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Allocate to Bonds Now or Wait?
Old 05-02-2004, 08:18 AM   #1
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Allocate to Bonds Now or Wait?

As a result of job elimination I will be retiring in a few months, about a year earlier than planned. Most of my investment portfolio is in a tax-deferred Vanguard account that is allocated as follows:

PRIMECAP 24.5%
Explorer 20%
Capital Opportunity 16%
Healthcare 18%
Small Cap Index 13%
Index 500 8.5%

Based on reading this ER forum, along with books many of you recommended (Bernstein, Bogle, Swedroe), I know I need to reallocate this 100% U.S. Stock portfolio into a more balanced, less risky one.

I am considering the "Coffeehouse" or similar allocation. Here is my concern: a balanced allocation would include bonds. With interest rates on the rise in the near future, bond funds will drop in value. Would I be better off to allocate as suggested by Coffeehouse except: temporarily put the money that should be allocated to bonds into a money market fund until the Fed's rates go up -- and buy the bond fund later when the rates stabilize? Or should I do the allocation to the bond fund now? Any opinions?

By the way, I appreciate this forum and the information and knowledge I have gained from it since I discovered it a couple months ago. It helped me go from a state of semi-panic upon learning of my job elimination, to a reasonable feeling of assurance that I can actually retire earlier than planned.
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Re: Allocate to Bonds Now or Wait?
Old 05-02-2004, 08:24 AM   #2
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Re: Allocate to Bonds Now or Wait?

If I were to start buying bonds now, I'd keep duration short (e.g., Vanguard Short-Term Corporate), and I'd start averaging into longer-term TIPS.
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Re: Allocate to Bonds Now or Wait?
Old 05-02-2004, 08:39 AM   #3
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Re: Allocate to Bonds Now or Wait?

Yikes. Pretty risky portfolio. However, I'm also a Vanguard investor and at one time or other have had all these funds and they have been super to own. Still have some Capital Opportunity in a Roth which will probably exchange next year when my 5 year time is up for doing so without 1% charge.

We have gone to a coffee house like allocation and I am sleeping well at night, so think you are definitely on the right track. Wabmester's advice sounds good. Perhaps you could determine what your future allocation will be and then convert what will be non-stock to ST Corp directly for it's allocation and to money market for any other planned bond fund holdings (e.g., TIPS) and begin $ cost averaging to it/them.

Good luck in ER. I think you'll enjoy it!... Bill
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Re:  Wait.
Old 05-02-2004, 09:39 AM   #4
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Re:  Wait.

A number of us have been attracted to the 5% APY of five-year CDs offered by credit unions like Pentagon Federal & Navy Federal.

You don't necessarily have to be military to join these two, and there are probably other CUs offering those kinds of rates.

You could put a few years' expenses into a ladder and wait for your bonding moment. (I haven't reached mine yet.)
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Re: Allocate to Bonds Now or Wait?
Old 05-02-2004, 01:35 PM   #5
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Re: Allocate to Bonds Now or Wait?

I am buying long term TIPS now. I realize that the market value may go down, but I plan to hold until maturity so it doesn't really matter to me. I'm able to lock in a 2.5%+ real return for 25 years, and there is some security in that.
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Re: Allocate to Bonds Now or Wait?
Old 05-02-2004, 01:45 PM   #6
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Re: Allocate to Bonds Now or Wait?

mcci,

"coffeehouse" is good. I posted my allocation on
another thread.

The real yield on TIPS is trending up right now and
these trends seem to persist so I would follow
Wabmester's advice and move in gradually.

It is about a toss up between Money Market and
Short Term Corporate. My personal feeling is that
short term rates will move up slowly in small steps
and should not bite too hard. I have my "cash" in
Short Term Corporate.

Cheers,

Charlie (aka Chuck-Lyn)
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Re: Allocate to Bonds Now or Wait?
Old 05-02-2004, 05:42 PM   #7
 
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Re: Allocate to Bonds Now or Wait?

I don't know of anything better. I do hold some
Freddie Mac notes which pay 5% for 5 yrs., then 6%
for 6 yrs., then 7% for 7 yrs., then 8 % for 8 years.
I assume this is just as safe as CDs. I also assume I
will be dead by the time they reach maturity.
No matter. I just want the certain income.

John Galt
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Re: Allocate to Bonds Now or Wait?
Old 05-03-2004, 07:48 PM   #8
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Re: Allocate to Bonds Now or Wait?

Thanks for the input. I will wait until interest rates go up a bit to make the allocation to bond funds.

New question: the "Coffeehouse" Vanguard allocation and the similar Bernstein "No-brainer Cowards" Vanguard allocation contain a several funds that Morningstar rates as only 2 or 3 stars. Should this be a concern about using these allocations?
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Re: Allocate to Bonds Now or Wait?
Old 05-04-2004, 05:07 AM   #9
 
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Re: Allocate to Bonds Now or Wait?

Quote:
Thanks for the input. *I will wait until interest rates go up a bit to make the allocation to bond funds. *

New question: *the "Coffeehouse" Vanguard allocation and the similar Bernstein "No-brainer Cowards" Vanguard allocation contain a several funds that Morningstar rates as only 2 or 3 stars. *Should this be a concern about using these allocations?


If Morningstar only rates them 2 or 3 stars, it is a good sign that these funds are about to take off. After which Moringstar will give them 4 or 5 stars.

You need to get a copy of Berstein's "4 Pillars of Investing" and read it. It will answer alll of your questions.
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Re: Allocate to Bonds Now or Wait?
Old 05-04-2004, 03:59 PM   #10
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Re: Allocate to Bonds Now or Wait?

Quote:
I don't know of anything better. *I do hold some
Freddie Mac notes which pay 5% for 5 yrs., then 6%
for 6 yrs., then 7% for 7 yrs., then 8 % for 8 years.
I assume this is just as safe as CDs.
It isn't just as safe as CDs. It may be probable that in the case of a bad housing debacle, the government would step in to limit losses on Freddie and Fannie paper. But there is no guarantee anywhere, as there is on a bank CD up to $100,000.

I think people can sucessfully take a lot of risks, but they ought to know which ones they are taking. Especially when there is no chance for profits, only interest (or losses).

I know that you, John, are not interested in details like this. But maybe someone else might be.

Mikey
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Re: Allocate to Bonds Now or Wait?
Old 05-04-2004, 05:07 PM   #11
 
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Re: Allocate to Bonds Now or Wait?

I am interested in the details up to a point. But,
I see little risk variation between bank CDs
and Freddie Mac notes. I understand the
distinction, but don't find it significant.

John Galt
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Re: Allocate to Bonds Now or Wait?
Old 05-05-2004, 04:28 AM   #12
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Re: Allocate to Bonds Now or Wait?

I am also utilizing Freddie Notes (and CMOs), and recognize the risk, although I believe its a small one! However, my Freddie notes are limited to 10 yr and the CMOs generally turn over in 2-3 years.

Doug
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Re: Allocate to Bonds Now or Wait?
Old 05-05-2004, 04:36 AM   #13
 
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Re: Allocate to Bonds Now or Wait?

Hello Doug. I view the risk variation between
Freddie notes and bank CDs is inconsequential.

John Galt
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