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Old 09-16-2016, 04:27 PM   #21
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Originally Posted by Bestwifeever View Post
I think the OP is worried. The experts might not agree, but perhaps he should minimize his personal exposure to the markets and his personal inflation risk by selling everything in both his bond and equity funds, and then buying a very inexpensive house for cash back near his home town and putting the remaining cash into CDs. He can figure out a way to live on his social security at 62 and the meager interest those CDs will earn at this point (and be ready to trade them in as it were on higher interest rates, if they ever appear); his exposure to the markets and to inflation will be less than it is today and he might sleep better.
I agree somewhat.

OP should sell to cash 2 or 3 years worth of his investments and put them in cd's earning 1% or better (maybe 1.25%)
So that should everything dive, he has 2 or 3 years of cash so he does not touch his investments, that would give him a chance that he only needs to touch them after they have come up.
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Old 09-16-2016, 06:22 PM   #22
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+1 - big fan of the 2-3 year cash so you can go "la-la-la" thru any downturn.

a big loss in equities is only a loss if you sell. Anyone that held tight thru 08/09/10 can tell you that.
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Old 09-16-2016, 06:46 PM   #23
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....So, are you still in bonds and if so in what ETF or Mutual Fund?
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I own individual bonds, notes, and preferred shares. I don't have the same market risk as a bond fund. The value of my holdings will fluctuate, but I will receive 100% of my original principal at maturity or when called(more in the case where I bought the security below par) as long as the company does not default.
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+1 - big fan of the 2-3 year cash so you can go "la-la-la" thru any downturn.

a big loss in equities is only a loss if you sell. Anyone that held tight thru 08/09/10 can tell you that.
I am still in bonds. I believe 30-50% in bonds is critical to having a diversified investment portfolio as bonds tend to zig when stocks zag, and vice versa... but not always as we saw in 2008.

A few years ago I transitioned to maturity date bond funds to mitigate the interest rate risk in my fixed income portfolio. These funds are a mix between a conventional bond fund and individual bonds. If held to maturity, they mitigate interest rate risk compared to a conventional bond fund yet provide better diversification/simplicity compared to owning individual bonds. The ones I own are sponsored by Guggenheim and BlackRock. I own the corporate investment grade and high yield flavors with maturity years in 2020 and earlier. I also bought a lot of 3% PenFed CDs in 2013.

I concede that this strategy has its downsides as I have not participated in interest rate gains over the last few years as a result of having a lower duration portfolio... my 3 year return has been 3.7% vs 4.4% for BND but I think in the long run the interest risk mitigation will be beneficial to me.

The only major change I made to my AA when I retired was to allocate 5% to cash (online savings account paying 0.95%) with a corresponding reduction in bonds, so I went from 60/40/0 to 60/35/5. I have regular monthly transfers from this online savings account to my local bank account that I use to pay my bills (which I do not count as part of my retirement savings but the daily balance is usually fairly small).

Those of us who stayed the course in 2007-2009 and didn't bail on equities have been handsomely rewarded for our discipline and patience. It is often easy to decide when to bail, the real trick is when to get back in... if you just stay in the whole way and stay the course and believe in your AA it takes a lot of guesswork out of investing... and for me, that 5% in cash makes it much easier with minimal cost in terms of lower return.
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Old 09-16-2016, 08:12 PM   #24
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Bond funds (or ETFs or a collection of high quality individual bonds) are much less volatile then stock funds. Also, unless the Fed is raising rates to fight inflation, bond funds are negatively correlated with stocks. Thus, when stocks go down bonds go up and vice versa. They are a great way to reduce the overall volatility of your portfolio.

However, this is only true if you have a high enough quality of bonds, including some treasuries.


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Old 09-16-2016, 08:14 PM   #25
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I also have a little under 50% of my portfolio in stocks and a little over 50% in bonds. Good recipe.


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Old 09-16-2016, 08:29 PM   #26
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Right now I have 50% of my money in VTI and 50% in a mixture of BND and AGG (Total Bond Funds).

As a retired person I can't afford to lose all my retirement money in a huge stock market crash like 2007-2009 where the stock mutual funds lost 60% of their value. I always thought that if I were fifty/fifty (Stocks/Bonds), the most I could lose is maybe 25%, if there were another similar crash. My Bond funds would be a hedge against the next stock market crash, in a sense.

Now, the experts say the bond funds are way overvalued and they will crash alongside the stocks in the next bear market.

So, are you still in bonds and if so in what ETF or Mutual Fund?
We use mainly liability matching for our retirement portfolio where we can. The strategy is outlined here and doesn't use mutual funds:

https://www.bogleheads.org/wiki/Matching_strategy
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Old 09-16-2016, 09:13 PM   #27
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You lost me at "Experts say..."
Love it! My thoughts exactly

I would like it one day if I could read the following FINANCIAL headline:

"Experts say, 'Experts know little' ".
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Old 09-16-2016, 09:24 PM   #28
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We use mainly liability matching for our retirement portfolio where we can. The strategy is outlined here and doesn't use mutual funds:

https://www.bogleheads.org/wiki/Matching_strategy
I suspect that you could use target maturity bond funds with this strategy since they pay a certain terminal distribution on a defined maturity date similar to individual bonds.
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Old 09-16-2016, 11:26 PM   #29
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I suspect that you could use target maturity bond funds with this strategy since they pay a certain terminal distribution on a defined maturity date similar to individual bonds.
Good point. Those would work as long as they had a set maturity date.

Forced - This strategy is compatible with the suggestions in bestwifeever's post. If you are interested there are more posts on the Boglehead forum by a poster named Bobcat2 that I found really useful, and also books and online articles by Zvi Bodie. It is a way to put the retirement money that you'll you need for retirement living expenses and can't afford to gamble with in relatively safe assets, and then anything above that you can put in the market or riskier investments for the possibility of higher returns.
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Old 09-17-2016, 06:15 AM   #30
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If you really can't handle a downturn, whether it's because you need the money in a few years or you just can't sleep at night, then your asset allocation/investment strategy is not the best for you. It doesn't matter what's "right" in the investment pool of knowledge if you can't stomach it.

I'd second the recommendation to put 2-3 years of living expenses in the bank/CD. I'd keep replenishing this as needed to keep a 2-3 year buffer. Then see how you feel.

As others have already posted, get your bond fund duration down. Nothing longer then intermediate. I was worried about interest rate risk last year and decided to replace some of my bond holdings with zero coupon (aka 'strips") treasuries. Am I leaving some money on the table with this conservative approach - YES. Am I sleeping a bit better - YES.

If you're in the 'red zone', as Otar describes in his book (meaning borderline whether you have the funds to make it through retirement), then a SPIA may be better for you.
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Old 09-17-2016, 06:21 AM   #31
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Good point. Those would work as long as they had a set maturity date.

Forced - This strategy is compatible with the suggestions in bestwifeever's post. If you are interested there are more posts on the Boglehead forum by a poster named Bobcat2 that I found really useful, and also books and online articles by Zvi Bodie. It is a way to put the retirement money that you'll you need for retirement living expenses and can't afford to gamble with in relatively safe assets, and then anything above that you can put in the market or riskier investments for the possibility of higher returns.
I'm not sure that this matching strategy is appropriate in the OP's case as he is struggling to have enough for retirement even with a 4% WR and a conventional 60/40 AA on a $300k portfolio. As I understand matching, the withdrawals he could take would be lower and he is having trouble making ends meet as is. If his spending were lower then perhaps.
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Old 09-17-2016, 07:27 AM   #32
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If you're in the 'red zone', as Otar describes in his book (meaning borderline whether you have the funds to make it through retirement), then a SPIA may be better for you.
An SPIA typically can be a useful tool if retiree's portfolio looks incapable of supporting bare-bones spending needs. But there are a few problems and challenges in the OPs case:
1) He's (relatively) young. At 61 YO, the mortality credits he'll receive will be small. Also, given the likely long draw period, inflation protection is even more important than if he were older--and SPIAs with inflation protection are pricey.
2) Today's interest rates have suppressed the payouts on all annuities.

It's possible that the OP may do better if he can delay annuitizing (so he can get older and in hopes that interest rates improve). In any case:
a) he is resistant to delaying his SS payments until FRA or longer, and that's a much better actuarial deal than he'll get with any commercial annuity. So, unless he sees the benefit of that, he's probably not ready to buy a commercial annuity.
b) An SPIA, along with other income (SS, etc) can help a retiree meet basic expenses. I don't know if the OP has come to a realistic appraisal of what his basic expenses need to be--a budget with a bottom-line not based on needs or desires, but based on his resources and working backward from there. It is possible that, despite today's environment, he believes his assets will grow at more than 4% real, and that he can safely withdraw 6% or more each year. If so, that would be a comforting thing to believe, it will delay the perceived need to make any drastic lifestyle cuts, and will likely hasten the day when external circumstances force involuntary cuts under less favorable conditions. We all make our own choices.
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Old 09-17-2016, 09:05 AM   #33
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Right now I have 50% of my money in VTI and 50% in a mixture of BND and AGG (Total Bond Funds).

As a retired person I can't afford to lose all my retirement money in a huge stock market crash like 2007-2009 where the stock mutual funds lost 60% of their value. I always thought that if I were fifty/fifty (Stocks/Bonds), the most I could lose is maybe 25%, if there were another similar crash. My Bond funds would be a hedge against the next stock market crash, in a sense.

Now, the experts say the bond funds are way overvalued and they will crash alongside the stocks in the next bear market.

So, are you still in bonds and if so in what ETF or Mutual Fund?
If we had a bad market like 2007-2009, then stocks would go down but bonds would stay flat or go up. This is assuming a general recession and no increase in interest rates as happened in 2007-2009 when rates went down. Of course, the Fed does not have as much room to play with rates in a normal way as back then. In 2008 VTI was down -37% and BND was up +8%. So for a 50/50 the return was about -12%.

Now let's imagine a bad future scenario. There is a lot of inflation, rates are going up, the Fed raises rates but the market panics and bang we are in a recession maybe worldwide so stocks go down. Suppose rates shoot up 3% in January then BND might return 5% but because of rate increases (duration=6.0) the actual BND return = 5% - 6x3% = -13%. Suppose equities return -37% as in 2008. Then the total 50/50 return is about -25%. Not good but not the end of the world although it might feel like it at the time.

But that is not the end. BND will now return around 5% before inflation. We might get that loss all back the next year if inflation recedes and rates go down some. Stock returns would depend on a business recovery.

FWIW, we have 27% of the portfolio in BND & VFIDX. Should conditions warrant I would transition all of that to Treasuries (either short term or intermediate) because in a depression corporate bonds could get hammered. Not suggesting others do that though.
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Old 09-17-2016, 11:41 AM   #34
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I'm not sure that this matching strategy is appropriate in the OP's case as he is struggling to have enough for retirement even with a 4% WR and a conventional 60/40 AA on a $300k portfolio. As I understand matching, the withdrawals he could take would be lower and he is having trouble making ends meet as is. If his spending were lower then perhaps.
Whether that strategy works for him or not is something he will have to decide. It reduces sequence of return risk and preserves the money he cannot afford to lose:

"Bernstein defines a risk-free portfolio as one adequate for a basic retirement—a so-called liability-matching portfolio. With a liability-matching portfolio, you earmark certain assets to pay for your basic retirement expenses, or liabilities. “Anything in excess of that can be invested in risky assets,” said Bernstein. “For some folks, that’s going to mean a 100% fixed-income portfolio, and for wealthier clients, something far more aggressive.”

How to avoid sequence-of-return risk - MarketWatch

There's not a lot of ways to avoid sequence of returns risk and get high returns these days. We all have to pick our poison. Liability matching is one alternative to consider.
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Old 09-17-2016, 10:29 PM   #35
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....
A few years ago I transitioned to maturity date bond funds to mitigate the interest rate risk in my fixed income portfolio. .....
I concede that this strategy has its downsides as I have not participated in interest rate gains over the last few years as a result of having a lower duration portfolio... my 3 year return has been 3.7% vs 4.4% for BND but I think in the long run the interest risk mitigation will be beneficial to me.
.......
So these seem interesting and certainly reduce the risk of buying the 1 bond that ends up in bankruptcy.

I thought interest rates went down over the past 3 years. So I don't understand why your return is lower, unless it is because you had 1 and 2 year terms vs 3,4,5 year terms, and had to renew at lower rates ?
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Old 09-18-2016, 05:14 AM   #36
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Yes, the target maturity ETFs provide good diversification against credit risk, but at a IMO modest cost of 24 bps for the Guggenheim Bulletshares and 10 bps for the iBonds vs 6 bps for BND.

Yes, interest rates went down over the past 3 years, so bond prices went up and total returns were higher for longer duration bond portfolios due to interest rate gains.

The 10 year treasury has declined from 2.9% to 1.7% over the last few years so BND with a longer duration than my portfolio has benefited more from the decline in interest rates. So a difference in duration of 3 results in a 1.2% annual return difference but that is somewhat offset by my portfolio having a ~0.5% higher yield than BND because I have a healthy slug of 3% PenFed CDs, a whole life policy that yields about 4% and some high-yield target maturity bond ETFs mixed in. Overall, last time I checked it, my aggregate yield was about 2.9% and duration was 3.2 across my entire bond portfolio.
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