Disclaimer: This is not financial advice, I just spend some time thinking about this so I thought I’d share it with my friends. I’m just getting sick and tired of the stock market not building my retirement the way “it is supposed to”. Do not sue me – I am not telling anyone what to do. Also, I have money in all the funds mentioned below.
So when I compare VIPSX (Vanguard inflation protected) and PTRAX (Pimco funds total return) , two bond income funds I can pick in my 401k vs. about any stock fund, its amazing. (Note you have to add the yield/dividends – a regular stock graph doesn’t show true gain)
The bond funds don’t have the crazy rises or the crazy drops as you’d expect. They just pump out 7-8% a year, every year without wild gyrations. (Source: Fidelity)
Here are some stock funds:
The Fidelity 2040 fund has a lifetime (from 2000) of 0.56% average annual total return, 5 year: -0.76%
Even though Fidelity Diversified Intl has a lifetime (from 1991) of 7.95%, it has a 1 year of -13.78% and a 5 year of -4.55%. (annualized!)
Vanugard Institutional Index: 8.34% lifetime (from 1990), 5 year: -0.22%, 1 year: 2.09%.
The 5 year stats are punishing here.
The stock funds are rollercoasters that have major implications if you have any significant money coming in or out at one time (pick the wrong day and it could be years before you see a gain).
The bond funds eliminate risk and provide pretty much the same returns, if not better, or much better!
Bond fund returns:
VIPSX: 1 year: 13.24%, 3 year: 10.03%, 5 year: 7.63%, Lifetime: 7.57%
PTRAX: 1 year: 3.91%, 3 year: 8.6%, 5 year: 7.82%, Life: 7.31% (from 1994)
You can never buy at a wrong time. Yes, there’s dollar cost averaging going on to mitigate the stocks, but still, its so wild….
The lifetime stats are awkward since every fund was born on a different day. However, the 1/3/5/10 year stats are fair game.
So I moved a lot of money into bond funds last August. I shifted some back to stocks but now that things have recovered a bit from last August, I think I might move more into bonds. Selling at the bottom is bad too but I’ll never pick the peak. This is surely not a bottom (last August was much lower) and probably not a peak.
It might be hard in the short term to see the stock market jump 10-20%, but year over year, 7.5% is going to trump it. The market can tank 5+% in a single day.
I snapshot my retirement funds every 1-3 months. I’m not making 7.5% or even close. Basically my annual ROI over the last 5-10 years is somewhere around -2% to 2% (its hard to tell since I don’t break out my contributions)…I can run reports but our money is spread out in 5 locations. Some of my “original” money from 1998 was so depressing – totally lost money over 12 years and cashed it out. All stock funds. Had I invested in bond funds, with compounding, that money would have doubled. Instead it was negative. -10% vs. 100% return.
The stock market is so manipulated and random, it just doesn’t work well anymore.
I’m just thinking, in the next 20 years, with a 7% return, every $1 I have now will be worth $3.86. My current money will almost quadruple, practically guaranteed. At 8%, it will be $4.66, more than quadrupled. Are we looking at Dow 50,000 in 2032. I’m not feeling it.
Of course, you don’t have to dive into bonds 100%, but I’m thinking 75/25 or 80/20 bond/stock split. If I’m wrong and the market outperforms bonds, fine. And of course as you get closer to retirement those 20XX funds or you yourself should go more and more bonds anyway to avoid a market crash dictating your retirement…
Just thought I’d share my train of thought. Or maybe I’m just trying to convince myself this is the right thing to do!