I'm a 73-year-old retiree with a 50/50 portfolio whose bonds are doing terribly! Should I sell?

MW I'm a 73-year-old retiree with a 50/50 portfolio whose bonds are doing terribly! Should I sell?

By Beth Pinsker

Diversification can be frustrating, but it's still necessary

Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line.

Dear Fix My Portfolio,

I'm 73 and have a 50/50 portfolio. I set up my asset allocation nine years ago based on funds that were recommended to me. The bond funds have been terrible! They are dragging down my holding-period return. Except for some minor gains on one of the bond funds, the others are all underwater. Should I sell all of them, and if so, what do I replace them with? I have $425,000 total investing in bonds in BNDX BNDX (Vanguard Total International Bond ETF), VFIDX VFIDX (Vanguard Intermediate-Term Investment-Grade Fund), BND BND (Vanguard Total Bond Market ETF), VFSUX VFSUX (Vanguard Short-Term Investment-Grade Fund), and VBTLX VBTLX (Vanguard Total Bond Market Index Fund).

Unbonded

Dear Unbonded,

I get that you have buyer's remorse on your bonds. It has been a tough road the past couple of years, especially in 2022, which is still showing up in your three-year return calculations. But you need to hang in there, at least in some capacity.

You're already in a fairly aggressive stance for your age at a 50/50 portfolio. Most financial advisers would probably be easing you toward an even higher fixed-income ratio as you age - up to 60% or maybe even 70%. Some of your age cohort even go safer than bond funds, to money markets and CDs while rates are high, or inflation-protected Treasury investments like TIPS.

Maybe it would help if you compared your bond returns to cash rather than to stocks, because your yield should be at least as high or higher than most high-yield savings accounts. It could shift your mindset from bond regret to bond enthusiasm.

Look at total return

The first thing to consider to shift your thinking is: When you say your bond funds are underwater, are you looking at total return? Or are you just looking at the summary page at your brokerage account and seeing red numbers for your bonds and green numbers, mostly, for your equity holdings? It's easy to get what's called "S&P envy" when you do that. Try going over a couple of tabs and look at your activity and see what your yield was, and how it's being reinvested. You can also click on each fund and get more detailed information.

When you see that you've been earning income all this time and not just losing ground on the bond-fund price, you might be happier. This is one way to remind yourself why you're invested in bonds in the first place: to provide income and protect your principal from the ups and downs of the stock market. You're retired now. You need to generate cash for your living expenses, and that's where the bonds come in. If you had to sell stock in order to withdraw the money you need, and your investments were down at that moment, you'd be locking in losses. "Regrounding in these purposes may help alleviate concerns about current performance," said Roger Ma, a financial planner at Lifelaidout and author of "Work Your Money, Not Your Life."

Reconsider your funds

If you're sure it's your particular bond funds that are causing the problem, you can look around for better options. You have your money now split up among five funds all from the same company, some ETFs and some mutual funds. That can be a bit duplicative.

Ma points out that you have both the mutual fund (VBTLX) and ETF $(BND)$ versions of the Vanguard U.S. bond fund. "If simplification and cost-saving are goals, a tax-free conversion from VBTLX to BND could streamline the portfolio and reduce the expense ratio by 0.02%," he said.

You can also shift some of your allocation to bond funds at other companies, invest directly in corporate or Treasury bonds, buy TIPS, or have other types of fixed-income like CDs and money markets. You can decide that international bonds aren't what you want right now, especially long-term ones, and shift that part of your portfolio to another choice. "A detailed review of each bond type in the portfolio can provide clarity," Ma said.

Whatever you choose to do, don't just abandon bonds for a riskier portfolio of just equities, and at the same time, don't just cash out and hide your money under a mattress. This is more about your mindset than "bad picks," so spend some time thinking about your choices and digging into the details before you make any moves.

You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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-Beth Pinsker

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November 15, 2024 16:05 ET (21:05 GMT)

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