How do I determine if a bond fund is right for my portfolio?
I'm 63 years old and unemployed. I'm not working because of health issues. I did not save much for retirement. I have 100 shares of a specific stock, a 401(k) with a $50,000 Vanguard Institutional Index, and $12,000 in a Roth Schwab Total Stock Market Index. Should I have a Bond Fund and if so, what kind?
Your choice of stock mutual funds is excellent. However, there is room for bonds in your investment portfolio to mitigate risk. The best place for them is your 401(k). I recommend that bonds be held in tax sheltered accounts like 401(k)s since their distributions are taxed as ordinary income. Bond interest, therefore, benefits more from the tax shelter because the tax savings is greater than for stocks. I'll suggest that you buy the iShares Universal Bond Index ETF (ticker IUSB). It's a "one stop shop" for fixed income because it includes the vast majority of dollar denominated bonds. Its management fee is only 0.08%.
Your 401(k) may have limited investment options. Since your 401(k) is no longer active, you can move the assets therein to an IRA Rollover account. You may want to transfer it to an IRA account at a discount brokerage. There, you will have a wide range of investment options including the ability to buy ETFs like IUSB.
You also may want to consider the liquidation of your individual stock holding. I will assume that your income this year is quite low and, thus, you will be able to sell those 100 shares without paying a capital gains tax. It doesn't make sense for you to bear the extra volatility that an individual stock brings to your portfolio. Most single stocks have 2 to 3 times the volatility of the index funds you already own. That's because portfolios of stocks cancel out much of the specific risks that individual companies face. Once sold, you can decide whether to reinvest in an index fund or keep the proceeds as cash reserves to pay bills.
Thank you for posting your question on Investopedia. I hope my answer provides you with the insight that you are looking for in order to make a well informed decision.
Without knowing more about you, your income needs, risk tolerance, and net worth, it is difficult for me (or just about any financial advisor) to provide you with a specific investment recommendation. In order for a recommendation to be suitable for you, we would need to have a conversation, either by phone, video chat, or in person. With that said, here are my thoughts:
I recently wrote a blog post that I believe will benefit you because it is entitled, "Retirees Can Protect Their Retirement Money With Better Asset Allocation." (click the previous link if you would like to read my blog post)
There are many things to consider when investing in a mutual fund or index fund, such as how to properly diversify your portfolio, what are the fees being charged by the fund itself, tenure of the fund manager, etc. There is simply a LOT of items that you should take into consideration. If you take the time to read my blog post and still have questions, then I would encourage you to post a follow up question on Investopedia Advisor Insights. However, I believe that you will find the answer to your question in the post that I recently wrote on a subject that is very similar to your concerns.
Thanks again for your question.
Bonds play a role in every asset allocation and act to lower volatility. However, when it comes to bonds, what I've found to be the best solution is to have different duration of bonds as part of your overall asset allocation. Most aggregate bond funds tend to favor 3-4 year duration. Rising rates will affect longer duration bonds greater than shorter duration, however, if rates fall due to a scramble to safety, then longer duration bonds work as a better hedge. Your specific allocation would need to be determined based on your overall asset allocation.
Very Truly Yours,
John A. Eiduk, CPA, CFP™
You are fortunate to work with two reputable companies: Schwab and Vanguard. Because the answer to your question involves assessing an investment mix and the related amount of risk that makes sense for you, I suggest you have conversation with both companies. See who's most helpful and has the best answers. Here are suggested talking points:
- Explain what you need and ask to be directed to the person who can best help you. You want someone who's interested to help. You'll know if the person is willing to listen. Don't be afraid to ask for someone else if you don't understand or like that person.
- Give that person a list of your income, cash needs (your household budget), and your investments. Tell the person everything you find relevant (e.g. health issues, expected inheritance, financial support, ect.).
- Ask that person to assess your need, ability, and willingness to take risk.
- Once you understand the overall risk that makes sense for you to take on, ask for an investment mix recommendation that would fit that risk (including stocks and bonds). Here, you'll get the answer to your question :-)
- Ask if holding 100 shares of the stock you have is wise in your situation.
- Ask about all fees involved in helping you manage your money and about the ongoing service and guidance you can expect.
- Consider bringing all your investments to the company you like most. It'll make your life easier and allow them to serve you better.
With all best wishes!