Bonds or no Bonds?

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Bonds or no Bonds?

Postby WHEEE » Fri Dec 21, 2012 7:05 pm

Hello! :D

I am a newbie to the world of investing, I've been reading this site a lot the past month and am about to start investing on my own.
I am still a student, and do not have any income for this year.
But I do have money in my bank that I would like to start investing.
I understand that normally, bonds are a no-no for taxable accounts.
Should I invest in funds like Vanguard Total Market and Total International for now, and start buying bonds when I have access to an IRA and 401k etc?
Or, if I do purchase bonds in my taxable account, should I sell it before the end of 2012 tax year, as I will start work in fall 2013 and most likely will fall into the 25-28% tax range?
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Re: Bonds or no Bonds?

Postby RyeWhiskey » Fri Dec 21, 2012 7:59 pm

I suggest taking a look into the wiki to familiarize yourself with everything. Furthermore, almost all of your questions can be answered via the Personal Finance Start-Up Kit and the Investing Start-Up Kit. :beer
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Re: Bonds or no Bonds?

Postby Call_Me_Op » Fri Dec 21, 2012 8:46 pm

WHEEE wrote:I understand that normally, bonds are a no-no for taxable accounts.


An oversimplification. Generally, bonds are preferably located in tax-deferred or non-taxable accounts, but there can be exceptions. For example, there is a type of bond always held in taxable accounts - municipal bonds - which are exempt from federal (and sometimes state/local) taxation. Treasury bonds are exempt from state taxation - and are sometimes held in taxable accounts.

There may also be cases where people run out of tax deferred space or do not have certain investments available in that space. For example, I cannot purchase individual TIPS in my 401K. If I want these, they will have to be in taxable. This is not considered a tax-efficient investment, but is not as bad as many people think. If real rates jumped to 3%, I'd probably buy a bunch of TIPS and keep them in taxable.

In other words, taxes are important, but don't let the tax tail wag the dog.
Best regards, -Op

"In the middle of difficulty lies opportunity." Einstein
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Re: Bonds or no Bonds?

Postby Peter Foley » Fri Dec 21, 2012 9:11 pm

I honestly don't think you have to worry about AA diversification until you have a reasonable amount of money in the market. Example: You are a recent college grad and have a new job. Your income is sufficient so that you can save 10% of it for retirement. Your gross is $50,000 per year so you save $5000. If you invest it just before going into a bear market (20% drop), you still have $4000 left. The next year you set aside another $5000 and you have $9000. If you had had a 50/50 portfolio - conservative for your age you would have perhaps $9500 after you second deposit. The point I am making is that at this stage in your life, your commitment to saving is more important than asset allocation. I would not add bonds to a portfolio until the portfolio was at least double or triple your annual savings with a minimum threshold of at least $10,000.
Putting your first $20,000 in equity index funds would not be unreasonable.
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Re: Bonds or no Bonds?

Postby WHEEE » Fri Dec 21, 2012 9:23 pm

Thanks guys :)
The amount I was planning to invest was around 30,000.
Based on the comments, I think I will go ahead and invest 10,500 each in Total Market and Total International, and hold off 9,000 until I am 100% certain what I want to do with it (perhaps more equity or i Bonds).
My target asset allocation was 70/30, but maybe I should not worry about it until the end of next year when I will have access to tax-advantaged accounts.
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Re: Bonds or no Bonds?

Postby Whiggish Boffin » Fri Dec 21, 2012 9:59 pm

Bonds. I-Bonds.

You want to invest $30k in a 70/30 allocation. 30% of $30k is $9k, which is below the $10k annual purchase limit for Series I savings bonds.

They're perfectly good bonds. They're secured by the full faith & credit of your rich uncle. Interest is better than TIPS and guaranteed to equal CPI. Federal tax on Interest is deferred until you cash the bond. Interest is exempt from state and local tax. The only drawback is that they lock up your money for the first year.
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