Disclaimer: Please be advised that this article represents my opinion only. I am not suggesting you do the same.
Asset allocation
Ever since I got my first finance book, I have been reading about the bond vs stock asset allocation ratio. In theory, the percentage of bonds vs stocks in your portfolio should change every year. The older you get, the bigger the bond ratio should be.
Financial advisors only recommend bonds and stocks because these are the asset classes for which they can get a commission. There are many other asset categories that are completely ignored. For instance, my asset allocation is 50% stocks and 50% real estate.
My stock portfolio is divided as follows: 33% Canadian, 33% US in US dollars and 33% international in either US or Canadian dollars. For the moment I only use ETFs (mostly from Vanguard). I don’t use (and I recommend never using) actively managed mutual funds.
Stocks are as safe as bonds
Financial pundits will tell you that bonds are safer than stocks. But that is not true. Stocks are more volatile than bonds, yes, but not necessarily riskier. Let’s not confuse volatility with safety. At any 30 year time period, stocks have never lost money (in North America) and it has always outperformed bonds. The historic rate of return for bonds is about 2% and the historic rate of return for stocks is about 8%.
It is suggested that, as we age, our bond portion should increase and our stock portion should decrease.
Why would you shoot yourself in the foot
Many advisers, recommend starting adding bonds to your portfolio as early as age 20. Really? A person in their 20s has about 60 more years of life and already a financial adviser is handicapping the growth potential of his portfolio.
Another advice that kills me is to have about 65% of your portfolio in bonds at the time the person retires at 65 years old. Really? A person who made it to 65 could easily live past 90. So for 25 years, the growth will be hampered.
My personal situation
As I mentioned, 50% of my portfolio is in real estate. Eventually, I will sell my real estate and I will be 100% in stocks. I am planning to hold stocks until the day I die. I will not have bonds. The price to pay for reduced volatility is simply too high.
Update March 2020
Last year I sold one of my rental properties. Now 75% of my portfolio is in stocks, 25% in real estate.
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