Should a Retiree Own Bonds?

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If you believe in Modern Portfolio Theory then you probably have 40% of your portfolio in bonds, bond ETFs or bond mutual funds.

I don't own any but have owned lots of different bond ETFs in the past.

I just don't see the case for fixed income products in a retiree's portfolio. I want my income to grow and don't want it fixed to a stagnant distribution rate.

Let's look at one of the biggest and most heavily promoted Bond ETFs on the planet. This is the one offered from ishares XBB. It holds 1,314 bonds.

Yield = 2.6%
MER - .10%
Distribution Per Share - 7 cents paid monthly

So after fees you are making 2.5% per year in income. Just above inflation but nonetheless above inflation. Here's exactly why I hate bonds for a retiree needing and relying on income to fund retirement.

The distributions are going down on an annual basis so we are losing income. Look at this 10 year period showing a loss of income of 44 cents per share. That's a huge loss. You would be forced to sell some of your units to make up for that income. The fund gained 6.8% in value last year while the distribution went down slightly.

2008  $1.32
2018 $0.88

You want a growing income in retirement and NOT a shrinking one.

Why Do People Own Bonds?

Just brainwashing and listening to too many bloggers, planners and analysts who adhere to MPT which focuses on asset allocation, diversification, rebalancing and other such financial jargon and twaddle.

You don't need bonds and they are a poor proxy for income in a retiree's portfolio.

So why?

It is a parachute to safety is how it is usually sold. Bonds are safe so keep 40% of your money in safe assets. 

But they're not safe and at present in one of the biggest bubbles in history. Even CNBC admitted as such today.

Bonds should never be bought for income so if you are retired like me shouldn't you own income producing assets? Yes you should is my answer. A retiree should be investing for income. My opinion.

Because of the inverse correlation to the market that bonds have, while the market rises the income yield on bonds goes in reverse. The price of the bond rises making a lower yield cost you more money.

I just hold income producing assets. Retirement is about cash flow and the future growth of that cash flow.

I don't worry about asset allocation, re-balancing or diversification. Check out the link below on more ideas to generate that retirement cash flow.


You Can Retire Sooner Than You Think

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