Am I crazy? 100% of portfolio in Vanguard high yield corporate
- Thread starter floatingdoc
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floatingdoc
Recycles dryer sheets
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running man, I found back to 1979 on yahoo (the origination date) for high yield.
Also...I read the annual report for all the corporate bond funds last night (120 pages!!). You folks have burst my bubble big time, thus the reading. I found some very interesting information. The so called safer short term corporate suffered 3 defaults in fiscal ending 1/09 (wamu, lehman and one other I forget) whereas the defaults for high yield during the worst financial crisis since the great depression...0
Keim..please explain what you mean. I don't understand your post
Also...I read the annual report for all the corporate bond funds last night (120 pages!!). You folks have burst my bubble big time, thus the reading. I found some very interesting information. The so called safer short term corporate suffered 3 defaults in fiscal ending 1/09 (wamu, lehman and one other I forget) whereas the defaults for high yield during the worst financial crisis since the great depression...0
Keim..please explain what you mean. I don't understand your post
Gone4Good
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Sure, Floating doc. My relative had all his eggs in one basket (Similar to what you propose by being so heavily invested in one company). When his basket broke (GM went to crap), he also went broke and had to downsize his home to free up cash.
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Floatingdoc;
To put your original plan in a broader context, I like to hearken back to my days as an engineer (long, long ago). All engineers know that, in designing any system, you never assume that there will not be a component failure. Every component has a non-zero probability of failure. The key is to understand the failure probability for every component and understand the consequences of any particular component failure. For mission critical components -- i.e. - the system completely fails if the component fails -- you build in redundancy, because each redundant train reduces the probability of failure exponentially. (e.g. - in a power plant, you have multiple feed pumps running off independent power supplies.) You can also over-design, so that a system can tolerate some level of component failure and still meet the output requirements. (e.g. - design an injection system capable of delivering flow at twice the rate you really need).
Translating to the financial world -- any bond has a non-zero probability of default. It is almost a certainty that in any bond portfolio, you will have some bonds that default. I haven't gone to look it up, but I seem to recall that in normal conditions, the default rate on all corporate bonds ranges between 2% and 4%. If you are investing in high yield bonds, that percentage is almost certainly higher -- they are high yield because they are financially weaker companies. So you have part of your "retirement financial system" that has a probability of failure north of 4%. Others have shown the results of this level of failure on the cash flows of HY bond funds.
There are two responses to this problem. First, you add some redundancy. This is where asset class diversification comes in -- you can suffer a default in the bond portion and still have income flowing from your portfolio. The key, of course is to ensure that your systems are truly redundant (e.g. -- two pumps connected to the same power supply are not redundant in the case of a power loss). This is the problem we saw recently with RMBS backed CDO's, where the designers did not understand that the underlying assets were in fact highly correlated and would all fail together. Second, you can build a system that can survive some level of failure. In other words, have substantially more invested than needed to support your desired cash draw.
What you cannot do, however, is design a system that assumes no failures and barely meets the output requirements when operating properly. It doesn't work in engineering. It doesn't work in personal finance.
To put your original plan in a broader context, I like to hearken back to my days as an engineer (long, long ago). All engineers know that, in designing any system, you never assume that there will not be a component failure. Every component has a non-zero probability of failure. The key is to understand the failure probability for every component and understand the consequences of any particular component failure. For mission critical components -- i.e. - the system completely fails if the component fails -- you build in redundancy, because each redundant train reduces the probability of failure exponentially. (e.g. - in a power plant, you have multiple feed pumps running off independent power supplies.) You can also over-design, so that a system can tolerate some level of component failure and still meet the output requirements. (e.g. - design an injection system capable of delivering flow at twice the rate you really need).
Translating to the financial world -- any bond has a non-zero probability of default. It is almost a certainty that in any bond portfolio, you will have some bonds that default. I haven't gone to look it up, but I seem to recall that in normal conditions, the default rate on all corporate bonds ranges between 2% and 4%. If you are investing in high yield bonds, that percentage is almost certainly higher -- they are high yield because they are financially weaker companies. So you have part of your "retirement financial system" that has a probability of failure north of 4%. Others have shown the results of this level of failure on the cash flows of HY bond funds.
There are two responses to this problem. First, you add some redundancy. This is where asset class diversification comes in -- you can suffer a default in the bond portion and still have income flowing from your portfolio. The key, of course is to ensure that your systems are truly redundant (e.g. -- two pumps connected to the same power supply are not redundant in the case of a power loss). This is the problem we saw recently with RMBS backed CDO's, where the designers did not understand that the underlying assets were in fact highly correlated and would all fail together. Second, you can build a system that can survive some level of failure. In other words, have substantially more invested than needed to support your desired cash draw.
What you cannot do, however, is design a system that assumes no failures and barely meets the output requirements when operating properly. It doesn't work in engineering. It doesn't work in personal finance.
Floatingdoc...I don't think you are crazy. Quite to the contrary, I think you are in a very enviable position for a person in his 40's. Not a position one arrives at by being financially ignorant (as some on this board rather arrogantly suggest you are). As to whether having all of your retirement money in Vanguard High Yield Corporate is a wise strategy, it will be one that gives you a lot of income, but no growth, so it will not be an optimal one in a highly inflationary environment, and you may later have buyer's remorse. However, there are infinitely worse options than the one you suggest. I own this fund and have found the income remarkably consistent month to month. May I suggest one book? Ben Stein's 'Yes, You Can Become A Successful Income Investor'. It may give you some ideas about other high yielding investments which would also enhance your portfolio diversification.
