What You Need to Know
- It's a good conversation starter but not an approach that works for most clients, especially wealthy ones, the CFA says.
- Even wealthy investors are often unsure how to allocate assets and afraid to spend.
- When a client asks about a rule of thumb, Ferri suggests, help them unpack what their financial goals really are.
Taking to the social media platform X earlier this week, Rick Ferri offered up a leading question for the contemplation of his fellow financial professionals: “Is your-age-in-bonds a useful portfolio rule of thumb?”
The rule in question states that investors should direct a percentage of their portfolio toward bond investments that approximates their age, making regular adjustments toward safer assets over time to account for their shortening time horizon ahead of retirement or some other big financial goal. Thus, the rule would suggest that a 30-year-old should hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.
Ferri, the founder and CEO of Ferri Investment Solutionsand a chartered financial analyst, stipulated in the extended post that he was “just thinking out loud” and welcomed other points of view. His own answer, though, is a pretty firm “no” — at least not for the vast majority of the wealthy clients that typical financial professionals serve.
“I think such rules are designed for the ‘average’ investor or retiree,” Ferri wrote. “But who is average? According to a 2023 survey by the Transamerica Center for Retirement Studies, median baby boomer households reported about $289,000 in retirement savings. I probably would recommend a high allocation to safe assets if a 65-year-old retiree with this amount in savings asked.”
But what if a 65-year-old retiree had $2.89 million in savings? Or even $28.9 million?
“Those are far greater than the $289,000 median,” Ferri pointed out. “Is the age-in-bonds rule useful for these people? My view is not as much for the first person — and not at all for the second.”
As Ferri and other commenters emphasized, different circ*mstances in the real world require different mindsets on asset allocation, such that clients with 10 times the median savings level require a hard look at the balance between spending in retirement and growing legacy assets. Those with 100 times the median, obviously, can focus even more on legacy, usually resulting in more growth assets.
In a follow-up conversation with ThinkAdvisor, Ferri said these dynamics are further complicated by clients’ behavioral tendencies, especially what he sees as a surprisingly common reluctance to spend confidently and fully enjoy one’s accumulated wealth after a lifetime of working and living below one’s means. This is why the job of the advisor is more than just dollars and cents, Ferri emphasized, and it is beholden on planners to keep such factors in mind while working with individual clients.
A Common Client Question
Ferri, who prides himself on his hourly approach to financial advice, said the motivation for his post came from the daily conversations he has with clients.
“Given my model, I speak with probably five or six individuals a day, and over time I get to talk to a lot of people about their financial situation,” Ferri explained. “One of my clients brought up the age-in-bonds rule just a few days ago, in fact. I hear about it a lot.”
In this particular case, Ferri noted, the client was a man in his early 40s who has been very successful at accumulating wealth, with a net worth around $5 million.
“So this is a guy who is doing great, financially speaking, but he had read on the internet about this rule and naturally assumed he needed to follow the ‘normal pattern’ of moving away from stocks,” Ferri said. “People who do their own retirement planning research online see this messaging all the time. It’s how target-date funds are designed, for example, and it’s really baked-in throughout in the industry. As you get closer to retirement, you should get more conservative.”
Ferri said that may be true for individuals at the median who face a genuine possibility of running short of funds in retirement and who don’t have big legacy-giving goals, but the spectrum of people who are trying to make sense of this rule of thumb goes way beyond that.
FAQs
Funny enough, Ferri said, the your-age-in-bonds approach can be sensible for managing the portion of wealth that clients plan to spend on themselves in their lifetime. This is often a far more modest amount than would be possible or even prudent.
Are bonds a good investment right now? ›
High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.
What is the age rule for investing? ›
Determining the allocation of assets is a pivotal choice for investors, and a widely used initial guideline by many advisors is the “100 minus age" rule. This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments.
What is the ideal investment allocation by age? ›
The Rule of 100 determines the percentage of stocks you should hold by subtracting your age from 100. If you are 60, for example, the Rule of 100 advises holding 40% of your portfolio in stocks. The Rule of 110 evolved from the Rule of 100 because people are generally living longer.
Do you believe bonds are a good investment for the average citizen? ›
Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio. Doing so can curb the risks you'd assume by putting all of your money in a single type of investment.
Is now a good time to buy bonds in 2024? ›
As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.
Why are bond funds losing money? ›
The share prices of exchange-traded funds (ETFs) that invest in bonds typically go lower when interest rates rise. When market interest rates rise, the fixed rate paid by existing bonds becomes less attractive, sinking these bonds' prices.
Should a 70 year old be in the stock market? ›
If you're 70, you'd look at sticking to 40% stocks. Of course, there's wiggle room with this formula, and it's really just a way to get started. And for many older investors, a 50-50 split of stocks and bonds is what's preferred throughout retirement, and that's fine, too.
What is the 120-age rule? ›
The Rule of 120 (previously known as the Rule of 100) says that subtracting your age from 120 will give you an idea of the weight percentage for equities in your portfolio.
What is the 50 30 20 rule? ›
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Given the numerous reasons a company's business can decline, stocks are typically riskier than bonds. However, with that higher risk can come higher returns. The market's average annual return is about 10%, not accounting for inflation.
How much money do I need to invest to make $1000 a month? ›
To make $1,000 per month on T-bills, you would need to invest $240,000 at a 5% rate. This is a solid return — and probably one of the safest investments available today. But do you have $240,000 sitting around? That's the hard part.
What is the number 1 rule investing? ›
Welcome to the Rule #1 Strategy, where we delve into the essence of successful investing through the principle of Rule #1: Avoid losing money. This foundational concept is akin to the Hippocratic oath in medicine, focusing on the importance of 'first do no harm.
Are bonds good investment right now? ›
Longer-term bond yields remain far more compelling today than they have been in years.” Merz says for conservative investors, “It's possible to generate reasonably attractive returns in a mix of bonds without extending their risk budget.”
Can you lose money on bonds if held to maturity? ›
After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
Why are bonds a good way to invest? ›
Historically, bonds are less volatile than stocks.
Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.
Should you buy bonds when interest rates are rising? ›
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
Is it smart to put money in bonds? ›
Historically, bonds are less volatile than stocks.
Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.
What's better now, stocks or bonds? ›
With risk comes reward.
Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.
Is there a best time to buy bonds? ›
Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market. If your goal for investing in bonds is to reduce portfolio risk and volatility, it's best not to wait.
