You’d think this would be common sense, but I see so many people who are constantly screwing this up.

If you talk to any financial advisor, most PF bloggers, or the bottom of my shoe, they’ll all tell you the same thing. As you get older, you should become more conservative in your investments. Most will recommend you take your age and subtract it by 100 or 110 to get the proper bond allocation. If you’re 55, then you’re looking at being between 45 and 55% in bonds. If you’re 111, you’re probably dead. Can I have your watch? Oh wait, you’re dead. (takes watch)

Of course, dividend growth investors don’t see it that way. They’re content in being close to 100% invested in stocks almost all the time, knowing that the growing dividend stream (which they’re a little sexually attracted to) will be enough to sustain their dreams of soft meat and annual trips to Arizona in their retirement. CPP will be their bond component, dammit.

And hey, that’s okay. If you’re so obsessed with dividend growth investing that you’re willing to see the strategy even through the times when the market falls 30%, then good on ya. But as we all know, many investors panic during market bottoms, crystalizing paper losses when the going gets too tough. They are the investing equivalent of Jay Cutler or a Russian hockey player, at least in Don Cherry’s erotic dreams.

It’s why I think a dividend growth strategy is unsuitable for a lot of investors, especially those people who are approaching retirement age. It’s tougher than most people think to even pick the best dividend aristocrats, and nobody wants to see a huge decline in their portfolio just a few years before they retire, even if dividends stay steady. The investor who truly doesn’t care about the amount every time they log in is few and far between.

But after saying all that, maybe there’s an argument that both dividend growth investors and traditional portfolios of 50-50 stocks and bonds are both doing it wrong as someone approaches retirement age.

The case for going 100% bonds

No, that’s not a typo. There’s an interesting argument to be made that an investor should approach a 100% bond allocation as they hit retirement age.

Essentially, the strategy goes like this. You plan to retire at 65, and you’re currently pushing 55. Your retirement portfolio is 65% stocks and 35% bonds, with most of the stocks of the blue chip variety because you want to be more conservative as you age. So far, it looks to be a pretty standard portfolio.

But instead of gradually moving to a more 50/50 weighting, you start exchanging your stocks for bonds pretty aggressively with the goal to get to a 90-100% bond portfolio by the time you hit 65.

Here’s the thought process for the strategy. The last thing you want is to suffer through the second coming of 2008-09 right when it’s time to retire. And since nobody can predict when the next crash will be, you should be proactive and reduce risk on your own. Protecting cash right at retirement age is paramount. If the crash happens right when you turn 65, you might be forced to delay your retirement, stretch for yield, or hit up your kids for gas money.

Of course, most people can’t survive a long retirement on a 100% bond portfolio, especially in today’s interest rate world. What you’d do is start to move back into equities after you retire, eventually getting back to something like a 50/50 split again. The thought process is once you’ve locked in your nest egg at 65, you can afford to take on more risk because you plan to live another 20-30 years. At that point, the risk goes from a market crash at the wrong time to running out of cash before you keel over from neglect because the damn grandkids never come to visit.

That’s the whole strategy. It certainly has its merits, although I can see the logic in having a 50/50 split around retirement time as well.

Tell everyone, yo!