Transitioning to Bonds
Transitioning to Bonds
Hi,
I’m 21, I’ve realised that at some point (closer to retirement) there is a need to hold some bonds to maintain the stability and risk-appropriateness of one’s portfolio. Now, I know the age at which this happens varies person to person, dependent on a multitude of factors that are individual to each person. However, what I wanted to know was how does one go about it?
For example, say I have £1,000,000 saved and invested around middle-age. To combat against uncertain market volatility and having a shorter time horizon, do I gradually start to convert my investment in my portfolio to bonds? If so, how much (%) each year? Do I continue to keep adding to my portfolio whilst transitioning to bonds? And do I keep transitioning to bonds until I’m 100% in bonds?
I appreciate any answers in advance
I’m 21, I’ve realised that at some point (closer to retirement) there is a need to hold some bonds to maintain the stability and risk-appropriateness of one’s portfolio. Now, I know the age at which this happens varies person to person, dependent on a multitude of factors that are individual to each person. However, what I wanted to know was how does one go about it?
For example, say I have £1,000,000 saved and invested around middle-age. To combat against uncertain market volatility and having a shorter time horizon, do I gradually start to convert my investment in my portfolio to bonds? If so, how much (%) each year? Do I continue to keep adding to my portfolio whilst transitioning to bonds? And do I keep transitioning to bonds until I’m 100% in bonds?
I appreciate any answers in advance
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Re: Transitioning to Bonds
It's entirely up to you how to construct some kind of a glidepath.Aaron14 wrote: ↑Thu Jun 01, 2023 4:01 pm Hi,
I’m 21, I’ve realised that at some point (closer to retirement) there is a need to hold some bonds to maintain the stability and risk-appropriateness of one’s portfolio. Now, I know the age at which this happens varies person to person, dependent on a multitude of factors that are individual to each person. However, what I wanted to know was how does one go about it?
For example, say I have £1,000,000 saved and invested around middle-age. To combat against uncertain market volatility and having a shorter time horizon, do I gradually start to convert my investment in my portfolio to bonds? If so, how much (%) each year? Do I continue to keep adding to my portfolio whilst transitioning to bonds? And do I keep transitioning to bonds until I’m 100% in bonds?
I appreciate any answers in advance
"Age in bonds" is one approach but this is likely too conservative, as you'd be 79/21 at age 21 already. You could look at something more aggressive, like "140 - age in bonds" which puts you at 100% equities until age 40.
Re: Transitioning to Bonds
How much you have allocated to bonds/cash at your retirement date should be a factor of your risk tolerance and your required withdrawal rate (expenses). Ignore any advice that suggests a bond allocation based on age or based on a percentage of your total portfolio value.
When and how to start allocating to bonds should be a factor of your risk tolerance and your projected income leading up to retirement. If your income is high & growing, you may be fine just building up that position from new money in the 5-10 years leading up to retirement.
When and how to start allocating to bonds should be a factor of your risk tolerance and your projected income leading up to retirement. If your income is high & growing, you may be fine just building up that position from new money in the 5-10 years leading up to retirement.
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Re: Transitioning to Bonds
Something like "140 - age" would essentially accomplish "you may be fine just building up that position from new money in the 5-10 years leading up to retirement," just a different way of expressing it.
I'm not advertising a glidepath; I'm just saying if they were to do it then making it age-based isn't all that crazy of an idea.
Re: Transitioning to Bonds
You can add bonds to your portfolio whenever you want to, via contributions or by exchanging stock investments for bond investments, as gradually or quickly as you want to, and to whatever extent you wish.
The thing about making a big switch all at once is you might end up doing it in a year like 2020 or 2021, and then get a year like 2022 and go "but where's my stability?!"
The thing about making a big switch all at once is you might end up doing it in a year like 2020 or 2021, and then get a year like 2022 and go "but where's my stability?!"
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Re: Transitioning to Bonds
Just make sure you recognize that bonds aren’t “safe”. Over history they have been shown to be less volatile than the equity market- but the number of posts the last year or so expressing shock that the bond portion of their portfolio lost value (double digit) shows that some believe that equities are risky and bonds are “safe”.Aaron14 wrote: ↑Thu Jun 01, 2023 4:01 pm Hi,
I’m 21, I’ve realised that at some point (closer to retirement) there is a need to hold some bonds to maintain the stability and risk-appropriateness of one’s portfolio. Now, I know the age at which this happens varies person to person, dependent on a multitude of factors that are individual to each person. However, what I wanted to know was how does one go about it?
For example, say I have £1,000,000 saved and invested around middle-age. To combat against uncertain market volatility and having a shorter time horizon, do I gradually start to convert my investment in my portfolio to bonds? If so, how much (%) each year? Do I continue to keep adding to my portfolio whilst transitioning to bonds? And do I keep transitioning to bonds until I’m 100% in bonds?
I appreciate any answers in advance
Not suggesting that bonds aren’t appropriate- I have hust read several posts where people seem to believe that the bond portfolio always maintains its nominal value.
EDIT--- This applies mainly to bond FUNDS as has been pointed out below in the thread.
Last edited by coachd50 on Sat Jun 03, 2023 3:42 pm, edited 1 time in total.
Re: Transitioning to Bonds
I've done an "age in fixed/bonds" AA, updating every 5 years. Having that as the plan made the path easy. Even as a younger guy it was good for me not to be entirely in equities. I've never had any temptation to sell during the many corrections I've been through.
Nobody knows nothing.
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Re: Transitioning to Bonds
Hello
While some advocate that you are too young for bonds, adding some bonds to your portfolio will give you the discipline of rebalancing between stocks and bonds to keep it synchronized with your asset allocation ratio.
I would say you go as follows:
- If very conservative, Bond allocation = age , so at 20 years old, 80% stocks and 20% bonds
- If you a bit less conservative, Bond allocation = age - 10, so at 20 years old, 90% stocks and 10% bonds
I say you change that every 5 years so avoid complexity, so age 20-24 same bonds allocation (either 10% or 20%) while age 25-29 (either 15% or 25%).
At retirement, depending at what age you are retiring and what is your total portfolio amount and what is the amount needed monthly to withdraw from portfolio, something between 40% bonds and 60% bonds might be suitable, but all depends on one’s situation.
Good Luck. The most influencer of your final number is your consistency in monthly contributions/investments and staying the course.
While some advocate that you are too young for bonds, adding some bonds to your portfolio will give you the discipline of rebalancing between stocks and bonds to keep it synchronized with your asset allocation ratio.
I would say you go as follows:
- If very conservative, Bond allocation = age , so at 20 years old, 80% stocks and 20% bonds
- If you a bit less conservative, Bond allocation = age - 10, so at 20 years old, 90% stocks and 10% bonds
I say you change that every 5 years so avoid complexity, so age 20-24 same bonds allocation (either 10% or 20%) while age 25-29 (either 15% or 25%).
At retirement, depending at what age you are retiring and what is your total portfolio amount and what is the amount needed monthly to withdraw from portfolio, something between 40% bonds and 60% bonds might be suitable, but all depends on one’s situation.
Good Luck. The most influencer of your final number is your consistency in monthly contributions/investments and staying the course.
60% VWRD 40% AGGG until further notice
Re: Transitioning to Bonds
All very personal but an actual example might help you
I started saving money via SIPPs and ISAs from 35 onwards
Had commitments-3 kids to educate
100% equities all the time
Kids gone -retirement as next commitment accumulated cash using age in bonds as my guide
As I got to my required total for retiring at 57 I was 30/70 equities/bonds
Stayed like that ever since -now retired 20+ years-currently 33/62/5 equities/bonds/cash
I am a conservative investor with a reasonable pot and a low withdrawal rate
Really 70/30 all the way to 30/70 portfolios produce the same results over a 30/40/50 year period so not a problem to fret about too much
The great John Bogle wrestled with this problem and in his retirement finally settled on a 50/50 split
It doesn’t seem to matter that much
Concentrate on those items under your direct control ie save as much as you can,keep costs as low as possible and live frugally
xxd091
I started saving money via SIPPs and ISAs from 35 onwards
Had commitments-3 kids to educate
100% equities all the time
Kids gone -retirement as next commitment accumulated cash using age in bonds as my guide
As I got to my required total for retiring at 57 I was 30/70 equities/bonds
Stayed like that ever since -now retired 20+ years-currently 33/62/5 equities/bonds/cash
I am a conservative investor with a reasonable pot and a low withdrawal rate
Really 70/30 all the way to 30/70 portfolios produce the same results over a 30/40/50 year period so not a problem to fret about too much
The great John Bogle wrestled with this problem and in his retirement finally settled on a 50/50 split
It doesn’t seem to matter that much
Concentrate on those items under your direct control ie save as much as you can,keep costs as low as possible and live frugally
xxd091
Re: Transitioning to Bonds
https://www.optimizedportfolio.com/asset-allocation/
I think the above link is a pretty good article. There's a discussion of and a graph of 3 common 'equations' for determining bond allocation (as you age).
There is an equation (age - 40) x 2 in bonds which is interesting. Clearly until you are over 40 it suggests zero bonds.
at 60 it's suggesting a 60/40. This seems sensible to me. But I don't like the equation after 60 so personally after 60 I think I will switch to approximately follow age - 20 in bonds instead (because it increases bonds % at a slower rate.)
When reaching 50/50 I think I will probably leave it at that until I pop off.
One could alternatively use Vanguards glide path as a general guide...
https://monevator.com/vanguard-target-retirement-funds/
I think the above link is a pretty good article. There's a discussion of and a graph of 3 common 'equations' for determining bond allocation (as you age).
There is an equation (age - 40) x 2 in bonds which is interesting. Clearly until you are over 40 it suggests zero bonds.
at 60 it's suggesting a 60/40. This seems sensible to me. But I don't like the equation after 60 so personally after 60 I think I will switch to approximately follow age - 20 in bonds instead (because it increases bonds % at a slower rate.)
When reaching 50/50 I think I will probably leave it at that until I pop off.
One could alternatively use Vanguards glide path as a general guide...
https://monevator.com/vanguard-target-retirement-funds/
Re: Transitioning to Bonds
Know thyself.
Many of us were 100% equities until our late 40s or 50s (some even longer). If you would give it consideration, it is important that you are honest with yourself that you have the tolerance to see a 50% drop in your portfolio and will not panic. The 50% drop happened to a lot of us during the Great Financial Crisis. I lost half my portfolio on paper, but thankfully did not lose my job and kept plowing ahead.
My experience has been that bonds are much more complex and challenging to understand vs stocks. Regardless of what you decide, start learning now.
You are already far ahead of me when I was 21 (now 50) just by finding this great forum. You will do great.
Best wishes.
Many of us were 100% equities until our late 40s or 50s (some even longer). If you would give it consideration, it is important that you are honest with yourself that you have the tolerance to see a 50% drop in your portfolio and will not panic. The 50% drop happened to a lot of us during the Great Financial Crisis. I lost half my portfolio on paper, but thankfully did not lose my job and kept plowing ahead.
My experience has been that bonds are much more complex and challenging to understand vs stocks. Regardless of what you decide, start learning now.
You are already far ahead of me when I was 21 (now 50) just by finding this great forum. You will do great.
Best wishes.
Re: Transitioning to Bonds
The three functions of bonds in decreasing order of importance are
To reduce volatility in your portfolio
To preserve the wealth in your portfolio
To make a little money via interest on capital involved
So you can see bonds are not really required till you have lift off ie a reasonably sized portfolio
You then have to balance reducing the growth of your portfolio with its increased “safety “ (reduced volatility and wealth preservation)
xxd091
To reduce volatility in your portfolio
To preserve the wealth in your portfolio
To make a little money via interest on capital involved
So you can see bonds are not really required till you have lift off ie a reasonably sized portfolio
You then have to balance reducing the growth of your portfolio with its increased “safety “ (reduced volatility and wealth preservation)
xxd091
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Re: Transitioning to Bonds
I would never go below 50% in stocks.Aaron14 wrote: ↑Thu Jun 01, 2023 4:01 pm Hi,
I’m 21, I’ve realised that at some point (closer to retirement) there is a need to hold some bonds to maintain the stability and risk-appropriateness of one’s portfolio. Now, I know the age at which this happens varies person to person, dependent on a multitude of factors that are individual to each person. However, what I wanted to know was how does one go about it?
For example, say I have £1,000,000 saved and invested around middle-age. To combat against uncertain market volatility and having a shorter time horizon, do I gradually start to convert my investment in my portfolio to bonds? If so, how much (%) each year? Do I continue to keep adding to my portfolio whilst transitioning to bonds? And do I keep transitioning to bonds until I’m 100% in bonds?
I appreciate any answers in advance
Age-20 in bonds till you hit 70. Then hold there forever.
Studies have shown that any time equities fall below 50% stocks then your retirement success rate goes down.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
Re: Transitioning to Bonds
Not disagreeing that this could be a good move for some but it does "kick the can" of how to eventually suddenly add bonds. Timing? Accelerated DCA? Just "pulling the trigger" and then staring at the ceiling in bed for months as a 2 year stock Bull then kicks in? An "age" percentage plan starting early avoids this eventual problem.
Nobody knows nothing.
Re: Transitioning to Bonds
Bonds are very safe. Barring default you get a guaranteed return.coachd50 wrote: ↑Thu Jun 01, 2023 7:29 pm Just make sure you recognize that bonds aren’t “safe”. Over history they have been shown to be less volatile than the equity market- but the number of posts the last year or so expressing shock that the bond portion of their portfolio lost value (double digit) shows that some believe that equities are risky and bonds are “safe”.
Not suggesting that bonds aren’t appropriate- I have hust read several posts where people seem to believe that the bond portfolio always maintains its nominal value.
Bond funds behave differently, and one needs to consider average duration and such.
Re: Transitioning to Bonds
Yes, thank you for the clarification. it is an important distinction and my post did not reflect that. I should have stated "bond funds" and not bonds.vxdx wrote: ↑Sat Jun 03, 2023 3:38 pmBonds are very safe. Barring default you get a guaranteed return.coachd50 wrote: ↑Thu Jun 01, 2023 7:29 pm Just make sure you recognize that bonds aren’t “safe”. Over history they have been shown to be less volatile than the equity market- but the number of posts the last year or so expressing shock that the bond portion of their portfolio lost value (double digit) shows that some believe that equities are risky and bonds are “safe”.
Not suggesting that bonds aren’t appropriate- I have hust read several posts where people seem to believe that the bond portfolio always maintains its nominal value.
Bond funds behave differently, and one needs to consider average duration and such.
Re: Transitioning to Bonds
Aye...a very good question and highly preferable to have a plan. Age percentage is one of them. There are others and one simply needs to decide. In my particular case, I was overhauling my entire portfolio (had discovered this forum and saw the light) and added bonds at that time in full (knowing extremely little in hindsight).windaar wrote: ↑Sat Jun 03, 2023 3:37 pmNot disagreeing that this could be a good move for some but it does "kick the can" of how to eventually suddenly add bonds. Timing? Accelerated DCA? Just "pulling the trigger" and then staring at the ceiling in bed for months as a 2 year stock Bull then kicks in? An "age" percentage plan starting early avoids this eventual problem.
As earlier noted, I think the most important thing is to learn about bonds well before they are needed, so you can more confidently decide and act when the time comes.
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Re: Transitioning to Bonds
I can hear everybody screaming at me, even before I write this but I've never owned bonds. I'm 61 and retired and I'm still 100% stocks although I do have some cash in case the worst happens. I can't ever see me owning bonds to be honest.