Common Sense on Mutual Funds, Updated 10th Anniversary Edition

by John C. Bogle

Long before the crash, I had fine-tuned my rule-of-thumb asset allocation model, centered at 50/50 for older investors in (Continued) the distribution phase of their investment plan. Rather, I recommended—as a crude starting point—that an investor’s bond position should equal his or her age. An investor age 65, then, would consider the propriety of a 65/35 bond/stock allocation. Clearly, such a rule must be adjusted to reflect an investor’s objectives, risk tolerance, and overall financial position. (For example, pension and Social Security payments would be considered bondlike investments.) But the point is that as we age, we usually have (1) more wealth to protect, (2) less time to recoup severe losses, (3) greater need for investment income, and (4) perhaps an increased nervousness as markets jump around. All four of those factors clearly suggest more bonds as we age.

strong stock markets transform your original allocation of 60 percent stocks and 40 percent bonds to a mix of 70 percent stocks and 30 percent bonds, you may need to sell stocks and invest the proceeds in bonds. This is easily done in a tax-deferred retirement account, where portfolio adjustments entail no tax liability. For taxable accounts, however, a sale of securities today is all too likely to trigger adverse tax consequences. If your holdings are primarily in a taxable account, a wiser course of action would be to redirect future contributions to bonds and gradually restore your portfolio to its original proportions.

Asset allocation is critically important; but cost is critically important, too. When compared to these two issues, all the other factors that go into investing in a diversified portfolio of high-grade stocks and bonds pale into insignificance.