This classic rule about bonds could actually be a riskier move — and financial advisers say you may want to do this instead

Answer: The rule that ‘the percentage of bonds in your portfolio should be the same as your age’ simply means that someone who is, say, age 65 would have roughly 65% of her portfolio in bonds.

This notion was made popular from the 1950s through the 1990s by Vanguard founder John C. Bogle when life expectancies were shorter, people retired with pensions and bonds paid more significant interest rates. But the rule is now dated, pros tell us — and yes, a financial adviser could help walk you through these kinds of rules, what rules might be better now and how to apply them all to your portfolio. You can find one at CFP Board, NAPFA or through this free tool that can match you to fiduciary advisers, from our ad partner SmartAsset.

Have an issue with your financial planner or looking for a new one? Email questions or concerns to [email protected].

“The rule was built for a time when people retired at 65 and didn’t live many years past it,” says Charles Urquhart at Fixed Income Resources, who adds that this rule is out of date — and “lazy.” “Holding 65% or 70% of a retirement portfolio in bonds that early [at 65] could actually be a riskier move because for most people, the real danger isn’t a bad year in the stock market, it’s outliving their savings.”

Indeed, well-diversified stock portfolios have often achieved higher returns than bonds over long time periods, which is something the NYU Stern School of Business has data for starting in 1928. “While past performance does not guarantee future results, a strong case can be made for only wanting to hold the amount of bonds you actually need versus simply following a rule of thumb,” says Jonathan Vance at Vance Financial Planning.

That said, bonds are finally doing their job providing income. “For much of the 2010s, bonds paid little to most investors. Now that interest rates have normalized and bonds are actually paying real income again, the makeup of a portfolio is worth reassessing,” says Urquhart.

Indeed, “instead of interest rates hovering around 2%, they are starting near 4% [for bonds]. The forward-looking return profile for bonds is significantly more attractive than it was five years ago and that must be taken into consideration when building a portfolio for a client,” says Jonathan Maula, chief investment officer at Castle Hill Capital. 

What rules might you follow instead?

Asher Rogovy, chief investment officer at Magnifina, says some updated guidelines, like the Rule of 110 or Rule of 120 (subtract your age from 110 or 120 to determine your stock allocation), boost equity exposure by 10 to 20 percentage points over the age in bonds rule.

“With stock valuations near record levels, and relatively high interest rates, there’s a compelling argument to consider allocating more to bonds, not less,” says Rogovy. Basically, given current market conditions, it may be wise to increase your bond allocation higher than 110 or 120.

To determine bond needs when future market returns are unknown, the bucket approach may be useful. “You might decide to hold five to 10 years’ worth of planned retirement withdrawals in safer bond investments, leaving the remainder to grow in your diversified stock portfolio. Depending on your spending goals, a bucketing strategy might reveal that you need significantly more, or far less in bonds than a simple rule of thumb may suggest,” says Vance.

Jake Falcon at Falcon Wealth Advisors says this rule of one’s age being the same as their bond allocation is one of the worst asset allocation myths out there. “We look to line up our clients’ bond allocations with their cash flow needs. Age is irrelevant to asset allocation.”

While there are numerous rules of thumb regarding investments, Urquhart says the best way to determine your strategy is to consider your tax situation, investment timeline and sources of income. “A more automated approach may work for those with simple financial situations but those with more complicated situations can benefit from the expertise of a fee-only fiduciary such as a CFP,” says Urquhart.

What kind of pro can help you?

You might want to consider working with an adviser like a CFP, as they have to complete significant education requirements, pass exams and perform thousands of hours of work-related experience. It also means working with someone who upholds a fiduciary duty, meaning they’re required to put their clients’ best interests ahead of their own at all times. Note that hourly planners often charge between $200 and $500 per hour while project-based planners range in cost from $1,500 to $8,500. You can find an adviser at CFP Board, NAPFA or through this free tool that can match you to fiduciary advisers, from our ad partner SmartAsset.

Have an issue with your financial planner or looking for a new one? Email questions or concerns to [email protected].

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