Bogleheads: How Much Bonds Should You Have in Your Portfolio?
The Bogleheads philosophy, named after the legendary investor John Bogle, has become one of the most popular approaches to personal finance and investing. At its core, it’s simple: minimize costs, hold a diversified portfolio of index funds, and stick to your strategy long-term. But where things get more complex is when we start talking about bonds. How much should you really have in bonds? It’s a question that Bogleheads endlessly debate, and for good reason: your bond allocation might be the single most important decision you make in your portfolio.
The 3 Most Important Factors to Determine Your Bond Allocation
Your Risk Tolerance Bonds are there to cushion the blow when stocks take a tumble. If you’re the type of investor who panics when you see losses, bonds can act like a security blanket. But the more bonds you hold, the less you’ll earn over the long term. There’s a tradeoff between growth and security, and it’s one only you can make based on how you feel about risk.
Your Time Horizon If you’re young and have a long time before retirement, many experts suggest holding more in stocks because, over time, stocks generally offer higher returns than bonds. However, if you’re nearing retirement, you might want more stability, making bonds a bigger part of your portfolio.
Your Income Needs Bonds can provide a reliable stream of income. If you need that income to cover living expenses, holding a larger percentage of bonds might make sense. But if you’re reinvesting everything, it might not.
These are just a few of the key factors. But let’s dig deeper into the Bogleheads’ specific strategies and guidelines.
Rule of Thumb: The "Age in Bonds" Approach
One of the most popular Bogleheads rules is the “age in bonds” guideline. Simply put, it suggests that you hold a percentage of bonds equal to your age. For example, if you’re 30 years old, you’d have 30% of your portfolio in bonds and the rest in stocks. By the time you’re 60, you’d have 60% in bonds.
This approach makes sense because as you get older, your ability to recover from market downturns decreases. When you’re 25, a market crash might not hurt you because you have decades to make up the losses. But at 65, you don’t have that luxury. The "age in bonds" rule helps protect your nest egg as you near retirement.
However, not everyone agrees with this rule. Some argue that it’s too conservative, especially in an era of low bond yields. Bonds are safer than stocks, but they don’t offer much in terms of return. Let’s say you’re 40 and follow the age in bonds rule, holding 40% in bonds. With today’s interest rates, those bonds might only earn 2-3% a year, which could seriously limit your portfolio’s growth.
Why "Age Minus 10" or "Age Minus 20" Might Make Sense
An alternative to the "age in bonds" rule is to subtract 10 or 20 years from your age. So if you’re 30, you’d hold 10-20% in bonds instead of 30%. This approach recognizes that, in today’s low-yield environment, you might need to take on more risk (i.e., more stocks) to achieve the growth necessary for a secure retirement.
If you have a high tolerance for risk and a long investment horizon, "age minus 20" might be a better fit. On the other hand, if you’re more risk-averse, sticking with the "age in bonds" guideline could give you peace of mind.
The Case for 100% Stocks (No Bonds)
Some Bogleheads and financial experts argue for an all-stock portfolio, particularly for younger investors. The idea is that over time, stocks almost always outperform bonds. By holding a diversified portfolio of stocks, you can maximize your returns, especially when you’re decades away from retirement. But this approach is not for the faint of heart.
Take a look at the historical data:
| Year | Stock Market Return | Bond Market Return |
|---|---|---|
| 2008 | -37.0% | +5.24% |
| 2009 | +26.5% | -3.57% |
| 2010 | +14.8% | +6.54% |
As you can see, stocks can be volatile, but over time, they’ve delivered far greater returns than bonds. Still, this approach requires you to weather the storm during down years, like in 2008. If you can’t stomach the thought of losing 30-40% in a single year, going 100% stocks might be too risky.
The Case for 100% Bonds (Very Few Should Do This)
On the opposite end of the spectrum, some investors—usually those with a lot of wealth or very low risk tolerance—opt for an all-bond portfolio. Bonds offer stability, and even during a financial crisis, they don’t tend to lose much value. But here’s the problem: over the long run, bonds don’t offer enough return to outpace inflation.
An all-bond portfolio might be safe, but it’s unlikely to grow enough to support you in retirement unless you already have a substantial amount of money saved.
The Bogleheads "Three-Fund Portfolio" and How Bonds Fit In
The Bogleheads are famous for their three-fund portfolio approach, which includes:
- A U.S. Total Stock Market Index Fund
- An International Stock Index Fund
- A U.S. Total Bond Market Index Fund
In this model, bonds serve as the ballast. You decide your stock-to-bond ratio based on your risk tolerance, age, and goals, but the core idea is simplicity and diversification. The beauty of the three-fund portfolio is that it’s easy to manage and rebalance.
Let’s say you decide to go with a 70% stock and 30% bond allocation. If the stock market has a great year, your portfolio might become 80% stocks and 20% bonds. At that point, you’d sell some stocks and buy bonds to get back to your original 70/30 allocation. This automatic rebalancing helps you sell high and buy low, which can boost your returns over time.
The Role of International Bonds in Your Portfolio
Should you hold international bonds? Many Bogleheads stick to U.S. bonds, but others argue that international bonds add another layer of diversification. International bonds can help protect your portfolio against a weakening U.S. dollar or economic trouble in the U.S. alone. However, they tend to have more volatility than U.S. bonds and don’t always provide better returns.
Inflation-Protected Bonds (TIPS) vs. Regular Bonds
Another debate among Bogleheads is whether to hold Treasury Inflation-Protected Securities (TIPS) instead of regular bonds. TIPS are designed to keep pace with inflation, which makes them a great option if you’re worried about rising prices eating into your savings. But they also tend to have lower yields than regular bonds.
So, should you hold TIPS? Many experts recommend having at least a portion of your bond allocation in TIPS, especially if inflation is a concern.
How to Adjust Your Bond Allocation Over Time
Your bond allocation isn’t static. As you age, you’ll likely want to shift more of your portfolio into bonds to reduce risk. But this doesn’t have to be a hard-and-fast rule. Some Bogleheads prefer to keep a high percentage of stocks well into retirement, arguing that they still have a long time horizon and want their money to continue growing.
Others take a more conservative approach, increasing their bond allocation as they near retirement. The key is to adjust based on your risk tolerance and needs, not just your age.
In Summary: There’s No One-Size-Fits-All Approach to Bonds
While the “age in bonds” rule is a good starting point, your ideal bond allocation depends on your personal situation. Think about your risk tolerance, time horizon, and income needs, and adjust accordingly. You might even want to consider a financial advisor to help guide your decisions. And remember, the goal isn’t just to maximize returns—it’s to build a portfolio that lets you sleep soundly at night.
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