I have a 15-year 5.375% mortgage with 13 years left. I have not paid it off only because it gives me a bit of a tax break and the rate is pretty decent. What worries me about the bond funds is that with interest rates going up inevitably, their NAVs will come down so I will have a negative hit to my portfolio right away. I have technology, small and medium cap, international stock mutual funds which have shown gains in the last 12 months but I am beginning to get concerned about them now. What kind of return can I expect form the balanced index fund and which one would be a good one to look at?
Hi Dante,
I agree with dm. If you love living in your house, keep it. If ER is more important, consider selling the house.
In your case I think that paying off your mortage is a no-brainer. (Assuming that you want to keep the house).
Think of it this way, would you buy a 15 year bond, with near zero risk of default at 5.375%? I would, especially given that you conservative and are sitting on $670,000 yeilding 2.3%.
I wouldn't worry so much about where interest rates are heading, or timing the market. Think about your portfioio in the aggregate, not how each component is peforming. If you're concerned about the direction of rates, or the market, then dollar cost average into your new investments. Same goes for the mortgage, if you're not sure whether or not you should pay it off now, pay off half.
Another thing that you can do if you're worried about rates is to add more weight to the short term bonds. Then, over time, move towards intermediate term bonds.
Whether to use individual Bonds or Stocks instead of mutual funds is a personal decison. There are some advatages to buying Bonds directly, it really depends of how much effort you want to put in.
Like many here, I like the Vanguard funds. They offer a vast selection of managed and index funds, and have the lowest cost in the industry.
I'd consider using the following funds:
Total Stock Market Index
(.9% 3 year, -.28% 5 year, 10.89% 10 year.)
Index-500
(-.85% 3 year, -1.54% 5 year, 11.26% 10 year)
Total Bond Market Index
(5.05% 3 year, 6.66% 5 year, 7.03% 10 year.)
International Index
Short Term Corporate Bond Fund
(4.19% 3 year, 5.63% 5 year, 6.09% 10 year.)
Balanced Index (60% stock, 40% bonds)
(3.05% 3 year, 2.92% 5 year, 9.71% 10 year)
Lifestrategy Conservative Growth (25-50% stock, 30-55% bonds, 20-45% short term securites.)
(3.9% 3 year, 4.16% 5 year.)
REIT Index
(15.63% 3 year, 14.23% 5 year)
Here's an example of a specific portfolio that you can dollar cost average into over the next 12 months.
1 year from now.
Cash - 30%
Short Term Corporate - %20
Total Bond Index - 20%
International Index - 5%
Total Stock Market Index - 25%
2 years from now
Cash - 15%
Short Term Corporate - 20%
Total Bond Index 25%
International Index - 10%
Total Stock Index - 30%
3 years:
Cash - 5%
Short Term Corporate - 10%
Total Bond Index 30%
International Index - 10%
Total Stock Index - 40%
REIT Index - 5%
You get the idea. You can sub. CDs for the Bond portion.
If you have an IRA/401K, keep the highest yeiding portion of your portfolio there (the bonds).
I would not own any sector specific stock funds (Technology), unless you're doing this with a small portion of your portfolio for entertainment (gambling) value.
