Hi everyone!
I'm 19 and currently trying to construct my optimal portfolio. I currently have 100% equities in my retirement accounts, and don't plan to revisit that until I am >40. However, I want to put some bonds into my taxable account. This is because my taxable account is for unknown goals that may not be as far away as retirement - maybe early retirement, a business, a house, or a car; therefore, I need more stability than 100% equities can provide.
I'm trying to decide what types of bonds to put in my taxable account, and while the common recommendation around here is a bond fund like BND, it seems to me that this wouldn't work in a taxable account. My argument goes like this: I want a bond ladder, and while many say a bond fund could replicate a bond ladder with more convenience, this only seems true in a tax-advantaged account. With a bond ladder of, say, 6 years, if at any time I realize I need the money in 6 years (ex: I'm 30 and want to buy a house at 36), I can stop buying bonds, hit the brakes, and have all my principal and coupons in 6 years. However, with a bond fund with an average maturity of 6 years, there is no guarantee that I would have my money 6 years from now and no mechanism for hitting the brakes in the same way. The only way to hit the brakes would be to sell the bond fund and immediately buy a target-date maturity bond fund 6 years from now, but since this would create a taxable event, this is not a viable strategy in a taxable account. Therefore, in a taxable account, bond ladders work like bond funds, but with more liquidity/flexibility. In a tax-advantaged account, then yes, it seems like a bond fund is just a convenient way to set up a bond ladder.
Am I understanding correctly, and is my argument valid justification for why bond funds only make sense for retirement? If so, should my taxable bond allocation be limited to treasuries/I-Bonds as I don't want to build a corporate bond ladder (too complicated with default risk & state taxes)? Thank you!
I'm 19 and currently trying to construct my optimal portfolio. I currently have 100% equities in my retirement accounts, and don't plan to revisit that until I am >40. However, I want to put some bonds into my taxable account. This is because my taxable account is for unknown goals that may not be as far away as retirement - maybe early retirement, a business, a house, or a car; therefore, I need more stability than 100% equities can provide.
I'm trying to decide what types of bonds to put in my taxable account, and while the common recommendation around here is a bond fund like BND, it seems to me that this wouldn't work in a taxable account. My argument goes like this: I want a bond ladder, and while many say a bond fund could replicate a bond ladder with more convenience, this only seems true in a tax-advantaged account. With a bond ladder of, say, 6 years, if at any time I realize I need the money in 6 years (ex: I'm 30 and want to buy a house at 36), I can stop buying bonds, hit the brakes, and have all my principal and coupons in 6 years. However, with a bond fund with an average maturity of 6 years, there is no guarantee that I would have my money 6 years from now and no mechanism for hitting the brakes in the same way. The only way to hit the brakes would be to sell the bond fund and immediately buy a target-date maturity bond fund 6 years from now, but since this would create a taxable event, this is not a viable strategy in a taxable account. Therefore, in a taxable account, bond ladders work like bond funds, but with more liquidity/flexibility. In a tax-advantaged account, then yes, it seems like a bond fund is just a convenient way to set up a bond ladder.
Am I understanding correctly, and is my argument valid justification for why bond funds only make sense for retirement? If so, should my taxable bond allocation be limited to treasuries/I-Bonds as I don't want to build a corporate bond ladder (too complicated with default risk & state taxes)? Thank you!
Statistics: Posted by SuddenlyCoding — Fri Aug 23, 2024 10:09 am — Replies 2 — Views 376