New Investing Rule of Thumb to Replace "Own Your Age in Bonds"

15/50 Stock Rule Helps Investors Strike a Balance Between Risk and Reward

Person checking their investments on their smartphone.
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One of the standing adages in the investing arena is for investors to break their portfolio into two categories—one with stocks, and the other with bonds—with the percentage of bonds in the portfolio corresponding to the age of the investor.

This financial axiom states that the percentage of bonds in your portfolio should equal your age, based on the notion that as we move nearer to retirement, we want to replace the growth potential and risk of stocks with the relative predictability of bonds.

For example, if you are age 25, then 25% of the value of your portfolio should be in bonds. If you are age 60, then 60% of the value of your financial assets should be in bonds. However, that formula might not be as relevant to investors as it once was. The bond market, while not traditionally as volatile as the stock market, can change—and is changing.

Key Takeaways

  • A traditional investing rule of thumb said that you should invest in stocks and bonds with the bond percentage equaling your age.
  • Today's longer lifespans, along with the potential lower returns on bonds, mean that it's worth considering a slightly more aggressive strategy.
  • The 15/50 rule says that you should always invest 50% of your assets in bonds and 50% in stocks as long as think you have more than 15 years left to live.

Why "Own Your Age" No Longer Works

The concept of bonds following a person's age is less useful today with the significant changes happening in the bond market. As interest rates fall, bond yields go up; the opposite is also true. After three decades of downward movement, interest rates have started to move slowly higher from all-time lows.

Interest rate trends are famously hard to predict in the short term, but we could be in for a longer period of slowly rising rates. That means the high annual return that bonds have averaged since 1976 would be unlikely, with yields slowly lowering.

Consider today’s long lifespans. It’s not uncommon today for someone to be retired for 25 or 30 years. Paying for a longer retirement in a shorter period will probably require you to take more risks before and during retirement than your parents did. That means owning more stocks, which offer better potential for growth but higher volatility.

An Alternative to Bonds by Age

If you have at least a moderate risk tolerance, forget about bonds and your age, and implement the 15/50 stock rule. If you believe that you have more than 15 years left to live your portfolio should consist of at least 50% stocks, with the remaining balance in bonds and cash. This approach can help you maintain a balance between risk and reward.

This isn’t a new idea by any means. The 15/50 portfolio idea—which is split 50/50 between stocks and bonds initially—has been around for decades. Columbia Business School professor Benjamin Graham (mentor to famed billionaire investor Warren Buffet) championed this philosophy, as did Vanguard founder John Bogle.

The stocks in your 15/50 portfolio can be either dividend-payers or growth stocks. Watch your allocations closely, and reallocate as necessary to prevent either stocks or bonds from tipping beyond the 50% mark.

Actions to Take When the Market Shifts

Benjamin Graham explained, “When changes in the market level have raised the common-stock component to say, 55%, the balance would be restored by a sale of one-eleventh of the stock portfolio and the transfer of the proceeds to bonds. Conversely, a fall in the common-stock proportion to 45% would call for the use of one-eleventh of the bond fund to buy additional equities.”

What does that mean for an investor? If the proportional value of stocks to bonds in their portfolio were to shift due to market swings, the investor should then shift their investments from stocks to bonds or bonds to stocks accordingly to maintain the 50/50 balance.

Tolerating Risk

A 15/50 Stock Rule portfolio requires more risk tolerance than one based on your age, especially if you are in your 70s. Higher risk is assumed if you build your portfolio to a 50/50 split and then leave it to grow; however, this split comes with a risk-mitigation tactic—proportional adjustment at 5% in either direction, which maintains the symmetrical value of each of the investment types.

To ensure that your portfolio is balanced, you should constantly monitor the value of your stocks and bonds to make sure you don't go past your trigger percentages.

Using this method, you should be able to maintain the overall approximate value of your portfolio when bond yields are rising and falling due to rate fluctuations. That would decrease your risk—as long as you believe that you have about 15 years left to live.

The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.