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November 08, 2012

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Alex in Virginia

Hi, Sydney...

Glad to see your post.

Where do you see high-yield bonds fitting in? I am gradually shifting 30% of my holdings to corporate bonds yielding 10% or better. Yes, this is in so-called "junk" territory, but there are a lot of levels of "junk". I go no lower than a B- S&P rating, and limit my holdings of any particular bond to 3% or my total portfolio (and no more than 6% in any one industry.)

Are you sticking strictly to "investment" grade bonds? Any tolerance for high-yield bonds?

Cheers :)

Retired Syd

Alex: I don't have an opinion on how much to invest in high-yield bonds, but that would be part of your fixed income/bond allocation. I do have a little exposure there, but in mutual funds rather than directly purchased bonds. (Although I'm not saying that's a better approach, just that I don't want to do that much work to diversify through individual stocks and bonds.)

Joe @ Retire By 40

That's an interesting way to look at it. I'll need to sit down, but I guess my allocation would be 10-20% bonds if I calculate it out. I still have some active income and my wife is working currently. It probably make more sense when we are fully retired to figure out.

deegee

I was going to ask Syd the same thing, Alex. I have a large holding of bonds (in a mutual fund) which are just below investment grade (they are mostly BB). I count this in my bond holdings.

As a fellow early retiree (Syd knows about me), I split my AA into 2 parts. One is for my taxable account (non-IRA) and the other for my IRA which I won't need until I near 60 (about 10 years from now). The former is mostly bonds while the latter is a small majority stocks.

Canadian Friend

Loved your Radio interview! Maybe you should take on a part-time contract doing some radio hosting? I know I'd listen. :)

Retired Syd

Canadian Friend: Well now that would be fun!

Retired Syd

deegee: Thanks for contributing those details.

Joe: Maybe that works out to be a little aggressive in your case with the working spouse factor. (Unless she's planning on working for many, many more years). When I was still working, I had a heavy allocation to equities, and eased into fixed income as I approached full-time retirement.

I guess you could figure out the ratios without her income and then slowly move toward that as she gets nearer to retirement?

Rick

Just some food for thought ......With respect to high yield bonds, there of course is a reason for the higher rate -- higher risk. So, a 40% bond allocation to a diversified high quality bond fund is not the same as a 40% allocation to high yield bonds (especially if they are individually owned bonds). David Swensen (Yale Endowment Fund Manager and author of Unconventional Success) advocates for only government bonds for the fixed allocation (assuming interest rate risk but essentially no credit risk), arguing that the portfolio risk should be on the equity and alternative allocations as they have the better risk/reward factors, and also that your "safe" assets should be, well, "safe." Not everyone may want to eliminate all credit risk, but it does seem valuable to know that when one takes on lower grade bonds they are exposing their portfolio to additional risk, and it is real and not just hypothetical.

Hope everyone has an awesome weekend (and for those like Syd who are fully retired, you may lose track of days, and this is your reminder that the weekend is here and the big paper comes on Sunday!).

Retired Syd

Rick: Or, if you only subscribe to the NY times electronically, you get to do lots of clicks. I never see a paper anymore!

fred doe

I'm 60 and retired but I don't think I'll ever stop investing. I'm in a bond mutual fund and it dose well. I only own four stocks and use D.R.I.P. and I'm pleased when I get my statements. In ten years time the investments will be a source of income to buy niceties. Like fine dinning? But I'll always order the Alpo pate' for an appetizer. ( you guys must not be preparing properly)?

Leslie

When we paid off our house 10 years ago everyone told us it was a bad investment decision. However, when the stock market tanked in 2008 and real estate took a big hit we were glad that the roof over our head was free and clear. Thankfully the equities and bonds in our retirement accounts have rebounded.

tom sightings

Me, I don't like bonds. The interest rate they pay is too low for the risk you take. That's my opinion. However, that being said, I do own a small amount of a municipal bond closed-end fund, and after years of being underwater, it's been doing quite well lately. So go figure. I guess that proves the argument for diversification, even into investments that you don't like, because nobody gets it right all the time.

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