I often read that if one doesn't understand what a proposed investment is or does, one shouldn't invest in it. But if I followed that rule, I'd have no investments at all. The truth is, when the talk goes to stocks and bonds, my eyes glaze over. The best I can do is stick with mutual funds, cross my fingers and hope for the best.
That worked well for me in 2010. In 2008 and 2009, not so much.
But at age 61 and 8 years from retirement, I need to get a lot more serious about bonds and bond funds. (Will the blogger at Living Almost Large please stop smirking and muttering "I told you so" under her breath!)
So far, I have almost a 10% stake in bonds. That's up from 7% in 2008 but it needs to be at least 25% so I have reallocated more of my future deposits in my 401(k) to get me up to that mark.
As usual, my timing is impeccably bad. Grace is buying bonds when everyone else is--never a good sign when it comes to investments. Money Magazine has been warning its readers for months now that we are in the midst of a bond bubble and that it is due to burst soon.
But what do I do? Clearly, my retirement funds are still top-heavy with stocks, and my stomach (not to mention my bank account) cannot take another couple of years like the last ones. I need bonds so I have to buy them. Just my luck that I'm buying them at the top of the market.
My solution, if you can call it that, is NOT to reallocate the monies or funds I already have, but to put new contributions mostly into a bond index fund, and a smidge into an international index fund where I'm a bit low at the moment.
While I was at it, I increased my 401(k) contribution by another $10 a month. Don't laugh. My wages are frozen for three years, so I wasn't planning to make any increases. But since my payroll taxes are going down, I tossed in another $10 toward my future retirement.
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5 comments:
I've run into the same issue over the last few years; I know I need more bonds, but rates are so low (i.e. bonds are so highly priced), that it makes no sense to buy them now! You're practically guaranteed a big loss. As soon as rates go up, the bond values will drop (rates and values always move in tandem, in opposite directions).
One option is to slowly dollar cost average your way into bonds by buying individual bonds instead of bond funds. At least then you have your return locked in for as long as you hold the bond.
But you can't do that in a 401k usually...
I have absolutely no knowledge of investing, and my eyes glace over too.
However as we are almost the same age I was looking at your retirement age and thinking wow you are going to be nearly seventy when you retire. I will be hovering around that mark myself and it just seems like a lifetime away.
Does this excite or depress you ???
I'm no investment guru, but I want to echo what MEG said: when interest rates go up, the value of bonds goes down. As interest rates are really low now, the value of any bonds purchased - whether individually or through investment in a mutual fund - is almost sure to go down when interest rates go up.
I think with all this deficit spending, we are going to see some really major inflation. Have you thought about TIPS (Treasury inflation-protected securities)?
Maureen, I plan to retire at age 69, and I am excited but in no real hurry to get there.
I agree with everyone that bonds are NOT a good buy right now and are likely, for the short term to lose value. But I also agree that at my age, I CANNOT be 100% in stocks--I need the stability that bonds provide for at least part of my portfolio.
If you're buying the bonds for the interest income stream then it doesn't matter what happens to the value (though no one likes to see their investment evaporate!).
As for TIPS, IMO just say "No"! There is the soveriegn debt issue (they are Treasuries after all).
But more importantly - can you trust the gov to be accurate in their inflation figures? Two years ago the White House delcared there was no inflation then nor would be for the following year (i.e. 2010).
How wonderful a prediction!
Too bad it is false.
Just go to the supermarket to see the reality.
Yet the gov says there is no inflation.
So how can you expect the Treasury to give an inflation adjustment when the White House says there is no inflation?
Just remember that a great many budget items are tied to the inflation numbers. By stating a low inflation that keeps the budget for these items artificially low and gives an appearance of reducing spending. Even when inflation is truly high and in everyone's face don't count on an honest figure.
Go for TIPS if you want but IMO don't bet the farm on them.
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