Thank you for downloading the Smart Investing podcast from index fund manager Vanguard Investments Australia, on the web at vanguard.com.au

This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is What is your correct asset allocation to bonds?

It was first published on Friday 25 May 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

Many investors readily understand how bonds provide a means to diversify their portfolios from higher-risk growth assets while providing a regular and reliable income. These are much valued attributes, particularly when the sharemarket is highly volatile.

However, a challenge for numerous investors is to decide how much of their overall investment portfolios should be held in bonds.

There is, of course, no single answer appropriate for all investors. Much should depend on an investor's personal circumstances including age, years until retirement, tolerance to investment risk and professional advice received.

The founder of Vanguard, Jack Bogle, for instance, uses a rule of thumb that the percentage of an investor's portfolio allocated to fixed interest should correspond with the individual's age.

Under this approach, 40-year-old investors would have 40 per cent of their overall investment portfolios in bonds whereas 60-year-olds would have 60 per cent of their portfolios in bonds. This asset allocation may appeal to, say, conservative investors who have the remainder of their portfolios diversified into the other main asset classes including shares and property.

It is important to emphasise that such rules of thumb are really only a starting point that will not suit all investors. Although tolerance to risk tends to decrease with age, some older investors can cope with more risk than others of the same age.  

A financial planner who is fully aware of your personal circumstances can help determine your tolerance to investment risk and recommend how your portfolio should be appropriately diversified.

Of course, the setting of your portfolio's initial diversification between the asset classes should not be treated as a set-and-forget exercise. Typically, your asset allocation will need regular rebalancing as markets change, along with your circumstances.

And that concludes the column

What is your correct asset allocation to bonds?

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

To receive the column by email each week go to vanguard.com.au and register with Smart Investing. 

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.