The "Bond" portion of my portfolio

[dandan14]

I currently have 23% of my portfolio in bonds. That 23% is divided between govt bonds and a mix of high/low grade corporate bonds. I hold most of these in tax sheltered accounts.

My question is this....
I have recently seen some 3yr and 5yr CDs paying 6%, and I'm really tempted to buy some of those.
Is there a rule of thumb when allocating the bond portion of your portfolio?
Here are the things I've already considered. Can anyone ellaborate, or even point out something I missed?

1. 6% is locked in for the life of the CD. This is good if rates go back down, bad if they go up. Rates would have to climb substantially (at least a 100 bp) to make up for the 6 month interest penalty for early withdrawl.

2. In a similar vein as #1, CD rates don't ebb and flow with the market like bonds typically do. However, it is a stable rate which has the same volitility reducing results.

3. I only know of one place offering 6% CDs, so getting these into my Roth IRA might not be easy. Any experience with this? What happens when the CD matures? Do I just move that money back to my brokerage?
My other option would be to buy with taxable money. This however knocks my real return down to 4%.

4. Does it make more sense to just buy a non-taxable muni at 4% (effectively 6%)?

 

[grumpy]

Dan,

Just one point you didn't mention:

If rates do go down then the bonds you hold will increase in value. You could sell them on the open market and pocket the capital gains. You can't do that with a CD.

Grumpy

 

[Maximillion]

If rates go down?

Pretty funny.

 

[mickeyd]

Is there a rule of thumb when allocating the bond portion of your portfolio?

The common ROT (came from Bogle) is that the FI part of your AA should resemble your age. That said, I don't consider this ROT as my FI is about half of my age, but I know why this is so and why the ROT does not meet my needs.

If an investor had no idea what FI allocation they should have but know that they had to have some part of their AA in FI, I guess the ROT regarding the age is as good as guessing, maybe better.

 

[MJ]

I currently have 23% of my portfolio in bonds. That 23% is divided between govt bonds and a mix of high/low grade corporate bonds. I hold most of these in tax sheltered accounts.

My question is this....
I have recently seen some 3yr and 5yr CDs paying 6%, and I'm really tempted to buy some of those.
Is there a rule of thumb when allocating the bond portion of your portfolio?
Here are the things I've already considered. Can anyone ellaborate, or even point out something I missed?

1. 6% is locked in for the life of the CD. This is good if rates go back down, bad if they go up. Rates would have to climb substantially (at least a 100 bp) to make up for the 6 month interest penalty for early withdrawl.

2. In a similar vein as #1, CD rates don't ebb and flow with the market like bonds typically do. However, it is a stable rate which has the same volitility reducing results.

3. I only know of one place offering 6% CDs, so getting these into my Roth IRA might not be easy. Any experience with this? What happens when the CD matures? Do I just move that money back to my brokerage?
My other option would be to buy with taxable money. This however knocks my real return down to 4%.

4. Does it make more sense to just buy a non-taxable muni at 4% (effectively 6%)?

Are you refering to PFCU? The life of the CD for 6% can be as short as 3 years. I dont' know if this applies to you but you can do an early withdrawal without penalty to an IRA CD after 59 1/2 there.

 

[cute fuzzy bunny]

If rates go down?

Pretty funny.

Not at all. Its entirely plausible that the fed has, or will, overshoot on the rate hikes as bernanke appears to be more interested in setting aside his reputation as an "inflation dove". Should we run into a pothole, which is equally plausible, its possible the fed will have to do a couple of quarter or half point cuts.

And we DONT get french benefits!

 

[2B]

And we DONT get french benefits!

We don't Again?

I couldn't tell by the post what the "goal" of the fixed income portion is.

If the goal is to reduce market volatility, buying bonds and holding to maturity equals a CD. I don't think it would be worth the trouble chasing the last 1/4 point of yield running between difficult to transfer financial institutions. This is particuarly true if it's IRA funds.

If the goal is current income, a laddered portfolio of CD's and individual bonds can be timed to "mature" when the cash is needed. Then chasing the yield doesn't have as much negative impact. When it comes due, the funds are withdrawn and spent.

I personally try to avoid speculating in interest rates. If the world economy pauses, stocks will fall sharply and interest rates will too. BTW, gold will then also tank (in US dollars).

I personally believe we are in for several years of continued growth despite the incompetence of the world's central bankers. That will bode well for higher equities, higher interest rates and highly volatile commodities. I'm not betting the "farm" on this. It would be too much speculation.