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Building a ladder
Old 05-13-2006, 12:23 PM   #1
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Building a ladder

As far as equities go I'm index all the way, some US and some international and I think
I have a reasonable understanding. However, fixed income planning is a bit more mysterious. I understand how to put together a CD ladder, but can you do something similar with bond funds? If so how, and what part would the various bond fund types play. ie High Yield, Short term, Bond indexes, Corporate, Muni etc. How do you get the timing of maturity thing working if you're not buying individual bonds, which seems way to archane for me to deal with. Right now I'm thinking about the income part of my portfolio having about 4 years worth of living expenses split between a short trem bond fund and a bond index fund. What do you think?

10% Short Term Bond TCSTX
10% Bond Plus TCBP
10% Real Estate Securities TCREX
20% Equity Index TINRX (Russell 3000 so is very broad)
20% International Equity TIERX
20% Large Cap Value TCLCX
10% Mid Cap Value TCMVX

I'll keep 1 year's living expenses in the bank and 4 year's funds in the bond funds. Every 6 months I'll rebalance selling enough for the next 6 months of expenses, should be around 2% of the portfolio's value.
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Re: Building a ladder
Old 05-13-2006, 03:29 PM   #2
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Re: Building a ladder

At the risk of starting another battle on the suitablility of bond funds, I'll say that bond funds do not appear to be what you want for your objectives.

All but the shortest term bond funds will have asset value changes with swings in interest rates. If you are planning to redeem cash for living expenses every six months, I suggest you ladder CD's that will mature every six months with the right dollar amount for your expenses.
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Re: Building a ladder
Old 05-13-2006, 05:03 PM   #3
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Re: Building a ladder

Quote:
Originally Posted by 2B
At the risk of starting another battle on the suitablility of bond funds, I'll say that bond funds do not appear to be what you want for your objectives.

All but the shortest term bond funds will have asset value changes with swings in interest rates. If you are planning to redeem cash for living expenses every six months, I suggest you ladder CD's that will mature every six months with the right dollar amount for your expenses.
So what part should bond funds play in a retirement portfolio? Why would they be included? if the CD ladder is what you are recommending for fixed income, are they just for diversification and to act as a damp on stock market volatility?

Seems that this planning is really just a modified critical damping problem, you just need to find the right mix of investmenst so that a down market input purturbation results in a similar, income, output. and if the market goes up you want the output to run away with positive feedback.
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Re: Building a ladder
Old 05-13-2006, 06:37 PM   #4
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Re: Building a ladder

UHoo, Brewer.. he is the go-to-guy on fixed income.

IMOH if you are in, or approaching, retirement bond or bond funds are an important part of your retirement portfolio.
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Re: Building a ladder
Old 05-13-2006, 07:16 PM   #5
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Re: Building a ladder

A fixed income portion is an essential aspect of a retirement portfolio. I like to do exactly what you started with. My concept is to ladder CDs for a fixed portion of time to provide the cash for living expenses on a periodic basis. I prefer CDs or individual bonds because you know how many dollars will be there what you want them redeemed. With a bond fund your asset value will vary with interest rates. Funds provide diversification but can not be counted on to be at a specific value at a specific point in the future.
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Re: Building a ladder
Old 05-13-2006, 09:56 PM   #6
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Re: Building a ladder

Quote:
Originally Posted by 2B
A fixed income portion is an essential aspect of a retirement portfolio. I like to do exactly what you started with. My concept is to ladder CDs for a fixed portion of time to provide the cash for living expenses on a periodic basis. I prefer CDs or individual bonds because you know how many dollars will be there what you want them redeemed. With a bond fund your asset value will vary with interest rates. Funds provide diversification but can not be counted on to be at a specific value at a specific point in the future.
So would you put 1 year's expenses in a bank savings account, 4 years in a CD ladder and the rest in equities. This would make my portfolio

4% cash
14% CDs
82% equities

Maybe I should just take the 82% left over after tha cash and CDs and apply my starting portfolio which included a bond index fund and short term bond fund to give me a bit more diversification. So I'd end up with

4% cash
14% CD ladder over 4 years
8.2% Short Term Bond TCSTX
8.2% Bond Plus TCBPX
8.2% Real Estate Securities TCREX
16.4% Equity Index TINRX (Russell 3000 so is very broad)
16.4% International Equity TIERX
16.4% Large Cap Value TCLCX
8.2% Mid Cap Value TCMVX

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Re: Building a ladder
Old 05-14-2006, 06:02 AM   #7
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Re: Building a ladder

Hi nun

I am using the cash and cd ladder approach - and I believe that the other portion should have some bonds to reduce volatility but not as much as your original portfolio. Because you have a longer time horizon with a cd ladder you can up the equity portion of your investment to 60-80% with a greater degree of safety. (defined as the ability to withdraw funds at the appropriate time without hitting a down market). I also am carrying no cash in my invested portion and just buying/rebalancing with the bond funds. (As cash is kept externally you already have some if needed)

Try firecalc with straight withdrawals and then with a delayed withdrawal (with reduced nestegg) and I think you will be pleased with the results.
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Re: Building a ladder
Old 05-14-2006, 08:26 AM   #8
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Re: Building a ladder

It's time for me to bite the bullet and build a ladder also. I think I understand the concept but haven't addressed the execution. My wife will retire in two years at the earliest, who knows at the latest. In the meantime we are still in a savings mode. It would seem that I should divert current savings to build a ladder of CDs and/or bonds to cover 4 or five years beginning two years from now. If we don't ultimately need them at that point, I would flip the ones due in two years to new ones due 4 years later.

Buying CDs seems pretty straight forward, but I have never bought individual bonds. CDs are paying pretty well now but at times, I guess, bonds make more sense than CDs, so I better learn how to buy them as well. Can you do it through a Schwab or Vanguard account? Can anyone point to a "howto" that provides a step by step?
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Re: Building a ladder
Old 05-14-2006, 09:37 AM   #9
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Re: Building a ladder

Quote:
Originally Posted by donheff
It's time for me to bite the bullet and build a ladder also. I think I understand the concept but haven't addressed the execution. My wife will retire in two years at the earliest, who knows at the latest. In the meantime we are still in a savings mode. It would seem that I should divert current savings to build a ladder of CDs and/or bonds to cover 4 or five years beginning two years from now. If we don't ultimately need them at that point, I would flip the ones due in two years to new ones due 4 years later.

Buying CDs seems pretty straight forward, but I have never bought individual bonds. CDs are paying pretty well now but at times, I guess, bonds make more sense than CDs, so I better learn how to buy them as well. Can you do it through a Schwab or Vanguard account? Can anyone point to a "howto" that provides a step by step?
I'm in a similar boat to you. My thinking is that with all the mutual fund companies basically going over to brokerage type accounts you can build the CD ladder right form your Fidelity etc account. Even my current firm TIAA-CREF that has always offered few funds and limited services is now selling CDs and doing a brokerage type account. I only hope that their fees don't go up too much beacuse of this.

Anyway your mutual fund firm probably sells CD, but the whole individual bond thing still leaves me cold and I have no idea of how to beging to buy or eveluate them. That's why I have some bond funds in my proposed portfolio, just to have some exposure to them.

A quick calc. shows that I'm proposing, 4% cash, 14% CDs, 16% bonds, 66% stocks.
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Re: Building a ladder
Old 05-14-2006, 09:57 AM   #10
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Re: Building a ladder

Most decent brokerages have a list of bonds they market.* My brokerage account has just been taken over by Etrade.* They have decent CD rates and access to more individual bonds than BrownCo.* They also have a decent tutorial online.* I don't think you have to be an account holder to access it.* I suspect most brokerages have some sort of on line tutorial.* If not, there are dozens of books in the libraries about how to buy/sell bonds.

For a 10 year maturity......

What I have seen lately (it does vary) is that CDs are paying around 5.3% and are FDIC insured.* US Government zero coupon bonds are very close to 6% but are only suitable for IRAs because of tax issues.* High rated corportates are between 5.5 and 6%.* If you go into corporates, diversify.* Remember Enron?* They used to have a high credit rating.

I know this isn't an annuity post but US interest strips for 10 years are yielding 6% (the calculation includes the value of getting your original investment returned).

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Re: Building a ladder
Old 05-14-2006, 11:25 AM   #11
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Re: Building a ladder

Quote:
Originally Posted by 2B
Most decent brokerages have a list of bonds they market. My brokerage account has just been taken over by Etrade. They have decent CD rates and access to more individual bonds than BrownCo. They also have a decent tutorial online. I don't think you have to be an account holder to access it. I suspect most brokerages have some sort of on line tutorial. If not, there are dozens of books in the libraries about how to buy/sell bonds.

For a 10 year maturity......

What I have seen lately (is does vary) is that CDs are paying around 5.3% and are FDIC insured. US Government zero coupon bonds are very close to 6% but are only suitable for IRAs because of tax issues. High rated corportates are between 5.5 and 6%. If you go into corporates, diversify. Remember Enron? They used to have a high credit rating.

I know this isn't an annuity post but US interest strips for 10 years are yielding 6% (the calculation includes the value of getting your original investment returned).

I'm not stoked about individual bonds for the same reason I got out of individual stocks. I perceive them to be a lot of effort and come with risk. I like the simplicity and performance of index funds and they have done very well for me. What I want to do know is how to get some fixed income going, is it appropriate to use a combination of a CD ladder, a short term bond fund and a bond index fund for income. When it comes down to it all we are trying to do by buying individual bonds or stocks is to come up with a personal fund that meets our requirements.

CDs are giving good rates now and they will probably get better, but if diversification is a good thing isn't it advisable to have some cash (very safe), CDs ( safe), bonds (some volatility and risk), and equities (volatile)

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Re: Building a ladder
Old 05-14-2006, 11:32 AM   #12
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Re: Building a ladder

I recommend and will only personally own FDIC insured CDs or Federally guaranteed bonds. My objective with fixed income is to have a certain amount of cash available on a given date -- absolutely, positively. That's why I avoid bond funds. That's also why I give up a few tenths of a percent in interest rate. Zeros are nice for ladders set up in IRAs. You avoid dealing with the interest payments. CDs will generally let you roll interest into the amount and it works like a zero. The tax implications are the same. You have to pay taxes on the interest whether you put it in your pocket or not.
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Re: Building a ladder
Old 05-14-2006, 03:01 PM   #13
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Re: Building a ladder

Quote:
Originally Posted by 2B
I recommend and will only personally own FDIC insured CDs or Federally guaranteed bonds. My objective with fixed income is to have a certain amount of cash available on a given date -- absolutely, positively. That's why I avoid bond funds. That's also why I give up a few tenths of a percent in interest rate. Zeros are nice for ladders set up in IRAs. You avoid dealing with the interest payments. CDs will generally let you roll interest into the amount and it works like a zero. The tax implications are the same. You have to pay taxes on the interest whether you put it in your pocket or not.
So would you ever invest in bond funds? You seem to be saying that bond funds are one thing that could become extinct and they wouldn't be missed. Are you completely in the in the 20% CDs 80% equity fraternity?
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Re: Building a ladder
Old 05-14-2006, 05:27 PM   #14
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Re: Building a ladder

Quote:
Originally Posted by nun
So would you ever invest in bond funds? You seem to be saying that bond funds are one thing that could become extinct and they wouldn't be missed. Are you completely in the in the 20% CDs 80% equity fraternity?
Would I ever invest in bond funds?
I did many years ago and watched about 30% of my assets disappear as interest rates skyrocketed. I guess I would have gotten my money back if I just held on these last 20 years. I won't buy a bond mutual fund again.

Are you completely in the in the 20% CDs 80% equity fraternity?
I sold all of my bonds holdings about 2003 and managed to miss the run up in interest rates. I am getting ready to set up my laddered portfolio but I'm waiting for interest rates to rise just a bit more. I admit I'm speculating but somehow it seemed so obvious the Fed would drive interest rates up. It appears that zero coupon bonds have a slightly better interest rate than CDs at this time. By the end of the summer I expect to be close to the 20/80 camp.

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Re: Building a ladder
Old 05-14-2006, 05:29 PM   #15
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Re: Building a ladder

Quote:
Originally Posted by nun
So would you ever invest in bond funds?
I think that part of the answer depends on what kind of bonds you are buying. *For US government bonds the argument for individual bonds is stronger than it is for corporates or munis because you don't have to worry about credit risk.

But for tax reasons all of my after tax bond exposure is in muni bond funds. *The funds make it a lot easier because they are diversified and I don't have to evaluate the financial strength of the bond issuer.

MB * * *
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Re: Building a ladder
Old 05-15-2006, 08:06 AM   #16
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Re: Building a ladder

Oy, here we go again with 2B shouting that bond funds are evil jsut because he lost some money on them 20 years ago...

nun, If you are comfy with a 66% equity, 34% FI portfolio, that's great. Setting up a few years' expenses in a money market and a CD ladder should be fine. I probably would just toss it all in a money market simply because you don't give up much yield vs. CDs and I think short term rate will just continue grinding higher, but that's up to you. Bear in mind that you can almost certainly get better CD rates by going outside your brokerage account (www.penfed.org for example), but of course you then are trading off some extra yield for a modicum of extra hassle.

With the rest of your fixed income allocation, there is nothing wrong with bond funds, especially if you stay away from long duraton funds. Something like a fund based on the Lehman Aggregate Bond Index will give you exposure to treasuries, high grade corporates and mortgage-backed securities with a duration of about 4. Nothing fancy, but a reasonable diversifier available at low cost and without a ton of interest rate or credit risk.

Conceptuallly, a portfolio of individual bonds that you roll over at maturity is basically the same thing as a bond fund. The difference is that you would likely have higher costs and less diversification unless you have a very large ($10MM+) overall portfolio. You'd also better be halfway decent at credit analysis.
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Re: Building a ladder
Old 05-15-2006, 06:38 PM   #17
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Re: Building a ladder

Quote:
Originally Posted by brewer12345
Oy, here we go again with 2B shouting that bond funds are evil jsut because he lost some money on them 20 years ago...
I wouldn't say "shouting" plus I started out my original post with a nod to those that like bond funds.

My whole point in avoiding bond funds is based on my objective with fixed income. My goal is to absolutely, positively have a certain amount of cash on a given date in the future. I can do that with individual CDs and government bonds. That can not be said about anything but the shortest of duration bond funds. The balance will adjust up or down based on changes in interest rates. If you are looking to dampen the swings in a portfolio you can use a bond fund. My fixed income allocation get all used in creating ladders.
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