Bond Funds?

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jerry
Posts: 36
Joined: Thu Aug 12, 2010 5:28 pm

Post by jerry »

With 40 days to go until retirement, I am wondering if there is any good reason to invest in anything riskier than short term bond fund.

Ten years ago, I got out of stocks when the dow was a little over 10k as I thought it was overvalued. Now, all of my money is in short/medium term bond funds.

Now the combination of pension + ss(in 5 years) will more than cover my current standard of living (relatively frugal lifestyle) for at least 30 years without touching savings assuming average inflation is less than 5%.

The tax shelter effect of buy and hold is the only benefit that I can see. The risk of huge interest rate increase seems smaller than the risk of stock market collapse.

What would you do?

Jerry


RightClawSouth
Posts: 123
Joined: Wed Jul 28, 2010 3:15 am

Post by RightClawSouth »

If your pension and SS easily cover your expenses then I think you're totally set and it doesn't really matter what you do with the other bucket of money.
It also really depends on a bunch of other factors: How old are you? (61? I guess), do you have kids? How is your health? etc.
If you're on the older side and have kids or other relatives that you might want to give that money to eventually then you might want to think about investing it in a way that is good for them (ie a more aggressive growth portfolio). If you're younger (ie 61ish) and/or you're worried about health issues then probably hang on to it in something safer like short to medium term bond funds.
My 2c.


jerry
Posts: 36
Joined: Thu Aug 12, 2010 5:28 pm

Post by jerry »

I am 57. I looked at 62 yr old payout from ss and it was enough. I figured I would collect early and pay it back if returns on savings were less than the increase I would get from full ss at age 66. That plan might go out the window if they eliminate that loophole.
My main concern is very high inflation which can make the pension worthless if you live long enough. I can not imagine that high or at least higher inflation will not come back. I have not done enough research on bond returns vs inflation.
While I have figured normal health care costs into my projections, I have not accounted for the costs if my wife or I need long term care outside of the home.
I would be happy to leave a large estate but I do not think it is necessary unless you have young children which I do not.
Jerry


Robert Muir
Posts: 280
Joined: Thu Jul 22, 2010 10:15 pm

Post by Robert Muir »

Your pension/SS would be the equivalent of owning bonds that pay out a guaranteed income stream. If you can live off the income from your pension/SS, then the last thing you want to invest in is bonds - especially now. With the rates that bonds are paying now, they have nowhere to go but down when interest rates eventually do go up.
That's why some experts are calling bonds a bubble. Many people are investing in bond funds because money markets and CDs aren't paying any interest and they don't trust the equities; so they're playing it "safe". But it wouldn't take much of an interest rate increase for them to see a lot of their capital disappear in a blink.
While I wouldn't recommend bonds, what you do invest in will depend on many variables: your appetite for risk, your desire for safety, your spending horizon, etc. etc.


George the original one
Posts: 5404
Joined: Wed Jul 28, 2010 3:28 am
Location: Wettest corner of Orygun

Post by George the original one »

It sounds like you're wanting to avoid taking any risks with the extra money and you have a high fear of inflation. With that profile, at this time, I would avoid bonds & bond funds in general unless you're willing to watch their market price (& NAV for bond funds) like a vulture who hasn't seen any roadkill in a month. Instead I would put that money into CDs until you see interest rates start to move and/or inflation begin.
Personally, I don't see interest rates or inflation going anywhere for 6 months to a year simply because we haven't had any movement in employment. Until employment starts going somewhere, there's no reason for the Federal Reserve to start raising rates.
Instead, the Feds are still talking about QE2, so despite the past years talk about "we've printed too much money" and "interest rates have got to go up", the fears and expectations have not come to fruition. I do agree that we've printed too much money, but we've been printing too much money for the past decade, not just as a result of economic collapse!
Now back to the bond funds. I own two (FAX & VKQ). I am also hovering over the sell button and already pulled the trigger once this year on VKQ at 14.70 and repurchased at 14.27 once NAV restabilized. With FAX, I'm compelled to watch the Aussie$ in addition to market price and NAV! This constant watching is a little bit nervewracking and may not be suitable for all personalities, but does appear warranted based on the fears and expectations.


jerry
Posts: 36
Joined: Thu Aug 12, 2010 5:28 pm

Post by jerry »

I wouldn't say that I have high fear of inflation but it is certainly my biggest concern.
My problem is that I do not find investing interesting. I would rather lose money than have to watch the market constantly.
If I find that bond etf vcsh or something like it has a high probability of keeping up with inflation after taxes (half of money is in taxable accounts) I will do nothing. Otherwise, I will put up to 50% in stock using a yet to be determined mechanical strategy.
jerry


miyatarama
Posts: 50
Joined: Thu Sep 09, 2010 7:27 pm

Post by miyatarama »

I like BSV (Vanguard's short-term US treasuries etf). Its yield is currently 2.39% (obviously not great, but equivalent to a 5-year cd) and since the holdings are only 1-3 years there shouldn't be much interest rate risk. Basically, the NAV could go down if interest rates rise, but in 3 years the NAV should at least equal your current investment as the holdings mature and rollover into individual bonds with the new/higher interest rate. Of course, if rates rise more than once the NAV will stay down until rates become stable or decrease. However, you should still earn the current yield (or higher as rates go up) regardless of the NAV. On the other hand, if QE2 happens/is successful your NAV should go up as interest rates decrease (and your yield would also decrease as the holdings rollover to the new lower rate).
You could also investigate inflation protected US treasuries, either individual bonds or in a fund like VIPSX or etf like TIP. One concern would be interest rate increases without equal inflation, I would think this would cause the NAV to go down. Another concern is the way inflation is calculated for the purpose of these bonds by the US Treasury. But, if you are mostly worried about inflation, this could be the way to go.


CestLaVie
Posts: 54
Joined: Fri Jul 23, 2010 4:24 am

Post by CestLaVie »

Lately, I have bought both individual TIPS (15-18 year maturities) and CDs. You should only buy bank or credit union CDs, no brokered CDs, and you may have to shop around to find the best offers. I just got a great deal recently, 5% interest on a 10-year CD at PenFed. You can still buy 7-year CDs paying around 3.5% at PenFed. Good deal, especially considering that 10-year treasuries pay only about 2.4% and CDs are fully backed by the US government (FDIC) just like treasuries. In addition, the value of CDs does not decrease when interest rates go up. They can be redeemed at any time (though you may have to forfeit some of the interests you earned), with no loss of principal, and the money can be reinvested in higher yielding instruments.


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