Fixed Income suggestions

[rodiy2k]

I am shooting for ER in 2017 at age 53 , wife will be 47. My portfolio strategy is to lose no lore than .5 to .75 of the S&P on a day when the index is down. I do this by keeping a very diverse portfolio of fixed Income including US intermediates, emerging market sovereigns, CMBS abs ABS funds, bank loans,multi-sector funds, TiPS, GNMA funds, strategic income funds and some munis in the taxable account. Usually it works well.

I'm not really that concerned about the talk of the 30 year bond run ending or the obvious decline that's coming when rates eventually go up because it still makes more sense to keep a good chunk of the portfolio on the conservative side with income producing securities. In fact here is the dilemma. The only thing that can totally kill the plan is another 2008 whereby very single asset class gets whacked every day no matter what for an extended period.

Despite the supposed "good news" behind the hinting of an end to QE, the fixes income markets around the world heard only one thing: The end to free money. As a result trillions of dollars that piles into SE Asian FI markets as well as many other markets came out in droves and sits in cash as we speak. For two straight days every single asset I own got clobbered although I still lot less than the S&P thanks to conservative equity funds

The bond markets reactions to Bernanke's every wow is utterly ridiculous. Hypothetically the capital markets should work properly if we ever get back to a normalized interest rate environment worldwide. Yet the sugar addiction is proving too much. Is anyone in a similar situation and if so, does anyone have any suggestion about how to stick to an asset allocation of about 40% FI given the insanity? It gets very hard to stick to your guns when the strategy fails

Thanks to all

 

[pb4uski]

You need to take a longer view and ignore daily gyrations. If volatility is bothering you, just don't look at your portfolio value so often.

 

[REWahoo]

You need to take a longer view and ignore daily gyrations. If volatility is bothering you, just don't look at your portfolio value so often.

+1

Or change your strategy to meet your low tolerance for risk. Failing to do either will have you buying high and selling low - a sure fire formula for working far longer than you wish.

 

[W2R]

does anyone have any suggestion about how to stick to an asset allocation of about 40% FI given the insanity? It gets very hard to stick to your guns when the strategy fails

I have 55% fixed income, and I am retired. It is sometimes tough to stick to my asset allocation, but for me it really helps to have a small amount (<$10K) in a separate account, that happens to be a Roth IRA in my case. I use this Roth IRA for my impulse trades. This way I can get these trading ideas out of my system without touching my main portfolio. I got the idea from what UncleMick calls his "testosterone" money for trades. From having this money to fool with, I have discovered:

1) my Roth has done abysmally and is pretty much a total failure in comparison with the rest of my portfolio which is governed by my AA and remains untouched; and

2) I am so glad that I have a written financial plan with asset allocation that I stick to when I am SO SURE that I should be trading in response to market events or (even worse) anticipated market events.

So, I would suggest a written financial plan and only rebalancing according to criteria which you have also written down in this plan. This approach got me through the crash of 2008-2009 and I retired in 2009. It is completely non-intuitive to some of us to not want to fool with things, but doing nothing (other than occasionally rebalancing according to specific, written criteria) is usually the best response to market conditions.

 

[pb4uski]

I'm currently working on a written investment policy for two reasons: 1) to stay disciplined (though I am pretty good at that) and 2) for DW and DS who will advise her should something happen to me.

 

[ducky911]

wish I was smarter about this kind of stuff....but I would think at some point (maybe now) bonds would be a buy.....I am scheduled to rebalance in june/july and hope things are sorted out by then.

 

[sengsational]

I put my entire "bonds" asset allocation in a "stable value fund". Its basically a bond fund thats wrapped in insurance so the unit price doesn't go down. It looks like it costs about 1% return when compared to bonds, but it gets me to 10 years without having to sell any equities (or bonds that have sunk).

 

[Willers]

So, I would suggest a written financial plan and only rebalancing according to criteria which you have also written down in this plan. This approach got me through the crash of 2008-2009 and I retired in 2009. It is completely non-intuitive to some of us to not want to fool with things, but doing nothing (other than occasionally rebalancing according to specific, written criteria) is usually the best response to market conditions.

+1
I thought I could outsmart the market back in the dot.com era and you can imagine how that turned out. After that experience I wrote a 2 step reminder on a sheet of paper and still have it attached to the summary page of my yearly goals for NW and investments. It reads:

1) It's not different this time. Stick to your AA plan.
2) See rule 1...always.

It defined my actions in 2008-2009 and is the reason I'm now FI.

Markets often don't act sensibly in the short-term. If you think you have a good plan, stick to it. You'll be happy you did.

PS - I LOVE the idea of the testosterone account as a reminder of how well those impulse buys and sells work out!

 

[RAE]

My portfolio strategy is to lose no more than .5 to .75 of the S&P on a day when the index is down.

Very difficult, if not impossible, to accomplish this anymore with a portfolio of 60% equities and 40% bonds, considering how all asset classes tend to go down in synch at times, as you said (and I would not be surprised to see even more of this type of strange market behavior in the future, given the state of the economy and continuing market manipulation by the Fed). If you truly cannot accept larger daily losses than that, you probably need to consider a CD ladder or something similar for the fixed income part of your portfolio.

 

[Tyro]

My portfolio strategy is to lose no lore than .5 to .75 of the S&P on a day when the index is down.

I don't think I'm understanding this statement. Do you mean that your portfolio will lose no more than 50% to 75% of its value on any given day when the S&P 500 is down? Wouldn't that take a pretty significant crash?

Tyro

 

[rodiy2k]

So, I would suggest a written financial plan and only rebalancing according to criteria which you have also written down in this plan. This approach got me through the crash of 2008-2009 and I retired in 2009. It is completely non-intuitive to some of us to not want to fool with things, but doing nothing (other than occasionally rebalancing according to specific, written criteria) is usually the best response to market conditions.

HI W2R
Thanks very much for the post; exactly the kind of information I was looking for; mostly confirmation from someone already retired that I need to stick to my plan; I am a 30 year employee of the financial services industry in fixed income (not necessarily proud of that, not a revenue producer and certainly not one those that helped create the mess); But it helps me have an advantage over laymen and I refuse to pay an advisor to do what I can do myself; management fees are insane; Anyway, I have a written plan and I will rebalance at least annually and sometimes twice a year or in extreme cases if one class is more than 5% out of my intended asset allocation (Needless to say my fixed income up to this point is below the intended allocation due to the surge in US equities)

We have an added advantage as we are expatriating to a cheaper country and will have about 600K cash from the sale of our house to live for the first 10-12 years which will allow our retirement accounts to continue growing (this money will not be in the market at all)

I also have a taxable a/c for play trading but like you, rarely does it perform better than the asset allocation accounts. I do believe the hardest balancing act with the FI component will be figuring out what to own; when rates rise, almost everything with agencies/mortgage backed and high yield corporates will get clobbered but that takes a huge segment of the allocation out of the mix; I'm hoping the negative convexity of the GNMA's may help and at that point I will probably look for a bunch of funds that invest in short duration 3 month floating rate issues that are pegged to LIBOR; this is what my trading desk is advising as they are not nearly as sensitive to interest rate swings

 

[rodiy2k]

I don't think I'm understanding this statement. Do you mean that your portfolio will lose no more than 50% to 75% of its value on any given day when the S&P 500 is down? Wouldn't that take a pretty significant crash?

Tyro

No; I meant if the S&P is down 1.0% for the day, I aim to lose no more than 0.5% to 0.75% of the entire portfolio. (which is comprised of a 401k, 403b, 457b, 2 IRA Roths, an IRA Rollover, a noncontributory DCP and one taxable account). I use the S&P only because it's a relatively good gauge of the US market although this is obviously not really an accurate benchmark if you keep foreign stocks in the portfolio (I keep a large chunk of Asian dividend payers, emerging markets and foreign large cap value and sadly, even some Latin American). But I am too lazy (or not sophisticated enough) to come up with a benchmark that would include every applicable index tied into one. This is just a general formula designed to ensure that we can withstand a significant loss if 2008 reoccurs.

As others have mentioned, it is getting more difficult because the old adage that equity redemptions go into bonds is mostly out the window thanks to Fed manipulation. However, I do this mostly to see if I can capture a good amount of upside with less risk than a portfolio allocated in all equities and my financial software measures including distributions.

 

[rodiy2k]

I put my entire "bonds" asset allocation in a "stable value fund". Its basically a bond fund thats wrapped in insurance so the unit price doesn't go down. It looks like it costs about 1% return when compared to bonds, but it gets me to 10 years without having to sell any equities (or bonds that have sunk).

My company had a stable value fund in the 401k as an option but dumped it last year in favor of several non-proprietary open ended FI funds. I can say from experience that it's an excellent option if available to you during periods of high volatility and in extreme down markets due to insurance component. Most are proprietary, however, and if not available in your company plan they are usually limited to full commissioned advisors/brokers

 

[rodiy2k]

wish I was smarter about this kind of stuff....but I would think at some point (maybe now) bonds would be a buy.....I am scheduled to rebalance in june/july and hope things are sorted out by then.

If you listen to what the entire global bond market is saying, nothing could be further than the truth; Usually the bond market is much smarter at predicting trends than the equity market mostly due to the higher complexity of FI securities and their extreme ties to interest rates and central bank monetary policy. In this case, however, I think they are have exaggerated; The bond market has essentially already priced in an imminent change in US interest rates that is not expected to occur at least until 2015; a tapering of QE does not truly affect bond yields unless the bond markets prices it that way; The smaller degree of liquidity is suppossed to signal that the US economy is starting to be able to stand on its own; However, nobody expects meaningful inflation until 2020 or later which makes the stated goal of Fed policy basically useless; It;s more that they can't rightfully keep it at zero another 6 years. The last two days have seen the 10 year yield rise in excess of 4.0% as a percentage in one day, a highly unlikely scenario except in the most extreme situations.

What I'm hearing from teh Aisan equity traders is that the real reason for the plunge was not what Bernanke said but what he meant (He meant that the slowdown in China is anticipated to have a negative impact on the US recovery although he can't say this publically). Traders read it that way; thus the plunge in bonds worldwide. (sans perhaps munis)

My issue is that I am entering the final years before retirement going into what is perceived as a horrible future for the fixed income markets; As others have commented, it's imperative to make a written plan and stick to it; I am always willing to accept even an annual net loss of principal (albeit a small one) in the FI component of my portfolio in exchange for the lower risk component; However, it is taxing seeing how the bond market is reacting lately; My company is conservative and yet they are piling into new WI UST issues now and drastically cutting corporates in anticipation of tougher times in the FI world.

 

[rodiy2k]

You need to take a longer view and ignore daily gyrations. If volatility is bothering you, just don't look at your portfolio value so often.

I never look at daily gyrations; I look mostly at what the bond market is telling the investing world; they are usually pretty accurate; They have priced in such a significant increase to yields so as to suggest that it will be detrimental rather than beneficial to the entire recovery, especially as the equity markets go; They also finally sold so many TIPS at one time that they finally pushed what has actually been a negative yield into positive territory; imagine the concept of investors paying to accept a negative yield as a cushion against the inflation/hyperinflation that everyone was expecting as a result of an extended QE policy; At some point, they throw in the towel and this is beginning to happen across all segments of the FI market. What they are saying is that QE has kept the economy from afloat while not really accomplishing any of the stated goals of a central bank monetary policy which is to regulate infaltion; NOT stimulate job growth.

 

[Tyro]

No; I meant if the S&P is down 1.0% for the day, I aim to lose no more than 0.5% to 0.75% of the entire portfolio.

IC. Thanks. Then would that be analogous to saying you're trying to have a portfolio with a beta of .5 to .75?

 

[rodiy2k]

IC. Thanks. Then would that be analogous to saying you're trying to have a portfolio with a beta of .5 to .75?

Yes. I guess I should have just said that

 

[Lsbcal]

People like Bill Gross say to lower your expectations of bond returns. Maybe expect 2% to 4% returns. I don't know if he was saying nominal or real returns.

My own modeling says that I might expect 2.5% or so nominal returns from an intermediate bond fund over the next 7 years if rates climb 2%. But by then rates will probably be higher so if one has a 20 year perspective it's not too awful. Actually the faster (and more brutal) the rate rise is, the better off for overall bond results. Maybe equities will pick up some of the slack -- my fondest hope.

This week has been pretty brutal. My bond funds are down about 3% to 5% since the beginning of May. But 1 year returns are a bit positive. We have to remember this is a continuing play in many acts.

 

[Katsmeow]

What they are saying is that QE has kept the economy from afloat while not really accomplishing any of the stated goals of a central bank monetary policy which is to regulate infaltion; NOT stimulate job growth.

Who is they? Apparently "they" are unaware that in this country the Fed has a dual mandate, one of which is price stability and the other of which is maximum employment.

 

[Gatordoc50]

I think the question is if one is willing to risk loss of capital for yields less than 2%. My answer was no. Once yields on the ten year get to around 3 to 4% then I think I might be willing to wade back into bond funds. Remember that bond fund holders have enjoyed returns beyond the stated yield for many years. Now you have to pay that back. Or get out and buy individual bonds or CDs.

 

[FIREd]

The specter of 2008 (when many bond funds got killed along with everything else) and the prospect for higher interest rates made me seek bond alternatives in 2010 and I went to cash, CDs, and ibonds for half of my fixed income portfolio. Most of my bond funds got whacked pretty hard this week but the cash/CDs/ibonds provided some stability as planned.

 

[nwsteve]

This week's bond action triggered me to go look more closely at my bond fund expenses line. Even though I [-]have[/-] had 4 and 5 star funds, I had failed to recognize some 12-1b fees as well expense ratios that were a bit pricey. All my funds were less than 5 years duration and most closer to 3.5 yrs.

Since yields are only going up and principal down, the incentive to smashed down the expense side has made me move into short (3 yr) ETFs. I particularly like Vanguard's short corp (VCSH), competitive yields for duration and expense ratio of only 12 basis points. Vanguard also has an intermediate ETF (VCIT) that has the same expense ratio if you want to move up the duration.

Haven't yet picked a high yield ETF--suggestions?? Need to explore the options a bit more--maybe look at Guggenheim's bullet funds as an option as well.
Nwsteve

 

[KingB]

I have 55% fixed income, and I am retired. It is sometimes tough to stick to my asset allocation, but for me it really helps to have a small amount (<$10K) in a separate account, that happens to be a Roth IRA in my case. I use this Roth IRA for my impulse trades. This way I can get these trading ideas out of my system without touching my main portfolio. .

Do you trade within your Roth IRA?

 

[W2R]

It is sometimes tough to stick to my asset allocation, but for me it really helps to have a small amount (<$10K) in a separate account, that happens to be a Roth IRA in my case. I use this Roth IRA for my impulse trades. This way I can get these trading ideas out of my system without touching my main portfolio. I got the idea from what UncleMick calls his "testosterone" money for trades.

Do you trade within your Roth IRA?

Yes. There is no mixing of this tiny Roth IRA with anything else. Nothing goes into it or out of it.

 

[bUU]

We've been talking with a financial adviser, just for educational purposes. I've not really been too terribly impressed with what I'm learning, but perhaps part of that is because there is no good news to be had, especially in the matter of fixed income.

What the adviser is saying though is that bond funds are, of course, evil, right now (and I believe that - if you don't then I suppose we'll have to agree to disagree), and that that's really forcing us to look at asset classes differently going forward than we have in the past. Lumping together a small-cap fund with a global real estate fund (as "equities") makes little sense, just like lumping together a short-term municipal bond with a high-yield bond fund (as "bonds").

So the upshot of his message is to make up for the loss of the bond market as a viable source of stable value by identifying new sources. He has a number of recommendations in that regard. I'm not sure I'm convinced that this is the right approach, but I have got to believe that some of these hold better prospects than bonds, for the purpose bonds have traditionally served in portfolios.

- convertible preferred stock
- utility stock
- real estate
- bank loans (floating rate funds)
- toll roads (?)

A lot of this sounds flaky to me (especially treating equities as if they're bonds), but I suspect that's just because it sounds new. New sounds scary. Bonds sound so safe. And of course they're not. So our visceral reaction to newness and oldness is going to betray us. I wish I knew how to work past that to get to the core of the matter.

And have the core of the matter not be, "You're screwed; roll over and die." Of course.

We're going to be moving a lot of money around this summer. My spouse is changing jobs, and so about half of our retirement savings is going to be moving from 401ks into an IRA, and will need to be reinvested. The other half is currently in a target date fund which is anemic due to how its bond component is dragging, and will increasingly be dragging, it down. More to the point, at the rate this traditional investment plan is earning returns we simply will fail to reach our goal of financial independence, based (solely) on revised (lower) estimates for how traditional fixed income assets will perform.