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These money and investing tips can help you give your portfolio free rein

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Do men and women save differently for retirement?

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A 2020 Bank of America study examined 401(k) participation rates, contribution rates, investment allocations, balances, and leakages for the 4.6 million participants in the company’s record-keeping systems.

This flight attendant saved enough to retire early but chooses to work

In addition to breaking the data out by gender, the report also includes results by generation. The authors conclude that participation rates are lower for women than men; contribution rates are roughly equal; equity allocation is lower for women than men; and women are more likely to borrow or take hardship distributions.

While these results are all borne out in the data, I think that the pattern by generation is also really interesting. The picture that emerges is that differences between men and women are disappearing over time. This conclusion must be somewhat tentative since we are looking at each generation at a different stage in the life cycle (baby boomers ages 55-73, Generation X 39-54, and millennials 23-38). Nevertheless, the pattern is tantalizing.

The tables below show three developments. First, participation rates for women, historically below those for men, are higher for millennials (see table 1). Second, the percentage of women’s 401(k) assets allocated to equities, historically below that for men, is also higher for millennials (see table 2). And third, while balances for women remain below those of men, women’s balances as a percentage of men’s appear to be increasing over the generations (see table 3). Contribution rates are not shown because they remain the same across gender and generation.

The final table shows the pattern for 401(k) loans and hardship withdrawals. Loans repeat the pattern identified above: in earlier generations, women were more likely to borrow against 401(k) balances; for millennials the pattern is reversed. In terms of hardship withdrawals, women in all generations are more like to withdraw funds.

So what’s the bottom line? My take is the reason for the continued shortfall in 401(k) balances for millennial women versus men must rest on salary differences, given that the contribution rates are the same across gender, women are more likely to participate, women allocate more to equities, and women are less likely to take out a loan. It’s true that women are more likely to take a hardship withdrawal, but the tiny percentage engaging in that activity would be unlikely to affect the outcome.



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Don’t stop investing in bonds

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Given the current doom and gloom, with the occasional spell of relief, over interest rates rising, does it still make sense to invest in bonds when saving for or living in retirement?

Well, it sure didn’t seem to make sense when interest rates were (and still are) at historic lows. Like, who in their right mind wants to earn 0.318% on a 10-year Treasury, which is what it was earning roughly one year ago?

And it might not make sense now that rates have risen from the March 2020 lows. Remember, the principal value of your bond does decline when interest rates rise.

But what folks might be missing in the current topsy-turvy environment is the role that bonds should or ought to play in a portfolio.

Safety, not income

According to Larry Swedroe, co-author of Your Complete Guide to a Successful Retirement and director of research at Buckingham Strategic Wealth, the main role of fixed income in your portfolio should be safety, not return, not income, not cash flow.

In other words, if all else goes to pot, if stocks should crater, bonds are there to provide safety of principal—at least at maturity.

Plus, bonds are there for diversification purposes. Bond prices should rise when in value when other assets, say, stocks are falling in value, and vice versa.

“Rule No. 1 that every investor should abide by is that you want to make sure your portfolio has a sufficient amount of safe, fixed income to dampen the overall risk of the portfolio to an acceptable level,” he said. “Because if not, and equities drop, which they tend to do once every 10, 15 years or so, 40, 50% or whatever, then you’re going to exceed your tolerance for risk.”

At best, he said, you won’t be able to sleep, enjoy your life, and everything else. And, at worse, you’ll engage in the worst thing you could do: panic and sell. “And once you sell…I think you’re virtually doomed to fail unless you just get lucky.”

Bottom line for Swedroe: “You have to have enough safe bonds.”

Now how much you should invest in bonds, stocks and cash is, according to Sébastien Page, author of Beyond Diversification and head of global multiasset at T. Rowe Price, “is, without doubt, the most important portfolio construction decision an investor makes.”

How much to invest in bonds?

According to Swedroe, how much you should invest in fixed income is a function of your ability to take risk. And your ability to take risk is determined by four factors: your investment horizon, the stability of earned income, your need for liquidity, and options that can be exercised should the be a need for a plan B. What’s more, Swedroe said owning bonds whose maturity is beyond your investment horizon takes on more risk than is inappropriate.

Ability to take risks

Investment horizon (years)

Maximum equity allocation (%)

0-3

0

4

10

4

20

6

30

7

40

8-9

50

10

60

11

70

12-15

80

16-19

90

20+

100

Source: Your Complete Guide to a Successful & Secure Retirement

Like Swedroe, Page also believes the decision turns in part on one’s human capital, the present value of your future salary income. And once you factor in a person’s human capital, which Page argues acts more like a stock than a bond, a balanced portfolio with a healthy allocation to stocks, not bonds, is the answer.

To be fair, the allocation to bonds isn’t static throughout the life cycle in either Page’s or Swedroe’s model portfolios.

For instance, in Page’s model portfolios, you’d allocate 15% to bonds in the 20 years before retirement, 45% at retirement, and 69% some 20 years into retirement, which is close to the rule-of-thumb that would have you subtract your age from 120 to determine how much to invest in stocks and how much in bonds. So, if you were 47, you’d invest 73% in stocks and if you were 87 you’d invest 33% in stocks.

The right bonds depend on your investment objectives

Investing in the right bonds is equally important as investing in bonds, said Massi De Santis, a certified financial planner with DESMO Wealth Advisors. According to De Santis, the right bonds help you avoid unnecessary risks and make the most out of your portfolio, particularly in a low interest rate environment.

What are the right bonds? That depends on your investment objective.

For growth portfolios, De Santis recommends that the bond component should be diversified across the bond universe, including government, government agency, investment-grade corporate and global bonds. The duration should be in the intermediate range (about 5-7 years).

The Vanguard Total Bond Market Index Fund ETF
BND,
-0.06%
,
the SPDR Bloomberg Barclays International Treasury Bond ETF
BWX,
-0.34%
,
and iShares Core US Aggregate Bond
AGG,
-0.07%

 are ETFs that would work for this objective.

For conservative portfolios, De Santis recommends highly rated short- to intermediate- bond durations that are similar to the horizon of the goal. The iShares 0-3 Month Treasury Bond
SGOV,
,
SPDR Bloomberg Barclays 1-3 Month T-Bill ETF
BIL,
,
Vanguard Short-Term Treasury Index Fund ETF
VGSH,
,
Vanguard Short-Term Bond Index Fund
BSV,
-0.02%
,
iShares Core 1-5 Year USD Bond ETF
ISTB,
+0.04%
,
and iShares 1-3 Year International Treasury Bond ETF
SHG,
+2.51%

are ETFs that would work for this objective.

And for income-focused portfolios, De Santis recommends government, inflation-protected and investment-grade corporate bonds where the duration of the goal is the average maturity. The iShares TIPS Bond ETF
TIP,
+0.10%

and the Vanguard Long-Term Bond Index Fund ETF
BLV,
-0.19%

 are examples of ETFs that would work for this objective.



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These money and investing tips can remind you to not take Mr. Market’s moods personally

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, help you make sense of your investment portfolio when stocks and bonds are choppy and Mr. Market’s mood seems to change hourly.

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