Willing to take a bit more risk in my bond fund portfolio

[Soon to be free]

I am retiring early next year with about 1.3 million in my investment accounts and 401k combined.

Up to recently, I was 50% total stock funds and 50% in total bond ETF (BND). I got tired of the 1-2% returns from the total bond ETF, so I spent hours and hours researching bond mutual fund options. After MUCH analysis I determined I wanted bond funds that had the following:

A CAGR of about 5% since 2010.

A standard deviation of under 4.00 since 2010. (Similar volatility than AGG but with higher returns.

A maximum drawdown of under 7% since 2010.

Higher SHARPE RATIO than AGG

Higher SORTINO RATIO than AGG

Here is what I came up with: (What do you think?)

25% of my bond money in each of these investments:

BMSAX
PONDX
PTIAX
CPXAX

According to Portfolio Visualizer, my new bond fund portfolio has a CAGR of 7.11% since 2010, with a lower standard deviation, lower maximum drawdown, and higher SHARPE and SORTINO RATIO than AGG.

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults

 

[bloom2708]

Bonds are for safety. It would have been easier to stick with Total US Bond and up your stock percentage to 60% or 65%.

Now you have risk on both sides of your portfolio while reaching for income on the "safe" side.

You found the perfect bond portfolio looking backwards. Nobody knows if the future will look like the past. It usually doesn't.

What are the expense ratios on the 4 funds you picked?

1-2% looks pretty good when stocks are -10%, -20%, -30%

Thanks for your post. Keep us posted on how it does over the years.

Also, why no international? Even 20% of your stock portion can add some good diversification.

 

[Soon to be free]

Bloom2708:

Did you read and fully comprehend the post?

This is a safe bond portfolio. In fact safer than AGG/BND.

I said that in the past my new bond portfolio has had a lower standard deviation and maximum drawdown than AGG/BND. It has had twice the return of AGG/BND with less risk.

Yes, we don't know what is going to happen in the future. But the past is a good indicator of the future. Fees are higher in my new bond portfolio than AGG or BND but that is because there is a team of bond market professionals analyzing data and make informed decisions. The fee is not really an issue if the results are better than a passive fund.

There is international exposure in my stock and bond portfolio.

 

[Mr._Graybeard]

I'm not familiar with some of those funds, but I've held PONDX/PIMIX off and on for about six years. I'm very happy with the results. Yes, it's somewhat riskier than the average fixed-income fund, but if you look at the fund's performance during the 2008-2009 credit crisis, the temporary hit it took was relatively minor -- about 15%. In the bottomed-out credit market we've lived in for the last five years, the fund has returned 6% per annum. The fund managers play their cards very well.

Moreover, I'm skeptical about how well the theory of indexing applies to fixed income. The value of the debt market is much larger than the stock market, and there are so many different types of debt. It's also a much more stable market than equities in terms of volatility. I personally feel like active management in the fixed-income market is in a better position to maximize total return than an indexer.

 

[OldShooter]

... But the past is a good indicator of the future. ...

I don't really want to engage in the details here but this statement struck me. If by "past" you mean 30 years or more I can start to agree, but any "past" that is dominated by or exclusively the past ten years I don't think the statement is even close to true.

For example, we held about $1M of 2%/26 TIPS going into the 2007/8 excitement and at one point they were up 50%. Now they are still up about 35%. That is due to pure luck, not genius, and no way is it "a good indicator for the future."

Had some fund owned those TIPS, the result would not be "because there is a team of bond market professionals analyzing data and make informed decisions." either. It would also have been just luck and, again, not "a good indicator for the future."

Be careful out there!

 

[Senator]

When interest rates are dropping, bonds are great. That is why the bonds you are looking at have performed so well. Interest rates are rising, bonds will suffer.

It's hard to say what the future will bring, unless you look at past periods when rates were rising.

I personally would go more US Stocks, 75%+. Maybe an ETF like DVY or HDV, which will throw off some income (~3%+) and participate in the stock run-ups. In the long run, US Stocks out-perform all.

As long as dividends do not get cut, the dividend ETFs probably throw off near as much as many bond funds.

It seems to be a lot of fees on those funds. Maybe they are worth it?
BMSAX Expense ratio 1.12%; Load 2.5%
PONDX Expense ratio 0.93%; Dist Fee 0.25%
PTIAX Expense ratio 0.82%; redempt Fee 2.00%
CPXAX Expense ratio 1.18%; Dist Fee 0.25%, Load 3.75%

 

[Soon to be free]

I paid no load on any of those funds. They are transaction free and load-waived at Fidelity and a number of other online brokers.

BMSAX, PONDX and PTIAX pay real dividends because the income is based on the interest from the bonds. So on the first of the month, I get quite a bit of income from the dividends. And unlike Stock Fund dividends which are mostly an accounting gimmick, with a decrease in the NAV the evening before the dividend is paid, these bond fund's dividend have no decrease in the fund price the evening before payment. (Because the income is based on interest on bonds and is collected daily and paid monthly.)

When interest rates are dropping, bonds are great. That is why the bonds you are looking at have performed so well. Interest rates are rising, bonds will suffer.

It's hard to say what the future will bring, unless you look at past periods when rates were rising.

I personally would go more US Stocks, 75%+. Maybe an ETF like DVY or HDV, which will throw off some income (~3%+) and participate in the stock run-ups. In the long run, US Stocks out-perform all.

As long as dividends do not get cut, the dividend ETFs probably throw off near as much as many bond funds.

It seems to be a lot of fees on those funds. Maybe they are worth it?
BMSAX Expense ratio 1.12%; Load 2.5%
PONDX Expense ratio 0.93%; Dist Fee 0.25%
PTIAX Expense ratio 0.82%; redempt Fee 2.00%
CPXAX Expense ratio 1.18%; Dist Fee 0.25%

 

[LOL!]

There is no free lunch, so why pay any expenses over a bond index fund? If you want more risk, just increase the percentage of equities in your portfolio. Did Mr. Graybeard say that a bond fund lost 15% and that was "relatively minor"? LOL!

 

[Mr._Graybeard]

There is no free lunch, so why pay any expenses over a bond index fund? If you want more risk, just increase the percentage of equities in your portfolio. Did Mr. Graybeard say that a bond fund lost 15% and that was "relatively minor"? LOL!

A lot of equity funds were down twice that, and more.

 

[Soon to be free]

Didn't I say that the standard deviation and the maximum drawdown of these funds are about 1/3 of the S&P 500 with similar returns to the total stock market.

Higher SHARPE RATIO than pretty much any stock or bond fund
Higher SORTINO RATIO than nearly any stock or bond fund

The fees are typical for bond mutual funds. I will pay it because of the expertise that it buys.

Low risk- high return, what a powerful portfolio!

 

[pb4uski]

I think the main problem with your proposed portfolio is that while the returns are good, it is too correlated with stocks.... at 0.50.

The purpose of holding bonds in a portfolio is to counteract stocks in times of stress. Note that BND has -0.16 correlation with stocks... so when stocks zig, BND zags.. you can see this by doing a portfolio visualizer run of 100% VTSAX, 100% VBTLX and 50%/50% and look at the lines. VBTLX has little variation and substantially mitigates the volatility of VTSAX.

If you are going to use Portfolio Visualizer, then use it selecting securities that have survived at least one, and preferably two periods of market turmoil... and then blend in some of the newcomers to the extent that they are sufficiently similar. That said, 50% VTSAX and 50% PONDX doesn't look too bad if you are willing to accept higher volatility.

 

[RunningBum]

You asked people for their opinions, and when they give them, you get very argumentative. No thanks, not playing that game. Sounds like you've got it all figured out. Best of luck, bye.

 

[pb4uski]

May be a troll. Time will tell.

 

[REWahoo]

I don't think any more time is needed. Read this thread he started and think about where you have heard something similar: http://www.early-retirement.org/for...ral-is-a-good-approach-89566.html#post1972190

SS at 62 anyone?

 

[haha]

You asked people for their opinions, and when they give them, you get very argumentative. No thanks, not playing that game. Sounds like you've got it all figured out. Best of luck, bye.

+1. Hard to understand why someone would ask opinions and then argue with what is offered. Offered free, I might add.

Ha

 

[REWahoo]

Hard to understand why someone would ask opinions and then argue with what is offered...

Unless they are trolling...

 

[haha]

Unless they are trolling...

Yes, I had not yet read your post.

Ha

 

[pb4uski]

+1. Hard to understand why someone would ask opinions and then argue with what is offered. Offered free, I might add.

Ha

Free? You mean we don't get paid for this?

 

[REWahoo]

Free? You mean we don't get paid for this?

Yep. You've already passed the point where you get paid by the post...

 

[LOL!]

A lot of equity funds were down twice that, and more.

So what? We are talking about a bond fund here.

But if one could tolerate a 15% drop, then have a mix of equities and bonds. So if you think equities will drop 45% at the most and a good low-risk bond fund will drop 0% or even go up when equities drop that much, then a 33% in equities and 67% in bonds will get you to a tolerated 15% drop in a total market meltdown.

Indeed, if a bond fund drops 15% when equities drop more, then one might even consider that it has an "equity-like" component and is not really a bond fund in the first place.

 

[bada bing]

I think the main problem with your proposed portfolio is that while the returns are good, it is too correlated with stocks.... at 0.50.

The purpose of holding bonds in a portfolio is to counteract stocks in times of stress. Note that BND has -0.16 correlation with stocks... so when stocks zig, BND zags.. you can see this by doing a portfolio visualizer run of 100% VTSAX, 100% VBTLX and 50%/50% and look at the lines. VBTLX has little variation and substantially mitigates the volatility of VTSAX.

If you are going to use Portfolio Visualizer, then use it selecting securities that have survived at least one, and preferably two periods of market turmoil... and then blend in some of the newcomers to the extent that they are sufficiently similar. That said, 50% VTSAX and 50% PONDX doesn't look too bad if you are willing to accept higher volatility.

If you examine PIMIX (the institutional version of PONDX), it has been virtually a "magical" fund. Since inception in 2007 it has had less much volatility than total bond index (AGG) with returns that actually beat total stock market over the period. It's only drawback during that time for being a good bond proxy is the moderate .57 correlation with equities.

I find the fact that it has been "magical" for a decade that includes the 2008 meltdown and the huge bull bounce that followed to be very interesting. I also find the idea that it has been "magical" during the period to be a warning that past performance doesn't indicate future returns.

I personally have 50% of my FI in PIMIX and have had since 2010. I don't recommend anyone do the same and don't expect the next decade to resemble the last for PIMIX. I do think it is very likely that PIMIX total returns
will handily beat total bond market over the next 10 years but for most people that isn't the reason they hold bonds.

 

[VanWinkle]

no comment, definitely being trolled.

VW

 

[REWahoo]

...

 

[Mr._Graybeard]

So what? We are talking about a bond fund here.

But if one could tolerate a 15% drop, then have a mix of equities and bonds. So if you think equities will drop 45% at the most and a good low-risk bond fund will drop 0% or even go up when equities drop that much, then a 33% in equities and 67% in bonds will get you to a tolerated 15% drop in a total market meltdown.

Indeed, if a bond fund drops 15% when equities drop more, then one might even consider that it has an "equity-like" component and is not really a bond fund in the first place.

So you're an unabashed stock market timer (per LOL's Market Timing Newsletter) but prefer indexing on the fixed-income side. I would argue that indexing is the way to go in equities but a well-run managed fixed-income fund (specifically PONDX/PIMIX) will deliver an optimal return from the debt market. Diffrent strokes.

 

[RunningBum]

...

Soon to be free we hardly knew ye!