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portfolio analysis says I'm light on bonds....
Old 02-29-2012, 09:59 AM   #1
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portfolio analysis says I'm light on bonds....

We have always aspired to be FIRE-like, and have maxed out TIAA-CREF 403b and steadfastly put extra cash into Vanguard funds. We would like to retire by 52 and had a portfolio analysis that shows we are very light in bonds at 3% of PV, and Emerging Markets. I have some cash available, would now be a good time to buy bonds, while they are low? The Emerging Market field has gone up sharply since Dec, so not sure if it will continue the rise- perhaps wait for a drop and then buy in?

I've always been a fan of Vanguard mutuals, and now am looking for Vanguard ETF's for even lower expenses. Thank you.
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Old 02-29-2012, 10:11 AM   #2
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Bonds are basically now at a 30-year high... it's their interest rate that's low, not their price. On a relative basis among broad asset classes, housing and stocks are currently underpriced.
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Old 02-29-2012, 11:16 AM   #3
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I have some cash available, would now be a good time to buy bonds, while they are low?.
At the risk of being called a dirty market timer, I don't think a large allocation to bonds makes much sense right now. High-quality bonds (US Treasuries and notes) pay less than CD's, corporate bonds have been bid up by those escaping stocks and wanting something better than the paltry rate on Treasuries, and long-duration bonds offer precious little additional yield at tremendous downside risk when rates go up (which is a virtual certainty from the present lows).

I think it makes sense to substitute CDs for bonds in non-equity holdings. When the Fed stops maintaining these artificially low rates or when higher-quality corporate bonds rise in yield in response to inflationary pressures I'd probably rebalance into more bonds.

Another option is to increase the "tilt" of your equities to include more value/steady dividend stocks to replace the regular income that bonds would have produced.
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Old 02-29-2012, 11:22 AM   #4
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I am out of index bond funds now, even the tiny bit I had.

They pay little now and interest rates can't go any lower (well, maybe a little, but there ain't much left). When interest rates go up, the value of bonds bought today will go down. They will for sure go 'lower' (NAV). Can't go 'higher'.

I am putting my money in selected energy stocks right now, but I would consider an emerging markets index fund if I weren't.

Of course, I always like small cap and value indexes.
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Old 02-29-2012, 11:23 AM   #5
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If you follow conventional AA theory, as least as I read in Rick Ferri's "All About Asset Allocation", timing is not really a factor, you buy what ever the AA says you should. That is the theory. If you find yourself with more equities than your AA calls for, then you sell equities and buy bonds (in a simple bonds and equities AA). This forces you to sell high and buy low.

However, I can't bring myself to buy bonds at this point. I have been sneaky with myself, and purchased some alternatives like floating rate funds to fill out my 30% bond allocation. Fidelity Floating Rate High Inc (FFRHX) is but one example of such funds. They buy bank loans that have a floating rate that will increase with prime rate increases. They are normally lower credit rating than bonds, but they are normally backed by assets so even if the loan goes bad there is an asset to be liquidated to recover some or all of the loan principal.

Just one option.
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Old 02-29-2012, 11:34 AM   #6
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The bond bubble has been talked about bursting for the last 2 years. There are many suggestions to mitigate any exposure to the bursting bond bubble: don't invest being the most popular. Dr Bernstein has suggested short term bonds are the "least bad option". He also cautioned that more money has been lost to reaching for yield than at the point of a gun. It's important to note the reason one would want to hold bonds in their portfolio and the risk they assign to that portion.

I like the suggestion of cd's, I wouldn't use that portion to instead invest in sector stocks or etf's. But, I'm extremely conservative.
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Old 02-29-2012, 04:46 PM   #7
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CD are the least sucky of the fixed income assets. If your 403B offers something called a stable value fund, it is probably worth investing in otherwise the shorter the better form bond funds IMHO.

Emerging market had a bad year last years down 15-20%, so much of this years rally is just catching up. If you have the option to invest in broad international fund like Vanguard Total International Stock Market then there is probably no need for separate emerging market fund. Otherwise you could investigate dollar cost average into a fund just by redirecting your future contribution to one.

@SamClem dirty market timer shame on you
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Old 02-29-2012, 06:51 PM   #8
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If you follow conventional AA theory, as least as I read in Rick Ferri's "All About Asset Allocation", timing is not really a factor, you buy what ever the AA says you should.
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The bond bubble has been talked about bursting for the last 2 years. There are many suggestions to mitigate any exposure to the bursting bond bubble: don't invest being the most popular. Dr Bernstein has suggested short term bonds are the "least bad option".
There is no right answer, more a choice between lesser evils.
  • I have not changed my bond allocation (about 38% at present), Mr Ferri seems like good company.
  • I have shortened duration considerably, half my allocation is in Short Term Invst Grade with the rest in TBM, Dr Bernstein and Jack Bogle seem like good company.
  • The bubble hasn't burst despite dire warnings for at least 2 years. Seems to me with the Fed on record holding interest rates down into 2014, the NAV damage is years away. But when interest rates do increase, and they will for sure, bond NAV's will take a hit. The longer the duration, the bigger the hit. However, I realize I may hang on too long and get burned. I will get more yield than any CD in the meantime.
  • And I don't plan to rebalance from equities to bonds in the meantime. If my equity allocation breaks the upper range, I will let it ride with apologies to true Bogleheads and the like.
Some people are advocating dividend equities instead of bonds lately. That's fine, but it's the same as increasing equity allocation with higher risk. Not the same function as bonds. And it's market timing to boot.

That's my story, and I'm sticking to it? Others here will make a compelling argument completely at odds with my POV.
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Old 02-29-2012, 07:15 PM   #9
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Have you considered the TIAA Traditional Account in your 403B? It's a nice fixed value account with a guaranteed return.

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Old 02-29-2012, 07:52 PM   #10
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I'm with the "be true to your AA" crowd. Just keep the bond duration on the shorter side and you should be OK. The longer duration bonds would be a no-no at the moment; maybe this is timing!?

I have never met anyone who can predict or time the market. Even Buffet can be wrong at times. Someone at w*rk used to try and give me "hot tips" from his broker about when to get in and out of the market. I'm pretty sure this guy is still sitting on the sidelines since 2008. As I used to tell him "I'm all in" followed by a pushing poker chips forward motion.
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Old 03-01-2012, 08:22 PM   #11
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Brinker has this bond fund on his list.

DLTNX

What do you think?
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Old 03-01-2012, 09:00 PM   #12
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I'm (nominally) 100% equities. How did you select you bond allocation? you can make a case for 0%-100%.

I'm trying TLT (long-term treasuries ETF) for some of my excess cash on the theory that if Europe drags us down or we do it by ourselves in the next couple of years they are likely to move in the opposite direction as equities. But not by much since they're already pricey.

Otherwise cash is nice...
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Old 03-25-2012, 10:18 PM   #13
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IBonds are paying over 3%. You get that rate 6 months then the rate resets. Assume it drops to 2%. You can get out after a year with a 3 month interest penalty but your annual rate of return souls still be well above most bonds.
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Old 03-25-2012, 10:43 PM   #14
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IBonds are paying over 3%. You get that rate 6 months then the rate resets. Assume it drops to 2%. You can get out after a year with a 3 month interest penalty but your annual rate of return souls still be well above most bonds.
True. But There's a $10K annual limit on purchases of electronic I-Bonds (you can still get up to $5000 additional in paper I-Bonds if purchased with a tax refund). You could get 1.5% interest risk-free with a CD, so for 6 months you'd be earning 1.5% extra interest--$75 overall on $10K. And a 3 month interest penalty if you quit early. Only the individual can decide if it's worth the hassle (another source of income for taxes, etc).
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Old 03-26-2012, 08:12 AM   #15
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I'm aware of the $10k annual purchase limitation but a married couple can purchase $20k. That would be $100k in 5 years. Added benefits include tax deferral and state tax exemption.

My real point, however, is that this iBonds will yield a minimum of 2% for a year even with the penalty. If we get some inflation the yields will be much better. But you are also correct about the purchase limits.
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Old 03-26-2012, 09:39 AM   #16
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I seek to avoid emotional "gut feeling" decisions and keep investing on auto pilot. Having said that, it's really tempting -- given pathetic bond yields -- to replace a portion of bond holdings with dividend stocks that are yielding just about as much as bonds and have some growth potential as well.
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Old 03-26-2012, 09:41 AM   #17
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I seek to avoid emotional "gut feeling" decisions and keep investing on auto pilot. Having said that, it's really tempting -- given pathetic bond yields -- to replace a portion of bond holdings with dividend stocks that are yielding just about as much as bonds and have some growth potential as well.
I'm fighting that urge as well, knowing if I do swap some bond funds for a high dividend stock fund, equities will immediately tank - and dividend stocks will lead the decline...
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Old 03-26-2012, 09:51 AM   #18
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I'm fighting that urge as well, knowing if I do swap some bond funds for a high dividend stock fund, equities will immediately tank - and dividend stocks will lead the decline...
Yeah, when I get that urge I create a mental time machine and go back three years...
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Old 03-26-2012, 09:52 AM   #19
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I seek to avoid emotional "gut feeling" decisions and keep investing on auto pilot. Having said that, it's really tempting -- given pathetic bond yields -- to replace a portion of bond holdings with dividend stocks that are yielding just about as much as bonds and have some growth potential as well.
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I'm fighting that urge as well, knowing if I do swap some bond funds for a high dividend stock fund, equities will immediately tank - and dividend stocks will lead the decline...
Yes. I guess we just need to do it a little at a time.
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Old 03-26-2012, 10:33 AM   #20
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I'm fighting that urge as well, knowing if I do swap some bond funds for a high dividend stock fund, equities will immediately tank - and dividend stocks will lead the decline...
Let me know before you do.
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