Decide on percentage of funds to allocate and choose an investment horizon
Before you invest in bonds, you need to decide what percentage of your funds you would like to shift into bonds and then decide on the intended time horizon(s) of the allocation to bonds. If making a more significant decision on the percentage of your portfolio to allocate to bonds on a longer term basis beyond the next year or two, or if making any significant investment decision, consult a professional investment adviser. One “rule of thumb” allocation model is presented below.
Portfolio allocation of bonds according to one widely used model.
There is no one-size-fits-all answer to the question of how much of a portfolio investors should allocate to bonds, as the appropriate allocation will depend on a number of factors, including the investor's goals, risk tolerance, time horizon and current market conditions.
That said, a widely circulated rule of thumb among financial advisors is based on the investor's age. With the assumption that bonds offer lower, but less volatile returns than stocks over time, the rule of thumb suggests that investors should subtract their age from 100, and allocate that percentage of their portfolio to stocks, with the remainder allocated to bonds.
For example, a 30-year-old investor would allocate approximately 70% of their portfolio to stocks (100 minus 30), and 30% to bonds – i.e. the percentage of bonds in your portfolio, according to this model, should equal your age. As the investor gets older and approaches retirement, the allocation to bonds would gradually increase, as a way to reduce overall portfolio risk and volatility.
It's important to note that this rule of thumb is just one approach to determining an appropriate allocation to bonds and may not be suitable for all investors.