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Old 07-07-2013, 12:05 PM
Location: Central Indiana/Indy metro area
1,618 posts, read 2,568,992 times
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I have an annuity, and wife has a 401(k), that both allow for a choice in various investments. Of course both have two or more bond funds available. At this point where I see the world, I'm not a fan of stocks. I thankfully didn't take a huge hit, but I also missed the run up to the current level. For the most part, we were viewing our retirement accounts as savings accounts. We have very minimal debt, though we don't make a ton of money (under six figures). There is no reason for us to need to invest in stock funds given what we have already saved and paid off outside of retirement savings.

While we don't really want to go into stock funds at this stage of the game, the current holdings we have don't pay very much. I'm able to invest in a guaranteed fund, but it is paying almost nothing due to low interest rates. The wife had such an investment, but changes to the plan took it away. She is actually in two very conservative bond funds now, and one actually lost money (though the hit was less than 1%). She is still making money, because the amount she contributes, 1% of income, is matched 100% by her company. Since don't care for stock funds now, but would like to try to make even just 1 or 2%, I'm starting to consider the bond funds. My fear is that as soon as I move the money and contributions to the various bond funds, interest rates will go up. That is great for when the funds buy new bonds, but the biggest fear is that they sell a good % of their holdings for a loss. Would it be common for bond fund manages to sell off lower performing assets for a loss? What would the typical hit be? If fund managers are likely to sell off their lower performing bonds, what time frame does that normally occur in? Biggest fear is jumping into a fund that will eventually make a safe 2% or so a year, but taking a 10-20% hit initially because of the selling of older bonds for a loss.
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Old 07-07-2013, 12:46 PM
Location: The Pacific NW.
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Look at the bond fund's DURATION. If, for example, the fund has a duration of 4, and interest rates rise 1%, you can expect your bond fund to drop in value by 4%. If the fund has a yield of, say, 3%, then you've really only lost 1%. If you stick with short and intermediate-term bond funds, that is a much more likely scenario than losing 10-20%.
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Old 07-07-2013, 12:54 PM
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The duration also gives you a ball park as to how long you will have to stay put for the higher rates the funds bonds will be getting to make you close to whole again.
In your example if rates rose 1% and the duration is 4 it will take you about 4 years at the higher interest rate to offset the drop in nav.
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Old 07-08-2013, 11:00 AM
Location: Paranoid State
13,045 posts, read 11,648,237 times
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If I understand you correctly, you are 100% in bond funds and Zero Percent in equity.

If that is true, you are actually incurring more risk than you realize. You can both lower your risk AND improve your ROI through diversification into other asset classes.
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Old 07-08-2013, 11:36 AM
Location: Florida
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(never mind - I would need to check the average remaining duration, not the absolute durations - there is nothing wrong with a fund that holds a 30 year bond it acquired 10 years ago when interest rates were higher)

Last edited by bUU; 07-08-2013 at 11:44 AM..
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Old 07-09-2013, 11:02 PM
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What age range are you in if you don't mind me asking OP?

If you are close to retirement age there is not much you can do besides stocks that will give you higher yields than what the bond funds currently pay.

Keep in mind that interest rates are starting to increase so be careful with getting into any new bond fund positions and/or pay attention to any existing bond fund positions because it might get a bit hairy soon around September.

The stable value fund in the 401k is like a savings account that pays actual interest but they usually pay no more than 2-3% a year. You are basically matching inflation only.

If you are risk averse unfortunately there is not much you can do for higher returns that are not riskier.
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