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Do you really need to change your Stock/Bond allocation as you age?

I have had an allocation of 60/40 for years and years (very well diversified in index funds). When I was younger that allocation undoubtedly seemed a bit too conservative too some, but I liked it as it passed the 'stomach test' and I didn't have a lot of money.
Now that I am older, the 60/40 split is about right according to the conventional wisdom.
As I get older and farther into my retirement, that allocation may seem to be be too aggressive, but I have about a year's worth of living expenses in a money market, so that undoubtedly will help to smooth any bumps.

Anyway, what are your thoughts about changing allocations based on age? (more stocks when you are younger versus more bonds when you are older) versus a middle of the road 60/40 split that you can hold forever?
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Anyway, what are your thoughts about changing allocations based on age?


FWIW --i like the "stomach test". if your stomach
changes with age, change your allocation. if it
doesn't, don't.
but keep in mind that as you sell stocks to buy bonds, you'll
incur some transaction costs and taxes... that, at
least, could have been delayed.


jp
(about 90/10, stocks to cash. just dont' like bonds
at all)

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jp
(about 90/10, stocks to cash. just dont' like bonds
at all)


That brings up another subject I've always wondered about - why have any bonds at all?
If you are using bonds to limit volatility of your stock portfolio, why not just use cash (money market) instead since it is even less volatile than bonds (which sometimes move down right along with the stocks).

I read somewhere once that having a 60/40 stocks/bonds traditional portfolio would be better if it was 75/25 stocks/cash. Not only would the cash buffer the stock volatility better (having that much cash means you could ride out a big bear market) but the higher stock allocation may give you a higher long-term return.
Any thoughts?


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Anyway, what are your thoughts about changing
allocations based on age? (more stocks when you
are younger versus more bonds when you are older)
versus a middle of the road 60/40 split that you can
hold forever?


I think fixed ratios are meaningless. The strategy I like is to keep 3-5 years of income needs in cash or very short term bonds and the rest in stocks or stock funds. Withdraw from the cash each quarter and sell stocks to replenish except when stocks are down. If stocks are down, wait until stocks recover to replenish. If you are an aggressive investor, 3 years income needs will work. If you are nervous, 5 years will be more appropriate. If you are VERY nervous, 7 years may be better.

Regards, Jim
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Read www.theatlantic.com/issues/99sep/9909dow.htm

Gives you good food for thought for a stocks/cash allocations only, my personal prefference. Would only hold as many years living expenses in cash that I thought would allow me to pass "the stomach test".

JLC
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Please look at message #13041, which codifies what previous posters have said. The difference between the 'total return' portfolio, as I call it, and the fixed percentages that you use, is that the bonds are not held for interest income exclusively. The idea of the portfolio is to create a steady, inflation-adjusted income. If the stock portfolio underperforms the bond portfolio, on a percentage basis, then the bonds that mature that year are kept in cash to pay for living expenses. If the stock portfolio outperforms, then enough stock is sold to pay for a year's worth of living expenses, plus any cash used in prior years.

The idea, of course, is to cash your bonds in while the market is down, so as not to affect your income. You have to believe that the market will recover in time to replenish the bonds/cash that you spent.

Zev
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1st --apologies: the makeup of my port. is Irrelevant
since i'm not yet retired. but i still like the
'stomach test' as opposed to age-based rule of thumb.

2d-- now that i've re-read it, i like the Zgriner
approach (if i understand correctly) : M months of
cash for immediate expenses; Y years of expenses in
laddered CD's &/or Bonds; rest in Stock. One
hopes that most of the time, the stocks gain enough
to replenish the cash. When they don't, you live off
the Maturing FII's...


jp
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