As Henrys, we have everything going for us. We are young, we are high earning and that gives us the capital to ride out any rollercoaster volatility in the stock market, believing that we can bounce back stronger than ever. While this is true today, this might not always be true particularly as we age and our capacity to withstand volatility goes down with mortgages, family commitments and unexpected illnesses (touchwood!)
Putting 100% of your portfolio in stocks and crypto might sound like a good idea to ride all the potential upside in the uncertain future, but take it from me as someone who has done it before, that will truly result in sleepless nights during market volatility. Deploying some part of your portfolio in relatively lower risk bonds and fixed deposits will help you sleep better during the market downturn and that emotional and mental security is what you need to make better decisions during such black swan events.
Investing in bonds and fixed deposit also provides a reliable source of income which gets increasingly important as we hit our FIRE number and want to solve for regular cashflow while preserving capital with relatively lower risk.
Overall, a well-balanced portfolio helps you achieve your financial goals by aligning your investment strategy with your risk tolerance, time horizon, and income needs. Proper allocation ensures that you’re not overly exposed to market fluctuations while still participating in growth opportunities.
So how do I decide on my portfolio allocation?
I thought you would never ask, we generally decide on portfolio allocation based on age and risk tolerance with the assumption that as you age, your risk tolerance goes down. Many FIRE advocates have shared the 100% rule where you hold a percentage of stocks equal to 100 minus your age. For example if you are 25 years old, you hold 25% of your portfolio in bonds and 75% of your portfolio in shares.
I disagree with the 100% rule for Henrys. Given our relatively high earning power and relatively young ages. We should have the capacity to ride out any storms especially in the early stage of our careers. Instead, I advocate the 120% rule.
The 120% Rule
Similar to the 100% rule, this rule suggests that you should hold a percentage of stocks equal to 120 minus your age, with the remainder in bonds. For example:
If you’re 30 years old: 120 – 30 = 90% in stocks and 10% in bonds.
If you’re 50 years old: 120 – 50 = 70% in stocks and 30% in bonds.
This will allow younger Henrys to take on more risk (with potentially higher upside) as we have a longer time horizon to recover from market downturns and as you get older you prioritise stability and regular income over growth.
Is there a lifehack for portfolio allocation?
Of course there is, we are HITC and we have a lifehack for everything! Traditionally, we might have approached a financial planner or a fund manager about our retirement needs and he deliberately constructs a finely balanced portfolio which he actively manages and charges you an arm and a leg in management fees eroding your gains.
What if I tell you there is a low cost alternative to this fund manager? They come in the form of Target Date ETFs and Perpetual Allocation ETFs.
Target Date ETFs
Target date ETFs automatically adjust the allocation of stocks and bonds as you approach a specific retirement date. These ETFs are designed to become more conservative over time, reducing stock exposure and increasing bond holdings as you near retirement. If you know when you are going to retire, you can just buy the ETF which aims for your retirement at that year.
Example:
• Vanguard Target Retirement 2045 Fund (VTIVX): This fund gradually shifts its allocation from a higher percentage of stocks to more bonds as the target date (2045) approaches.
Perpetual Allocation ETFs
Perpetual allocation ETFs maintain a fixed ratio of stocks to bonds, providing a consistent level of risk and return. These are ideal for investors who prefer a steady, predetermined allocation.
Example:
• iShares Core Growth Allocation ETF (AOR): This ETF maintains an 80/20 allocation, with 80% in stocks and 20% in bonds, providing growth potential with a cushion of stability.
• Vanguard LifeStrategy 60% Equity UCITS ETF Accumulating (VNGA60): This ETF maintains an 60/40 allocation, with 60% in stocks and 40% in bonds. Interestingly, this ETF does not payout any dividends, instead it accumulates more units of this stock for you to continue riding the upside if you are investing for the long term.
Conclusion
Balancing your portfolio between stocks and bonds is essential for managing risk and ensuring long-term financial stability. By following general allocation guidelines like the “120 minus your age” rule, you can tailor your portfolio to your risk tolerance and time horizon.
Remember, the key to financial independence is not just earning and investing but also allocating your portfolio wisely. A well-balanced portfolio will help you navigate market volatility, provide reliable income, and ultimately achieve your financial goals. Start adjusting your portfolio today, and stay on the path to financial independence!