Percentage of Stocks vs Bonds in Roth

[the207life]

Less than 2 years of investment experience so looking to get peoples insight into what a good percentage of your holdings should be in Stocks vs Bonds in a Roth IRA.

I know the rule of thumb is to subtract your age from 100 and invest that percentage of your assets in stocks with the rest in bonds or cash which is what I have been doing since I opened my Roth. The reason I am starting to question my decision is I'm currently reading the "Intelligent Investor" by Benjamin Graham and in the commentary Jason Zweig asks the following question:

Why should your age determine how much risk you can take? An 80-year-old with $3 million, an ample pension, and a gaggle of grandchildren would be foolish to move most of her money into bonds. She already has plenty of income, and her grandchildren (who will eventually inherit her stocks) have decades of investing ahead of them. On the other hand, a 25-year-old who is saving for his wedding and a house down payment would be out of his mind to put all his money in stocks. If the stock market takes an Acapulco high dive, he will have no bond income to cover his downside-or his backside.

What's more, no matter how young you are, you might suddenly need to yank your money out of stocks not 40 years from now, but 40 minutes from now. Without a whiff of warning, you could lose your job, get divorced, become disabled, or suffer who knows what other kind of surprise. The unexpected can strike anyone, at any age. Everyone must keep some assets in the riskless haven of cash.

So while I have been following the fundamental rule of thumb with subtracting from 100, this claim seems to hold a lot of weight and really got me thinking. Now I'm not sure what side of the fence to jump... so out of curiosity what are you guys doing or what do you suggest for a 25 year old and why?

Sorry if this has been covered indepth before.

 

[Mac1958]

Less than 2 years of investment experience so looking to get peoples insight into what a good percentage of your holdings should be in Stocks vs Bonds in a Roth IRA.

I know the rule of thumb is to subtract your age from 100 and invest that percentage of your assets in stocks with the rest in bonds or cash which is what I have been doing since I opened my Roth. The reason I am starting to question my decision is I'm currently reading the "Intelligent Investor" by Benjamin Graham and in the commentary Jason Zweig asks the following question:

Why should your age determine how much risk you can take? An 80-year-old with $3 million, an ample pension, and a gaggle of grandchildren would be foolish to move most of her money into bonds. She already has plenty of income, and her grandchildren (who will eventually inherit her stocks) have decades of investing ahead of them. On the other hand, a 25-year-old who is saving for his wedding and a house down payment would be out of his mind to put all his money in stocks. If the stock market takes an Acapulco high dive, he will have no bond income to cover his downside-or his backside.

What's more, no matter how young you are, you might suddenly need to yank your money out of stocks not 40 years from now, but 40 minutes from now. Without a whiff of warning, you could lose your job, get divorced, become disabled, or suffer who knows what other kind of surprise. The unexpected can strike anyone, at any age. Everyone must keep some assets in the riskless haven of cash.

So while I have been following the fundamental rule of thumb with subtracting from 100, this claim seems to hold a lot of weight and really got me thinking. Now I'm not sure what side of the fence to jump... so out of curiosity what are you guys doing or what do you suggest for a 25 year old and why?

Sorry if this has been covered indepth before.

I'm a financial advisor, let me just toss out a couple of things:

First, "bonds" include a very, very wide range of securities. So the question is not only what percentage of bonds you have, but what kinds of bonds you have.

Second, books and videos and talking heads and internet posts are produced by people trying to attract the widest range of investors possible and simply do not know your specific situation, goals, time frame or risk tolerance. The example of the 80-year old woman with $3 million is a great example, it's not just age, it's the big picture you need to concern yourself with.

My humble advice would be to interview a few financial advisors in your area, ask for referrals, and choose one to help you. Their experience, resources and advice would be well worth +/- 1.0% per year. They'll ask a lot of questions about your situation and should be able to put you in a portfolio that makes good sense for you.

My two cents, worth every penny, no pun intended.

.

 

[the207life]

Mac, thank you for the response. I'm doing some research on the best bond types to hold in a retirement fund and starting (taken lightly) to get an idea. I guess I just let the age - 100 concept hold to much weight without actually thinking about other options.

I am starting to look at financial advisors although it's a little harder in my case as I am stationed overseas.

 

[Mac1958]

Mac, thank you for the response. I'm doing some research on the best bond types to hold in a retirement fund and starting (taken lightly) to get an idea. I guess I just let the age - 100 concept hold to much weight without actually thinking about other options.

I am starting to look at financial advisors although it's a little harder in my case as I am stationed overseas.

Crap, that does make it tougher. USAA works with military members, most of their people are former military. I'm just guessing, but maybe they can help with people in your situation. You might want to contact them.

.

 

[the207life]

Yeah, I am looking through TDameritrade to see what they offer. I will also check out USAA, didnt even think of that. Thanks for the help, I really appreciate it.

 

[SteadyMercury]

USAA will let you do free consultation with a financial advisor, not sure if there is some qualifying threshold like years of membership or whatever.

Vanguard also does this for a certain asset tier, I think 500k.

Also = I agree that age formula is definitely not a one-size-fits all thing, like many other common personal finance formulas there are far too many variables for it to be useful. Another one I hate is that you'll need 80% of your pre-retirement income after you retire, come on man some people might be saving a lot more or have their house paid off, some might not have kids in college anymore, some might be downsizing their home, etc. far too many variables.

 

[william the wie]

Me, I'm a huge advocate of simplicity so, I would advise googling the following:

Modigliano portfolio,

Bullet proof Portfolio,

Lazy man portfolio

Once you have a portfolio you understand and can follow do so then ignore the market except for monthly options writing when possible and quarterly checks to see if you need to rebalance.

 

[SteadyMercury]

That's the way I roll too. Simple three way stocks/bonds/intlstocks rebalanced twice a year, all low cost index funds I think expenses average 0.09% across all of them.

Shit just realized rebalance time is a few days away, will mostly be scraping the big winner US stock into my loser for 2014 the intl fund.

 

[Mac1958]

Me, I'm a huge advocate of simplicity so, I would advise googling the following:

Modigliano portfolio,

Bullet proof Portfolio,

Lazy man portfolio

Once you have a portfolio you understand and can follow do so then ignore the market except for monthly options writing when possible and quarterly checks to see if you need to rebalance.

Many people read too many magazines and websites and over-do the complexity of their investments.

Really not necessary if you find a good basic strategy and stick to it (which is often the toughest part).

For that, the Lazy Man portfolio is perfectly fine for many.

.

 

[william the wie]

Me, I'm a huge advocate of simplicity so, I would advise googling the following:

Modigliano portfolio,

Bullet proof Portfolio,

Lazy man portfolio

Once you have a portfolio you understand and can follow do so then ignore the market except for monthly options writing when possible and quarterly checks to see if you need to rebalance.

Many people read too many magazines and websites and over-do the complexity of their investments.

Really not necessary if you find a good basic strategy and stick to it (which is often the toughest part).

For that, the Lazy Man portfolio is perfectly fine for many.

.

I agree, I simply write covered options as safe busy work. It gives me something to do, a little extra money and reminds me to rebalance.

 

[Snouter]

Less than 2 years of investment experience so looking to get peoples insight into what a good percentage of your holdings should be in Stocks vs Bonds in a Roth IRA.

I find it interesting that the idea of "holding stock" still exists. Like marriage, it is an obsolete concept. Trade stocks. Doing so in an IRA means you don't even have to keep track of the trades.

 

[Toro]

It depends on what you need the money for.

First, you must understand your risk tolerances, i.e. knowing how you will react when you lose money. If you don't mind your portfolio falling a lot, you have a higher risk tolerance. In the long-run, the higher your risk tolerance, the more money you will make. That means incurring paper losses, but it also means earning more over time. The less risk tolerant you are, the less you will have well into the future.

If you need the money over the next couple of years, you shouldn't stick it in the stock market. OTOH, because you are young, you should put a great deal into stocks for your retirement.

Right now, stocks are expensive, so I'd have less than average. But if you don't need the money for 40 years until retirement, you should have a fair allocation to stocks.

And get an IRA.

In the current market, if I were 25 years old and I didn't know much about investing, I'd have my portfolio look something like this.

30%-50% US stocks
10%-30% international stocks, mostly China right now
0%-10% gold
0%-30% cash, used to buy stocks as the market falls

Don't be afraid of a falling market. People have a funny reaction to falling stocks because they don't like to lose money. That's fair if you can't afford to lose money, but if you are young, you should take advantage of falling stock prices to buy more in your retirement account since you won't need it for decades.

I'd use ETFs. They're cheap and easily traded.

I also wouldn't look at my portfolio that often.

Also, Mac's advice about seeing a financial adviser is a good one.

 

[william the wie]

Sorry Toro I'm with Steady Mercury on this one. Wide asset bands tend to be a great way to screw yourself. And I simply hate forgoing hedging against my own episodes of stupidity/arrogance.

 

[HenryBHough]

Be careful of uninsured bonds, even in big "institutions". They have a mysterious way of making you to convert to shares at a dime on the dollar or losing all.

 

[fmdog44]

Less than 2 years of investment experience so looking to get peoples insight into what a good percentage of your holdings should be in Stocks vs Bonds in a Roth IRA.

I know the rule of thumb is to subtract your age from 100 and invest that percentage of your assets in stocks with the rest in bonds or cash which is what I have been doing since I opened my Roth. The reason I am starting to question my decision is I'm currently reading the "Intelligent Investor" by Benjamin Graham and in the commentary Jason Zweig asks the following question:

Why should your age determine how much risk you can take? An 80-year-old with $3 million, an ample pension, and a gaggle of grandchildren would be foolish to move most of her money into bonds. She already has plenty of income, and her grandchildren (who will eventually inherit her stocks) have decades of investing ahead of them. On the other hand, a 25-year-old who is saving for his wedding and a house down payment would be out of his mind to put all his money in stocks. If the stock market takes an Acapulco high dive, he will have no bond income to cover his downside-or his backside.

What's more, no matter how young you are, you might suddenly need to yank your money out of stocks not 40 years from now, but 40 minutes from now. Without a whiff of warning, you could lose your job, get divorced, become disabled, or suffer who knows what other kind of surprise. The unexpected can strike anyone, at any age. Everyone must keep some assets in the riskless haven of cash.

So while I have been following the fundamental rule of thumb with subtracting from 100, this claim seems to hold a lot of weight and really got me thinking. Now I'm not sure what side of the fence to jump... so out of curiosity what are you guys doing or what do you suggest for a 25 year old and why?

Sorry if this has been covered indepth before.

Read, read, read, being young is a super times to get going but don't invest in what you don't know. 60/40 is the typical with 60% in stocks, But keep in mind when you decide you need to monitor it so if the market soars or dumps you must make adjustments to maintain the balance you want. The younger you are the more risk you can afford. Keep it simple and most important do not get greedy, let time be on your side to let it build slowly but nevertheless "build". Also, it is important to diversify, divide your choices in to say three different categories in both bonds and stocks.

 

[the207life]

Thanks for all the input guys.. It honestly means a lot.

Just calculated and this is what I currently have..

31% BND
50% VTI
18% VXUS

I started reading the intelligent investor by Benjamin Graham and in it he makes a strong argument for a greater portion in bonds at a younger age which goes against everything I am reading online. Any thought on this for anyone who has read his argument? To sum it up he argues that those with less invested funds should be taking less risk then those who are nearer retirement with more funds as they can afford more risks.

Also, I am depositing 400 a month for a total of 5000 annually. I know the max is 5500 but I upped the deposits into my savings account as I will be exiting the military in a year and need funding for expenses while I start school.

For this 400 monthly I will be using the DCA strategy but is there an advantage to depositing biweekly vs one at the end of the month?

Thanks again for all the input!

 

[Mac1958]

I started reading the intelligent investor by Benjamin Graham and in it he makes a strong argument for a greater portion in bonds at a younger age which goes against everything I am reading online. Any thought on this for anyone who has read his argument? To sum it up he argues that those with less invested funds should be taking less risk then those who are nearer retirement with more funds as they can afford more risks.

Up until they're about 50 (every situation is different), I put clients in the lowest percentage of bonds or bond funds that they can handle. There are indeed times that I have to talk them off the ledge, but they end up trusting and seeing what I'm doing.

I learned a long time ago that there is one thing that investors hate more than losing money (they know that's going to happen now and then): What they hate worse is not fully participating in upswings. If "the market" goes up 30% and you only go up 21% because of your bond holdings, you'll be frustrated.

If I'm under 40, I'm dollar cost averaging into 100% equity funds.

.

 

[HenryBHough]

Dollar cost averaging is the only "method" that has always proven itself over time. But right to back off from it at an age one figures to be about 15-20 years pre-retirement but only if stocks are in positive territory at the time. If they're down, wait it out a bit longer.

But not too long:

Bears make money
Bulls make money
Pigs get slaughtered

 

[fmdog44]

I started reading the intelligent investor by Benjamin Graham and in it he makes a strong argument for a greater portion in bonds at a younger age which goes against everything I am reading online. Any thought on this for anyone who has read his argument? To sum it up he argues that those with less invested funds should be taking less risk then those who are nearer retirement with more funds as they can afford more risks.

Up until they're about 50 (every situation is different), I put clients in the lowest percentage of bonds or bond funds that they can handle. There are indeed times that I have to talk them off the ledge, but they end up trusting and seeing what I'm doing.

I learned a long time ago that there is one thing that investors hate more than losing money (they know that's going to happen now and then): What they hate worse is not fully participating in upswings. If "the market" goes up 30% and you only go up 21% because of your bond holdings, you'll be frustrated.

If I'm under 40, I'm dollar cost averaging into 100% equity funds.

.

I have to disagree with the idea it is worse to miss out on gains vs. losing money. The reason is missing out on upswings you still have your money, what do you have after dips...........nothing. I own diversified bond funds, equity funds including a Dow index fund, GLD (gold), REITs, annuities, an IRA and a savings account. You must protect your self and if you were 100% in equities describe 2008-2009 for the readers!!!

 

[Mac1958]

I started reading the intelligent investor by Benjamin Graham and in it he makes a strong argument for a greater portion in bonds at a younger age which goes against everything I am reading online. Any thought on this for anyone who has read his argument? To sum it up he argues that those with less invested funds should be taking less risk then those who are nearer retirement with more funds as they can afford more risks.

Up until they're about 50 (every situation is different), I put clients in the lowest percentage of bonds or bond funds that they can handle. There are indeed times that I have to talk them off the ledge, but they end up trusting and seeing what I'm doing.

I learned a long time ago that there is one thing that investors hate more than losing money (they know that's going to happen now and then): What they hate worse is not fully participating in upswings. If "the market" goes up 30% and you only go up 21% because of your bond holdings, you'll be frustrated.

If I'm under 40, I'm dollar cost averaging into 100% equity funds.

.

I have to disagree with the idea it is worse to miss out on gains vs. losing money. The reason is missing out on upswings you still have your money, what do you have after dips...........nothing. I own diversified bond funds, equity funds including a Dow index fund, GLD (gold), REITs, annuities, an IRA and a savings account. You must protect your self and if you were 100% in equities describe 2008-2009 for the readers!!!

Well first, I'm just talking about the psychology of it, my observation of the way clients react. In earlier days I had more than a few clients in broadly diversified portfolios quiz me as to why they didn't go up 20% when the market did. I had to (once again) explain to them the way diversification works and why so many do it that way.

2008/2009 was lousy, but if a 100% equities investor was calm, smart and dollar cost averaged, they'd be in great shape today. They would have enjoyed all of the upswing plus they'd have more fund shares from the dollar cost averaging.

To me, risk isn't always about how you're invested; it's also about whether an investor will be smart enough not to panic when things drop. If an investor can handle the downs, it will pay off in the long run. If the volatility is too much for them, great, diversify. They just can't complain when they don't match the market's up years.

.