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Old 06-21-2013, 07:12 PM   #21
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The specter of 2008 (when many bond funds got killed along with everything else) and the prospect for higher interest rates made me seek bond alternatives in 2010 and I went to cash, CDs, and ibonds for half of my fixed income portfolio. Most of my bond funds got whacked pretty hard this week but the cash/CDs/ibonds provided some stability as planned.
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Old 06-21-2013, 07:44 PM   #22
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This week's bond action triggered me to go look more closely at my bond fund expenses line. Even though I have had 4 and 5 star funds, I had failed to recognize some 12-1b fees as well expense ratios that were a bit pricey. All my funds were less than 5 years duration and most closer to 3.5 yrs.

Since yields are only going up and principal down, the incentive to smashed down the expense side has made me move into short (3 yr) ETFs. I particularly like Vanguard's short corp (VCSH), competitive yields for duration and expense ratio of only 12 basis points. Vanguard also has an intermediate ETF (VCIT) that has the same expense ratio if you want to move up the duration.

Haven't yet picked a high yield ETF--suggestions?? Need to explore the options a bit more--maybe look at Guggenheim's bullet funds as an option as well.
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Old 06-21-2013, 07:53 PM   #23
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I have 55% fixed income, and I am retired. It is sometimes tough to stick to my asset allocation, but for me it really helps to have a small amount (<$10K) in a separate account, that happens to be a Roth IRA in my case. I use this Roth IRA for my impulse trades. This way I can get these trading ideas out of my system without touching my main portfolio. .
Do you trade within your Roth IRA?
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Old 06-22-2013, 12:55 AM   #24
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It is sometimes tough to stick to my asset allocation, but for me it really helps to have a small amount (<$10K) in a separate account, that happens to be a Roth IRA in my case. I use this Roth IRA for my impulse trades. This way I can get these trading ideas out of my system without touching my main portfolio. I got the idea from what UncleMick calls his "testosterone" money for trades.
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Do you trade within your Roth IRA?
Yes. There is no mixing of this tiny Roth IRA with anything else. Nothing goes into it or out of it.
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Old 06-22-2013, 05:00 AM   #25
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We've been talking with a financial adviser, just for educational purposes. I've not really been too terribly impressed with what I'm learning, but perhaps part of that is because there is no good news to be had, especially in the matter of fixed income.

What the adviser is saying though is that bond funds are, of course, evil, right now (and I believe that - if you don't then I suppose we'll have to agree to disagree), and that that's really forcing us to look at asset classes differently going forward than we have in the past. Lumping together a small-cap fund with a global real estate fund (as "equities") makes little sense, just like lumping together a short-term municipal bond with a high-yield bond fund (as "bonds").

So the upshot of his message is to make up for the loss of the bond market as a viable source of stable value by identifying new sources. He has a number of recommendations in that regard. I'm not sure I'm convinced that this is the right approach, but I have got to believe that some of these hold better prospects than bonds, for the purpose bonds have traditionally served in portfolios.

- convertible preferred stock
- utility stock
- real estate
- bank loans (floating rate funds)
- toll roads (?)

A lot of this sounds flaky to me (especially treating equities as if they're bonds), but I suspect that's just because it sounds new. New sounds scary. Bonds sound so safe. And of course they're not. So our visceral reaction to newness and oldness is going to betray us. I wish I knew how to work past that to get to the core of the matter.

And have the core of the matter not be, "You're screwed; roll over and die." Of course.

We're going to be moving a lot of money around this summer. My spouse is changing jobs, and so about half of our retirement savings is going to be moving from 401ks into an IRA, and will need to be reinvested. The other half is currently in a target date fund which is anemic due to how its bond component is dragging, and will increasingly be dragging, it down. More to the point, at the rate this traditional investment plan is earning returns we simply will fail to reach our goal of financial independence, based (solely) on revised (lower) estimates for how traditional fixed income assets will perform.
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Old 06-22-2013, 08:09 AM   #26
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.....Haven't yet picked a high yield ETF--suggestions?? Need to explore the options a bit more--maybe look at Guggenheim's bullet funds as an option as well.
Nwsteve

I've moved some of my fixed income allocation to the Guggenheim Bulletshares. While their fair value gets hammered in weeks like this similar to bond funds, I'm looking at them more as CD substitute since in intend to hold them to maturity (or a portfolio of individual bonds held to maturity). I have both the corporate and high yield flavors that mature in 5-7 years.

I've only had them a month so it is far to early to tell.
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Old 06-24-2013, 01:44 PM   #27
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Who is they? Apparently "they" are unaware that in this country the Fed has a dual mandate, one of which is price stability and the other of which is maximum employment.
I suppose I misstated my thoughts here; Yes, one of the mandates of monetary policy is in fact maximum employment; What I meant was that the Fed broke protocol awhile back by labeling QE as "QE Infinity" by stating that QE will remain in effect until the unemployment rate hits 6.5%. Having realized in a few short months that this almost economically impossible in the near future, this has now been modified to an acceptable rate of 7.0%.

The "they" referred to the general consensus of the financial industry, economists and various others that feel job creation is bolstered by legislation from Congress which includes, among other policies, favorable corporate tax policy and foreign trade policies that encourage domestic manufacturing. Many believe that in the absence of meaningful changes enacted by Congress, the Fed became so frustrated as they were basically stepping in and saying that QE shall remain in effect until its results create an acceptable employment rate. Sadly, all QE has really done is keep the economy from crashing through massive infusions of liquidity while artificially manipulating equity markets into a lulled sense of complacency. A healthy economy creates jobs through a combination of private sector and government hiring, small business start-ups and other forms of entrepreneurship, not by seeing US equity prices climb forever and watching investors desperate for yield buy new issues from sub-Saharan Africa and other third world nations that have been offering third world debt at first world yields.

The markets totally ignored every piece of bad news from anywhere on the globe all year until the threat of ending QE, coupled with softening numbers from China sent investors to push yields so high so fast that many central banks are being forced to consider actions to avoid currency devaluation. Clearly this can't be the road to a healthy economy or a normal marketplace
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Old 06-24-2013, 02:14 PM   #28
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We've been talking with a financial adviser, just for educational purposes. I've not really been too terribly impressed with what I'm learning, but perhaps part of that is because there is no good news to be had, especially in the matter of fixed income.

So the upshot of his message is to make up for the loss of the bond market as a viable source of stable value by identifying new sources. He has a number of recommendations in that regard. I'm not sure I'm convinced that this is the right approach, but I have got to believe that some of these hold better prospects than bonds, for the purpose bonds have traditionally served in portfolios.

- convertible preferred stock
- utility stock
- real estate
- bank loans (floating rate funds)
- toll roads (?)
Any advisor that is worthy of his or her certification would have to suggest alternatives because , as you say, bonds are simply probably not going to be able to play the role in most portfolios that they have in the past:

Convertible preferreds: Not a bad alternative since they kind of act like a bond and have shareholder preference over the equivalent equity issues; However, check the call provisions carefully and make sure you understand them or perhaps buy a fund if you want professional management.

Utility stocks: Not the same as the old days and do not necessarily outperform other equities in times of heavy selling; Bottom line: Any income from an equity is not "fixed"

Real estate: Not my cup of tea; have owned all the variations including MLP;s (complicated tax issues), REITS (sector is always in favor then out of favor), foreign funds (among the best choices: check Third Avenue Funds). If he refers to actual property, I suppose that’s great for those with lots of cash up front or big cohunes

Floating rate funds: the very best choice among them and the traders on my company's liquidity desk will back this up. Like an ultra short, durations are very low and they usually reset to LIBOR + a spread; The added risk of LIBOR provides a higher yield then a CD but with significantly less volatility when rates rise. Fidelity has a few top quality funds; I may switch my core intermediate bond funds to this choice if the perceived loss of principal exceeds the worth of yield.

"Toll roads": He is speaking of public/private partnerships, a new and upcoming methodology of funding public infrastructure projects, both new and existing; California has several such ventures; However, these tend to be relatively illiquid private placements which can sometimes defeat the purpose.

My biggest concern is when or how to switch up my asset allocation; Like most, I have bailed from an asset class before only to watch rebound. Even though nobody disputes that bonds are on the way down for the foreseeable future, CD's will never keep with inflation (even though they claim there is none) and overweighting equities is still risky by definition. I've read some good ideas in this thread, however like the Vanguard short duration ETF. For me, I usually avoid ETF's because I never want to earn an index; I want to beat it. Simultaneously, I want to lose less when an asset crashes; sadly, this almost impossible with fixed income because of the obvious nature of the inverse relationship; Nowhere to hide. (sans perhaps GNMA's with theior negative convexity although GNMA's have been equally pummeled of late)

I've been getting the best bang for my buck in funds that are overweighted in CMBS (commercial mortgage backed sceuirties) but thise days are over
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Old 06-25-2013, 09:58 AM   #29
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I've moved some of my fixed income allocation to the Guggenheim Bulletshares. While their fair value gets hammered in weeks like this similar to bond funds, I'm looking at them more as CD substitute since in intend to hold them to maturity (or a portfolio of individual bonds held to maturity). I have both the corporate and high yield flavors that mature in 5-7 years.

I've only had them a month so it is far to early to tell.
The concept of funds that holds its bonds to maturity is a nice option for investors to have. But I wish BulletShares had a longer track record and a bit more clarity of details (e.g. wind-up expenses on termination dates). And don't quite understand how such a fund which says it holds bonds maturing in a certain year can have an ave maturity well beyond that (e.g. BSJE ...2014 with ave maturity >4.5yrs)
ETFs | Guggenheim Investments
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Old 06-25-2013, 10:29 AM   #30
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Any advisor that is worthy of his or her certification would have to suggest alternatives because , as you say, bonds are simply probably not going to be able to play the role in most portfolios that they have in the past:
...
Bonds can still earn a very modest real return if viewed over several years. I agree they won't likely give investors excess returns as in the last 30 year interest rate decline period.

It is quite likely that there will be months where the past 12 month return is negative. But that is likely to be a short term ugly followed by improving returns. Very difficult to get the timing right if trying to sidestep it -- as has been mentioned by others. My simulations indicate that the negative 12 month returns could last for 12 months depending primarily on bond fund duration and the rate rise slope (extent of rate rise and number of years it lasts).

Bonds are still likely to provide a cushion against declining equity prices brought about by business slowdowns.

I don't like even short term losses either, but it's important to view the bond segment of the portfolio as a complement to equities, not just in isolation.
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Old 06-25-2013, 10:47 AM   #31
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What the adviser is saying though is that bond funds are, of course, evil, right now
This is the phenomenon my adviser was referring to:

Center for Financial Planning, Inc. - Money Centered - When Interest Rates Go Up, Bond Prices Go

The same thing is mentioned late in this article:

First Quarter 2013 Market and Economic Review
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Old 06-25-2013, 10:52 AM   #32
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And don't quite understand how such a fund which says it holds bonds maturing in a certain year can have an ave maturity well beyond that (e.g. BSJE ...2014 with ave maturity >4.5yrs)
ETFs | Guggenheim Investments
I had not noticed that but had not specifically looked at BSJE. I noticed in the top holdings list they show many holdings that are 2018, 2019 maturity. BSJI shows 2018 for maturity as does the top holdings.

You can use the "contact us" link to ask them, they have responded quickly when I sent some questions before.
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Old 06-25-2013, 11:58 AM   #33
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Bonds can still earn a very modest real return if viewed over several years. I agree they won't likely give investors excess returns as in the last 30 year interest rate decline period.

It is quite likely that there will be months where the past 12 month return is negative. But that is likely to be a short term ugly followed by improving returns. Very difficult to get the timing right if trying to sidestep it -- as has been mentioned by others. My simulations indicate that the negative 12 month returns could last for 12 months depending primarily on bond fund duration and the rate rise slope (extent of rate rise and number of years it lasts).

Bonds are still likely to provide a cushion against declining equity prices brought about by business slowdowns.

I don't like even short term losses either, but it's important to view the bond segment of the portfolio as a complement to equities, not just in isolation.
Intermediate term bond funds will continue to be 30% of my portfolio. If the NAV goes down I see it as a buying opportunity and the higher interest rate will eventually compensate. Things go up and down and I rebalance. I don't need to beat the market.

I have 15% of my portfolio in a 457plan Stable Value fund paying 2.83% and that should pay for the first 10 years of my ER starting at age 52.
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Old 06-25-2013, 12:21 PM   #34
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Intermediate term bond funds will continue to be 30% of my portfolio. If the NAV goes down I see it as a buying opportunity and the higher interest rate will eventually compensate. Things go up and down and I rebalance. I don't need to beat the market.

I have 15% of my portfolio in a 457plan Stable Value fund paying 2.83% and that should pay for the first 10 years of my ER starting at age 52.
Sounds like a plan .

We have about 23% of the portfolio in intermediate bond funds with durations from 5 years down towards 3 years.

What some people don't appreciate is that if rates go up very fast, that is better then a slow rate rise as the pain is immediate but then you have a longer time to earn the higher rates. To market time things correctly you need to know how fast and how far rates will move up. I had to build a spreadsheet model to believe this sort of thing myself. So I'm prepared for the pain but still will hate it.
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Old 06-25-2013, 12:28 PM   #35
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The concept of funds that holds its bonds to maturity is a nice option for investors to have. But I wish BulletShares had a longer track record and a bit more clarity of details (e.g. wind-up expenses on termination dates). And don't quite understand how such a fund which says it holds bonds maturing in a certain year can have an ave maturity well beyond that (e.g. BSJE ...2014 with ave maturity >4.5yrs)
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This might be due to having some callable bonds in the portfolio. I believe that they do not try to keep the exact same bonds in the portfolio until its maturity.

My major problem with this investment is wide spreads and tiny size. They need to get some volume going.

Ha
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Old 06-25-2013, 01:20 PM   #36
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Fixed Income Suggestion: SELL
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Old 06-25-2013, 01:52 PM   #37
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The concept of funds that holds its bonds to maturity is a nice option for investors to have. But I wish BulletShares had a longer track record and a bit more clarity of details (e.g. wind-up expenses on termination dates). And don't quite understand how such a fund which says it holds bonds maturing in a certain year can have an ave maturity well beyond that (e.g. BSJE ...2014 with ave maturity >4.5yrs)
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This might be due to having some callable bonds in the portfolio. I believe that they do not try to keep the exact same bonds in the portfolio until its maturity.

My major problem with this investment is wide spreads and tiny size. They need to get some volume going.

Ha
I think Ha may be on to something. The 2014 issue seems to be an anomaly as the average maturity and duration seem quite different compared to the other target years where in each case the duration is a bit lower than the average maturity whereas for the 2014 portfolio the duration is less than half the average maturity. Also, the maturity years of the top holdings for the other issues are the same as the target year, but not for 2014. Very odd.

I concede that I wish their disclosures/financial reporting was more robust and that they had a longer track record and bigger fund sizes.
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Old 06-25-2013, 03:21 PM   #38
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Fixed Income Suggestion: SELL
Intermediate bond funds are down double what one would expect for a 50 basis point rise. Interesting.
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Old 06-25-2013, 04:16 PM   #39
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Intermediate bond funds are down double what one would expect for a 50 basis point rise. Interesting.
I wondered about this so checked on fund that I don't own, Vanguard Intermediate Treasury (VFITX) with duration = 5.4 years.

It was down -2.8% in one month as of June 24. The 5 year constant maturity Treasury data showed a 0.62% rise in this time. So this gives duration x rate rise = -3.4%. Pretty close I guess given that VFITX has various maturities and so that duration figure is an average one.
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Old 06-25-2013, 04:25 PM   #40
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I wondered about this so checked on fund that I don't own, Vanguard Intermediate Treasury (VFITX) with duration = 5.4 years.

It was down -2.8% in one month as of June 24. The 5 year constant maturity Treasury data showed a 0.62% rise in this time. So this gives duration x rate rise = -3.4%. Pretty close I guess given that VFITX has various maturities and so that duration figure is an average one.
I was hoping that it was more and that the marker had priced in a future rate hike.
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