How Much of My Portfolio Should Be in Bonds?

Investing is inherently risky. To try and offset this risk, most investors will turn to safer assets, like bonds. But investing too much of your portfolio in bonds could limit your returns and leave you falling short of your financial goals. This brings us to the age-old investing question: How much of my portfolio should be in bonds? 

To answer this question completely, we need to consider factors like your risk tolerance, time horizon, and investing goals. This is why it’s best to speak directly with a financial advisor who can provide a clearer answer and recommend a diversified portfolio strategy that’s best for you.

That said, this article will break down general tips and guidance that can help you determine what percentage of bonds to put in your portfolio.
If you would like to speak with a financial advisor, please call ARQ Wealth at (480) 214-9572 or use our contact form to request a meeting.

How Much of Your Portfolio Should Be in Bonds?

As a general rule of thumb, investors who value stability and consistency should have a larger percentage in bonds, while investors who value growth should have a smaller percentage in bonds. 

Let’s explore a few common allocation strategies.

The 60/40 Portfolio

Allocating 60% of a portfolio to stocks and 40% to bonds has long been considered a classic approach to achieving a balance between growth and stability. 

This portfolio allocation helps investors capture both growth (through their exposure to stocks) as well as stability and income (through bonds), with a slight lean toward stocks.

While no strategy is one-size-fits-all, the 60/40 allocation has served as a good starting point and benchmark for many investors. The stock portion drives returns over time, while the bond allocation cushions against downturns and generates predictable income. 

Investors can also flip the allocations (60% bonds, 40% stocks) to create a slightly more stable portfolio. Or, they can mix-and-match the percentages according to their personal goals: 

1. 70% stocks, 30% bonds (or vice versa)
2. 80% stocks, 20% bonds (or vice versa)
3. 90% stocks, 10% bonds (or vice versa)

The more aggressive you want to be, the more stocks you should own. The safer you want to be, the more bonds you should own.

To help understand which allocation might be best for you based on your age, consider using the Rule of 110.

The Rule of 110

The Rule of 110 works by subtracting your age from 110. The result is your recommended stock allocation, and the remainder is your recommended bond allocation. 

Here are a few example allocations, using the rule of 110:

1. 40 Years Old: 70% stocks and 30% bonds (110 – 40 = 70)
2. 50 Years Old: 60% stocks and 40% bonds (110 – 50 = 60)
3. 60 Years Old: 50% stocks and 50% bonds (110 – 60 = 50)
4. 70 Years Old: 40% stocks and 60% bonds (110 – 70 = 40)
5. 80 Years Old: 30% stocks and 70% bonds (110 – 80 = 30)

This helps provide a general starting point for a bond allocation that might be appropriate for you based on your age alone. 

But remember that this is just a general recommendation, and many other factors (portfolio size, financial goals, income, etc.) are at play. 

Let’s explore how those factors can influence your portfolio.

Asset Allocation: Factors to Consider

Time Horizon

Your time horizon is the length of time that you plan to keep your capital invested. As a rule of thumb, the more time you have to keep your money invested, the more aggressive you can be.

A longer time horizon provides more time to navigate market downturns. If the stock market were to drop 20% next year, then it’s not the end of the world because your portfolio has time to recover over the next few decades.

A shorter time horizon may require a more conservative investment approach, as there is less time to recover from potential losses. If you plan to retire next year and the market dips 20%, then you may be forced to delay your retirement or sell your investments at a loss. 

Financial Goals

Investment strategies can also vary widely depending on your personal circumstances and financial goals. 

For example, are you still saving for a house? Do you have children? Do you have a comprehensive retirement plan, or are you still in the planning phase? 

Questions like these guide investment decisions, and it’s best to work with a financial advisor who can create a personalized investment strategy that is aligned with these goals.

Income Vs Growth

Another key question to consider is whether you plan to rely on your portfolio for income or make growing capital your primary goal.

If you are retiring and need to replace your traditional income, then you’ll likely benefit from a greater allocation towards bonds and other fixed-income assets. A higher percentage in bonds means more immediate income, although the tradeoff is that your longer-term returns will be lower when compared to an all-stock portfolio.

If you are still working full-time and have a consistent income, then you likely aren’t relying on income from your investments just yet. In this case, you might benefit from a greater allocation towards stocks. The increased growth potential could help you capture a greater return. Or, you could also opt for dividend-paying stocks, which offer a middle ground.

Tax Implications

Your asset allocation strategy doesn’t just shape your risk and return; it also affects your tax bill each year. 

For example, stocks held in taxable accounts will generate capital gains, which will be taxed at either short-term or long-term rates depending on how long you hold them. Bonds, on the other hand, typically produce interest income that is taxed as ordinary income, which can be higher than capital gains rates. 

Placing different assets in tax-advantaged accounts, such as IRAs or 401(k)s, can help minimize your overall tax burden. Working with a financial advisor who specializes in tax planning can help ensure your allocation strategy is not only aligned with your financial goals but also structured to be as tax-efficient as possible.

What Bond Allocation is Right For You?

Like almost all investment decisions, determining how much of your portfolio should be allocated to bonds is not a one-size-fits-all decision. 

Bonds play an essential role in reducing volatility, generating income, and balancing risk against reward, but the right allocation depends on factors such as your age, time horizon, income needs, and long-term financial goals. While rules of thumb like the 60/40 portfolio or the Rule of 110 can provide helpful starting points, they don’t capture the full complexity of your unique situation.

That’s where professional guidance can make all the difference. 
At ARQ Wealth, we can help create a customized asset allocation model designed to maximize your returns, manage risk, and minimize taxes. If you’re ready to build a portfolio that has the right asset allocation to help build your financial future, connect with ARQ Wealth today, and let’s design a strategy that works for you.