I am 30 years old and invest fairly aggressively. I have been advised to keep 10 to 15 percent of my portfolio in bond funds, but that seems to me like a waste. I can’t see that 10 to 15 percent in bond funds will do me much good except to satisfy some formula. Am I missing something?
Your long-term strategic asset allocation decision should not be based solely on your age. You should also consider your financial ability and emotional willingness to withstand volatility.
Some of our clients who are 70 and older are quite comfortable with 70 percent in equities and 30 percent in fixed income. Other clients in their 30s feel that is about as aggressive an allocation as they can handle. Everybody is different, and a big part of a financial advisor’s job is to help clients determine a suitable asset allocation based on their unique circumstances.
You sound like someone who is willing to accept greater risk and volatility in hopes of achieving a higher rate of return, and an all-equity portfolio could be the appropriate choice for you.
The likely reason you have been advised to invest a small part of your portfolio in bonds is that history indicates that such a portfolio has tended to deliver similar returns to an all-equity allocation, with reduced volatility.
Indeed, it is interesting to note that in the 10 years ending March 31, 2010, the composite of our tax-deferred buy-and-hold all-equity portfolios achieved an annualized return of 5.74 percent, while similar portfolios with 80 percent in equity earned 6.1 percent. The 80/20 portfolios experienced less volatility as well: 14.16 percent, vs. 18.2 percent for all-equity portfolios.
Every period is different, of course, and future returns cannot be known or controlled. What we can control are our asset allocations and our saving and spending habits.
An all-equity allocation may be suitable for you. However, I hope this helps you realize why some people have advised you to at least consider maintaining a small exposure to bonds in your portfolio. Ultimately, the choice is yours to make based on the best information you can get plus a realistic evaluation of your circumstances and risk tolerance. Good luck.