Author Topic: Asset allocation : Bond Vs equity  (Read 3231 times)

force majeure

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Asset allocation : Bond Vs equity
« on: February 23, 2015, 01:07:07 PM »
Hello everyone,

I have been worrying myself awake at night about my current holdings. Looking for some advice before I act....

In brief, aged 45, I am invested, high 6 figures;

80% global equity (dividend)
5% European equity
15% dividend / high yield

Believe me, this took a huge turnaround to move from being in one stock (company stock) to this spread.
I cant bring myself to buy bonds right now, given the run up in values, and low yield, should I sell down part of the global fund and go to cash? Basically, I do not like bonds. Having been invested thru 2008 I dont mind volatility as I would simply average in from cash holdings. I could take a 30% hit and still not be underwater.
 
Thanks

Kaspian

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Re: Asset allocation : Bond Vs equity
« Reply #1 on: February 23, 2015, 01:21:28 PM »
The "yield" of holding in cash is even lower than bonds though.  And the run-up in values has served most of us well as it's almost like having another equity fund to rebalance with. ...But to each their own.  The percent of your portfolio you want in "safe" investments should be some sort of fixed-income--Real Estate Investment Trusts, Certificate of Deposit/GICs ladders, etc.  I don't think there's anyone here who would recommend more than 5% in straight up cash.

Bicycle_B

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Re: Asset allocation : Bond Vs equity
« Reply #2 on: February 23, 2015, 01:53:55 PM »
You could buy your limit of i-bonds.  They provide interest plus inflation protection, and never fall in value because they are redeemable directly instead of through a secondary market.

Sure, you can only buy $10k/year.  But hey, buy your limit, then decide what to do with the rest:

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

http://www.bogleheads.org/wiki/I_savings_bonds

http://retireby40.org/what-are-ibonds-why-im-buying/

Bicycle_B

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kiwigirls

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Re: Asset allocation : Bond Vs equity
« Reply #4 on: February 23, 2015, 02:05:19 PM »
Hi We are in a similar position - our share portfolio is all equities & REITS.  I know I should have some bond holdings but I can't bring myself to buy some now for the reasons you mentioned.  Am just sitting and waiting to see where interest rates go in the meantime.  The only difference is that I do have a lot in cash - 33% as we might buy a rental property and we are getting 4.5%pa on deposit here in NZ so its not too bad a return whilst we decide what to do. 

ryan114

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Re: Asset allocation : Bond Vs equity
« Reply #5 on: February 23, 2015, 02:35:05 PM »
I have purchased bonds (through bond funds) last year, and it's worked out quite well in part because interest rates have remained low despite expectations that they will rise (thus I have made some gain in the fund value). Perhaps rates will remain low due to the worldwide landscape in spite of interest rate rises in the US.

But putting all that aside, I think you should recognize that by putting off a bond purchase due to expectations in interest rate changes, you're really just timing the market. Look at the reasons that people own bonds- near guarantees on income (depending on bond risk), low volatility, tax free income in the case of tax exempt bonds, etc. If interest rates do change, then a bond fund or bond ladder will tend to turn itself over in time to keep bringing you a reliable income. If these reasons fit your long term financial goals, then it is appropriate to buy bonds.

starguru

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Re: Asset allocation : Bond Vs equity
« Reply #6 on: February 23, 2015, 02:51:22 PM »
I read this a few days ago

http://www.schwab.com/public/schwab/nn/articles/Should-You-Worry-About-Bond-Funds-if-Interest-Rates-Rise

It makes me feel better about my bond holdings.  I wish the typical finance charts (google, yahoo, etc) would take into account payouts when presenting bond pricing history.

kiwigirls

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Re: Asset allocation : Bond Vs equity
« Reply #7 on: February 23, 2015, 05:23:07 PM »
I have purchased bonds (through bond funds) last year, and it's worked out quite well in part because interest rates have remained low despite expectations that they will rise (thus I have made some gain in the fund value). Perhaps rates will remain low due to the worldwide landscape in spite of interest rate rises in the US.

But putting all that aside, I think you should recognize that by putting off a bond purchase due to expectations in interest rate changes, you're really just timing the market. Look at the reasons that people own bonds- near guarantees on income (depending on bond risk), low volatility, tax free income in the case of tax exempt bonds, etc. If interest rates do change, then a bond fund or bond ladder will tend to turn itself over in time to keep bringing you a reliable income. If these reasons fit your long term financial goals, then it is appropriate to buy bonds.

Ryan114 - thanks for reminding me of this.  You are of course right - we should focus on the long term, on the fundamentals of building the investment portfolio and stay away from trying to time the market. I am off to investigate bond funds in my part of the world.