Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Interest Rates + Inflation + Bonds = FEAR
Old 12-31-2009, 08:20 AM   #1
Dryer sheet wannabe
 
Join Date: Dec 2009
Location: Kennesaw, Ga
Posts: 14
Interest Rates + Inflation + Bonds = FEAR

Well my 4% 13 month CDs are maturing in January and the best CD deals are about half of what I got last year so I am considering bonds. My goal is to have 35% in equities and 65% in bonds after the CDs mature and I reallocate. I am now going the self directed path with Fidelity so I want to make sure I am not making a mistake. I met with one of their advisors and he said that if rates go up that any NAV hit I would take on the bonds would be more than offset by the increase in my equities value. Is this a reasonable assumption. Should I not fear throwing up to 65% of my retirement into bonds now.

Sam
__________________

__________________
Sowhatdoidonow is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-31-2009, 08:34 AM   #2
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,143
Quote:
Originally Posted by Sowhatdoidonow View Post
Well my 4% 13 month CDs are maturing in January and the best CD deals are about half of what I got last year so I am considering bonds. My goal is to have 35% in equities and 65% in bonds after the CDs mature and I reallocate. I am now going the self directed path with Fidelity so I want to make sure I am not making a mistake. I met with one of their advisors and he said that if rates go up that any NAV hit I would take on the bonds would be more than offset by the increase in my equities value. Is this a reasonable assumption. Should I not fear throwing up to 65% of my retirement into bonds now.

Sam
Try reading this thread on how bond funds work.

As for the advisor's statement that "if rates go up that any NAV hit I would take on the bonds would be more than offset by the increase in my equities value." is bogus in my opinion. He is making the assumption that equities go up when bonds go down and that is certainly not always the case.

FWIW, I am retiring in a month and have 35% in equities, 50% in bond funds and the rest in cash but I moved to this position over a number of years in readiness for ER.
__________________

__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 12-31-2009, 08:43 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
If you cannot hit your minimum return requirement with CDs, you will have to decide what risks you are willing and able to take. Bonds have inflation and possibly credit risk (both of which can be mitigated with TIPS), equities have a lot of market risk, commodities ditto, etc.

I think a diversified portfolio that includes lots of different types of assets is probably a better choice, but that is up to you.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 12-31-2009, 09:06 AM   #4
Dryer sheet wannabe
 
Join Date: Dec 2009
Location: Kennesaw, Ga
Posts: 14
brewer12345:

Agreed but in this environment can anyone reach their minimum return with CDs. Last year I got 13 month 4% CDs. Now you have to lock in at 5 years to get that. I would consider myself conservative based on the fact that if I have anymore than 35% in equities I lose sleep. That being said, I don't want lose sleep over the bonds too and I am just looking for some sort of reasonable "conservative" approach to this. I would be happy with a 7% long term yield. How can I get their without risking the farm? One final question, the Fidelity guys are telling me to avoid ETFs when investing in bonds because such funds many times require so much monies be invested in treasuries and with rates so low, a managed fund allocate differently, Are you in agreement that managed funds on the bonds side make sense in this environment?
__________________
Sowhatdoidonow is offline   Reply With Quote
Old 12-31-2009, 10:13 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Long-term thinking is your friend. As is disciplined asset allocation. I'd avoid making major portfolio changes based on an interest rate environment that will likely change over the next couple of years. Chasing yield is a classic way that folks get themselves into trouble.

Some mix of short-term and intermediate-term fixed income exposure is probably warranted in a well diversified portfolio. My advice is set the mix and forget about it.

With respect to CDs. There was a thread not too long back discussing the advantages of opening a long-term CD (5-yrs) and paying the break fee if the money is needed earlier. Just be careful that you understand the terms of the CD before you go down that road, but in some cases it makes sense.
__________________
Gone4Good is offline   Reply With Quote
Old 12-31-2009, 12:02 PM   #6
Thinks s/he gets paid by the post
DblDoc's Avatar
 
Join Date: Aug 2007
Posts: 1,224
Well after 2 years of having the risks associated with equity investments pounded into our heads we now get to see the ugly downsides to fixed income investments.

The only thing I would add to ...Yrs to Go's advice is to have several years of living expenses set aside in cash/easily liquidated low risk investments so you can weather the storm until your diversified portfolio recovers.

DD
__________________
At 54% of FIRE target
DblDoc is offline   Reply With Quote
Old 01-01-2010, 07:38 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,528
Why not put your money in a conservative balanced fund that meets close to your income needs, and then sell a little extra if necessary to meet the 4%. Something like VWINX gets you close. A lot of folks have managed to live off the distributions and still have their original investment keep up with inflation.

By looking at CDs or fixed income only, you are looking at current yield ignoring the fact that your portfolio had better keep up with inflation over the long run.

There is nothing magic about taking income only from yield, you can also take income from cap gains. Look up the concept of "Total Return" of investments.

Audrey
__________________

__________________
audreyh1 is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Interest rates jrcase FIRE and Money 12 04-23-2008 11:01 AM
Capitalizing on Higher Interest and Inflation Rates Culture FIRE and Money 7 02-11-2008 10:25 AM
New Zealand interest rates. CCdaCE FIRE and Money 9 08-05-2007 01:31 PM
When interest rates drop... blanston FIRE and Money 29 08-11-2006 11:10 AM
Low interest rates Whisper9999 FIRE and Money 29 12-01-2004 06:03 AM

 

 
All times are GMT -6. The time now is 01:47 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.