John Bogle: Social Security is the new fixed income

With last week’s epic bond slaughter, and the brutal 14% face-ripping that Apple bond buyers just got in two months, it’s worth listening to the advice of sages on bond investing.

Here’s Vanguard legend John Bogle: Are retirees holding too many bonds?

“Social Security’s the greatest fixed income you’ll ever get,” Mr. Bogle said.

With that in mind, it would behoove retirees to pay more attention to dividend-paying stocks in a retirement account.

“Dividends go up virtually every year with two exceptions: the Great Depression and 2008. I don’t think that’s likely to happen again,” Mr. Bogle said. 

Traditional asset allocators have rules of thumb like that your equity exposure should be 100% minus your age, e.g. a 30-year-old should be 70% equity and a 70-year-old should be 30% equity. I think that’s bunk, and it seems Bogle agrees. Perhaps such a model could be defended when real interest rates are significantly positive, but with nominal rates still near all-time lows, I wouldn’t touch fixed income with a 10-foot pole.

Bogle has a great point: use your Social Security income for the fixed-income portion of your portfolio, and allocate the rest to stocks (and precious metals, obviously). Unless, of course, you’ve saved enough that you’ll be means-tested out of Social Security, in which case you’ll be well-off enough to weather the volatility and you’ll still want the real return and inflation protection of stocks over the puny nominal yields of bonds.