Retirement Answer Man #216 - Shaken, Not Stirred: What Bonds Add to the Investment Cocktail
Why would you ever add bonds to your portfolio if their return is so low? This is the second episode in the April bond series. This month we are learning all about bonds. On this episode, we delve into the question: why do we even have bonds in our asset allocation? I really get into the science behind why bonds are in our portfolios. If you are planning on retiring soon your role as an investor is changing and you may want to have more bonds than you think. Find out why you need bonds in your mix and what bonds add to your portfolio by listening to this episode of Retirement Answer Man.
What is the difference in investing when you’re younger vs when you’re older?When you’re younger you have a lot of time for your investments to work for you. When you’re in the wealth accumulation mode of youth you’re on autopilot, socking away money each month without even paying attention. This strategy no longer serves you when you are preparing to retire and you stop accumulating wealth. Now your role is changing, soon you will start tapping your wealth. So when the markets dip you will actually feel it in your portfolio. Psychologically you will feel more vulnerable because the market volatility becomes pretty scary. This changes the way you think about markets and investing. Listen to this episode to understand how your role as an investor has shifted with age.
What can bonds add to your investment cocktail?Bonds add more than you think to your portfolio. Soon you will stop adding to your portfolio and you will be taking money out of it. Now that you don’t have as much time to play the markets, the security that bonds bring to your investments will provide peace of mind. And a healthy mix of bonds in your asset allocation can actually bring about good returns while also providing stability and less risk. It may be time to start thinking about managing your assets differently. Listen to this episode to understand how bonds can lead to the perfect investment cocktail.
What is the science behind asset allocation?Let’s get to the science behind why we have different asset classes and what their benefits are. The modern portfolio theory is considered the best practice in portfolio management. This theory states that for a given level of return you will try to minimize as many risks as possible. And that for a given level of risk you will try to optimize returns and get the most bang for your buck. We measure this by using standard deviation. Is this bringing on flashbacks from college? Listen to me explain standard deviation in a way that you can finally understand, I promise there won’t be a pop quiz at the end!
What does modern portfolio theory mean for your assets?Modern portfolio theory is great for helping to measure your risk tolerance. And this is the whole reason that your financial planner asks you to fill out risk tolerance questionnaires. The problem with all this science is that once you reach your 50’s and 60’s everything changes. You should no longer be measuring your maximum amount of risk tolerance, but how to live the life that you really want to. This episode will help you to understand how much science and how much art you should apply when managing your money, so grab your favorite pair of headphones and listen in.
OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN
- [1:22] What can bonds add to your investment cocktail?
- [4:00] What happens when you accumulate assets when you’re younger?
- [11:02] What role do bonds have in your investment cocktail?
- [12:25] Let’s understand the science behind different asset classes
- [17:28] Why are risk tolerance questionnaires are so important?
- [24:42] Try a new cocktail (or a new recipe!)
- [26:13] What is the role of the bonds in your portfolio
BOOK - Rock Retirement by Roger Whitney
3-video Series: 5 Minute Retirement Makeover
Roger’s Retirement Learning Center
The Retirement Answer Man Facebook Page
Intro music by bensound.com