Investing

Is investing in bonds really necessary in your 20s?

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  • Jul 18th, 2012 10:44 pm
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[OP]
Newbie
Nov 8, 2005
89 posts
105 upvotes
Halifax

Is investing in bonds really necessary in your 20s?

Hey guys,

I'm looking at starting a Couch Potato retirement portfolio. The asset mix they recommend for the "Complete Couch Potato" is this:
[INDENT]Canadian equity 20% iShares S&P/TSX Capped Composite (XIC)
US equity 15% Vanguard Total Stock Market (VTI)
International equity 15% Vanguard Total International Stock (VXUS)
Real estate investment trusts 10% BMO Equal Weight REITs (ZRE)
Real return bonds 10% iShares DEX Real Return Bond (XRB)
Canadian bonds 30% iShares DEX Universe Bond (XBB)[/INDENT]

The mix is 40% bonds. I'm 23. Should I really have 40% of my portfolio in bonds, when I have 40+ years for my investments to grow? If not, what is a good percentage to have in bonds at my age?
18 replies
Newbie
Oct 21, 2007
93 posts
9 upvotes
Hard to answer - over the past few years bonds have been the stars of many people's flaccid portfolios - including people in their 20s. Many would have been significantly in the hole in the past year had it not been for the bond portion of their portfolios. Many are also saying what DaleCooper suggests - as interest rates rise again (when will that happen?), bonds should begin to get hammered. Though if you take the more apolitical view of the world right now, your stocks could get hammered a lot more. I think you have to do your own research - about both bonds and bond funds, and decide what you'd like to do. I would definitely keep some in my portfolio though...
Deal Addict
User avatar
Dec 26, 2010
1708 posts
743 upvotes
Calgary
Don't listen to the guy above (DaleCooper). Anyone with a new account, an avatar and their location in CAPS is not someone to listen to.

The 40% bond allocation on the Couch Potato site I think is just a general allocation for the average Joe. Think someone that is in their late 30's, early 40s just trying to get their retirement in order. And also 40% is a much safer portfolio.

Your bond allocation should be whatever you need to deal with the fluctuations in the market. It's hard to guess when you're young and don't have a ton of money, but a lot of people can't stomach watching 50% of their portfolio disappear. You probably can. Safe advice would be making your bond allocation your age. So as you get older it gradually grows. Go with what works for you.
Banned
User avatar
Jul 14, 2012
132 posts
8 upvotes
TORONTO
wm009 wrote:
Jul 18th, 2012 8:22 am
Don't listen to the guy above (DaleCooper). Anyone with a new account, an avatar and their location in CAPS is not someone to listen to.
I have read some ridiculous things in my life, but this one tops it.

If at least you provided the reasoning not to short bonds before writing something infantile then I would understand.
Deal Addict
Jul 23, 2007
3599 posts
1419 upvotes
Stewx wrote:
Jul 18th, 2012 7:42 am
Hey guys,

I'm looking at starting a Couch Potato retirement portfolio. The asset mix they recommend for the "Complete Couch Potato" is this:
[INDENT]Canadian equity 20% iShares S&P/TSX Capped Composite (XIC)
US equity 15% Vanguard Total Stock Market (VTI)
International equity 15% Vanguard Total International Stock (VXUS)
Real estate investment trusts 10% BMO Equal Weight REITs (ZRE)
Real return bonds 10% iShares DEX Real Return Bond (XRB)
Canadian bonds 30% iShares DEX Universe Bond (XBB)[/INDENT]

The mix is 40% bonds. I'm 23. Should I really have 40% of my portfolio in bonds, when I have 40+ years for my investments to grow? If not, what is a good percentage to have in bonds at my age?


I've seen financial planners recommend the bond portion should be equivalent to your age. Others say your age minus 10 or plus 10, depending on your risk tolerance. Some investors like short term bonds or a 1 to 5 year ladder of GIC's, while others prefer a mix of long, intermediate and long term bonds in the portfolio. Plenty of choices, but there's no one size fits all.
Deal Addict
Aug 28, 2010
3521 posts
1218 upvotes
Halifax
wm009 wrote:
Jul 18th, 2012 8:22 am
It's hard to guess when you're young and don't have a ton of money, but a lot of people can't stomach watching 50% of their portfolio disappear. You probably can.
Many people who thought they could stomach a 50% loss freaked out during the 2008 crash and sold their stocks, meaning they bought high and sold low.

I don't have a clue if the OP can stomach it or not, but without knowing much about the OP, I'd be hesitant to say they can probably stomach it. Who knows whether they can or not.
Banned
User avatar
Jul 14, 2012
132 posts
8 upvotes
TORONTO
Fact.

Nobody can stomach a 10% loss, let alone 50% unless you are playing with other people's money.

Just look at the facebook ipo and this board how they all panicked in unison. It was a sad event to watch. I think only Brunes stayed calm.
Deal Addict
Aug 28, 2010
3521 posts
1218 upvotes
Halifax
DaleCooper wrote:
Jul 18th, 2012 12:18 pm
Fact.

Nobody can stomach a 10% loss, let alone 50% unless you are playing with other people's money.

Just look at the facebook ipo and this board how they all panicked in unison. It was a sad event to watch. I think only Brunes stayed calm.
If you are going to troll us, could you at least tell us which previously banned user you are?


BTW, I was perfectly calm through both the dot.com crash and the 2008 crash. And so were many others. When I started investing I knew I would go through a number of crashes and the best thing to do would be to stick with my investment plan. Which I did without any concerns.
Banned
User avatar
Jul 14, 2012
132 posts
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TORONTO
If you were perfectly calm through dot.com crash that means you were wiped out.

Not exactly the smartest thing to stay calm, is it?
Deal Addict
Aug 28, 2010
3521 posts
1218 upvotes
Halifax
GonePostal wrote:
Jul 18th, 2012 1:56 pm
At least use the proper index...
I am using the proper index. If you are suggesting I should be using the NASDAQ, why?

I'm a passive investor and hold a properly diversified portfolio. I never held a NASDAQ index because there was no reason to do so. There are much better diversified indexes of the US market available.
Deal Addict
May 31, 2007
4996 posts
2107 upvotes
As mentioned above, you need to understand how your risk tolerance is. You already understand that you have 40 years of investing time. So you understand there is lots of time to make up. When you have lots of investing time, crashes or bear markets are good because you can buy low.

If the thought of losing 50% value in a few months makes you panic and sell, you will need a higher fixed income portion to balance this risk. But as mentioned about, I don't see this being a risk right now because you can buy low and have many years to make up in bull markets.

As you get older, you can re-balance and dca some more bonds. At your age, I would suggest to have a low bond allocation (maybe 5-15%) and rest equities. As you get older, your age = your bond allocation % is a good suggestion.

I like the idea of having some bonds, because if the market crashes, you have something rebalance. More than likely you can sell bonds high and buy equity low.
Deal Addict
User avatar
Sep 30, 2003
3906 posts
118 upvotes
Toronto
Bond investment is a function of risk. Age is one (of many) of the factors that affect risk. E.g. a 25yr old who inherits a large amount of portfoli may want to protect the capital. You cannot simply say risk = X-age/100 or whatever the stupid formula is. It's a good rule of thumb for "average" people etc. but your specific situation may be different and if you care enough, you should evaluate your situation specifically.
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