Bond Funds

[rollergrrl]

Thoughts on investing in Bond Funds inside retirement accounts such as 401k's, when your company only provides a few options.

 

[Whisper66]

If they fit your asset allocation needs and the bond funds are well diversified, why not?

 

[rollergrrl]

It seems like most information I read about bond funds are negative, specially with interest rates rising. But wouldn't bond funds be cheaper now to buy? Wouldn't this be the time to buy bond funds?

 

[Sunset]

Based on the scant information provided, this is my thoughts.

As interest rates rise, the bond funds will go down in value, but they will be able to buy higher paying bonds, so their payout will go up.
It's good that you are reading up on this.

If I was planning to work 15 or more years longer, I would skip bond funds and put it all in stock funds that are broad based and have low fees. About 70% US and 30% the rest of the world.

If I was 10 yrs or closer to retirement, each contribution I would put 40% USA stock, 30% rest of world stock, and 30% intermediate bonds (not long term, and not short term).

 

[pb4uski]

It seems like most information I read about bond funds are negative, specially with interest rates rising. But wouldn't bond funds be cheaper now to buy? Wouldn't this be the time to buy bond funds?

No, it is the opposite of what you are thinking. When interest rates rise, bond fund prices decline. The prices later recover as bonds mature and new bonds are purchased at higher interest rates.

For example, lets say you own a $1,000 bond that pays 2% interest and is due in a year... in a year you will receive $1,020. If market interest rates for that bond is 2%, the price of the bond is $1,000 ($1,020/(1+2%)). If market interest rates spike to 3%, the price of the bond is now $990 ($1,020/(1+3%)).

Does your 401k plan offer a stable value fund? Does it offer a match?

If your 401k offers a stable value fund and it pays a decent rate of interest (say, 2% or so) that may be a good alternative in the short run. If your 401k does not offer a match then you may be better off just skipping your 401k and saving in a deductible IRA if your income is low enough to deduct contributions.

 

[Whisper66]

Rollergrrl - keep in mind that bonds (or bond funds) are typically bought to offset the volatility of the equity (stock or stock funds) part of your portfolio. A good summary can be found on Bogleheads Wiki here.

Big +1 to comment below by pb4uski. Whenever a match is available, take it. Can debate how to invest it but take the match.

Does your 401k plan offer a stable value fund? Does it offer a match?

If your 401k offers a stable value fund and it pays a decent rate of interest (say, 2% or so) that may be a good alternative in the short run. If your 401k does not offer a match then you may be better off just skipping your 401k and saving in a deductible IRA if your income is low enough to deduct contributions.

 

[Sunset]

Absolutely do the 401K if you get a match, my post above was with the idea it would be in a 401K.

 

[audreyh1]

While I was working and contributing to my 401K I did not invest in bond funds. It was only when I got close to retiring that I started moving moving to an allocation that included bond funds. I think it's far more important to the retiree who is no longer receiving paycheck, and withdrawing money from their portfolio every year.

 

[UnrealizedPotential]

Thoughts on investing in Bond Funds inside retirement accounts such as 401k's, when your company only provides a few options.

I would need more information from you so that I can give an opinion. What is your age? What is your risk tolerance? Do you have other assets outside the 401k? How much longer do you plan to work? Answers to these questions will help me to give a solid response.

 

[OldShooter]

...

If I was planning to work 15 or more years longer, I would skip bond funds and put it all in stock funds that are broad based and have low fees. About 70% US and 30% the rest of the world.

If I was 10 yrs or closer to retirement, each contribution I would put 40% USA stock, 30% rest of world stock, and 30% intermediate bonds (not long term, and not short term).

This.

 

[rollergrrl]

I would need more information from you so that I can give an opinion. What is your age? What is your risk tolerance? Do you have other assets outside the 401k? How much longer do you plan to work? Answers to these questions will help me to give a solid response.

I will be turning 40, hopefully be able to have the option to retire at 55. I do own my house, it's value is around $100,000. I have an emergency fund of 6 months. My tax deferred account balance is about $200,000. I started maxing out my 401k, putting about 37% of my salary in account, this included employee match. I do have a Roth, that I just started and been trying to max that out. Just don't want to be to risky, because I am putting so much in. Any thoughts?

 

[rollergrrl]

Rollergrrl - keep in mind that bonds (or bond funds) are typically bought to offset the volatility of the equity (stock or stock funds) part of your portfolio. A good summary can be found on Bogleheads Wiki here.

Big +1 to comment below by pb4uski. Whenever a match is available, take it. Can debate how to invest it but take the match.

Whisper66 great read! Thanks for sharing.

 

[OldShooter]

I will be turning 40, hopefully be able to have the option to retire at 55. I do own my house, it's value is around $100,000. I have an emergency fund of 6 months. My tax deferred account balance is about $200,000. I started maxing out my 401k, putting about 37% of my salary in account, this included employee match. I do have a Roth, that I just started and been trying to max that out. Just don't want to be to risky, because I am putting so much in. Any thoughts?

FWIW, I retired at 56, my wife at 58. When we were 50, our allocation was 90% equities/10% in a bond fund. At 60, we were 75/25, using TIPS. Earlier we were usually 100% equities.

"Risky" is a funny word. If you sit tight for 15 years, history says you will come out ahead by being 100% equities. There is very little risk in that. If we get a market drop of 20-40%, say, the "risk" is mostly that you will panic and sell. I have read that having "weak hands" is the usual reason that amateur investors have relatively low net yields. I have had more than one investment advisor argue that keeping this from happening is one of the most valuable things (s)he brings to clients.

The famous Fred Schwed quotation applies: "There are certain things that cannot be adequately explained to a virgin by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money you used to own.”

Said another way, I don't think your risk tolerance can be theoretically determined. You need an actual test. I wish you luck.

I learned following October 19, 1987 that our risk tolerance was such that we did not sell into panics. So we were comfortable holding very high equity percentages well into retirement. We are temporarily at 50/50 because I decided a couple of years ago that I wanted to have a conservative position with very short maturities going into a period of Fed increasing interest rates. I also wanted to have some dry powder if we do get a good buying opportunity. If it were not for that (possibly misguided market timing, I know) we would probably be at 75/25 still.

 

[GalaxyBoy]

Perhaps the OP meant they desired a bond fund investment but the 401(k) plan offered only a few, probably lousy, options. Tax-efficient fund placement would suggest placing the bond portion of one's allocation in a tax-sheltered account such as a 401(k) or IRA, but what does one do when the only choices in one's plan stink?

I faced this same issue when I was still working. One solution I used was to use the plan's self-directed brokerage option to purchase Vanguard bond ETFs (ETFs had a much lower trading cost than mutual funds in that account). If that's not available to you in your particular plan, then it might be better to eschew the lousy bond fund (which might only invest in high-yield or junk bonds, and would very likely have a high expense ratio) in the 401(k) and buy an equivalent fund in another account.

However, this would be a personal decision based on more information than was given here.

Edit to add: Don't forget to check the target date funds you probably do have available to you, which should have a healthy dose of bond funds embedded in them. Just because you plan to retire in 20xx doesn't mean you can't choose to invest in a fund called the "20yy Fund."

 

[rollergrrl]

I have 3 bond funds to choose from, 1 being a bond index fund. My current retirement plan portfolio has been 15% bond fund index, 65% US stock Mutual index funds mixing from large/mid/sm, 15% international index fund, and 5% real Estate Securities Fund.

My concern is now that I am approaching 40, should I look at increasing my bond funds to 20% or maybe 30%. I am currently putting 37% of my income, so I don't think I need to be too risky. It just seems like there is a lot of information out there telling people to get out of bonds and avoid bond funds.

 

[rollergrrl]

Do you think one should move to bond funds when they are investing a higher % of their income such as 37% or should it only be based on age/years to retirement? Thoughts?

 

[Scuba]

Your risk tolerance may go down as you approach retirement. Personally even though we are now ER'd, we only have about 20% in bonds because our portfolio needs to carry us for 40+ years (hopefully). Short-term market fluctuations don't concern me because we have enough cash/bonds to avoid selling equities at a loss.

However many people sleep better at night knowing their portfolio is more buffered against valuation declines. If that is how you feel, perhaps you should have a higher bond allocation. I'm more concerned about longevity risk and feel our portfolio needs to generate growth to meet our lifestyle goals. At your age and time to retirement, I'd be fine with close to 100% equities but that's based on my personal risk tolerance. Yours may be different.

 

[bingybear]

Do you think one should move to bond funds when they are investing a higher % of their income such as 37% or should it only be based on age/years to retirement? Thoughts?

how much in bonds really depends on desired asset allocation, not what % of income one is investing. Asset allocation is created from risk tolerance and return needs among other things.

You note you have few bond options in your 401k. What are they. A few good options is all you may need.

 

[UnrealizedPotential]

I will be turning 40, hopefully be able to have the option to retire at 55. I do own my house, it's value is around $100,000. I have an emergency fund of 6 months. My tax deferred account balance is about $200,000. I started maxing out my 401k, putting about 37% of my salary in account, this included employee match. I do have a Roth, that I just started and been trying to max that out. Just don't want to be to risky, because I am putting so much in. Any thoughts?

You say your options to your 401k plan is limited. Does your 401k plan offer a balance fund? Maybe 60 to 70 % stocks and the rest in bonds? If so, I would do that if I were you. You are much more likely to the stay the course if we have a downturn. But you are doing well. Just stick with it . Keep socking that money in every paycheck. Your age being 40 you still need a lot of stock allocation. But since you are a little uncomfortable with the risk stocks have, I would increase the bond portion to 30% to 40% just so you can sleep better and feel more comfortable. Calmness counts for a lot in investing.

 

[rollergrrl]

how much in bonds really depends on desired asset allocation, not what % of income one is investing. Asset allocation is created from risk tolerance and return needs among other things.



You note you have few bond options in your 401k. What are they. A few good options is all you may need.

There is a Core Bond index, inflation Focus fund , High Yield fund,and Core bond fund....

 

[OldShooter]

There is a Core Bond index, inflation Focus fund , High Yield fund,and Core bond fund....

If the "inflation focus" fund is basically a TIPS fund and you are committed to putting a portion of your savings into bonds, I'd suggest that one. It exposes you to the least interest rate risk compared to long bonds, and if inflation spikes IMHO the value of TIPS will rise disproportionately. But at 40, I still think 100% equities is the way to go. It worked well for us and if history is a guide, history says it will work well for you too. I think you do not want to hear that, however.

 

[rollergrrl]

If the "inflation focus" fund is basically a TIPS fund and you are committed to putting a portion of your savings into bonds, I'd suggest that one. It exposes you to the least interest rate risk compared to long bonds, and if inflation spikes IMHO the value of TIPS will rise disproportionately. But at 40, I still think 100% equities is the way to go. It worked well for us and if history is a guide, history says it will work well for you too. I think you do not want to hear that, however.

I am open to 100% equities and believe history says it works. But then I come across information stated below and wonder if it's worth taking more risk for 2.5% a year. I am not concerned about me panicking and selling short. But what about having a decent amount in bond funds to purchase more stock funds when the market is down in a retirement account. Just been thinking a lot....

Vanguard's info showing 1926-1999 average returns and worst losses were:
Return-- Worst Annual Loss-- Portfolio type
11.3%-------(43.1%)...100% Stock Portfolio
10.5%-------(34.9%)...80/20 Stocks/bonds
09.5%-------(26.6%)...60/40 Stocks/Bonds
08.9%-------(22.5%)...50/50 Stocks/Bonds
08.3%-------(18.4%)...40/60 Stocks/Bonds
07.0%-------(10.1%)...20/80 Stocks/Bonds
06.1%-------(06.7%)...10% Cash/10% Stocks/80%Bonds

 

[Fedup]

Why they only show average returns up until 1999? That was almost 20 years ago and missed a huge event like 2008-2009.

 

[OldShooter]

Well, you have to do what you have to do. But you aren't looking at 2.5% per year, you're looking potentially at 2.5% for 20 - 30 years. In 20 years that's a 64% larger ending portfolio. At 30 years, 2.5% compounded is enough to more than double the portfolio value. Nothing is certain of course, but it's not "just 2.5%," it's 2.5% compounded over a relatively long time.

Re worst annual loss, you just have to be ready. When the market is strong, watch and enjoy. When it is weak, stop watching. Like for two or three years. I've been doing that since the 1970s. It works.

 

[Fedup]

Good point, I never thought of it that way. But the heirs will receive a nice inheritance, that would spoil them for sure. It's a dilemma.