Wednesday, April 7, 2010

Retirement Bond-Aid?

It's my week for spotlighting Walter Updegrave at Money Magazine. In this week's column, he addresses an issue that has confused me for years.

Namely, whether bonds have a place in my retirment mix, and if so, how much?

Ever since I first started seriously saving for retirement, I've avoided bonds. This comports with what Dave Ramsey teaches, and fit my own perception that I didn't have enough time left to have my earnings held back by conservative bonds when I could be investing it all in equities.

Ramsey suggests mutual funds divided evenly among growth, growth and income, aggressive growth and international funds. Note that he does not recommend buying bonds at all.

But I started getting cold feet in late 2009 as the recession was decimating my equity portfolio. At that point, while I left my equities alone, I divided future payments so as to put 50% of them into bond mutual funds. Right now, about 7% of my 401(k) and 403(b) monies are in bonds, and that percentage is growing.

Updegrave says that is typical of those of us who "fly solo" as we invest. We tend to take much more risk than we should or that we would be advised to if we got professional help.

I guess what I really want to know is if the professionals are correct? The obvious downside to a portfolio containing only stock mutual funds is if we have to retire just as the market is at a low, we won't have as much money available to us. But over the longterm, won't we be better off?

In the end, I just could not handle the level of losses my accounts were sustaining, and I am now opting for slower growth but less stomach-churning drops.

I have no clue if that's the right position to take or not.


Anonymous said...

First, although I generally like Ramsey, his knowledge (if you want to call it that) of investing can be summarized by reference to the phrase he uses non-stop: "growth-stock mutual funds." Keep in mind that his wealth comes from his business which throws off income, not "growth stock mutual funds." So top paying attention to his investment advice unless you own a business with 300 employees. Second, my suggestion is to create a retirement spending plan to determine how much income you need to retire, then work back from there, taking into account inflation and any pension income or Social Security benefits you will receive. Right now, all but the shortest term bond funds are high risk. If your plan will work, consider buying some I-Bonds or TIPS (in a tax deferred account.) If your plan won't work that way, use a lazy man/couch potato portfolio and stop worrying about asset allocation. I've written lots about them, as has Scott Burns and Paul Ferrell. Burns is a big Coach Potato advocate and I use his ten-speed portfolio in my 401(k) plan.

Another Reader said...

I agree with Anonymous. Ramsey owns stock mutual funds and real estate, makes most of his money from his business, and is 10 to 15 years younger than you. I would also pay zero attention to Walter Updegrave, who is a nothing but a shill for the advertisers on that website.

The problem with bond funds is that the bonds are bought and sold as fund shares are purchased or redeemed and not held to maturity. The share price will decline as yields go up because the bonds are worth less.

I'm in favor of TIPs and of I-Bonds when the base rate is higher than it is now. If you are knowledgeable about bonds, purchasing individual bonds to hold to maturity can also work, but you need a pretty good bond education to do that successfully.

In stocks, I favor companies that have a solid dividend growth record for someone in your position. They tend to be less volatile and yield consistent growth.

Your strategy of paying off both properties is also smart. A paid for rental property and no mortgage on your house will give you both a financial cushion and peace of mind.

Your problem is you need to make a lot of money in a few years because you are making up for lost time. If you would get those kids and grandkids off the payroll, you cound devote a lot more money to savings and take less risk.

MasterPo said...

Keep in mind that reinvesting dividends, be it stocks or bonds, from a mutual funds will help your funds last longer that just capital appreciation.

MasterPo said...

ps- MasterPo is leery of I-Bonds. The political risk is too high, especially given the current gang in DC.

Obama has already said there was no inflation in 2009 and will be none in 2010 (hence no SS COLA in 2010 and none expected for 2011).

Do you really believe there was no inflation in 2009? And won't be any this year? (gas is already at $3/gal on most of LI and rising fast)

I-Bonds are a nice concept. But there is more risk than most people think.

Anonymous said...

Ditto-- Dave Ramsey is awesome until you get to his investment advice. If you follow him you won't be in horrible shape, but he works more with heuristics than actual sensible advice when it comes to investing. (1/4, 1/4 etc. is easy to remember! You're more motivated to save money for retirement if it looks like it's going to grow at 12%/year, which it won't unless you are very lucky.)

Ironically, Suze Orman ONLY invests in bonds (according to a or similar article I read about her). She's much more risk averse with her money than with her advice. She says the difference is because she has so much money the rules are different for her-- she's actually following the original Your Money or Your Life approach (the newer edition recommends the standard time-adjusted portfolio, though doesn't assume a 65 retirement age with 20 years of retirement).

I really do trust Walter Updegrave. He's one of my favorites. Yes, I think Bonds make up part of a diversified portfolio once you start nearing retirement. We currently don't have any (our "safe" money fits nicely into a savings account for short term withdrawal!), but we're in our 30s. Eventually we'll move some over into bonds as we get closer to needing the money and will need a larger safe asset to balance out the stocks.

Living Almost Large said...

Took you how many years? LOL! I think I mentioned this years ago that you should have some bonds. Oh grace...

I prefer the ideology of Paul Merriman, the ultimate buy and hold.

Gotta have bonds. And NOT based on "feelings" but due to statistical analysis of risk versus reward. Totally something I follow. Numbers.