Bonds Don’t Have Enough Juice for My 401k

Generic financial advice would advise someone of my age (39) to have between 20-30% of my 401k in boring bonds, fortunately I don’t follow generic advice from cookie cutter financial advisers. Approximately two weeks ago I dumped my position in iShares Core US Aggregate Bonds (AGG) from my 401k. The position represented less than 2% of my portfolio so it really wan’t a very significant move. Although the position was tiny, removing it represents something much larger for me: My first step in rejecting traditional orthodoxy of long term buy and hold and generic diversification portfolio strategies.

Over the year that I held the AGG position I made an 0.8% total return. At this rate of return it would take 88 years to double the investment. However we know no one buys bonds expecting them to double in value like a stock. You add bonds to your portfolio for the stable value and consistent dividend returns. AGG yielded me a near 2% annual dividend and provided stable value with only 5.5% price range fluctuation for the year. This represents a safe and ultra conservative investment approach, not a strategy for growth.

The cash liquidated from AGG I flipped into Fidelity’s Select Technology (FSPTX) to take advantage of the continued red hot streak in tech stocks. In less than 2 weeks FSPTX is up 3.3% (as of 6/5/2017). So one year yields 0.8% total return and two weeks yields 3.3% return…I don’t think I need any more proof that I’ve made the right decision.

I’m well aware this is an aggressive strategy, in six months (or six hours) tech could easily be down 10% while AGG will mostly keep chugging along with a stable price and a steady 2% yield. Over the long term, the next 5 years, 10 years, 20 years my bet is the tech sector of the economy will yield far greater returns than bonds. Since I want and need my money to grow I’ll accept the greater volatility and risk that comes with 100% stock allocation.

It’s also important to mention my flexibility, if FSPTX hits a wall and begins a long term break down (for example moving below its 200 day moving average) there is no reason I can’t move my money into a better performing sector of the market. This requires the discipline to consistently monitor the market, different market sectors and my investment performance. I’m up for the challenge and hopefully you are too.


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