So you’ve been wondering, “How much of my portfolio should be in bonds?”. In this week’s Mullooly Asset Management podcast Tom and Brendan discuss a recent article from the New York Times that relates to that topic. The article’s title is, “For Retirees, a Million-Dollar Illusion”. The main point of the article was that if you have a million dollars saved for retirement, it might not be enough money. This paints a pretty negative picture. If you work your entire life saving money, it still isn’t going to be enough. Well that’s sure depressing, huh?
Tom explains why their statement isn’t necessarily true. For starters the article assumes that you have your money invested in tax free bonds. We had a previous podcast that explained why bonds are risky in 2013 because of the currently low interest rates. So tax free bonds are yielding about 2% today, and the article assumes they are your investment of choice. In reality, if you have money in tax free bonds you probably have a handful of different interest rates from when you put money into those bonds. This means what you would likely be yielding is more than 2%. Nobody is forcing you to reinvest your money right now and receive the current 2% yields. Tom explains that we are currently at the bottom of a thirty year interest rate cycle, and that money can surely be put to work at higher yields. The article is also assuming that you are fully invested in bonds. Don’t worry, we’re getting to the how much of my portfolio should be in bonds part soon.
Some other “low-lights” (opposite of highlights) from this lackluster article included their “advice to investors”. This included the suggestion to work longer before retirement, save all that you can, and to think about tapping into your home equity. None of those are true answers and the suggestion to tap into your home equity is absurd.
Tom offers his own suggestions to their proposed issue in the podcast. A question that investors should be asking is, “How much of my portfolio should be in bonds?”. This is a somewhat controversial topic because the financial planning industry has always said that no matter what your age is you should have a portion of your assets in bonds. Tom tends to disagree with this though, and here’s why. Today many people are discovering that they should have stayed in stocks much longer before moving to bonds. A lot of investors assume that retirement means moving all of their assets to bonds immediately. This certainly doesn’t have to be the case.
In 2013, you need to have your money growing a lot longer than most were advised to in the past. While being invested in the market might make you a little more nervous than being in bonds, it is important to keep growing your funds. Bonds are not a growth investment, they are designed to provide steady income. So it might be time to start asking, “How much of my portfolio should be in bonds?”, because it probably isn’t as much as you think.
Tom’s advice to investors is a little more useful than what the New York Times had to offer. His suggestion is to stay in the market! If you are still interested in bonds, then average into bonds. Don’t make the move all at once. Averaging the move out over five or ten years will (hopefully) get you better yields. Readjusting your retirement plans is also an option, but not one that many individuals want to hear. Make sure to listen to this week’s podcast if you have ever wondered, “How much of my portfolio should be in bonds?”.
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