Scott Burns: What to do about bonds
Q: I am underweighted in bonds for a retired 68-year-old. I have 36 percent in bonds, mostly in Vanguard TIPS, GNMA and short-term bonds.
In the next three to five years, I could wait out the wave of inflation to buy more and dollar-cost-average in.
Or I could jump in all the way now to get to a 50 percent weight. I plan to then continue on up 1 percentage point a year up to a 60 percent weight. How does this sound to you?
A: Your bond allocation is low, according to the conventional wisdom, but it seems quite reasonable when you consider that bond yields have been artificially lowered by Federal Reserve policy.
PIMCO top dog Bill Gross is so concerned he sold Treasurys. So you needn't be in a hurry to increase that allocation to 60 percent.
If you do start increasing the allocation, the safest way would be to build a simple three-year ladder.
This will give you a good yield when yields are closer to "normal," and the constant turnover of the securities will allow you to buy higher-yield securities in future years.
Q: I have $87,000 in one of my IRA accounts. It is currently sitting in cash.
My financial adviser, Morgan Stanley, suggests short-term bonds. I would like to know if I should instead go to a fee-only adviser to save money when the bonds are bought and sold.
I am 67 years old and won't need the money for about three years.
A: There are quite a few short-term bonds out there from which to choose, and you could easily lose money compared to sitting in cash.
This is particularly true if you are being offered one of Morgan Stanley's three short-term bond funds, all of which rank in the bottom 25 percent, or worse, against other short-term general bond and government bond competitors, according to Morningstar data.
Or roll your IRA account to a savings institution or credit union.
According to Bankrate.com, you could earn about 1.8 percent a year on a three-year CD. Not much, but more than the average 30-day SEC yield on short-term general bond funds, according to Morningstar data.
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