Fixed Income Advice

[roninop]

Hi Folk's,

Next month we have a decision to make regarding a CD that is maturing. We would like to generate some additional income. We had a meeting with our Fido rep recently and he was pushing a new Fido/Blackrock Diversified Income Portfolio, basically a managed account, fee of 0.70 plus the fees of the assets in the portfolio. He said it was a "low beta" portfolio and was expected to generate approx. $26K income on a $690K investment. According to the glossy brochure he gave us "the risk profile seeks to be generally consistent with a traditional balanced portfolio defined as being composed of the following: 50% MSCI World Index and 50% Barclays US Aggregate Bond Index".

The CD ($690K) is approx. 60% of our FI assets of a little over $1.2M. Total portfolio is almost $2.5M. The other 40% of FI is in PIMIX, PTTRX, FTBFX, VTINX, and Vanguard GNMA.

I am seriously considering Wellsley Income Fund for the entire amount. So my question is do you think having 60% of your FI in one fund too risky ? I have spoken with VG and while they talked with us about the total return approach, they didn't see a major problem with using Wellsley instead. I think we can live off of our dividends and CG's just fine.

I'm recently retired (involuntary) 58, and DW is retired (by choice) 63. Her pension and SS is $79K, house paid off, no debt, no children. Pretty much covers our living expenses so the income from VWINX would give us some travel money, etc. I plan to take SS at 62 in four years, that would give us about $100K before taxes and any portfolio income.

 

[bobafett]

Wellesley is nice and I own a $50k chunk of admiral shares (VWIAX) in my portfolio.

If i'm reading you right I would not buy as much as you are proposing. Here are some things to consider:

Wellesley is tax inefficient
It's comprised of 60% bonds and 40% stocks with a large portion of corporate bonds.
It's still a managed fund, albeit with a good record, but managed nontheless
Its expense ratio (.18) is higher than other VG funds that you could use to create a similar balance.

I use wellesley to smooth out my overall portfolio and provide a small active managed corporate tilt but that's about it.

 

[Mulligan]

Far be it for me to give advise, but I am curious as to why you would consider at your stage in life suddenly switching from in effect 60% of your assets guaranteed "sleep at night" to riding the waves up and down on the markets. Is there a reason other than interest rates are low? Concerning the Fido part, that .7 fee plus fund expense on the bond side of the equation would blow a big hole in that part of the suggestion. I don't see how that part of the equation improves upon a no expense CD.


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[Animorph]

Wellesley is by no means a "fixed income" fund, being 40% equities. Reading between the lines a bit you look like you already have a 50/50 portfolio. Using Wellesley as FI would push your equity allocation past 50%.

No way would I ever add 0.75% to a portfolio that already had fund fees. FI is hurting enough for returns without carving out an additional 0.75%. What if they invested in your CD and took 0.75% off its interest before giving you the rest?

 

[pb4uski]

...So my question is do you think having 60% of your FI in one fund too risky ? .....

Having 60% of your FI in one fund is not at all risky because the fund is backed by hundreds of stock and bond investments and that provide diversification, but you are really asking the wrong question.

The more important question is what do you want your overall AA to be? With the CD it is roughly 50/50 but with the Fido investment or Wellesley it would change to roughly 66/33. Since you have pension income that covers your living costs the $2.5m is really gravy. Some people in your situation figure that they have "won the game" and go with little equities because they can't stomach the volatility. Others figure that with their living costs covered that they can easily take the risk and go aggressive. And of course, there are a whole bunch of in-betweens. Given your situation, I think 66/33 is a good place to be (I'm your age and 60/40 but my pension is a lower % of our living expenses).

So I suggest that you decide your overall AA first.

For FI, I would be tempted to park the $690k in a online savings accounts paying 1% or so (spread to keep under the FDIC limits) and see if PenFed offers another CD special in December (last year's was 3% for a 5 year term). For FI at this point, I also like the Guggenheim and Blackrock target maturity bond funds as a CD substitute and Merger Fund. For now, I'm staying away from all bond funds other than target maturity due to interest rate risk.

On your taking SS at 62, have you had an analysis of your situation done by socialsecuritysolutions.com or other websites as to your optimal claiming strategies?

 

[roninop]

Thanks for your reply. Yes, we need to generate income with this money. The best deal on a CD we can find is Synchrony at 2.3% for 60 months. This is approx. 28% of our total portfolio and 60% of our fixed income sleeve. The other alternative is VG Total Bond Market with a 30 day yield of 2.01 %. I'm really stuck here trying to figure out which of these 3 would give us the best income yet keep the risk as low as possible.

I was disappointed with our Fido reps. suggestion. The yield was right at 4 % but it seems like there is way too much risk and of course the high expenses.

 

[roninop]

pb4uski, thanks for responding as well, appreciate your ideas.

 

[W2R]

I love Wellesley! I loved it long before I ever appeared here at the Early Retirement Forum. You would be hard pressed to find a more enthusiastic fan of Wellesley than me.

However, I limit myself to 30% Wellesley, because out of an abundance of caution I don't feel comfortable investing more than 30% in any one fund. Many intelligent investors do not limit themselves this way, so YMMV

 

[wolf]

Far be it for me to give advise, but I am curious as to why you would consider at your stage in life suddenly switching from in effect 60% of your assets guaranteed "sleep at night" to riding the waves up and down on the markets. Is there a reason other than interest rates are low? Concerning the Fido part, that .7 fee plus fund expense on the bond side of the equation would blow a big hole in that part of the suggestion. I don't see how that part of the equation improves upon a no expense CD.


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Also, in agreement. We all are aware of very low interest rates on CD's.

Be careful, of taking on added risk, to get a better return. Seems, a

lot of retiree's may be lulled into taking risks they are not really aware

of by smooth talking financial advisers.

 

[brewer12345]

You have to decide whether you are willing to take less income or more risk. Unfortunately that is the way of the world. I suppose if I were in your shoes I might take a "barbell" approach, with a big slug of the portfolio in very low risk, modest yielding stuff (CDs primarily, with maybe some MERFX, ARBFX and target date fund type stuff) and a smaller portion in higher risk vehicles that have outsized yields. The risk piece could be a variety of things: shorter maturity junk or leveraged loan funds that have ample credit but little interest rate risk, closed end funds that trade at a big discount and pay high yields (I own a smidge of FOF for this reason, for example), possibly even a preferred fund (perhaps too much interest rate risk for the yield, though).

Is there some reason why you are fixated on yield rather than total return?

 

[rayvt]

Yeah, it sounds like you are in danger of joining the herd who are reaching for yield and innocently taking on much more risk than you think.

A couple of quotes I've gathered:
"Wanting or needing x% return doesn’t cause it to be available in the market."
"Stock market history is littered with people who misunderstood the risks they were taking on."

That FIDO advisor's advice doesn't make any sense to me. Why would you pay 0.7% to have somebody put your money 50% equity and 50% bonds? Just go buy them yourself and save 0.7%.

ACWI: current yield 2.15%, e/r 0.34%
BND: current yield 2.55%, e/r 0.08%

 

[Mulligan]

Also, in agreement. We all are aware of very low interest rates on CD's.

Be careful, of taking on added risk, to get a better return. Seems, a

lot of retiree's may be lulled into taking risks they are not really aware

of by smooth talking financial advisers.

Wolf, I agree. Ron may be very well versed in the difference between fixed income and total return. But he appears to be using them a little to closely together which they are not. I'm just thinking out loud here, Ron but you seem to be only wanting to change horses because rates are low. I don't know if that is a good enough reason to switch to the ratio PB said would happen if you went that route. I'm not saying it's right or wrong, but how will this effect your "sleep at night" factor. To currently have so much in CDs has got to be saying something about your invest style (I am even more conservative BTW because I live entirely in my pension with comfort) and that is something you would need to mentally address if the market was not kind to you in the coming years. I am not advocating this, but there are other CD options to consider such as Vanguard brokerage 10 year CD that pay 3.35%. Keep in mind though 100% guaranteed, they act like a bond if you chose not to carry it to maturity.

I know I am playing master of the obvious which I am good at, but that chunk could be split up in various degrees of 5, 7, and 10 year CDs to ratchet your interest level higher with not all of it trapped at a 10 year commitment. Certainly no recommendation, just thoughts to ponder, as I haven't seen you directly come out and say I want more into the market. You appear to be stating you want better fixed income rate opportunities.


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[roninop]

Folk's, thank you all for responding. I'm going to think this through some more and take into consideration all the advice given. I may come back with plan B and ask your opinion once again.

Ron