Comments on: The “Right Mix” of Stocks and Bonds? http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Fri, 25 May 2012 02:50:51 +0000 hourly 1 http://wordpress.org/?v= By: lep http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-447062 lep Sun, 14 Nov 2010 17:54:02 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-447062 I believe Jeremy's comments (first comment) are the most salient. As you go through your career and age, you need to reinvest the yield earned from equities (stocks) and bonds. The goal at retirement is to have the highest monthly/quarterly income from equity dividends and corporate (and junk) bond distributions, not to have the highest dollar amount of your holdings. There is an optimum point that you can reach with yield vs. risk, and I believe this falls around 5-6%. Equities with annual dividend yields greater than say 7-8% have by design large payout ratios (e.g. REITS), or will eventually reduce their dividend. Take NLY (Annaly Capital) as an example, which yields a 15% monthly dividend. Most knowledgeable dividend investors would not touch NLY simply because of how they earn the high yield (purchasing mortgages and other high risk securities) -- which does not have the characteristics of a wide economic moat. NLY is not like Coca Cola (KO), which has a very competitive product and is probably not going to lose out to a competitor overnight. Pepsi has been trying to beat Coke for years, however, when you travel overseas in Europe, S. America, Asia, Africa, Russia, you still see Coke everywhere. (ask for a Pepsi on an Alitalia flight in Italy). Back to the point, NLY does not have a wide economic moat and can suffer tremendously in a heartbeat when things go bad. As far as corporate bonds are concerned, you might invest maybe 40-50% of your portfolio in high-yield bond funds. Fidelity has several high-yield corporate bond mutual funds: Focused High Income (FHIFX), Strategic Income (FSICX), Capital & Income (FAGIX), and High-Income (SPHIX). These all yield 5-7% monthly distributions, and when reinvesting the monthly distributions over several decades, the result can be a quite high level of income at retirement. Mix this with the dividend payout for equities with yields in the range 5-8% that you reinvested for several decades and you should beat inflation. I believe Jeremy’s comments (first comment) are the most salient. As you go through your career and age, you need to reinvest the yield earned from equities (stocks) and bonds. The goal at retirement is to have the highest monthly/quarterly income from equity dividends and corporate (and junk) bond distributions, not to have the highest dollar amount of your holdings.

There is an optimum point that you can reach with yield vs. risk, and I believe this falls around 5-6%. Equities with annual dividend yields greater than say 7-8% have by design large payout ratios (e.g. REITS), or will eventually reduce their dividend. Take NLY (Annaly Capital) as an example, which yields a 15% monthly dividend. Most knowledgeable dividend investors would not touch NLY simply because of how they earn the high yield (purchasing mortgages and other high risk securities) — which does not have the characteristics of a wide economic moat. NLY is not like Coca Cola (KO), which has a very competitive product and is probably not going to lose out to a competitor overnight. Pepsi has been trying to beat Coke for years, however, when you travel overseas in Europe, S. America, Asia, Africa, Russia, you still see Coke everywhere. (ask for a Pepsi on an Alitalia flight in Italy). Back to the point, NLY does not have a wide economic moat and can suffer tremendously in a heartbeat when things go bad.

As far as corporate bonds are concerned, you might invest maybe 40-50% of your portfolio in high-yield bond funds. Fidelity has several high-yield corporate bond mutual funds: Focused High Income (FHIFX), Strategic Income (FSICX), Capital & Income (FAGIX), and High-Income (SPHIX). These all yield 5-7% monthly distributions, and when reinvesting the monthly distributions over several decades, the result can be a quite high level of income at retirement. Mix this with the dividend payout for equities with yields in the range 5-8% that you reinvested for several decades and you should beat inflation.

]]> By: mack http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-428426 mack Fri, 03 Jul 2009 05:29:43 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-428426 Thanks for sharing such great post on stocks and bonds, what i like is the Municipal bonds as they are exempt from all the taxes and interest earned on this bond is not subject to federal income taxes. Thanks for sharing such great post on stocks and bonds, what i like is the Municipal bonds as they are exempt from all the taxes and interest earned on this bond is not subject to federal income taxes.

]]> By: Stephen http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-406773 Stephen Mon, 09 Mar 2009 22:59:07 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-406773 Hey, just stopping by from the future. How did that "all stocks" thing work out for ya? Anyway, if you are young (like me) we should be able to weather the storm. Within a decade or so the market should have recovered all its losses. But they whole point of them "moving to bonds" as you get older is just in case the impossible happens: a 55% decline in the market. Hey, just stopping by from the future. How did that “all stocks” thing work out for ya?

Anyway, if you are young (like me) we should be able to weather the storm. Within a decade or so the market should have recovered all its losses. But they whole point of them “moving to bonds” as you get older is just in case the impossible happens: a 55% decline in the market.

]]> By: Phil A. http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-287931 Phil A. Sat, 19 Apr 2008 03:27:12 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-287931 I'm 29 years old and have 10% of my portfolio devoted to bonds. I'm opposed to an all stock portfolio. It just seems a little unwise to me. I believe in a little balance. I’m 29 years old and have 10% of my portfolio devoted to bonds. I’m opposed to an all stock portfolio. It just seems a little unwise to me. I believe in a little balance.

]]> By: Roundup for week of 11 November 1007: Colonial Williamsburg edition at Mighty Bargain Hunter http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-174106 Roundup for week of 11 November 1007: Colonial Williamsburg edition at Mighty Bargain Hunter Mon, 19 Nov 2007 08:13:02 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-174106 [...] All Financial Matters discusses what the right mix of stocks and bonds is. [...] [...] All Financial Matters discusses what the right mix of stocks and bonds is. [...]

]]> By: Friday Finance Findings for November 16th : Generation X Finance http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-173080 Friday Finance Findings for November 16th : Generation X Finance Sun, 18 Nov 2007 02:54:47 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-173080 [...] The “Right Mix” of Stocks and Bonds? - There are a lot of rules of thumb out there regarding how to allocate your investments in stocks and bonds, but most are just that–rules of thumb. While there is some science behind it in terms of the Modern Portfolio Theory, there is no blanket allocation that is right for everyone. I have some posts in the pipeline to address this in the future. [...] [...] The “Right Mix” of Stocks and Bonds? – There are a lot of rules of thumb out there regarding how to allocate your investments in stocks and bonds, but most are just that–rules of thumb. While there is some science behind it in terms of the Modern Portfolio Theory, there is no blanket allocation that is right for everyone. I have some posts in the pipeline to address this in the future. [...]

]]> By: Ryan http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-172386 Ryan Fri, 16 Nov 2007 22:08:33 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-172386 Wow. I totally agree on the issue of semantics in these plans. My 24 year old friend picked a "conservative growth" fund for her 401k because she thought it matched her risk tolerance. I hurriedly looked up other funds described as conservative growth and they were all at least 40% bonds. Now she's getting a personal finance book for Xmas :) Wow. I totally agree on the issue of semantics in these plans. My 24 year old friend picked a “conservative growth” fund for her 401k because she thought it matched her risk tolerance. I hurriedly looked up other funds described as conservative growth and they were all at least 40% bonds. Now she’s getting a personal finance book for Xmas :)

]]> By: Dave2 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-172297 Dave2 Fri, 16 Nov 2007 19:54:12 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-172297 I feel like most people only look at this issue from the contribution side of the equation. Equal consideration needs to be given to portfolio survival immediately prior to and during retirement. Dave touched on this above. Consider that during the contribution phase a 35% loss doesn’t really affect the long-term portfolio performance. During retirement however a 35% loss can be catastrophic, especially if it occurs early on in retirement. Required reading: http://www.fundadvice.com/articles/retirement/retirees-earn-lower-returns.-have-more-money..html http://www.fundadvice.com/articles/retirement/retirement-when-your-portfolio-starts-paying-you-.html I feel like most people only look at this issue from the contribution side of the equation. Equal consideration needs to be given to portfolio survival immediately prior to and during retirement. Dave touched on this above.

Consider that during the contribution phase a 35% loss doesn’t really affect the long-term portfolio performance. During retirement however a 35% loss can be catastrophic, especially if it occurs early on in retirement.

Required reading:
http://www.fundadvice.com/articles/retirement/retirees-earn-lower-returns.-have-more-money..html

http://www.fundadvice.com/articles/retirement/retirement-when-your-portfolio-starts-paying-you-.html

]]> By: sam http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-170686 sam Wed, 14 Nov 2007 20:52:51 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-170686 Meg, I agree with you that Target Retirement Date funds can be too conservative. My wife and I are in our early 50's and have our 401k contributions going into a 2040 retirement date fund, even though we will be eligible to retire in less than 5 years. The 2040 fund has 15% going into corporate and government bonds. That is compared with the 2010 fund that has 50% going into bonds. That is way too conservative for us. In response to some of the commenters above, a small amount of bonds in your portfolio (10 to 20%)can reduce the volatility of your investment without substantially reducing your returns in the long run. It may seem counterintuitive, but the bonds keep on providing returns even in a bear market for stocks. Something to consider. I used to have all of my 401k in stock funds, mostly S&P500, but after watching it lose a third of its value in the 2000-2003 time period, I change my strategy and started including small amounts of bonds in the mix. Meg,
I agree with you that Target Retirement Date funds can be too conservative. My wife and I are in our early 50′s and have our 401k contributions going into a 2040 retirement date fund, even though we will be eligible to retire in less than 5 years. The 2040 fund has 15% going into corporate and government bonds. That is compared with the 2010 fund that has 50% going into bonds. That is way too conservative for us.

In response to some of the commenters above, a small amount of bonds in your portfolio (10 to 20%)can reduce the volatility of your investment without substantially reducing your returns in the long run. It may seem counterintuitive, but the bonds keep on providing returns even in a bear market for stocks. Something to consider. I used to have all of my 401k in stock funds, mostly S&P500, but after watching it lose a third of its value in the 2000-2003 time period, I change my strategy and started including small amounts of bonds in the mix.

]]> By: Meg http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/comment-page-1/#comment-170684 Meg Wed, 14 Nov 2007 20:50:33 +0000 http://allfinancialmatters.com/2007/11/13/the-right-mix-of-stocks-and-bonds/#comment-170684 Thanks for all the great comments! Jeremy-thanks for pointing out the value of bonds themselves, not just as downside protectors. Swim Upstream--it certainly is more about risk capacity than age. If you're 60 and extremelly wealthy and/or earning boatloads of income, you might not want much in bonds. If you're 20 and very risk averse, you might want almost all of it in fixed income. To each his own. Don--good point about rebalancing. I don't/wouldn't use them to rebalance, so maybe that's part of why I'm not too keen on having bonds. And to all you other young folks with nothing or little in bonds in your portfolio, I'm right there with you. Though I do keep my real estate reserves in bonds as a hedge and as emergency funds. It's not that bonds are a bad idea, it's just that you have to know WHY you're investing in them--or not. Thanks for all the great comments!

Jeremy-thanks for pointing out the value of bonds themselves, not just as downside protectors.

Swim Upstream–it certainly is more about risk capacity than age. If you’re 60 and extremelly wealthy and/or earning boatloads of income, you might not want much in bonds. If you’re 20 and very risk averse, you might want almost all of it in fixed income. To each his own.

Don–good point about rebalancing. I don’t/wouldn’t use them to rebalance, so maybe that’s part of why I’m not too keen on having bonds.

And to all you other young folks with nothing or little in bonds in your portfolio, I’m right there with you. Though I do keep my real estate reserves in bonds as a hedge and as emergency funds. It’s not that bonds are a bad idea, it’s just that you have to know WHY you’re investing in them–or not.

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