Rebalance portfolio from equities to bonds at this point in time

[dtbach]

Hi, just joined and want to say what a find!! Probably the most useful site I have found.

After running through some of the worksheets and calculation programs here, I found (not to my surprize) that I'm fairly heavy in equities vs bonds (87% to 13%).

At 58 I should be more conservative but it seems that now is not the time to buy bonds since interest rates are sure to climb and soon.

I have been moving out of growth stocks to more value (i.e. into funds such as Vanguard Wellington and Dodge and Cox Balanced) plus that gets me more bond exposure. I was also thinking more of Total Bond funds or at least Intermediate.

What are your thoughts on moving to bonds at this point in the economy?

 

[MasterBlaster]

I feel exactly like you do. Bonds scare me right now.

 

[brewer12345]

5 year CDs make a nice substitute for bond funds. You earn 2.5% if you shop around and if rates spike you surrender early and reinvest for a higher yield.

 

[nun]

You've probably researched asset allocation a little which is why you're asking if you are too heavily weighted towards equities. It's basically a decision based on your risk/return requirements and tolerance. If you decide you want more fixed income you then get into another set of risk return trade offs ie CDs are guaranteed, but currently offer poor returns, long term bonds have historically been good investments, but will rising interest rates hurt their price. Do you want Govt bonds or corportate

Personally I would not try to time the market or predict the future. I would decide on an AA and implement it asap and rebalance whenever your AA diverges by more than 5% from your plan. A total bond index of some kind might be a good place for you to start.

 

[eytonxav]

While bonds will be subject to taking a hit in a raising rate environment, I would say its never a wrong time to get to an asset allocation that lets you sleep at night. There are lot of ways to pare back some of your equity and increase your fixed income exposure (eg CDs, Floating Rate, Strategic Income, International, Emerging Market, Convertibles, Total Bond Market, Preferreds, etc). Certainly increasing expose to Wellesley and Wellington is one way to go.

 

[Animorph]

I'm happy with 100% equities, though I have quite a bit of cash now since my portfolio value is above my retirement projection and I've been selling some equities. If you are retiring soon I'd definitely carry something like three years of cash or very short term bonds. Live off of that for the first three years. Worked great for me over the last three years, plus DW decided not to retire with me. I'm back at a new peak portfolio value this year, even with our withdrawals. I'd certainly be selective about buying bonds now.

 

[W2R]

If you are investing for the long term, then I would go ahead. You could do it gradually, moving just a fraction every month. Then you wouldn't have to worry about changing your AA at the absolutely worst time possible. At least for me, a gradual approach would be easier.

 

[LOL!]

I do not see any reason to avoid short-term bonds right now. So if you need to unload equities, you can use the proceeds to buy CDs or short-term bond funds. For the latter, I prefer Vanguard funds and there are three of them that I own:

VBIRX short-term bond index
VFSUX short-term investment grade (actively managed)
VCSH short-term corporate index

Another possibility is to purchase I bonds from Treasury Direct.

Good luck!

 

[easysurfer]

I like just using a Total Bond Fund for my bond portion. Simple enough.

 

[fritz]

While bonds will be subject to taking a hit in a raising rate environment, I would say its never a wrong time to get to an asset allocation that lets you sleep at night. There are lot of ways to pare back some of your equity and increase your fixed income exposure (eg CDs, Floating Rate, Strategic Income, International, Emerging Market, Convertibles, Total Bond Market, Preferreds, etc). Certainly increasing expose to Wellesley and Wellington is one way to go.

+1 for Wellesley and Wellington. Their duration is similar to Total Bond Market, but their treasury exposure is very low (3-5% vs 42%).

 

[nun]

Reading the comments the general opinion seems to be that you should decide on an AA and implement it. Don't worry about the future or what they are saying on MarketWatch or in Forbes, just implement you desired AA and stick to your plan.

 

[dtbach]

Wow! Thanks for all the suggestions and the thought put into them. I like the idea of getting approx 3 years worth of money into CD's and cash equivelents to ride out the inevitable storms.

As a retired Naval Officer (Reserves) I will start to get a fairly good pension in 2 years (30K+) which also comes with very low cost health insurance. Then in 2 more years, the mortgage is paid off and then in 2 years after that SS kicks in (approx another 25K). At that point, we could certainly cover all the basics without any income from other assets.

This is one reason I feel a bit more confident with a higher equity %. Still I will take the advise and get more to 70/30 at least in the next 2 years and a goal of 60/40 in 5 years.

 

[Gone4Good]

At 58 I should be more conservative but it seems that now is not the time to buy bonds since interest rates are sure to climb and soon.

What makes you so sure? People have been warning that interest rates are going to skyrocket for more than two years now. Still waiting. I think there is good reason for rates to stay low, but nobody knows. The only thing we know for certain is that if there was an absolute guarantee that rates were going up 'and soon' rates would already be up.

I feel exactly like you do. Bonds scare me right now.

No more scary than stocks yielding 1.75% with a PE-10 of 24x. It's hard to see any asset class as 'cheap'

5 year CDs make a nice substitute for bond funds. You earn 2.5% if you shop around and if rates spike you surrender early and reinvest for a higher yield.

Yup, CDs are still one of the best fixed income games in town, although not as attractive as they used to be.

As to the original question, I've been 're-balancing' to a lower equity allocation for the last six months or so. I've gone from 65% equity down to 53% currently. With the way equity has been rallying it's been a struggle to keep up. I just sold another chunk and could stand to sell more. Most of the proceeds have gone in to CDs and cash. About 75% of my fixed income portfolio is zero duration, and it still yields more than the Bond Market Index. No need to take duration risk at the moment with CDs yielding more than treasuries.

I don't worry about current low cash yields. With equities up more than 100% over the last two years, I can earn nothing on that cash for the next thee years and still have a 15% 5-year annualized return.

 

[nun]

With the way equity has been rallying it's been a struggle to keep up. I just sold another chunk and could stand to sell more. Most of the proceeds have gone in to CDs and cash.

I'm selling equities every few months to keep me at 50/50. I'm using the proceeds to make extra mortgage payments.....my interest rate is only 4.5%, but that's still a pretty good rate to get from the money when you consider today's CD and savings interest rates. It also has the added "advantage" (I know this is arguable) of bringing the date of my mortgage payoff and ER closer.

 

[clifp]

As to the original question, I've been 're-balancing' to a lower equity allocation for the last six months or so. I've gone from 65% equity down to 53% currently. With the way equity has been rallying it's been a struggle to keep up. I just sold another chunk and could stand to sell more. Most of the proceeds have gone in to CDs and cash. About 75% of my fixed income portfolio is zero duration, and it still yields more than the Bond Market Index. No need to take duration risk at the moment with CDs yielding more than treasuries.

.

Where in the heck are you getting zero duration fixed income that yields more than bond market index. Can I get some or do I need to make pact with the Devil?

 

[veremchuka]

How would you feel if the market craters again and you loose 40 or 60%? Any nav loss in a bond fund will look like a winning lotto ticket compared to that! You can't do much rebalancing should that happen with such a small allocation to fixed income. I kept a good % in my 401k for the stable value fund, 3.5% and no nav drop when interest rates rise.... like that's ever going to happen.

 

[LOL!]

Where in the heck are you getting zero duration fixed income that yields more than bond market index. Can I get some or do I need to make pact with the Devil?

I'm gonna guess it's the TSP G fund.

 

[megacorp-firee]

. Still I will take the advise and get more to 70/30 at least in the next 2 years and a goal of 60/40 in 5 years.

you may want to consider accelerating your goals or even go a bit further. In the 2008 crisis, right after I had retired, I experienced over 45% drop in portfolio value. I had a 65/35 allocation. Not good. DW and I had a lot of (one way) conversations on how this happened. Even though we had jointly agreed to our AA previously. Nothing like a real world experience to make one come to reality. ... and truly understand what your risk tolerance (all parties) is.
We now have a 40/60 AA so that we can sleep at night (accomplished fairly recently, as the market has come back closer to the 'high' position that we had experienced).
The good news on this is that we had enough experience under our belts, so that we did not panic at the bottom and dump out.

Hope this helps.

 

[Gone4Good]

Where in the heck are you getting zero duration fixed income that yields more than bond market index. Can I get some or do I need to make pact with the Devil?

2.84% (which is what the Bond Market is yielding) isn't a high hurdle. 2.5% CDs get you most of the way there. If you have access to a decent stable value fund in a 401(k) that probably brings you the rest of the way home. And if you had put this portfolio together a year and a half ago when CD rates were an additional 75bp or more over treasuries, then it is even easier.

 

[clifp]

2.84% (which is what the Bond Market is yielding) isn't a high hurdle. 2.5% CDs get you most of the way there. If you have access to a decent stable value fund in a 401(k) that probably brings you the rest of the way home. And if you had put this portfolio together a year and a half ago when CD rates were an additional 75bp or more over treasuries, then it is even easier.

I don't have access to a stable value fund, cause I don't have a 401K and I don't think we had one to begin with.

The only PenFed CD yielding more than 2.5% are the 7 year which is hardly zero duration. I did get a nice slug of the PenFed 5% CD but they are 10 year duration. I treat CD as bonds although they have some nice benefits. The best my zero duration cash is doing is earning .45% in my Schwab savings account.

Needless to say if I could back in time 18 months I wouldn't waste my time with higher CD yields. No sir, Jan 2011 options on Apple stock would be where my money was.

Of course if what you really mean is the TSP G, than my suspicion about selling my soul to the devil (aka Uncle Sam) is correct.

 

[Gone4Good]

The only PenFed CD yielding more than 2.5% are the 7 year which is hardly zero duration.

I think you misunderstood my use of the word 'duration' as a bond math concept . . .

Macaulay Duration is a measure of a bond's price sensitivity to changes in interest rates. So yes, a 7 Year PenFed CD (yielding 2.75%) is essentially a zero duration product (5-yr Ally CDs at 2.4%, BTW). Coupled with the fact that they also have relatively low cost put options that can likely be exercised if rates rise, makes them a far better product than a similar yielding bond, or bond fund.

 

[dtbach]

you may want to consider accelerating your goals or even go a bit further. In the 2008 crisis, right after I had retired, I experienced over 45% drop in portfolio value. I had a 65/35 allocation. Not good. DW and I had a lot of (one way) conversations on how this happened. Even though we had jointly agreed to our AA previously. Nothing like a real world experience to make one come to reality. ... and truly understand what your risk tolerance (all parties) is.
We now have a 40/60 AA so that we can sleep at night (accomplished fairly recently, as the market has come back closer to the 'high' position that we had experienced).
The good news on this is that we had enough experience under our belts, so that we did not panic at the bottom and dump out.

Hope this helps.

I hear you. My portfolio didn't drop nearly that bad as approx. 20% of my equities are in Utilities which didn't drop nearly so far. And it was nice reinvesting those dividends into lower cost shares. Also my situation is somewhat different in that with my Naval Pension and joint SS we will easily cover our basic costs. The IRAs and investments I have are mainly for entertainment and travel so again, I feel I can hold a somewhat higher % in equities. 2008 was a Mega bear and generally they only come around every 30 years or so (30's, 70's and this last decade)

Unless its "Different this time"

 

[pb4uski]

I think you misunderstood my use of the word 'duration' as a bond math concept . . .

Macaulay Duration is a measure of a bond's price sensitivity to changes in interest rates. So yes, a 7 Year PenFed CD (yielding 2.75%) is essentially a zero duration product (5-yr Ally CDs at 2.4%, BTW). Coupled with the fact that they also have relatively low cost put options that can likely be exercised if rates rise, makes them a far better product than a similar yielding bond, or bond fund.

While I understand your point, I wouldn't agree that the duration of a 2.75% 7 year CD is zero. Technically, I think it would actually be the same as a 2.75% 7 year bond.

The difference is that there are active markets for bonds so when interest rates rise, prices/value decline as the bonds contractual cash flows are discounted at the higher market discount rate and the decline is more visible. The same thing would happen with a CD - the exchange value of the contractual cash flows would be discounted at the current market rate and the value someone would be willing to pay for those cash flows would be lower because their alternative would be to simply buy a "new" CD at the current market rate.

With both a 7 year CD and a 7 year bond, if you hold to maturity you get a 2.75% return. Though I would agree that the implicit put in the CD makes it preferable to a bond with the same coupon and term.

 

[rescueme]

I would think that part of the decision is when you actually are planning on full retirement. AA decisions are also related to your "time in life".

For instance, DW/me were at a 90/10 (equity/bond-cash) for most of our accumulation period.

Five years before we planned to retire (at age 59), we gradually changed our AA to a 60/40 ER target, selling off equities to fund our retirement cash "bucket" (contains 3-4 years of gross income, to avoid selling in a down market - equities or bonds), along with moving equities to bonds, when it made sense.

Being retired four years (at least me - DW decided to stay "in service"), and going through 2008, we've dropped our joint AA to a 50/50 mix (equity/bonds-cash). If equities grow beyond that 50% target (as it has recently) we sell - either to push more to our respective cash buckets and into bonds. Last week, I sold a bit off, reducing our current equity side from 54% to 52%. Now, it's back up again. I'll let it sit (since I believe we're in for a short term downturn due to folks "harvesting" their short term gains - but what do I know) untill it comes up a bit - but not more than 54%.

If you don't expect to retire till age 70 (some do) then you have time to state your intent, and make your changes. However if you decided to retire next year, you are subject to short term market flux, win or lose.

 

[Gone4Good]

While I understand your point, I wouldn't agree that the duration of a 2.75% 7 year CD is zero. Technically, I think it would actually be the same as a 2.75% 7 year bond.

If we're talking about non-brokered CDs, I disagree. Remember that a market would value that put option (early redemption penalty) too, which in the case of Ally CDs is a scant sixty days interest. So even if a liquid market developed tomorrow, a floor price around par would still exist.

If you want to get 'technical' I'd agree that a CD's duration isn't zero. It is a function of its early redemption penalty, the starting coupon, and the change in rates. So in the example of a 200bp increase in rates a 5 year 2.4% Ally CD costs 40bp to reset to 4.4%. that works out to be an equivalent duration of about 0.2 years. Whereas a 2.4% coupon 5-Year treasury bond declines in value by 8.9% with a 200bp increase in yields, for a 4.74 duration (duration isn't linear which is why the decline in value isn't exactly twice the duration). That is a pretty tremendous difference in a perfectly realistic example of 5 year rates rising to 4.4%.

It's important to note here that not all CDs are created equal, and early redemption terms vary widely. Ally is the best I've seen, some others are pretty good, and still others are really bad. So buyer beware.