Interest Rates + Inflation + Bonds = FEAR

[Sowhatdoidonow]

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

 

[Alan]

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.

 

[brewer12345]

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.

 

[Sowhatdoidonow]

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?

 

[Gone4Good]

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.

 

[DblDoc]

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

 

[audreyh1]

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