Fixed income conundrum

[Ologist]

‘I'd recommend PIMCO Income Institutional (PIMIX) which you can buy in a Vanguard Brokerage account for $25k minimum vs the normal $1M minimum, DODIX (Dodge and Cox Income), VWIUX (VG Intermed Term Tx-Ex), PIGIX (PIMCO Corporate Bond), Vanguard High Yield (VWEHX) and either FNMIX (Fidelity New Markets) and/or DBLEX (Doubleline Emerging Markets) instead”

What percent would you put in each of these bond funds?

Thanks!

 

[Running_Man]

There is recent correlation in a longer term decline in interest rates, but there have been multiple times in the past where declines in the market have occurred at same time as increases in interest rates.

 

[24601NoMore]

‘I'd recommend PIMCO Income Institutional (PIMIX) which you can buy in a Vanguard Brokerage account for $25k minimum vs the normal $1M minimum, DODIX (Dodge and Cox Income), VWIUX (VG Intermed Term Tx-Ex), PIGIX (PIMCO Corporate Bond), Vanguard High Yield (VWEHX) and either FNMIX (Fidelity New Markets) and/or DBLEX (Doubleline Emerging Markets) instead”

What percent would you put in each of these bond funds?

Thanks!

I'm still tweaking the allocation models to determine an optimal balance of risk/reward, but here's one potential mix. Note the significantly higher income of the mixed portfolio (vs VBTLX alone). As I ER'd earlier this year, income is important and one of the things I prioritize in investment decisions..

 

[COcheesehead]

Let's be clear though.... BND has had periodic declines in value and will likely continue to do so... share price has varied between $10.15 and $11.23 over the last 10 years.... and even the value has had periodic declines...see growth of $10,000 chart below.

So BND can decline in value it is just that the value of a portfolio would be much more stable than equities.

Don't let the share price, NAV, throw you. That reflects pricing ex dividend and capital gain distributions so it does not always reflect true total return.

 

[pb4uski]

Don't let the share price, NAV, throw you. That reflects pricing ex dividend and capital gain distributions so it does not always reflect true total return.

You are right but also wrong... there are plenty of days where the NAV declines where there has not been a dividend or capital gain distribution... and even days where the decrease in the NAV exceeds the distribution by a significantly amount. Besides, there are less than 15 days a year where there is a distibution to cause such noise.

Nonetheless, that is why I put in the growth or $10k graph rather than the share price graph... and even that shows that there are periodic downturns... the ride is not stable... only relatively stable compared to equities.

 

[COcheesehead]

You are right but also wrong... there are plenty of days where the NAV declines where there has not been a dividend or capital gain distribution... and even days where the decrease in the NAV exceeds the distribution by a significantly amount. Besides, there are less than 15 days a year where there is a distibution to cause such noise.

Nonetheless, that is why I put in the growth or $10k graph rather than the share price graph... and even that shows that there are periodic downturns... the ride is not stable... only relatively stable compared to equities.

No I meant over a range. If you look at just the NAV from pt A to pt B, that doesn't mean that is what the fund returned. That was my point.

 

[pb4uski]

I understand.... I guess my point was that its not a smooth ride like a CD... that the NAV will wander around some and can decline even if there isn't economic trouble.

 

[COcheesehead]

I understand.... I guess my point was that its not a smooth ride like a CD... that the NAV will wander around some and can decline even if there isn't economic trouble.

Correct. Almost anything with risk moves around.

 

[kjpliny]

I also like the Wellesley fund. It held up very well during the 2008 crash, only down about 9%. Overall return is quite impressive for it's high bond mix.

 

[REWahoo]

I also like the Wellesley fund. It held up very well during the 2008 crash, only down about 9%. Overall return is quite impressive for it's high bond mix.

I'm also a big fan of Wellesley and have held the fund for almost 15 years. I think it is important not to mislead anyone about the funds performance during the Great Recession. The VWIAX was around $54.50 a share in October of 07 and declined to $39.30 or so by March of 09. Excluding dividends, that was a drop of 28%.

 

[pb4uski]

I'm also a big fan of Wellesley and have held the fund for almost 15 years. I think it is important not to mislead anyone about the funds performance during the Great Recession. The VWIAX was around $54.50 a share in October of 07 and declined to $39.30 or so by March of 09. Excluding dividends, that was a drop of 28%.

Yup.... looks like about a 20% drop with dividends... still significant.... but it recovered quickly.

 

[audreyh1]

Let's be clear though.... BND has had periodic declines in value and will likely continue to do so... share price has varied between $10.15 and $11.23 over the last 10 years.... and even the value has had periodic declines...see growth of $10,000 chart below.

So BND can decline in value it is just that the value of a portfolio would be much more stable than equities.

Sure BND has declines, but they usually occur at different times than stock declines, and when the economy has recovered enough that interest rates climb. These are generally during economic expansions = good times.

My argument was against the comment of bonds declining during economically difficult times, when actually bonds tend to behave as more of a safe haven during economically difficult times when stocks falter. Where did I indicate bonds never go down?

P.S. ignore the share price. What matters is total return.

 

[Clone]

This video maybe sums things up...

My thoughts on using bonds to chase yield- (I understand the stability, the performance is just - not exciting!)

 

[HI Bill]

My argument was against the comment of bonds declining during economically difficult times, when actually bonds tend to behave as more of a safe haven during economically difficult times when stocks falter.

In our odd markets of late, we've seen many days where both equities and bonds fall, more or less in sync. Yes, equities tend to fall more, in such times, and therefore, bonds or bond funds can provide a semi-safe haven. My point is, that when interest rates were very low before the recent hikes, we saw far more volatility in BND than I expected!

 

[thepalmersinking]

Just to add additional data points. 5% is in taxable account. 85% is in traditional IRA and 401k and 10% in Roth’s.

 

[I am He]

I'd shift a lot ASAP since it's tax-free.

If the advice to someone who wants to buy a house in three years (a short horizon) is to not risk losing their downpayment money and stay light in equities, I think your situation would be similar.

I'll ask...What's more important 'to you' : Another 30% gain or the potential downside if things go bad? For some it means different things and of course you could probably plan to work another decade if needed which counts for something (again different for everyone).

Nothing wrong with T Bills while you're figuring things out. I like tax free state income (in WI which is 6.27%+) if it were in taxable.

 

[Gearhead Jim]

As others have mentioned, bond funds can go down in price as interest rates rise. Some day, you recoup that loss by getting higher interest as the fund buys new bods. Do you want to wait for "some day" with money that's supposed to be secure?


Individual bonds can do the same thing, but if you have laddered so you don't need to sell before maturity, that problem is solved. But there are still the problems of diversification and credit risk evaluation.


Now in our 70's, we keep about 5 years of living money in individual laddered CDs, being careful to stay within the FDIC insurance limits. They can be cashed out with fairly small penalties if we have to sell early for some calamity, which is not so easy with brokered CDs.




The rest of our money, ~50%, is still in Vanguard equities.

 

[2177V]

I recommend morningstar.com. Review the 4 or 5 star bond funds. I am a big fan of short term corporate funds such as VFSTX because of the low risk and 4 star rating. See
https://www.kiplinger.com/slideshow...uard-funds-to-own-in-a-bear-market/index.html

Liquidity is important in retirement in order to protect you during a bear market. The longest bear market and recovery time since WW2 is 90 months or 7-1/2 years according to the following link:
https://www.cnbc.com/2018/12/24/whats-a-bear-market-and-how-long-do-they-usually-last-.html

Once you have sufficient liquidity (or a sufficient safety net) to suit your risk tolerance during a potential bear market, you can be more aggressive in your equity investments.

I generally have a 50/50 portfolio but during a 15% or more market decline, I reallocate to 75%stock/25%bond to take advantage of the recovery. Since I already have a sufficient safety net or sufficient liquidity of 7-1/2 years of income in CDs, short term corp bonds, short term treasury bonds, etc, I can afford to reallocate my portfolio to become more aggressive.

A 70% stock and 30% bond portfolio is aggressive but may work only if the 30% bond has about 7-1/2 years of liquidity. Most investors are not concerned about liquidity before retirement because their paychecks acts as their liquidity. However, after retirement, your paychecks stops and you have to make sure you have sufficient liquidity in retirement.

During a bear market, your stock investment loses liquidity because the stock prices have declined and selling stock "locks in your losses" without giving time for your stock investment to recover. Hence you are depending on your other asset classes to hold you over.

During a bull market, everybody is making money and liquidity is not a problem. However, planning for a bull market to last forever is not wise. I therefore recommend thinking about liquidity or constructing a safety net when a bear market do arrive. People can get hurt because they picked the wrong bond fund and they do not have assets in CD or short term treasury bonds.

 

[gooddog]

treasurydirect.gov T-bills, 4 week or 13 week. $ has no risk of going down, you get a current market %.

 

[thefist]

I was in a similar place as you when I retired at 52 last year, but most of money is in taxable. With yours in tax deferred, adjusting asset allocation is easy.
Some thoughts... in 3 yrs you are 57, which is early for retirement fund withdrawal. Only 5% liquid right now isn’t much. Start putting together your withdrawal plan NOW so you can adjust savings in the next 3yrs.
You mentioned you are in “stocks”. If individual stocks like I am, then bond funds may have little appeal vs individual bonds. Consider checking out a service such as http://bondsavvy.com for help in constructing an individual bond portfolio.

For me, I put a few years expenses worth in Muni bond funds, with the intent of keeping income low to help facilitate Roth conversions or to get ACA subsidy.

Good luck with your next 3yrs.

 

[2cheap2eat]

Instead of a bond funds, wouldn’t it be better to buy high rated muni bonds and hold to maturity?

Bond funds may have to sell at higher interest rates thus lower bond prices. Muni’s have no federal and generally no state taxes. If muni’s held to maturity, interest rate fluctuations won’t matter.

 

[gwraigty]

Instead of a bond funds, wouldn’t it be better to buy high rated muni bonds and hold to maturity?

Bond funds may have to sell at higher interest rates thus lower bond prices. Muni’s have no federal and generally no state taxes. If muni’s held to maturity, interest rate fluctuations won’t matter.

It depends on your tax bracket and the spread between corporate bonds and muni bonds.

As far as funds vs. individual issues, I've done both, corporates and munis. Last year I bought a muni bond fund. I sold it earlier this year because of an unwelcome tax surprise. The fund had some paltry amount of private activity bond interest. I also had some qualified dividends. Because of the combination, I had to fill out the form to determine if we'd owe AMT, which I knew we didn't, but filling out the form was a requirement anyway. I will have the displeasure of going through that process for our 2019 taxes next year, but not again. For munis, I'm sticking to individual issues, where I can screen for only those that aren't subject to the AMT.

 

[RetMD21]

Just to add additional data points. 5% is in taxable account. 85% is in traditional IRA and 401k and 10% in Roth’s.

So you can reallocate tax free. I favor low cost shorter duration bond funds (intermediate term at most.) Expense ratios are <0.2% and often halt that. When I looked into it several years ago shorter duration funds were less correlated with stock returns. They are certainly less affected by interest rate increases. I wanted to look into buying individual bonds but what I ended up given my maturity preferences were from the secondary market and I think were a better deal for the broker than for me. I last bought TIPS when the real return was 2%. Although I have a couple of international bond etfs I think they are quite nonessential. I don't see the point in long term bonds. You get a variety of ideas here but I think just splitting your allocation between a short term and an intermediate term bond fund wold be fine. I use Vanguard but there are others that are fine.

 

[2177V]

So you can reallocate tax free. I favor low cost shorter duration bond funds (intermediate term at most.) Expense ratios are <0.2% and often halt that. When I looked into it several years ago shorter duration funds were less correlated with stock returns. They are certainly less affected by interest rate increases. I wanted to look into buying individual bonds but what I ended up given my maturity preferences were from the secondary market and I think were a better deal for the broker than for me. I last bought TIPS when the real return was 2%. Although I have a couple of international bond etfs I think they are quite nonessential. I don't see the point in long term bonds. You get a variety of ideas here but I think just splitting your allocation between a short term and an intermediate term bond fund wold be fine. I use Vanguard but there are others that are fine.

I agree with all your points! Especially splitting short term bonds from intermediate bonds. I also split between government bonds and corporate bonds to diversify even further which translate to a minimum of four separate bond funds. I have more choices on which bonds to liquidate during my retirement. I found that some people do not understand bonds very well and they end up buying only a single total market bond fund. It is refreshing to read your comment and your knowledge of bonds which is consistent with my understanding of bonds.

 

[Cayman]

For fixed income, you could keep 3 to 5 years living expenses in cash such as CDs or Vanguard Prime Money Market Fund (VMMXX) so you can potentially weather any storm without selling stocks at a low point.

If you truly want to "Weather any storm without selling stocks at a low point" you really should consider more than 3-5 yrs. living expenses in cash/CDs. Historically, we've had much longer downturns, and we may again in the future. Depends on your risk/comfort level.