Owning Bonds

Bonds most commonly are used to reduce portfolio risk. Typically, as your risk tolerance decreases with age, you will include more bonds in your portfolio, shifting its weight from stocks – with more growth potential – to bonds, with more income and less risk. This change in the weighting of portfolio assets usually begins as you get closer to retirement.

For years, the conventional wisdom was that you should have the same percentage of your portfolio invested in bonds as your age, so that when you are thirty, you have 30 percent of your portfolio in bonds; when you are fifty, you have 50 percent of your portfolio in bonds, and so on. That wisdom is being questioned now, however, because while bonds are lower risk, they also lower growth potential. Today, since more people can expect to live much longer past retirement age, they run a real risk of outliving their funds if they invest as conservatively as the conventional wisdom suggests.

It is still true nevertheless that for most people, risk tolerance changes with age, and your investment in bonds should reflect that change.