What Bond Fund?

[yakers]

I posted this on the VG Diehards site and got two replies; both opposite positions Thought I would check with the folks here for any interesting insights:

My MIL is 81. The family is discussing her portfolio with a financial advisor. So far we have decided on an AA of 40% stocks and 60% bonds. This may seem high but most of her expenses are met from SS and pensions. None of the family are really familiar with bonds. Her whole portfolio is taxable. She would use interest for income so it may not matter that she only has taxable funds. The advisor wants to set up a bond ladder but a couple family members are suggesting a bond fund instead. That makes sense to me too but I want to suggest an appropriate VG bond fund or at most two funds. I understand the total bond index but another family member is suggesting only short term bonds. Is the VG short term investment grade fund (VFSTX) the best way to go?
Or 50% VSFTX and 50%total bond (VBMFX) or intermediate investment grade (VFICX)?

 

[Dawg52]

Well let me be the first to say .......... psst Wellesley. Gives you the 40/60 split in one fund with Vanguard. But if you already have your stock funds purchased, I would put half with a short term bond fund and half with a total bond fund like the one's you mentioned. Forty % stocks does seem a little high for an 81 year old though.

 

[clifp]

I posted this on the VG Diehards site and got two replies; both opposite positions Thought I would check with the folks here for any interesting insights:

My MIL is 81. The family is discussing her portfolio with a financial advisor. So far we have decided on an AA of 40% stocks and 60% bonds. ...Is the VG short term investment grade fund (VFSTX) the best way to go?
Or 50% VSFTX and 50%total bond (VBMFX) or intermediate investment grade (VFICX)?

I had a decent size muni bond mature recently and went through the same exercise and similar thing for my 82 year old mom.

Given that the VFSTX has a higher current yield than the total bond fund, I decided to stay away from that. Personally, I think Vanguard GNMA provides the best overall risk to reward ratio. Very competitive returns over any period, low maturity (4 years) high stability the fund is basically $10 +/- $.50 for ever, Govt "backed". So I'd look at VFSTX and 50% VFIIX.

 

[donheff]

Forty % stocks does seem a little high for an 81 year old though.

OP said she covers most of her needs with SS and pensions. I do the same and can't see any reason to up my fixed income dramatically as I age.

 

[Dawg52]

OP said she covers most of her needs with SS and pensions. I do the same and can't see any reason to up my fixed income dramatically as I age.

I saw that. I guess everyone's comfort level is different. I wonder how the 81 year old MIL will feel about it after a major market correction?

 

[W2R]

I saw that. I guess everyone's comfort level is different. I wonder how the 81 year old MIL will feel about it after a major market correction?

On the topic of differing comfort levels...

Yesterday my 64-year-old brother (who retired in the late 1980's) mentioned in an e-mail that in 1998 he was 100% in stocks, mostly tech stocks. Ouch! He lost over 2/3 of his portfolio, and he says it is STILL not back to where it was (though he's not hurting, by any means). He says he will never make that mistake again. He is more comfortable with a 50:50 allocation, now.

By the way, he says that he hasn't had much luck with bond funds lately, so right now he has his fixed income in brokered CD's instead. I thought that was interesting.

Right now, two years before ER I have about 60% equities. I have been planning to go 50:50 by the time I ER at age 61.

But lately I have been getting even more conservative than that, thinking that 40% equities might be the right mix for me even when I first retire. I don't need or want much to live on, and I do worry a lot so this could lower the ER stress level a whole lot. I am thinking 30% Wellesley (2/3 of which are bonds, 20%), 20% TSP "G Fund", and maybe put 10-20% in brokered CD's like my brother unless I find something else that looks better. Dunno yet. Decisions, decisions.

 

[REWahoo]

Want2, I can relate. I didn't find my comfort zone until after retiring. My mix was 60/40 but I found once I'd pulled the plug my "sleep well at night" allocation was in the 45-50% equity range.

If you look at FIREcalc, you will see you don't get a huge improvement in long-term portfolio survivability once you get above the 45% equity level. I'm at 47/39/14(cash) and not sweating market gyrations at all.

 

[W2R]

Want2, I can relate. I didn't find my comfort zone until after retiring. My mix was 60/40 but I found once I'd pulled the plug my "sleep well at night" allocation was in the 45-50% equity range.

If you look at FIREcalc, you will see you don't get a huge improvement in long-term portfolio survivability once you get above the 45% equity level. I'm at 47/39/14(cash) and not sweating market gyrations at all.

That sounds like a good mix. What sort of bonds did you decide on?

 

[REWahoo]

Most of my bonds are subsets of the two balanced funds I hold - Wellesley and Dodge & Cox Balanced.

 

[W2R]

Most of my bonds are subsets of the two balanced funds I hold - Wellesley and Dodge & Cox Balanced.

I really like Wellesley too, because they can manage the bonds for me and I don't have to decide! I don't want to put all my eggs in one basket, though. The "G Fund" will provide a good, reliable fixed income investment, too. I don't know if I'll add brokered CD's like my brother did, or what, for the third part of my fixed income.

I just ran Firecalc for my retirement situation, and you're right! (well, you knew that ). I tried it for 50% equities, and 40% equities, and asked how much I could withdraw for 35 years and 95% confidence. There was almost no difference.

 

[youbet]

I just ran Firecalc for my retirement situation, and you're right! (well, you knew that ). I tried it for 50% equities, and 40% equities, and asked how much I could withdraw for 35 years and 95% confidence. There was almost no difference.

Try the FireCalc option where it tells you what AA was optimum (historically) to max your SWR.

 

[FinanceDude]

Most of my bonds are subsets of the two balanced funds I hold - Wellesley and Dodge & Cox Balanced.

There's probably some overlap between those........

 

[REWahoo]

There's probably some overlap between those........

OK, I'll fess up - I'm a risk taker.

 

[Dawg52]

once I'd pulled the plug my "sleep well at night" allocation was in the 45-50% equity range.

I'm at 47/39/14(cash) and not sweating market gyrations at all.

Almost identical here. I guess great minds think alike?

 

[REWahoo]

Almost identical here. I guess great minds think alike?

Yep, that's probably it. I refuse to believe it's due to chickenheartedness being contagious.

 

[ats5g]

I posted this on the VG Diehards site and got two replies; both opposite positions Thought I would check with the folks here for any interesting insights:

My MIL is 81. The family is discussing her portfolio with a financial advisor. So far we have decided on an AA of 40% stocks and 60% bonds. This may seem high but most of her expenses are met from SS and pensions. None of the family are really familiar with bonds. Her whole portfolio is taxable. She would use interest for income so it may not matter that she only has taxable funds. The advisor wants to set up a bond ladder but a couple family members are suggesting a bond fund instead. That makes sense to me too but I want to suggest an appropriate VG bond fund or at most two funds. I understand the total bond index but another family member is suggesting only short term bonds. Is the VG short term investment grade fund (VFSTX) the best way to go?
Or 50% VSFTX and 50%total bond (VBMFX) or intermediate investment grade (VFICX)?

Yakers,

The fact that none of the family members are knowledgable about bonds and are suggesting bond funds over the laddered bonds might give me the willies a bit. But, I think we've debated the whole ind bonds vs bond fund thingee before and here's a recent conversation at the VD Forum on the subject. Unless your MIL is going to be doing a asset-liability matching strategy, I'd stick with the low cost bond funds. They're simple and all pay a monthly dividends [unlike ind treasuries].

As I'm sure you're aware, in the bond world there ain't no free lunch, so the higher the yield on the bond/fund, the more risk there is. Not trying to throw Clifp under the bus here, but take Vanguard's GNMA fund for example. It certainly does only invest in GNMAs, which are explicitly backed by the US gov't, and does have a high comparative yield, but this is just compensation for the increased prepayment risks of GNMAs. Having said that, the yield spread b/w ultra-safe treasuries and say high grade corporate bonds or GNMAs has widened in the late credit crunch, as can be seen in the various yields of Vanguard's Bond funds. So venturing into things like VFSTX, VFICX, VFIIX and VBIIX may not be a bad idea. Though be forewarned that when the S**T hits the fan in the equities markets, the place to be is usually treasuries, so just b/c VFSTX, VFICX, VFIIX and VBIIX have higher yields doesn't mean that her entire portfolio of stocks and bonds will have a higher return than if she went with the Treasury funds.

Perhaps yet another consideration is the types of guaranteed income your MIL has. SS is obviously COLA'd, but is the pension? If not, your MIL may want to shorten the duration/maturity of the bond fund she uses, or even use the TIPS fund. Of course, this may also depend on the ratio of SS income to pension income [if non-cola'd]. If SS is a smaller ratio of the guaranteed income, then using ST bonds and/or TIPS would be a way to hedge the inflation risk of the non-cola'd pension. [Edited to add] Also, if the pension is a corporate pension, then tilting the bond portfolio towards treasuries would also be a good idea.

Also, my own personal opinion is that ladders of bonds are just a bond fund in disguise, so if you want to venture into bond ladders other than treasuries, use the ST bond funds instead of say a ladder of ST corporate bonds.

[Edit to add]: Either VFSTX or VBISX alone or a combo of VFSTX/VFICX or VBISX/VBIIX will likely be fine. Neither is going to blow up your MIL's portfolio.

- Alec