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Having thought about an investing plan were I would put 60 to 70% into stocks, the other
30 to 40% I would like to be in a more conservative place. Bond funds don't seem to be the answer
for fear of losing principle when interest rates go up. I would like to generate at least 3% from
my conservative allocation. Is that even possible today? Also, if mutual funds are my choice of
Investment, would 1 or 2 funds be right or 4 to 5 for more diversification.
equities and immediate annuities seem to offer the best results according to the work done by dr wade pfau, one of the most famous researchers today in the area of retirement planning...
I think the answer to your question is 'no' although there might be some "alternative" options out there that folks will suggest that will pay that much, if you're willing to keep your mitts off the money for many years. I personally don't consider "alternative" options to be "more conservative" because their alternative nature carries with it risks that aren't counted only because they're not quantifiable.
I've confronted the suckiness of bond funds in the last year. My solution is to aim that conservative allocation to short- and middle-term bond funds that are heavy into investment grade bonds, and also floating rate funds. I won't pay a load or high fees (those are just other kinds of risk as far as I'm concerned), and as a sanity check I won't invest in something that neither Fidelity nor Vanguard would be willing to offer to buy for me, so that limits my choices a bit. It limits my choices a lot.
THOPX is perhaps the best that fits all my expectations and criteria. It's middle-term, which is longer-term than I would want. And its practically all BBB bonds, which sucks, relatively speaking. That's just the way things are.
I have considered numerous options for my non-equity investments. I do have a small annuity. I have had it for many years and can cash out at any time. Unfortunately over the years this annuity has cost me a lot of money in lost increases. I think it is currently accruing at about 3.5%. Another option would be to buy individual bonds. If interest rates increase, I would not lose principal which would happen with a bond fund. Unfortunately if interest rates increase I would plan on holding a low interest bond for many years. I might be just as well off with a bond fund. Another option is a short or ultra short bond fund. If interest rates go up, I would not see a big loss if I decided to sell. Of course, the downside is these funds are paying very little.
To my thinking the best long term solution is a high percentage of investment in equities and a minimal amount available as fixed investments for short term use. I suspect the wisest strategy would be to have 70-80% in equities at retirement age. That should be closer to 100% well before retirement and should decrease to maybe around 50% well into the retirement years. Unfortunately I hold a much lower percentage of equities. I attribute this to being overly conservative and also from listening to an equally conservative advisor. Since the stock market has gone up well, I should be selling to rebalance. Instead I am holding pat with the plan of buying if there is a major stock market decline. The saddest story is my TIAA-Cref funds. I had a small amount of money with 50% Cref stocks and 50% TIAA annuity funds. I left those investments alone for close to 30 years. At that time the stock fund was many times larger and I really regretted my decision on the TIAA fund. Of course, that same thing would have happened if I had been retired during that period of time.
I am dealing with the same decision making right now. My thinking is that the fixed income part of my AA is for stability and to lower volatility. So for that reason in our financial plan I agree with the poster who said go basic with Fido/Vanguard etc and if you want to go Boglehead do it or work in a valanced fund. Between a Fido/Van and TRowe is hopefully our sweet spot.
I am reading the OP as asking about investing once retired and after investing for retirement. I am reading him as asking about how to deploy new money.
volatility is the key word . if swings in your portfolio are going to bother you than you want intermediate term bonds in your portfolio if you are not going to use annuities in my opinion.
why?
well take an example where you think rates will rise and bonds will fall so you go cash instruments and equities.
in order to control the swings of that portfolio from going down more than you want you need to hold a lot of cash to offset that drop. that means less in equities and more in cash.
intermediate term bonds ,especially treasuries tend to rise when stocks fall. that rise can control volatility with a lot less of an allocation to bonds than cash can.
that means you can keep more allocated in equities and less in bonds to get the same swing.
even if bonds fall ,the extra amount you can allocate to equities will easily overcome the slight drop in bonds.
long term that higher allocation to equities with bonds should easily beat the equities /cash allocation because the bonds allow greater equity exposure than cash instruments would..
you are not using bonds as an investment as much as flying fighter cover for your equities and other real investments so you can keep the maximum amount of money in them and still maintain volatility in a range..
Last edited by mathjak107; 03-22-2014 at 11:37 AM..
I am referring to investing in retirement. Planning on retiring this year. Both my wife and I will have pensions. I will be a couple of years away from social security. Looking at investing my 401k which is in equities right now. I will need some income from the 401k.
Not all equity funds have the same volatility. Buying high Beta funds may require more bonds to match your overall portfolio volatility goals. That's what makes some newsletters nice. They do it for you.
which is just why i use a newsletter . we are in the same boat as i am going part time for the next year and then retiring.
i won't be collecting until 66 and i will be 62.
i use a newsletter , fidelity insight and have 2/3's in an income and capital preservation model which is a balanced fund and an assortment of different types of bond funds.
the other 1/3 is in the growth and income model a 60/40 mix.
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