This New Investing Rule Of Thumb Helps Retirees Strike A Balance Between Risk And Reward

Freshly installed Presidents often set a new tone for the country, influencing attitudes and actions far beyond the federal government and Washington, DC. President Trump’s quick and decisive action on several fronts, including his move to rollback cumbersome and outdated regulation, seems to be having that effect.

Maybe that’s why I’ve decided it’s time to up-end a famous long-standing rule of thumb in personal finance. It’s called Own Your Age in Bonds (OYAIB).

Own Your Age is Bonds says that the percentage of bonds in your portfolio should equal your age. If you are 30, just 30% of your money should be in bonds. If you are 70, then, you guessed it, 70% of your assets should be bonds. The idea behind OYAIB is that as we get closer to retirement, we want to trade the growth potential and volatility of stocks for the relative safety and predictability of quality bonds.

OYAIB isn’t the worst rule in the world, but it makes less sense today with the dramatic shift we’re seeing in the bond market. Remember that as interest rates fall, bonds go up. That was the trend for 30 years – until mid-2016, when rates started to inch steadily higher from historic lows. So we could be in for 20 or 30 years of the inverse of what we’ve seen. That means the 8% per year bonds have averaged since 1976 would be unlikely to materialize over the next 40 years.


And consider this. We’re living longer. Your retirement could easily last 25 years. Depending on how much you saved over the decades, funding such a long stretch of life might well require you to take at least a bit more risk than earlier generations of retirees. That means owning more stocks.

So, if you are an investor with a “moderate risk tolerance” (or higher) let’s toss OYAIB and replace it with something more timely and effective. I call this new guideline the 15/50 Stock Rule. It’s very simple. If you believe you have more than 15 years left on this planet, your portfolio should consist of at least 50% stocks, and the remaining balance in various bonds and cash. This new rule of thumb tries to help you always strike a balance between risk and reward.

Don’t take my word for it. The 50/50 portfolio idea has been around for decades. It was most prominently championed by Columbia Business School professor Benjamin Graham, who is considered the father of value investing and the person most responsible for shaping the investment philosophy of some guy named Warren Buffett. Vanguard founder John Bogle also believes in the 50/50 strategy. He sees it as the ideal strategy for defensive investors.

The stock allocation can be made up of either dividend-payers (my preference) or growth stocks. You just need to keep an eye on your portfolio and reallocate as necessary to prevent stocks from creeping beyond the 50% mark. As Benjamin Graham explained, “When changes in the market level have raised the common-stock component to, say, 55% the balance would be restored by a sale of one-eleventh of the stock portfolio and the transfer of the proceeds to bonds. Conversely, a fall in the common-stock proportion to 45% would call for the use of one-eleventh of the bond fund to buy additional equities.”

Of course, a 15/50 Stock Rule portfolio requires a bit more risk tolerance than one based on OYAIB, especially if you are in your 70’s. But I think this new rule makes much more sense in the current and near-future investment environment.

So out with the old rule, and in with the new!

Wow. It’s like my own personal First 100 Days.

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