Hello. Tess here. Frankly, I'm worried that I don't have any bond investments in my portfolio. This has bothered me for some time now and I'm unsure on how to proceed. For a few years, I could be comfortable with a 70/30 allocation of stocks to bonds/fixed income. I will retire in approx. twelve years, have no credit card debt, and my house mortgage will be paid off before retirement. Cash in a 6 month CD (due to roll over soon) $48,000In Taxable:Vanguard Total Stock Market $64,000Vanguard Tax-Managed Small-Cap Fund $20,000Vanguard Tax-Managed International Fund $22,000Inherited an account at Ameriprise:Riversource Disciplined Equity (AQEAX) (Morningstar gives 3 *'s--Large Blend) $84,000In Roth IRA:Vanguard REIT $9000Would like to purchase VIPSX for my IRA--but of course, can only invest $4,000 this year.T. Rowe Price has the Virginia Tax-Free Bond (PRVAX). Morningstar gives it 4 *'s. YTD return is 4.01%.Hi Tess,First, I don't see any point in using your Roth as a place for your bond/fixed-income allocation, because that is money you will use last in your life (probably well over 30 years from now). You definitely don't need a tax free bond fund (or tax free bonds) in Roths or any other tax-advantaged account, where there is no advantage.You don't mention any retirement accounts, other than the Roth, but from a tax perspective a 401 (k) or Traditional IRA is a better place for your bond/fixed-income allocation than a taxable account, and you would be combining your tax-deferred (not Roth) retirement assets with your taxable account assets in 12 years (or age 70.5, if you prefer to wait).Ignoring the Roth, you now have $238,000 (if I added correctly). 30% bonds/fixed income would be $71,400, of which you already have $48,000 in a CD. If you want to get to your allocation quickly, you might look to the inherited fund. If you inherited recently, the tax basis starts when inherit, so selling shares would mean paying capital gains taxes only on recent gains. (If it is a high expense fund, compared to your index funds, selling at this point may make sense anyway, and then you can put part in your index funds and about $24,000 toward your bond/fixed-income allocation). Or, you can just gradually build toward your 30% bond/fixed-income allocation over time with new savings.Assuming this is taxable account money (or anything that doesn't have limited options, like many 401 k plans), you don't need to use funds. If you are in a high tax bracket, tax-exempt (muni) bonds, or possibly a fund, may make sense, but except for Vanguard's muni funds, state specific muni funds for relatively low tax states tend to have too high expense ratios (you can probably do better after expenses with a generic Vanguard muni fund). However, given how little money you have saved with 12 years to retirement, I'm guessing you aren't in a high enough tax bracket to warrant munis.So, if we start with $72,000 for bond/fixed-income in a taxable account, you have considerations. First is liquidity. Presuming some of your CD is emergency fund money, you probably need to keep some money liquid. Also, with short term interest rates higher than long and intermediate term rates, and long and intermediate rates historically low, you probably don't want to throw all the money into longer instruments all at once. You also will want to build a ladder, so you have liquidity when you retire.The send issue is getting the best yields. Nothing looks exciting at the moment, but there are some 5-year CDs that are better, or with high money market yields, you could just roll the 6-month CD into a money market, plus the other money if you sell some stock fund assets, and wait for January and see what things look like then. I think you don't have enough Vanguard money to qualify for free auction bids on TIPS and Treasuries (or free brokerage account), so I would open a Treasury Direct Account (you don't need money, just a link to your bank account) with the idea of getting 10-year TIPS in January, if the yield looks reasonably good, with some of your bond allocation. (You will need to have the money moved into your bank account, which takes a few days with Vanguard, or at least used to.) You might also open an account with the Pentagon Federal Credit Union and/or one of the on-line banks with high yielding CDs. We think Pen Fed will have some good yields on CDs in January, but they may change their minds if interest rates stay low.It would be fairly easy to build a ladder with TIPS and CDs, aiming to have them maturing at 6 month intervals once you retire (maybe 3 month intervals with CDs, but that's hard when you need to meet minimums). I use a 5-year ladder, but have 10-year TIPS as an alternative to rolling over 5-year CDs. So, with around $70,000, you could keep $14,000 in a money market, or half in a 6 month CD or Treasury bond, for emergency money, then start moving the rest into 2,3,4,5 (or 10) cycle, with a combination of TIPS and CDs. At the moment, I don't think regular 5 or 10 year Treasuries are competitive, and there is nothing in the investment grade corporate bond world available, given the commissions you would pay for the amounts of money you could use for each, that would come to CDs, unless you get into junk bonds, which are more on the risk level of stocks.
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