Thoughts on parent's AA

[cardude]

My parents are struggling with their AA. They are in their 70s and their current AA is 66% equities and 32% bonds 1% cash. Individual stocks and and bonds mostly. Not many mutual funds.

They have a financial advisor, and as individual bonds come due she is reinvesting them in more bonds, with maturities of 7 years or less. She is determined to get the bond AA up 50%.

My parents are concerned about taking a big hit on these bonds if inflation cranks up in x years, but they really don't know what else to put the money in. They don't want any more equities. I told them just stick the proceeds in cash.

Is a 7 year or less term short enough maturity? Should they put bond maturity proceeds in all cash until they get a handle on inflation?

[Dawg52]

The $64k question for many of us. I would probably go the CD route as discussed in another thread. They are not paying much, but safe. Maybe rates will be better in a few years.

[cardude]

Yeah. I just saw that CD thread. Thanks.

[JOHNNIE36]

I've been out of the market overall for quite a few years so my recommendations don't count. How badly do they need income off these investments? If the market took a hit, it sounds like they might be worried. If that is the case, then I would worry now. My opinion is that they are too heavily invested in equities. I think someone in their seventies would need a more conservative portfolio, like 30% equities and the balance in bonds. Right now I'm a cash guy. Have a big IRA maturing in March 2014 and I'm starting to wonder what to do with it. Being almost 77, I know it won't be in stocks. Good luck.

[heeyy_joe]

What kind of yield are they getting on the individual bonds and are they investment grade or junk status?

[Meadbh]

Quote:

Originally Posted by JOHNNIE36 I've been out of the market overall for quite a few years so my recommendations don't count. How badly do they need income off these investments? If the market took a hit, it sounds like they might be worried. If that is the case, then I would worry now. My opinion is that they are too heavily invested in equities. I think someone in their seventies would need a more conservative portfolio, like 30% equities and the balance in bonds. Right now I'm a cash guy. Have a big IRA maturing in March 2014 and I'm starting to wonder what to do with it. Being almost 77, I know it won't be in stocks. Good luck.

An annuity might be worth consideration in your case, Johnnie, despite the fact that it is a taboo on the Board. Depends on your objectives, of course.

I agree that Mr. and Mrs. Cardude Senior are overinvested in equities, but overinvestment in bonds is probably not optimal at this time either. In their situation I would be leaving their present bond allocation alone, taking profits on the equities and putting perhaps 30% of the portfolio in cash or CDs. I might go with a short duration ladder (1, 2 and 3 years) of CDs to be able to take advantage of higher interest rates when they eventually return.

Disclaimer: I am not a professional financial adviser and my advice is worth only what you pay for it.

[Katsmeow]

They could do CDs and/or possibly a short-term bond fund. I have VFSUX which has an average duration of 2.3 years.

[cardude]

Quote:

Originally Posted by heeyy_joe What kind of yield are they getting on the individual bonds and are they investment grade or junk status?

They are not all investment grade. Some are b-

Yields range from 4%-7%. There are quite a few bonds in this portfolio. I'm not a bond guy so I don't really know about these individual bonds, and they will probably do nothing even though they asked for my advice.

They have some long term stock holdings with very low cost basis and they really don't want to sell them. Would rather let the kids inherit them at the stepped up basis they said. They have a few smaller positions they said they might sell to clean things up.

I advised them to quit letting the FA buy bonds when old ones came due. Just put into cash it CDs. Also sell some of the smaller stock positions

[clifp]

Quote:

Originally Posted by cardude They are not all investment grade. Some are b- Yields range from 4%-7%. There are quite a few bonds in this portfolio. I'm not a bond guy so I don't really know about these individual bonds, and they will probably do nothing even though they asked for my advice. I advised them to quit letting the FA buy bonds when old ones came due. Just put into cash it CDs. Also sell some of the smaller stock positions

Individual B- bonds for folks in their 70's, holy crap. No wonder the board hates financial advisers.

Here is what S&P says about B- bonds.

Quote:

‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. ‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.

If we look at the S&P report on global defaults we see that over the last 7 years 23.8% of all speculative bonds BB+ and below defaulted. Historically it looks like roughly 1/3 of all B- bonds default in 7 years. Typical recover for defaults is 40-80%. Which means that a portfolio of B- bonds with a 7 year maturity, would only get about 80% of its principal back.

In other words you parents are being subject to substantially more risk than I bet the realize with these nice safe bond investments.

Probably more importantly about a year ago, Brewer who is IMO an expert on the subject. Said the junk board market is getting crazy.

I would definitely not be buying junk bonds right now.

[cardude]

Jesus. I wondered if this FA knew what she was doing. Thanks for the info. First time I've seen their portfolio so I had no clue.