bonds vs money market question

[joesxm3]

In today's situation where there is not much of a premium being paid for long term fixed income investments is it ok to be keeping money in money market funds at 5% rather than in bonds or bond funds.

Can the money market fund be thought of as a bond with a really short maturity period?

I currently have about 20% in money market funds, 14% in series I savings bonds and 6% in bond index funds.

Should I buy some bonds with the money market money? Only if I get a better rate or if I expect rates to drop in the future?

I do not think I want a lot of default risk. Can I do better than 5% on good quality corporate bonds? My bond index fund has 4.6% 5-year average return.

If I am 5 years from ER should I start building m 5 year bond ladder now?

Thanks.

[clifp]

Most studies have shown there is little if any return benefit for holding long-term bonds vs 5 years or shorter. There is a major downside with long-term bonds/bond funds higher volatility. Now days with basically flat yield I personally don't see a benefit. One suggestion is to look at a GNMA fund.

An alternative to bonds is to take advantage of the numerous promotional CD rates that credit unions and often savings and loans offer. On these forums you can see 6% being offered by some credit unions.

[Alex]

I have some cash too, but I am still a big fan of bonds. If you ask me, the best time to buy any asset class is when it is out of favor. For that reason, I am slowly adding to my bonds at this time. Best of luck!

[chinaco]

I believe it depends on your goals and how your are trying to position the portfolio. Do you want growth or do you want stable value? Are you in the accumulation phase or distribution phase? How many years before you want to consume the asset?

IMHO - over time bonds appear to out perform very short-term paper.

If you are trying to time things... good luck! The direction of interest rates seems to be unclear based on what you read in the press... for whatever that is worth.

If I were sitting on cash and intending to move money into bonds, I would probably average the money into bonds over time (length of time would depend on how much money). But then again... I am not a timer. I would be seeking to achieve my target asset allocation for the intermediate term.

I hold some TIPS, Intermediate Term Bonds, Money Market in mutual funds. From there I will be rebalancing between the assets classes. I have a 70/30 allocation.

I am beginning to accumulate cash over the next few years (slowly) to prep for the distribution phase of ER. My cash (short-term security) target is 10% of the portfolio.

[Spanky]

My current cash holding is 34%. I plan to move it to short-term and intermediate term treasury bond funds.

[haha]

Quote:

Originally Posted by Alex I have some cash too, but I am still a big fan of bonds. If you ask me, the best time to buy any asset class is when it is out of favor. For that reason, I am slowly adding to my bonds at this time. Best of luck!

By what line of inquiry could bonds be said to out of favor? Interest rates are very near to historic lows.

Ha

[tightasadrum]

I've looked at this issue as well, and I just do not see enough premium between bonds and MM to assume the risk, small as it is. I too have a lot tied up in cash/MM, but as long as there appears to be a reasonable risk of rising interest rates, whether its due to increased inflation or possible large selling by foreign holders of Treasuries, I don't see the inherent reward for the risk. So my cash stays in MM for now. The exception is in mutual funds that have bonds as part of their mix. I do own some of those. MM, bonds & annuities pay about the same now. But, your opportunity to move quickly is better when it's in MM if something interesting comes up.

When interest rates drop, bond values will go up of course. But so, most likely, will equities. But wait, equities continue to rise now anyway. How long has it been now since we had a real correction? Six years? I just cannot make myself commit a lot more money to equities now. Do you anyone who has swamp land in Florida they want to sell?

drum

[Alan]

Quote:

Originally Posted by joesxm I currently have about 20% in money market funds, 14% in series I savings bonds and 6% in bond index funds. . . . If I am 5 years from ER should I start building m 5 year bond ladder now? Thanks.

FWIW, I am 2.5 years from RE and have built a 5 year ladder in I-Bonds. ($100K) The first bonds are 5 years old in 2009. With MM funds at over 5% I have stopped buying I bonds.

I am at 40% in stock index funds and plan on maintaining that level. Cash is at 10% and bonds 50%. I class I-Bonds as cash as the chances of the gov't not returning principal is probably in the same order as MM funds not maintaining a $1 NAV.

[Danny]

I've been buying short term (under 1 year) Cds don't want to mess with bonds or bond funds right now. 5+ return principal guaranteed.

[Alex]

Quote:

Originally Posted by haha By what line of inquiry could bonds be said to out of favor? Interest rates are very near to historic lows. Ha

there is very little premium over cash (money market) rates right now.

[2B]

I'm building a 3 year CD ladder for my eventual 30% fixed income portion. Yields in this maturity range are in the 5.3 to 5.4% range. The yields are about 1/2 point higher with CDs than high quality corporates, treasuries and agency bonds.

You can get up above 6% if you go out 10 years but most choices are callable.

[Lsbcal]

Quote:

Originally Posted by haha By what line of inquiry could bonds be said to out of favor? Interest rates are very near to historic lows.

The bond market is supposed to be very efficient -- that's what some pretty smart people tell us anyway. Also TIPS are at about 2.7% whereas historical real rates for intermediate bonds have been around 2.3%. When TIPS were down below 2.0% I would have thought that bonds were unattractive. Who knows where real rates are going in the future but it is clear they are at fairly attractive levels on a historical basis.

Personally I have things split up into
1) inflation protected bonds (TIPS & Ibonds)
2) intermediate bond fund (DODIX)
3) short term treasury bond fund (VFISX but right now its in Vanguard Prime Money Market)

The short term treasuries are for rebalancing needs. All this stuff is in retirement accounts so no tax worries yet.

Les