Where are you putting your fixed income/ bond investments?

[freebird5825]

I guess you don't mind the occasional roller coaster ride with that fund!

Not at all. Historically, when it dipped, I bought more.

Right now I am only reinvesting dividends in VWALX. Sometimes I direct the dividends into my brokerage sweep fund for several months to accumulate some dry powder to invest at a favorable time.

 

[mathjak107]

I wonder sometimes whether my concerns on interest rate risk might be misplaced in that higher interest rates would likely be associated with a recovering economy so in theory, fixed income losses from rising interest rates might be offset (or more than offset) by equity appreciation.

if the economy gets better ,equities should do better but why drag them down with a weight if rates rise.? cash and equities would even be a better choice.

in fact you would likely give up less now missing out on the higher bond rates then you would give back when we turn the corner.

a 40 year bond bull market has made folks think they have to sit static in bonds,

there are far better choices if rates and inflation kick up.

i would switch to TIPS, FLOATING RATE FUNDS ,REIT INCOME AND SOME COMMODITY FUNDS with my conventional bond budget.

it woulsd make no sense sitting in conventional bond funds .

 

[mathjak107]

I saw their paper. If I remember it correctly, it simply showed that if you put your money into their total bond fund and left it their all of the principle was made whole after some period of time (~10 years?). I asked the Vanguard CFP if the total bond fund held their bonds to maturity. I never received a yes or no answer. I was shown their paper.

I have asked many times for someone to show me a spread sheet of how the bond fund that doesn't hold to maturity will exceed the value of an equivalent portfolio of individual bonds that will eventually be redeemed at par. So far, I'm still waiting.

Not wanting to be ugly but I suspect I am. Vanguard has a large business interest in selling bond mutual funds.

Much of the total bond fund's holdings are government bonds. CD rates of comparable maturities have a higher yield. They are theoretically just as safe if you stay under the $250,000 FDIC limit from individual banks. If my CD ladder is set to have the same average maturity, it will have a better yield. I also know that all of my principle will come back to me some day no matter how far up interest rates go if I don't sell.

Bond funds are low effort. CD ladders aren't for everyone. I'm waiting for the threads that will pop up here if 10 year treasuries go to 10%.

credit ratings of holdings in the total bond fund would likely make the above very hard to count on. staying for the duration of a fund only really works with treasuries and gov't bonds. once credit downgrades happen values are not just based on interest rates.

usually though you will remain behind the curve in practice as rates go up .

 

[audreyh1]

Not at all. Historically, when it dipped, I bought more.

Right now I am only reinvesting dividends in VWALX. Sometimes I direct the dividends into my brokerage sweep fund for several months to accumulate some dry powder to invest at a favorable time.

Good for you!

 

[pb4uski]

if the economy gets better ,equities should do better but why drag them down with a weight if rates rise.? cash and equities would even be a better choice.

in fact you would likely give up less now missing out on the higher bond rates then you would give back when we turn the corner.

a 40 year bond bull market has made folks think they have to sit static in bonds,

there are far better choices if rates and inflation kick up.

i would switch to TIPS, FLOATING RATE FUNDS ,REIT INCOME AND SOME COMMODITY FUNDS with my conventional bond budget.

it woulsd make no sense sitting in conventional bond funds .

I actually agree with you and have no conventional bond funds in my fixed income allocation.

I'm ~25% in Penfed 5 year CDs earning 3%, 15% in a 0.9% online savings account, 36% in target maturity bond funds maturing in 2017 to 2020 in lieu of a CD ladder, 17% in international and emerging market bond funds and 3% of whole life insurance cash value that is earning ~4% with the remainder in Merger Fund (which I view as a fixed income substitute because it isn't correlated to equities).

I just sometimes wonder if the complexity compared to a one-stop diversified bond fund is worth the effort. I have certainly given up some return this year since conventional bond funds have done well this year, but I don't really have many regrets.

 

[audreyh1]

I don't think long-term interest rates are going up next year. They might even keep going down.

I think short-term interest rates might go up a little.

From this point of view my intermediate-term bond funds shouldn't experience much pain next year, and my 7-yr duration muni bond fund might even appreciate. Although the latter (FTABX) may be fully valued right now. Funny how munis sometimes suddenly fall drastically out of favor and then later become wildly popular.

 

[mathjak107]

I actually agree with you and have no conventional bond funds in my fixed income allocation.

I'm ~25% in Penfed 5 year CDs earning 3%, 15% in a 0.9% online savings account, 36% in target maturity bond funds maturing in 2017 to 2020 in lieu of a CD ladder, 17% in international and emerging market bond funds and 3% of whole life insurance cash value that is earning ~4% with the remainder in Merger Fund (which I view as a fixed income substitute because it isn't correlated to equities).

I just sometimes wonder if the complexity compared to a one-stop diversified bond fund is worth the effort. I have certainly given up some return this year since conventional bond funds have done well this year, but I don;t really have many regrets.

as of now i have lots of bond funds but that will change at some point, still to early yet .

 

[gcgang]

http://money.usnews.com/funds/mutual-funds/world-bond/templeton-global-bond-fund/fbnrx

A top bond fund manager believes EM debt should be emphasized.


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[Birchwood]

As a retiree, my whole asset is divided in three "buckets"
1. Cash mainly CDs to live on.
2. Fixed income, which should be bond funds but now turning more cash.
3. Equity- stocks and mutual funds.
I am finding that 2 and 3 are now moving back and forth and are not exactly where I want it.
For my retirement fund, they are in Wellington, Wellesley, and Intermediate term bond fund and a little cash to invest when there is a correction.
In other account I also have muni funds, short term BF and Hybrid.
I think a small amount should be in US treasury only for stability.

 

[W2R]

I haven't changed my AA since I first devised my financial plan some years ago. Here is my bond/fixed AA, in order of amounts:

1. I have more fixed income/bond investments in the TSP "G Fund" than anywhere else. It yields a long term rate, but is still guaranteed to never drop in share price. Access to the "G Fund" was part of my benefits package as a federal employee.

2. The next highest portion of my fixed income/bond investments is in Wellesley (VWIAX).

3. Then comes Total Bond Market Index (VBTLX), and

4. cash.

In retirement, I get equal monthly payments from the TSP "G Fund" and this is part of what I live on. Since I know the value will never drop, it is pretty easy to figure out how much I can withdraw and never run out, as well as how much the RMDs will be. In four years I will be 70+1/2, and will be subject to RMDs so I will be withdrawing from it for at least part of my living expenses, for life.

Wellesley also provides a nice dividend for living expenses and Wellington Management (that manages Wellesley) has had a longer and better track record than I have.

 

[audreyh1]

Templeton Global Bond Fund (FBNRX) | US News Best Mutual Funds

A top bond fund manager believes EM debt should be emphasized.


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Too rich for me. Multi sector bond fund FSICX has a position, but I try not to look under the hood.

 

[Winemaker]

Why do I see no mention of preferred stocks, or a preferred stock etf as a fixed income alternative? You can purchase some at or below par value of different issues, and collect a qualified dividend on most (unlike interest). The credit risk is the same as an individual bond, (purchase no more than $5,000 to a single company.) and if the preferred is called in at par value, one collects a modest capital gain. I have done this for years and have gotten burned slightly on GM and FNMA, while collecting 6-8% annually.

 

[jazz4cash]

Why do I see no mention of preferred stocks, or a preferred stock etf as a fixed income alternative. You can purchase some at or below par value of different issues, and collect a qualified dividend on most (unlike interest). The credit risk is the same as an individual bond, (purchase no more than $5,000 to a single company.) and if the preferred is called in at par value, one collects a modest capital gain. I have done this for years and have gotten burned slightly on GM and FNMA, while collecting 6-8% annually.

Great point....I was wondering the same thing, recently. I personnally have no experience with preferreds, but heard something that piqued my interest. This topic is probably worth a seperate thread.

 

[audreyh1]

I don't own preferred stock instead of bond funds because my fixed income allocation is there to diversify against my equity funds.

If you are focused mostly on dividend income it might make sense.

 

[Winemaker]

The dividends for preferred are fixed amounts like a bond; and are usually paid quarterly whereas a bond pays semi-annually. Some issues are marketed as "trusts" and are issued by the investment banks for other entities; and those dividends are paid as interest. A etf symbol, PGX, pays monthly because of the various preferreds it holds. I believe it is worth a look see as a portion of a fixed income portfolio.

 

[RockyMtn]

In 401k, Stable Value and TIPS. In IRA's Metropolitan West Unconstrained Bond (MWCRX). In taxable Vanguard Intermediate Term Muni Fund (VWITX).

 

[Mulligan]

Why do I see no mention of preferred stocks, or a preferred stock etf as a fixed income alternative? You can purchase some at or below par value of different issues, and collect a qualified dividend on most (unlike interest). The credit risk is the same as an individual bond, (purchase no more than $5,000 to a single company.) and if the preferred is called in at par value, one collects a modest capital gain. I have done this for years and have gotten burned slightly on GM and FNMA, while collecting 6-8% annually.

Glad to see you are the brave one! I have thought about bringing this up, but thought I would get razzed for it. I have been getting some tips through a few posters here that I will not mention and let them chime in if they want. If you know what you are doing and know the advantages and disadvantages before buying, I like them. I stay at that $5k per and under myself. I'm starting to branch out but I have been buying relatively illiquid investment grade utility prefereds. One has been paying without a missed payment since it's 1968 issue. Pays me 6.25%. Clip the coupon and move on.


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[pb4uski]

What is the interest rate risk with preferreds? Wouldn't it be similar to a long maturity zero coupon bond?

 

[gcgang]

The problem with preferreds is negative convexity.


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[Mulligan]

What is the interest rate risk with preferreds? Wouldn't it be similar to a long maturity zero coupon bond?

That is the fun part with studying preferreds... Simple in theory but so many options...kind of like wanting to eat some candy....many types to choose from. Some are indefinite, some are fixed, some convert later from a fixed rate to fixed plus Libor. Others are adjustable plus Libor right out of the gate. All will respond differently a bit based on interest rate changes. Buying above and below par also comes into play a bit as you don't want to buy one significantly above par and then have it called on you. As a general rule the fixed perpetual cumulative preferred investment grade utilities are running between 4.75%-6.5%. The lower rates are ones that are below par and have a chance for capital gain if called. The higher ones are generally older higher rate payers that are a bit above par and you run the risk of losing some capital if called.
I have been buying at the upper rate end just above par and buying only after next dividend has been declared that would recapture any capital loss on a slight chance of a call.
Also, obviously, generally the higher the "safety" of the company the lower the rate.


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[RobLJ]

That's right. That's why I don't invest in junk/high yield bond funds directly - because they act like stocks, and I use bonds and cash as diversifies for my stocks.

I agree with all the comments on Fidelity Floating Rate. It is a high yield fund and should be viewed as such.

Nonetheless, it is about 15% of my bond allocation, which also includes a corporate, foreign, and munis, as well as a large allocation to mixed bond funds (Loomis Sayles Bond, Fidelity Total Bond, and PIMCO Total Return). I'm also re-averaging into an intermediate Treasury fund, which served me well in '08-'09. I was afraid of money markets going down in '06, which was more accurate even than I feared, but now I also have 10% in MMs.
The muni closed end funds, by the way, are among my largest gainers this year, other than biotech and a couple other funds, but they are leveraged.
I don't mind harvesting yields while the NAVs go down, when I start withdrawing, although rebalancing can be tricky

 

[Turn_the_Page]

Blend of intermediate maturity bond index fund and a five year zero coupon ladder.

 

[Sunset]

That is the fun part with studying preferreds... Simple in theory but so many options...kind of like wanting to eat some candy....many types to choose from. Some are indefinite, some are fixed, some convert later from a fixed rate to fixed plus Libor. Others are adjustable plus Libor right out of the gate. All will respond differently a bit based on interest rate changes. Buying above and below par also comes into play a bit as you don't want to buy one significantly above par and then have it called on you. As a general rule the fixed perpetual cumulative preferred investment grade utilities are running between 4.75%-6.5%. The lower rates are ones that are below par and have a chance for capital gain if called. The higher ones are generally older higher rate payers that are a bit above par and you run the risk of losing some capital if called.
I have been buying at the upper rate end just above par and buying only after next dividend has been declared that would recapture any capital loss on a slight chance of a call.
Also, obviously, generally the higher the "safety" of the company the lower the rate.
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My experience has only been buying stocks/etfs/mutual funds in a brokerage account.
Do you buy preferreds directly like other stocks in a brokerage account ?
Or do you buy an etf of preferreds ?

 

[Mulligan]

My experience has only been buying stocks/etfs/mutual funds in a brokerage account.
Do you buy preferreds directly like other stocks in a brokerage account ?
Or do you buy an etf of preferreds ?

I personally have been buying individual preferreds to get the rates I want and avoid the expenses ratios. That is violating the diversity rule, but in reality most true preferreds are not diverse sector wise as most are either insurance, banking, or utilities.
Yes, you buy them through a brokerage account like a stock. Some of these sell OTC and you may have to call broker. The first one I bought I had to do that, but subsequent ones I have not.
More liquid ones such as CHSCM are listed on NASDAQ and are pretty liquid. Others like old utility issues such as CNLPL (Connecticut Light and Power bought out by Northeast Utilities are on OTC which means you need to be careful with the bid/ask price. Do not ever buy a "market order" assuming you will get current last trade.
For example, BGLEH (Baltimore Gas and Electric owned by Exelon now I believe) last traded at $102 with a 6.75% dividend. But it has an ask price of $150 which is just a crazy number no one would buy at unless they hit market order as some of the ones I dabble in are not highly liquid.
I am no expert and a few forum members have helped me out a lot and I have read a lot. Plus my desires may not be normal. I'm slowly buying them and just want to clip coupons. I will never sell, so current price will not bother me. Always be aware of Par and call dates. Though one I bought could have been called 30 years ago and hasn't yet.
quantumonline.com is an excellent place to start digging in to research them.


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[Winemaker]

I always try to buy my preferreds below par through Fidelity. Originally I purchased an etf, which I still own, but have purchased many to build my own etf, in order to keep fees low. I believe if you google "preferred stocks below par", you will get a link to a list of preferreds way under par to those over par, as well as some past income portfolios. You can do your own due diligence, I buy about 200 of each issue to limit my exposure. Just like when I buy a bond, I do not pay a premium. I have only been burned twice, in GM and Freddie Mac; however I bought those way under par more for speculation than for income. You will be pleasantly surprised; just remember me in your prayers......