stocks vs bonds

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Hello, prior to 1/1/00, I moved my retirement portfolio from all stocks (I have 27 years to go for retirement) over to bonds (the most conservative place I could go within my company). Normally not a stock watcher, For the Y2K challenge, I was trying to avoid a potentially large downturn that was going to happen (ie, was relatively predictable event). Well, the downturn has not happened yet. No big deal, while I've missed the upswing in the market over the last 8 months, I've not worried at all. Question now is, I noticed the bonds have tended to swing up and down, sort of in line with the stock market. Is it true that if the economy goes into a "deflationary economic period" that bonds will increase in value? I am assuming that a corresponding drop would occurr in the stock market. I guess that is how, in my situation, I've positioned myself. I am wondering if I should get back into the stock market (via my retirement fund) and since its a very long term deal for me, just go along for the ride. I guess I would be buying at the low end if stocks did go way down. Any advice would be greatly appreciated.

-- thomas saul (thomas.saul@yale.edu), January 18, 2000

Answers

1) Investing in 30 year bonds when you have 27 years to retirement could be very risky.

2) Investing in lower grade bonds brings credit risk.

3) Investing in callable bonds brings call risk.

Investing in bond funds bring 2) and 3) plus the risk of the manager churning your account.

The big question is will you be compensated appropriately for those risks?

In a deflationary environment, usually bond prices go up (yields go down) but there is no guarantee that the yield curve won't steepen (Murphy's Law) even if your economic prediction is correct.

Let me advise you to diversify into stocks and bonds but only after you have taken advantage of all those tax incentives the gov is handing out (401 K, IRA, SEP, real estate interest deduction etc)

-- Sandwich (anon@anon.anon), January 18, 2000.


to Sandwich:

Hmmm. Good Advice. Yet... should I go ahead and split between stocks and bonds to diversify, or just go all into stocks for now. I am sorry if your answered this question in your statement below. It's not getting through my thick skull I guess. Thanx again for your answer

-- thomas saul (thomas.saul@yale.edu), January 18, 2000.


Does your retirement portfolio have a money market option? That may be safer. Bonds do fluctuate greatly in price. If inflation heats up bonds get crushed. 1999 was supposedly the worst year on record for bonds with a total return of -14%. How safe is THAT? The safest fund is probably a U.S. govt short termn money market fund.

-- nobody (nobody@nowhere.com), January 18, 2000.

Thomas, Why would you seek the advice of someone on a message board? Go do your own research and talk to someone with a face. Best of luck to you.

-- (I'm@pol.ly), January 18, 2000.

Prediction by Dr Edward Yardeni for 1999 was that bonds would outperform stocks by a great margin. It's on record. He could be late by a year, but now he says bull market to continue. So much for research. Money market looks boring and safe for the time being.

-- W (me@home.now), January 18, 2000.


Bonds are only safe now in shorter term notes. The average maturity on any bond fund I would consider is 7years or less. Money market is ceratinly a safe bet. To dump money back into stocks because you missed the last leg up only to catch the top would make you more depressed. Consider two points. Return on money has to balanced by the risk (staying awake worrying?). Bonds return "If kept to maturity" is a known risk, you have to remember the dividend and not just the price fluctuations as interest rates change.

-- Squid (ItsDark@down.here), January 18, 2000.

Don't put all your eggs in one (or two) baskets. After owning your own home, I would get some professional advice on how to allocate your investments. Safest might not be the best. Personally I'm looking at putting 100k in some rikkity S&L CD that pays the highest rate. If they default hopefully the FDIC bails them out! If you are really loaded (more than 1 million in liquid assets) look into "alternative investments" (type in alternative investments in a web search engine like: http://www.altavista.com)

-- Sandwich (anon@anon.anon), January 18, 2000.

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