This article is an excerpt from the Shortform book guide to "The Little Book of Common Sense Investing" by John C. Bogle. Shortform has the world's best summaries and analyses of books you should be reading.
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What percentage of your portfolio should be comprised of bonds? What are some things you should consider when deciding on how much to invest in bonds relative to stocks?
There’s no universal, ideal stocks-to-bonds ratio in a portfolio. When it comes to asset allocation, the rule of thumb is to base it on your financial circ*mstances and your risk tolerance.
Here’s how to decide how much to invest in bonds relative to equity, according to Jack Bogle.
The Ratio of Equity to Bonds
According to Jack Bogle, the author of The Little Book of Common Sense Investing, the ideal stocks-to-bonds ratio depends on your financial position and your personal degree of risk aversion.
To start, Bogle cites Benjamin Graham’s advice in The Intelligent Investor that your portfolio should be split 50-50 between stocks and bonds. Although Bogle considers this a good starting point, he argues that it’s too rigid: Certain investors should incur more risk, investing more in stocks, while other investors should incur less risk, investing more in bonds.
(Shortform note: To further diversify your portfolio, some experts recommend alternative investments beyond just stocks and bonds. For example, investing in real estate can provide additional income and is generally less volatile than the stock market. Moreover, you can consider investing in gold, which is fairly insulated from the stock market’s ebbs and flows. Such investments can provide further protection against dips in the stock and bond markets.)
Bogle argues that your financial position affects your ability to take risks. For example, those with financial liabilities looming in the near future—like purchasing a home, or paying to raise a child—should be less risky with their investments. After all, if they’ve only invested in stocks, then they might not be able to cover these liabilities if the market crashes. By contrast, investors with fewer liabilities can afford a riskier allocation of stocks to bonds.
Beyond financial position, Bogle argues that your personal preferences for risk aversion should affect your asset allocation. For example, if the ebbs and flows of the market cause you extreme stress about potentially losing money, then your portfolio should contain fewer stocks and more bonds. On the other hand, investors comfortable with greater risk to earn higher returns should have a higher ratio of stocks to bonds in their portfolios.
(Shortform note: One reason why many of us struggle to cope with the market’s fluctuations is that we suffer from loss aversion—the notion that the pain of losing is psychologically stronger than the joy of winning. For example, the pain most investors experience when their portfolio dips by 2% is stronger than the happiness they experience when their portfolio rises by 2%. However, because loss aversion doesn’t maximize expected utility, some have argued that it’s irrational and should be suppressed.)
More generally, Bogle advises that your ratio of stocks to bonds should be as high as your financial position and risk aversion allows. For example, he counsels an 80-20 split of stocks to bonds for young investors with low risk aversion who want to grow their wealth. Conversely, for retirees whose portfolios fund their retirement, Bogle counsels a 25-75 split. Because retirees are more concerned with short-term stability than long-term growth, they benefit from the stability of bonds rather than stocks.
(Shortform note: Because stocks provide greater long-term returns than bonds, it’s tempting to think that young investors should invest exclusively in stocks. However, other experts caution that this practice fails to consider investor psychology: Because investors are often inclined to sell when stocks are down, investing only in stocks can yield unwise decisions when markets drop. Conversely, owning bonds provides psychological comfort that minimizes the risk of selling stocks when they drop.)
What Is the Ideal Stocks-to-Bonds Ratio?
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FAQs
If you wish moderate growth, keep 60% of your portfolio in stocks and 40% in cash and bonds. Finally, adopt a conservative approach, and if you want to preserve your capital rather than earn higher returns, then invest no more than 50% in stocks.
What is the ideal stock bond ratio? ›
Once you're retired, you may prefer a more conservative allocation of 50% in stocks and 50% in bonds. Again, adjust this ratio based on your risk tolerance. Hold any money you'll need within the next five years in cash or investment-grade bonds with varying maturity dates.
Is 80% stocks and 20% bonds good? ›
Generally speaking, younger investors are willing to take on more risk. While there's no standard rule of thumb, a mix of 80% stocks and 20% bonds is aggressive, but not overly so.
Is 90% stocks and 10% bonds good? ›
A 90/10 investment allocation is an aggressive strategy most suitable for investors with a high risk tolerance and a long time horizon. While Warren Buffett has an enviable track record as an investor, it probably isn't for everyone. Berkshire Hathaway Inc.
What is a 70 30 stock bond ratio? ›
The US Stocks/Bonds 70/30 Portfolio contains 70% Stocks, 30% Bonds. Over the last 30 years (last update: April 2024), the portfolio has returned 8.72% annualized, with a maximum drawdown of -37.47%. 7.918% has been a safe withdrawal rate.
What is the ideal stock bond ratio by age? ›
According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities. The rest would comprise high-grade bonds, government debt, and other relatively safe assets.
Is 60% stocks and 40% bonds good? ›
The 60/40 portfolio is the standard-bearer for investors with a moderate risk tolerance. It gives you about half the volatility of the stock market but tends to provide good returns over the long term. For the past 20 years, it's been a great portfolio for investors to stick with.
What is the 80 20 rule in stocks and bonds? ›
One method for using the 80-20 rule in portfolio construction is to place 80% of the portfolio assets in a less volatile investment, such as Treasury bonds or index funds while placing the other 20% in growth stocks.
Which is better, 70/30 or 80/20? ›
The main difference between the 70/30 and 80/20 asset allocation models is how much risk you're taking. With an 80/20 allocation, you're devoting a larger share of your money to stocks, which can mean greater exposure to stock market volatility.
What is the 70 30 strategy? ›
The old-school approach for many investors and financial advisors has traditionally been to structure an investment portfolio on a 70/30 basis (or similar figures). This strategy allocates 70% of an investor's funds to equities or equity-focused investments, and 30% to bonds, or fixed-income investments.
According to Buffett, you should invest 90% of your retirement funds in stock-based index funds. According to Buffett, the remaining 10% should be invested in short-term government bonds. The government uses these to finance its projects.
What is the 70/20/10 rule for trading? ›
Part one of the rule said that in the next 12 months, the return you got on a stock was 70% determined by what the U.S. stock market did, 20% was determined by how the industry group did and 10% was based on how undervalued and successful the individual company was.
Does Buffett invest in bonds? ›
Berkshire Hathaway's portfolio includes a significant amount of short-term bonds, despite its leader's infamous public position. Speaking to CNBC's Becky Quick on Aug. 3, 2023, Buffett admitted: “Berkshire bought $10 billion in U.S. Treasurys last Monday. We bought $10 billion in Treasurys this Monday.
What should a 60 year old stock bond ratio be? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What is the best stock bond ratio for retirement? ›
- Cash: 10% for years 1 and 2 of retirement.
- Bonds: 40% for years 3-10 of retirement.
- Stocks: 50% for year 11 and beyond.
Which Mix Is Right for You? If you're a younger investor with a long time horizon and are comfortable taking on more risk, the 80/20 portfolio may be a good fit. However, if you're closer to retirement or prefer a more conservative approach, the 60/40 portfolio may be a better option.
What is a good mix of stocks and bonds in retirement? ›
The conservative allocation is composed of 15% large-cap stocks, 5% international stocks, 50% bonds and 30% cash investments. The moderately conservative allocation is 25% large-cap stocks, 5% small-cap stocks, 10% international stocks, 50% bonds and 10% cash investments.
What is the 50 50 investment strategy? ›
As per this formula, investors should invest 50% of their money in the equity market and 50% in the debt market, and balance it from time to time.
