Bond selloff is risky investment strategy, study says

January 9, 2009

Although withdrawing bonds first from a diversified retirement portfolio extends its life 90 percent of the time, a bonds-first strategy is not worth the risk for today's retirees, according to a recent study.

Although withdrawing bonds first from a diversified retirement portfolio extends its life 90 percent of the time, a bonds-first strategy is not worth the risk for today's retirees, according to a study by the Financial Planning Association.

Researchers compared the strategies of withdrawing bonds first, stocks first, or a 50/50 combination of stocks and bonds in the November 2008 Journal of Financial Planning. Based on 136 years of historical data, the authors concluded that cashing in bonds results in the portfolio lasting longer than the other two strategies about 90 percent of the time, by an average of 2.3 to 3.8 years.

However, the challenge of a bonds-first strategy is that it creates a potentially more volatile situation, researchers say, because it leaves retirees with an all-equity portfolio. The least volatile strategy is equally withdrawing stocks and bonds from a 50/50 stock/bond portfolio.