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So, I keep hearing that bonds are not a very safe bet nowadays.
I'm a very conservative investor. Since the beginning of the year, I've had my 401K portfolio enrolled (through Fidelity) in a moderately conservative fund. It consists of approx 30% stocks and 70% bonds. Currently, I've broken even on my year-to-date.
However, I'm thinking the it may be time to move from this moderately conservative fund to a less conservative or growth model.
I have already enrolled my future allocations to go to a growth portfolio (80% stocks, 20% bonds).
Should I move my current 401K balance to a growth portfolio too? You think it is smart to move my portfolio to a 80% stock/20% bond portfolio OR a less aggressive 60% stock/40% bonds OR keep it the same?
Just wanted to hear some thoughts.... thanks!
If you are a very conservative investor, your puker factor is probably very sensitive (meaning you will make emotional moves when there are periods of high volatility)
Don't get caught up over recent actions or people who think they know where asset classes will perform better over the short term. They don't know and you can go back and see their predictions as fact.
the key is to have a plan for the LONG TERM. Invest in low cost options, rebalance accordingly and ignore the daily noise that infects this place from people who short term/swing/day trade....its a losing proposition...
Your comments are based on an understanding of what bonds did when interest rates were declining, which is not likely to be the case over the next long-term period. Volatility isn't the issue over the long-term; principal risk is. And the last time things were anything like they are now was the early 1950s, so unless you're quite old you don't have any personal experience with that aspect of the coming bond market. The OP's concern is depicted in this graph:
As you can see, during that period, bonds did even a bit worse than inflation-adjusted cash, and only caught up with cash fifteen years later.
Now, I don't know what the right answer is. But I do know that relying on our understanding of the last fifty years with regard to bonds is not smart.
I understand all that. But someone who has a bond heavy portfolio should already know the outlook for bonds is not that great. They should be making a conscious decision to give up a fair amount of return potential in exchange for a more stable portfolio value. That's true now and it was true 50 years ago. I think switching strategies to chase returns is a bad idea.
But someone who has a bond heavy portfolio should already know the outlook for bonds is not that great.
But that's not what you said: You implied that the outlook for stocks was worse over this upcoming period. Putting aside the idea floated earlier that we have absolutely no way of knowing anything, based on the historical data, what makes you say that folks should be, "even more afraid of stocks losing money"? It is that word "more" that I'm following up on.
Quote:
Originally Posted by mysticaltyger
in exchange for a more stable portfolio value
So in saying that your alternative would actually need to offer definitively "more stable portfolio value", but it didn't, given all you admitted that you understood.
I think you're confusing volatility with returns. :shrug:
But that's not what you said: You implied that the outlook for stocks was worse over this upcoming period. Putting aside the idea floated earlier that we have absolutely no way of knowing anything, based on the historical data, what makes you say that folks should be, "even more afraid of stocks losing money"? It is that word "more" that I'm following up on.
So in saying that your alternative would actually need to offer definitively "more stable portfolio value", but it didn't, given all you admitted that you understood.
I think you're confusing volatility with returns. :shrug:
I have no idea what the outlook for stocks is and didn't mean to imply so. But when you're investing in stocks or stock funds, you have to be comfortable with a reasonable worst case scenario or you'll bail out at the worst possible time.
Somebody who's 70% in bonds shouldn't switch just because "everyone" is saying bonds are a bad investment. They SHOULD ALREADY KNOW bonds won't be getting great returns and that you normally get modest returns from bonds in exchange for lower volatility.
I have no idea what the outlook for stocks is and didn't mean to imply so. But when you're investing in stocks or stock funds, you have to be comfortable with a reasonable worst case scenario or you'll bail out at the worst possible time.
The point is that there is reason to believe that that is going to be just as true for bond funds, in the upcoming period. So to the extent that that analysis is accurate (and we have no reason to believe it is necessarily inaccurate since, as mathjak pointed out, we have never been here before, and all the research that pertains to this situation that we do have does support this contention rather than supports the contrary contention), bond funds will represent the worst of both worlds in the upcoming period, the drastic loss of principal due to interest rate risk which therefore fails to provide the ballast for volatility that the bonds portion of your asset allocation is allegedly supposed to provide.
I'm not 100% sold on it - well, let me rephrase that - I don't know what else to do, and I'm too chicken to go 100% equities. So I do have about 15%-20% in bonds, but that doesn't mean that it would be good to have that much in bonds.
Quote:
Originally Posted by mysticaltyger
Somebody who's 70% in bonds shouldn't switch just because "everyone" is saying bonds are a bad investment. They SHOULD ALREADY KNOW bonds won't be getting great returns and that you normally get modest returns from bonds in exchange for lower volatility.
You're again missing the point, and maybe we've been talking past each other a bit.
If you're invested in bonds, and have no intention of ever trying to trade them, but rather will always hold them to maturity, no matter what, then ignore what I've been saying.
If you're invested in bond funds, I suggest you may want to ignore what mysticaltyger has been saying, for the reasons I've outlined earlier, that tend to indicate that bond funds will not necessarily provide "modest returns" but may actually lose significant value over the upcoming period.
Bond funds will still not be so bad. Don't forget that even though share value falls when rates rise there are quite a few things working to offset that.
As the fund replaces older bonds or sells bonds you will earn higher and higher interest.
If you are reinvesting the interest you are buying in at higher yields.
If you rebalance you are adding more higher interest paying bonds.
All in all if credit ratings do not change you can be whole again in less than 5 years in an intermediate term bond fund.
If markets fall and bonds do as they typically do in a flight to safety the bonds should offset some of the drops. Cash canot do that. In order to have the same volatility range with cash you have to cut allocations to stocks and keep more money in cash at near zero.
That will cut gains more than you may give up in any drops in bonds.
That is the biggest reason for holding bonds, volatility range.
It never dawns on folks that because without bonds they will not have the chance of bonds cushioning equities fall. so they cannot keep as much allocated to equities to stay in their targeted comfort range.
Cutting equity allocations decreases gains.
All you would do by not using bonds is decrease losses on bonds but you also decrease gains on stocks.
Think about this,it is a very important concept in portfolio volatility.
Remember that time changes the course of all assets. Buying the s&p and gold in equal amounts on the day gold peaked back in the 1980's had gold falling for years.
Just rebalancing over time had your gold you bought at the worst time and the s&p running neck and neck in long term performance recently even though you bought your gold at the worst possible time back then.
As time goes on what you owned and what you paid origonally is overshadowed by decades of action,rebalancing and reinvesting.
Buying individual bonds may pan out the same as funds held that long. Rates are fixed on individual bonds and never change over time. But what does change is purchasing power.
Losing 1/2 your purchasing power on a long term bond when it matures 30 years later is the same loss as a share price drop in a fund had you bailed out.
Folks think individual bonds are safer but they really are not. Bond funds give you rising interest rates over time on your money to offest falling share prices.
Individual bonds don't raise rates they just mature at face value and lose it in purchaing power at maturity since inflation and rates are usually joined at the hip when they rise.
Last edited by mathjak107; 08-26-2013 at 06:31 AM..
So says you. And some experts say that as well. Other experts say the exact opposite.
Quote:
Originally Posted by mathjak107
All in all if credit ratings do not change you can be whole again in less than 5 years in an intermediate term bond fund.
Or 15 years, depending on who you believe.
Quote:
Originally Posted by mathjak107
If markets fall and bonds do as they typically do in a flight to safety the bonds should offset some of the drops.
It didn't work out that way the last time bond yields were so low.
Quote:
Originally Posted by mathjak107
That is the biggest reason for holding bonds, volatility range.
But not necessarily preservation.
Quote:
Originally Posted by mathjak107
It never dawns on folks that because without bonds they will not have the chance of bonds cushioning equities fall.
If their bonds allocation doesn't react the way you're hoping it will, then they'll actually have a false sense of security assuming what you're suggesting they take comfort in.
Quote:
Originally Posted by mathjak107
All you would do by not using bonds is decrease losses on bonds but you also decrease gains on stocks. Think about this,it is a very important concept in portfolio volatility.
I have thought about it. I've spoken with a financial expert about it, and he disagrees with you. He's more convincing than you are. But neither of you is convincing enough to prevail.
So says mathamatics my friend as far as being whole again in a bond fund.. Look up what the duration value of a bond fund is. If you think i made that figure up for being whole you do not understand bond fund duration values.
Last edited by mathjak107; 08-26-2013 at 07:20 AM..
So says you. And some experts say that as well. Other experts say the exact opposite.
Or 15 years, depending on who you believe.
It didn't work out that way the last time bond yields were so low.
But not necessarily preservation.
If their bonds allocation doesn't react the way you're hoping it will, then they'll actually have a false sense of security assuming what you're suggesting they take comfort in.
I have thought about it. I've spoken with a financial expert about it, and he disagrees with you. He's more convincing than you are. But neither of you is convincing enough to prevail.
Go with what you believe. I prefer math,studies and history to at least base a plan on rather than what i or any supposed soothsayer thinks.
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