Andrew: ‘I am 36, self-employed and currently have all of my retirement money (approximately $70,000) in domestic stocks. I know that I need to diversify into bonds (probably 10-15% of my overall holdings), yet I’m concerned that the bond market is too high. So, the question is whether I should take the plunge into bonds now, put more of my retirement money into stocks, or park it in cash until the bond market cools off? Which principle rules: diversification or ‘buy low/sell high?”

☞ The only long-term bonds I’d buy at today’s low interest rates are TIPS – Treasury Inflation Protected Securities. First recommended here May 12, 2000, when they were yielding 4.25% above inflation, they now yield what is still a pretty respectable 3% above inflation. The issue I own, the ‘3.375% bonds maturing April 15, 2032,’ are offered at around 111 — $1,110 for each bond. Although I was a lot happier paying $990 for these bonds a year ago than I would be paying $1,110 for them today, I would still consider them.

Why? Because I’m not sure we can expect the US stock market to outpace inflation by a lot more than 3% for the next few years. So a more or less certain 3% above inflation might be a place for even a bit more than 10%-15% of your portfolio, at least until such time as stocks became so cheap (which they may or may not do) that the potential rewards are greater.

That said, you are 36. If you keep investing in the market, even if it goes a lot lower, as it well might (or well might not), over the very long run you should do fine.

THAT said, remember that we have a lot of baby boomers approaching retirement age. If 20 and 30 and 40 years from now they have become a drag on the market, withdrawing more from it than they put in, to supplement their Social Security income, well, this is a broad demographic dynamic that can’t be ignored.

I like to think that dazzling technological advance, with the stunning increase in productivity that could accompany it . . . not to mention world peace and a gigantic young middle class in China and India eagerly buying shares that our baby boomers are selling . . . will make for a bright future. But it’s not a sure thing.

One more note on diversification: Remember that there are economies outside the US. At some point, you might consider adding an international index fund to your mix.

(And one more note about TIPS: They are best within the shelter of a retirement account. That’s because outside, both the semi-annual interest you receive and the inflation factor that you don’t receive are taxable as income.)

Finally, note two additional options for some of your money: cash, or cash equivalents like short term Treasury bills (because even at 36, not every cent must be fully invested and exposed to risk at all times); high-yielding stocks like the ones I suggested November 25.

Have a great weekend.


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