I am concerned about increasing my bond allocation

[nico08]

I am (hopefully) getting closer to FIRE. I understand that as that time nears, conventional wisdom suggests that you should increase your bond allocation of your investment portfolio.

I just keep hearing/seeing from multiple news/commentary sources, that now is not the time to be buying bonds, particularly long term bonds.

So my queston is, if I am get closer to FIRE, let's assume less than 3 years out as early as 1, do I continue to purchase bonds at this time? Do I have an alternative? What are others doing in this situation?

Thanks for your insight.

[galeno]

Not enough information to answer your questions. In 2014 we're going to sell 5% of our stock port to buy world bonds if that helps.

[karluk]

Quote:

Originally Posted by nico08 I am (hopefully) getting closer to FIRE. I understand that as that time nears, conventional wisdom suggests that you should increase your bond allocation of your investment portfolio. I just keep hearing/seeing from multiple news/commentary sources, that now is not the time to be buying bonds, particularly long term bonds. So my queston is, if I am get closer to FIRE, let's assume less than 3 years out as early as 1, do I continue to purchase bonds at this time? Do I have an alternative? What are others doing in this situation? Thanks for your insight.

Neither I nor anyone else on this forum is going to be able to offer assurances that bonds are a good investment right now. But I suggest that you ponder your alternatives. Five years of stellar stock market returns has done what it always does - convince investors that stocks aren't the high risk proposition that history shows they have always been and undoubtedly will continue to be. If you optimistically continue pouring money into stocks while they are hovering near record highs, you are facing a very real risk that they will be worth considerably less than your purchase price in the not too distant future.

In the longer term, of course, we all expect stocks to recover from any downturn and eventually make a profit. The question is can you hold them long enough to see that profit? If you expect to need to cash in your investments in order to fund your retirement, you really need investments that you can reasonably hope to sell at a profit starting in the next one to three years. That means some mixture of bonds, cash, CDs, savings bonds and the like.

[nico08]

Thanks for the advice. You have given me some good alternatives to consider.

[Animorph]

You don't have to do anything before you retire, if you are flexible with your retirement date. You can work a little longer if the market dips lower than you are comfortable with.

Once your retirement date is certain, then you need to raise some cash for expenses, something like a year. I retired in 2007 and was more comfortable with about 3 year's worth of expenses in cash at that time. That and DW deciding not to retire came in handy. You can put that cash into bonds or CD's or online savings account or whatever works for the liquidity you need and gives you the best short term return you can get.

Beyond that, your portfolio is most vulnerable when you are making the largest percentage withdrawals from it. With the 4% rule, this is at the start of retirement. Normally your portfolio will grow so that your original 4% will shrink as a percentage of the current portfolio, providing a safety margin. However, if there's a big market drop at the start of your retirement, that original 4% might grow into something much larger and endanger your portfolio. Having a substantial bond or cash allocation would allow you to draw down your bonds while waiting for an equity market recovery. On the other hand, a large bond allocation means less equities available to grow and slower total portfolio growth.

I would recommend a conservative portfolio just after retirement, whatever that means to you. You can allow it to get more aggressive as your safety margin increases. T

hat said, I was just fine with my cash and the rest in equities. For me, that was as conservative as I got. But it was definitely better than entering retirement, and 2007, with 100% equities.

[Midpack]

You're not alone and there have been many threads on this topic over the years, you may find more by doing a search. Here's just one recent example http://www.early-retirement.org/foru...ary-69624.html.

[pb4uski]

My AA was no different when I retired than it was when I was working. I was mostly equities until my mid-late 40s at which point I started putting new money to fixed income. My AA was 60/40 for some years prior to retiring and is still 60/40 today. The important thing for you to do is to decide what your target AA should be. To the extent your current AA is different, then the question is how to get from A to B.

We're all a bit scared of the implications of interest rate risk on our fixed income portfolios. My solution has been to transition to CDs and target maturity bond funds. If you have a stable value option in your workplace 401k, that would be a good alternative as well.

[mrfeh]

Quote:

Originally Posted by nico08 I am (hopefully) getting closer to FIRE. I understand that as that time nears, conventional wisdom suggests that you should increase your bond allocation of your investment portfolio. I just keep hearing/seeing from multiple news/commentary sources, that now is not the time to be buying bonds, particularly long term bonds. So my queston is, if I am get closer to FIRE, let's assume less than 3 years out as early as 1, do I continue to purchase bonds at this time? Do I have an alternative? What are others doing in this situation? Thanks for your insight.

It depends on when you'll need the money that you're considering investing. If it will be for living expenses in 1-3 years, then I suggest keeping it in CDs, money markets. If you already have near-term living expenses set aside and you're just looking at reducing the risk of your overall portfolio, then I think TBM is fine.

I'm planning on retiring in 3 years. I have begun throwing all new contributions at short-term fixed income (I-bonds, CDs, short-term munis), to be used for living expenses when I FIRE.

[ERhoosier]

I've always disliked generic references to "bond" allocations for the "stability" in "conservative" portion of a portfolio. If rates rise sharply, as most predict they will over coming months/yrs, long bonds (20-30+yr maturities) can easily loose 20+% in value. Hardly stable or conservative. OTOH- In that scenario investment grade 1-2yr bonds (or some better CD's) can be rolled over into higher rates as they mature with stability of capital. Agree with mrfeh that iBonds (currently 1.38% plus poss increase if/when inflation rises) are also worth considering, although there is limit to how much you can buy per yr.
https://www.treasurydirect.gov/indiv...nds_glance.htm

[haha]

At most times I tend to prefer fairly low duration bonds- no more than 5 years anyway. But the unanimity of opinion that rates are set to rise strongly, the recent perceived "good" jobs report, plus Janet Yellen coming on board soon-and she being one of the most dovish chairpersons ever- makes me think that I would not agonize over shifting some $ from my equities to my fixed. After all, it's not like equities are zero risk assets. I would not be attracted to going long as a spec, but it may not be so bad as it is being painted
.
Ha