Asset Allocation question: Bonds

you are young (age 31)... my advice would be determine what age you will cash in these investments (retirement). Substract your current age from your retirement age. If the number is greater than 20, then bonds would NOT be needed.

If difference is less than 20, subtract number from 20, this is % bonds needed...

Current Age 31 retirement age 65

65-314... no bonds needed until age 45 (1%) Increase bond allocation 1% per year until age 65... at this point you would be at 20% bonds the year you retired.

If you are more conservative, add 10% to this (so add first bond position 30 years prior to retirement and be 30% bonds the year you retire).

I am 34 and am nearly 100% stocks. Be aggressive now as you have time to recover from losses.

I agree with jIM. The goal of asset allocation is to manage your personal risk and return trade off. Many articles will propose some allocation scheme and not discuss the r & r considerations.

If you are comfortable with market risks, then keep 100% equities until five years before withdrawals begin. Then you need to transition so you can have a 5 years buffer on your withdrawal rate. For a 5% withdrawal rate you need 25% non-equities as a buffer. Rebalance when the market is up.

Frank

Would you consider the "Target Retirement" mutual funds from Fidelity and Vanguard conservative? Even the Target

2050 fund from Vanguard has a 10% bond allocation.

Anoop

YES the funds are conservative IMO- bonds really are not needed until one of two things happen

1) a person reaches the principal amount they want within portfolio (in this case preserving capital is more important than growing it)

and/or

2) a person needs to stablize performance because of withdraws in less than 10 years.

I believe any "downturn" of 100% stocks can be recovered in 7 years (probably) and 10 years (even more probably). If one didn't think a market could recover in 10 years, then they should probably be investing in something else anyway...

bonds do well to reduce volatility and generate an income stream. I do not see them as helping returns.

hedge beating the S&P 500 in down years in hopes of showing their fund of funds can "meet or beat" the market.

Here are my opinions, although I'm not an expert:

Yes, if you're holding long term, bond mutual funds will be about the same as holding individual bonds.

Not really, if interest rates increase, your bond funds will lose value too.

Yes, they're kind of like short term bonds (less than 1 year)

"jIM" wrote

snip

The Trinity Study argues compellingly otherwise, with the thrust being that adding a certain, not insignificant fraction of bonds will reduce volatility yet yield the same returns.

Have you actually studied the historical data, Jim? See some of the sites linked at

I would further recommend looking closely at the expense ratio of the bond fund(s) you're interested in.

Anoop

My targeted retirment age is 60 not 65 so i should be more aggressive now because I plan on living until 90. It's simplistic to say I know but I would want 30 years living covered by my portfolio. However the option is there to work until 65 or longer of course. But all my planning for the next 10 years will be on retirment at 60.

Now according to your rule of thumb I should not consider bonds until 39. 40 or 41 Correct?

Here is why I feel Conservative investing and why I want fixed income funds or holding in my portfolio.

I make blue collar income and my prospects for increased salaries are diminished. I do not have a high school diploma so indeed any shift into a white collar position will be rarely presented although not unlikely, and I would probably not pursue it. I do however make a decent slightly above national salary now with a stable employment picture. Good for tax refunds directly related to retirement and long term investing. Unfortunately the city where I live in is I make a low salary. Bad for cost of living expenses.

I work in an industry that needs my young age and values experience. My salary is increased to matched inflation and a hard work ethic will even beat inflation some years. So I'm bullish on my employment outlook within my industry but to jump ship into another career is smaller than say somebody with a degree.

However after all that spiel I'm thinking several consecutive years with bear markets will be harder for me to make up for with a lower salary. That is my thinking. But if a prolonged bear market (war, running out of oil, bankrupt fed blah blah blah etc etc etc.) were to occur do my portfolio increases and reinvestments from earlier bull markets allow me to recover or does the addition of capital, i.e. a percentage of my salary, allow me to recover??? If somebody can guide me on that question with their expience in the 70s or 80s or 90s I would be willing to research. How do you deal with a long bear market? My thoughts are to use it as a buying opportunity. Could I use the sale of bonds or fixed income assets to fuel the buying during a bear market to make up for a smaller contribution from my salary?

So I think It's my salary that makes me believe to be conservative for my age.

And yes I do have emergency funds set aside that will not enter my portfolio and no I do not have any consumer or car debts. In fact I have way too much cash in emergency reserves.

I've studied the Fidelity Canada Clearpath group of funds. They are easily available in Canada whereas Vanguard are not up here. I have to research of the if Canadian banks offer these lifecycle or target funds as well.

it seems to me that these targeted retirement funds allow themselves lee-way in their bond to stock holdings. The managers are allowed, according to the prosecutes to swing 10% either way in terms of bond allocations. This swing does not include cash holdings and they seem to be allowed to carry up to 5% cash. I'm talking about 2040 and 2045 funds.

This is the info from the clearpath 2040 prospectus: The blended index is approximately 55% S&P/TSX Capped Composite Index (Canadian equities), 15% Dow Jones Wilshire 5000 Composite Index (U.S. equities), 15% MSCI EAFE (Net) Index (international equities), 8% Scotia Capital Bond Universe Index (Canadian bonds), 7% Merrill Lynch U.S. High Yield Master II Constrained Index (U.S. high-yield bonds). Prior to January 1, 2006, the U.S. high-yield bond portion of the blended index was the Merrill Lynch U.S. High Yield Master II Index.

Here is a PDF link to Fidelity Canada's lifecycle Cleapath 2040: 2006 report:

Fidelity here in Canada have really begun to market these funds to my age group (26 to 34). Good sign or bad?

How about mortgage backed securities? Anyone have opinions on these?

I just want to say thanks for posting. So many in this group think a white collar, million dollar retirement fund is what we all need. It is as important - maybe more so - for young, blue collar employees to be thinking about financial planning. Good for you!

And yes, to answer your original question, bond funds are a good substitute for individual bonds. As another poster says, be sure to check and compare costs on funds. As your return is likely to be less on a bond fund than in some other types of investments, it is very important to pay attention to their costs.

Elizabeth Richardson

They are an odd duck. When rates are rising, bonds fall in present value, and mortgage holders (borrowers) tend toward holding on longer, not refinancing. When rates fall, bond prices should rise. But that's when refinancing also rises, so principal is returned. This is a bit lose-lose to me. Rates are higher than a comparable duration straight Government bond, but the above issues balance out the higher yield.

Think about it this way, I had a 7-5/8 mortgage in 1996, and refinanced (no points, no closing costs) three times, last time in 2004, at 5.24%. Each refinance saw a pooled fund getting back a chunk of money, only to see a new loan pop up at a lower rate. JOE

Not me. I think a person making a lower income will see a larger percent replaced by Social Security, and needs to save taking that into account. Absolute numbers mean far less than getting started early, and understanding the numbers. The rule of 25 still applies to us all. JOE

Very good points jIM. I agree completely.

To the OPer, whether you decide to keep with the bond allocation or not you probably shouldn't hold actual bonds. ETFs for both equities and bonds work great. They are not subject to the discretion of money manager's which can keep them more in-line with your intended allocation. There is also one for pretty much every sector imaginable, so diversification is a snap. Of course, that's just one of many viable options.

good luck!

I think the Trinity Study agrees with Jim: "In contrast to stocks, bonds provide little upside potential, which causes the portfolio success rate to be small or even zero for bond-dominated portfolios at high withdrawal rates. Because of the benefits of diversification, however, the presence of some bonds in the portfolio increases the portfolio success rate for low to mid-level withdrawal rates."

-Will

I'm thinking of starting with index and mutual funds first ONLY because ETF's have trading commissions and I cannot quite afford that yet. I'll pay the higher MER's on funds and index funds first because I will have to rely on paying a set amount of money each month into the portfolio to build worth. Once I have estblished some good capital I can shift into some ETF's with one of those discount brokerage firms. My trouble seems to be finding a short term bond fund that has a low MER.

Do you think my reasoning is sound?

Hi Henchman, The Henchman schrieb:

What is MER?

John

Management exspense ratio.

I disagree. If interest rates rise and your bonds lose value, you have the option of holding individual bonds to maturity and getting your capital back. AFAIK, bond funds do not have maturity dates.

Another reason to invest in bonds is if interest rates are rising, bonds will appreciate in value at a time when stocks are especially vulnerable.

Bonds are not all that expensive to invest in if you buy original issues. They do tend to incur high expenses and commissions if you buy... what's it called... on the secondary market. [that might not be the right terminology] I buy bonds direct from the US Treasury outside my retirement accounts for my bonds allocation, and my tax-deferred retirement are almost 100% equities (and a few high-yield exchange traded debt securities).

Best regards, Bob