Tips and treasuries or Wellsley?...or?

[antmary]

Hi everyone,

I could sure use some input regarding the bond section of our investments. They are all in the non-taxable accounts. They represent 60% of our investment portfolio, and consist of:

50% Vanguard TIPS fund
50% Vanguard Intermediate Treasuries fund

The other 40% of our investment portfolio is:

60% Vanguard Total Stock Market Index
32% Vanguard FTSE All-world ex-US
8% Vanguard FTSE All-World ex-US small cap

With all that has been going on in the news (mostly, over on the Boglehead Forum), I am feeling a bit apprehensive about treasuries. I am even thinking about gradually putting our funds into Wellsley. It sure would be easier for our heirs when we cross the metaphorical great waters.

We are 65 and 67 years old.

I am wondering - what are your concerns? How are you addressing them? Do you have any suggestions for me? I would really appreciate your contributions to this thread. Thank you!

 

[yakers]

No perfect answer. In my 401k I have a stable value type fund so that covers my bonds, some fixed income in cash. My wife's IRA bonds are all in Wellesley & Star funds. Just our opinion/hope that VG will manage bonds better than I will. And we have a few ibonds. I have a COLAd pension. Not sure what anyone should do but in my portfolio I don't need treasuries.

 

[antmary]

I think all of us are in a bit of a quandary. I have been "staying the course," but this situation with treasuries is unsettling.

 

[Koolau]

My bond "approach" is very similar to yakers. I'm fortunate to have a stable value fund in the 401(k). DW has significant exposure to Wellsley/Wellington. We too have I bonds. I also have a modest pension (non-cola'd). I have a small allocation to Vanguard's short-term bond fund. I think that is enough bond exposure (or similar fare). It seems to me that if bonds are a part of your overall strategy (AA) that "tweeking" them should be kept to a minimum. Market timing is rarely effective (unless you get lucky). I wish someone had the crystal ball needed to know what moves to make. I'm thinking good old diversification is still the best game to play here. Any suggestion I would have would be along those lines - diversify if you haven't already done so. I know very little about this stuff, so a big YMMV is in order. If you figure it out, be sure to let us know! Honestly, right now, I'm more concerned about stocks!

 

[FIREd]

I think that the Vanguard TIPS fund could be partially replaced with i-bonds (partially because there is a limit on the amount of i-bonds you can buy every year). And yields on CDs are competitive with the Vanguard Intermediate treasuries fund. So I would go the i-bond/CD direction to limit my downside (and that's what I have done).

 

[brewer12345]

I think all of us are in a bit of a quandary. I have been "staying the course," but this situation with treasuries is unsettling.

What "situation" are you talking about?

If you are concerned with rising interest rates, you can either go very short duration and take reduced coupon income, or you can pursue alternatives. The most obvious alternative to me would simply be to find some CDs with reasonably attractive yields vs. treasuries and modest early surrender penalties.

 

[antmary]

I think that the Vanguard TIPS fund could be partially replaced with i-bonds (partially because there is a limit on the amount of i-bonds you can buy every year). And yields on CDs are competitive with the Vanguard Intermediate treasuries fund. So I would go the i-bond/CD direction to limit my downside (and that's what I have done).

I hadn't thought of IBonds - thanks for the suggestion.

 

[Midpack]

I think all of us are in a bit of a quandary. I have been "staying the course," but this situation with treasuries is unsettling.

What "situation" are you talking about?

+1. I haven't figured out what new "situation" you're talking about either. Was it the Bernstein thread on Bogleheads? The Bernstein interview was just another (good) "no place to hide, stay the course" piece it seemed...

 

[REWahoo]

Is this the situation?

Fed's Williams: May start tapering QE this summer - MarketWatch

 

[pb4uski]

While I'm not sure what situation you are referring to either, I haven't been keen on treasuries because the rewards are so small in relation to the risks (inflation, interest-rate). The best I have come up with so far is a mix of intermediate term corporate, high yield corporate with a bit of short term corporate and GNMAs (all funds). When Vanguard finally debuts its foreign bond fund I'll probably make that 10-30% of my fixed income allocation (still pondering).

 

[brewer12345]

Is this the situation?

Fed's Williams: May start tapering QE this summer - MarketWatch

Or is this the situation?

Bullard Says Fed

 

[REWahoo]

I sense a bit of dissension in the ranks...

 

[brewer12345]

I sense a bit of dissension in the ranks...

Well, let us consult the ultimate source of all answers...

 

[MikeTN]

You might consider Vanguard's relatively new short term inflation protected securities fund. I have moved some of my TIPS money there because I noticed that the duration on the regular Vanguard TIPs fund is rather long, so they can be expected to lose value when interest rates increase. Of course, the coupon goes from something like -1% to -2% so at current rates of inflation the short term TIPS fund's yield is not much better than a MM fund. However, it is attractive as a way to protect yourself if inflation and interest rates both increase.

 

[antmary]

What "situation" are you talking about?

If you are concerned with rising interest rates, you can either go very short duration and take reduced coupon income, or you can pursue alternatives. The most obvious alternative to me would simply be to find some CDs with reasonably attractive yields vs. treasuries and modest early surrender penalties.

Sorry I wasn't very clear...yes, the situation is interest rate risk that I am concerned about. Similarly to FireD, CD's and I-Bonds look more stable going forward. Right now I am inclined to open a Roth CD for this year (actually, 2012); We have a neighborhood bank nearby that had only one foreclosure during the recent housing crisis. I'll let the other parts of our portfolio stay put.

Some food for thought: John Bogle gave an interview (sorry, I can't provide a link) that he is concerned with what is happening with TIPS and Treasuries right now re: rising interest rates. There is, of course, lots of info on the Boglehead site.

Thanks a lot for your continuing response, Everyone!

 

[FIRE'd@51]

The real return on TIPS ranges from about negative 1.5% for 5-years to about +0.6% for 30-years.

FRB: H.15--Selected Interest Rates

A 30% holding of these in a portfolio from which one is targeting a 2-4% SWR puts an awful lot of pressure on the rest of the portfolio.

 

[eytonxav]

Look at the diversification you are getting in your equity holdings, but conversely you are very concentrated to govt securities on the bond side. Therefore, I would try to diversify a bit more on the bond side, maybe adding a diversified bond fund like PTTRX (or BOND etf), short-int term corporate, high yield/floating rate, and a perhaps foreign and emerging markets bond funds. Of course, not a bad idea to have some cash or short term equivalents.

 

[gerrym51]

I would make sure of your situation as oppossed to how much you leave your daughter

 

[antmary]

The real return on TIPS ranges from about negative 1.5% for 5-years to about +0.6% for 30-years.

FRB: H.15--Selected Interest Rates

A 30% holding of these in a portfolio from which one is targeting a 2-4% SWR puts an awful lot of pressure on the rest of the portfolio.

I purchased the TIPS for my Roth IRA starting 2006. I'm inclined to check out our local credit union, which have relatively decent rates, and I would not have the concern about rising interest rates.

 

[antmary]

Look at the diversification you are getting in your equity holdings, but conversely you are very concentrated to govt securities on the bond side. Therefore, I would try to diversify a bit more on the bond side, maybe adding a diversified bond fund like PTTRX (or BOND etf), short-int term corporate, high yield/floating rate, and a perhaps foreign and emerging markets bond funds. Of course, not a bad idea to have some cash or short term equivalents.

Thanks DFW,
I created the portfolio allocation with the Bogleheads around 2006 - before the crash. I will check out the bond funds you mentioned; but, I would like to keep those funds with Vanguard for ease of paperwork.

 

[okapi]

I put all my fixed income into short-term TIPS fund in october,when Vanguard released it.Also increased my stock percentage a bit.Seems ok for now.The future,I will have to borrow Brewer"s 8 ball.

 

[clifp]

Sorry I wasn't very clear...yes, the situation is interest rate risk that I am concerned about. Similarly to FireD, CD's and I-Bonds look more stable going forward. Right now I am inclined to open a Roth CD for this year (actually, 2012); We have a neighborhood bank nearby that had only one foreclosure during the recent housing crisis. I'll let the other parts of our portfolio stay put.

Some food for thought: John Bogle gave an interview (sorry, I can't provide a link) that he is concerned with what is happening with TIPS and Treasuries right now re: rising interest rates. There is, of course, lots of info on the Boglehead site.

Thanks a lot for your continuing response, Everyone!

It isn't just Bogle that is concerned, everybody from Bill Gross, the manager of PIMCO, to Warren Buffett have described US Treasury as "return-free risk". Now collectively these smart guys,and those off us who follow them have been wrong on our prediction that the bond bubble is going to burst for 4 or 5 years. On the other hand we have been right saying equities will do better, and bonds funds are finally starting to dip.

I recently started moving some of my 87 year old mom's money from Vanguard GNMA to Wellesley. I know Wellesley is still 60% bonds, but
I have some confidence the Wellesley managers will be able to navigate the tricky fixed income water better than the average manager/investor.

If you comfortable with Wellesley than even 100% allocation to the fund only moves your asset allocation for 40% equities to 56%. A 50% allocation to Wellesley along with some CDs seems very sensible to me. BTW, Vanguard also offers CDs and they are generally very competitive.

 

[gerrym51]

Yikes!

wife and i have a bunch of cds expiring this year. they were all started prior to the crash in 2008 and had interest rates 3.3-5.

now i am looking at far less interest rates on new CDS.

these will be a roth and non roth cds(mostly non -roth).

since i know nothing about wellington or wellesly whats your advice

 

[antmary]

Those were the days weren't they?...when CD's had reasonable interest rates.
The plan I am settling on is to:

1. Continue gradually transferring the stocks in taxable into our Roth accounts; our easy, online business will enable us to have the yearly earned income for that.

2. Open a new account in our Roth IRA's that we will use to hold our money as we age into our 70's and 80's. We are considering one of these three:
a. Vanguard Wellesley
b. Vanguard Target Retirement Income VTINX
c. Vanguard Lifestrategy Conservative Growth fund VSCGX

3. Laddered CD's...our local credit union has reasonable rates, and they have a good "credit rating."

 

[Accidental Retiree]

When DH got "whacked by a RIF," to borrow Ziggy29's phrase, it was June 2008, and he rolled his 401(k) over to his Schwab account, where I built him a CD ladder.

Those last few great 5% CDs are maturing this August, and we will fill in a few rungs to the ladder where the holdings are light, but also move some to the Wellesley bucket.