I have a weak stomach when it comes to stock funds - in the past, I was into funds that were a mix of
stocks and bonds but now I am invested solely in PTTRX and DODIX.
I am 60 and will retire in 6 years and feel I will be better off saving and investing in bond funds rather than getting Into riskier funds. Although they don't yield as much as stock funds, the funds I mentioned have been steady over the last several years averaging 6-7 per cent which is good enough for me.
My question: are bond funds still a relatively safe investment or will they begin to lose value in your opinion? I don't no a lot about it but isn't it true as long as the Feds keep the interest rates low bonds will be OK?
Thanks in advance for any of your advice!
Comments
I'm retired (too early,) and will be 59 in the summer. Wife works, and with my too-small pension, we're ok. I'm about 50/50 stocks/bonds. I have no need to draw on the investments yet. They say the 'buy and hold' strategy is dead, but I make changes rarely. My bonds are in DLFNX and PREMX. And I own one "balanced" fund with both equities and bonds: MAPOX. Generally, stocks are more volatile than bonds, but over 5, 6 or 10 years, stocks always win, hands-down. I seriously want to alert you to the fact that to pile all your stuff in just 2 specific funds is quite risky.
I'm extremely happy with two of my newer holdings (bought-in in 2012:) MAPOX and MSCFX, both Mairs and Power funds. My others include SFGIX, MACSX, MAINX, MAPIX, TRAMX. The way things happened was not the way the textbooks would have you do this stuff. I'm "barbelling" PREMX and MAPIX. The other holdings are much smaller in proportion to those two.
"Break a leg."
I definitely understand the desire to have lower volatility and lower risk in/near retirement (and I think I've been particularly understanding of that on this board for some time), but I think it's good to have *some* (even if a bit) of exposure to equity. I think something that can offer consistent dividends that are reinvested (monthly like the SPLV) is something that may be more volatile than fixed income, but the monthly reinvestment could at least take some of the stress off over time in that you can let it go on autopilot and just reinvest (?)
You can be 100% in any one asset class, but as long as you're accepting of the risks (and potential underperformance at times, possibly for longer periods) of that. The same goes for anything - equities, commodities, bonds or even more specific sectors - emerging markets, tech, whatever.
However, a better question might be: Is it really necessary for everything in your diversified portfolio to show positive returns? Many things we own provide great value, even though they cost money and appear to offer little material gain. Consider house insurance, fire extinguishers, umbrellas, and life rafts on a vessel. By owning a variety of investments that MAY do well under different circumstances, you can reduce volatility and uncertainty, and perhaps sleep better at night. I don't consider this too important for youngsters under 50 who can ride out the bumps and who also tend to have fewer investable assets. I do consider it important for folks 60+ who are retired and reliant on their life savings for subsistence.
One good way to address the issue above is to study the allocation models of some good moderate or low-risk mutual funds, along with their rationale, with an eye to learning how managers design portfolios taking into consideration (1) desired risk profile and (2) allocations to cash, treasuries, various grades of corporate debt, equities, and sometimes "real assets." Prospectuses can be pretty dry, so that's not where I'd point you. However, some of the annual and semi-annual fund reports - replete with pie charts - make for good reading. Couple better ones are those from managers at PRWCX or OAKBX - both moderate allocation funds. Also, look at the allocations for target date funds which try to adjust risk to age and years from retirement. Some of the websites are also pretty good on their own. And, many third parties, like M* break the allocations down if you look beyond the "headline" rankings.
Overlooked In your question is the fact that bond funds comprise a large and diverse group with much different risk profiles or purposes within a portfolio. To that end, here's a decent read showing some of that variety (much more substantial than merely choosing between a chocolate or cherry soda:-) https://www.tradeking.com/education/mutual-funds/bond-mutual-funds ... And, if you look closely, many shun the moniker "bond fund" completely, preferring the term "income fund" which gives them more latitude within the fixed-income (and sometimes equity) universe. I happen to own DODIX and RPSIX - both of which are so identified,
Regards
So, I agree with the posters here suggesting dipping your toes into some assets beyond core bonds. You could try on a multi-sector bond fund, with more stock-correlated assets but nowhere near the volatility of stocks, get into one or more quality conservative or moderate allocation funds, or start to build a stock position with the minimum volatility etf's like Scott suggested.
Those min-vol etf's have gotten pretty popular in their short lifespans exactly for the reasons you've been avoiding stocks. You could check out SPLV and USMV in US large caps, and maybe eventually, if you get comfortable with the idea, consider the global, emerging markets, and small and mid-cap versions for a small part of your portfolio.
By the way, you might take a look at Gross's BOND etf and think about switching some of the PTTRX exposure to the etf ... it's smaller and more nimble, and represents more of BG's best ideas; he's also not as limited there in changing allocations with changing market conditions as he is in the ultra-giant open-end mutual fund. The etf has stayed well ahead of PTTRX in total return for essentially all of its ~ one-year existence.
If you are still not comfortable consider investing in a couple of balanced type of portfolio that hide the equity volatility internally and make it easier for tipsy investors to continue to invest. Consider VWINX GLRBX or some conservative allocation funds.
You can sell half of your pure bond funds and buy a couple of balanced funds. This should put you into 20-30% equity allocation.
I think there are head winds coming for bond funds. With this I shortened the duration in my income sleeve within my portfolio this past month by making some changes that I felt might extend my staying power with my positions within this sleeve.
I think my hybrid income sleeve will fair better that my income sleeve with the anticipated coming headwinds. My hybrid income sleeve consists of mostly conservative allocation type funds that also provide a good income stream. I am prepared to sell down my fixed income funds as these headwinds present themselves to preserve principal and for go the income they are generating. In doing this that leaves me with the question of how to reposition the sell proceeds from the income sleeve. Perhaps I’ll start the restoration of my cd ladder within the cash sleeve of my portfolio and only keep the fixed income funds that are weathering the headwinds. We want know this though until the headwinds arrive.
In short words, nobody knows for sure how this will play out until the headwinds arrive.
So I would say, stay flexible, be willing to adapt and have a game plan. And also know, you will not be by in this storm by yourself. So keep posting and reading the board as I am sure it will continue to be a topic of discussion.
You can read more about how I repositioned my income sleeve under a thread started by Scott titled ... New Thread: Open Discussion (What are you buying, selling, considering?)
Good Investing,
Skeeter
Stout, speaking to shareholders as the trust reported its annual results today, said investors are underestimating the potential consequences of unprecedented central bank stimulus.
"A lethal cocktail of unparalleled levels of global debt and unparalleled global money printing, shaken and stirred by numerous financial indicators at multi-century highs/lows, suggests a global fixed income hangover is fast approaching," he said.
"There is no precedent within fixed income history to assess the likely damage, but significant sums of money will be lost."
Stout's fixed income pessimism is shared by Robin Geffen, CEO of Neptune Investment Management, who in December warned bond investors should brace themselves for severe losses when the interest rate cycle turns.
Geffen argues the long end of the bond market will fall between 30% and 40% when interest rates and inflation normalise.
http://www.investmentweek.co.uk/investment-week/news/2251064/shaken-and-stirred-how-to-beat-the-fixed-income-hangover
Citi strategist Matt King, who sent us this chart in December, put it this way: "Since 2007, credit mutual fund assets have doubled, while dealers' corporate bond inventories have halved. So while in 2007, it would have taken a 50% outflow from mutual funds to double the size of the street's inventory, now if there were to be a 5% outflow it would double the size of the inventory."
In other words, the "buffer" of higher inventories on bank balance sheets provided the market with liquidity.
Now, that buffer is gone.
http://www.businessinsider.com/citi-bond-funds-to-spark-next-crisis-2013-2