Bond portion of Portfolio - Long Horizon....

[Cut-Throat]

I have settled on a 60/40 Stock to Bond/Cash Portfolio. And was looking for recommendations and opinions on how the 40% Bond/Cash position should be invested. The simpler the better!

Example - 37% Tips - 3% Cash ?

Half of this amount will be in a Tax Deferred Account the other will be in a Taxable Account.

Thanks for comments.

 

[charlie]

Hi Cut-Throat,

I am a little afraid of TIPS right now because I think
real interest rates are abnormally low and will be
headed up as GDP growth picks up. I would back
up the truck after the rate goes up. In any case,
you might consider DCA into TIPS.

As for cash, I think Vanguard's Short Term
Corporate is better than a MM fund. It is
paying around 2.8% with a duration of 1.8 years.
This would be a good place to park most of your
sheltered bond money while you DCA into TIPS.

If you need cash in an after tax fund that is needed
for expenses, you might consider Vanguard's Tax
Exempt Money Market. It is currently paying better
than the Prime Money Market (strange but true).

Finally, if you like Index investing and are comfortable
with a 60/40 mix, you might consider one of Vanguard's
balanced funds such as Balanced Indes, Target Retirement 2025 or Life Strategy Moderate Growth.

I personally use Target Retirement 2025 for the
bulk of my IRA. I use Total Stock Market for my
after tax investment and achieve a 60/40 mix
by balancing the TSM fund against Vanguard's Short
Term Corporate held in my IRA. This is the best
compromise for me because it takes all the emotion
out of rebalancing. Some will say this is a cop out,
but after being an "active" asset manager of my
own funds since ER'ing in 1989 I am happy to
let the computers at Vanguard take over.

Good luck!

Charlie

 

[Bob_Smith]

Cut-throat, I have the same questions you do, and few good answers. I'm taking the same approach as Charlie regarding TIPS. I want them, but not at this yield. If it hits 2.5% I'm going to buy LT TIPS on the secondary market with the intent to hold until maturity in 25 years or so.

I am in the process of buying two CDs at Penfed. It's money I'll use to live on in years #3 and #4 of my ER (ER is about a year away). Penfed 4 & 5 year rates seem good relative to other options.

Here's roughly what I plan to own:

ING (2%)/VANG. MONEY MKT ............................3%
VANG. SHORT TERM CORP FUND........................9%
INTERMEDIATE TERM TIPS/CDs/Bond Funds....12%
30 YEAR TIPS...................................................31%
VANG TOTAL STOCK FUND...............................28%
VANG INTERNATIONAL GROWTH FUND..............7%
VANG. REIT FUND.............................................10%

 

[Cut-Throat]

Thanks Bob, Charlie,

Charlie,

I really like the idea of Vanguards Computer balancing things for me. However, I am little leary of TSM indexes because I beleive they are heavily weighted towards Large Cap Stocks. (according to Swedroe) - It would really be nice if Vanguard would have combined their individual asset classes into a Target Fund. I'd snap it up in a minute!

I'll probably go the route of Bob Smith and pick my own Indexed into separate asset classes and balance myself, until Vanguard comes up with a Fund That combines these.

 

[dogon]

I have a long investment horizon and thus a low bond allocation. But, given the pending interest rate hikes, I have moved almost all of my bond holdings into international bond funds and some in TIPS. I will keep the international bond holdings probably for the next couple of years, until the interest rate hikes subside.

Two world bond funds that I found appealing were the Loomis Sayles Global bond fund and the T. Rowe Price International bond fund. The Loomis fund has a stake in US treasuries, TRP does not.

 

[charlie]

Hi Cut-Throat,

I haven't read Swedroe yet, but will check him out.
You are probably aware of this but for the benefit
of others, the Total Stock Market Fund is about
73% large cap blend, 18% mid cap and 8% small
cap (according to John P. Greaney's safe withdrawal
report). Vanguard's balanced index funds such as
Balanced Index, Target Retirement .... and Life Strategy
hold TSM. I like the Target Retirement 2025 because
it also holds European Index (8%) and Pacific Index (4%) . This weighting of foreign stocks is similar to
examples in Bernstein's "4 Pillars..." book. By the
way, Bernstein favors using separate index funds
to cover the 4 corners. For me, the balanced index
approach takes out the hassle. After all, according
to Bogle, 94% of your portfolio return is explained
by the basic asset allocation decision.

I gather from your desire to use TIPS that the balanced
index approach won't float. Forgive me for using your
thread as a bully pulpit.

Cheers!

Charlie

 

[unclemick]

Cut-Throat you lucky dog!

It's pouring buckets here and expected to continue Mardi Gras day - sniff, sniff - I'm jealous.

 

[cute fuzzy bunny]

Nearly 70 here, clear and sunny, light breeze, humidity about 45%.

TIPS today look to be yielding about 1.8%. Just a hair under 1.5% if you're buying them in a cheap fund like vanguard. I need to see more than the spectre of inflation before I'll put much into them. I've got 6k in a Roth I just put together in them, but thats just pocket change.

 

[wabmester]

I need to see more than the spectre of inflation.

It's heeeere!

At least according to Fleck:

http://moneycentral.msn.com/content/p72748.asp

Summary: we're already seeing inflation due to the falling dollar and our dependence on imported goodies. And it can only get worse since we're currently at the mercy of foreign governments propping up the dollar as well as exporters absorbing some of the currency hit -- neither of which can go on for very long.

 

[ats5g]

Cut-Throat,

I think I'd take the position that I can't predict future inflation hikes (declines) or future interest rate hikes (declines). Therefore, i think I'd do something like what Bob_Smith has. Maybe 1/3 short term (ST corp), 1/3 Intermediate Term, and 1/3 TIPS. Seems like nice even "round" numbers. I'd stay away from nominal long term bonds.

This assumes that I have no other outside income (like from SS or Pensions currently). If I did have a good amount of my retirement income coming from SS (which is Cola'd), or coming from a pension (cola'd or non-cola'd), i might consider how that could affect my investment portfolio. For example, if my SS and pensions are inflation adjusted, I might not own all that much TIPS since I've already got inflation hedges (my pensions/SS). If my pension was not cola'd and was a good deal of my retirement income, I think I'd own a lot of TIPS. No pension would probably put me back to 1/3 in each (or something along those lines).

Also look at what your equity portfolio looks like, since it's not just how your bonds interact w/ each other, but how they interact w/ your equities as well. If you've got mostly TSM funds (like in Vanguard's Balanced Index, or one of their Target or Life Strategy funds), I think I'd go with TIPS and ST bonds. If you've got a serious value tilt going on, you could probably add more intermediate term bonds.

Personally, I like adding things like small value (and large value), REITs, emerging market stocks, etc., to a TSM dominated portfolio b/c adding these lowers portfolio volatility, and quite possibly increases future expected returns (although that's not that main point). TSM is certainly easier, but not as psychologically easing as slicing and dicing a little. TSM and growth stocks are also not as good hedges for a retiree who is at serious inflation risk as value, REITs, commodities - especially for someone who has a fixed pension.

Also, given that interest rates are low, I'd be looking to slash expenses wherever possible. For example, why buy nominal Treasuries in the IRA, when I can buy them for free in my taxable account (EE bonds or individual Treasuries for longer maturities)? And if I have to pay state taxes, I think I'd hold nominal treasuries (if I was going to in a bond index fund) in my taxable account to take advantage of the tax benefit. Although, given that CD's are paying such a higher rate than Treasuries of similar maturities, I think I'd stick w/ CD's b/c they may still pay a higher after-tax rate. Why buy CD's through in a brokerage account (and incur a transaction fee) when I can buy them for free in a taxable account or through an IRA at a CU? etc.

- Alec

 

[fire5soon]

I like TIPS in theory, but I'm nervous about the house being able to "fiddle" with the inflation rates on which my payments are based. I would prefer the open market do this. I am currently about 50/50 between intermediate & short term debt right now and probably will be in the future.

 

[cute fuzzy bunny]

Yeah I saw the stories about CPI perhaps not being entirely accurate and the possibility that it may be readjusted in not-a-good-way with regards to tips.

 

[fire5soon]

It could be the Libertarian in me, but I just don't trust the government enough to let them decide what they'll pay on their debt like TIPS allow them to. Don't get me wrong... I think TIPS are great but they make me nervous. At this point I guess I could take them or leave them. If you keep your maturities relatively short, inflation shouldn't be as huge as a killer anyway, although still a real risk (no pun intended).

 

[wabmester]

Why would somebody avoid TIPS because of fear of CPI fiddling and instead buy nominal bonds when the federal reserve blatantly fiddles with the federal fund rate (which affects your yield)?

The fed already has control over their borrowing rates, or at least they think they do, so no conspiracy theory is needed here.

The only reason I would avoid TIPS right now is that their real yield is below the average long-term treasury real yield. I've got enough below-average investments.

I just had a juicy bond called, and I've got an even juicier one that's sure to be called in Nov. Stupid reinvestment risk! I can't find any bonds I'd like to hold, so I'm just going to keep piling up those short-term corps. Yech!

 

[cute fuzzy bunny]

My thinking on tips and cpi is that it would suck if you were taking that 1.8% because that+cpi is better than most short and inter term bonds, and then they decide that cpi is only half what they've been reporting it as and the value of tips drops through the floor.

 

[sgeeeee]

If you like the inflation protection of TIPS but don't trust the government CPI calculation in the future, you could consider I-bonds.

A couple can buy $60K per year. After several years you can have a considerable stash of inflation protected bonds. If you don't like what Uncle Sam does with CPI, you can redeem after a year. You don't have to worry about re-sale on the open market. And if the inflation protection is working for you, you can keep them for 30 years.

 

[wabmester]

A couple can buy $60K per year.

As of last year, it's $60K per person:

What are the maximum amounts I can invest in EE and I bonds each year?


In general, as of May 2003, you can invest up to $30,000 (issue price) in paper EE bonds per calendar year, and up to another $30,000 (issue price) in electronic EE bonds through TreasuryDirect. (The previous annual limitation was $15,000 (issue price) for paper EE bonds.) You can also continue to invest up to $30,000 (issue price) in paper I bonds and up to another $30,000 (issue price) in electronic I bonds in TreasuryDirect. Bonds purchased as gifts or in a fiduciary capacity are not included in the computation for the purchaser.

[I assume you can still get paper bonds at a bank, but they're no longer available online.]

 

[JWR1945]

As of last year, it's $60K per person:

I think that it is slightly more accurate to say per social security number. That limits foreign ownership.

Have fun.

John R.