FREE NEWSLETTER
I DON’T WANT BONDS in my portfolio—or, at least, not to the degree traditionally recommended in financial planning guidelines.
For years, I had accepted the premise that bonds should be included in a serious investor’s portfolio. Not that I necessarily followed that dictum. But I accepted the idea that young people should have a low percentage in bonds, and increasingly greater percentages through middle age and retirement.
I kept thinking that someday I’d come around to more bonds, but not now. The years went by. I took early retirement at age 62 and had zero dollars in bonds. Still relatively young, I felt. I’ll definitely think about those bonds down the road. Four years later, after my divorce was finalized, I purchased a blended stock-bond fund. That raised my bond allocation from zero to 1.7%.
Ten years later, my bond allocation reached a lifetime high of 8.7%. About that time, I noted that my blended fund, with both higher fees and lower annual returns, was a drag on my portfolio. I moved two-thirds of the fund into more productive pure stock funds. I accepted the idea of diversification, but chose diversity in large, mid and small cap funds, in both growth and value funds, and in total market funds.
“Later” finally came in 2017, after being reminded for the umpteenth time that I was low on bonds. I moved some money from my cash position into a total bond market index fund. My bond holding quickly moved from 5.3% to 8.6% by early 2018. Now, I’m getting with program, I thought.
Well, this euphoria didn’t last long. I did some serious thinking about my risk tolerance and my annual income, and began to question why I had made the long-postponed move to bonds in the first place. I’ve now reverted to a lower bond component. Bonds are down to 8.2%, with full confidence I’ll get to my new bond target in the sub-5% range.
By no means am I advocating that all, or even most, retirees follow my example. But some readers may feel like “cheating” a bit on their bond allocation. To “gamble” on a low or zero bond component, you should probably possess most of the following qualities:
Dennis E. Quillen is a retired economic geographer and university professor. In addition to blackjack, he loves long-term investing. His previous articles were Bouncing Back, Starting Over and Getting Comped.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
I appreciate this affirmation of my own, long-held view. I can think of points in one’s economic life where a focus on amassing cash-based savings has value, but this value ought to diminish over time. What one needs, in lieu of “bonds,” is some access to the stability of cash, for dire circumstances. Beyond that, as Mr. Quillen says, one should have no need.
I suspect that the percentage-based allocation recommendations are efforts to simplify the overarching process of (1) assembling needed savings and (2) growing one’s financial wealth toward the long-term. One-size-fits-all seldom fits any particular, uh, size very well, but has the best chance, on average, of keeping the whole body of readers in good shape.
By the time one retires, one of course hopes to have a portfolio of about ten-gazillion dollars. In such a case—and assuming one’s lifestyle hasn’t expanded to match available resources!—keeping one whole “gazillion” in bonds would probably be pretty, uh, stupid.
Thanks to Mr. Quillen, and Mr. Clements yet again, for giving this curmudgeonly old saver something else to think about, and talk about here.
(($; -)}™
In the present economic environment, one characterized by the likelihood of increasing interest rates, I’m personally more comfortable with CDs than I am with bond funds. Just my “two cents.”
Lets see, buy when there is blood in the streets. Wouldn’t bonds fit the bill of a depressed asset that may make a good purchase while at a reduced price? I continue to invest in bonds within my IRA that I won’t access for 7 years. The best indicator of bonds return is the yield, and it continues to rise. Maybe we should wait until the interest rate stops rising to invest in bonds- but won’t everyone be thinking the same way at that time?
I too cannot justify bond mutual funds or bond ETFs in today’s economy. It’s hard to look back at bond performance in any period over the last 18 months and find any in the black; as rates continue to rise, bonds continue to go down which it appears will continue right through 2019.
But that leaves the question of where to park some cash. 2.7% CDs? hmmmmm