Do you really need bonds before you are near retirement?

[Nika]

I have friends that think this is a necessary part of balanced portfolio (this seems to be prevailing financial recommendation) and some that primarily invest in them.

I could understand that if you are so rich, that protecting capital is the primary objective, and the difference in interest is not so significant, or when you are approaching retirement and may have to draw on your nest egg when market is down. But do bonds really make much sense for people in the middle of their earning years or young people? Like "your age -100 " rule. Does a 30 year old really need to be 30% in bonds?

[disneysteve]

I don't the stats on hand but if you look at the research, a portfolio that is 100% stocks doesn't return much more, on average, than a portfolio that is 90/10 or 80/20 but is much riskier and more volatile. Owning some bonds helps reduce risk and volatility without having a significant impact on returns. In fact, in years when the stock market is down, the bond allocation often helps support the overall portfolio return.

[feh]

I have friends that think this is a necessary part of balanced portfolio (this seems to be prevailing financial recommendation) and some that primarily invest in them.

I could understand that if you are so rich, that protecting capital is the primary objective, and the difference in interest is not so significant, or when you are approaching retirement and may have to draw on your nest egg when market is down. But do bonds really make much sense for people in the middle of their earning years or young people? Like "your age -100 " rule. Does a 30 year old really need to be 30% in bonds?

Go run a search on bogleheads.org regarding bonds in your portfolio. You'll have enough reading material to fill up a weekend.

[Nika]

I don't the stats on hand but if you look at the research, a portfolio that is 100% stocks doesn't return much more, on average, than a portfolio that is 90/10 or 80/20 but is much riskier and more volatile. Owning some bonds helps reduce risk and volatility without having a significant impact on returns. In fact, in years when the stock market is down, the bond allocation often helps support the overall portfolio return.

But if you don't plan on drawing from that portfolio for few decades, does that volatility matter to you at this point?

[feh]

Over time, stock prices roughly follow the trend of the economy, which is to grow. But prices can stagnate or decline for decade-long periods. This is why having an allocation to bonds is a necessary element of asset allocation.

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

http://www.bogleheads.org/wiki/Asset_allocation

[Nutria]

But if you don't plan on drawing from that portfolio for few decades, does that volatility matter to you at this point?

No need to follow the "100 - age" rule, but do put some money in bonds. At your age, I'd put 10%.

Of course, if you do follow the "100 - age" rule, then maybe you could stand some extra risk in your stock allocation, and so put a chunk of the remaining 70% in a volatile stock fund.

[disneysteve]

But if you don't plan on drawing from that portfolio for few decades, does that volatility matter to you at this point?

Absolutely. That volatility can significantly cut into returns. If the bond allocation helps buffer declines in the equity allocation, the long term return overall will be better.

[feh]

Absolutely. That volatility can significantly cut into returns. If the bond allocation helps buffer declines in the equity allocation, the long term return overall will be better.

I think this is somewhat inaccurate, Steve. Bonds will reduce losses when the equity markets decline, but they will also reduce gains when equity markets rise.

The long term return of 90/10 would be expected to be better than 70/30, for example.