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Best way to transition into bonds?
Old 12-07-2008, 02:42 PM   #1
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Best way to transition into bonds?



There are a lot of people here and collectively a ton of knowledge so I'm hoping I might get some investment advice.

I want to retire in about 5 years when I'm in my mid-50's. I plan to do it early with personal savings and not touch my pension until age 62.
When I'm retired I'd like to be about 50% securities and 50% fixed income; right now I'm 100% Securities with a small amount in cash.
The current security position is about half in Vanguard Total Stock Market ETF (VTI) and the other half in QQQQ. I plan on selling QQQQ and buying the VG total bond market. I'm guessing after the steep decline in the market that I'd be a lot better off waiting for "the Q's" to rebound (hopefully in less then 5 years) and then selling as apposed to transitioning over now when the market is low.

My question is this, how should I do this transition? Wait until the market returns to what it was a year ago, sell all the Q's at one time and lump sum into the bond market? Sell off a little bit over several years and dollar cost average into the bonds? Or

Any advice would be appreciated.
Bob
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Old 12-07-2008, 02:46 PM   #2
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I would be inclined to slide about 10% a year from stocks to bonds. That is, go 90/10 now, 80/20 in a year, 70/30 two years from now, and so on.

I don't think I'd like to do that full reallocation now because of the depressed level of the stock market. If you asked before the market began its meltdown, I'd have been more comfortable with an all-at-once allocation change, though.
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Old 12-07-2008, 03:13 PM   #3
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Here's what worked for me. Whenever the market had one of its "best days" in weeks, months, I sold stock funds and switched to bond funds. It is very easy to see if the market is having one of those days just by checking about 15 minutes before the market closes. The financial media will have terms like "best day in weeks" or "best day in 6 years" in their reports whenever this happens, so one can make a decision in an easy and timely manner.
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Old 12-07-2008, 04:53 PM   #4
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Originally Posted by ziggy29 View Post
I would be inclined to slide about 10% a year from stocks to bonds. That is, go 90/10 now, 80/20 in a year, 70/30 two years from now, and so on.

I don't think I'd like to do that full reallocation now because of the depressed level of the stock market. If you asked before the market began its meltdown, I'd have been more comfortable with an all-at-once allocation change, though.
I would be inclined to put this plan on the back burner for now. Risky bonds are on sale, but governments are expensive. Equities are cheap, relative to what they cost over the past couple decades anyway.

Why sell what is cheap to buy what is expensive?

All predictions about what is going to happen are just guesses. What we unequivocally know is that equities are cheaper now than they were before. Besides, have we forgotten- Mr. Change is coming to Washington, so things might be getting much better soon!

Ha
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Old 12-07-2008, 05:58 PM   #5
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I wouldn't sell any equities right now and, since you are still working, I would buy CDs or some types of depressed bonds (good quality corporates, TIPS, and perhaps munis) using new contributions. Then, when the equity market recovers, I would start selling stocks and buying more bonds.
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Old 12-07-2008, 07:58 PM   #6
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Originally Posted by LOL! View Post
Here's what worked for me. Whenever the market had one of its "best days" in weeks, months, I sold stock funds and switched to bond funds. It is very easy to see if the market is having one of those days just by checking about 15 minutes before the market closes. The financial media will have terms like "best day in weeks" or "best day in 6 years" in their reports whenever this happens, so one can make a decision in an easy and timely manner.
I would use this strategy if I were in the same situation. 100% in stocks is quite risky. Selling on surges is the mirror of buying on dips for younger people.
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Old 12-08-2008, 04:24 AM   #7
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Unfortunately you should have asked yourself that question a few years ago. But you have learned a lesson. We have all learned the same lesson at one time or another.

There are a lot of variables to consider regarding life circumstances. I will assume a couple of things:

A) You do not have enough money at this point to ER at 55 or that to ER you are now looking at downgrading your planned life style (at this level).
B) You have a stable and reliable job till you ER
C) You have an adequate emergency fund already in fixed.
D) Your equity portfolio is well diversified.

My opinion --- using those assumptions I would not sell equity now. I would wait until the stock market recovers. For example: if you are 50 and plan (hope) to retire at 55.... I would wait several years for the market to recover and then when you are feeling greedy and don't want to put the money in bonds... then do it. [ Of course, I would have a bit more of a defined rule than greedy... but you catch my drift].

What is at risk? You retiring at 55. What does it mean? You might have to wait a little longer (e.g. 57 or 59).

I am confident that the market will come back up a fair amount (it is overdone on the downside due to investor confidence) but it might take several years to move back up substantially. After that recovery... I am unsure about the level of growth that we can expect. Some are saying it will be lower.

One thing to consider. Stock market moves up (and down) often happen in bursts. When confidence recovers... we will likely see a substantial move upward. Of course as they say... past performance is no guarantee of future performance. YMMV


I was in your situation after the tech bubble... that is how I did it and it worked for me. The last market drop was no deeper than it is today. The problems we are facing right now are a little different... but I have confidence we will recover.
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Old 12-08-2008, 04:53 AM   #8
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I would take the advice of FIREdreamer...put the new contibutions more heavily into bonds/bond funds, maybe adding a bit to your equities to take advantage of the fire sale prices. I would not sell any equities right now because they are so cheap. Buy low, sell high, remember. Rebalance little bits here and there when recovery is underway, on surges as was also advised above.

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Thanks (everyone) for the feedback!
Old 12-08-2008, 05:04 AM   #9
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Thanks (everyone) for the feedback!

I've learned a bit about mutual funds over the years but have not paid much attention to the in's and outs of the bond market.

Bob
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