Should I have bonds in my 401(k) portfolio as a 23 year old?

Question

I've heard several different recommendations on what my 401k allocations should be. I've got things pretty set, but I'm trying to decide whether or not I should have bonds in my account. I'm 23 right now, so I know I have some time to be aggressive before I need to start worrying about security.

What are your thoughts? Bonds or no bonds?

Answer 1

Bonds are good in two situations.

1) In times of recession. Because bond dividend rates are guaranteed regardless of the fluctuation of the trading value, they are secure in uncertain times. Not a bad plan in case of a sudden recession or stock market crash.

2) If you're close to retirement. Bonds are a very low-risk investment, making them ideal for people who expect to be drawing on their savings soon. Typically they will give you a little growth to offset inflation without putting your investments at risk.

At your age, I would recommend very little investment in bonds.

Answer 2

If you're buying "bonds" in a 401K then, you're really buying a bond fund. They are NOT the same thing. You CAN loose money in a bond fund because it is actively traded. Buying bonds is safe. Buying bond funds is risky and the up side is not great. Like others have side, you are too young to be really concerned about bonds. However, you should manage your accounts. Let say you buy 700 shares of an index fund. After 5 yrs, the fund goes up 50%. You should sell 200 shares of this index fund and buy into a less risky fund like a money market. What I'm saying is you should from to time to time take money off the table. You would do the same in a private stock right? If your shares of GE went up 200%, it might be smart to sell a few. Because it's inside a 401K, you can't sell it for cash. A money market fund is the next best thing.

Answer 3

Bonds are generally thought of as "fixed" income instruments. You will only be paid the amount of interest specified. Bonds are usually good for older people looking for a stable return on investment. Younger people like yourself are better off with dollar cost averaging, higher risk/aggressive growth funds and the like. If you feel compelled to add bonds to your 401K portfolio then you might want to check into a bond fund.

Answer 4

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Answer 5

The rule of thumb in financial planning is that you should have about the same percentage of bonds in your portfoilio as your age. In your case 20-25 percent.

Answer 6

You've got it right, you're young enough to ignore them for awhile.
If anything maybe allocate 10% of your portfolio to your plan's " balanced" fund (every plan usually has one) it'll have just 20 or 30% in bonds. ( It can't hurt)