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Deciding Between Intermediate Bond Fund and Stable Value Fund
Old 06-12-2013, 06:17 PM   #1
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Deciding Between Intermediate Bond Fund and Stable Value Fund

I'd just like to make sure I'm not missing something, or brainwashed by Larry Kotlikoff and Scott Burns (just read 'Spend til The End').

The authors (in 2008) were big into TIPS for someone like me, who is near FIREing. The idea, which I found agreeable, is "why gamble if you can lock-in your consumption smoothed amount, and that amount is ok?" But I can't buy TIPS directly, since the money is in a 401k. So I've got an Intermediate bond fund or a stable value fund to choose from. I'm sure that authors, and many folks on this board would suggest the stable value fund, even though it's yeild is 1% less.

So the SVF will prevent you from the extreme southerly direction that bond funds took in 2008, for instance, at the price of just barely keeping up with inflation? I just read the wikipidia entry on SVF's and it had a risk in there about how money entering the fund at the wrong time can impact the yield. But the article also said that SVF's were the only funds not bashed in 2008. As a side note, the wikipedia entry for bond funds doesn't mention the risk that fund inflows and outflows have on bond funds. Someone that's smart about these things might consider fixing that! That's another reason I'm less interested in bond funds...if 2008 is a good example, they can take a steep dive when folks want to bail into cash. Not really true if you have individual bonds (it would be your own fault if you sold before maturity in a non-adventagious interest rate environment). But in a fund, you get the negative side effect of reactionary fellow investors.

Anyway, it's looking like the SVF is the right place for my "bonds" allocation. But if my thinking could use a tweak, or an overhaul, please advise.
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Old 06-12-2013, 06:38 PM   #2
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Given the current low interest rate environment and the potential impact on an intermediate term bond fund of a rise in interest rates, I would prefer the SVF.

I wish I had access to a SVF.
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Old 06-12-2013, 07:22 PM   #3
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I'm in a similar boat. With about $600k coming available in 457 accounts, $190k should go into bond funds to keep my AA, as the rest goes into stock funds. Most of that $190k is in an SV earring about 2.5%. I've been debating the same logic; while money in an SV wont act to offset volatility as bonds would, the value won't drop, either, n the expected environment of rising interest rates. It might be more prudent to hold off until bonds suffer the expected drop in value. Market timing? I guess, but...
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Old 06-12-2013, 08:25 PM   #4
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Originally Posted by sengsational View Post
k. So I've got an Intermediate bond fund or a stable value fund to choose from. I'm sure that authors, and many folks on this board would suggest the stable value fund, even though it's yeild is 1% less.


Anyway, it's looking like the SVF is the right place for my "bonds" allocation. But if my thinking could use a tweak, or an overhaul, please advise.
Normally I'd say the SVF, but if the interest rate is only 1% then you'll need to some math and interest rate forecasting.

Step 1. find the SEC yield and duration of the Intermediate fund. Let's assume it is Vanguard VBILX. 2.0% yield and 6.53 year duration.
Step 2. Subtract the SVF yield 1%
The difference 1%/money in this case is your reward for risking your money in a bond fund.
Step 3 pick a time period say 3 or 5 years.
Step 4 make a forecast of interest rates. Say you think there is 20% change that in 3 or 5 year the interest rates will go up 3%,2%, 1%, stay flat or decrease 1%

Now the duration of bond fund is the percentage change that will occur with a 1% raise in interest rates. So for the Vanguard fund a 1% rise in interest rates will mean the principal will fall by 6.53%. So if you think rates will go up 1% in 5 years, your reward will be additional 5% in interest (ignoring compounding) but you'll lose 6.5% in principal. Kinda of wash, on the other hand if rates go up 3% you'll lose 19% in principal for 5% more interest income.

My guess is if you start making forecasts you'll come to the conventional conclusion. Now of course back in 2008, I would have assigned a roughly zero percent chance that bond rates would fall another 1-2% further.
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Old 06-12-2013, 08:36 PM   #5
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I'm in a similar boat. With about $600k coming available in 457 accounts, $190k should go into bond funds to keep my AA, as the rest goes into stock funds. Most of that $190k is in an SV earring about 2.5%. I've been debating the same logic; while money in an SV wont act to offset volatility as bonds would, the value won't drop, either, n the expected environment of rising interest rates. It might be more prudent to hold off until bonds suffer the expected drop in value. Market timing? I guess, but...
But does a bond fund really offset volatility? I was under the impression that bonds and equities tended to go in opposite directions, but it seems like they move together (especially bond funds vs equities) when the markets get 'a disturbance'. At least that's my impression after 2008. So rather than a counter force on equities, I look at a bond fund as something that just won't drop as fast when we go over a bump. But given that interest rates have nowhere to go but up, it's just a question of when. If it's sudden, then bond fund holders will not be happy, which is the scenario I'm thinking I'll avoid by taking the SV approach.

This is foreign thinking for me because I've had a secure source of income since collge and so was allocated very thinly in these low risk things. Now, looking at the spigot getting closed, requires a quite different mind set.
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Old 06-12-2013, 08:49 PM   #6
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Normally I'd say the SVF, but if the interest rate is only 1% ....
I interpreted the OP as the yield on the SVP was 1% less than the yield of the intermediate term bond fund, not that the yield of the SVP was 1%.
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Old 06-12-2013, 09:09 PM   #7
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I interpreted the OP as the yield on the SVP was 1% less than the yield of the intermediate term bond fund, not that the yield of the SVP was 1%.
Correct, that's what I meant, that I'd be getting 1% less in the SV than the BF.
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Old 06-12-2013, 09:20 PM   #8
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Step 4
Thanks for the approach, but my capacity for prediction has failed me too many times. But it's less worrisome since it's a choice between (historically) 3.6% in the SV and 4.6% in the B.
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Old 06-12-2013, 10:04 PM   #9
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But does a bond fund really offset volatility? I was under the impression that bonds and equities tended to go in opposite directions, but it seems like they move together (especially bond funds vs equities) when the markets get 'a disturbance'. At least that's my impression after 2008.
Different types of bonds will behave differently. Plot Hi yield, corporate and treasury fund. The Hi yield ( junk ) will follow stocks for the most part. The corporates can get trashed in a recession because they are backed by the assets of corporations which may be in trouble or in panic like 08. Treasuries survived because they are backed by "full faith and credit" of the government, but tend to be more sensitive to interest rates.
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Old 06-13-2013, 03:39 AM   #10
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Thanks for the approach, but my capacity for prediction has failed me too many times. But it's less worrisome since it's a choice between (historically) 3.6% in the SV and 4.6% in the B.
What intermediate fund has 4.6% yield right now. I must buy it!.

Forget historical yields and focus on current ones 30 day SEC yield.
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Old 06-13-2013, 04:57 PM   #11
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The last month everything in my "diversified" portfolio has been tanking, some more, some less, almost every day. But my stable value funds are still chugging away predictably, upwards.
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Old 06-13-2013, 08:46 PM   #12
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Given the current low interest rate environment and the potential impact on an intermediate term bond fund of a rise in interest rates, I would prefer the SVF.
That ^
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Old 06-13-2013, 09:04 PM   #13
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What intermediate fund has 4.6% yield right now. I must buy it!.

Forget historical yields and focus on current ones 30 day SEC yield.
Those were
2012 values, which were the ones in front of me, but obviously not the best, most current.
I put both of the M* sheets, but since they're employer offered, you'd need to get a j*b to buy-in, hehe.
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