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Granny's Asset Allocation
Old 03-12-2013, 01:23 PM   #1
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Granny's Asset Allocation

My question is regarding my 88 year old motherís asset allocation. My DB is very concerned about potential (looming) fall in bonds. Since these funds are in annuities the investment choices are somewhat limited. My primary objective is low risk and to make sure inflation risk is covered (17 % Stock and Inflation Bonds should cover this). These funds are primarily used for discretionary spending (vacations, gifts, extraordinary expenditures). She has enough other income to cover day to living expenses.

All input is greatly appreciated and I thank you advance.
Bonds 82%
Stocks 17%
Cash 1%

Of the bond allocation:
18 % are US Savings Bonds
24 % are Vanguard VVA Short Term investment grade
26 % are Vanguard VVA Bond fund
11 % are Variable annuity that will not be changed
3 % are Vanguard Inflation Protection Bonds

My question is in regards to:
24 % are Vanguard VVA Short Term investment grade
26 % are Vanguard VVA Bond fund

The choices are:
VVA Balanced (0069)
Capital Growth (0603)
Conserv Allocation (0801)
Diversified Value (0145)
Equity Income (0008)
Equity Index (0068)
Growth (0010)
High Yield Bonds (0146)
International (0086)
Mid-Cap Index (0143)
Moderate Allocation (0803)
Money Market (0064)
REIT (0147)
Short-Term Invest-Gr (0144) <<< this is the one already in>>>
Small Company Growth (0160)
Total Bond Index (0667) <<< this is the one already in>>>
Total Stock Market Index (0604)

Move to:
Conserv Allocation (0801) or Moderate Allocation (0803) or Money Market
My take is leave alone, because any move will still have exposure to bonds and more market risk, but I am open to input.

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Old 03-12-2013, 02:31 PM   #2
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A ladder of CDs?

This gives her no loss of principal and the ladder allows her to track higher interest rates if/when they show up.

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Old 03-12-2013, 05:04 PM   #3
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It is unlikely that the short-term bond fund will have any meaningful change in value --- either up or down in her lifetime.

I don't see anything to worry about here.
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Old 03-12-2013, 09:49 PM   #4
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I managed my grandmother's portfolio of 95% fixed income holdings from about 2005-2011 when she passed on at the ripe young age of 88.

Starting even in 2006, as rates started dropping, I discovered the callable CD market with the "death put/estate" feature.

The CDs offer richer rates, but in return, are callable at the option of the issuer after a certain date. But, many CDs issued also have the death put/estate put feature, whereby when the original CD owner passes on, the heirs can either redeem it at full par, or hold onto it (or sell it in the open market).

If someone is up in years, and probably has maybe at most 5-8 years left, it wouldn't be a bad idea to ladder a good chunk into 10/20/30 year CDs offering higher rates to begin with...and if they're callable, they'll likely offer even slightly higher rates. Then, when she passes on, even if rates have gone up substantially and the market value of her CD has dropped, you can exercise the estate put and redeem it at full par.

One caveat: usually, each prospectus will detail limits that each issue can redeem due to the estate feature each year (usually expressed as a % of the total outstanding issue...such as, no more than, say, 1% or 3% of the outstanding CDs can be called in any one year with the death put feature).

I loaded up my grandmother's portfolio with about 28 different callable CDs, and not a single one had any issues with using the death put feature resulting in maxing a redemption covenant and having to wait a year, although your own experience may vary.

There were even some more exotic CDs that had rich teaser rates for the first 6 months or 1 or 2 years, and which had multipliers afterwards (like 7% or 8% guaranteed the first year, and afterwards the rate was 4x the spread between the 30 year and 2 year Treasury bond rate). These days it's very slim pickins, but there are some juicier rates out there if you think the death put feature will be exercised in the not too distant future, so you can take a chance with a 20 or 30 year CD.

The CD broker I started her out at was FISN (CD Rates, CD Alternative Rates, Money Market Rates, IRA Investments :: FISN). The broker we were dealing with left to join RBC Wealth Management right around the time she passed on, and we then began liquidating everything. I could give you the broker's name at RBC over a private message if you want.
Dryer sheets Schmyer sheets
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Old 03-13-2013, 06:06 AM   #5
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I like the ladder CD approach, however the choices for moving fund are limited to the funds I have listed without invoking a taxable event. The other issue with CD ladder is "perceived complexity" of setting up by Granny.

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Old 03-13-2013, 06:37 AM   #6
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Whenever I look at my bonds I have two questions:1. How important are dividends.
2. How important is making or losing money on the value of the bonds.
Frankly, I sort of look at my long term bonds as an annuity that I can eventually leave as part of my estate. I really don't care if the bond values go up or down since, overall, my dividend payments don't change a lot. I've had a lot of long term municipals that pay around the same dividend for the past 10 years. Today, I show a big profit if I sell them since rates have gone down but when rates rise I'll lose money but still have the same amount to spend each month.

To cover myself on inflation, I have 30% of my portfolio in dividend stock ETF funds. This is really simple, works for me and takes very little day to day management.

Good Luck and I'm sure your Mom appreciates your help. If DB is uncomfortable, would he like to manage it? Since there is no single answer and you have a well thought out program, I'd feel very comfortable, if I were you, simply do what you think best......Someday I hope I have someone who cares about me as you do for your Moml.
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Old 03-14-2013, 06:47 AM   #7
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Thank you for your kind word. DB has her best interest at heart as well and Mom is very appreciative. His sugestion was to move from bond fund to conserv Allocation (0801) or Moderate allocation (0803). My only concern is this has more overall exposure to market risk, but not too concerned since it would still be mostly in bonds regardless.

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