Asset allocation with $8 million

[FIRE'd@51]

What you are missing is this: if the equity markets tank, interest rates will drop, and the bond fund will go up in value.

Not necessarily! It depends on why equities tank. If it's because of rising inflation, bond yields will rise and bonds will drop in price also. Think 1970's.

 

[gwraigty]

I strongly suggest that people google "The difference between a bond and a bond fund"

If you own an "individual bond" and hold it to maturity, you get your principle back plus interest. Regardless of the stock market's up and down. This is because a bond is a "loan" to the government or corporation with a fixed maturity date and interest rate.

For an individual bond, you earn interest and 100% of the principle is returned at the maturity date, provided the government or corporation does not declare bankruptcy...which is why they categorize bonds as AA, A, B and junk.

Granted the value of the bond may flucturate due to market condition but ONLY IF YOU SELL PRIOR TO THE MATURITY DATE. Once you hold it until the maturity date, you get 100% of your principle back. The classical example is a Government Savings Bond which grandparents like to give to their grandchildren.

A Bond fund is a completely different animal because the fund manager has to buy and sell bonds due to buy orders and sell orders. Hence the price of the Bond fund flucturates. Investors are sometimes confused about the behavior of a bond fund versus the behavior of an individual bond.

If you want better security, I suggest buying individual bonds from the government or a AAA rated corporation and hold it to maturity date. I prefer short term individual bonds which reduces the risk but the return is small. A diversified portfolio should have some individual bonds...and not a bond fund to reduce the volatility.

As an addition to your excellent post, one can also choose to treat their bonds funds somewhat as individual bonds by taking all dividends in cash without the intent to sell shares of the bond fund to live. I own both individual bonds and bond funds. Fluctuations in the price of either do not worry me.

 

[gwraigty]

That's not completely correct or clear. The standard deposit insurance (FDIC, NCUA) amount is $250,000 per depositor, per insured bank (not per branch location), for each account ownership category.

In addition, if you hold brokered CDs, you could theoretically have an entire $8M FDIC insured with the convenience of one brokerage account. Just make sure that no more than the FDIC limit is with any one bank.

 

[2177V]

Let's compare options to stuffing money in your mattress:

First Bank of Indiana CD....2.8% FDIC insured up to $250,000 per depositor (per bank)

Treasury Bonds........2.4 to 2.5% per www.treasurydirect.gov However, they are exempt from state of local taxes.

Inflation is 2.1% in 2017, 2.2% in 2018.

Looks like break even.....depending on your tax situation. Inflation also depends your your situation since the government uses CPI and other metrics. For example, if housing prices goes up but your house is paid for, you are not directly affected.

Side Issue: The biggest elephant in the room is health cost. This is why i invest some of my money in the health industry such as VGHAX which has done very well. Since the health industry is ripping off the public (my opinion)...i might as well join them.