(Money Magazine) -- Question: I consider myself a good 401(k) citizen. I contribute the max, get the company match and have an age-appropriate level of stocks in my account. But one of the bond funds in my plan has a 10-year average return of about 9%, which is better than almost every stock fund. So I'm wondering whether I'd be better off just putting all my money into that bond fund. Would that make sense? -- Dan, Southfield, Mich.
Answer: Things are hardly ever black or white in the investing world. There's almost always an area of gray, more likely shades of gray. Which means it's not often that my answer can be completely unequivocal.
But your situation is one of the rare exceptions, so I want to make the most of this opportunity. Let me see, how should I put this?
No! Don't do it! Bad idea! Absolutely do not move all your money into that bond fund!
Of course, most of your investing compatriots have to one degree or another already been doing what you would like to do -- i.e., avoid stocks and buy bonds. From the beginning of 2009 to the end of last month, investors have poured a staggering amount of new money into bonds and bond ETFs -- more than $615 billion, according to Morningstar. Meanwhile, they've yanked some $3.9 billion from stock portfolios.
But I think you would be making a big mistake to follow their lead and invest your entire 401(k) account in that bond fund.
For starters, it almost never makes sense to put all your retirement savings in one asset basket. You never really know which type of investment is going to provide the most generous returns in the future, so it's a good idea to protect yourself from picking the wrong one by spreading your money around.
If you transfer your entire 401(k) balance as you envision, you would not only be tying your retirement prospects to the performance of one asset class -- bonds -- you would also be pegging your future to the performance of a single fund. Instead of hedging your bets, you would be concentrating them.
But there's another compelling reason you ought to reconsider -- namely, the chances are low at best that the bond fund you find so attractive will be able to repeat its 9% annualized performance in the years ahead.
The reason is that over the past 10 years bond yields have dropped fairly dramatically, falling from roughly 6% or so at the beginning of this decade to less than 4% recently. That decline in interest rates acted as a tailwind for bond funds, creating capital gains on top of interest income and generating those eye-catching returns.
But with interest rates already so low today, the potential for further rate declines and more capital gains is limited to say the least. Ibbotson founder and investing guru Roger Ibbotson made this very point to me in a recent interview on the return potential for stocks vs. bonds.
If anything, investors are more concerned about the opposite occurring -- that is, rates rising and bond prices falling. The point, though, is that while you should never consider past returns a roadmap for the future, bonds today represent a case where past results might be an outright misleading indicator of future performance.
In short, I think you might end up sorely disappointed if you move your stash into that bond fund expecting it to reprise those 9% annual gains over the next 10 or so years.
That said, I don't think, as some people do, that the possibility of rising rates at some point in the future means you should totally avoid bonds or bond funds. As I've noted before, I don't buy into the whole bond-bubble brouhaha, or at least not enough to advise going to the extreme of eschewing bonds altogether. I think doing that would make about as much sense as shunning stocks -- i.e., none.
So what do I recommend that you do?
Basically, you want to spread your 401(k) stash among a blend of stock and bond funds that's right for your situation. You say that you have an age-appropriate level of stocks in your account. If that's the case -- and your stock stake is diversified among large and small stocks, growth and value and maybe a bit of international -- then maybe you don't have to change anything, other than your intention to hop into that bond fund.
But since you're thinking about how to invest your 401(k) money anyway, it's probably not a bad idea to re-evaluate your asset mix.
One way to do that is to see how your mix compares with that of a target-date retirement fund for someone your age. There are many target-date funds you might refer to, but I'd suggest checking out the ones that made our MONEY 70 list of recommended funds. I'm not saying you've got to duplicate their asset blend exactly. But you can use it as a starting point and then adjust according to your own tastes.
Once you've arrived at a stocks-bonds mix that seems right for you, plug it into Morningstar's Asset Allocator tool. Doing that will show you how that allocation might do in the future. By using the tool's sliders, you can also fiddle with the mix and see how that affects risk and return.
As a final check, you might want to plug your portfolio, as well as such information as your 401(k) account balance and the percentage of salary you're saving each year, into T. Rowe Price's Retirement Income Calculator. This will show you whether you're on track to a secure retirement, given your savings effort and investing strategy. If the outlook is iffy, you can see how adjustments like saving more and investing differently improve your prospects.
|Overnight Avg Rate||Latest||Change||Last Week|
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|15 yr refi||3.38%||3.24%|
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