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Bond allocation tinkering... perhaps market timing??
Old 07-19-2018, 06:15 AM   #1
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Bond allocation tinkering... perhaps market timing??

While I subscribe to avoiding market timing with my equity allocation, I can't help but look at my bond allocation and second guess my strategy. Conventional wisdom says my bonds are there to mitigate volatility so just stay the course. I am 18 months from launching and will be 100% dependent upon my investments to provide my RE income. My AA is 60/40 with my 40 primarily comprised of intermediate bond funds/ETFs, however, I have sprinkled it with a small portion of preferreds/foreign bonds/high yield to hopefully juice it some and appease my inner desire to tinker... I know, you purest are going to tell me I am playing games with my AA.

So here is where I am starting to have further thoughts about my intermediate bonds. In the current environment of somewhat predictable rate increases, it appears bond prices will continue to have negative pricing pressure eating into overall returns (despite 3% yield, overall return may be negative). Meanwhile, I notice my money market fund is up to about 1.88% and continues to bump up with rate increases. It appears to me that there could be a more prudent short term strategy here, at least in your tax differed accounts, to take your short/intermediate bond allocation and go into money market accounts (or perhaps some sort of CD ladder) and wait until certain market forces (i.e. rate increases flatten out, market event) and then switch back?? Yes, this is market timing, but from what I can see, with short/intermediate bonds being less volatile and more predictable in this current climate along with rising money market yields, is there not something to gain (and not much to lose) by taking this short term approach? Not suggesting this in every situation, just in the current environment. Thoughts?
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Old 07-19-2018, 06:28 AM   #2
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That is exactly what I did. I moved my intermediate bonds into a CD ladder in my TIRA.
Technically, I locked in a minor loss though.
Tough call and the purists will probably disagree, although there are clearly some current posters who are heavily into CD's.
I believe Big ERN is another popular blogger against bond funds.
As one who besides current (DGF) and eventual SS payments (me), will also be depending upon Investments only, there is a "pulling" of sorts to try and squeeze a little more out of the bond side instead of it just being mainly a hedge of sorts to the equity side in a down scenario.
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Old 07-19-2018, 07:04 AM   #3
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I have cash/cash equivalents, short-term bond funds and intermediate bond funds making up my bond allocation and rebalance between them. Had it this way for decades. I very much see them as a hedge against equities, so I stick to the high quality stuff that has lower correlation with equities.

It’s impossible to predict the near future. Personally, I believe a big chunk of the interest rise is done or will be by end of year, and is mostly baked in, but what do I know?

Remember, you will be rebalancing. Usually bonds lag stocks, so you are buying them while stocks rise. If bonds drop and stocks continue to rise you will be buying more at a discount.

And if you have a large stock allocation, why would you worry about small temporary losses in bonds?
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Old 07-19-2018, 07:18 AM   #4
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+1 I redeemed all my bond allocation other than PenFed CDs and am currently in the Prime MM yielding about 2%.
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Old 07-19-2018, 07:27 AM   #5
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I should add that I also have a 401k Stable value fund which makes up 50% of my bond allocation and is currently earning 4.24%. Thus, I feel I could play a little against this backstop of sorts.
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Old 07-19-2018, 08:29 AM   #6
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I am 2 years from FIRE.

I dropped my equities to 35%

Prime MM cash paying 2% is at 15%, but some of these funds will go towards a new house.

Two bond ladders, a muni and a corporate make up the rest. 5-6 year length, all investment grade. They are currently throwing off about $60k/year. Average coupon for the muni is about 4% mostly state specific so double tax free, average corporate coupon is about 5%.

I personally feel with sequence of return risk hanging over my head, now is not the time to take big risks.
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Old 07-19-2018, 09:13 AM   #7
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I should add that I also have a 401k Stable value fund which makes up 50% of my bond allocation and is currently earning 4.24%. Thus, I feel I could play a little against this backstop of sorts.
4.24% on a Stable Value fund? Pretty impressive. Mine looks like it might do 2% max this year. Who offers yours?
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Old 07-19-2018, 09:25 AM   #8
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... Conventional wisdom says my bonds are there to mitigate volatility so just stay the course. ...
Thought #1: Conventional wisdom is often conventional because it is, well, wisdom.

Thought #2: If you want to tinker, ditch the bond funds and start buying individual CDs, governments, and investment grade corporates. You will make more money due to eliminating fees and you will eliminate the risk that rising rates will have driven your bond funds' values down when you need to sell.

Thought #3: If you want more volatility and risk (aka "foreign bonds/high yield") just tilt your portfolio a little more toward equities and stick to the conventional wisdom on the fixed income side. We all look at our fixed income tranche and sigh about low yields, but slightly changing the tilt is the easy way out.
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Old 07-19-2018, 09:34 AM   #9
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My thoughts are that if you want to market time bonds now, you are kind of late to the game. The Fed started raising rates about 3 years ago, with the 10-year yielding only 2% and one-year notes essentially nothing. Other than the Fed, there is no obvious driver for increasing interest rates as evidenced by the muted rate increases in the longer bonds.

I'm starting to think about when to move my short term bond position back into total bond market. Your DMT mileage may vary.
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Old 07-19-2018, 09:47 AM   #10
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4.24% on a Stable Value fund? Pretty impressive. Mine looks like it might do 2% max this year. Who offers yours?
Mass Mutual. It has always been higher than the typical SV fund.
Some of the underlying investment are in Mortgage Backed securities, which could be a part of the reason.
Too bad I didn't think about moving rolled over 401k funds from Fidelity to this fund before I left the firm.
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Old 07-19-2018, 10:22 AM   #11
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With options like the Vangard Prime Money Market yielding over 2% now and the fact it will adjust upward as rates rise, I see no need to mess with intermediate bond funds.
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Old 07-19-2018, 11:25 AM   #12
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With options like the Vangard Prime Money Market yielding over 2% now and the fact it will adjust upward as rates rise, I see no need to mess with intermediate bond funds.
+1
I think a side point is if this "market timing" is taking place in a TIRA, then it is much easier to switch with no tax implications.
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Old 07-20-2018, 07:27 AM   #13
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Staying the course. 60/35/5. I don't time the market, and don't hold much in bond funds. Always keep a comfortable cash balance, currently at $525K, drawing 1.8% at Marcus. Bond ladder (mainly corporates and muni) kicks off around $119K annually. Upcoming closing on RE sale will contribute another $400K to cash reserves, which will probably go into bond ladder. I hope we can weather any storm with current allocation.
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Old 07-20-2018, 08:29 AM   #14
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Hesperus/Cocheesehead,
I have moved into CD's from Bond funds and might not go back. However, I see both of you have individual (I assume) muni and Corporate Bonds vs. Bond funds.
On a general level, how did you get comfortable with the individual company holdings?
I understand the credit ratings, etc.
Just contemplating whether to take some "risk" in individual bonds held to maturity vs. CD's to achieve higher returns.
My non Stable Value portion of my bond holdings is around 15%.
I believe Puerto Rico bonds were at AA rating just a few years ago as a perhaps scary example.
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Old 07-20-2018, 08:52 AM   #15
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Hesperus/Cocheesehead,
I have moved into CD's from Bond funds and might not go back. However, I see both of you have individual (I assume) muni and Corporate Bonds vs. Bond funds.
On a general level, how did you get comfortable with the individual company holdings?
I understand the credit ratings, etc.
Just contemplating whether to take some "risk" in individual bonds held to maturity vs. CD's to achieve higher returns.
My non Stable Value portion of my bond holdings is around 15%.
I believe Puerto Rico bonds were at AA rating just a few years ago as a perhaps scary example.
I first off use the bond tool at Fidelity. Very helpful in not only finding bonds, but managing them. It gives you a good dashboard to see average coupon, duration, ratings, diversification and cash flow by month, year and account.
Secondly I avoid concentration.
Third buy quality. There are no sure things, but the failure rate on highly rated bonds is in the .0X% range. For example an Aa rated bond for a 5 year duration has a .01% failure rate. For Muni's it doesn't hit the 1% failure rate until you get down to Ba level at 3 years. Corporates hit it at about the Baa level. So still 99% success rate.

I like the predictability of owning individual bonds. I have a lot of moving parts with RE holdings and business equity positions that I am selling so it helps me place money precisely when I need it.


I find in general most folks don't understand bonds, but they aren't anymore complicated than owning a stock and I think far more predictable.
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Old 07-20-2018, 09:14 AM   #16
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Hesperus/Cocheesehead,
I have moved into CD's from Bond funds and might not go back. However, I see both of you have individual (I assume) muni and Corporate Bonds vs. Bond funds.
On a general level, how did you get comfortable with the individual company holdings?
I understand the credit ratings, etc.
Just contemplating whether to take some "risk" in individual bonds held to maturity vs. CD's to achieve higher returns.
My non Stable Value portion of my bond holdings is around 15%.
I believe Puerto Rico bonds were at AA rating just a few years ago as a perhaps scary example.
Use Fido bond tool. Research. Make a judgement call. Here's a small sample of some of the bonds I have that I took from my spreadsheet.

Capture.PNG
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Old 07-20-2018, 09:32 AM   #17
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I first off use the bond tool at Fidelity. Very helpful in not only finding bonds, but managing them. It gives you a good dashboard to see average coupon, duration, ratings, diversification and cash flow by month, year and account.
Secondly I avoid concentration.
Third buy quality. There are no sure things, but the failure rate on highly rated bonds is in the .0X% range. For example an Aa rated bond for a 5 year duration has a .01% failure rate. For Muni's it doesn't hit the 1% failure rate until you get down to Ba level at 3 years. Corporates hit it at about the Baa level. So still 99% success rate.

I like the predictability of owning individual bonds. I have a lot of moving parts with RE holdings and business equity positions that I am selling so it helps me place money precisely when I need it.


I find in general most folks don't understand bonds, but they aren't anymore complicated than owning a stock and I think far more predictable.
Thank you Cocheesehead for your information. I have most of my investments at Fidelity and will check it out.
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Old 07-20-2018, 09:33 AM   #18
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Use Fido bond tool. Research. Make a judgement call. Here's a small sample of some of the bonds I have that I took from my spreadsheet.

Attachment 29084
Thank you Hesperus for your information and specifics. Will check it out.
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Old 07-20-2018, 09:36 AM   #19
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Thank you Hesperus for your information and specifics. Will check it out.
You're welcome. It's really not that difficult, esp with Fido tool. Good luck!
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Old 07-20-2018, 09:55 AM   #20
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Thank you Cocheesehead for your information. I have most of my investments at Fidelity and will check it out.
You're welcome. Let me know if you need any help.
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