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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Re: Advice to SIL Date: 11/5/2006 12:41 PM
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For my age I feel the 46% bonds is too much and as I said earlier I think I can do better than 5.25%.

Marjorie,

A 46% allocation to bonds isn't the problem. The problem is the lack of diversification within that 46%. Don't blame the bonds themselves. They are doing exactly what they were intended to do. If you want higher yielding bonds, you have to buy higher-yielding bonds.

On a risk-adjusted basis, there is no less money to be made in bonds than in stocks. That isn't how ordinary investors think about the asset class and use the asset class. But bond professsionals can achieve returns that rival those of stocks on a risk-adjusted basis. So the asset class doesn't matter. Risk matters, because that is what provides reward. As you yourself recognize, "Small risk; small reward."

A more careful re-statement of what you said would go like this:

"I have 46% of my portfolio in very conservative investments. Given my age, which will allow me time to recover from mistakes, and given my willingness to accept greater risk in order to achieve a higher return, my present allocations do not reflect my long-term goals."

In other words, you already recognize a problem. Now you need to decide how to solve it. Impulsively dumping your bonds and jumping into stocks is one approach and likely a foolish one, IMHO. Exploring bonds more deeply and more widely would be another approach. A lot of work, but a possibility. (Some of my currently open bond positions have achieved over 200% in capital gains, which isn't shabby. That's not common, but it does suggest what is possible with bonds, and it is a lot better than 5.25%.)

Unwinding your bond positions gradually and gradually rotating into stocks and/or higher-yielding bonds as you increase your knowledge of how to manage those asset classes is another approach and, perhaps, a good compromise. And there are dozens of more ways to solve the problem of getting your portfolio to do what you want it to do and what you need it to do.

You're the driver. Decide where you want to go and how you want to get there.

Best wishes, Charlie

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