One investment strategy is the all stock with a 10 year bond cushion. 

This strategy keeps you heavily invested in higher return stock funds while holding the money you will absolutely need over the next ten years in bonds.  This strategy is based on the philosophy that if the markets drop and your stocks take a hit, you don’t have to worry.  You have the next ten years of money to live off of in low risk bonds.   As long as the market returns within the next ten years, you’re golden.  Except for the great depression crash in the 1930’s, every market crash has corrected itself well within a 10 year period.  The crash of the 1930’s took 26years to recover.  Even the financial crisis of 2008 isn’t expected to hold stock returns down for 10 years.  The market maybe down 20 some percent, but the experts are looking to buy at the botto, for fast returns.  While every financial expert is concern with preserving their investment over the next year or so, they are all looking at the value of the equities.  They are all watching and calculating when to buy.  These people aren’t gamblers, they are calculators.  They have their eye on the stocks of businesses with solid balance sheets and strategic growth potential.  They are just waiting for the businesses with poor balance sheets and poor management practices to stop pulling the entire market down and then you will buy low.

So how does the 10 year strategy work?  You invest in diversified stock funds to minimize your systematic risk (that’s fancy talk for overall market influence) and capture higher returns while keeping 10 years worth of living in lower risk bonds. 

Here is an example:

Say you are 45 and plan on retiring at 65.  You hold all stocks funds (diversified across sectors and countries of coarse) to maximize your return.  At age 55 you move 10 years of annual income into a lower risk bond funds.  Over the next 10 years you keep adding to you retirement accounts by buying higher yielding stock funds.  At 65 you are no long buying as you are no longer employed.  You are now living off of your bond investments.  At age 66 you have used up one year of bond investments so you shift one more year’s worth on living expenses from stock funds to replenish the 10 year bond cushion.

Based upon 70 years of history, your stock funds will provide you a greater return than the bond funds.  You are ahead using a safety net to weather the down times. 

What happens if the market drops when you are 67?  The rule of smart investing says buy low and sell high.  That means you do not sell your stock funds during a year of down time.  That would be selling low and we want to sell high.  And by the way, you don’t need too; you still have 9 years of bond money left to live off of.   Live off of your bonds and when the market returns, sell high and replenish the bond amount to the 10 year cushion.