Author Topic: Final Issue Before I Set And Forget My 401k  (Read 4987 times)

joer1212

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Final Issue Before I Set And Forget My 401k
« on: June 17, 2012, 06:33:21 AM »
I have a 60% stock, 40% fixed income asset allocation in my employee 401k. Should I?
put all 40% of the fixed income into bonds (Barclay's Capital U.S. Aggregate Bond Index), or should I allocate a portion of my fixed income to a Stable fund?
The reason I ask this is because interest rates are at an all-time low, and I fear losing money if I allocate all 40% of my portfolio to a bond fund, and interest rates rise.
But, on the other hand, if I put, maybe 10%-15% of my portfolio in a Stable fund, I would STILL be losing money because it only yields about 3% a year vs. 6%+ for bonds.
So, I think I have 3 options. Please tell me which would be more prudent in this low interest rate environment we're in:

Option 1

15% Stable fund
25% bond index fund
60% stock index funds

Option 2

10% Stable fund
30% Bond index fund
60% Stock index funds

Option 3

40% Bond index fund
60% Stock index funds

FYI: I am looking to retire early, in about 8-10 years (I'll be 50-52).
My employer does not offer TIPS, IBonds, or any other fixed income option except for a Stable fund and a bond fund that tracks the Barclay's Capital US Aggregate Bond Index.
One final word, as I see this coming: Please do not make an issue of my stock/fixed income asset allocation ratio. I have thought long and hard about this, and read many books and articles on the subject. I have done my homework. I have made up my mind, and I am comfortable with the allocation I chose. If you are going to reply to my post just to question my asset allocation, please do not reply.
« Last Edit: June 17, 2012, 08:29:59 AM by joer1212 »

astadt

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Re: Final Issue Before I Set And Forget My 401k
« Reply #1 on: June 17, 2012, 08:17:37 AM »
This is a great question and one theres several layers to. I wont lie to you Im really avoiding Bonds right now and I'll tell you why.

With the Financial Melt Downs (FMDs) of 2007/8 and 11/12 and stunningly low interest rates Bond Funds are heavily overloaded with Yield/income seekers. Im not a huge fan of following the crowd.

Interest rates have to go up at some point (lots of economics here that im not going to get into right now, but at some point our economy will begin to grow again and our national debt will need to be figured out) once they do, im looking for glut of people hiding in bonds to get sick of losing principle and cash out.

Typically for Bonds, you would expect total loss's (%) to equal (=) 2x (percentage of interest increase) x average bond length

So you'd typically expect from a 1% increase to interest rates to effect a Short Term bond fund (2 year average) by about - 4%, The longer the term (note higher yield, higher risk)

Thats typically, with all the craziness in the market and overflow of people invested in Bonds, it could be much much worse (i bet it will be).

Note: Im invested in some Corporate Bond Funds, one being a Junk bond fund. These react similarly to bond funds but a lot closer to stock funds. These too have had a lot of hangers on as well.
« Last Edit: June 17, 2012, 08:39:24 AM by astadt »

sol

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Re: Final Issue Before I Set And Forget My 401k
« Reply #2 on: June 17, 2012, 08:27:54 AM »
My personal crystal ball, for what little it's worth, suggests that bonds will be a lot less of a good deal after interest rates begin to rise than they are right now.  But I don't think rates are going up anytime in the next 18 months or so, so I'd stick with the bond fund and then diversity a bit down the line.

While maintaining your 60/40 asset allocation, have you considered putting the bond portion of your portfolio into a vehicle outside of your 401k?  Just because they offer lousy bond options doesn't mean you can't look elsewhere.  Do you have a Roth IRA that could hold a portion of that 40?  Is it worth the tax hit of holding them outside of a tax shelter in order to have access to better investment options?

astadt

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Re: Final Issue Before I Set And Forget My 401k
« Reply #3 on: June 17, 2012, 08:47:00 AM »
I have a 60% stock, 40% fixed income asset allocation in my employee 401k. Should I?
put all 40% of the fixed income into bonds (Barclay's Capital U.S. Aggregate Bond Index), or should I allocate a portion of my fixed income to a Stable fund?
The reason I ask this is because interest rates are at an all-time low, and I fear losing money if I allocate all 40% of my portfolio to a bond fund, and interest rates rise.
But, on the other hand, if I put, maybe 10%-15% of my portfolio in a Stable fund, I would STILL be losing money because it only yields about 3% a year vs. 6%+ for bonds.
So, I think I have 3 options. Please tell me which would be more prudent in this low interest rate environment we're in:

Option 1

15% Stable fund
25% bond index fund
60% stock index funds

Option 2

10% Stable fund
30% Bond index fund
60% Stock index funds

Option 3

40% Bond index fund
60% Stock index funds

FYI: I am looking to retire early, in about 8-10 years (I'll be 50-52).
My employer does not offer TIPS, IBonds, or any other fixed income option except for a Stable fund and a bond fund that tracks the Barclay's Capital US Aggregate Bond Index.
One final word, as I see this coming: Please do not make an issue of my stock/fixed income asset allocation ratio. I have thought long and hard about this, and read many books and articles on the subject. I have done my homework. I have made up my mind, and I am comfortable with the allocation I chose. If you are going to reply to my post just to question my asset allocation, please do not reply.

As long as your dollar cost averaging into a Bond fund its not the worst plan to go with the bonds. Once interest rates rise, i you will need to shift more money to your bond allocation to keep the 60/40 balance.  Im not an expert on stable funds (is it a bundle of CD's  or other financial products? or a Money Market fund? 3% isnt bad and most bond funds wont yield more than that, and if they do they have considerably more interest rate risk. Let us know what you decide.

joer1212

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Re: Final Issue Before I Set And Forget My 401k
« Reply #4 on: June 17, 2012, 09:25:22 AM »
Quote
While maintaining your 60/40 asset allocation, have you considered putting the bond portion of your portfolio into a vehicle outside of your 401k?  Just because they offer lousy bond options doesn't mean you can't look elsewhere.  Do you have a Roth IRA that could hold a portion of that 40?  Is it worth the tax hit of holding them outside of a tax shelter in order to have access to better investment options?


Very good point.
Yes, in fact I have considered other options outside of my 401k for part of the fixed income portion of my portfolio.
I have maxed out, both my 401k and 457b plans (total 34k/yr).
I have also recently opened a Roth IRA with Vanguard, and invested 3k in a REIT index fund (VGSIX).
I want to balance this out with a fixed income fund, so I am eyeballing one of the following:

*Vanguard Short-Term (VFSTX or VBISX).
*Vanguard High-Yield (VWEHX)



« Last Edit: June 17, 2012, 09:31:26 AM by joer1212 »

joer1212

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Re: Final Issue Before I Set And Forget My 401k
« Reply #5 on: June 17, 2012, 09:36:07 AM »
Quote
Note: Im invested in some Corporate Bond Funds, one being a Junk bond fund. These react similarly to bond funds but a lot closer to stock funds. These too have had a lot of hangers on as well.

What junk bond funds do you recommend? I haven't yet done my homework on these. Does Vanguard have one?
I'm a fan of low fees, so Vanguard is the first place I look.

joer1212

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Re: Final Issue Before I Set And Forget My 401k
« Reply #6 on: June 17, 2012, 10:03:53 AM »
Quote
As long as your dollar cost averaging into a Bond fund its not the worst plan to go with the bonds.


I was thinking the same thing for the longest time during this whole process of figuring out what to do with the fixed income portion of my portfolio. Thank you for mentioning this.
I mean, even if a bond fund does lose value due to rising interest rates, dollar cost averaging would ensure that I will be purchasing new bonds at a discount, with a higher interest rate to boot, right? This will offset any losses, and, over a relatively short period of time, make gains in the bond fund.
Not to mention that I will be making, on average, about 3% more from my bond fund than from my Stable fund until interest rates rise (3% yield for Stable, 6% yield for bond fund).
Right now I am kind of leaning towards investing just 10% of my fixed income in the Stable fund, just to hedge my bets a little.
 
« Last Edit: June 17, 2012, 10:05:58 AM by joer1212 »

Dicey

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Re: Final Issue Before I Set And Forget My 401k
« Reply #7 on: June 17, 2012, 04:25:26 PM »
Please tell me which would be more prudent in this low interest rate environment we're in[.*]

If you are going to reply to my post just to question my asset allocation, please do not reply.

Hi joer1212. Heaven forbid anyone on this site would dare question your asset allocation, myself included. But, why ask in such a public place if you don't want advice?

Disclaimer: This reply is NOT "question[ing] my asset allocation". They're ordinary, garden variety questions.

Do you know the differences between short/intermediate/long term bonds?
Do you understand that the differences could be critical to your successful retirement in 8-10 years?
Do you think these low interest rates* are going to last forever or even 8-10 years?

joer1212

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Re: Final Issue Before I Set And Forget My 401k
« Reply #8 on: June 17, 2012, 05:57:39 PM »
Quote
Heaven forbid anyone on this site would dare question your asset allocation, myself included. But, why ask in such a public place if you don't want advice?

Disclaimer: This reply is NOT "question[ing] my asset allocation". They're ordinary, garden variety questions.

Do you know the differences between short/intermediate/long term bonds?
Do you understand that the differences could be critical to your successful retirement in 8-10 years?
Do you think these low interest rates* are going to last forever or even 8-10 years?


I want advice, but not about my allocation between stocks and fixed income. I have already done my homework extensively on this subject, and I'm comfortable with the allocation I've chosen (60% stocks, 40% fixed income). I think it's reasonable to ask that this decision be respected.
Besides, this was not the question that was asked. The question was whether or not I should include a Stable fund (and how much) as part of the fixed income portion of my portfolio. It wasn't about whether I am right to have 40% of my portfolio in fixed income. I've already made this decision.
Yes, I know very well the differences between short, intermediate, and long-term bonds.
I never said you should not question what was in the fixed income portion of my portfolio. I just don't want people telling me "why are you in 60/40 stocks to fixed income? You should be in 90/10, blah, blah, blah" It's happened many times before when I ask a question about investing, so I don't want to waste energy talking about this again.
And, no, I don't think low interest rates are going to last forever. This is precisely why I asked the question that I asked. If I thought low interest rates were going to last forever, I would know exactly what to invest in in my portfolio.
« Last Edit: June 17, 2012, 06:02:11 PM by joer1212 »

astadt

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Re: Final Issue Before I Set And Forget My 401k
« Reply #9 on: June 17, 2012, 07:41:04 PM »
Quote
Note: Im invested in some Corporate Bond Funds, one being a Junk bond fund. These react similarly to bond funds but a lot closer to stock funds. These too have had a lot of hangers on as well.

What junk bond funds do you recommend? I haven't yet done my homework on these. Does Vanguard have one?
I'm a fan of low fees, so Vanguard is the first place I look.

Im invested in Vanguard's High Yield Bond Fund but that fund is closed to new investors. Im pretty sure the ETF equivalent fund is still available.

Ive heard good things about the SDPR Barclays Capital High Yield fund, free at TD Ameritrade

I havent heard anything good, about the IBoxx High Yield Corporate Bond fund, free at Fidelity

joer1212

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Re: Final Issue Before I Set And Forget My 401k
« Reply #10 on: June 18, 2012, 04:30:53 PM »
Quote
Ive heard good things about the SDPR Barclays Capital High Yield fund, free at TD Ameritrade

I will check this out, thanks.
Coincidentally, I recently opened a TD Ameritrade account!