When people say there's a bear market on bonds, what they mean is there's a bear market on bond funds. Bonds are stable and reliable, but not terribly liquid. Bond funds, while more stable and reliable than equity funds, have an element of risk to them stemming from the very liquidity that makes them so popular. That risk makes them more profitable than other fixed income options, and thus more popular. It's no wonder bond funds have become synonymous with the asset class.

People have a tendency to look at the dollar sum at bottom of their account page as though that's an amount of cash they own. They feel the bills slipping through their fingers every time the number changes. It's easy to lose focus on the fact that It's purely a nominal representation of your various shares. They neither earn nor cost you money until they are actually sold or produce a dividend or interest payment.

One possibility is to buy some i-bonds with a chunk and dump the rest into Vanguard total stock market.

Another possibility (if you don't mind paying taxes on the 2% or so income that bonds will generate) would be to pick either a target retirement fund (which will rebalance stocks/bonds and gradually move towards bonds), a life strategy fund (which will rebalance stocks/bonds but keep a fixed % of each), or one of their managed balanced funds (wellington and windsor, which invest in stock and bonds).

Anonymous wrote:That 35% is not a bond allocation- It's a fixed income allocation. You can fill it with any fixed income product that meets your needs, i.e. something low risk that shouldn't track with equities. This category includes individual government bonds, individual treasuries, muni bonds, corporate bonds, stable value funds, CDs, and even rewards checking and savings account. Somewhere in that lot should be a return to tickle your fancy. It won't be five percent, but it needn't be a losing proposition, either.

It seems pretty clear that bond funds are going to be losers for a couple years. Do you need the money in a couple years, though, or will you be redeeming these funds years after the securities within them have matured? You'll eventually make up the loss of NAV in dividends and, while there will be some opportunity loss, is it really worth stewing over?

This is interesting. The asset allocation calculators always recommend that I buy bonds. I assumed that was because I didn't have any bonds, not that I was lacking a "fixed income" allocation.

In short, if you think you will need your money in two years, invest is short term securities. If you think you can let it ride for ten years or more, invest in long term securites. If you think the government is going to default on the whole sorry mess, invest in yoga lessons. At least you'll have the satisfaction of being able to kiss your ass goodbye....

Anonymous wrote:

Anonymous wrote:That 35% is not a bond allocation- It's a fixed income allocation. You can fill it with any fixed income product that meets your needs, i.e. something low risk that shouldn't track with equities. This category includes individual government bonds, individual treasuries, muni bonds, corporate bonds, stable value funds, CDs, and even rewards checking and savings account. Somewhere in that lot should be a return to tickle your fancy. It won't be five percent, but it needn't be a losing proposition, either.

It seems pretty clear that bond funds are going to be losers for a couple years. Do you need the money in a couple years, though, or will you be redeeming these funds years after the securities within them have matured? You'll eventually make up the loss of NAV in dividends and, while there will be some opportunity loss, is it really worth stewing over?

Now is not a good time to buy bonds. They will lose face value for many years to come.

?sigh?

Bonds do not "lose face value" unless the issuer goes spectacularly bust. In a rising interest rate environment bonds only lose resale value if you seek to redeem them before maturity. Buy a ten year bond and, barring a GM/Detroit style calamity, you can know to the penny what income you will receive from it for ten years. Try that with a stock sometime and see how much success you have.

What this kind of rate environment exposes is the number of people who pick their bond exposure according to what returned the best rates last week rather than the period of time within which they will need to redeem their investment. You get a lot of folks freaking out because that house downpayment account they invested in a thirty year treasuries fund because it had the highest percentage in the prospectus, mysteriously won't be ready liquidate next year when they actually need to buy a house.

Anonymous wrote:That 35% is not a bond allocation- It's a fixed income allocation. You can fill it with any fixed income product that meets your needs, i.e. something low risk that shouldn't track with equities. This category includes individual government bonds, individual treasuries, muni bonds, corporate bonds, stable value funds, CDs, and even rewards checking and savings account. Somewhere in that lot should be a return to tickle your fancy. It won't be five percent, but it needn't be a losing proposition, either.

It seems pretty clear that bond funds are going to be losers for a couple years. Do you need the money in a couple years, though, or will you be redeeming these funds years after the securities within them have matured? You'll eventually make up the loss of NAV in dividends and, while there will be some opportunity loss, is it really worth stewing over?

Now is not a good time to buy bonds. They will lose face value for many years to come.

That 35% is not a bond allocation- It's a fixed income allocation. You can fill it with any fixed income product that meets your needs, i.e. something low risk that shouldn't track with equities. This category includes individual government bonds, individual treasuries, muni bonds, corporate bonds, stable value funds, CDs, and even rewards checking and savings account. Somewhere in that lot should be a return to tickle your fancy. It won't be five percent, but it needn't be a losing proposition, either.

It seems pretty clear that bond funds are going to be losers for a couple years. Do you need the money in a couple years, though, or will you be redeeming these funds years after the securities within them have matured? You'll eventually make up the loss of NAV in dividends and, while there will be some opportunity loss, is it really worth stewing over?

Thanks for the bond info. Yes, this $$ is taxable extra after every other account/contribution is maxed out. I guess my question is more specific. The current financial news is all gloom and doom on bonds as in "don't throw away your $$." Of course others say because the govt is not buying bonds, it's a good time to buy. So does the 65/35 (or whatever %) still apply despite the current bond market flux? Or maybe I'm asking the wrong question all together . . . .

You don't want to invest in bonds in taxable if you can possibly help it. You've got a few options, once you decide on a bond allocation.

1) Use your lump sum to augment living expenses while temporarily hiking up your 401k contributions. This is a good choice if you're not already maxing to employer match. Invest according to allocation- 50/50 split between a total bond index and TIPS is usually a good bet. Replace TIPS with stable value if you have a fund returning 2.5% or greater.

1a) If you already have a good amount in your 401k, allocated according to your risk tolerance, you can swap stocks within the plan for bonds and then use your lump sum to replace those stocks in a taxable account. Your overall allocation percentages won't change.

2) If you do not already have a roth IRA you can hold your bond allocation in that. Yearly contribution limits may not give you enough room right away, depending on the size of the lump sum. If you already have a healthy IRA you can apply the principles of 1a.

3) If you must hold the whole shebang in taxable, I would split your bond allocation between I Bonds, a well rated tax free muni fund, and long term CDs (in that order of preference). If that's too much fuss for you, a Vanguard tax balanced fund will accomplish much the same thing, only with slightly more bond risk and the inability to harvest tax losses.

Your age, your risk level, what is your total portfolio break down? In general a 10 to 15% bond hold will protect you on the down side and not kill your returns. As you age, you increase your percentage to safer things. If you have enough money, vanguard can do a recom. portfolio for you.

So I have a chunk of $$ that I just want to dump into Vanguard and basically forget about it. I was planning about 65% stock fund (US foreign mix) and the rest in bond funds (I was aiming for a fairly conservative mix). When I researched which bond fund to pick I saw about a 50/50 split among the "experts" regarding whether to buy bonds or not (and nothing about a particular fund to buy). So, DCUM financial gurus, what say you? Any input much appreciated.