You need a new bond-fund plan
- March 6, 2010
- 17 comments
- Posted in Investing, Latest Posts
It’s a tricky moment for bond-fund investors. The economy is improving. Interest rates and inflation are going to rise, which means that the price of shares in bond mutual funds will fall.
If you’re making new fixed-income investments, these facts suggest that cash is a better place for money right now. Choose a money market fund instead of adding to your bond funds. Switch that money into bond funds when the recovery has been going on for a while, interest rates are higher and people are getting more worried about inflation–maybe in a year or so.
For me, this is uncharacteristic advice. It’s a gamble on interest-rate timing, which I usually oppose. I’ve weakened because so much money is pouring into bonds and interest rate increases seem so plausible. It seems wise to hold off. If I’m wrong, we’ll know soon enough and you’ll never see a post like this from me again.
I feel differently about stocks. They can move ahead during a recovery, even if interest rates and inflation rise (see my post here). They might zig-zag but you can’t be sure. So stick to your stock program and reinvest dividends. But for the fixed-income side of your portfolio, consider cash.
Tags: bond funds, bond mutual funds, bonds, market timing
You don’t think putting new money into a good global bond fund (I like TPINX) is better than a domestic money market account?!? I am sticking with my same stock/bond rebalancing strategy that I learned fron a very sensible and wise woman! :-)
Global bond funds and money market funds serve two different purposes. Money markets for funds you have to keep safe–no variability in price. Bond funds for diversification with higher potential returns, but potential losses, too. Don’t put “safe” money into bond funds.
Jane,
Appreciate the advise regarding new money and bond funds !
What do we do with the money already in the bond fund?
I hate advising anyone to try to buy and sell bond fund shares to time interest rates. even if you’re right going out you might be wrong coming back. So keep it. Your income will rise when (and if) rates go up. Assuming you’re holding the fund for diversification, you need to keep holding it.
Which money market mutual fund do you recommend? The Primary Fund even tho it broke the buck in 2008? Or Fidelity’s Spartan Fund? Or Dreyfus Worldwide Dollar? Or what?
My CD just matured a few weeks ago..I need a temporary parking place for the money..preferably a place that has tax advantages like a Treasury (I know that the 13-week bill has a very low interest rate…only 0.165% but it would be for only 13 weeks…and it would help me save money on state taxes…I live in a high-tax state (Massachusetts). It would buy me time to find a better place for my CD money. I need to save money on taxes with things like a 403b, an IRA (already have an IRA), and a Treasury or a money market mutual fund(both of which have tax advantages).
Get the money fund with the lowest cost–Fidelity or Vanguard. For tax savings, a Treasury
At some point my wife and I may well wish to consider an immediate pay annuity. Is best time to by when interest rates are up, thus they will assume money will earn more and thus, per unit of invested dollars, pay you a higher monthly benefit, for life. ( or for number years you select as minimum years, if you elect to protect a spouse or other person in that option of for life and/or so many years time for annuity.)? So you do not want to buy an annuity in times when interest rates are so low? I was given a 1.1 % rate for 100K by a local FCU this week.
You buy an immediate annuity at a time when you feel it’s important to use your remaining assets to guarantee an income for life. That’s normally in your later 70s or early 80s. You cannot time the interest rate market. What you can do is ladder your annuities, putting in some money now and some next year, etc etc. For a look at what other insurers are charging, see ImmediateAnnuities.com.
I got to ask. With the last bust in wall street, banks, toxic mortgages, and then to make it perhaps even worst, the federal government has pushed the taxpayer to assume the debt of risk failure models, mortgages, bank irresponsibiity , on and on, so national debt too high, all kinds of problems. How does American dig out of this hole, and to be more specific, I have a question on my own generation.
I am age 65, ready , supposedly , to retire, but my life savings took a big drop, and this was pushed upon all except those wise enough to have been in cash. NOw ,with what we have left, those in our age, we get only 1% interest , even for 100K large savings CD, and stock and bonds both rather at risk these days, how are we supposed to make it, earn equal to or exceed annual inflation? I heard one speaker say stop routine stock and bonds, or buy and hold, but go to use of puts and options? I think some did find this a tool for use, perhaps even got rich off it, but many of my own generation have not learned to use puts and options, surely that is not the only tool or hope we have in this day and time, is it? Learn market gimmicks and tricks, join some would say, the mentality of many who might have helped cause maket failure, by betting against success, like options to the down side do ??
cityjimmy@yahoo.com Looking for safe harbor…..
Please don’t listen to speakers who say that you have to get tricky to get ahead. They earn big commissions on put-and-call strategies, with no guarantee for you. They’re out in force, however, because of the reason you cite–rates too low on traditional safe investments.
From your comment, I gather that you can keep on working–I’d definitely do that. Wait until 70 for Social Security. Do you have retirement money that you know you won’t touch for at least 10 or 12 years? Consider a stock market index fund (maybe 35% in stock funds), with the rest of your money in bonds. Chasing yields is a big mistake. I suspect that more money has been lost chasing yield than in any other type of investment.
This is a tough time to have to retire. You have been caught in a national catastrophe.
Dear Jane,
I have stumbled on to your site out of uneasiness in my current investment strategy that has been developed for me by an consultant. I should say he is a friend and has years of experience and a grand reputation. But I am 53 and all of my investment money is going into stock funds 100%. I am just so uneasy with this and have been looking at bond funds such as Vanguards Total Bond Index. I read your book years ago and remembered your name and found you. Any thoughts would be helpful.
You’re right to be uneasy. 100% stocks is completely inappropriate for someone your age. You caught last year’s market upswing, but were killed in the crash. Owning bonds would have cushioned your loss. 50% stock funds (with part of that in international and emerging market funds) would be close to the mark at 53. Vanguard’s bond fund is distinguished by its low costs–especially important for bond investing. The new edition of my book. Making the Most of Your Money Now, talks more about this.
Thank you so much for your confirmation and I will get your new edition, mine is quite old I confess.
I first heard your interview with Larry Mantle on KPCC in February, and bought the massive book. I know that some place in there is the answer to my question but the dollars are burning a hole in my pocket. I currently have GMAC fund with Vanguard but would like to diversify a little further with, I think you suggested, a bond fund and an international fund. Please refresh my failing memory as to what you had suggested or would suggest at this time for a 10M investment. Thanks and keep on educating us.
As you have my book, I’ll answer you in pages. For expected returns with different asset mixes, p 718-719. For suggested asset mixes by age, 723-726. For indexed stock funds, 850-853. For bond strategies, 920-927. For the different types of bonds and bond funds and what they’re good for, 927-949.
Jane,
Where would you keep one’s savings for a house?
Would you use Vanguard for buying a 2 year CD?
I have been saving up for a house ($20k) and do not want to lose the saving.
In couple years I hope to have around $40k as 20% on a house.
Thanks in advance.
You’re thinking is correct: these kinds of savings should be kept in a place where they won’t lose value.
Keep savings for a house in a bank or money market fund. A two-year CD is fine, if don’t expect to buy any earlier than that.