When should I change my asset allocation?
The process of selecting an asset allocation can be compared to the process a captain uses when setting out on a voyage - chart a course and only make significant deviations when there is an emergency.
You should stick to your allocation for a period of years, not months, and only make changes when absolutely necessary. You might need to change your allocation because of a life event change, or because your risk tolerance level changes, or because you need to rebalance.
The process of setting long-term asset allocations is called strategic asset allocation. It's built on the premise that an investor's asset allocation should be held constant for a minimum of five to seven years with subtle changes along the way to accommodate for market movements.
Can I lose money in a bond fund?
Yes. When interest rates go down, bond funds make money. When interest rates go up, bond funds lose money.
Example 1: Assume interest rates are at 6%. You decide to invest $1000 into a bond fund which is also returning 6%. Then because of growth in the economy interest rates rise to 8%. The bond fund you purchased is still returning 6% and you decide to sell (liquidate) your bond fund. However, at 6%, your bond fund is not as attractive to buyers, so you must sell it at $900 netting an investment loss in your bond fund.
Example 2: Assume that interest rates drop from 6% to 4%. Your bond fund is now more attractive to buyers and you could sell your $1000 bond fund for $1100 giving you a positive return on your investment.
As this illustrates, a bond fund can lose money, or make a profit just like stock funds. This is why it is important to keep your portfolio diversified.
What is the advantage to delaying retirement?
Assuming a normal retirement age of 65, let's say you put off retirement for three years, until you are 68. Even if you didn't save another dime toward retirement, your current portfolio compounded at 8% a year would give you and additional 26% at retirement. That three years then gives you time to pay off more debts.
The biggest benefit may come from these sources of income:
1) Social Security retirement benefits increase for every year you delay retiring and taking those benefits. Your monthly check could rise as much as 8%.2) Delaying the purchase of an immediate-fixed annuity. With this type of an annuity, you plunk down a chunk of cash and get a check every month, no matter how long you live. By delaying the purchase, you will receive a larger monthly cash flow.
3) Delaying retirement can also benefit you if you plan to take out a reverse mortgage. A reverse mortgage lets you tap into the equity of your home, without selling your house. The money you receive is paid back after you die and the sum cannot exceed your home's value.
