A New Take on Bonds

CIA Bonds

For a long time now, our team has mentioned general guidelines about bond investing based on an acronym – OYA – Own Your Age (in bonds).  This principle, most notably, came from the investing philosophy of Vanguard-founder Jack Bogle. For instance, if you are 50 years old, roughly 50% of your investment portfolio should be in high-quality, high-yield bonds.  When clients have asked us how they should use the OYA approach, we’ve always cautioned them that this is simply a general guideline and much of their allocation decisions need to take into account risk tolerance, time horizon and return expectations.

As we near 2014, we’ve put a new spin on this old notion of OYA. Own your age in bonds worked for the last 30 years…for the next 30 years, Own Your Age in Income.

For the last 30 years, we filled the income bucket with just traditional bonds. Today – our team looks at other asset classes to fill to complement bonds in the income bucket. Take for instance REITs and MLPs. These are stock-like investments with bond characteristics. Because of their tax structure, REITs and MLPs are obligated to pay out 95% of their profits as “distributions” to shareholders. Their share price can be volatile like stocks, but the payouts from index funds in these asset classes is generally very stable. These asset classes represent the second “D” in the DID Rule… distributions. Dividend stocks are still part of your Growth Bucket, but can offer a great income stream, as well.

As you’re reviewing your investment portfolios at the end of this year, these are some tips to take into consideration.