Monday, March 9, 2009

Grace Gets With Bonds (Finally!)

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.

6 comments:

Florence said...

Good for you!! Right after the dot.com bust in 2001, I put half my 403b into bonds and that is the only reason I haven't slit my wrists in the past few months. LOL. My DH is still in stock funds and I refuse to even look at his statements. My nerves just won't take the all stocks route any more!!

Petunia said...

I think you are making a good decision to begin adding bonds, while continuing to buy stocks at today's prices. Do you have a target allocation in mind?

Grace. said...

I'm thinking that I should at least get to 25% in bonds and keep the rest in stocks. The real test will be when the stock market gets back to norma--will I then stick with the bonds or not?

mapgirl said...

I'm glad you are adding bonds. As we age, there is less opportunity to recover from a major market loss like the one in 2008 (er, now?).

Think of this as salting away some money so that you can take advantage of the next rising market. Capital preservation is really important during turbulent and extremely volatile times.

I found out where my guts were last year in a mkt that was down 40%. I started buying bonds then in a similar way, adding them on to my investment mix without selling off the stock funds and locking in my losses.

Living Almost Large said...

Finally, you are taking advice from T.Rowe, and the guru of retirement investing Paul Merriman.http://www.fundadvice.com/articles/buy-hold/the-ultimate-buy-and-hold-strategy.html

Read the table carefully, it's likely where your T.Rowe price got their data from.

Right now we're all into stocks, and have lost about 50% of our savings in retirement accounts.

To mitigate that, we've been shoring up cash not even bonds, in our taxable accounts. We aren't going to look at retirement for another 20-30 years.

Plus we have cash needs which balances out our 100% stock allocation right now because it's dropped so much! We were at 90% stocks and 10% cash, but now it's closer to 80/20 just because we're losing so much in stocks.

You should figure out how much you would have lost if you had a 75% stock/25% portfolio during this crash versus a 100% stock portfolio. That will help you determine if after this crash you want to go back into 100% stocks.

Anonymous said...

@Grace,

Hi! I'm new to your blog by way of LivingAlmostLarge, and I have to say, good for you for getting into bonds!

I strongly encourage you to stick with bonds (even invest above 25%) and not revert back to equity, especially being less than 10 years from retirement. As you found out, you cannot financially survive another downturn. If the market drops 50%, it must rise 100% if you are to recover to pre-meltdown levels.

Unfortunately you did not start sooner. You are now in reactive mode as opposed to proactive and must wait it out.

Best wishes to you.