401 investing - Bond Funds in Inflationary Times ???

Question

Right now I have a mix of various Stock funds.

What I do not have is any Bonds right now.

The question I have is if I feel that we are headed into Inflationary times And I think interest rates are headed up, is this the time to move some $$$ into bonds?

I know that bonds decrease in value as yields go up. I also know that the Fed could fight inflation by raising interest rates.

If I buy into funds now, would I expect the share values to DECREASE if interest rates rise?

Thanks for your opinions.

Answer 1

How many years until retirement?

Which bond funds?

These questions matter more than a straight yes/no on your other questions...to which my answers are:

No.

Yes.

Direct ownership of TIPS Bonds might be worth some consideration, if offered in your plan.

A good, low cost money market plan (Vanguard Prime Money Fund being the model) is a necessary component of all good 401(k) plans.  If over 29 y/o and under 60, all things being equal, a 5%-10% allocation to a solid money fund may be all the exposure to non equity investments you need.

Answer 2

A retirement account should always have some fixed income component.  Take a look at the asset allocations of the various target retirement date mutual funds.  That will give you an idea of what they consider a good mix.

Answer 3

There is one bond fund specifically that might increase in value as inflation rises.  TIP  It is an index fund that invests in inflation protected government bonds. There are others of the same nature but this one is the most well known.  In general though inflationary times are not at all good for bond funds and yes the share value will decrease as interest rates rise.

Answer 4

It's usually good to have some amount of bonds in your asset mix.  (The usual recommendation is from 0% for the very young to more and more as you get closer to retirement age.)  

However, now is probably not the best time to start.   Typically bonds lose value as interest rates increase, which will probably start happening relatively soon (maybe).

However, if you do want some bonds, if you have a choice of a short-duration bond fund, they will be considerably less affected by the general interest rate climate.  In the prospectus for the bond fund[s] it will describe the typical or average duration of bonds held.

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P.S. FBIDX is an intermediate-term fund at 4.4 years mean duration.   LSBDX is a little harder to categorize, since they have such a wide spread of bond investments, but has a longer duration (7 years).   I'd just wait before investing in bonds if I were you, but later on (perhaps next year) there won't be anything wrong with investing in either.