Should I have a bond fund and/or stable value fund in my retirement portfolio at age 23?

Question

I'm 23 right now, with at least 35 more working years until I retire. My job has a pretty good 401k plan, and I've done a lot of research on the various mutual funds. My question is, should I include a bond fund as part of my portfolio being as young as I am?

I read that in the recession of 2001-2002, people with all their money in equities lost 30% of their portfolio.

Should I safeguard myself against those losses by putting some of my money in a bond fund or stable value fund, or would I be better off sticking with dollar-cost-averaging and keeping all my money in mutual funds for the time being, just sticking it out through the bear markets?

Answer 1

Hi,

You are too young to be investing in bonds. Put your money in growth stocks and do not worry about what happened in 2001-2002. Most of the people who lost money were in dot com internet stocks and they lost it all. The people who were in good growth stocks with good earnings saw their stocks go down, but not a lot and in a year they were back up and over what they had been.

Listen to Warren Buffet. He pays no attention to what is happening in the market - he just finds good value stocks and sticks with them.

The best software is Vector Vest if you can afford it.

Here is a free Web site for charting stocks: (http://www.incrediblecharts.com/).

First of all, stay away from "professional brokers" and tips coming to you via e-mail or friends and acquaintances.

Hey! They will say anything to get you to buy their junk. If it's too good to be true, it is.

Remember this, they are just sales people trying to sell you what their firm is pushing. They are not security analysts or financial planners, not even financial advisers. Trust me, I know from experience that they cannot be trusted especially with a million dollars. You risk losing it all. A million dollar account is known as a "whale" and they would love to get their greedy little paws on it and suck it dry. They just want to make commissions on what they buy and sell for the suckers, err...clients..

Risk avoidance is the name of the game.

Remember, the harder I work, the luckier I get.

Penny stocks are great and speculative, but I would avoid the ones under a dollar a share. For example, Best Buy started at less than $5. So there are some good companies, but it takes a lot of digging to find the good ones. You are looking for companies with good earnings, little debt, low capitalization, and good P/Es. For stocks under $5, very few will meet these requirements.

Stay away from the pharms unless they have patented drugs - do not invest in generic pharms, no growth there.

Check out which business sectors are the most popular and invest in the companies in those sectors. The number one, two and three are: technology, health care, and cyclicals (retail). These change every few months.

Watch CNBC, but don't pay too much attention to the talking heads, except for Jim Cramer, the wild man - but he tries to teach you how to invest and has some great advice.

Get Jim Cramer's Real Money: Sane Investing in an Insane World by James J. Cramer

Listen to Jim Cramer on CNBC.com

Go to Clearstation for quotes and tutorials on investing at (http://clearstation.etrade.com/). Sign up is free. Look up a few stocks. Do their tutorials.

Get this book: Value Investing: From Graham to Buffett and Beyond (Wiley Finance) by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, and Michael van Biema.

Another good book: The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of (Motley Fool) by David Gardner, Tom Gardner, and Selena Maranjian

Jim Cramer's Mad Money: Watch TV, Get Rich by James J. Cramer and Cliff Mason

I Want to Make Money in the Stock Market: Learn to Begin Investing Without Losing Your Life Savings! by Chris M. Hart\

Sensible Stock Investing: How to Pick, Value, and Manage Stocks by David P. Van Knapp

Stock Investing For Dummies (For Dummies (Business & Personal Finance)) by Paul Mladjenovic

All About Stock Market Strategies : The Easy Way To Get Started by David Brown and Kassandra Bentley

The Motley Fool Investment Guide and their Web site (http://www.fool.com/).

The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks by Dan Holtzclaw

How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition by William J. O'Neil

Trading for a Living: Psychology, Trading Tactics, Money Management by Alexander Elder

Big Trends in Trading: Strategies to Master Major Market Moves (A Marketplace Book) by Price Headley

Extraordinary Popular Delusions & the Madness of Crowds (Paperback)
by Charles Mackay (Author), Andrew Tobias (Foreword) This book talks about the Tulip craze in Holland where people would mortgage their homes to buy Tulip bulbs. Same thing happened in 2001 - 2002 with the Internet bubble that brought the stock market to its knees. The dot com companies were the Tulip bulbs.

Buy Investors Business Daily. It has lots of tutorials and I like it better than the stodgy Wall St Journal.

Money Game by Adam Smith

Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics) (Hardcover)
by Philip A. Fisher. Recommended by Warren Buffet who took $100,000 and grew it to $34 billion!

Value Investing with the Masters by Kirk Kazanjian

Valuegrowth Investing by Glen Arnold

The 5 Keys to Value Investing by J. Dennis Jean-Jacques

The Intelligent Investor Rev Ed. (Collins Business Essentials) by Benjamin Graham. Warren Buffet was his student at Columbia.

The Money Masters by John Train

The Bogleheads' Guide to Investing by Taylor Larimore

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle

Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics by Gary Belsky

Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! by Phil Town . See his Web site at (http://www.ruleoneinvestor.com/). Free sign-up. I got the book at the library.

Listen. You don't have to spend a lot of money on these books - most can be found at your library and those that your library doesn't have they can usually get from other libraries in your state.

Most of these books talk about stock and mutual fund investing, but for a good introduction to other forms of investing Gerald Appel has a great book called Opportunity Investing - How to Profit When Stock Advance, Stocks decline, Inflation Run Rampant, Prices fall, Oil Prices Hit the Roof and Every Time In Between.

First, Break All the Rules: What the World's Greatest Managers Do Differently by Marcus Buckingham and Curt Coffman Not a book on investing, but it's a nice segue into the next book.

Now, Discover Your Strengths by Marcus Buckingham and Donald O. Clifton

Go Put Your Strengths to Work: 6 Powerful Steps to Achieve Outstanding Performance by Marcus Buckingham

Finding your strengths is important when investing. These books teach you to build on your strengths, what you a good at. Everyone is good or passionate about something. Why not get better at what you are good at?

Another good book is: Opportunity Investing: How To Profit When Stocks Advance, Stocks Decline, Inflation Runs Rampant, Prices Fall, Oil Prices Hit the Roof, ... and Every Time in Between (Hardcover)
by Gerald Appel

Most mutual funds do not even keep up the the return on the S&P. That's like 99% of them.

Vanguard Index funds are a no brainer.

A CD is better than a savings account. They range from six months to several years. You cannot touch your money tho until the time limit is up.

Check out this Web site on Direct Investment Plans where you can buy shares directly from companies: (http://www.fool.com/School/DRIPs.htm). Usually no fees and you can buy one share at a time.

Bonds are probably the safest. You might try a bond fund. They might return 5 or 6 percent. At 5% a million would return $50,000 a year - not a bad income. Remember, you have to pay taxes on the $50,000.

There are also municipal bonds and the income from them is taxfree especially if you buy them in a state that offers them, but they only pay about 3%, but it's mostly taxfree.

Kindest Personal Regards,

Walt Brown
Site Build It Certified Webmaster
[e-mail]

P.S. This is a life-long learning process. Reading these books and applying the rules to analyzing stocks that may be good It takes time. Be patient and keep reading and listening.

P.P.S. Internet has lots of good stuff, for example (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve
Stockcharts.com is very good and their discussion of MACD is one of the best, barring its originator, Gerald Apple, but now we are getting into Technical Analysis and that is not for beginners.

Answer 2

Bonds do not typically yield as much as stocks. Many financial ad visors say you should be aggressive when your young because you have so much time to make up for any loses. In this current market, bonds may better than some of the mutual finds, but being the same age as you, I would say to be aggressive still. Maybe move some money into foreign mutual funds. Or, if you think the market is still going to go down, invest in a short sell mutual fund (they bet against the market) that could hedge some of your risk.

Many people our age keep 100% of their investments in stocks, I think in the long run, at least until you are about 30, that it is alright to be heavily weighted in stocks (90-100%)

Answer 3

You are too young for a bond or stable value fund in your retirement portfolio. But you should have a stable value fund (money market or bank savings account) in a readily available to use an an "emergency fund." And a bond fund can be used to build up a payment for something you need (condo, house, car, wedding) in 5 or 10 years.

Answer 4

You should always have some money in either a bond and/or stable value fund. At your age, perhaps only 5% to 10%. Increase this perhaps 1% or 2% per year.

Answer 5

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Answer 6

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Answer 7

Here is one thing to keep in mind about the Roth IRA account. There is never any tax on it where as there is on your 401k. This becomes important when considering your asset mix. Income producing investments are taxed at the full tax rate as will be your 401k. Hence it makes sense to invest at least some of your 401k in income producing assets--bonds, LPs, REITs. The income from each of those is taxed at the full tax rate anyway. Now since the Roth IRA is never taxed, it also makes sense to put those types of assets into the Roth IRA also. And also equity investments. What you neglected to mention are investments outside of these two vehicles. If you have some, they should be investments that would be taxed at the capital gains rate--equity investments. Actually, unless you are in the highest tax bracket it makes sense to have a portion of your equity investments outside of a 401k. By doing so your total tax bill will be decreased, especially if you are a long term investor. If you have the least hankering to invest some of your money in gold and silver those absolutely should be within a Roth IRA. Both are taxed as collectibles otherwise. Another thing to consider in regard to the 401k is that in future years the tax rate might actually be higher, perhaps much higher, than it currently is. Since you really have no choice of placing non-mutual fund investments within a 401k except for perhaps company stock, it certainly does make sense to invest Roth IRA money in company stocks rather than mutual funds. But be careful. It is very tempting for many to speculate with their Roth IRA account especially short term trading which otherwise would be taxed at the full tax rate. That would be a good way to reduce that value of the Roth account. Be just a little cautious. Invest in the likes of MCD, WMT, JNJ, BDX, KO, etc. Or maybe ETP with its 8% dividend or PAA with its 7.5% dividend. And do not invest it in fewer than 5 different companies.

Answer 8

Not at your age. You can afford 100% stocks as you have plenty of time to make up any short term falls. In fact, even if they do have a big drop, it's probably no more of a loss than the 5-10% less your bonds will be making per year. Just make sure you properly diversify, including a good chunk of internationals.