Since I got on top of my finances (I wrote to you before about this), we got married, and now I’m the finance person. My husband has similar values as me (spend < earn, save) which is good. He also believes in ‘put it in index funds’ – also good, but that’s where his thoughts stop. So he had all his 401k money in vanguard s&p500; no bonds. I need to have a conversation with him about asset allocation, ie, a choice of some percent of bonds. I plan to show him a morningstar chart of total market and total bond plotted over 20 years, and point him towards the bogleheads wiki. What other resources or reasoning can you suggest for him, and others who need to learn a bit more here? Preferably more concise than not, as I know the longer the page, the less likely he’ll actually read it.
(I know about target date funds, but we’re past that already for several reasons, including a sizeable taxable acct, and a sucky choice of funds in his 401k where the only reasonable choice is the 500 fund; my 403b is great, so that’s where most of bonds are)
This is a fun question.
Ok, so first, that morningstar chart is the place to go for what you’re asking, as is the Bogleheads Wiki. So thank you for answering your question. :) Walter Updegrave has some good articles on asset allocation as well, but they tend to be based on specific situations so you’re probably best off with the Bogleheads Wiki. (Note: Updegrave recommends this questionnaire from Vanguard to figure out what % mix is right for you– according to it I should be 100% invested in stocks(!).)
Second, for the question you didn’t ask, asset allocation is both more and less complicated than it initially seems. Which really means the experts understand the basic idea, and there’s heuristics (ex. 120 – your age in stocks, but there are many others) to use that generally won’t get you into trouble, but we really don’t know what the ideal portfolio mix is. Even target-date funds will have different glide paths because they have different underlying beliefs about what the appropriate asset allocation is.
Your DH’s choice of 100% stocks may actually be a valid choice.
Including bonds in your portfolio is mainly important because the stock market is volatile over the short term, even though it generally goes up over the long term. If your time horizon is long before you’re planning on taking assets out and you’re not very risk averse, then you may not need that many bonds because you can trust that the market will eventually get better after a crash. Bonds are safer than stocks and don’t track stocks, so they help to smooth out volatility in your portfolio. However, bonds also give lower returns on average.
It is recommended for most people that you have some safe assets in your portfolio, because most of us don’t have infinite investing time horizons and there’s all sorts of unexpected emergencies that can happen. Those safe assets don’t have to be bonds, though bonds are nice because although not as safe as an FDIC insured CD, they generally have higher returns than said CDs. But if you have a lot invested in cash or CD ladders for whatever reason and you don’t yet have a huge 401(k) portfolio, you might not need bonds yet. On the opposite side, if you have huge amounts of wealth and are planning on passing your inheritance on rather than drawing it down, you may also tilt towards stocks away from bonds because your horizon is infinite (though at huge amounts of wealth you should probably be looking at more complicated ways to dodge taxes).
IIRC, you’re (plural) in your early 40s but doing catch-up retirement savings. That means your time horizon may be longer than that of many people in their 40s, meaning you might be willing to take on additional risk. However, just because you may see yourself working longer doesn’t mean that the labor market will agree. So having a more traditional bond allocation may make sense.
Now, does the bond allocation have to be in your DH’s portfolio? You’re married and will most likely have to reallocate investments should you get a divorce. So no, not at all. My DH’s current portfolio has no bonds because he probably has the same stupid retirement company that your DH does– the only affordable thing is the S&P 500 fund. So we also tilt more towards bonds in my Fidelity account.
So, bottom-line– it sounds like you already know what to do. But your husband may be right about his asset allocation based on his levels of risk aversion. This is something that you two may have to compromise on, but you’ll (plural) still be ok wherever you end up within that compromise. It’s not like he’s 100% invested in company stock, which would truly be dangerous.