Are you wondering whether to buy bonds to build wealth? Well, wealthier people in America do not follow the conventional asset allocation model of buying bonds, i.e. age equals your bond percentage allocation or a 60/40 equities/fixed income split. Nor do they follow my stock allocation by bond yield either.
How do I know this? Empower has over 1,000,000 users of their free financial dashboard to help manage your money and I'm a consultant who is privy to some of their data to share with all of you. Data geeks, rejoice!
Out of one million plus Empower financial dashboard users, roughly 200,000 of them have linked investable assets of between $100,000 to $2 million. We call this the mass affluent class, or upper middle class if you're so inclined. The mass affluent are generally regular folks with mainly W2 income.
They save and invest in order to provide for their family, pay for expensive tuition bills, take a couple nice vacations a year, and hopefully achieve a comfortable retirement when all is said and done. Interestingly, the mass affluent don't have a large bond allocation at all.
Let's do a quick review of my proposed stocks and bonds asset allocation model before moving on to the big data. Bonds are certainly more attractive post rate hike. However, bonds are a defensive asset for capital preservation, not so much for wealth creation.
FINANCIAL SAMURAI ASSET ALLOCATION MODEL
If you read my article about the proper asset allocation of stocks and bonds by age, I've proposed five different types of asset allocation models. Each model instructs you to buy bonds based on a certain percentage of your overall portfolio.
1) Conventional Asset Allocation Model (Age = percentage allocation in bonds)
2) New Life Asset Allocation Model (A more aggressive blend than conventional)
3) Survival Asset Allocation Model (50/50)
4) Nothing To Lose Asset Allocation Model (100% equities until 65)
5) Financial Samurai Asset Allocation Model (hybrid between Nothing To Lose & New Life)
The Financial Samurai Asset Allocation Model shuns bonds until age 35, and begins with a 20% bond allocation until reaching a 50/50 split by age 75.
The Financial Samurai asset allocation model is based on the following assumptions:
- You have multiple income streams.
- You are a personal finance enthusiast who gets a kick out of reading finance literature and managing your money.
- You are not dependent on your 401k or IRA in retirement, but would like it to be there as a nice bonus.
- You are not dependent on Social Security.
- You are an early retiree or one who is shooting to be an early retiree who won’t be contributing as much to your pre-tax portfolios as before.
- Average genetics and plan to live between the ages of 80-90.
In other words, my model is relatively aggressive. What's interesting is that according to the data analysis of the ~165,000 mass affluent users of Empower's financial dashboard (most of whom are not paying clients, but free dashboard users), their bond allocation is also very minimal, much like the Financial Samurai Asset Allocation Model!
Let's explore the data in a little more detail.
BOND ALLOCATION BY AGE FOR THE MASS AFFLUENT
Study these six charts from Empower's demographics carefully. The easiest way to analyze the charts is to compare the age range with the bond allocation in red. The higher the difference, the higher the investment risk compared to conventional wisdom.
At the end of the asset allocation charts, I'll share with you five key takeaways.
Average bond allocation for 20-34-year-olds is 9%.
Average bond allocation for 35-44-year-olds is 10%.
Average bond allocation for 45-54-year-olds is 12%. As a 47 year old man, the 12% in bonds and 12% in cash seems relatively conservative.
Average bond allocation for 55-64-year-olds is 16%.
Average bond allocation for 65-74-year-olds is 19%.
KEY TAKEAWAYS FROM THE BOND DATA BY AGE
If you want to buy bonds, review the following points.
1) Young people aren't taking the most risk, older people are.
Not even in my most aggressive “Nothing To Lose Asset Allocation Model” or “FS Asset Allocation Model,” where there's lots of alternative income streams, would I ever recommend a 65+ year old to only have 18-19% of their investment portfolio in bonds.
65+ year olds are likely no longer interested in working 40+ hours a week. I certainly don't know any 75-89 year olds who are working steady day jobs. A 20% or less bond + cash allocation for people under 44 seems more digestible, since people under 44 have at least 20 years to make up for any massive losses.
2) The data is showing that the mass affluent are generally bullish about the economy.
That, or they are extremely bearish about the bond market, which has been rising for 30+ years in a row. I get a sense that after five years of a bull market in stocks, investors are overly confident about their investing prowess and have forgotten what financial pain feels like. Investment bloggers with zero financial work experience or formal education have gained tremendous popularity.
Robo-advisors have raised a tremendous amount of new funding because they can do no wrong when stocks keep going up. Don't confuse brains with a bull market. As Warren Buffet said, “After all, you only find out who is swimming naked when the tide goes out.”
3) Even in a downturn, things aren't so bad.
Let's say there is a 50% correction in the stock market for a 75-89 year old who displays the exact same asset allocation profile above with a 62% allocation in stocks. With bonds and cash equaling 32%, his/her entire portfolio will probably only be down by ~30%.
Now let's say that the average net worth for 75-89 year olds is $800,000 based on dashboard data; the 75-89 year old still has $560,000 left over after a 30% decline.
Surely $560,000 is enough to last a 75-89 year old for the rest of his or her life since the median life expectancy is roughly 81-84. The chances of another financial crisis like 2008-2010 in our lifetimes is small.
However, 2022 and 2023 turned out to be the worst years for bonds in history because of a surge in inflation and an aggressive Fed. But this means that buying treasury bonds now is more attractive given yields are much higher.
I don't think we'll regret buying Treasury bonds yielding 4.5%+ for our low-risk and risk-free portion of our net worth asset allocation.
4) Alternative investing is a decent percentage of every asset allocation.
For every age range, alternative investing comprises 5-7% of an investor's total allocation. That's a pretty decent allocation given private wealth managers who manage $5 million+ often have 10% alternative investing allocations recommendations.
I was just at a JP Morgan Chase Private Wealth meeting doing some research. I think the alternative asset allocation is structurally lower than it could be due to access being still quite limited to the majority of Americans.
Personally, I love investing in private funds that have 5-10-year investment periods. It's nice NOT to always know what prices are doing so I can focus on more important things in life.
I've also invested over one million dollars in private real estate investments. Real estate is my favorite asset class to build wealth. I just don't like being a landlord, hence investing in private real estate is a great solution for passive returns.
I'm dollar-cost-averaging into Fundrise, my favorite private real estate platform that invests in Sunbelt real estate. It's nice to diversify away from expensive San Francisco and Honolulu real estate and earn more passive income.
With Fed rate cuts resuming and pent-up demand, I think residential commercial real estate is going to catch up to stocks. The valuation and performance gap between commercial real estate and stocks is too huge to ignore.
5) Maybe the mass affluent are much more diversified than the average person.
The median household has a large majority of their net worth in their primary residence – a scary proposition when the housing market crashed. I don't recommend any household have more than 30% of their net worth in their primary residence.
The Empower data only reflects linked investable assets. Not everybody links all their assets like real estate, coin collection, etc like I do. In other words, the overall net worth pie is likely much bigger with different slices and slice sizes.
My investments in stocks makes up about 23% of my overall net worth, if I don't count my online business. If I count my online business, stocks would make up less than 20% of my net worth. I've got 45% of my net worth in real estate, and 10% of my net worth in risk-free investments like cash and Treasury bonds.
If the market takes a dump, I will still suffer on paper due to my real estate investments, but my cash flow will stay sticky because rents, CD interest income, dividend income, and online income are relatively sticky. It's ironically easier to generate more passive income in a bear market sometimes.
Furthermore, I strongly believe in my ability to hustle and make more money if necessary because I've made money from nothing before. Overconfidence in one's ability to make money may be the key reason why every single mass affluent demographic above is under allocated in bonds.
I'm sure I'm being overconfident right now with a little bit of Dunning-Kruger given my 27+-years of investing experience.
HOW DO I BUY BONDS?
Just like stocks, there are plenty of different types of bonds to buy. I personally just buy individual Treasury bonds and municipal bonds through my online brokerage. I also sometimes buy bond ETFs like MUB, the iShares National AMT-Free Muni Bond in my after tax brokerage account. But bond ETFs have no maturity date, so you have to just ride the ups and downs.
I view bonds, cash, and some commodities as defensive positions in a portfolio.
Below are some other popular bond ETFs.
- iShares iBoxx Investment Grade Corporate Bond symbol “LQD”
- 20+ Year Treasury Bond ETF symbol “TLT” (iShares)
- iShares iBoxx $ Investment Grade Corporate Bond Fund symbol “LQD”
- 7-10 Year Treasury Bond ETF symbol “IEF” (iShares)
- Core U.S. Aggregate Bond ETF symbol “AGG” (iShares)
- iBoxx $ High Yield Corporate Bond Fund symbol “HYG” (iShares)
- PIMCO 25+ Year Zero Coupon U.S. Treasury ETF symbol “ZROZ”
- SPDR Barclays Capital High Yield Bond ETF symbol “JNK”
- Vanguard Short-Term Bond ETF symbol “BSV”
- Vanguard Extended Duration Treasury ETF symbol “EDV”
Here's a tutorial on how to buy treasury bonds and other types of bonds. If you buy Treasury bonds and hold to maturity, they are risk free. If you buy bond funds or bond ETFs, you face principal risk if you need to sell at an inopportune time.
Hence, if you want lower risk, you should buy individual treasury bonds and hold them to maturity. Below shows the various types of individual bonds with various maturities you can buy in 2025 as an example. Notice how the yield curve is upward sloping again.
There's Always A Place For Bonds In Your Portfolio
You won't get rich investing in bonds, but you will protect your capital and beat inflation. With bond yields higher post-pandemic, investing in bonds has become more attractive.
If you're over 45 and have been enjoying a fantastic equity run by being heavily overweight equities, I suggest rebalancing your portfolio to be more in-line with the New Life or Financial Samurai Asset Allocation model. Even if you have a Survival Asset Allocation Model of a 50/50 split, you'll still probably make a high single digit return if the bull market continues.
The Empower data is very telling about mass affluent investor sentiment given the 165,000 samples. As the company grows, there will be further insightful data points to share. The key is making an educated guess as to what all the data means. That's where you make or save a lot of money.
Related posts:
The Case For Buying Bonds: Living For Free And Other Benefits
The Allure Of Zero Coupon Municipal Bonds
Selling Individual Muni Bonds Is Expensive And Cumbersome
Best Bond Alternative: Real Estate
Before you buy bonds, you should consider buying real estate. Real estate is like a bond with its steady rental income. However, real estate also provides shelter and tends to inflate faster than the rate of inflation. With inflation picking up, inflation is one of the best hedges.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms.
I view real estate as a bond plus type of investment, where there is an income component plus greater potential principal upside.
Best Private Real Estate Investing Platforms
Fundrise: A way for all investors to diversify into real estate through private funds with just $10. Fundrise has been around since 2012 and manages over $3 billion for 350,000+ investors.
The real estate platform invests primarily in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher. The spreading out of America is a long-term demographic trend. For most people, investing in a diversified fund is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends.
If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.
I've invested $954,000 in real estate crowdfunding so far, $300,000+ of which is in Fundrise. My goal is to diversify my expensive SF real estate holdings and earn more 100% passive income. I plan to continue dollar-cost investing into private real estate for the next decade.
Both platforms are sponsors of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise funds.
Invest In Private Growth Companies
In addition, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
One of the most interesting funds I'm allocating new capital toward is Fundrise Venture. It invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
About the Author
Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $300,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
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I‘m 36, have $165k in my TSP (FED 401K), a rental property that’s doing well, and zero debt. I will get a pension equal to 50% of my takehome pay at age 50 and max out TSP, Roth IRA, and HSA contributions yearly in addition to another 30% of my net pay going into a taxable brokerage account. I plan on dumping the taxable account to buy another rental once I have the down payment In a year or so. I have zero bonds because I do not foresee ever “needing” to touch the investments. Belt tightening, sure, but never “need.” If I can stomach the ups and downs, is there any reason I would include bonds?
Re:
“Now let’s say that the average net worth for 75-89 year olds is $800,000 based on dashboard data; the 75-89 year old still has $560,000 left over after a 30% decline. Surely $560,000 is enough to last a 75-89 year old for the rest of his or her life since the median life expectancy is roughly 81-84.”
I dunno about the “surely.” That leftover $560,000 would last 5.8 years in Minnesota if one had to move to a nursing home permanently. The average annual cost of such a facility is $96,021.
Oops…I meant to say the nursing home annual bill was a median, not an average. The figure is from a survey report published yesterday by a long-term care insurer, Genworth Financial.
[…] some previous research, I discovered that the mass affluent class are extremely underweight bonds at every single demographic. One theory is that real estate has taken the place of bonds as a fixed […]
You know, bonds and bond funds/ETFs are very different animals in some ways. Individual bonds are an absolute promise to pay a set amount at a set time. If you sell them before then, their value will vary. But if you hold on to them to maturity, they have a set value.
Bond funds values vary daily as interest rates change, even without selling them. I’m not saying one is better or worse, but they are different.
I recently realized that with a pretty fat pension coming into the household, it’s pointlessly constraining to invest in bonds at all. Dividend stocks, value stocks, rental income….
A “fat pension” is like winning the lottery! CONGRATS!
I am not overly bullish on the stock market, but I still allocate a relatively large portion to stocks as I feel that they are more likely to outperform in the long run. My main goal is to provide some diversity to my portfolio so that–hopefully–there will be one portion that won’t get hit as hard if stocks take a nose dive or underperform.
I have about 75% stocks (U.S., developed, and emerging), 15% bonds, and 10% REITs. I separate out REITs because I believe they have some diversification value. I feel relatively confident that these will show a positive real return–even if low single digits–over the next 15 to 40 years.
Other sectors/investments I’ve seen people overweight for diversification purposes are precious metals, energy funds, utilities, commodities, and hedge funds/mock-hedge funds. I haven’t decided to use any of these yet because I am not necessarily convinced of their long-term performance potential.
Although, I am currently evaluating the possible inclusion of Energy Funds and Utilities. If I decide to included these in my portfolio, it would be at around the 5% level for each.
I don’t have any bond holdings save what I have in a balanced fund that is about 15% of my portfolio. At some level I think i should have a bit more (I have only about 5% in my entire portfolio) but I come back to the idea that I don’t mind volatility and that I prefer growth and I just don’t get that with bonds. I can’t stand to see my portfolio not grow and under perform the broader indices. Maybe when I need the cash or income I will go to a lot more bonds, but I don’t see increasing that percentage for a at least a few years.
Very interesting post, Sam. I don’t find the stats to be particularly surprising. Either the high stock allocation promoted wealth, or wealth (in the form of good income and job security) promoted the heavy investment in stocks.
I admit, I am one of those people who is (almost) entirely in stocks. I do not count cash as part of the investment portfolio since it is for emergency uses only (and for peace of mind). I would like to diversify more but I am still in the asset accumulation phase. By “average” standards I’m doing ok. But by personal finance blogger standards, my net worth is still a baby. The reason I am basically 100% in stocks is because hubby and I are nowhere near retirement and are willing to risk the money we don’t plan to use. (Yes, I stayed invested during the most recent bear market.) Furthermore, luckily we are both of technical background and believe we may be able to freelance or find another job should the worst happen. I am so incredibly interested in generating a sustainable side hustle, you have no idea. The corporate world has some brutal hours. I want us to be financially independent like yesterday.
Reformed Broker just did a solid post of the surprisingly strong performance of the old school 60/40 portfolio. Over the past decade it came ahead of the broader US market in return while having less volatility. Thought it was an interesting data point.
I’m not putting the link because I think that’s throwing me in the spam filter (pretty sure my comment on the hedgefund article is sitting in filter somewhere) but I’ve quoted below.
“RA takes a look back at the last ten years and calculates the annualized return of a classic 60% equity / 40% fixed income portfolio versus 16 pure asset classes on their own. The 60/40 portfolio generated 7.2% annual returns (nominal) from 2005 through the end of 2014, edging out 9 of the 16 asset classes in their data set and with significantly less volatility than most as well.”
Sam – I very much enjoyed this post where you share insights from your work with PC. Definitely feels like great value-add to your readership :)
You mention that weak oil prices are possibly a sign of trouble to come and I’d like to offer a different perspective.
The weak oil prices is actually a consequence of very good economics in the US and the shale boom. This has actually propelled the country’s domestic production to its highest level in 30 years and in 2014, the US produced 89% of the energy it consumed. Consequence : excess capacity on the world market, the US gains market share, OPEC loses market share and the cartel led by Saudi Arabia decides to keep production high to maintain prices low in the hope to weaken the US fracking industry.
This is more about geopolitics than a weak global economy (even if it plays a part).
In 6-12 months this is expected to be over and the US will go back to increasing its production.
The latest EIA forecast sees oil prices remaining low (<80$) at least until 2020.
So this should actually be a strong signal that the global economy will largely benefit from it.
Nick
Sam,
Bonds are currently overpriced! They are priced for global deflation.
I would not buy them as an investment right now (I would consider them in a matching cash flow type situation). I think in this environment, blue-chip dividend paying firms are the way to go.
I would recommend cash or cash equivalents as a replacement for your bond allocation.
Also, many of the older generation may be collecting pensions (most certainly social security). Pensions are essentially a monthly bond payment, so I’m not sure having heavy equity exposure is bad. But, I would certainly recommend more cash equivalents as a risk management asset.
As a PC user, it’s kind of weird to know I’m in your sample space above, and I’m pretty much in line with my age group as someone very bearish on bonds. A couple of notes:
1. The Fed has stated, repeatedly, that interest rates will go up in 2015. Quantitative Easing ended last year (unlike what you state above), so rates are next. They need higher rates to have room to mitigate the next downturn, when (not if) it happens. Treasuries are so low they’re basically at the inflation rate (the government is so creditworthy it borrows for free) so the only way to keep going down would be to PAY bond issuers (negative real interest rates), or slide into deflation (see: Europe). If that happens, we have bigger problems.
2. Bonds provide diversification because they are (mostly) uncorrelated with stocks, not because they preserve principal. Bond FUNDS in particular shouldn’t be considered for preserving principal. The market price (NAV) of a fund is the value of the bonds it contains, so if rates go up (nowhere else to go), prices crash, and so does the NAV so there goes your principal. If you want to preserve principal (and diversify to uncorrelated assets) buy ACTUAL bonds that you can redeem at maturity (and take the lower interest while you wait and hope the issuer doesn’t recall the bond). I’m not sure if actual bonds appear on the PC dashboard (I don’t have any) but I know if PC manages your money they buy bond funds, not actual bonds.
3. Finally, a quick note about “alternatives” in PC — my adviser noted this includes REITs, commodities, and metals funds, so I think you might give us too much credit for holding “alternatives” when most people are just buying VNQ and GLD. These have different risks and are good for diversification too (less correlated to stocks and bonds) but they are not as esoteric as “alternative investing” vehicles like hedge funds and venture debt, which I doubt can be linked in PC.
I’m lucky in a sense because my low-cost 401k target retirement funds put about 5-6% in REITs. I put a little more in VNQ in a Roth IRA so I get some fund diversification.
I’m not convinced about GLD being a worthwhile long-term investment. I think it holds more value as a short to medium term hedge for those who investors who try to time the stock market.
I think at a certain point one has to look at bonds as being a place to not lose principal. At a certain point with wealth one probably has enough, and just doesn’t want to lose it, the aggressive growth isn’t needed.
That is absolutely correct. After one develops “enough” principal protection while beating inflation is what it’s all about.
$200,000 is a great income per year, for example. Build a $6 million portfolio at 3.5% yield relatively risk free, and you are there forever.
Sam,
Thanks for all the insight.
Is there really such a thing as having a portfolio that is yielding 3.5% “relatively risk free”? Bonds would be included in the portfolio so as not to lose principal but bond yields are so low right now, and any stocks giving you a 3.5% yield are not going to be low risk. So then how would a 3.5% yield be achieved with low risk?
I grew up in the Peter Lynch era. Growth stocks and 10 baggers. In all my years of investing, I’ve only had a handful of 10 baggers, plus an almost equal number of worthless stocks.
My father (and father-in-law) both invested in blue chip dividend paying companies. I’m retired and doing fine, but I believe I’d be doing even better if I learned from my dad and followed his example.
At 65, I hold 5% bonds. Most of the rest are higher yielding (>3%) blue chip companies. I’m not concerned if the market drops as long as they don’t cut the dividend! No plans to ever touch the principle.
Having a HANDFUL of 10 baggers is impressive! I’ve only had one, my unicorn, that has never been found again.
A 95% equity weighting at 65 is impressive. May I ask what your weighting was between 2008-2010 and what investment choices you were making then?
Never touching principal is one way of going for sure. It’s similar to never selling real estate and collecting rent.
You’re my hero, Jim!
Sam, can you let this guy write a guest post?
I thought I was your hero Steve?
Jim, want to write a post? Let Steve and I know. Thanks.
Sam,
First…not all 10 baggers are created equal. A few 100 shares of a $2 stock going up to $20 isn’t going to pay for a BMW. (No, I don’t own a BMW.)
Some of the telecoms in the 90s, MCI for instance, simply imploded.
Btwn 2009 and 2013, I was consolidating my 401ks and IRAs. Purchased bond funds w/dividend reinvestment for about 8% of my portfolio. Haven’t added or rebalanced. Growth in the equity side has lowered that 8% to 5%.
2/3 of my ira is set-up like a dividend mutual fund. I looked up the holdings of 8 dividend mutual funds: “dividend aristocrats”, vanguard div growth, franklin rising div fund, and 5 others. [Dogs of the DOW is another good list to check.]
All of them held PG, 7 held ABT, ADP, JNJ, MCD, PEP, WMT; etc.
I bought mostly ‘equal dollar amount’ of stocks held by 2 or more funds that yielded at least 3% skipping a few i didn’t like. Basically, I’m holding only the higher paying stocks held by dividend mutual funds. [I don’t hold MLPs ‘cuz I’m too lazy to deal with the tax reporting!]
Steve, thanks for the kind words. What I’ve written above pretty much covers it.
What an interesting post! I feel reassured, because I only have 4% in bonds, and I only have that because my vanguard advisor strongly encouraged me to out at least Some money into bonds. I guess I am not alone! I consider my rental property and p2p lending to be my “bonds” right now– fairly safe and they provide predictable income.
One of my good friends comes from old money (meaning, they haven’t needed to work for income for generations), and I was discussing my investments with her – she was shocked I had any bonds at all! This was back in 2012 when I had ~40% in bonds due to my old advisor. She has always had all of her money 100% in stocks, most of them blue chip or dividend stocks. I started shifting things around after she told me that — if only we had talked in 2009 not 2012!
Very insightful about your friend there! Nice job shifting more to equities in 2012. The question is, what now? Nobody knows.
Rental property and P2P lending could be considered bonds, but property is illiquid, and as of yet, I’m not sure people can buy and sell their P2P portfolios in a liquid market place with reasonable spreads. At least bonds have the coupon component and principal gains and losses in the market.
The title of this article is “Should I Buy Bonds? Wealthy People Don’t”. The Personal Capital data shows that for the most part wealthy people don’t buy bonds. Does the same personal capital data show that non wealthy people do buy bonds? Just curious. I’d like to know about the people below the 100k investable asset threshold.
Sounds like I’ve messed up seriously. I’m 22 debt free and have about 70k in cash getting .4% and another 20-30k in assets such as rolexs, guns etc. 0% in bonds and 0% in stocks. My dilemma was waiting to find out about funding for my masters but I’m covered from my company to go to Stanford or Berkeley (which I was saving for) but now I’m not sure where to invest my cash since I won’t be able to manage it for the next 2 years while I’m in school. My other dilemma is I refuse to give people my money in the forms of fees. So what would you recommend? I have the full ride and don’t really need the cash was thinking of buying a 4 plex before I leave but I’m not sure. Thoughts on how to allocate my funds? I also have a job and save 80-90% so I can be pretty risky (more so after coming back from my grad program and my working paying me more – which will likely boost my savings to 95% a year then). But what should I consider in maximizing my wealth besides say a 2% cd… Cause the rental is going to be hard to manage while in another state. Thanks
Doesn’t seem like you messed up if you’ve been able to accumulate 100K by age 22. Don’t think many 22 year olds can accumulate that much at your age. How did you do it?
If you refuse to let people manage your money, and are conservative then develop a 50/50 equities/fixed income ETF portfolio that’s offensive/defensive. You can build one for $9.95 with Motif Investing for example, and the first trades are free. I did, and it was so easy.
I currently have 0% in bonds and don’t plan on changing that any time soon. The interest rate has been kept artificially (and now historically low) for far too long. There is no doubt in my mind that interest rates WILL go up in the next couple of years – and as you know the price varies inversely with bonds. Getting stuck holding the bag doesn’t sound good to me!
People have been saying interest rates will go up in the next couple of years for decades now. What makes you so sure? How long have you been investing?
I like stocks over bonds in the long term. To me, loss of purchasing power is a bigger risk than market volatility. Just like @Gen Y Finance Guy and @Robin, my plan right now is to pay extra on the mortgage. If the stock market takes a dive before I pay off the house, I may reallocate some of what I was adding to the mortgage to buy more equities while they’re on sale.
I wouldn’t be too afraid of the loss of purchasing power. I would be more afraid with the actual loss in principal.
Aren’t we seeing a skewed perspective because real estate and equities have outperformed bonds substantially in the past 25 years?
Hard to say. I would love to see the PC data from 25 years ago to compare snapshots.
During bull markets, it makes sense that the skew is towards equity. Investors tend to lose their discipline, which is one reason why bubbles grow and burst.
Very interesting stuff. We currently hold no bond in our portfolio, 100% in equity. In our son’s RESP we’re holding 15% bond as the timeline is somewhat shorter. At current interest rates, holding a large percent of bond may not make sense.
Interesting stuff. That is kind of ironic that your son has a higher bond weighting than you given he’ll need to go to school soon, don’t you think?
Just goes to show that asset allocation isn’t just an age thing, but a purpose thing.
Very interesting post. Bonds are mostly compelling when there is a potential for arbitrage. They are a tool best made for financial engineering with large amounts of capital.
Seems to me the time is right to either be hedged or mostly in cash.
The markets really are flip flopping now with no direction. I ALWAYS love to be hedged in someway…. the range for me ranges from 10%-50%.
But the other “hedge” is build those multiple income streams and also work ethic.
Build Financial Buffers For Your Financial Buffers
Sam — Good post to make one think. But….which is it?
a) Wealthy people don’t buy bonds – full stop (your headline premise)…OR…
b) Wealthy people do not follow the conventional asset allocation model for buying bonds (your first sentence premise).
My vote is a very strong “B.” And this does not mean they are bond free.
First of all, let’s please agree that your sample from one investment firm is by no means statistically significant across all wealthy U.S. investors. For one, I have to believe a disproportionate share of wealthy Personal Capital account holders are millennials or slightly above. At the same time, I propose that the majority of 50+ “wealthy people” in this country have likely never heard of Personal Capital. And I’m betting that the market research department at Personal Capital would validate this. It’s their awesome “market opportunity!”
I also know a few people – admittedly not many – who once they made their $20 to $50 million, said “I’m done playing” and have gone mostly bonds with a big chunk of their dough and they simply live on the dividends.
But I’d say that for most wealth ACQUIRERS, too much in bonds equals less than mediocrity. The “age in bonds” thing absolutely never made sense to me. It didn’t 20 years ago, and it REALLY doesn’t now. I’m at 20% bonds now and MAY get up to as high as 30% in the next 10-15 years. Even your FSAA Model is a bit too sleepy for me.
Speaking of sleepy, look at the boring-assed Vanguard Wellington Fund. You could hold that fund, sleep under a nice and large oak tree while you’re not playing tennis, and do better, total returns wise, than most U.S. investors over lengthy periods of time. I’m seriously tempted, at some point in time, to dump EVERYTHING in there and never pick up a WSJ or read a financial blog again. zzzzzzzzzzzzz…….ahhhhhhhhhhhh………..
Yep, I’m not “bond free” because I rolled a retirement account over to Wellington. Boring…and consistent. As in consistent for decades.
Actually, the average age for all PC users is something around 45-48, and older for those who are in the mass affluent crowd.
I’m sure the majority of 50+ mass affluent haven’t heard of Personal Capital. It’s a simple numbers game. There are more than ~100,000 – 165,000, 50+ mass affluent people.
Bonds are considered to be safe a investment however I see it as quite opposite as resulting opportunity cost. Not taking risk is the riskiest move of all time. As I am still young( I am early 30s), I will keep pushing for equities.
Thanks for the excellent posting.
BeSmartRich
I suspect many investors in today’s markets, especially the older ones, are desperately chasing returns due to central banks’ ZIRP or NIRP policies.
When you haven’t been saving enough for retirement, the economy is tanking, and you earn nothing on your cash, you have to put your money somewhere, and bonds just don’t perform.
Given the average investor’s overconfidence in their abilities, it ends up in stocks.
The market correction when it comes will be devastating.
I like the pessimism! It will be devastating, but people will learn after devastation and become better because of it.
“…people will learn after devastation and become better…”
You would think…:-)
You’re right. Greed might be impossible to overcome for 95% of the world!
To make your statement apply to me, I would only change one letter. Make the first “e” in “better” an “i”!