Where’d All the Bonds Go?

Oh, to be young! To eat all the junk food and not get heartburn; to dance the night away with not an inkling of a hangover the next morning… To buy ALL of the stocks or equity funds in your investment accounts without worrying a bit about market volatility.

Because let’s face it: you can afford to be an aggressive investor when you’re younger, but that aggressive manner should be mellowing with age. As you get older and your paychecks stop coming, you need to rely less on stocks and more on sources of fixed income — bonds, pensions, CDs — to pay your bills during retirement.

Does that mellowing really happen, though?

At SigFig, we analyzed the asset allocation of more than 30,000 investors across all age groups and compared that to their ideal allocation, based on their risk profile and investment horizon. The results surprised us. Across all age groups, the portfolios we analyzed were too heavy on equities — and too light on fixed income investments.

We found that 93% of investors aged 50 to 60 had too much of their portfolios invested in equities; more than investors half their age — the 20- to 40 year-olds — with 90%.

Bonds? What about ‘em?

Across all age groups, investors’ portfolios are simply lacking in bonds. And as they get older, a greater proportion of investors have far less of them than they should.

But don’t just take our word for it. A study released earlier this year by the Investment Company Institute, a mutual fund industry group, found that a third of investors in their 50s had 100% of their IRA accounts in stocks, and so did a quarter of those age 60 to 64.

For Boomers easing into retirement, having 100% of anything doesn’t make for a well-diversified portfolio. And on days like July 31, 2014, when the stock market plunged 317 points – erasing all of its gains for the year – owning just stocks probably doesn’t feel reassuring.

Why the love of stocks?

We’ve got three theories about this:

  • It’s the Great Recession, Stupid. Investors, especially those Boomer-age and up, are still feeling the effects of the market crash in 2008-2009. According to the Federal Reserve, Americans saw $1.3 trillion of wealth vaporize in the first quarter of 2009 alone. Older investors saw their retirement portfolios shrink so much, they’re still heavily invested in equities to make up their losses.
  • Bonds are Boring. Investing in Twitter is sexy. Investing in Treasury bills is just not. Stocks are easier to understand and to follow online. Bonds, with their multiple maturity rates, yields, prices and other factors to follow, can be head-scratchers. Most Main Street investors lack a deep knowledge of bonds.
  • Bonds are Boring, Part II. The yield on the benchmark 10-year Treasury is at a 14-month low, down to 2.4%. That’s due to factors ranging from tame inflation to slow global growth, and many investors end up chasing higher returns elsewhere.

Three Re-Investing Strategies for Retirement

  1. Readjust your stocks. If you’re over 50, your retirement nest egg probably shouldn’t be invested in 100% of any one thing. That doesn’t mean you should give up on stocks. Jane Bryant Quinn, a personal finance expert at AARP, says Boomers should stick with at least 50% in stocks because fixed-income investments alone won’t be enough to carry you through in what could be 30 or more retirement years.
  2. Get a fix on your fixed income. Take a look at all the guaranteed sources of money you can get, including Social Security, a pension, lifetime-payout annuities, inflation-adjusted bonds, short-term bond funds and certificates of deposit. All your essential expenses during retirement should be covered by these investments. Consider it your “safe” money.
  3. Rethink your expenses. If the “safe money” won’t produce enough income to cover your basic expenses, rethink and reduce those expenses. You can’t afford to gamble on stocks to cover them.

The takeaway:

Sure, stocks are sexy. And they’ve been on the rise for a while. But as the Great Recession recently showed us, one cannot live on stocks alone. With age should come wisdom, and that means building a smart portfolio that’s safe enough to keep you going through the many decades of your Golden Years.

Vanessa Richardson is a freelance writer in Northern California who writes about personal finance, business and — for a total 180-degree turn — scuba diving.