Close to Death

In the old days, people used to say that your age should be your percentage allocation to bonds. So, if you were 70 years old, you would have a 70% allocation to bonds.

Seems quaint.

My readers tend to skew older—I’m sure I have lots of 60-, 70-, and 80-year-old subscribers—and I would be stunned if even one had their age as their percentage allocation to bonds. In 1995, this would have been commonplace. Not today, because stocks are the only game in town. I bet my subscribers have a higher allocation to leveraged ETFs than they do to bonds.

Of course, bonds are unloved, to say the least, but that is not the point. A secondary point is that when they are unloved, the yields are pretty high! But nobody cares.

When It’s Time to Decumulate

The reason you’re supposed to have your age as a percentage allocation to bonds is because, as you get closer to retirement, and you’re going to be living off your retirement savings, a sharp drop in the stock market could greatly affect your standard of living. If you retired with $4 million and experienced a 50% bear market in stocks, that would leave you with $2 million. Then you would have to cut back on the European river cruises with the newlyweds and the nearly-deads. 

Also, people always wonder how much money they should retire with. Well, the answer to that question is an amount of money such that you don’t really have any constraints on your behavior, within reason. If you want to take six vacations a year, you can. That is the whole point. On the other end of the spectrum are people who haven’t saved anything for retirement, living off a $3,000 social security check, at best. Not a good position to be in.

So really, when you get old, you should be investing in bonds out of an abundance of caution, because you don’t want to take down your standard of living in retirement. My guess is that if we had a 50% bear market today, a lot of senior citizens would be SOL. 

I don’t understand the mentality. You are already worth $4 million—are you trying to turn $4 million into $8 million… when you’re 80? Beyond about age 45, you should be in decumulation mode, not accumulation mode. You accumulate assets in the first half of your life and decumulate assets in the second half of your life. You spend it or give it away. I am 52, and I think about this all the time. I recently moved about 30% of my liquid assets into bonds, partially because I like bonds, but also because I am getting old! Time to take some risk off the table.

The Consequences Are Enormous

So, the general principle here is that you should take more risk when you are younger and less risk when you are older. Today, people have it ass-backward. The Boomers are trading leveraged memory ETFs, and the Zoomers are stashing money in a bank account. I know this because I teach the Zoomers, and I ask them about their risk tolerance, and most of them say they are conservative. For sure, there are always one or two students who are trading options or ripping around crypto, but the majority of them keep their money under the proverbial mattress. 

The reason you take more risk when you are younger is because you have more time to recover from the mistakes. If you were 22 in 2000 and put everything you had—say, $10,000—into the top of the stock market, you are still doing pretty well 26 years later at age 48, as the Nasdaq has returned over 8% a year since that high-water mark. If you have $4 million in the top of the stock market at age 80 and it goes to $2 million, you are very sad, because there is no time on the clock left to make it up. All the old wisdom has gone out the window, and we have all lost our collective minds.

If you have $2 million, or $4 million, or $8 million at age 80, unless you have an astronomical standard of living, you probably have enough. Your kids would appreciate it if you didn’t vaporize it in a bear market. Or your charities. 

This is all a long way of saying that there is a lot of greed out there these days—nobody is content with what they have. I get it. I am always trying to make more money. Your opinion on the stock market didn’t matter. The S&P 500 is currently at 7,500. If you thought it was going to 10,000 before it went to 5,000, maybe you would stay fully invested in stocks. But there is an argument for taking risk off regardless of your opinion on stocks. 

First, nobody knows. Second, the consequences of you being wrong are enormous.

If you are old, reduce risk. Reduce risk to the point that the damage from a large correction or bear market will be insignificant. By the way, 4.5% interest on $4 million is $180,000 a year. You might be able to live on that, if you quit smoking.

Jared Dillian, MFA