I am the trustee for my brother's trust currently managed by a bank. He will not gain access to the Trust (according to the terms of my father's Will and the Trust) for 5 more years (although he is 60). Brother has "heard" that he should get rid of all the bonds (held in Mutual Funds) little by little and concentrate on equities etc....His current allocation (HIS choice last year re. asset allocation) is 70% Mutual Fund (equities) 30% Mutual Fund bonds.Since I am responsible for the finances of the Trust and tend to be much more conservative re. my dad's Trust and the funds in it for the benefit of my brother, I am more than hesitant to make any such change as recommended by "his friends" - Therefore the reason for the my question.My feeling is although he won't make a helluva lot of $ from the bonds, they represent a "safer" investment than equities at this point. Bearing in mind the current global financial situation and the ups and down of the stock market,my opinion is that I would be abdicating my responsibility to the Trust if I permit him to act/react to everything he hears on the street. (that's why I'm the Trustee) <sigh>.... Note: My husband and I also have our investments managed by the same bank although since we are older and retired our allocation differs and we are comfortable with our own situation.Would appreciate feedback on this situation.
If you had the foresight to set up a bond portfolio years ago, you are enjoying substantially higher interest payments than current market rates. Of course your bonds have considerable value over their face value, and many have been called.Absent that situation, bond holder are in for some pain. If they own quality bonds and hold them to maturity, they should be OK. But bond fund investors can expect to take a hit.Bonds are less volatile than stocks, but still sizable declines seem likely as interest rates rise.Sadly the very low interest rates offered by treasury bonds means most alternatives also pay low returns.Most are better off in stocks just now, even though they are higher risk. But the risk can be minimized by concentrating on dividend paying stocks. The dividend tends to support the stock price even in bad times. Otherwise, I would focus on good quality blue chips to provide a measure of stability.If you worry about the stock market, now is not the time for speculative investments.No matter how you slice it, there are still risks out there. We do the best we can and hope for the best.
Bond funds may be safer (as measured by volatility) but are not necessarily so. Each bond fund is different and some are holding bonds that have appreciated by well over 40% - which means those bonds are garuanteed to lose those gains of their value drops as rates go up and as those bonds approach maturity. On a risk-adjusted return basis, there are probably quite a few bond funds that are worse than stock investments - especially looking forward.What will happen in 5 years? Will he liquidate those holdings? Use them for income? His timeline would be the most important part of this.Give us a few of the bond funds and tell us what is likely to happen when he gains access and we will be able to better respond.
There is nothing particularly safe about bonds. Bonds bought now, in this low interest rate, will lose value when interest rates go up, which is bound to happen before too long.The point is that is a matter of when you buy and what the current interest rates are at that time, as well as the maturity date of the bonds.Of course if you buy bonds with close-in maturity dates, e. g. 90 day Treasury Bonds, you can hold to maturity without too much trouble. You just might miss a buying opportunity in stocks by a little bit.Years ago, I built a bond portfolio which was well diversified. It had about a 10% yield, and therefore brought in good income. Interest rates were generally high at the time, and the stock market was terrible. When interest rates went down, I was faced with the decision of whether to sell at a profit and put the money into stocks, which were doing very well, or hold bonds longer. Holding to maturity was not a good idea, since the bonds were selling over par. Anyway, I eased out of the bonds and went into stocks.The point is that there is a time to buy and a time not to buy bonds. Having some kind of allocation between stocks and bonds is not a good idea.
Tuni in today's world it is almost impossible to address the question you have with knowledge of the specific holdings. I am saying the terms "bonds" and "fixed income" can and today often do cover things way beyond the likes of an AT&T bond maturing in 2025 paying X%. An example BEIBLX name Eaton Vance Floating Rate - sounds like a bond mutual fund. In reality it is composed of corporate loans whose interest rate is adjustable - think Adjustable rate mortgage as something similar. If you own mutual funds that are traditional bonds (example VBMFX) at some point in the near future (5 years of less) the principle of that holding is likely to drop well over 5% -- maybe 15%. In short if 5 years in the time frame, changes are excellent you will have more money by selling VBFXM and burying the cash in your back yard. This fund has lost more than 1% in the last 12 months even though its bonds pay dividends every month. This is interest rate risk.Since the funds are not needed for living expenses today, I would say put them in a Balanced, Actively managed fund with a few decades of history. To excellence one are Vanguard's Wellington and Dodge & Cox Balanced. Both these funds have returned over 7% in the period from June 2008 to June 2013. There are damn few investments of any kind that can claim that. Yes in high growth periods like the 1990s these will not do as well. But given your fiduciary responsibility and the age of the person to get the money, you could do much worse.I am personally putting our funds largely in VWENX - I view it as a simple retirement portfolio. Yes VWENX has 30% bonds, but when you drill down and look at he interest rate risk, it is low. DODBX has bond holdings that range from 20% to as high as 50% - right now it is about 20%. Both these funds have excellent ratings by Morningstar. GordonAtlanta
I know this is a tangent but:DODBX has bond holdings that range from 20% to as high as 50% - right now it is about 20%. Both these funds have excellent ratings by Morningstar. Ratings are not what one should necessarily base investment decisions.DODBX lost over 50% from peak to trough from 2008 through 2009.http://finance.yahoo.com/echarts?s=DODBX+Interactive#symbol=...http://quotes.morningstar.com/fund/dodbx/f?t=DODBXMorningstar states that this fund has much higher risk than its category.VWENX is a much better alternative for moderate risk IMO. Better income, less volatility, though slightly worse average duration on their bonds.
But the risk can be minimized by concentrating on dividend paying stocks. The dividend tends to support the stock price even in bad times.How will dividend stocks be affected by rising interest rates? Will their price go down like bonds?
Yes, as interest rates rise, investors will see new opportunities to increase yield. That should cause the value of dividend stocks to drift downward too.But the saving grace is that dividend stocks are equities. Their dividend has potential to grow over time as their earning increase. Hence, growth potential moderates the downside.
70% stock/30% bonds doesn't sound too bad for a 60-year-old, but I'd keep the maturities on the bonds very short -- 1 to 2 years is plenty.intercst
HAve just spoken with our financial advisor at the bank - we share fiduciary responsibility for his trust. We've reduced his bond fund exposure by a bit - now he's about 25% in Bonds, the rest in equities or cash equivalents. All his equities are in mutual funds as are his bonds. He will have no or little tax issues since the dividends he's been getting over the years should just about offset that from the sale. We sold Pimpco for him, which had disappointing performance anyway.Meanwhile, we continue to watch the market - everyone says that interest rates are bound to rise, however, I've been hearing that for a few years now. Meanwhile the global financial market remain unchanged, status of everything is risky and I have to be careful not to do anything (even if his current mood, asks me to) to protect myself legally as the Trustee. I depend on the bank (which shares that responsibility with me) to ensure that they and I are careful stewards of that responsibility.thanks for your help, as always,
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