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the question is why do you want to own bonds? you need a reason to own anything .
if it is for flying fighter cover over the portfolio than you need intermediate to long term bonds.
short term bonds have very little ooomph for protecting anything.
if it is for a bit more yield than a money market than short term bonds will be okay.
i own quite a bit of fidelity and vanguard short term bond fund but it is only a temporary holding place until new investment opportunity elsewhere presents itself.
And TIPS. You never know when we'll see significant inflation again so hedge your bets!
And TIPS. You never know when we'll see significant inflation again so hedge your bets!
i wouldn't do tips yet , way to early for that. later when rates and inflation rise they are a decent option. with the world deflating and deleveraging inflation isn't a threat yet . the negative interest rates on tips reflect that fact..
Last edited by mathjak107; 12-07-2014 at 04:35 PM..
This is the most important point of your post.
Here's what Cramer has to say about bond allocation... Younger than 30 - No reason to own bonds In your 30's - 10% - 20% bonds In your 40's - 20% - 30% bonds In your 50's - 30% - 40% bonds 60 to retirement - 40% - 50% bonds After retirement: Own some stocks, approximately one-third of your portfolio. Focus on high yielding stocks that can generate more income with less risk.
This is the most important point of your post.
Here's what Cramer has to say about bond allocation... Younger than 30 - No reason to own bonds In your 30's - 10% - 20% bonds In your 40's - 20% - 30% bonds In your 50's - 30% - 40% bonds 60 to retirement - 40% - 50% bonds After retirement: Own some stocks, approximately one-third of your portfolio. Focus on high yielding stocks that can generate more income with less risk.
The problem is that what is optimal financially is usually not optimal psychologically. Most people should own at least some bonds (say 15% to 20%), IMO. Most people are really bad at estimating their risk tolerance. Those who want complete security need to be pushed into stocks to some degree. And those who think they can handle 100% stocks probably can't when times are bad, so I think almost everyone should probably be at least 15% in bonds, even 20 year olds.
those of us into investing tend to think in terms of what we would do ,understand and can tolerate. the rest of the masses are nothing like that.
the best thing about some sort of bonds is they are not stock. by not falling as much they can provide not only some check on the volatility but money to buy with in a dip by rebalancing.
Then maybe the OP would be best advised to look at Ric Edselman's portfolio selector to estimate bond allocation based on his answers. https://gps.ricedelman.com/
Either way you have to study how the markets have done in the past and have a real honest conversation with yourself about how much downside you can tolerate as well as how much you would kick yourself if the market continues up. Stocks and Bonds, Calendar Year Performance 1980-2013
human nature is such that the brain hates losing money more than making it. hindsite is great, i mean i wish i took every penny i owned in the downturn and invested it in stocks. but no i do not beat myself up for not doing it.
in fact if you read jason zweigs book your money your brain he uses brain imaging equiment to test how humans respond to money stress.
it is scarey how different parts of the brain come into play when you have real money at risk vs hypothetical plans if things fall.
the hypothetical simulations all used rational decision making with staying the course regardless of the drop the plan.
the brain scans showed the fear of losing money during actual downturns brought totally different parts of the brain into action then were used for the hypothetical decision making and the scans were on par with watching someone vomit or smelling dog crap under their nose..
the fear of losing money in real time had scans that were on par with some of the worst things humans could react to and the scans and brain areas called into play matched each other..
on the other hand making money was not nearly as powerful. it was exhilarating but no where did the body react the same or even bring other areas of the brain into play.
clearly the fear of losing money did some major changes to our thought process and plans.
what that gave us an insight into was the fact we are not being given a rationale decision about things once the crap hits the fan.
our brain is feeding us one sided thoughts and unless you can fight it and not pay attention you will be led to do the wrong thing at the wrong time.
rarely do folks kick themselves for giving up a profit but they beat themselves up all the time as the fear of losing money gets worse as things are plunging.
the interesting thing is the scans reverted back to normal once the money was actually lost. so it is the fear of losing that money when in battle that actually drives us to do the wrong things at the wrong times.
it is important to understand this as an investor. i am glad i read this book as many years ago i had to decide whether to enter a real estate venture with a famous mogal.
it involved going into debt beyond my wildest dreams to buy in.
nightly my brain would pound me with the negatives of doing this. but i knew i was not getting good unbiased feedback from my own brain as it was attempting to talk me out of the deal.
well did the deal , went into debt ,kept my fingers crossed and things could not have worked out better. but had i not known my brain was feeding me all the negatives and little positives i may have listened.
much of my success as an investor through the years i attribute to understanding my brain and learning to work around the bull-sh&t it hands me at times ,thankfully by happening to read jasons book i understood why it wanted me to do certain things.
i even still use the fidelity insight newsletter so i don't have to count on my own brain during those downturns. it has kept me from ever listening to myself as the more your portfolio grows and the older you get the more the fear during downturns can take over your thinking process.
notice i said fear during the downturn and not fear of a dowturn. they will not get the same reaction from your brain..
since the masses have no clue about this they are generally much to aggressively invested when those downturns hit and they end up doing the wrong thing thinking bailing or halting their contributions to investments is the right thing based on poor feedback from the wrong parts of their brains.
that is why mystical is 100% correct in his posting above about being to aggressive.
it is also why i am against alot of the advice given here to newbees or those with no knowledge or experience with markets . folks throw out all kinds of aggressive advice without knowing a thing about the poster and their brains..
Last edited by mathjak107; 12-08-2014 at 03:56 AM..
i wouldn't do tips yet , way to early for that. later when rates and inflation rise they are a decent option. with the world deflating and deleveraging inflation isn't a threat yet . the negative interest rates on tips reflect that fact..
A very small TIPS allocation protects from "tail risk" of high inflation, but I wouldn't hold more than 2-5% of my net worth in them at any stage.
Or to be more accurate, bond MFs. I've been reading predictions that bond prices are expected to fall next year. Keep in mind that I'm new to investing, so I may have misunderstood the implications. All my investments are in MFs. I have approximately:
20% in equity MFs (Canada, USA and World)
40% in equity income MFs (Canada/USA)
20% in balanced MFs (Canada, USA and World)
20% in government, muni and corporate bond MFs (USA and World).
I am 30 years old.
I'm not worried about it myself, and I'm not changing my allocation.
When rates rise, bond prices will fall and your bond MFs will take a temporary hit. However, as new bonds are added to the portfolio, they will be at higher rates. So going forward, the yield will rise. In the long-term, this is not a bad thing.
If your allocation is well thought out for your personal situation, just stick with it.
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