Question- I'm thinking about retirement. I'd like to work at least another five years. I've been looking at my portfolio; I'm overweighted in stocks...
By Ric Edelman
Question: I’m thinking about retirement. I’d like to work at least another five years. I’ve been looking at my portfolio; I’m overweighted in stocks, and I only have about 25% bonds. I’ve been thinking about reapportioning my portfolio, but with interest rates as low as they are, I’m kind of hesitant to be putting fresh money into the bond market right now. I’ve got some short-term corporate bonds, some Ginnie Maes, and I was looking at some foreign bond index funds or possibly some inflation-protected ones. But I need some advice as to how to proceed and if this is the time to do my rebalancing.
Ric: You’re smart to be approaching this from an asset allocation perspective, not a market timing one. Rather than trying to get rich quick, you’re looking at investing methodically and scientifically.
Let’s assume that your premise is correct and that 75% is too much for you to be placing in stocks. That means you need to reduce the amount you hold in stocks and diversify a little more into bonds. You raise a very reasonable question about interest rates and bond prices. If rates go up, bond prices will drop. So is it wise to buy bonds?
Well, you really don’t have a choice. If you don’t buy bonds, you’ll end up continuing to hold 75% of your assets in stocks — which is the problem you’re trying to solve. So what to do?
The solution lies in the fact that bonds are not all the same. Just like an aircraft carrier is less susceptible to an ocean’s waves than a small schooner, prices of long-term bonds (20- or 30-year maturities) are more sensitive to interest rates than those of shorter maturities.
So if it’s true that you need to add bonds to your asset allocation mix because too much of your money is in stocks, you should consider bonds that have three-, five- or seven-year durations and maturity dates and stay away from longer-term bonds.
But are you certain that your premise is correct? I’m not convinced that your current allocation strategy is necessarily wrong. To be sure, you’d need to have a longer conversation about your situation, so I suggest you talk with a financial advisor.