Reluctant Rebalancing to Bonds in January

[TromboneAl]

My asset allocation has gotten to 57.6% stocks, thanks to the good stock performance in 2013. On Jan 2, my plan calls for trimming this back to 50% stocks. It will involve moving money from the total stock market VG fund to the total bond market fund.

The outlook for bonds sure doesn't seem good, but my plan doesn't allow me to make decisions based on my forecast.

Thoughts?

 

[explanade]

I read this article, which seems to say that decreases in bond prices should be offset by increase in income, if you reinvest principle and income:

The key to positive returns was the rising coupon income. An investor who used a strategy that allowed for reinvesting principal and income annually would have benefited from the increase in the coupon rate. The rising income helped offset price declines. That’s why the negative returns were seen in the early years of the bear market.

They show charts showing is still positive:

 	Average annualized total return, 1954-1981	Average annualized standard deviation, 1954-1981
Intermediate-term Government Bonds	4.45%	5.42%
Stocks	10.01%	15.46%

Is a Bear Market in Bonds Around the Corner?


Now the question is, do the managers of various VG bond funds take these kinds of actions or do they trade out of bonds when it's a mixed fund like Wellesley?

I have Wellesley and Intermediate Term, VWIUX.

Or is what the article saying more geared towards investors who hold actual bonds, not bond funds?

 

[galeno]

If you hold short-intermediate good quality bonds you should not worry about increasing interest rates as long as you hold the bonds to their weighted duration.

Over the duration of the bonds the increase in yield will make up for the fall in NAV.

 

[Dawg52]

Why not put what you trim in CD's? Call them bonds and be happy.

 

[haha]

My asset allocation has gotten to 57.6% stocks, thanks to the good stock performance in 2013. On Jan 2, my plan calls for trimming this back to 50% stocks. It will involve moving money from the total stock market VG fund to the total bond market fund.

The outlook for bonds sure doesn't seem good, but my plan doesn't allow me to make decisions based on my forecast.

Thoughts?

I'd say go with your plan. It is commonly thought that stocks will do well, and bonds poorly. I wouldn't count on that.

I make no comment on your specific choice of fixed income vehicle or its duration.

Ha

 

[REWahoo]

Al, I feel your pain. With the financial press saying a market pullback is imminent and also predicting a decline in bonds when the Fed starts to taper, there is no right answer, eh?

The purists will say hold your nose and do it, but if I were in your situation I might waffle a bit. Maybe split the difference by rebalancing back to 54% stocks rather than all the way back to 50?

I've avoided getting myself between that rock and hard place by investing heavily in Wellesley and Wellington balanced funds, letting the funds do the rebalancing behind the scenes. Out of sight, out of mind, no decisions to make - and I can always blame someone else if it goes wrong.

 

[Midpack]

Wow, who isn't wrestling with "what about bonds?" I'm not selling any of my bond fund holdings but I bought iBonds and (finally) moved cash from VMMXX to Ally last year.

And this year when I rebalance (across 2013 & 2014 to split LTCGs) I'll probably by more iBonds and I'm looking at 3-5 year CDs. I really wish I could buy a piece of a slug of bonds held to maturity (to reduce the default risk of buying individual bonds myself) to lock in a yield and maintain principal. I want to believe Bulletshares and iShares fill that niche, but since they're traded (NAV) I'm not clear how they're that different from conventional bond funds.

 

[seraphim]

Have you considered tactically changing your AA? Much of of what I've been reading the past six months have indicated even the 'tried and true' 60s/40b may be insufficient for proper growth in the upcoming economy. Or, have you other fixed income options? I'm generally a buy and hold guy with the 60s/40 AA in retirement, and I know that in the long run things generally balance out, but I'm extremely hesitant at the moment to put new money into bonds. Maybe in a year or so...

 

[brewer12345]

I think I would rebalance now and put the proceeds in Pen Fed 3% 5 year CDs.

 

[W2R]

I am definitely going to sell the excess of my equity portion, to get it down to my planned 45%.

The question is, will I buy according to my plan so that I end up with 5.5% cash, and 49.5% bonds? Or will I just leave just a little more in cash as a security blanket, maybe putting it in those great Penfed CD's that Brewer mentioned? I am sooo tempted to end up with around 7% cash and 48% bonds.

But, knowing me, I will probably just stick to my boring ol' plan because I feel I am too stupid to gain from doing otherwise.

 

[Options]

What does your ISP say? The time for doing this type of thinking is when creating it, not after. Changing your AA due to "events" is dating your asset allocation, as opposed to having a relationship. Changing ones AA should occur about every 10 years, or when major life or financial events occur, whichever is later.

Listening to any type of street talk (pundit, experts, chartists, etc.) is always, but always, a mistake. How many studies have confirmed this Be extremely aware of behavioral pitfalls.

Tune out the noise. Stay the course.

 

[eytonxav]

Most on here seem to purport to being buy and hold/rebalance types, so whats the point in having a plan or AA if you don't adhere to it regardless of what the market might or might not do. That being said, why not reduce equities over several months to get back to your plan and that way you can't be accused of blatent market timing

 

[audreyh1]

My asset allocation has gotten to 57.6% stocks, thanks to the good stock performance in 2013. On Jan 2, my plan calls for trimming this back to 50% stocks. It will involve moving money from the total stock market VG fund to the total bond market fund.

The outlook for bonds sure doesn't seem good, but my plan doesn't allow me to make decisions based on my forecast.

Thoughts?

My thoughts are these.

1. "Outlook for bonds doesn't seem good" - that's been true for years. Yet we keep being surprised by lower interest rates. So we really don't know what might happen next year. The economy could take off and hurt bonds (and then stocks if interest rates jump). On the other hand, the economy could stall, and bonds would do OK. In this case stocks might get hurt.

2. We did just have an incredible increase in stock prices over the last two years. Up something like 50% over the past two years. Why don't stocks seem just as vulnerable as bonds?

Me - I hedge my bets by sticking with my planned allocation. Often I'm wrong, only occasionally right, so I'm usually glad I left the AA well enough alone.

On bond funds specifically:

I tend to hold short to intermediate term bond funds anyway, and I don't use bond index funds.

On the total bond market fund - I'm not convinced there is the same benefit to owning a total market bond fund as there is in the total stock market fund. These "indexes" are very different animals. Isn't there a huge distortion in the total bond market funds due to the issuance of so much Treasury debt? I would consider other bond funds. - Hey, like 5-yr PenFed CDs yielding 3%!

Actually - I did put part of my short-intermediate bond allocation into those CDs recently as their yield and holding period are better than some of my other intermediate bond funds but at considerably lower credit and interest rate risk. But only a part!

 

[explanade]

If rates go up because of taper and other reasons, wouldn't CD rates also go up too?

So maybe now would not be the best time to lock in 5-year CDs?

Some "market strategist" types have said if interest rates go to 3% on the 10-year, it could be disaster for stocks and bonds. But historically, that's not high, though certainly higher than it's been in the past 5 years or so.

 

[audreyh1]

If rates go up because of taper and other reasons, wouldn't CD rates also go up too?

So maybe now would not be the best time to lock in 5-year CDs?

Some "market strategist" types have said if interest rates go to 3% on the 10-year, it could be disaster for stocks and bonds. But historically, that's not high, though certainly higher than it's been in the past 5 years or so.

Considering that 10-yr Treasury rates were almost 3% (2.98%) in September and above 2.8% at the moment, I don't see how an 0.2% increase can cause a "disaster".

In other words - maybe a bunch of the rise is baked in?

These "market strategist" types have all sorts of wild stuff to say. Often they are full of hot air and if you base your decisions on their blather you invest at your peril.

5yr CD at 3% still compares very favorably to a 10-year treasury at 2.8% and a 5-year treasury under 1.5% and an iBond at 1.38%. So even with some interest rate rise due to reducing the taper, it might still be a while before CD rates went any higher.

You aren't "locked in" either. You can pull out your money at any time if a much better deal comes along all of a sudden. At most you'll forfeit up to a year's worth of interest.

 

[FIREd]

If rates go up because of taper and other reasons, wouldn't CD rates also go up too?

So maybe now would not be the best time to lock in 5-year CDs?

But when interest rates go up, you can cash in your lower-yielding CD with no loss in principal and purchase a new CD at the higher interest rate. I did this earlier this month actually.

 

[Gatordoc50]

I'd just go with my gut. I am coming into some cash from a rental sale this Thursday. I don't feel compelled to invest in anything. I'll open a few CDs and wait this market out. Opportunities will come along.

 

[REWahoo]

I'd just go with my gut

If I'd followed this advice I would have never invested a dime, would still be working and trying to build up enough CD's in FDIC insured accounts to supplement my SS check.

 

[Gatordoc50]

If I'd followed this advice I would have never invested a dime, would still be working and trying to build up enough CD's in FDIC insured accounts to supplement my SS check.

I meant that I agreed with the OP that I would be reluctant to rebalance right now. I agree that investing requires that you go against your instincts sometimes, but I would say that CDs are a superior investment to bonds in a rising rate environment.

 

[tmm99]

5yr CD at 3% still compares very favorably to a 10-year treasury at 2.8% and a 5-year treasury under 1.5% and an iBond at 1.38%. So even with some interest rate rise due to reducing the taper, it might still be a while before CD rates went any higher.

.

Where can you get 5yr CD at 3%?

 

[REWahoo]

Where can you get 5yr CD at 3%?

http://www.early-retirement.org/forums/f28/new-at-penfed-3-5yr-certificates-69476.html

 

[Mr._Graybeard]

I've been loading up on munis, but individual bonds, not funds. Frankly, I think the Fed is going to keep a lid on interest rates even after the taper. I've picked up 5% federally tax exempt bonds in recent months at 105% of par. Some of them mature as late as 2021, but most have call eligibility well before then. I suspect that municipalities will be motivated to get 5% debt off the books even five years down the road.

If I have to hold them to maturity, that's OK too ...

 

[foxfirev5]

Personally I think that all that cash sitting on the sidelines is just waiting for interest rates to go up. But won't that suppress the rates at some point? On the other hand if rates rise considerably won't the rotation to equities be reversed as investors return to fixed income safety? Who knows?
Anyway that's why an old plodder like myself continues to save and invest, holding to my comfortable 45/40/20 equity/bond/cash, CD allocation.

 

[audreyh1]

Here's my 2014 prognostication:

1. The economy, although it has seemed to improve a little recently, still remains modest in strength and employment improves only at a snails pace.

2. Deflationary pressures persist, making the Fed nervous and limiting the extent of any QE tapering. The CPI stays stuck at around 1%.

3. The 10-year Treasury might make it to 3.25%, but doesn't really go above that. Well, there may be a temporary spike if we have another "Taper Tantrum" - but it moderates quickly.

Given these conditions, 3% on a 5yr CD looks pretty good, and it's pretty friendly environment for bonds.

But I've been wrong many times before .

 

[Jmo1969]

Buy the pen fed 3% cd?