Transitioning from Stocks to Bonds - when?

[jjquantz]

Hey all,

I am currently in the process of transitioning out of the w*rkplace and we are planning on DW continuing for 8 more years. I would like to move from our current extremely aggressive AA to something a little more balanced over the next 8 years or so. We currently only hold 10% in bonds through index funds and I am thinking that 30% in these bond funds when DW retires would be about what I would like.

I am currently thinking that when I do the annual reallocation I will just increment the percentages by an equal amount each year. So for example, the Bond allocation would go:

2014 10%
2015 12.5%
2016 15%
.
.
.
2022 30%

I like this because it commits me to a plan and I don't fall prey to worrying about when interest rates will rise, AKA market timing. Thoughts?

How have others handled these types of transitions?

 

[pb4uski]

I just started putting new money (ie contributions) into fixed income once I was a certain age and it happened gradually over time. You could do the same things with dividends and capital gain distributions - use them to purchase fixed income.

But your plan seems fine.

 

[Animorph]

I like to wait until everything is in place, retire, and change AA. You may get additional equity gains, but you (or DW in this case) may have to work an extra year if markets are down.

Once you start thinking of fixed dates, then you need to get conservative. If your 8 years is firm, it wouldn't be terrible to transition slowly starting now.

 

[jjquantz]

pb4uski, I thought about your approach with new money but, unfortunately, our current bond fund holding is in an inherited IRA and is isolated from most of the other funds. We are currently faced with MRDs from this account so it has held our bond holdings to reduce potential swings in its valuation as we face these withdrawals. I guess this could act as an incentive to consolidate our multiple retirement accounts into fewer and start up a second bond fund and feed it with dividends and distributions. I would have to do this eventually, so why not now? In fact, thanks for making me think of that.

 

[LongPrime]

Never.

 

[heeyy_joe]

Go slow.

 

[jjquantz]

Never.

If I were retiring alone, this might be my approach, but DW would probably like to be 30/70 stocks/bonds. I'm looking for a happy medium so that I can stay married in retirement.

 

[Totoro]

I am thinking about a transition the other way: from 40% equities to 85%

I kind of decided to wait for the beginning of a market drop and start DCA'ing over the following three to five years. Note that I am currently somewhat in OMY-mode, which is kindof similar to your situation.

Basically we've got three scenarios from my perspective

• The market tanks. Great opportunity, firesale start buying more as long as it keeps dropping until we hit 85% allocation.
• The market goes on a (further) rampage. This means automatic rebalance towards equities, so I won't even have to take any action
• The market doesn't go anywhere. Don't just do something, stand there! Except I invest any new incoming cash I earn from my current undertakings in equities until 85% is reached.

Since your perspective is the exact opposite of mine, you might want to consider something similar, only in reverse:

• The market tanks. Automatic rebalance! New savings go to bonds until 30% allocation is reached
• The market goes on a (further) rampage: sell-off every year so you keep the same nominal amount in equities. New savings go to bonds. This is effectively somewhat like your suggested approach.
• The market doesn't go anywhere: do nothing! New savings go to bonds.

In essence what we both do is never to sell when the market is tanking. You do nothing, I buy.


Likewise, with rising markets we never buy. I do nothing, you sell. Makes you the smarter man looking at it like that


What I like most about this approach is that it is not market timing (forward looking). You just look at what the market actually did (rule-based) once a year, and decide on that.


Or am I spouting non-sense now

 

[LongPrime]

PIMCO not doing well as people/companies pull out of bonds (rising interest rates-falling prices). Price movements are quite large in comparison to interest changes.

Other good alternatives exist.

 

[pb4uski]

pb4uski, I thought about your approach with new money but, unfortunately, our current bond fund holding is in an inherited IRA and is isolated from most of the other funds. We are currently faced with MRDs from this account so it has held our bond holdings to reduce potential swings in its valuation as we face these withdrawals. I guess this could act as an incentive to consolidate our multiple retirement accounts into fewer and start up a second bond fund and feed it with dividends and distributions. I would have to do this eventually, so why not now? In fact, thanks for making me think of that.

So leave the inherited IRA as bonds and add to it by buying fixed income in your other accounts that you are making contributions and reinvestments to (IRAs, 401k or whatever).

 

[haha]

PIMCO not doing well as people/companies pull out of bonds (rising interest rates-falling prices).

The difficulty with this thesis is that it is exactly opposite to what has actually been happening with interest rates, for a year or so. PIMCO's problems seem to be mainly their own.

Ha

 

[CaliforniaMan]

PIMCO not doing well as people/companies pull out of bonds (rising interest rates-falling prices). Price movements are quite large in comparison to interest changes.

Other good alternatives exist.

Falling bond prices, maybe in the future, but so far no big rise in interest rates as Ha has pointed out.
But what about the bolded part. Can you describe them?

 

[brewer12345]

Falling bond prices, maybe in the future, but so far no big rise in interest rates as Ha has pointed out.
But what about the bolded part. Can you describe them?

Easy: A nice, Pen Fed 5 year CD.