401k allocation
My 401k balance is at an all-time high and I would say my risk tolerance level has not changed. I’m about ten years from retirement. My current allocation is 37% growth funds, 28% growth and income funds and 35% bond funds. If Biden is elected and the Senate flips (which is what I anticipate), I believe corporate tax rates will rise and regulations will tighten which will put pressure on the stock market to drop.
With that said and uncertainties related to Covid, do you think it makes sense to change my allocation prior to the election to put more in bond funds? Historically, I have just put in my contributions and ignored fluctuations in the market figuring that over the long haul, I would make money regardless of short-term changes in the market. Thank you for the opportunity to ask this question.
Terry Says
First of all, you can lose as much in bond funds as you can in stock funds! This is not because companies default. You can solve that paroblem by only buying high-quality bonds.
BUT, when interest rates rise, bond prices FALL. That’s true of all bonds. (Search my columns for “Beware of Bonds”.) And rates are likely to go MUCH higher at some point. That will cause bond prices to fall in general. So don’t think you can hide in bonds. When it comes time to take distributions you could be selling older, low-yielding bonds at a loss.
And let me give you some perspective on stocks. There has never been a 20-year period where you would have lost money in a diversified portfolio of large-company American stocks with dividends reinvested. Even adjusted for inflation. That goes back to 1926. A pretty good track record! So since you are 10 years from retirement, and have many years (hopefully) to live IN retirement, I’d say stick with your plan. Just don’t “chicken out” when it gets scary!!
