In a move that is likely to thrill Living Almost Large who harasses me every time I mention my all-stock retirement portfolio, I have decided to invest 50% of my future contributions into a bond index fund.
Why the change of heart?
Well, first, my 403 (b) funds hit their lowest mark ever last Friday. I use Financial Engines to help me gauge whether I'm on track for retirement. That site gave me just a 48% chance of succeeding with my current mix of investments.
Second, the March issue of "Money" magazine talks about the comparative risks between an all-stock portfolio and a 40% mix of bonds to 60% stocks. According to that article:
"T. Rowe ran the numbers for a 55-year-old with
a $100,000 salary and just $150,000 in savings
who ratcheted up his stock allocation from 40%
to 80% to help his portfolio recover. After
running 10,000 market scenarios, the researchers
found that while the portfolio invested 40% in
stocks replaced an average of 27% of the
investor's salary in retirement, the
80%-stock allocation replaced only
28% - virtually no difference. That's because
while stocks have historically delivered higher
returns over very long periods, over any
10-year period you're more likely to suffer
a few losing years, and there simply isn't
enough time for your gains to compound."
I've always agreed with David Ramsey that bonds might be safe, but they aren't helpful in one's retirement accounts. In my heart-of-hearts, I still believe that, but the volatility of this market is causing me too much distress. Maybe it's my age catching up to me, but I've decided to tone things down a bit. I won't stop contibuting every month, but by moving partway into bonds, at least on a temporary basis, maybe I can stop some of the stomach churning.
I will continue to contribute $1225 a month (plus I get a additional 6% of salary contribution from my employer) but I'm going to put half of that into a bond index fund for the time being. The other half will continue to go to a mix of stock mutual funds. I am not going to reallocate the balances; I'm just adding a bond component.