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Rebalance portfolio from equities to bonds at this point in time
Old 04-21-2011, 11:55 AM   #1
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Rebalance portfolio from equities to bonds at this point in time

Hi, just joined and want to say what a find!! Probably the most useful site I have found.

After running through some of the worksheets and calculation programs here, I found (not to my surprize) that I'm fairly heavy in equities vs bonds (87% to 13%).

At 58 I should be more conservative but it seems that now is not the time to buy bonds since interest rates are sure to climb and soon.

I have been moving out of growth stocks to more value (i.e. into funds such as Vanguard Wellington and Dodge and Cox Balanced) plus that gets me more bond exposure. I was also thinking more of Total Bond funds or at least Intermediate.

What are your thoughts on moving to bonds at this point in the economy?
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Old 04-21-2011, 12:03 PM   #2
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I feel exactly like you do. Bonds scare me right now.
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Old 04-21-2011, 12:14 PM   #3
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5 year CDs make a nice substitute for bond funds. You earn 2.5% if you shop around and if rates spike you surrender early and reinvest for a higher yield.
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Old 04-21-2011, 12:22 PM   #4
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You've probably researched asset allocation a little which is why you're asking if you are too heavily weighted towards equities. It's basically a decision based on your risk/return requirements and tolerance. If you decide you want more fixed income you then get into another set of risk return trade offs ie CDs are guaranteed, but currently offer poor returns, long term bonds have historically been good investments, but will rising interest rates hurt their price. Do you want Govt bonds or corportate

Personally I would not try to time the market or predict the future. I would decide on an AA and implement it asap and rebalance whenever your AA diverges by more than 5% from your plan. A total bond index of some kind might be a good place for you to start.
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Old 04-21-2011, 12:27 PM   #5
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While bonds will be subject to taking a hit in a raising rate environment, I would say its never a wrong time to get to an asset allocation that lets you sleep at night. There are lot of ways to pare back some of your equity and increase your fixed income exposure (eg CDs, Floating Rate, Strategic Income, International, Emerging Market, Convertibles, Total Bond Market, Preferreds, etc). Certainly increasing expose to Wellesley and Wellington is one way to go.
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Old 04-21-2011, 12:31 PM   #6
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I'm happy with 100% equities, though I have quite a bit of cash now since my portfolio value is above my retirement projection and I've been selling some equities. If you are retiring soon I'd definitely carry something like three years of cash or very short term bonds. Live off of that for the first three years. Worked great for me over the last three years, plus DW decided not to retire with me. I'm back at a new peak portfolio value this year, even with our withdrawals. I'd certainly be selective about buying bonds now.
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Old 04-21-2011, 12:48 PM   #7
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If you are investing for the long term, then I would go ahead. You could do it gradually, moving just a fraction every month. Then you wouldn't have to worry about changing your AA at the absolutely worst time possible. At least for me, a gradual approach would be easier.
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Old 04-21-2011, 01:19 PM   #8
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I do not see any reason to avoid short-term bonds right now. So if you need to unload equities, you can use the proceeds to buy CDs or short-term bond funds. For the latter, I prefer Vanguard funds and there are three of them that I own:

VBIRX short-term bond index
VFSUX short-term investment grade (actively managed)
VCSH short-term corporate index

Another possibility is to purchase I bonds from Treasury Direct.

Good luck!
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Old 04-21-2011, 01:22 PM   #9
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I like just using a Total Bond Fund for my bond portion. Simple enough.
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Old 04-21-2011, 01:26 PM   #10
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Originally Posted by DFW_M5 View Post
While bonds will be subject to taking a hit in a raising rate environment, I would say its never a wrong time to get to an asset allocation that lets you sleep at night. There are lot of ways to pare back some of your equity and increase your fixed income exposure (eg CDs, Floating Rate, Strategic Income, International, Emerging Market, Convertibles, Total Bond Market, Preferreds, etc). Certainly increasing expose to Wellesley and Wellington is one way to go.
+1 for Wellesley and Wellington. Their duration is similar to Total Bond Market, but their treasury exposure is very low (3-5% vs 42%).
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Old 04-21-2011, 01:49 PM   #11
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Reading the comments the general opinion seems to be that you should decide on an AA and implement it. Don't worry about the future or what they are saying on MarketWatch or in Forbes, just implement you desired AA and stick to your plan.
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Old 04-21-2011, 03:06 PM   #12
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Wow! Thanks for all the suggestions and the thought put into them. I like the idea of getting approx 3 years worth of money into CD's and cash equivelents to ride out the inevitable storms.

As a retired Naval Officer (Reserves) I will start to get a fairly good pension in 2 years (30K+) which also comes with very low cost health insurance. Then in 2 more years, the mortgage is paid off and then in 2 years after that SS kicks in (approx another 25K). At that point, we could certainly cover all the basics without any income from other assets.

This is one reason I feel a bit more confident with a higher equity %. Still I will take the advise and get more to 70/30 at least in the next 2 years and a goal of 60/40 in 5 years.
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Old 04-21-2011, 03:39 PM   #13
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At 58 I should be more conservative but it seems that now is not the time to buy bonds since interest rates are sure to climb and soon.
What makes you so sure? People have been warning that interest rates are going to skyrocket for more than two years now. Still waiting. I think there is good reason for rates to stay low, but nobody knows. The only thing we know for certain is that if there was an absolute guarantee that rates were going up 'and soon' rates would already be up.

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I feel exactly like you do. Bonds scare me right now.
No more scary than stocks yielding 1.75% with a PE-10 of 24x. It's hard to see any asset class as 'cheap'

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5 year CDs make a nice substitute for bond funds. You earn 2.5% if you shop around and if rates spike you surrender early and reinvest for a higher yield.
Yup, CDs are still one of the best fixed income games in town, although not as attractive as they used to be.

As to the original question, I've been 're-balancing' to a lower equity allocation for the last six months or so. I've gone from 65% equity down to 53% currently. With the way equity has been rallying it's been a struggle to keep up. I just sold another chunk and could stand to sell more. Most of the proceeds have gone in to CDs and cash. About 75% of my fixed income portfolio is zero duration, and it still yields more than the Bond Market Index. No need to take duration risk at the moment with CDs yielding more than treasuries.

I don't worry about current low cash yields. With equities up more than 100% over the last two years, I can earn nothing on that cash for the next thee years and still have a 15% 5-year annualized return.
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Old 04-21-2011, 04:54 PM   #14
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With the way equity has been rallying it's been a struggle to keep up. I just sold another chunk and could stand to sell more. Most of the proceeds have gone in to CDs and cash.
I'm selling equities every few months to keep me at 50/50. I'm using the proceeds to make extra mortgage payments.....my interest rate is only 4.5%, but that's still a pretty good rate to get from the money when you consider today's CD and savings interest rates. It also has the added "advantage" (I know this is arguable) of bringing the date of my mortgage payoff and ER closer.
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Old 04-21-2011, 05:33 PM   #15
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As to the original question, I've been 're-balancing' to a lower equity allocation for the last six months or so. I've gone from 65% equity down to 53% currently. With the way equity has been rallying it's been a struggle to keep up. I just sold another chunk and could stand to sell more. Most of the proceeds have gone in to CDs and cash. About 75% of my fixed income portfolio is zero duration, and it still yields more than the Bond Market Index. No need to take duration risk at the moment with CDs yielding more than treasuries.

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Where in the heck are you getting zero duration fixed income that yields more than bond market index. Can I get some or do I need to make pact with the Devil?
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Old 04-21-2011, 05:44 PM   #16
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How would you feel if the market craters again and you loose 40 or 60%? Any nav loss in a bond fund will look like a winning lotto ticket compared to that! You can't do much rebalancing should that happen with such a small allocation to fixed income. I kept a good % in my 401k for the stable value fund, 3.5% and no nav drop when interest rates rise.... like that's ever going to happen.
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Old 04-21-2011, 07:06 PM   #17
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Where in the heck are you getting zero duration fixed income that yields more than bond market index. Can I get some or do I need to make pact with the Devil?
I'm gonna guess it's the TSP G fund.
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Old 04-21-2011, 07:21 PM   #18
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. Still I will take the advise and get more to 70/30 at least in the next 2 years and a goal of 60/40 in 5 years.
you may want to consider accelerating your goals or even go a bit further. In the 2008 crisis, right after I had retired, I experienced over 45% drop in portfolio value. I had a 65/35 allocation. Not good. DW and I had a lot of (one way) conversations on how this happened. Even though we had jointly agreed to our AA previously. Nothing like a real world experience to make one come to reality. ... and truly understand what your risk tolerance (all parties) is.
We now have a 40/60 AA so that we can sleep at night (accomplished fairly recently, as the market has come back closer to the 'high' position that we had experienced).
The good news on this is that we had enough experience under our belts, so that we did not panic at the bottom and dump out.

Hope this helps.
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Old 04-21-2011, 07:52 PM   #19
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Where in the heck are you getting zero duration fixed income that yields more than bond market index. Can I get some or do I need to make pact with the Devil?

2.84% (which is what the Bond Market is yielding) isn't a high hurdle. 2.5% CDs get you most of the way there. If you have access to a decent stable value fund in a 401(k) that probably brings you the rest of the way home. And if you had put this portfolio together a year and a half ago when CD rates were an additional 75bp or more over treasuries, then it is even easier.
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Old 04-21-2011, 09:44 PM   #20
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2.84% (which is what the Bond Market is yielding) isn't a high hurdle. 2.5% CDs get you most of the way there. If you have access to a decent stable value fund in a 401(k) that probably brings you the rest of the way home. And if you had put this portfolio together a year and a half ago when CD rates were an additional 75bp or more over treasuries, then it is even easier.

I don't have access to a stable value fund, cause I don't have a 401K and I don't think we had one to begin with.

The only PenFed CD yielding more than 2.5% are the 7 year which is hardly zero duration. I did get a nice slug of the PenFed 5% CD but they are 10 year duration. I treat CD as bonds although they have some nice benefits. The best my zero duration cash is doing is earning .45% in my Schwab savings account.

Needless to say if I could back in time 18 months I wouldn't waste my time with higher CD yields. No sir, Jan 2011 options on Apple stock would be where my money was.

Of course if what you really mean is the TSP G, than my suspicion about selling my soul to the devil (aka Uncle Sam) is correct.
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