stemikger wrote:Call_Me_Op wrote:stemikger wrote:Hi confused Investor this is certainly not an easy time to invest in bond funds, but they still play an important role in our portfolio.
I will push back a little on this statement. It sounds like you are saying that it this role cannot be achieved with anything but bond funds. I don't agree with that.
Yes this is true, but try to find anything but equities, money market and bond funds in a 401K. It would probably be tough. Also, for us forever newbie investors (even after 20 years), we like to keep things simple and go with something like the three fund portfolio or an even simpler approach a Target Date Fund or Balanced Fund. None of those funds have other options and they are supposed to be an all in one fund. So knowing I'm not smarter than Vanguard I don't know what other options to use. Other asset classes may be good for the more sophisticated investor, but only things I hear about is keeping costs low, diversification between bonds and equities and enough cash on hand for emergencies. John Bogle also disagrees with other asset classes and believes the best way to invest for the long term is an all U.S. Stock and all U.S. Bond Market Index fund.
Having most/all of your retirement portfolio in a 401k/403b does indeed restrict your choices. The OP mentioned bond funds as an alternative to a checking account, so it sounds like this is a taxable account. His specific mention of "checking account" prompted me to point out a reward checking account (RCA) as an option in response to his question #3.
One option that often available (only) in an employer sponsored retirement plan (401k/403b/etc.) or a 529 is a stable value fund (SVF). Some SVFs currently provide yields that are comparable or even higher than a typical bond fund, and I would use that over a bond fund. The Colorado 529 SVF is available to anyone, although probably best used with future college expenses in mind (although even after the 10% penalty if used for non-qualified expenses, it still may provide a higher return than a bond fund, and with very minimal risk of principal loss). For some folks, it might make sense to use this as at least part of their fixed income allocation, and use stock funds in their 401k/403b plans.
Simplicity definitely is a consideration. Everyone places a different value on it. It may have a cost, and it's up to each of us to decide if the cost is worth it. The OP's wife might well be better off with a single RCA or a single CD than the hodge-podge of bond funds she owns; simpler, safer, and comparable expected return.
On the other hand, it might be better for her to stick with her bond funds for behavioral reasons; i.e., to help build the emotional muscles to handle the volatility of risky investments. Perhaps it's better to start building those muscles with bonds than stocks. Also perhaps do some tax-loss harvesting by selling most or all of these bond funds and buying one single bond fund that suits her needs and simplifies her portfolio. Or perhaps that's too advanced for her at this point.
I may not be smarter than the folks at Vanguard either, but I also know they're not going to suggest that I withdraw assets from them to invest in superior products that they don't offer. I enjoy reading their papers on bonds, interest rates, etc., but I have never seen them mention buying direct CDs as a way to get comparable or higher yield with less risk. They only mention alternatives that have higher risk, like high-yield bonds, extending maturities, increasing exposure to corporates (also recommended by John Bogle) or dividend paying stocks.
Kevin
If I make a calculation error, #Cruncher probably will let me know.