Bond Funds Risk (IRAs, margin, cash, 401k)

[happyinca]

I am a government employee. I am invested in my 457 and 401 (a) as follows:

25% High Yield Bond Fund (TIAA CREF)
25% Pimco Total Return
25% Putnam Stable Value - returning around 2% currently (considered cash portion of portfolio)
25% DFA Inflation Protected Securities

I have a Roth IRA that is 100% TIPS

I am 52 years old. Was 100% Stock funds ages 22 until July of 2007. I had a nervous feeling about the market and went to cash and bonds. The market topped in October of 2007 and then my funds that I had dropped 40%. I side stepped that loss. I know some of you will say had I stayed the course I would have recovered. I lost 40% in the Tech Wreck and it took me until 2005 to make it back and I do not want another ride on the roller coaster.

Now I am basically 80% bond funds and 20% cash. I understand when interest rates rise bond funds will fall. I have been reading Money Magazine for 30 years but beyond that I don't have a financial education. Last month Money had an article about bond funds that was basically "Don't worry, stay the course, you might be risking 5% but market timing never works and going all cash is not the right choice. Even if you dip a little it will come back, so just stay invested." Through the years I have seen "Money" make some really bad calls, so don't trust everything I read in it.

Then I get on the Internet and read articles from people I don't know (meaning should I trust them?) who are saying, get out of bonds NOW, you are risking a 30% drop. Having lived through the Tech Wreck, again I don't want the roller coaster ride of 30 - 40% drops. I can handle 5% dips as long as the money comes back.

I feel I have done great since getting out of stocks in 2007 averaging 5 - 8% per year. I save 15% of what I earn. I will retire in 5 years with a 50% pension and will need this money eventually so don't want to risk principle. Not interested in the stock market anymore. It was so fun in the 1990s (20% - 30% returns were fun!) but now it feels like a giant casino to me and I don't gamble when I am in Vegas. Losing even $20 to me is not fun.

So my question boils down to this...Do I stay the course, or am I taking on too much risk? Considering I hate losing money?

[chet everett]

Bond risk is then current "hot topic" . The sites you read for free and just like the tabloids you see around the check-out aisle -- full of splashy "celebrity news" that is all about selling you a junky magazine and not about providing useful info...

Yes, there is real risk in bond funds. Yes, it is nuts to ignore this risk, especially if you are "over weighted". So, what to do? Well for starters you probably need to think not of just "worst case scenarios", which no doubt having been burned by tech bubble and dodged a bullet in 2007 is probably hard to do -- bond markets have tended not to move as dramatically as stocks. Further the "rubber band" effect is very very strong for bond funds -- as the managers dump low rate bonds they are going to replace them with the higher rate bonds. If rates climb suddenly investors will be back into the funds very quickly. In many cases the yeild will slip downward over a much longer period...

ETFs ought to be considered if you can -- much speedier trade execution.

Beyond that you might want to think about different "sectors" -- obvious areas for diversification include real estate / REITs, maybe energy , maybe tech...

[ohio_peasant]

This is an excellent question... in fact the operative investment-question of our times. Though I'm more sanguine about stocks than the OP, some significant portion of one's portfolio should NOT be in stocks, and that portion grows with age.

My own approach for the non-equity portion of my portfolio has been short-term bond index funds. Yield is low, but interest-risk is also low, since the underlying short maturity means that the holdings recycle quickly. As has been discussed extensively on this forum, mid-term (next 1-2 years) rise in interest rates is unlikely, for lingering economic reasons; but long-term rise in US interest rates is inevitable. And all of this is liable to another panic and flight-to-quality, for example from the next hiccup in Europe or yet another "rogue nation" deciding to live up to its reputation.

The real problem with bond funds, as I'm discovering this week doing my taxes, is that the dividends are "ordinary" and are taxed at my marginal rate, instead of 15%. That's not a concern inside of 401K's and IRAs, but it really stings when in a taxable account.

Treasuries, perhaps? REITs?

[happyinca]

Thank you both for your replies. You both brought up different sectors. I will so some research this weekend on the other funds available in the 457 and 401(a). Because if not in bonds but where is another question to figure out.