Today, they are yielding 1.60%.

Therefore, if retirees want to get anything remotely close to the same return as they would have gotten through much of the last 40 years, they have virtually no other choice than to increase their stock allocation.

'Age in bonds' made more sense when bonds were yielding 8% than it does today when they aren't even yielding 2%.
What were the rolling returns for 10 year treasuries then, and how about now? What were the taxes then and now? Inflation? Also, how much did the people of the past save and expect to live off of versus today? In essence, are we in general expecting too much out of the retirement given a saving rate as to require a riskier portfolio? I am not saying any here are guilty of anything; it is just a thought.

That said, I disregard the "age in bonds" advise because it ignores individual needs; not the "because of low yields" argument.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by tibbitts »

willthrill81 wrote: Mon May 10, 2021 4:28 pm Therefore, if retirees want to get anything remotely close to the same return as they would have gotten through much of the last 40 years, they have virtually no other choice than to increase their stock allocation.

'Age in bonds' made more sense when bonds were yielding 8% than it does today when they aren't even yielding 2%.
I think it's important that we qualify that by saying:

if retirees want the possibility to get anything remotely close to the same return

Sometimes we tend to assume that a higher equity allocation will necessarily result in a higher return.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

secondopinion wrote: Mon May 10, 2021 5:17 pm
willthrill81 wrote: Mon May 10, 2021 4:28 pm
WillRetire wrote: Mon May 10, 2021 4:12 pm Age in Bonds is still appropriate for anyone who plans to live off of their investments during retirement. Things are not different now, life expectancies have not increased much (and have actually declined), more risk is not warranted.
The life expectancy of 70 year olds has increased by approximately 1 year every decade since the 1950s. That's not earth shattering, but it's not nothing.

Bond yields are very much different now than they were 30 years ago. 10 year Treasuries were yielding 8.12% on May 6th, 1991. Today, they are yielding 1.60%.

Therefore, if retirees want to get anything remotely close to the same return as they would have gotten through much of the last 40 years, they have virtually no other choice than to increase their stock allocation.

'Age in bonds' made more sense when bonds were yielding 8% than it does today when they aren't even yielding 2%.
What were the rolling returns for 10 year treasuries then, and how about now? What were the taxes then and now? Inflation? Also, how much did the people of the past save and expect to live off of versus today? In essence, are we in general expecting too much out of the retirement given a saving rate as to require a riskier portfolio? I am not saying any here are doing this; it is just a thought.
10 year Treasuries had a real return of about -1.6% from 1941-1981, so negative real yields aren't new. But the bond bull market that lasted through most of the last 40 years has lulled many investors into thinking that bonds' returns will continue to be robustly good, despite the very clear math and the bond market itself clearly revealing that to be an illusion. Just look at the yields of TIPS these days.

The percentage of taxes that Americans actually pay, not just marginal tax rates, has actually been remarkably consistent for decades. While marginal tax rates did reach 92% briefly in the 1950s, reportedly no one actually paid those rates because of all the deductions, legal loopholes, 'gray' areas, etc. For instance, you could deduct credit card interest until 1986.

Retirees of the past were much more reliant on pensions than retirees can be today. Pension in the private sector are almost completely gone, though they are still fairly common in the public sector.

The bottom line is that the developed world is awash in cash that is not being spent but, rather, largely hoarded, which is why inflation has been very modest even though the money supply has more than doubled in the last decade. More cash pursuing the same investments puts huge downward pressure on forward returns.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

tibbitts wrote: Mon May 10, 2021 5:22 pm
willthrill81 wrote: Mon May 10, 2021 4:28 pm Therefore, if retirees want to get anything remotely close to the same return as they would have gotten through much of the last 40 years, they have virtually no other choice than to increase their stock allocation.

'Age in bonds' made more sense when bonds were yielding 8% than it does today when they aren't even yielding 2%.
I think it's important that we qualify that by saying:

if retirees want the possibility to get anything remotely close to the same return

Sometimes we tend to assume that a higher equity allocation will necessarily result in a higher return.
Good point, and I stand corrected.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by secondopinion »

willthrill81 wrote: Mon May 10, 2021 5:23 pm
secondopinion wrote: Mon May 10, 2021 5:17 pm
willthrill81 wrote: Mon May 10, 2021 4:28 pm
WillRetire wrote: Mon May 10, 2021 4:12 pm Age in Bonds is still appropriate for anyone who plans to live off of their investments during retirement. Things are not different now, life expectancies have not increased much (and have actually declined), more risk is not warranted.
The life expectancy of 70 year olds has increased by approximately 1 year every decade since the 1950s. That's not earth shattering, but it's not nothing.

Bond yields are very much different now than they were 30 years ago. 10 year Treasuries were yielding 8.12% on May 6th, 1991. Today, they are yielding 1.60%.

Therefore, if retirees want to get anything remotely close to the same return as they would have gotten through much of the last 40 years, they have virtually no other choice than to increase their stock allocation.

'Age in bonds' made more sense when bonds were yielding 8% than it does today when they aren't even yielding 2%.
What were the rolling returns for 10 year treasuries then, and how about now? What were the taxes then and now? Inflation? Also, how much did the people of the past save and expect to live off of versus today? In essence, are we in general expecting too much out of the retirement given a saving rate as to require a riskier portfolio? I am not saying any here are doing this; it is just a thought.
10 year Treasuries had a real return of about -1.6% from 1941-1981, so negative real yields aren't new. But the bond bull market that lasted through most of the last 40 years has lulled many investors into thinking that bonds' returns will continue to be robustly good, despite the very clear math and the bond market itself clearly revealing that to be an illusion. Just look at the yields of TIPS these days.

The percentage of taxes that Americans actually pay, not just marginal tax rates, has actually been remarkably consistent for decades. While marginal tax rates did reach 92% briefly in the 1950s, reportedly no one actually paid those rates because of all the deductions, legal loopholes, 'gray' areas, etc. For instance, you could deduct credit card interest until 1986.

Retirees of the past were much more reliant on pensions than retirees can be today. Pension in the private sector are almost completely gone, though they are still fairly common in the public sector.

The bottom line is that the developed world is awash in cash that is not being spent but, rather, largely hoarded, which is why inflation has been very modest even though the money supply has more than doubled in the last decade. More cash pursuing the same investments puts huge downward pressure on forward returns.
I do not doubt the bond bull market is play tricks on performance; but that is beside the point. Any savvy investor knows that past performance does not imply future returns, but I doubt stupidity is the reason bonds are the way they are currently. Again, what were the rolling returns? Yield is different than yield + rolling returns. This is a key aspect to bonds and their pricing, so it cannot be ignored.

Assuming constant taxes, then I see they are not really a factor here.

Pensions would result in more conservative allocation recommendations. This may seem counterintuitive to some, but those with pensions were probably living on less income; and if they had a retirement account, it would not need to be risky to support retirement.

Regarding the dollar, hoarding is not the only way inflation stays low despite the increasing money supply. Some countries actually peg their currency to the dollar, so those countries demand the dollar. Some countries buy US bonds to strengthen their currency; it adds more demand. People want to export goods into the US, so more can be bought for a dollar. Even favorable investment environments strengthens the dollar. As long as the dollar is both backed by a sufficiently growing GDP and/or demand in the world of currencies, inflation will stay low despite the increasing money supply.

I am not counting on bonds being impressive; they have not been and will probably never will be. But really, I do not things have changed that much as to avoid bonds; we just need to assess individual needs instead of following advise blindly. I think most people are doing it wrong.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by SnowBog »

I've never subscribed to the "age in bonds" view.

Initially because I was financially ignorant and didn't know what a bond was, so I just picked the best rated funds in my 401k (regardless of what they were). :oops:

Around 2018 when I found BH, and became more financially literate, I learned about concepts such as Financial Independence. To me the idea of bonds related to FI makes a lot of sense. (But I suppose for many age might be a proxy for FI...)

With high savings and unexpectedly high returns the past few years, we are nearly FI. We'll hit FI on savings alone, even if markets return 0%. As such, we are 60/40. (I'll be 45 this year for context, planning on retiring within next 10 years.)

Wish I could give credit to who said this, but this fits my thoughts exactly:
Stocks will make you rich. Bonds will keep you rich.
Again, after FI we don't need significant returns. I'm even OK if bonds lose value due to inflation in the short term. But an untimely stock market crash around our planned retirement date could be very painful if we didn't have bonds. (If we wildly surpass our target and/or as we get closer to pensions/SS kicking in at 70, we'll likely increase our AA as we'll be less dependent on our portfolio.)

Sure, we might end up with less money to leave to our heirs with our 60/40 AA. But the goal is retirement is to meet "our" needs, which includes protecting "when" we want to be able to retire.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by vineviz »

secondopinion wrote: Mon May 10, 2021 5:55 pm I do not doubt the bond bull market is play tricks on performance; but that is beside the point. Any savvy investor knows that past performance does not imply future returns, but I doubt stupidity is the reason bonds are the way they are currently.
You possibly overestimate the degree to which people actually internalize the fact that "past performance does not imply future returns". The past has much more salience for most people that it should.

secondopinion wrote: Mon May 10, 2021 5:55 pm Again, what were the rolling returns? Yield is different than yield + rolling returns. This is a key aspect to bonds and their pricing, so it cannot be ignored.
It can be ignored for the purposes of this discussion, because although the level of real yields is at all-time lows the slope of the yield curve is near its average level. Expected roll yield is neither higher nor lower than it has historically been, and in any case it's only a factor when bonds are being rolled.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by abuss368 »

vineviz wrote: Mon May 10, 2021 6:45 pm
You possibly overestimate the degree to which people actually internalize the fact that "past performance does not imply future returns". The past has much more salience for most people that it should.
Hi Vince -

So what is essentially your starting point for a bond allocation considering you have noted that Jack Bogle, David Swensen, and William Bernstein are incorrect?

I am curious and perhaps you could educate us regarding your strategy.

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Re: What Ever Happened to "Your Age In Bonds"?

Post by vineviz »

abuss368 wrote: Mon May 10, 2021 7:59 pm So what is essentially your starting point for a bond allocation considering you have noted that Jack Bogle, David Swensen, and William Bernstein are incorrect?
Investors who are moderately comfortable using a spreadsheet program can generally estimate their own target asset allocation using a few simple parameters, but a "rule of thumb" that is better than "age in bonds" would look something like this.

Bonds = 2 * (age - 40)
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Tattarrattat »

Am a year or two from retirement and have been following age in bonds for a while and am very happy to do it. When I no longer have an income stream, and a nasty bear market comes along, I don't want to sit and watch a 50% drawdown with decades of savings suddenly disappearing, and no more human capital to earn it back. A 20% drawdown I can handle. This dismissal of bonds and advocacy of high equity holdings is typical of what we hear in a bull market, along with all the other signs of froth we've been seeing, bitcoin, dogecoin, CAPE 37, etc. The flip side of the doom and gloom posts we saw in March 2020. Our shoeshine moment is nigh.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by abuss368 »

vineviz wrote: Mon May 10, 2021 8:38 pm
abuss368 wrote: Mon May 10, 2021 7:59 pm So what is essentially your starting point for a bond allocation considering you have noted that Jack Bogle, David Swensen, and William Bernstein are incorrect?
Investors who are moderately comfortable using a spreadsheet program can generally estimate their own target asset allocation using a few simple parameters, but a "rule of thumb" that is better than "age in bonds" would look something like this.

Bonds = 2 * (age - 40)
Hi Vince -

Did you arrive at that by estuary backing into a 40% allocation for a 60 year old?

60 less 40 = 20 * 2 = 40

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Re: What Ever Happened to "Your Age In Bonds"?

Post by abuss368 »

vineviz wrote: Mon May 10, 2021 8:38 pm
abuss368 wrote: Mon May 10, 2021 7:59 pm So what is essentially your starting point for a bond allocation considering you have noted that Jack Bogle, David Swensen, and William Bernstein are incorrect?
Investors who are moderately comfortable using a spreadsheet program can generally estimate their own target asset allocation using a few simple parameters, but a "rule of thumb" that is better than "age in bonds" would look something like this.

Bonds = 2 * (age - 40)
Vince -

One still needs to consider the money they can not afford to lose. Those funds should be in bonds and cash.

Tony
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Orthodoc1. »

I suspect there may be a day when TINA may catch many off guard.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by willthrill81 »

abuss368 wrote: Mon May 10, 2021 9:37 pm
vineviz wrote: Mon May 10, 2021 8:38 pm
abuss368 wrote: Mon May 10, 2021 7:59 pm So what is essentially your starting point for a bond allocation considering you have noted that Jack Bogle, David Swensen, and William Bernstein are incorrect?
Investors who are moderately comfortable using a spreadsheet program can generally estimate their own target asset allocation using a few simple parameters, but a "rule of thumb" that is better than "age in bonds" would look something like this.

Bonds = 2 * (age - 40)
Vince -

One still needs to consider the money they can not afford to lose. Those funds should be in bonds and cash.

Tony
I've heard that saying often, but putting into practice can be more challenging that some suggest and can easily put limitations on how much rebalancing one does. For instance, let's say that one's essential spending needs that aren't covered by other income sources is $20k annually. If an investor is preparing for a 30 year retirement, then does that mean that they need to have $600k in something like TIPS or I bonds (assuming 0% real yield for simplicity's sake) and can only invest funds above that point in stocks? Should 100% of funds over the $600k mark be put into stocks? If rebalancing into stocks would mean that the retiree's fixed income would fall below $600k, then the retiree shouldn't do it?

This can be done, but it requires a good bit of thought and consideration. A withdrawal policy statement is definitely needed for those considering this approach. It's actually got some similarities to McClung's Prime Harvesting approach.
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Re: What Ever Happened to "Your Age In Bonds"?

Post by Peter Foley »

Svensk Anga wrote:
The Bengen and Trinity studies that give us “safe” withdrawal rates show that likelihood of success falls off if equity allocation is too low, especially for longer retirements. Early retirements and improvements in life expectancy should logically lead to higher equity allocation. Age in bonds is a holdover from the era when life expectancy was about to normal retirement age. The 1970’s inflation may have lead to some rethinking of just how safe a high bond allocation really is, although TIPS can now alleviate that.
This is part of my reasoning as well. The second part is that for many retirees age in bonds becomes too conservative. They are not going to spend all their money and therefore the "age in bonds" timeframe is not relative to current holdings. Many are investing, in part, for their heirs.
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