How to Determine Your Bond-to-Stock Asset Allocation - Rodgers & Associates
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How to Determine Your Bond-to-Stock Asset Allocation

Many people are familiar with the old adage you should hold your age in bonds.  For example if you are 70 years old you should have 70% of your invest­ments in bonds.  The idea behind this axiom is that as you age your life expectancy becomes shorter and therefore has less ability to recover in market downturns.  Fast forward to today and retirees are facing the more and more common proba­bility of one spouse living until age 90 and beyond. In addition interest rates are hovering around historic lows and have remained at these stubborn low levels for close to a decade.

So what is the right allocation for equites (stocks) and fixed income (bonds) for your investment portfolio?  In order to determine this one needs to know what rate of return your portfolio needs to earn in to give you the best statis­tical chance for your retirement to end success­fully.  This nugget of infor­mation can be the key to deter­mining your asset allocation.

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Research has shown us that investment rate of return is derived primarily by the allocation between stocks and bonds.  Brinson, Hood and Beebower published a study called “Deter­mi­nants of Portfolio Perfor­mance”. The study revealed portfolio perfor­mance or rate of return is deter­mined by various factors but that asset allocation is the primary deter­minant.

Based on this knowledge, if you know what rate of return your portfolio needs to earn you can begin the process of selecting the allocation of stocks to bonds that will most likely achieve this goal. For example below is a sample of various asset alloca­tions and their respective rates of return that could be earned over time:

Aggressive portfolio of 80% stocks and 20% bond is projected to earn 8.37%*

Moderate portfolio of 60% stocks and 40% bonds is projected to earn 7.17%*

Conser­v­ative portfolio of 40% stocks and 60% bonds is projected to earn 5.94%*

*These rates of return are based on the research of Harold Evensky CFP® and considers the historical rates of return since 1970 coupled with projected standard deviation, interest rate, diver­si­fi­cation, corre­lation and inflation assump­tions.

At Rodgers & Associates we counsel our clients on the rate of return they need to achieve their retirement goals with the least risk possible.   We also spend consid­erable time educating our clients on the drivers of their investment perfor­mance and on the perils of focusing on market timing.