A long-term problem: Too much in cash and bonds

Q: At age 60, I now have 13 years of living expenses in cash and bonds, about half of my portfolio. If I add expected Social Security income, it rises to 15 years. As the stock market climbs, I sell stock, adding it to the cash and bond pile. If I don't, my risk goes up. But if I do, I have a lot of long-term money in cash and bonds. Can one overdo the bond thing?
R.D., via e-mail

A: Yes, you can overdo the "bond thing" and it could be dangerous to do so, says Eric Hutchinson, a certified financial planner in Little Rock, Ark.

Here's why: The general role that fixed-income investments such as cash and bonds play in a portfolio is to produce income and preserve capital. But they do not grow in value.

The role stocks play is to grow in value over time. In order to offset the loss of purchasing power due to inflation, most people need some growth in their overall asset allocation picture and will continue to need it for most of their lifetime, Mr. Hutchinson says.

Since you probably have many years ahead of you, a longer outlook may be necessary. Bottom line? Even though some view the stock market as risky, it is still one of the best growth vehicles for most investors.

Hutchinson recommends that you hold steady at 50 percent stocks and 50 percent bonds and cash. Managed properly, you stand a good chance of having enough to meet your living expenses indefinitely, he says.

Q: How is the base rate figured on the Series I US Savings Bond?
J.F., via e-mail

A: These government securities pay an interest rate that combines a base rate, which is fixed for the life of the bond at issue, and the inflation rate, which is adjusted every six months.

Since all I bonds pay the same inflation component, what makes one I bond better than another is the fixed base rate, says Tom Adams, editor of www.savings-bond-advisor.com.

Depending on when they were issued, base rates on I bonds vary from 1.0 percent to 3.6 percent. I bonds issued from May through October this year will have a base rate of 1.4 percent, which is the highest the rate has been in the past three years.

The US Treasury sets the I bond's fixed base-rate "administratively," not by a specific, public formula. He points out that the Treasury is obligated to borrow from the public as cheaply as it can. When the I bond inflation component is high, the Treasury can offer a low fixed base-rate and still meet its financial goals because most I bond investors make the mistake of looking only at the I bond's total rate when deciding where to invest.

For example, according to the Treasury's Bureau of Public Debt, from November 2005 though April 2006, when the I bond composite rate was 6.73 percent but the base rate was only 1.0 percent, investors poured an average of $896 million a month into I bonds. In May, when the composite rate was just 2.41 percent, only $252 million was invested in I bonds, even though they had a base rate of 1.4 percent – 40 percent higher than before.