Dear Dr. Don,
I am 69 and retired. I have about 50% of my savings in short-term bond funds and inflation-protected funds. I recently moved out of intermediate bond funds into the short-term funds. I'm concerned about the much-discussed "bond bubble." What should I do? My other assets are invested in cash (40%) and stocks/mutual funds (10%). Am I on the right path, if protecting my assets is my goal?
-- George Guards

Dear George,
First recognize that protecting your investments against loss of principal is different from protecting the purchasing power of your investments. The inflation-protected investments are protecting you against a loss of purchasing power by paying part of its yield based on the inflation rate, typically measured by a change in the U.S. Consumer Price Index. You haven't provided a breakdown between the inflation-protected funds and short-term bond funds, so it's not clear what part of your portfolio is protected against inflation.

There can be price risk in these inflation-protected funds if investors start looking for higher real returns. That means they want the inflation protection plus a yield over and above the inflation component. Currently, the real yields on inflation-adjusted investments are quite low. If real yields trend higher, the inflation-protected fund prices will fall.

Cash investments protect principal but don't do a whole lot in protecting your purchasing power. You have 40% of your portfolio invested in cash. These cash instruments are low-yield investments in the current interest rate environment. If you're in money market mutual funds, you could potentially gain an increased yield by moving to a bank's money market account or high-yield savings account.

I understand the move to shorter bond funds if the expectation is that interest rates are heading higher. With the yield on the 10-year Treasury note at 3.16%, and the two-year at 0.52%, as I write this column, it seems a whole lot more likely that rates will trend higher over time. Rising interest rates means falling bond prices, so shortening your investment maturities should minimize the price risk. The risk is that world events keep money funneling into the U.S. Treasury market, keeping rates at these low levels for longer than anyone expects.

I think you need a different investment strategy than protecting assets. You accumulated this wealth for a reason. What is it supposed to fund in retirement? What's the best asset allocation to help you accomplish that funding goal? What's the big picture here? Do you have a pension? Are you receiving Social Security? Do you have a long-term care policy in place?

My best advice is for you to meet with a fee-only financial planner and discuss your retirement goals and your financial situation. Take a look at the National Association of Personal Financial Advisors, or NAPFA, electronic publication, "Pursuit of a Financial Advisor Field Guide" at for help in finding financial advice. If you can't get comfortable with a planner's recommendations, get a second opinion.