So why did I pick a 21% allocation to bonds in the balanced portfolio? There’s an old investing rule of thumb that says you should allocate the equivalent of your age, in percentage terms, to bonds. If you’re 21, this would mean that you allocate 21% of your portfolio to bonds; if you’re 50, 50%; and so on. Like all rules of thumb it is far from perfect, but it’s a good starting point for thinking about how much risk an investor should have in their portfolio at different ages.
If you look at where yields are right now, the idea of buying a 30-year bond with a coupon of four percent may not seem that attractive. If you’re a Millennial, and you’re looking to earn more on your investments in the near term than that four percent yield, you may forgo bonds altogether. However, if that’s the path you take, you may be setting yourself up for disappointment. Think not just about what you could earn, but also about what you could lose.
In my next post I will discuss how bonds aren’t just for retired people or Millennials, showing how they can also be put to work for multiple life stages.
* Data for S&P500 and Barclays Agg from 1/31/1994-7/31/2014. Throughout this post, stocks are represented by the S&P 500 index and bonds are represented by the Barclays U.S. Aggregate Bond Index.
Matthew Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.