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Retirement Planning – Reallocating Bond Funds

Q: I am 66, retired (although I work part time form home for a small non-profit. I have my IRA invested in Vanguard VSMCX with the breakdown 40% bonds, 27% large US stocks 15% medium/small US stocks, and 18% international stocks. I keep hearing Wes Moss give advice about needing to look at your bond funds to see if they should be reallocated. Do you have some specific direction in this case?

 

A: When Wes talks about reallocating bond funds, he is talking about shortening your bond fund durations. Bonds are interest rate sensitive. As interest rates go up, bond prices go down and vice versa. The longer duration bonds (5 to 10 years) are more price sensitive to interest rate changes than shorter duration bonds (1 to 5 years).

 

We expect interest rates to slowly rise over the next 9 months. Accordingly, if you have bonds allocated in a shorter duration, their pricing will not be as negatively impacted as longer duration bonds.

 

So when Wes speaks of whether your should reallocate your bonds, he is talking about shifting your portfolio from long term bonds to short term bonds during a rising interest rate environment.  


 

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