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I'm 31. My portfolio is $70k. Right now, it's split 50/50 between index funds and individual stocks. 8 individual stocks. $40k is in tax advantaged accounts, the rest in brokerage.

I have what I consider a high appetite for risk in the past, but we just bought our first house (In San Francisco. So while it's not big, it's nobodies definition of starter house).

So, I want to diversify myself better. Obviously I have 2 methods at my disposal:

1) Sell existing assets and buy bond funds. I'd do this in my 401k or IRA to avoid any tax bill coming due.

2) Roll new contributions into a Bond fund. I could do this fast or slow.

If you were in my position, what would you do?

Every month, I have $4k to allocate. $1k in my 401k, and another $3k (after tax) in company stock options. I execute my options monthly so every month I have seasoned funds available that I can sell at long-term rates and re-invest somewhere. Until a few months ago, I just sold for cash to accumulate a San Francisco sized down payment. For the last few months I've just let them sit. If the stock hit a rough patch i would consider sitting on the shares but as-is I'm comfortable taking profit and selling at least half these shares. Bottom line is that if I don't, i'll be overly exposed to my employer. I already rely on them for income.

Should I just start cost averaging out of existing assets and into bonds? Any advice? (FWIW, my IRA and Roth IRA (no new contributions allowed) are at Fidelity, my 401k is at Principal. I have some brokerage funds at Sharebuilder that I think I will transfer over to Fidelity soon (or possibly Merrill because I get free trades, etc, due to my BofA banking relationship)
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No. of Recommendations: 7
Because interest rates are at historic lows and are likely to rise from here as the economy recovers (ie the result expected if the Federal Reserve Board ends quantitative easing as being discussed in the news), now is a terrible time to buy bonds.

1. Wait if you can for at least a year until rates are up a bit.

2. Consider buying stocks that pay dividends instead. They are still equities but the dividend yield provides some downside protection.

3. If you must, buy the bonds themselves rather than bond funds. When held to maturity, they will return full face value. You may see some paper losses, but they do not matter as long as you hold to maturity. But note minimum is $5K to make bonds saleable if you need the money. (Bond funds will decrease in value as interest rates rise.)

Under the circumstances I would be in no hurry to sell assets to buy bonds. So better to accumulate a bond position by buying them (dividend stocks or bonds themselves) with new contributions.
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Thanks. This is actually what I thought. Rising interest rates will put downward pressure on bond prices, right?

Ok, fair enough. Dividend stocks, I have some. GE, Microsoft, Ford.

I will look for other opportunities.
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No. of Recommendations: 3
I get the impression you want to make your portfolio more conservative, and you don't need bonds for immediate income. If you're buying bonds in a retirement account at age 31, I don't see a bond fund being out of line for you. Just track the fund(s) against their peer funds every few years. Maybe consider individual bonds when your 5 years from retiring.

Maybe some shares in a high yield (junk) fund with a decent track record, and some of a corporate bond, intermediate maturity fund, with bond maturities of about 10 years or so??

If you want real conservative, treasury bonds. Yield on the 30-year is about 3.8 or 3.9%, and if you buy them as "zeros", yield is probably over 4%.

You may or may not want to consider preferred stock funds, or preferred stock.

This is probably not a good time to search for individual discounted bonds for capital gains or high returns.

The above is only my opinion. Others may disagree.
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That's correct, I don't need them for income, just as a hedge against stock market volatility.

I'm reminded of 2009 where people lost their jobs and needed to tap their portfolio to keep the lights on -- at a deep loss in some case.

So, now that we have a mortgage, I want to plan for an eventuality like that even though I find it unlikely and almost intolerable. So it would be useful to have a meaningful portion of the portfolio in debt instead of all equity.

Right now my whole portfolio (excluding emergency fund cash, like $30k in a savings acct) is $70k so it's not like 20% of that would somehow magically sustain me through a rough patch. But in a few years, at our current heading, that $70k should triple, and onward from there. And I guess my POV is that in 2017, looking at a $250k portfolio, I want a meaningful chunk of that in something other than US equities.
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No. of Recommendations: 5

You wrote, I'm reminded of 2009 where people lost their jobs and needed to tap their portfolio to keep the lights on -- at a deep loss in some case.

So, now that we have a mortgage, I want to plan for an eventuality like that even though I find it unlikely and almost intolerable. So it would be useful to have a meaningful portion of the portfolio in debt instead of all equity.

I must point out that bonds were definitely not a good hedge against stocks in 2009. Had you been forced to sell then, you would have taken huge losses. Most *buyers* made out like bandits.

I lost my job in 2008 and didn't get a new one until 2009. My hedge against an emergency was simply cash - I had enough to last me a year even without unemployment benefits. Fortunately I found a contract position before unemployment benefits expired. All the crash cost me was the inability to save (unemployment was adequate to cover most expenses) and it made me react too conservatively with my investment purchases - which was a cost in its own right. How you might ask?

I was watching several preferred and debt instruments as the market was tanking. They eventually traded for a fraction of their par value. One of the preferreds I was watching hit $5.50 and it pays a coupon of $1.75. I bought some close to that price; but had I had the courage of my conviction and not been worried about my job and that issuer surviving the crash, I could have afforded to buy enough so I could live off the interest payments. I could also easily be a millionaire today had I reacted differently; but I'm not sure I could have slept at night for all the worry.

What would things have been like for me if the issuer had folded? What if everything I'd bought went bankrupt? And what would I have been going through if I'd bought those issues before the crisis, thinking they were safe investments?

In my view we're pre-crisis once again - though its anyone's guess when or how it will manifest.

Food for thought.

- Joel
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No. of Recommendations: 6
Some very smart people have given you good advice.

My advice for someone your age is to keep at least 6 months of living expenses (including the full price of your health insurance) in an emergency fund in cash. If you can't relocate, it's safer to keep 1 year's living expenses in cash.

Joelcorley wrote about his job loss. DH and I also lost our jobs about the same time in 1997.

Although the economy is improving (especially where you live), business cycles eventually bring recession inevitably. During a recession, jobs often vanish generally at the same time that you may have lost your job.

The Median Duration of Unemployment is declining but is still high on a historic basis.

If you were to lose your job, you would want to be able to pay your mortgage and other expenses while searching for a new job. The stress is dramatically reduced (and you may be saved from default) by an adequate emergency fund.

Please take a look at the history of the 10-year Treasury bond yield.

If you buy bonds when both yields and spreads are low, you take the risk that your bonds will lose value when yields rise.

In an emergency, you need CASH. Don't take the risk that you may be forced to sell either stocks or bonds when their values are depressed.

Wendy (many a crisis)
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No. of Recommendations: 1
What Joel said.

Save up 9-12 months of cash, lock it away in some high yield FDIC investment. You'll make peanuts in interest on it, and hate yourself a little, but who cares... just do it.

Then, take the rest of your money for the rest of your life and invest for the long term in whatever will generate the best returns with moderate risk (bonds, stocks, real estate or maybe a bit of all of them).

The cash will be the the thing you live on if like Joel you hit a rough patch without (too) much worry, but alternatively during the downturns where you are still employed, the cash will be what gives you the perspective and safety to take a few well placed risks when all your coworkers and people your age are soiling themselves.

I was a buyer hand over fist in '08 and '09, it was truly a life changing experience for me. I'm not that smart, I just tried to learn from smart people and I had my finances in order so I had a cool head when many others didn't.

I think that should be your goal more than having some allocation to bonds to reduce volatility... that may not be what you really want / need.

Hope that helps!

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I must point out that bonds were definitely not a good hedge against stocks in 2009. Had you been forced to sell then, you would have taken huge losses. Most *buyers* made out like bandits.


Corp bonds did very well in 2009. Perhaps you meant 2008 where they took a beating at the end of the year.
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No. of Recommendations: 9
Everybody hates bonds these days -- you've already received responses pointing that out. "The negativity toward bonds is nearly universal", as Barron's puts it in today's `Up and Down Wall Street`.

Historically, being _contrarian_ (selling what everybody loves, to buy what everybody hates) has proven a winning strategy for the long run (while in the short run `momentum`, the reverse idea of buying what's going up right now, works... until it doesn't;-).

You have a very long investment horizon, so you should consider this.

There's nothing mysterious about why being contrarian is useful. The market is a discounting mechanism. At extremes of sentiment, when everybody `knows` asset XYZ will be going up and ABC will be going down -- why, what happens right now of course is that nobody wants any ABC and everybody's bidding XYZ up. So XYZ becomes over-valued, and ABC under-valued, rapidly settling to (respectively) a ceiling and a floor.

In the short run, the market's a voting machine -- tells you what's popular. In the long run, it's a _weighting_ machine -- tending to assets' actual `fair` values (which in theory can be computed as a discounted cash flow, DCF -- the present value of all income that will come from the asset in the future, using an appropriate discount rate).

So, buying the hated, undervalued asset ABC, and selling the beloved, overvalued asset XYZ, in the long run, will give good returns as both valuations eventually revert to `fair` territory (in the short run you're swimming against `the current` of momentum, so things may not look that good for a while, but, just don't panic!-).

This takes patience and fortitude -- as Keynes, who loved to speculate on margin in his private accounts, put it, `the market can stay irrational longer than you can stay solvent` (the solvency issue does not arise if you carefully _avoid_ using margin debt of course, but the observation underscores the need for patience;-).

Sometimes the effects are sharp enough to observe in a shorter span of time. For example, consider TLT, an ETF holding long-term Treasuries (NOT a recommended investment at all -- just an example).

It peaked at 124 on May 1. Then Bernanke spoke the word `taper` -- and TLT in just a few months sank down to 102 in the summer (most of the loss came just in May and June). And there it stayed -- no further loss -- just modest fluctuations for many months now; it's now at 104.

Everybody who thought long-term Treasuries (and thus TLT) would tank obviously sold pretty fast -- so it hit bottom reasonably promptly (in this case I'm _not_ claiming said bottom is undervalued -- rather I think it was overvalued before;-).

My personal reaction to the stock market's strong bull year, and the debentures' panic in late spring, has been contrarian (in the slow, prudent, gradual way I always move -- I'm no fast trader;-). At the start of 2013, as for years before, I was positioned with 75% equities, 25% debentures (`debentures` is a broad term that covers bonds _and_ other investments based on lending money -- bank loans, mortgages, &c; "cash" that one's holding for investment typically is actually in debentures, because money market funds hold e.g commercial paper and T-bills).

And I was that high (25%) in debentures only because I follow Benjamin Graham's sage, immortal advice: _never_ get further than 75/25 to 25/75 in the balance between the two major securities asset classes -- even such extremes are warranted only when you have a strong conviction that one asset class is very under/over valued wrt the other. (If you're not familiar with Graham, he was the founder of security analysis, Buffett's teacher and still-revered mentor, &c; look him up!-).

In 2013 stocks at long last moved to (at least) fairly valued (some claim they're crazy overvalued but I think they're wrong -- other debate, anyway) and debentures to (at best) fairly valued, with clear pockets of under-valuation and extreme negative sentiment.

So, I've re-positioned to 70%/30%, on my way to 65%/35% where I plan to stay for the foreseeable future (Graham thought the ideal balance in normal markets was 50/50; I think 65/35 because that's the ratio of annualized real total returns; as it happens, analyzing Berkshire's portfolio of securities, and counting preferred stocks as debentures the way I personally do, it's pretty close to 65/35 these days...!-).

So, I've trimmed or closed some common-stocks positions, to enhance instead my exposure to bonds, preferred-stocks, loans, &c; and I'll be doing a bit more of that until I'm close enough to my desired 65/35.

Moving _slowly_, prudently, and cautiously, as usual -- and I would recommend you do the same.

Great econometrist Jerry Siegel has traced US securities over 140 years and found that stocks' real (i.e inflation-adjusted) total (dividends plus capital gains) returns, annualized, are 6.5% (pretty steady around that amount); bonds', 3.5% (less steady, actually, in _real_ terms, as bonds are quite vulnerable to inflation); a mixed portfolio, 65% stocks and 35% bonds, and annually re-balanced, has by a little the best returns, 7.0%, with even less variability than an all-stocks one.

That's the real reason to keep a balanced portfolio: the reduction in volatility is only a minor benefit -- the big deal is that, with disciplined rebalancing, you get _higher_ real total returns (rebalancing amounts to `buy low, sell high` -- always a good idea;-).

Now, finally, to your question -- _how_ best to proceed to gradually shift your allocation, from almost 100/0, towards _some_ balance (doesn't have to be my current favorite 65/35 -- but I would recommend not going beyond 75/25, or at a stretch 80/20 if you really insist;-).

First: taxes matter. IOW, "it's not what you earn, it's what you keep".

_Most_ debentures don't make sense in taxable accounts because coupons are taxed as ordinary income -- substantially higher than stocks' qualified dividends, and long-term capital gains.

Minor exception: some preferred stocks pay _qualified_ dividends, so may make sense to keep in a taxable account (about as much sense as it makes to keep dividend-paying common stocks there). Given that contribution limits constrain the total size of your tax-protected accounts, that can help.

Major exception: municipal bonds' coupons are tax-free (entirely so from Federal taxes; only in the State of issuance, for State taxes; Puerto Rico is a special case, triple-tax-free everywhere, but it's in dire financial straits so its bonds are very risky at this time).

California residents are particularly well placed wrt muni bonds because CA munis are seriously under-valued -- apparently the kind of CA residents who buy munis detest CA's politics and fiscal situation and are firmly convinced we're all going to H*** in a hand-basket. In reality, and despite occasional scary headlines on Stockton or San Bernardino, we're doing better than we have in years; Brown's new budget proposes to start re-paying the State's debts (which will also help the bonds of school districts, counties, &c, since some of the State's debts are to just such local entities!) and accumulating a rainy-day funds.

So CA muni bonds are under-valued (and thus high-yielding) and if the budget passes and the State starts buying some back that can only help their valuation. Plus of course CA's income taxes are among the highest, so the tax-free nature of munis is especially valuable here!

To put a cherry on top, I'm convinced that the best way to own munis is via closed-end funds (CEFs) -- actively managed, please (indexing makes NO sense in debentures). CEFs are still trading to a discount to their net asset value (NAV), so you're getting _that_ vig too, and end up with luscious yields. I personally prefer prudently-leveraged ones and in particular I've picked NKX for my muni-bonds exposure (in my taxable account of course). I bottom-fished it at a cost basis below 12, but even at the slightly more reasonable 12.52 to which it has since recovered, it's still a great buy - its 6.7% _tax free_ coupon is equivalent to a fully taxable yield of 15% or more (depending on your tax bracket of course) which is enough to make my pupils $-shaped!-)

Qualified-dividend preferred stocks need the same due diligence as common stocks do (unfortunately I don't know of any _funds_ doing a good job at collecting preferred stocks -- there may be some, I just don't know about them). So I wouldn't recommend them unless you're happy with the time-consuming process of individual stock-picking.

In tax-protected accounts, you have more latitude (just don't go holding munis there, that would waste their tax-free nature!-). I strongly recommend you go by funds -- actively-managed ones, by all means, indexing makes no sense in debentures: single issues are just not liquid enough for the individual investor, and you'd need far too many (at a minimum $5k a pop) to get properly diversified.

For high-yield (junk) bonds, I heartily recommend actively-managed ETF `HYLD` -- the managers well deserve their expense-ratio. They eschew the really risky stuff (PIK and covenant-lite horrors), do their own credit-solidity studies (who trusts Moody's, S&P's, or Fitch's any more?!), gain flexibility and short duration through the possibility of also buying some floating-rate loans and owning a little equity (which places them well to invest in distressed bonds: a bankruptcy can often turn those into fresh common stock poised for a rally); no leverage.

Past performance is no guarantee of future results, but it's still somewhat indicative. HYLD's coupon is now 7.82% (vs e.g JNK's 6.02%) and in the past year HYLD's +3.43% vs JNK's -0.49% -- all this after expenses of course. Why anybody would choose to own indexed JNK rather than superbly-managed HYLD, I have no idea.

I do think junk deserves some exposure in your portfolio, by the way.

So do non-US corporates; I get that exposure via a mix of GLCB, mostly developed-countries firms, and EMCB, emerging-markets firms. (Yes, emerging markets are also widely hated today, good reason to get into them -- in equities too, but, that's another story).

For investment-grade corporates _and_ dividend-paying blue chips (in a ratio of about 2:1), I've chosen VWIAX, an actively managed Vanguard balanced fund. You probably don't have access to that specific `Admiral` share class (I do only because my 401k's at Vanguard and my employer has negotiated great conditions for us there), but VWINX is OK, too, just with slightly higher expense ratio.

I fill in the corners with SNLN (for floating-rate loans), BIZD (for business-development companies), and BAB (`Build America bonds` -- "taxable munis" with a Federal debt guarantee backing them up). Plus, preferred stock, of course (the non-qualified kind, e.g from REITs, I keep in the 401k's "brokerage window", like all of these ETFs).

I don't own Treasuries (except the tiny amount VWIAX has) and I plan to keep it that way for now. If I'm wrong in my assessment of interest rates' futures, and I see 10y Treasuries yielding 4% while inflation stays low, I'll reconsider. Similarly, I don't own foreign sovereign bonds -- just can't see any bargains justifying the obvious political risks -- but, that might change more easily.

So if I were in your shoes I'd pick a first target, say 80/20, for your asset class balance a year from now, and move towards it slowly in the course of the year, getting debentures via funds mostly in tax-protected accounts except for NKX or the like in a taxable account.
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All good advice here.

I have a lot to consider :)

I do agree w/ the logic of a large cash emergency fund. Mine (around $30k) isn't as big as what's being advocated here, but that's fixable.

What I'm wondering is if there's any better place to park this cash rather than just as cash? CD ladders could work. Possibly Series-I bonds (Up to the 10k annual cap of course)?

If I really wanted a solid, year long emergency fund, I'd need about $100k in there. That covers our mortgage plus living expenses. At that size, I'd basically be losing 2, 3k a year (on a good year) to inflation.
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You wrote, What I'm wondering is if there's any better place to park this cash rather than just as cash? CD ladders could work. Possibly Series-I bonds (Up to the 10k annual cap of course)?

I consider anything that is guaranteed not to lose principal to be cash or a cash-equivalent account. Currently my cash is spread across checking, savings and CD accounts. In the past I've substituted a diversified short-term bond fund - if you do that, add a little more because you can lose a small amount of the principal.

I was seriously considering I-bonds before the market crash - I even started an account with TreasuryDirect - but never bought anything. After that the fixed rate component went to 0%. It looks like we're finally above 0%; but I think I'll give it another pass this quarter.

The problem with I-bonds is that you can't liquidate for the first year. That means you can't really count the holdings as part of your e-funds until that first year is (nearly) up. For most people that could be more important than the $10K/yr purchase cap.

Also, If I really wanted a solid, year long emergency fund, I'd need about $100k in there. That covers our mortgage plus living expenses. At that size, I'd basically be losing 2, 3k a year (on a good year) to inflation.

$100K is pretty hefty for just one year's expenses. I assume you're just counting expenses that are non-discretionary? I live in the Seattle area (not cheap) and my annual expenses including the mortgage are significantly less than half that. Be sure to not count things like savings or investment contributions in that number. Also eliminate expenses that might be optional expenses.

Even if you make a lot in income, one of the advantages of owning things out-right is that you don't have loans that must be paid on even if stuff happens. I'm guessing, but I also suspect a large part of that expense is because you're in that stage of life where you're married and have children. That can be a real drain on assets; but it's still a good idea to reserve appropriately even if your expenses will eventually go down when the kids get out on their own...

Anyway as to the inflationary loss, consider it as a buffer that can be used as a hedge and this is the on-going cost of your hedge. By having cash on hand, you avoid a forced sell when the markets are down - which is the most likely time for you to have a serious emergency. The fund can also be put to use for more than just emergencies. You might consider using part of it for making new investment purchases after the market has tanked. That's when investments are on sale! And only people with cash on hand can make the most of the opportunity.

- Joel
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I consider anything that is guaranteed not to lose principal to be cash or a cash-equivalent account.

It also has to be guaranteed to be accessible on a "moment's" notice! That's why we generally divide our "cash" into portions:

* that which is immediately accessible (in a drawer at home let's say)
* that which can be accessible in usual circumstances in a few hours (ATM)
* that which can be accessible in a day or two or three (bank teller)
* that which can be accessible in a week or so (brokerage cash account)
* that which can be accessible by the beginning of next month (I-bonds after first year, etc)
* and then the various classes of short-term instruments (30-day treasury, I-bonds during first year, etc)

Then there is a class of instruments that need to be sold to access them (short-term bonds, I-bonds, etc)
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