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Do Bond Funds Have A Place In Your Portfolio?

Bozo
  |     |   1,375 posts since 2011

For many folks, contributions to 401K accounts are about as good as it gets. Periodic contributions, perhaps an employer match, what's not to like? Well, for one thing, the fact that many 401K plans offer only bond funds as a fixed-income alternative. Stable-value funds, long an option in 401K plans, seem to be disappearing right and left.

Contributors to 401k plans are thus left with a question. Should I just choose a bond fund for my fixed-income allocation, or choose something else?

In a rising-rate environment, bond funds will suffer. As rates rise, the NAVs on intermediate-term bond funds will under-perform, especially when compared to equivalent ladders of 5-year CDs.

Contributors to 401Ks need to explore their options. For some, an in-service transfer from a 401K might be possible.

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Ally6770
  |     |   4,307 posts since 2010
Would never purchase a bond fund. If you want a bond get only a high paying one and hope to make a profit as the rates go lower. Otherwise stay with CD's. So far they have always worked out for our family.
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Bozo
  |     |   1,375 posts since 2011
Ally6770, regrettably (as I noted), many folks enrolled in 401K plans have few options. The reason I suggested the in-service transfer is that some (not all) 401K plans allow in-service transfers of total or partial 401K balances at a certain age (59 1/2, I believe). Moving right along, if the 401K allows such an in-service transfer, it might be possible to cherry-pick the bond fund component of a 401K, and transfer that to an IRA CD ladder. While complicated, it might be better than being stuck with a bond fund in a 401K until you retire.

In a nutshell, in a rising-rate environment, laddered IRA CDs are good. Bond funds, not good.
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