Thursday, May 27, 2010

BONDage

Apropos to the comments left on my last post, I have been paying more attention to my 401(k).

For most of my financial life, I've put whatever monies I had available into stock mutual funds, often index funds.

I proudly avoided bond funds and money market funds right up until the end of 2009, by which time it just got too frightening to see the volatility within my retirement resources.

So, I started putting new money into bonds.

Right now, I have about 7% of my money in bonds, but the percentage is on the rise.

Apparently I am not alone in my rush toward bond funds. According to the latest issue of Money magazine (the article is not yet online on their website), there is a current feeding frenzy as investors turn to the safety of bonds.

But Money magazine is sounding the alarm that the 30 year bull market in bonds may well be coming to an end, just at the point that people like me are buying them.

So where does that leave Grace?

Since I'm within 10 years of retirement, and have only 7% of my holdings in bonds, clearly I need to continue buying them. But I'm paying high prices for funds that are likely to go lower in the near future.

One solution is apparently to stick with short-term to intermediate-term bond funds or to look at riskier funds that invest in floating-rate bank loans or municipal bonds.

My real problem is that I don't understand the markets well enough to know exactly what I'm doing. I seem to be 'following the crowd' which is almost always the wrong thing to do when it comes to investing.

I'm going to keep reading and trying to find my way through this morass.

In the meantime, no matter what a couple of my readers say, I am NOT going to be seduced by gold--so far nothing I've read persuades me that those investments are good for the long term.

10 comments:

Morrison said...

Grace,
I'm sorry. I didn't mean that your investments (or any one's investments) should be replaced by gold. I just meant that a person should just buy a few gold or silver coins (from a reputable dealer-shop around) just in case the dollar goes down or there is a re-evaluating of the USD. If so, then in the interim, you can cash in a few gold coins to tide you through. As in the case with the Euro: the value went down, thus less purchasing power but the value of gold went up which equals (once cashed in) more euros for purchasing power.

That's all.

I cashed in a few gold coins during Christmas, when dollars were down and gold was a bit higher and just bought more presents with the extra money. I apologize if I indicated anything other than having gold or silver coins as a slight hedge against the future.

It couldn't hurt?

Anonymous said...

It's great that you're reading up on all this.

Like a commenter in the previous post said... don't worry so much about optimizing your money. You will never be able to optimize it unless you're clairvoyant. Just keep contributing in something that makes sense (like a low fee stock/bond mix that's appropriate for your expected retirement date and risk tolerance) and you'll be doing a lot better than you would not doing anything at all.

It's like Voltaire and a bunch of personal finance bloggers say, "the perfect is the enemy of the good." Whatever reasonable choice you make will be a good one. It sounds like you're on your way to doing great.

Grace. said...

Morrison, I'm finding the comments on my last post very interesting. I didn't read you to say that I should move everything into gold. I'm just writing about what I'm thinking as I go along. I don't think gold is for me. But I'm wondering about the bonds. It's all so dang confusing!!! However I do agree that I have to keep saving, and that almost any investing (short of tulips!) is better than no investing.

Anonymous said...

If your 401k has a guaranteed return account, you should consider that for the short term. These tend to be pooled short term annuity contracts and should pay a slightly higher return than the CD at your local bank.

No one knows whether we will have high inflation because of government printing of money or another meltdown followed by a severe recession/depression and deflation. Markets hate uncertainty and are likely to be volatile until the direction becomes clear. These two scenarios, along with the third of just muddling through, all have the potential to undermine what you have already invested and the outcome determines where you should invest in the future.

No one with 8 years left to work should be fully invested in the stock market. Bond funds are very dangerous if interest rates rise. A portion of your money should already be in cash or very short term treasuries.

In your shoes, I would fully fund the 401k and the Roth IRA. However, I would also srart saving outside of retirement accounts and pay off those mortgages ASAP. To do that, I would kick those kids off Grace's payroll ASAP.

Grace. said...

Anon--good advice. I have two properties but only the home I live in has a mortgage. It will be paid off in 2014. I'm working (albeit, not too successfully) at getting my adult kids off my payroll!

Petunia said...

Grace,

I think a mix of short, intermediate, and TIPS is an excellent bond fund portfolio. High yield bonds are risky. IMO, if owned, they should be mentally lumped in with stocks as the risky, growthy part of one's portfolio.

Petunia

Super Saver said...

Grace,

I prefer to buy actual bonds and hold them to maturity. That way I don't need to worry about a loss in investment principal, as can happen with bond funds. The downsides of this approach are less diversification and higher default risk.

Petunia said...

Super Saver,

In a rising rate environment, individual bonds will lose value too. Individual bonds aren't priced daily the way that bond funds are, so you're not seeing the price fluctuations. However, if you decide to sell before maturity, you will find that your bond has lost value.

Belmont Thornton said...

I agree to all of your point except one, thats the value of gold as a potent investment option. Gold is emerging as a strong investment avenue with price rising internationally and it has a good sale value.

Living Almost Large said...

Diversify. I'd invest in short, mid term bond funds and TIPS. I'd also consider buying tips if the fixed portion ever goes above 2% again, which it was a couple of years ago.

So what portion of your portfolio do you think would be an appropriate amount of bonds to hold? Do you still think people should be in stocks 100% until 10 years out?

What place do bonds have in people's portfolio. I have bonds not a lot but always have just because. I think we've been 10% and 5% cash.