Asset Allocation 6

I briefly touched on asset allocation in my last post about 529s. So I felt it was a good segue into this post:

Asset Allocation is an all-encompassing term for where and why you put your money in certain places for retirement. At its most basic, the two most general categories are Stocks and Bonds. For simplicity’s sake, consider Stocks as “More Aggressive” and Bonds as “More Conservative” in a general sense. What this really means is that stocks are more volatile than bonds. This means that in general, stocks will have higher highs and lower lows compared to bonds.

I alluded to this idea in prior posts, but the old adage is to keep ” roughly your age in bonds”. This was popularized from the sage John Bogle. This is a very crude starting point, and he even says that himself. However, the point he is trying to make is that your desire to be “aggressive” or “conservative” should change with age.

For example:

At age 30, you should be putting money away and maxing your retirement accounts with the assumption that you will retire around 60 or 65 or so. (I realize some will want to retire before then, but that will require a completely different style of retirement plan than my Simple Doctor Plan.) So, at age 30, you are putting away money that you won’t (and shouldn’t) need. There are significant penalties from withdrawing money from a retirement account early, such that you almost never want to do it.

For this reason, you can be more aggressive and have more of your retirement in stocks. If you follow the “age in bonds” adage, then 70% in stocks and 30% in bonds is a good starting point (70/30). Of course, you can tailor this to your own risk tolerance profile. If you are more aggressive, you can go 80/20 or if you more conservative you can go 60/40, and anywhere in between.

At age 60, however, when you are winding down toward your retirement, you don’t want to have 80% of your retirement in stocks… and then have the stock market crash JUST as you attend your retirement party. That is the exact recipe for disaster that I saw happen to many of my attending physicians. They wanted to retire in 2008, but couldn’t. They had to deal with losing a significant amount of their retirement nest egg.

It was so bad that I even knew of attendings who had ALREADY retired that had to come back to work part time. Even worse, some of them panicked and moved their money into bonds because they were told it was “safer”. Those who did that successfully relegated themselves to their new nest egg (which was about half of what it was pre-2008). Some physicians tried to “wait it out” and keep their 80% stocks until the stock market recovered.

This may have been ok for those who were trying to retire at 60… but for those trying to retire at 65 and then having to slog along until 70 or so when the stock market hoping the stock market would recover seems…. unpleasant. Instead, at 60, if you go by the adage “your age in bonds”, you would have (and should have) had 60% of your retirement in bonds. At that point, even if the stock market DID crash, you could still retire without much concern, slowly withdrawing from your bonds to give your stocks time to recover.

*Ok… but why?

The you at 30 and the you at 60 have different priorities. The you at 30 wants to place his/her faith in mostly the stock market to let that compound interest work for you. So you will have the majority of your retirement in stocks and try to earn that 7% a year. However, the you at 60 doesn’t care about compound interest anymore. You already had 30 years to have the compound interest do its thing for you. Your major concern is keeping your nest egg healthy enough to give you a comfortable retirement. Therefore most of it will be (and should be) in bonds.

The key is to be aware of this difference before you start your retirement accounts. Some people do it the wrong way and are super conservative early on, only to fall short of their retirement goals later in their career. Then they desperately try to “catch up” by switching into a more aggressive allocation. These people might get lucky and have the stock market do well just after they allocate more money into stocks. However, it is more likely that it simply puts them at significant risk late in their career.

More risk is something you do not want. Index funds will almost always beat actively managed funds over the long term. Whenever you try to make short-term gains by moving stuff around, you are trying to time the market (even with index funds). No one can time the market. If someone could, everyone would invest in their fund forever and there would only be one fund. Certain actively managed funds and hedge funds may beat index funds here and there, but to do it consistently year-after-year for 30 years is damn near impossible.

*Ok ok ok… so… Age in bonds then? Got it.

Like I said, that’s a good starting point. But you need to be aware of your own risk tolerance level. The whole point is to have a plan so you can set it and forget it.

If you are super conservative and it scares you to have anything more than 60% in stocks, then just keep it 60/40 until you are 45 or 50 then change it to 50/50 and so on. Like I said, it is just a starting point. Do whatever will make you stick to your own plan and not worry about things.

This style of investing is not something you keep on your iPhone and watch the numbers go up and down everyday. It’s boring. And that’s good. Stay the course.

You don’t (and shouldn’t) care what the stock market is doing because where it is today doesn’t matter for you long-term… and long-term is what matters.

*Ok… Age in bonds. Boring. Got it. So where do I put my money?

Here is where it gets a little difficult. Like I said, even if I say 80/20 or 70/30 and you now know what I mean, there are subsections to stocks and subsections to bonds. This is complicated by the fact that not all 401k/403b/457s allow you the same picks of funds. So even if you find the asset allocation you like, it may not have the funds you want. You will need to find one that approximates what you want. With all that said, I am a simple man and therefore I am a fan of the simplest portfolio possible, but I will review a lot of good portfolios in a future Finance Fridays post.


“Age in bonds” is an adage to remember… but just as a starting point.

The you at 30 and the you at 60 have different priorities.

If you plan correctly, it won’t matter to you what the stock market is doing.

No one can time the market.

Be boring. Stay the course. Watch the balls go by, collect your $26.


Agree? Disagree? Questions, Comments and Suggestions are welcome.

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About Sensei

A young attending physician trying to navigate the mine field that is life after medical school…

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6 thoughts on “Asset Allocation

  • Fred

    Does the age in bonds rule still apply even if you just started a retirement fund at 35 years old? Should one start more aggressively at first like 80/20?

    • Sensei Post author

      The “age in bonds” isn’t really a rule, it’s just a starting point. You can think of it as “reasonable”.

      Some like to use age minus 10 in bonds or age minus 5 in bonds, etc. There is also the opposite idea which is 100-age or 110-age in stocks.

      There was an interesting survey with 200 respondents on Bogleheads. It shows a wide range of what Bogleheads do with their allocation.

      I may discuss this more in a future post, but in the end, whether you’re 80/20 or 70/30 at 35 doesn’t make all that much of a difference. The single most important thing, is that regardless of age, that you are maximizing your retirement options as much as possible, as early as possible.

      Full Disclosure:

      I’m 35 and I currently run a 80/20 split for both my wife and I. However, I consider myself only mildly aggressive risk-tolerance wise. I will probably keep this split until I turn 40 and then maybe rebalance to 70/30. I may dedicate a future post to further discussion as well as my current plan for future allocations (and why).