Ask Terry Questions Sold Bonds and Blended Funds — What now?

Sold Bonds and Blended Funds — What now?

By Terry Savage on March 26, 2020 | Investments

Based on your bond warning, I sold my investment grade bond fund and also liquidated my balanced funds at Vanguard (I put the equity percentage of the balanced funds into Total Stock market fund, so only the bond portion was essentially liquidated. I put all these bond funds in money market. Should I keep this money (60% of my portfolio) in money market, or is it safe to go back into balanced stock/bond mutual funds to get bond exposure? If so, should I avoid balanced funds with any BBB or below bond holdings? (I will adjust my Total Stock Market fund holding to keep overall equity exposure constant).

Terry Says

OK, you’re getting pretty specific here, which is not something I can do without knowing more about your situation.
So, in general, let me say this: When I issued my warning about bonds, it was over concern that many bond funds had some questionable bonds — with low ratings — inside them, thereby giving them higher yields and making them more attractive to investors.
Bond prices and bond fund prices had just started to fall, and many investors thought they could “hide” from market fluctuations inside a bond fund. In the next week, bond prices fell.

But now you’re asking a different question — about whether to get INTO a bond fund. The attraction is the slightly higher yield than money market funds or bank CDs. BUT, what will happen to those bonds in the future as we have yet to feel the full business impact of the economic shutdown? AND, what will happen to the value of the bond when (if) after creating all this liquidity, there is future inflation, pushing general interest rates higher. That’s also bad news for existing bonds and their prices. (Who will want an”old” 3% bond if new ones with similar ratings are sold yielding 5%?)

So those are two reasons to be careful in investing in bonds — two weeks ago, and now!
I don’t know how old you are, your time horizon, your entire financial plan. All that has to be considered in deciding how much, if any, of your portfolio belongs in the bond market! And similarly, how much of your portfolio belongs in stocks at this point.

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