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With the current fixed income environment, have you given any thought to your portfolio asset allocation?
For most of the last 15 years bonds paid next to nothing, a big fat zero actual return. For a stretch in 2021 they actually paid less than nothing: 10-year TIPS traded at negative real yields, meaning you were paying the government for the privilege of protecting your own purchasing power. In that world, equities weren’t one part of the growth engine. They were the only party in town.
That’s now changed. Depending on how you view your portfolio, it could mean you can reduce your equity level without harming your planned return.
Let’s say leading up to retirement, you or your advisor was reaching for a conservative 3% real return. To achieve that, with bonds contributing nothing towards the heavy lifting, your equity sleeve had to do all the work. Using standard long-term return assumptions, that solves out to an equity allocation around 66%, giving you roughly a 70:30 split.
With bonds now in positive territory, real yields pushing 1.5-2%, that changes the calculation considerably. You can flip the script to something closer to 30:70 and still expect that same targeted 3% real return. That’s not a small tweak. It’s a massive reduction in risk exposure.
Now before you go all “but, but, but,” I’m the first to admit there are lots of variables. You need an accurate handle on your long-term spending horizon before you can lock in current bond rates. Maybe your real goal is maximizing inheritance, or maybe your current plan can handle any amount of volatility and you’re happy with your allocation. Asset location and tax implications are another big one, and there are plenty more valid points besides.
But none of that negates the fact that, compared to a decade ago, your equity sleeve doesn’t need to be as large to deliver the same planned return.
Obviously this doesn’t mean you have to change anything. But to my mind, it’s worth considering the possible implications for your own situation, even if that’s just out of intellectual curiosity.
As for the calculations, I’m no Einstein and I’m not trying for a white paper. I fed the information into my local, friendly, house-trained AI and got it to crunch the numbers, then got another one to check its work. So if it’s wrong, I take full responsibility. After all, the AIs in question were probably busy plotting our eventual downfall at the time and couldn’t afford the compute cycles.
Mark,
Another interesting article from you, thanks.
And also enjoyed Michael’s comments below regarding reducing equity exposure – I’m struggling with that decision myself…and your banter with Dan… both educational and entertaining 😀.
I’m a bit torn between the concept of: if you’ve already won quit playing the game which drives one to a decision to lower equity risk with the counter view of if you have 7 to 10 years of expenses covered in fixed income and that would result in one’s portfolio to be at a 80/20 mix due to withdrawal rate of ~2-3%. Should one really reduce equity exposure OR enjoy the extra potential gain while having enough fixed income to survive a 7 to 10 year market downturn.
Maybe I’m suffering from recency bias and feel like my gut is much stronger than I think if I experience a bona fide market downturn gut punch 🤷♂️?
I think differently than you, and to beat inflation over the long term, I flip your 30% Equities-70% bonds to 85% equities and 15% cash. This has worked very well for me over the last many years, and at 80 years old, I plan no changes.
William, just to clarify — I don’t actually hold a 30:70 portfolio myself. The post was more of a thought exercise: with the recent shift in bond yields, you don’t need as large an equity allocation today to achieve the same overall portfolio return you’d have needed 10-15 years ago.
William: similar plan here. We are at 70/30 and plan to stick with that AA.
It’s rare to find a real, inflation-adjusted return of 3% with no risk to capital! The last time this happened was back in 2008.
If you’re interested in learning more about various scenarios, I recommend reading this article by Bill Bernstein and Ed McQuarrie: https://www.advisorperspectives.com/articles/2026/08/13/long-tips-yield-time-to-buy
I’m very comfortable with risk in general. I founded and ran my own business for 25 years, making plenty of hair-raising decisions along the way. But I’ve won the game now, and I don’t need to take on much risk going forward. To my mind, it’s irrational to do so when there’s no need to.
Thanks for the link. That’ll give me something good to read with my coffee tomorrow morning.
“Let’s say leading up to retirement, you or your advisor was reaching for a conservative 3% real return.”
Mark, you do say conservative, but where did you come up with such a low number of 3% ? From my observation, peoples ability to predict the market’s future is essentially zero, and the market routinely returns more than 3 %
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Mark, I can only speak from my own experience. This is the exact method I used for my own portfolio: I started with a target real return — in my case, 3% — then used the long-term average equity return and long-term average bond return to work out roughly what mix of the two would get me there, once long-term inflation is factored in. I then shaped my asset allocation to match that blend.
Obviously, this won’t deliver that 3% return in any single year — but over a thirty- to forty-year horizon, it should trend toward that figure.
As to why 3%: that’s all the growth I require. Why shoot for the stars when all I need is a gentle amble down the street? If someone needs a high-return strategy just to make their retirement numbers work, that would concern me. If I get extra upside, that’s fine and dandy — my inheritance will be bigger — but personally, I don’t need it.
Worth saying too: the post itself is more of a musing on what higher bond yields mean for the maths, rather than a signal that I’m actually planning to implement the change myself.
“As to why 3%: that’s all the growth I require. Why shoot for the stars when all I need is a gentle amble down the street?”
As Bill Bernstein has said, “if you have won the investment game stop playing.” By this he doesn’t mean stop investing, but significantly reduce your investment risk.
Mark, I think that refers to 3% after deducting inflation from total return.
That still seems very low. It implies that the 4% rule would not be valid.
Mark, I get why it might look that way, but it implies nothing of the sort. The 4% SWR is a heuristic with a lot of academic research behind it, and it’s answering a different question than the one I’m asking. It’s about how much you can safely withdraw from a portfolio you’ve already built, not about what return you need to target when building it in the first place. Those two things aren’t in tension: you can fully believe markets will average more than 3% over time and still only need 3% to hit your specific goal. I think that’s where the confusion is coming from, you’re reading my target return as a market forecast, when it’s really just a required return.
My choice of 3% real return is irrelevant to the directional thesis of the post anyway, namely that higher bond yields, locked into a bond ladder, mean a smaller equity sleeve can deliver the same targeted return than in prior years when bond yields were lower. If someone revisits the allocation assumptions they made 10 or 15 years ago, they’ll likely find a lower equity allocation now does the same job. The 3% figure was just an illustrative example, nothing more.
“If someone revisits the allocation assumptions they made 10 or 15 years ago, they’ll likely find a lower equity allocation now does the same job.”
Morningstar came to this same conclusion a year or so ago. As a result I trimmed my equity position by 5% using Adam Grossman’s theory of little, or half steps if you don’t have full confidence in your investment move.
You can see in my quotes on this post by Mark Crothers that I have a wide breath of financial reading, and use ideas from many writing sources in managing my portfolio. Even from some financial Einsteins here on HD. 😁
As another example of my financial reading guiding my moves with my portfolio I just read on Morningstar that my Vanguard Short Term Bond ETF (BIV) has been downgraded to a bronze rating from gold. This means that they do not expect future returns to outperform as many like category funds in the future.
I also read one of Adam Grossman’s Daily Briefs entitled Building a Sleep-at-Night Bond Portfolio where he recommends to having your short term bonds in US treasuries.
His reasoning is as follows, “For me, the most important thing is to own mostly short-term bonds. Specifically, you might allocate 60% of your bond portfolio to short-term Treasurys, using a fund like Vanguard’s VGSH. This fund should be among the most stable investments available because it’s backed by the U.S. government, which, for better or worse, has the ability to print money to meet its obligations. And its short duration means that, all things being equal, it will be less susceptible to rising interest rates if rates do continue to rise.“
I have a very small amount in VGSH.
Based on these two factors above on Monday I will be selling BSV (the vast majority of my short term bond position). This will further reduce the number of ETFs I have resulting in more simplicity in my portfolio.
I own BSV also. Curious… Are you investing your proceeds from BSV into VGSH or some other fixed income investment?
Into VGSH. It has a 4 of 5 star rating (top 22.5% returns in it’s category, ie backward looking), and Gold rating by Morningstar (highest forward looking rating).
Got it, thanks. I’ve held VBIRX (mutual fund equivalent to BSV) for many years. The low MorningStar rating has always baffled me a bit. While VGSH is 100% treasury, BSV is roughly 75% treasury and 25% corporate; both short-term. Yes different, but seems a bit harsh of a ratings difference. I’m still holding on to my larger positions in VBIRX and a smaller position in VGSH across various accounts. 🤷♂️
Interesting topic. Have thought about it for some time but have taken no action. I haven’t even gone so far as to do the math you had the AI do. I’m not sure the AI has the correct target allocation in terms of getting the same return for less risk, but I think certainly directionally you raise a good point, and I do think some change from our current 60/40 may be warranted.
I should add that I was already thinking about this last year. So the current environment isn’t my reason, but may push me over the edge. If I hadn’t already been leaning this way I’m not sure the current environment would move me.
Michael, full disclosure — this whole post came out of a rain-cancelled golf game and a suddenly empty Friday morning, so don’t put too much weight on the precision. More a rough compass bearing than a coordinate. That said, using the current environment as a nudge rather than the reason seems the healthiest way to come at it.
Mark, I don’t doubt the calculations at all, but I would not be comfortable at 30/70, perhaps FOMO? I feel pretty good with 53% equity at present.
Dan, nothing wrong with FOMO as a data point — it’s telling you something about your own risk tolerance, which arguably matters more than what the maths says you “should” do. Out of curiosity, did you ever get all that cash moved back into the market? Or are you still sitting on it?
LOL, I don’t wanna talk about it. I sat on too much cash for too long, but when the market went down at the end of March, I took the allocation back up to 50%, which helped heal my self-inflicted wound. It has drifted up to its current 53%. I still have enough cash to increase equities to 60%.
Now that’s a great idea for a post. You self-flagellate while explaining how much upside you missed out on, and the rest of us get to sit back feeling smug and self-satisfied. 😂
Who said anything about flatulence💩
The sky high stock market, especially as to tech stocks, combined with the current elevated interest rates, have increased my desire for a little rebalancing.
We happen to have a large portion of our domestic equity allocation in taxable accounts, and have held the postions for decades. So any sales in order to rebalance would come with a hefty capital gains tax bill.
I recently took one step, which, while very modest, does avoid the tax problem. I turned off dividend reinvestment for VTI (Vanguard Total Stock Market), and a couple of other tech heavy ETFs, VGT (Vanguard Technology) and SCHB (Schwab Broad Market).
As future dividends are paid out in cash, I’ll probably roll it into money market funds rather than bonds. The MM interest rates are favorable–and probably getting better judging by the Fed’s current attitude–and I’m still a little gun shy on bonds given recent experience.
Andrew,
”We happen to have a large portion of our domestic equity allocation in taxable accounts, and have held the postions for decades. So any sales in order to rebalance would come with a hefty capital gains tax bill.”
It’s interesting that I hear people over and over again are stuck in this conundrum. Since we were never a high income couple we never were able to maximize our 401Ks so nearly all of our portfolio is in IRAs where we don’t have to worry about capital gains taxes. Since we are retired now and live a basic lifestyle our living expenses are quite low (no debt) we have been doing Roth conversions up to the maximum of the 12% tax bracket. That has meant at least 50K in conversions each year. We also have had some taxable money due to an inheritance which was first in an intermediate bond fund, and for the last two years in a short term fund as we are close to building a porch with this money. I know that investment writes will say that this money should be in stock, but the conundrum you write of is the reason we have not.
BTW over the past seven years since our early retirement this money has allowed us to obtain ACA policies with nearly 100% subsidy until we qualified for Medicare and two new upper scale Toyotas which may be our final automobiles. Prior to that we had only purchased lower end vehicles had always purchased lower their vehicles before retiring.
David, thanks for your post. And I’m with you on Medicare and Toyotas. The former is a godsend and the latter last forever!
Andrew, you might consider selling your recent reinvestment purchases since the basis will be higher on those shares. Be sure to use the specific ID basis method to identify the particular shares you’re selling. This will also simplify things by cutting down the number of tax lots to track as Bill mentioned.
Thanks, Randy. I may look into that.
Andrew, I hear you on being gun-shy with bonds — the 2022 crash rather soured me on the idea too. Worth clarifying, when I wrote the post I was thinking more of a bond ladder than a fund, so no worries about being stuck below par indefinitely.
Hi Andrew,
When you write “I recently took one step, which, while very modest, does avoid the tax problem” I found myself nodding in agreement as I have recently turned off the automatic reinvestment of dividends in a tiny new equity position in our joint taxable account. My motivation in turning off the reinvestment is somewhat different than yours in that my primary goal is to simplify our tax basis record keeping by having dividends (mostly qualified) paid in cash to our settlement fund rather than being reinvested. I also am planning for this investment to hold any part of our future IRA RMDs that we do not currently plan to spend during our lifetime so our heirs should, hopefully, receive such assets without an embedded taxable gain.
Such basis tracking may be less important to you as I believe you live in one of the community property states (Texas) where the surviving spouse, when first spouse dies, typically gets a step up (or down) basis adjustment to 100% of the fair market value as of the date date of death for assets in a taxable brokerage account. Texas seems to have some interesting provisions in their Estates Codes including one about a community property survivorship agreement (CPSA) that may impact tax decision making. As I do not live in Texas I will pass on trying to understand that law.
Best, Bill
Hi, Bill, and thanks for your kind reply.
You’re right that we live in Texas and so the surviving spouse should benefit from a stepped up basis.
I wasn’t even aware of “community property survivorship agreements” till reading your post. It looks like they allow probate to be bypassed for the properties they cover. I think our estates will go through probate in any event, but in Texas, as along as you have a will, the probate process is usually pretty straightforward.
You said your main goal in turning off dividend reinvestment for that holding was to simplify cost basis records. I likewise have some mutual funds acquired decades ago for which I had to burn a weekend manually calculating the adjusted basis after including all the many dividend and capital gains that were reinvested. Once that chore was completed, I turned off reinvestment as I never wanted to re-figure those laboriously acquired bases!
But let me ask: As to the investment for which you wanted to simplify the cost basis record, you indicated it is new. Since in more recent years brokerage firms maintain and recalculate basis for us, what complications are you concerned with?
Thanks as always for your expertise,
Andrew
Here is a link to a AICPA 2013 archive article about the history of the basis reporting mandate passed in 2008 that became effective starting for basis of investments bought starting after 2010 that describes many of problems in the initial years.
I actively worked preparing complex individual tax returns during this change over period and I agree electronic tracking of basis is much better now. But when something happens with basis tracking now the burden still falls on you, the taxpayer, to determine the basis. I would prefer to deal with just the basis on the handful of my individual purchases and not the basis on all of the dividend re-investments.
When do things typically go wrong now regarding basis? My experience was the most frequent problems with basis occurred when-
If a person looks at their basis as shown on their broker statement prior to sale and the basis is there, then I would expect the broker tax report for the year will likely be reported correctly on their annual 1099-B tax form. If the basis is unknown on the reporting broker statement prior to the sale, typically blank, zero or N/A, then typically the broker tax statement assumes the basis is zero. Not the answer the taxpayer would prefer.
If the manner your tax reporting is input into your personal return does not match what the IRS computer has received directly from your broker a letter from the IRS is likely. Usually a long while after your return has been filed.
If your broker initial 1099-B warns you the information is preliminary that means a change is possible. I would often recommend extending filing the 1040 rather than having to amend the return due to changes in amounts on a subsequent amended consolidated 1099 from your broker. Some broker amended 1099-B forms will show the changes in bold or italic lettering.
I hope my thoughts help.
Bill
Thanks, Bill. As always, your replies are detailed and helpful.
Andrew
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