A client, aged 30, has a long-term investment horizon and high-risk tolerance. They are currently contributing to their retirement account and want to maximize long-term growth. Which asset allocation strategy best aligns with the 'bond tent' approach for this client?
- AStarting with 10% bonds / 90% equities, gradually decreasing bonds towards retirement, then holding a static high-equity portfolio.
- BStarting with 90% equities / 10% bonds, gradually increasing bonds towards retirement, then decreasing them post-retirement.
- CMaintaining a static 50% equities / 50% bonds portfolio throughout their life.
- DStarting with 10% equities / 90% bonds, gradually decreasing bonds towards retirement, then increasing them post-retirement.
Show answer & explanationAnswer & explanation
Correct answer: B. Starting with 90% equities / 10% bonds, gradually increasing bonds towards retirement, then decreasing them post-retirement.
The 'bond tent' strategy suggests a higher allocation to equities in early years (like 90% for a 30-year-old with high-risk tolerance), gradually increasing bonds as retirement approaches (the 'peak' of the tent), and then gradually decreasing bond allocation again in retirement. Option B accurately describes this approach.
Why the other options are wrong
- A. This only covers the pre-retirement phase and suggests a static high-equity portfolio post-retirement, which is risky and doesn't fully represent the bond tent.
- C. A static allocation does not follow the dynamic adjustments of the bond tent strategy.
- D. This is incorrect; it suggests starting with a very conservative portfolio and then becoming more aggressive, which is the opposite of typical life-cycle investing.
Bond Tent Strategy
An asset allocation strategy where bond allocation is initially low, increases significantly as an investor approaches retirement, and then decreases again during the decumulation (retirement) phase.
- High equity allocation in early career.
- Peaks in bond allocation around retirement age.
- Decreases bond allocation post-retirement.
- Aims to mitigate sequence of returns risk near retirement while allowing growth pre- and post-retirement.
Memory trick: Bond Tent: Imagine a tent with bonds as the peak protection around retirement.