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Bonds in my portfolio.
Financial Independence
Hi there, I’m currently 34 and working on building a long-term investment portfolio, primarily through ETFs like DHHF and IVV. Looking ahead, I understand that as I approach retirement age, it’s generally recommended to reduce portfolio volatility by increasing exposure to more defensive assets such as bonds. My question is around how best to implement this shift in practice. When the time comes, would it be more appropriate to sell some of my existing equity ETFs to purchase bond ETFs? Or is it generally more efficient to maintain my current holdings and gradually build a bond position over time using distributions or new contributions through automated investing? I’d appreciate any guidance on the most effective and tax-efficient approach to managing this transition. Kind regards, Lach
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Lachlan Holmes
Asked on 29 July 2025
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After retirement, you have another 20-30 years to be drawing from this portfolio and over that time inflation will reduce it’s worth. So you probably still need a high weighting to growth assets. Where you probably need the defensive assets is when there is a market crash and the prices of your portfolio fall, but you are still needing to draw an income stream from it. In the time period between the crash and the recovery, you want to be able to pull that stream from defensive assets like cash or bonds. So the number of years at your draw down rate gives an estimate how much you need in there.
(I personally don’t see a point in a pre-mix ETF as you can’t then use defensive components independently of the growth.)
On a related issue is the weighting between growth and dividend paying stocks. Pre-retirement, you probably don’t want dividends as it increases your tax, but after you’ve probably dropped tax brackets and can take the dividends and perhaps franking credits. Yes, of course you could sell shares to provide income but that feels to me like destroying the cash generating engine.
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Good question. I can tell you how I do it if it helps. I have just hit 50 so its time to think about transitioning some of my portfolio to Fixed interest over the coming years through to retirement in order to reduce risk and preserve capital. Im doing this through super. I have a portfolio outside of super for which I have a different strategy, but ignore that for now.Work out what percentage of your portfolio you want in fixed interest once you retire. For me I can take a higher risk tolerance at retirement due to my personal situation so my targeted allocation of fixed interest is 40%. I am 50 and so I have 15 years until I reach retirement. If my target is 40% at retirement, and I have 15 years until retirement then allocating and additional 2.6% per year (40% / 15) of my portfolio Total value to fixed interest helps me drip feed up until retirement. This way I am gradually reducing my risk tolarence the closer I get to retirement. I simply sell a parcel of shares to give me funds to then buy an additional 2.6% parcel of Fixed Interest. This is my plan based on my circumstances just to give you an idea. It is by no means the only way. Before the age of 50 I did not worry about having a fixed interest allocation as my investment plan was aggressive.
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Also I can not comment on what is the most tax effective startegy for you. That will be based on your circumstances and you really need to get professional advice on tax effective strategy for you.
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