Would adding a bond fund help stabilize a Roth IRA that mainly holds a Target-Date Fund?

Question

I've asked something similar to this in the past but that was mainly if it was a good idea to have an additional fund along side a Target-Date Fund in a Roth IRA. The answer I believe was yes since even though target-date funds are diversified they are still heavily focused on domestic funds and one would be helped by exploring more international stock. For the time being I'll focus on the target-date fund (2050). Still while I know it's a long term investment that I keep adding to with the way things are now in the market I can't help but wondering about something.

Would adding a Bond Fund help stabilize or offset the loses one will get a little?

What I mean is having a Target-Date fund and a Bond Fund. Currently I'm putting in $150 each month (will go up over time of course) for the Target-Date Fund (TRRMX at T.Rowe Price). I'd be willing to up that to $200 by adding $50 for a bond fund. Could that help lessen the overall drop of the IRA's value?

Thanks.

Answer 1

You are partially defeating the intent of the target-date fund by doing that.  You could get the same outcome by switching to a nearer-term target date.  Remember that your "losses" are only on paper due to the current recession, but your investment is long term - decades in the future.

Answer 2

It all depends when you plan to retire. If your target is more than 15 years away, then the anwser is NO. Time in the market always beats bonds. Look at history, if you bought at the top of the market in 2001, while the Dow was at 11,500 and then the Dow dropped in one year to 7,100 you would be down a lot, but by 2007 the Dow was back up over 11,500 and in 2008 went to 13,000. Time is your friend, and overall you will do better in Stocks. As you get closer to retirement age, then you want to protect some of your money with a bond fund. Any questions, feel free to email me.

Answer 3

Adding a bond fund to your Roth IRA would help lessen the overall drop in your IRA value in a bear market.  It would also help lessen the growth during a bull market.  

Currently that fund (which is meant for someone who plans on retiring in over 40 years) has about 10% in bonds and cash.  If you plan on retiring in 40 years then I have to assume you are probably younger than 30.  The point I'm getting to is that you have such a long time horizon that you can afford to be more aggressive with you investments because you have more time for it to pay off.

My suggestion is that you continue contributing to the Target-Date fund.  Right now the stock market is on sale and any fund investing in stocks has the opportunity to buy shares much cheaper than before which means the potential for much higher returns.

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Answer 4

Feeling Mutual is wrong.  T. Rowe Price does NOT add a management fee on top of the fees of the funds invested in.  Fidelity does though.

Since you still have a long way to go until you retire, you want the target date fund to stay low priced now.  While buying shares "on sale" you get more shares for your dollars.  So let the value drop for now.

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Answer 6

Bond funds normally are FIXED INCOME, but low growth. Too often they do not beat inflation.

What I do, is put 20% into Bonds, 20% into large company stocks, regularly so that they dollar cost average.

When Stocks go exceptionally high, I sell the gains on the stocks, and put it into bonds to lock in my gains.

When Stocks go exceptionally low, I sell the gains on the bonds, and buy stocks.

I don't use "Target-Date" Funds, because they combine other funds, and it is extremely VAGUE about the "management fees". Your target date fund has a fee, but it buys other mutual funds, which have fees. So you are paying managment and other fees twice? No thank you...

Answer 7

I looked up the asset structure on Morningstar, the fund already holds 7-8 percent in bonds.  It is an aggressive asset mix.  The addition of more bonds, given the current very low yield environment, if the bonds were short term, would reduce volatility and return.  So imagine that TRRMX will get you 8% over time, which is a very reasonable belief and a bond fund will get you 2% and say you make the mix 25% bonds, then you are looking at dropping return to about 6%.  Over forty years a loss of 2% per year is a huge loss of future value, whether you would make it up in stability is uncertain.  If you are worried about volatility of the target asset in 2050 then holding bonds makes no sense at all.  If you are worried about the volatility today, but do not care what it is worth in 2050 then buy bonds.