Fixed income conundrum

[2177V]

Here is a good link on how various bonds perform during a crash

https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/

During a crash, stock performs horribly. (duh)
High yield bond decline 20%
intermediate corp bond decline 10%
intermediate government bonds gain 10%

Note that these gains are temporary since all of the bonds recover together in a couple of years while stocks lag behind.

I prefer short term corp bonds and short term government bonds with some assets in prime market funds and CD to hold me over. Once I have sufficient liquidity for my retirement "safety net", my stock portfolio portion tends to be aggressive because my stock portion is on a longer time horizon. As RETMD21 pointed out, I also don't see the value in long term bonds because my long term strategy is in stock and not bonds. My short term strategy is liquidity using bonds, prime market and CD.

This is also why I do not like the total bond market fund in retirement because a total bond fund co-mingle various bond funds which is OK before retirement. I am retired and i need to pick and choose which asset class to liquidate. Naturally I pick the asset class that is near its 52 week high and this works for me as long as I have sufficient number of different funds of separate and different asset classes. I currently have 10 stock funds and 5 bond funds and this give me more choices to liquidate or transfer assets from one class to another. I like to transfer an asset class that is near its 52 week high with a different asset class that is near its 52 week low...which is consistent with buying low and selling high.

 

[steelyman]

I’m not bond-savvy at all and have a good chunk of my portfolio in Vanguard’s total bond market index. I’ve wondered whether it would be better to be more picky.

My understanding is that duration is an important metric for a bond fund and, looking right now, the average duration of the fund is 6.0 years. So, is it correct to think of it as intermediate overall? I think I’d be OK with that over my projected (hoped-for) time frame.

 

[2177V]

I’m not bond-savvy at all and have a good chunk of my portfolio in Vanguard’s total bond market index. I’ve wondered whether it would be better to be more picky.

My understanding is that duration is an important metric for a bond fund and, looking right now, the average duration of the fund is 6.0 years. So, is it correct to think of it as intermediate overall? I think I’d be OK with that over my projected (hoped-for) time frame.

My personal opinion: Vanguard total bond market index fund is OK up to "several years before retirement". If you look at the graph that I cited closely, different bonds behave differently after a crash. Generally short term bonds are safer during a crash. intermediate bonds are less safe but the performance is better. This is the conumdrum many investors face: Safety and less performance versus more risk for more performance. The graph that I cited also indicates all the bonds recover after a few years. It is those few years that I am concerned about since I am retired.

When you get close to retirement or during retirement, people situation changes because a crash or bear market just before retirement or during retirement is not a good thing. During a crash or bear market, your value of your stock portfolio decline and liquidating stocks means you are locking in your losses and not giving time for your stock investment to recover. This is the reason I have sufficient short term corporate and government bonds, CD and other liquid assets to hold me over and to balance my aggressive stock investments. I personally do not feel comfortable with the total bond index market fund as my safety net because that fund co-mingle short, intermediate, and long term bonds to match the overall bond market.

If you compare the performance of a short term government bond to the total bond index market fund during a crash or bear market, you will find that the short term government bond does not decline as much. However, the total bond index market fund's performance is better overall. The decision for safety versus performance is up to the individual.

I am retired now, so safety take priority. My bond portion of my portfolio is having sufficient short term bonds, CD and other liquid assets while my stock portion is aggressive even though I am retired. This means I should have a soft landing during a crash or bear market but if there is no crash or bear market, my aggressive stock investments will make me money.

A 50/50 portfolio is very similar to what I am doing. 50% bonds for safety. 50% stock for performance. However, acquiring more knowledge on bonds will benefit investors to be more "sophisticated". Many people wrongly assume all bonds are safe. However, these same people should look at the graph that I have cited.

 

[bobandsherry]

Here is a good link on how various bonds perform during a crash

https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/

During a crash, stock performs horribly. (duh)
High yield bond decline 20%
intermediate corp bond decline 10%
intermediate government bonds gain 10%

Note that these gains are temporary since all of the bonds recover together in a couple of years while stocks lag behind.

I prefer short term corp bonds and short term government bonds with some assets in prime market funds and CD to hold me over. Once I have sufficient liquidity for my retirement "safety net", my stock portfolio portion tends to be aggressive because my stock portion is on a longer time horizon. As RETMD21 pointed out, I also don't see the value in long term bonds because my long term strategy is in stock and not bonds. My short term strategy is liquidity using bonds, prime market and CD.

This is also why I do not like the total bond market fund in retirement because a total bond fund co-mingle various bond funds which is OK before retirement. I am retired and i need to pick and choose which asset class to liquidate. Naturally I pick the asset class that is near its 52 week high and this works for me as long as I have sufficient number of different funds of separate and different asset classes. I currently have 10 stock funds and 5 bond funds and this give me more choices to liquidate or transfer assets from one class to another. I like to transfer an asset class that is near its 52 week high with a different asset class that is near its 52 week low...which is consistent with buying low and selling high.

What i took from that, the bond funds lose less, but over the long haul they also gain much less. So losses hurt just as much as you never get the upside to offset the downside. If you've won the game, all good.

 

[wolf]

70/30 to risky. Unless you have other sources of income? Prefer CD's over bonds. IMHO.

 

[RobbieB]

I'm at 75/20/5 and it works for me. No other income except SS at 15 grand a year.

 

[pb4uski]

.....I currently have 10 stock funds and 5 bond funds and this give me more choices to liquidate or transfer assets from one class to another. I like to transfer an asset class that is near its 52 week high with a different asset class that is near its 52 week low...which is consistent with buying low and selling high.

What are your 15 tickers and target percentages?

 

[RetMD21]

Vchan2177, you are a lot more energetic than I am. Rather than intermediate term corporate and treasury bond funds I would favor a mixed intermediate fund without any asset class rotation among bond funds. Your graph about bond fund performance during the 2008 recession was interesting.

Steelyman, I don't understand the total bond fund's strategy and I am not sure if the allocation among maturities might vary over time. On the other hand duration of 6 years is intermediate range which is shorter than I would have guessed and not a cause for concern. I would still want to have some shorter maturity bond exposure.

I think investors have different plans for what to do in the case of a market melt down. I plan to spend out of the short maturity bucket. One could just stick with their pre-planned stock/bond allocation and sell to adjust.

Bond funds are a matter of trade offs. Longer maturity gives higher current yield but more price volatility and chance of loss. I am concerned about losses with increases in interest rates and got the impression somewhere, maybe from Rick Ferri, that intermediate term bonds were good enough. I know that is what he advocates in his Cor 4 portfolio. My short term bond allocation makes me feel better about having very little cash.

 

[audreyh1]

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!

Yes, but these recent times were not economically difficult times, these were economically improving times and for that reason interest rates were rising, and bonds dropped. Bonds almost had a bad year in 2018 until the major equity correction in December had bonds break even for the year because they suddenly appreciated.

During 2008-2009 financial crisis and bear market, the highest quality bond funds did not go down, many of them appreciated instead.

 

[Running_Man]

Yes, but these recent times were not economically difficult times, these were economically improving times and for that reason interest rates were rising, and bonds dropped. Bonds almost had a bad year in 2018 until the major equity correction in December had bonds break even for the year because they suddenly appreciated.

During 2008-2009 financial crisis and bear market, the highest quality bond funds did not go down, many of them appreciated instead.

At some point the comparison to 2008-2009 must include what is high grade now and what was high grade then and how the diferences in valuation will be effected in the future. Bond market confidence in BBB debt is unbelievable right now. The AA and A rating markets are disappearing and being replaced with BBB debt. With the difference in BBB debt being so slight, a diversified portfolio of A graded debt such as I shares Aaa is in my view far better than total bond market at Vanguard and will offer far greater downside support
https://www.ishares.com/us/products/239431/ishares-aaa-a-rated-corporate-bond-etf

 

[bjorn2bwild]

At some point the comparison to 2008-2009 must include what is high grade now and what was high grade then and how the diferences in valuation will be effected in the future. Bond market confidence in BBB debt is unbelievable right now. The AA and A rating markets are disappearing and being replaced with BBB debt. With the difference in BBB debt being so slight, a diversified portfolio of A graded debt such as I shares Aaa is in my view far better than total bond market at Vanguard and will offer far greater downside support
https://www.ishares.com/us/products/239431/ishares-aaa-a-rated-corporate-bond-etf

That is my thinking too.
I have been using QLTA for intermediate term (7yrs duration), and Vanguard BSV (13.4% Baa, 2.6yrs Duration) or VGSH (1.9yrs duration) for short term.
QLTA is thinly traded, so it's best to use limit orders.

 

[2177V]

What are your 15 tickers and target percentages?

My current 15 tickers are with Vanguard.....

5 bond funds

VFISX Short Term Government Bond
VMBSX Intermediate Government Bond
VFSTX Short Term Corporate Bond
VICSX Intermediate Corporate Bond
VMFXX Money Market

10 stock funds

VFIAX SP500 Large Cap
VMNDX Large Cap Value
VCVLX Mid Cap Value
VEVFX Small Cap Value
VHGEX Globel Equity
VGENX Energy Sector
VCHCX Medical Sector
VGSLX Real Estate Sector
VWELX Balanced Fund
VWINX Balanced Fund

Notes: My two balanced funds are my oldest funds which are being drawn down. Medical Sector is down due to the "Medicare for All" but I expect this nonsense to die after 2020 so I am increasing my exposure. I prefer Value since I am retired and Value tends to (excuse my pun) hold its value during a down turn compared to Growth funds. I am retired so I am no longer in the growth phase. I do not like long term bonds because the risk/reward ratio is not to my liking. I also do not like total market funds because it co-mingle different assets classes.

This is simply my personal preferance and I know other people will disagree with this portfolio structure but I do not care. I made enough money during my growth phase and i am in the defensive phase. The purpose of having this many funds is to allow me to exchange money from one fund near its 52 week high with another fund near its 52 week low. My target percentages are dynamic and not fixed because they vary a lot.

With this many funds, I can pick and chose which fund to liquidate during my retirement. Naturally, I pick the fund that is closest to it's 52 week high to liquidate during my retirement. If there is a crash or a bear market, I have sufficient money in VMFXX, VFISX and VFSTX to hold me over for about 8 years of retirement income. After 8 years I can then turn to my other funds to select which fund has recovered the best compared to the others. If there is no bear market, my stock funds will make me money.

 

[bmcgonig]

That is my thinking too.
I have been using QLTA for intermediate term (7yrs duration), and Vanguard BSV (13.4% Baa, 2.6yrs Duration) or VGSH (1.9yrs duration) for short term.
QLTA is thinly traded, so it's best to use limit orders.

Not sure why QLTA would be safer than BND in a crisis situation. BND is 60% Government and 40% investment grade, half of which is Baa. Wouldn't the 60% Government hold it up better?

 

[bjorn2bwild]

Not sure why QLTA would be safer than BND in a crisis situation. BND is 60% Government and 40% investment grade, half of which is Baa. Wouldn't the 60% Government hold it up better?

Oops,
I was agreeing with the first part of Running_Man's post where I think there is too much Baa risk in most corporate bond funds. I meant to back out the part about being far better than BND.
At 64% government and 17% Baa, BND should do better in a crisis situation. OTOH, with something short of panic, QLTA might hold it's own just fine - 3.14%/30day SEC yield vs 2.87% for BND and 7 vs 6yrs duration.
It is not a large holding for me.

 

[audreyh1]

At some point the comparison to 2008-2009 must include what is high grade now and what was high grade then and how the diferences in valuation will be effected in the future. Bond market confidence in BBB debt is unbelievable right now. The AA and A rating markets are disappearing and being replaced with BBB debt. With the difference in BBB debt being so slight, a diversified portfolio of A graded debt such as I shares Aaa is in my view far better than total bond market at Vanguard and will offer far greater downside support
https://www.ishares.com/us/products/239431/ishares-aaa-a-rated-corporate-bond-etf

Highest quality debt = US government backed debt, particularly treasuries. Does not include corporate debt.

 

[pb4uski]

I changed tacks on fixed income recently and am pretty happy with the results.

I jumped on a few recent credit union CD specials... all 5-year... two at 3.5% and one at 3.0%. I also have a portfolio of 20 high quality (BBB- or better) preferred stocks.... mostly insurance, banking, utility preferreds that are yielding 5.62% that I consider part of my fixed income portfolio.

The above, along with a small, old whole life policy which is yielding about 3.3%, have aweighted average yield of about 4%..... overall good credit quality and limited interest rate risk.

In addition, I have some Vanguard Total International Bond Fund that I am on the fence on.... the yield is pathetic.. less than 0.5%... but the toal returns for 1,3 and 5 year periods have been good... 7.8%, 3.4% and 4.3%, respectively. I'll probably keep it for now but without enthusiasm. I'm currently below my equity allocation target by about 8% so if we have a dip this money might be my dry powder to use to buy equities.

If I blend in the VTABX the weighted average yield is about 3.5%.

So overall I'm finally pretty happy with the fixed income side of things.

 

[Dtail]

My weighted average Fixed Income yield is at 3.27%. Would like to get it to 3.5%, but not easy in this environment, as don't wish to analyze/monitor individual bonds currently.

 

[VanWinkle]

I changed tacks on fixed income recently and am pretty happy with the results.

I jumped on a few recent credit union CD specials... all 5-year... two at 3.5% and one at 3.0%. I also have a portfolio of 20 high quality (BBB- or better) preferred stocks.... mostly insurance, banking, utility preferreds that are yielding 5.62% that I consider part of my fixed income portfolio.

The above, along with a small, old whole life policy which is yielding about 3.3%, have aweighted average yield of about 4%..... overall good credit quality and limited interest rate risk.

In addition, I have some Vanguard Total International Bond Fund that I am on the fence on.... the yield is pathetic.. less than 0.5%... but the toal returns for 1,3 and 5 year periods have been good... 7.8%, 3.4% and 4.3%, respectively. I'll probably keep it for now but without enthusiasm. I'm currently below my equity allocation target by about 8% so if we have a dip this money might be my dry powder to use to buy equities.

If I blend in the VTABX the weighted average yield is about 3.5%.

So overall I'm finally pretty happy with the fixed income side of things.

Do preferred stocks act as a ballast for equities in a bear market?
I always thought they would react like stocks and also lose capital
in a correction/bear. I am not very familiar with them so I apologize
for my question if it is an obvious answer.

 

[COcheesehead]

My weighted average Fixed Income yield is at 3.27%. Would like to get it to 3.5%, but not easy in this environment, as don't wish to analyze/monitor individual bonds currently.

Have you looked at closed end funds?

 

[Dtail]

Have you looked at closed end funds?

Not really, but probably worthwhile.
I remember you giving me individual bond advice, especially using the Fidelity site, but have instead (for now) spent the time on the CD side.

 

[Winemaker]

The horse may have already gotten out of the barn with preferred stocks this year. They act like "mini" bonds for the most part, paying a fixed rate of dividends based on the par value of the issue, usually $25. Since interest rates have fallen this year, most quality issues are well above $25.75 and some are around $27+, since Christmas. Yes, we are expecting another rate cut, but is it already baked into the cake? IIRC, some bond funds are up over 10% since July !st, even.

 

[COcheesehead]

Not really, but probably worthwhile.
I remember you giving me individual bond advice, especially using the Fidelity site, but have instead (for now) spent the time on the CD side.

Individual bonds are a tight market now. A couple years ago, there were a lot of great buys when everyone thought rates were going up. Now its a crowded trade.

There are some nice yields in closed end funds, but that comes at the cost of taking on more risk. They still can make sense for a portion of one's fixed income. I have money in a couple closed end muni's funds and I have been happy with the cash flow, but I also know what I am getting into.

 

[COcheesehead]

The horse may have already gotten out of the barn with preferred stocks this year. They act like "mini" bonds for the most part, paying a fixed rate of dividends based on the par value of the issue, usually $25. Since interest rates have fallen this year, most quality issues are well above $25.75 and some are around $27+, since Christmas. Yes, we are expecting another rate cut, but is it already baked into the cake? IIRC, some bond funds are up over 10% since July !st, even.

If you put money into bonds last year or even earlier this year, you made out, maybe even better than equities.
Its one of those lessons of where sometimes you just have to hold your nose and keep putting money to work.

 

[pb4uski]

Do preferred stocks act as a ballast for equities in a bear market?
I always thought they would react like stocks and also lose capital
in a correction/bear. I am not very familiar with them so I apologize
for my question if it is an obvious answer.

They are not as ballastly as bonds.... but not as volatile as stocks.

 

[pb4uski]

The horse may have already gotten out of the barn with preferred stocks this year. They act like "mini" bonds for the most part, paying a fixed rate of dividends based on the par value of the issue, usually $25. Since interest rates have fallen this year, most quality issues are well above $25.75 and some are around $27+, since Christmas. Yes, we are expecting another rate cut, but is it already baked into the cake? IIRC, some bond funds are up over 10% since July !st, even.

+1 Most of mine were bought in the first quarter of 2019... my overall cost is about 1.0% less than par... current market values are about 3.6% more than par.... while it is nice that prices have gone up it is becoming harder and harder to find attractive yields for me.