Some stupid questions about asset allocations

[Cap_Scarlet]

I am looking at stucturing my portfolio for retirement but to be honest I am pretty limp when it comes to investing.  My main pensions will come from DB schemes but as those schemes dont kick in until age 62 I will need to make sure I have enough cash to last from early retirement through to that date (about 12 years).

I hvae been investing in investment funds for a number of years but just using the policy of having a reasonbly diversified portfolio.

I have seen that a conservative allocation is around 20% stocks; 60% bonds and 20% cash.

My stupid question is what sort of bonds does that mean (since there are such a variety out there) and does that mean investing in a bond fund?  If so which one?  Would appreciate any tips!

[Catbert]

Generally if you were using this AA you would have a variety of bonds:  muni, investment grade commercial, maybe junk bonds (lower rated bonds) and even Treasure bonds.  These bonds can be short term or long term.  This could be a bond fund or you could buy individual bonds if you have a large enough portfolio.  You certainly wouldn't want to buy just one or two individual bonds.  Bond funds can be very broad or focus on one time of bond and duration (e.g., short term California muni fund).

IMHO it would be folly to put 60% of your portfolio in bonds at this point.  Over the last 30 years bonds have done great.  That's because interest rates have been drifting downwards.  I think pretty much everyone believes that over the next 10+ years that interest rates will climb.  Maybe not next year or even the year after, but soon.  When interest rates climb the value of your bond will decrease if you have to sell early. 

Let's say you bought a $1000. bond at 4% and interest rates climb to 5%.  No one is going to pay you face value for your 4% bond.  They are going to want to pay you less so that they will reap 5%.  I believe that the rough estimate is that if interest rates rise 1% then the value of your bond will go down by 10% for each year.  (I may be remembering that wrong  and I'm too lazy to look it up.)  If you hold the bond to maturity then you will still get your $1000 back.

I would go for a  portfolio much lower in bonds.  I'm retired and keep about 15% in bonds (it use to be 20% and will derop more when a bond matures in August.)  I'd up the stock and maybe even cash %, and look at REITS.  I'd keep my bonds short-term.

[Nords]

My stupid question is what sort of bonds does that mean (since there are such a variety out there) and does that mean investing in a bond fund?  If so which one?  Would appreciate any tips!

You're asking the sort of asset allocation questions which are best answered by a trip through the Bogleheads wiki:
http://www.bogleheads.org/wiki/Main_Page

For the last five years (maybe longer) investing pundits have been advising "short-term bonds" (durations of only a few years) because interest rates are going to go up "any day now" and crash the share value of intermediate bonds and long-term bonds.  But if you read up on asset allocation and invest in a bond index fund, then you'll probably feel more comfortable with intermediate/long-term bonds-- because you're living off the interest payments instead of the share price (or the capital gains).  The problem with getting this advice before you've read about asset allocation is that our emotional behavioral psychology can cause us to sell at a huge loss at the first sign of adversity. 

You're considering an extremely conservative asset allocation.  While it will have low volatility and help you sleep at night, it can also lose ground to inflation.  Even at age 50 you could probably double your proposed allocation to stocks if you're going to stay 20% cash:  40% index stock funds, 40% index bond funds, 20% cash.  But again the key is to learn more about asset allocation and get comfortable with stock-market volatility so that you don't feel compelled to sell as soon as a recession hits.