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Now that I'm controlling my retirement accounts, I'm trying to get a handle as much as possible on proper asset allocation.
Jack Bogle, founder and CEO of Vanguard, says that proper asset allocation should be about your age in bonds and mostly the rest in domestic and international stocks.
And not that I'm one to argue with Jack Bogle and the Bogleheads, but I had to question the idea of such a high percentage of my portfolio in bonds. While nothing is guaranteed, stocks have historically outperformed bonds over the long run, so shouldn't I want to maximize my retirement fund?
I asked this question over at the Vanguard Diehards forum, and received many answers — and many strong opinions.
I'm 23 years old investing only in non-taxable accounts (401k, Roth IRA) and am comfortable knowing that the market will go up and down, but over the long haul will go up.
Asset allocation says that I should have about 20% of my long-term investments in bonds given my age. But if I can't start taking out the money until I'm close to 60 — meaning I'm in it for the long haul — why shouldn't I have a smaller percentage in bonds to maximize my earnings?
The arguments I've read about for allocating stocks vs. bonds in such a way says that it helps calm your volatility, which I'm not afraid of, and because it preserves buying power should you need the money. But it seems like it would only cause my maximum earnings to suffer.
As my investments are only index funds, what's wrong with — at least for the next so many years — keeping bonds out of my accounts?
While some of the posters said that 100% equities made sense, others said that, over time, the difference between 100% equities and "Bogle" asset allocation was minimal.
Taylor Larimore, author of The Bogleheads' Guide to Investing, chimed in with this advice:
Hi Junger:
I am a competitive sailor and former sailing instructor. When I encounter a beginning sailor who wants to be a winner, I always advise them to copy the tactics of experienced champions.I think it is the same in investing. The best advice is to follow the the tactics of experienced and successful investors.
Benjamin Graham, Warren Buffet's mentor, wrote:
Quote:
"The investor may vary his holding of common stocks between the 25% minimum and the 75% maximum."John Bogle suggests, as a starting point, that an investor should hold a percentage of bonds equal to one's age.
Consider these figures from "Mutual Finance for Dummies":
Starting with a $10,000 stock portfolio on January 1, 1928, by December 1937 the portfolio was worth $8,298. (At one point, the Dow declined -89%.) Meanwhile, The same 10-year investment in bonds was worth $21,744 (a +217% gain).
Do you honestly think that if you had invested $10,000 in stocks and had been losing money for 10 long years, and meanwhile watching bonds trounce your portfolio, and not knowing what what was ahead, that you would have the fortitude to hold your 100% stock portfolio? And what about sleepless nights? Is it worth it?
p>There is no law that says stocks will always beat bonds. However, there is one rule of successful investing — "Diversify."
I believe every portfolio should hold some bonds–if for no other reason than to learn about them–which will prove invaluable as you get older.
What do you think? What's wrong with a 100% stock investment?
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