With these considerations in mind, it is worth thinking about your plan for fixed income assets. I find it ironic that this portion of assets, which is usually considered the "safest," tends to cause the most angst for a lot of investors. Simply, most investors don't feel comfortable with bonds. They struggle with the question of whether they should buy individual bonds or funds. They worry about the impact of rates going higher, and they just feel outright cheated when they contemplate the thought that they could have a negative return when they in effect are lending money to corporations or the government, etc.
The bottom line is that many investors are stymied with this part of their portfolio and, as a result, hold an excess in cash (at practically zero interest) or buy CDs which lock them in at low rates. Or they take up the laborious task of constructing a laddered portfolio of individual bonds.
I'm not in a position in this post to alleviate all of these concerns with fixed income assets, but I do think it adds perspective to look at a basic ETF bond allocation for the past few years to see one possibility in terms of allocating bond assets.
|Returns from iShares|
The right hand column shows the return on the portfolio with the weightings. In other words, with 50% allocated to the overall market in 2011 and 10% to the other sectors, the return would have been approximately 7.1%.
In normal times (with the 10-year Treasury yield at 5% -6% ), it would be sufficient to just hold the whole position, or at least most of it, in the AGG. But these aren't normal times - short-term yields are at historically low levels, and most observers see the possibility of a sharp rise in rates sometime in the next 5 years.
In any event, the results show that this simple construction provided exceptional returns - well in excess of what was available in cash and in CDs. In fact, retirees who achieved similar returns surely were well satisfied.
As always, the allocation for a specific individual will be somewhat different. The purpose here is just to bring out the actual performance results of a particular allocation that can easily be implemented. You can play with the returns in the table and add those of other sectors to calculate performance of allocations you would be comfortable with.
Disclosure: This information is for educational purposes only. I hold, and my clients hold, some of the ETFs mentioned. Individuals should do their own research or consult a professional to make investment decisions.