Financial Samurai’s Allocation of Stocks and Bonds

Financial samurai’s blog proposes several models for stocks/bonds allocations (see Table 11.9).

The New Life asset allocation recommendation suggests subtracting your age from 120 to determine the percentage of your portfolio that should be allocated to stocks. This approach is based on the premise that advancements in science and better awareness of healthy living are increasing life expectancy. Given that stocks have historically outperformed bonds over the long term, a greater allocation towards stocks is recommended to support longer lifespans. However, risk tolerance typically decreases with age, necessitating a more conservative approach as one nears retirement. Ideally, retirement portfolios should aim for conservative returns, low volatility, and steady passive income. Candidates for the New Life Asset Allocation:

• Expect to outlive the average. U.S. life expectancy at birth is roughly 76 for men and 81 for women, but that is the wrong number for retirement planning: conditional on already having reached 65, the averages run several years higher, and half of you will exceed even that. Plan for the longevity tail, not the median.
• Prefer not to actively manage your investments but rely on your portfolio for a comfortable retirement.
• Plan to retire around the conventional age of 65, give or take five years.
• Maintain a healthy lifestyle, regularly exercise, and follow a nutritious diet.

The Survival Asset Allocation is designed for risk-averse investors. A 50/50 allocation between stocks and bonds increases the likelihood of portfolio stability during market downturns, as bonds typically rise in value when stocks fall. Historical data supports this, with bonds showing resilience during crises such as the 2008 Global Financial Crisis and the 2020 recession. Candidates for Survival Asset Allocation:

• Believe the stock market may underperform bonds, despite historical data.
• Are within 10 years of full retirement and want to protect their nest egg.
• Depend on their portfolio for retirement due to a lack of alternative income streams.
• Are wary of stock market volatility, scams, and downturns.
• Are entrepreneurs seeking financial safety in case their business fails.

Nothing-To-Lose Asset Allocation is designed for those willing to invest entirely in stocks. This strategy may be suitable if you have a sufficiently long time horizon. Candidates for the Nothing-To-Lose Asset Allocation:

• You are wealthy and do not rely on your stock portfolio for current or retirement income.
• You have minimal assets and are willing to take significant risks because you have little to lose.
• You possess substantial earning power that is expected to increase for decades.
• You are young or have an investment horizon of at least 20 years.

Financial Samurai’s original list adds a fifth candidate: the investor who believes they can consistently pick winning sectors and stocks. This book does not. The Ibbotson–Kaplan finding at the head of this chapter — selection is a wash before costs and a loss after them — makes that belief the most expensive reason to hold 100% equities, and the four reasons above stand without it.

The Financial Samurai Allocation is a hybrid approach, combining elements of the Nothing-To-Lose model and the New Life model. It assumes that stocks will outperform bonds over the long run but acknowledges ongoing market volatility. This model anticipates lower returns for both stocks (7–8%) and bonds (2–4%) compared to historical averages. Candidates for the Financial Samurai Asset Allocation:

• Have multiple income streams.
• Are personal finance enthusiasts who enjoy managing their money.
• Do not rely solely on their 401(k) or IRA for retirement but see it as a bonus.
• Enjoy studying macroeconomic policy and its financial implications.
• Are early retirees contributing less to their portfolios.
• Invest in real estate to diversify and mitigate stock market volatility.