Bond allocation?

M

Murf2

Recycles dryer sheets
Joined
Jul 27, 2013
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317
Hi all, I'm back for some more advice. The wife & I have retired and will be drawing down our "nest egg". We have approx 70/30 split at this time. We would feel better at around 50/50 or so. We can do this by moving from Wellington to some form of bond fund in the wife's IRA.
We shouldn't need this money for 10 yrs or more. All of our current bond allocation is in Total Bond.

Now for the question. Does it make any sense to put the new money in Intermediate Corporate bond or should we just add to Total Bond.

Are there any other places to put it that would help reduce volatility in the long term but still have a little return?

Thanks, Murf

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Well, I am increasing my bond allocation to reduce my chances of taking a big hit in my portfolio value in a downturn. I suppose I am reaching for yield with something other than Total Bond. I know that may not be a good idea but there has been a lot of talk recently about Total Bond not being as diverse as it could be. Thank you for letting me qualify my question.

Murf

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In a market downturn, Intermediate Corporate Bond is probably more vulnerable than Total Bond Index because corporate debt doesn't do as well as government debt during bad equity market years. If you want a "rush to safety" component in your portfolio, you want exposure to government backed debt. These are both intermediate bond funds.

Some people have part of their Vanguard allocation in Wellesley to provide a higher bond allocation in conjunction with Wellington.

Another option is a very high quality short-term bond fund like Vanguard Short-term Bond Index. But it probably doesn't make sense to have a large chunk in it. Maybe 5 to 10% of a portfolio. It provides a rush to quality boost in bad equity market times as well as being less interest rate sensitive. It doesn't pay as high an interest rate, of course, as Total Bond. Those are the tradeoffs you are making.
 
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You could do the famous Wellesley/Wellington combo to get to your desired allocation.
 
Thanks for your reply. Do you agree with Mr Bogle that Total Bond is overweight government issues? What I think I need is a balanced bond allocation. Would you just add to Total Bond and call it good? I would be adding about half the amount we currently have in Total Bond.

Thanks, Murf

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RetireAge50, funny you should mention those. We would have to exchange Wellington to get more Bond allocation. My IRA is all in Total Bond now. Wife's is in Wellington. All our taxable is in stocks. I can't really do anything with that this year. We have gains from the sale of my wife's business and me must control our income to meet ACA requirements.

Thanks,
Murf

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I'm not keen on Treasuries right now, so therefore not keen on Total Bond.... its related to the old return-free risk notion that Warren Buffett talked about. I got out of Total Bond a few years ago in favor of Intermediate Corporate to avoid Treasuries and later sold Intermediate Corporate and went into CDs and target maturity bonds funds.

What you would overall AA be if you swapped all your tax deferred accounts for Wellesley and kept the equities in your taxable accounts?
 
a total bond fund is really a misleading name because it is more than 50% gov't bonds and treasury's .

it is missing so many segments of the bond market that it really is not a total bond fund as the name suggests .

much to most of our surprise the bond market is doing very well this year .
 
I googled:

how to diversify total bond

There are some hits to bogleheads site you may want to read.

I have an IRA that is 25% of portfolio. It breaks down like this:

Fund > Allocation within Total Portfolio > Allocation within IRA
Vanguard Total Bond Market Index Fund Adm 8.27% 37.4%
Vanguard High-Yield Corporate Fund Inv 2.09% 9.5%
Vanguard Total Stock Market Index Fund Adm 5.58% 25.2%
Vanguard Total International Stock Index Fund 5.15% 23.3%
Vanguard Energy Fund Investor Shares 1.01% 4.6%

So, am using high yield to diversify.

I think Wellesley makes a lot of sense too.
 
I don't see the point in owning a high yield bond fund unless you are trying to maximize income and don't have much equity exposure.

Why have a bond fund? If it's to diversify against stocks, you don't need all parts of the bond market. You just need the parts that have low correlation with stocks.

High yield bond funds tend to behave very poorly when stocks do poorly because they are sensitive to credit quality. You might as well just own more stocks instead.

Going all corporate bonds isn't nearly as bad, but still you are concentrated in the same segment of the market - all companies debt AND equity.

IMO it's best to own the higher quality bond funds to diversify against stocks: investment grade, including a big slug of government-backed bonds (not just treasuries). Many of the bond index type funds provide this higher quality bond exposure.

You can see it when you look at fund performance during market stress periods. The higher credit quality bond funds tend to go up, while the lower quality bond funds tend to behave poorly. Take a look at 10 year total return type charts like at M* and compare how funds behaved in 2008/2009.

It all comes down to why are you owning a bond fund.
 
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Pb4uski, If I went all Wellington in tax deferred we be at approx 22% bonds.
If Wellesley it would be about 44%. That would be close to where I think we would be comfortable allocation wise. How would that act in a down market compared to Total Bond.
Do you/ could I get decent CD's through Vanguard?

audreyh1, what would your thoughts be of an allocation of 50% stocks 50% bonds with Intermediate Corporate being approx 30% and Total Bond 70% of the bond allocation?

Is there a diversified Bond fund that is actually closer to a "total bond" fund that I could hold efficiently in my Vanguard fund.

Again, I want to thank everyone for their help!

Murf

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If you want to look at how things might act during down markets, take a look at the 10 year return charts at Morningstar.com. It's easy to compare funds and it's free.
 
Will do, Thanks

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Murf2 said:
Will do, Thanks

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Click to expand...

When you get a M* quote for a given fund, click on "growth of 10K" and you will get a larger graph where you can add other fund symbols to compare on the same graph.
 
audreyh1 said:
I don't see the point in owning a high yield bond fund unless you are trying to maximize income and don't have much equity exposure.

Why have a bond fund? If it's to diversify against stocks, you don't need all parts of the bond market. You just need the parts that have low correlation with stocks.

High yield bond funds tend to behave very poorly when stocks do poorly because they are sensitive to credit quality. You might as well just own more stocks instead.

Going all corporate bonds isn't nearly as bad, but still you are concentrated in the same segment of the market - all companies debt AND equity.

IMO it's best to own the higher quality bond funds to diversify against stocks: investment grade, including a big slug of government-backed bonds (not just treasuries). Many of the bond index type funds provide this higher quality bond exposure.

It all comes down to why are you owning a bond fund.
Click to expand...


+1
I do have a bit in a high yield bond fund, but expect it to behave like a higher quality equity fund in a down turn. US government bond funds did their job in 08, 09.
 
Murf2 said:
Pb4uski, If I went all Wellington in tax deferred we be at approx 22% bonds.
If Wellesley it would be about 44%. That would be close to where I think we would be comfortable allocation wise. How would that act in a down market compared to Total Bond.
Do you/ could I get decent CD's through Vanguard?

audreyh1, what would your thoughts be of an allocation of 50% stocks 50% bonds with Intermediate Corporate being approx 30% and Total Bond 70% of the bond allocation?

Is there a diversified Bond fund that is actually closer to a "total bond" fund that I could hold efficiently in my Vanguard fund.

Again, I want to thank everyone for their help!

Murf

Sent from my Z936L using Tapatalk
Click to expand...
That would probably be OK, but I wonder if you all were comfortable with Wellington all these years whether using Wellesley wouldn't be a better option. Otherwise you would have to manage the rebalancing yourself.
 
You are getting some great comments.

A book that personally helped me a lot with questions like yours, was "All About Asset Allocation" by Rick Ferri. The original is a bit outdated but has been updated at least somewhat in the second edition. Most importantly, it is easy to read and it gives one plenty of food for thought if you are interested in this sort of subject matter.

I'm not saying that my bond allocation is identical to that recommended by Ferri - - that's far from the case, but it's a good read and I felt like I at least understood a little more about the topic after reading his book. With any luck you will be able to find it at your library.

My investment philosophies are pretty conservative compared with most here. My own personal fixed income allocation is 55%, and includes:
(1) Total Bond Market VBTLX
(2) Wellesley VWIAX
(3) TSP "G Fund"
(4) cash
​
 
FWIW, our portfolio holds 2 parts VFIDX (Intermediate investment grade) to 1 part VBTLX (Total Bond).

If and when the equity markets really start heading south, the plan is to move those to intermediate term Treasuries. This is because I'd like to temporarily eliminate corporate bonds in any severe recession. I have a set criteria for this action and data that shows it's been a decent technique over the past 30 years. Not saying people should do this but this is why I'm comfortable holding the above intermediates.

The nice thing about Wellington and Wellesley is that the bond component is masked by the overall portfolio so one doesn't get to obsess over the bond performance. :)
 
Murf2 said:
Pb4uski, If I went all Wellington in tax deferred we be at approx 22% bonds.
If Wellesley it would be about 44%. That would be close to where I think we would be comfortable allocation wise. How would that act in a down market compared to Total Bond.
Do you/ could I get decent CD's through Vanguard?....
Click to expand...

On the second question, no, I haven't found Vanguard's brokered CDs attractive but I guess you could do worse. Just be aware, the CDs you buy from Vanguard are brokered CDs and have the same interest rate risk as a Treasury bond of similar maturity.

On option might be to go all Wellesley in your tax deferred accounts... that would put you at 56/44... pretty close to 50/50... and if use equity dividends and draw from equities for living expenses then you will probably be at 50/50 in no time. Or if you are keen to get to 50/50 right away you could swap add just enough Corporate bond funds to get to 50/50 when combined with Wellesley and your equities.
 
Is there a diversified Bond fund that is actually closer to a "total bond"
fund that I could hold efficiently in my Vanguard fund.
Click to expand...

Take a peek @ Vanguard Intermediate-Term Bond Idx fund. Contains both Corporate as well as G bonds (50/50). Admiral ER just dropped to 0.09%.
 
Meb Faber points out the largest asset class, and the most underowned, is non -US debt.

GMO in their 7 year asset class return projections show only EM debt, at 1.7%, has a positive return projection. US bonds -1.4%, Intl developed -3.4%.

Doesn't seem like a good time for bonds. OTOH, the equity return projections aren't much better.

I couldn't find where Vanguard has any non US fixed income offerings.

I've started buying small amounts of a couple CEF EM debt funds.

With our, hopefully, soon to be received home sale proceeds, hello Ally, Discover and whatever online savings accounts yielding less than 1%. Whoopee! I'm officially an old fart retiree.
 
gcgang said:
Meb Faber points out the largest asset class, and the most underowned, is non -US debt.

GMO in their 7 year asset class return projections show only EM debt, at 1.7%, has a positive return projection. US bonds -1.4%, Intl developed -3.4%.

Doesn't seem like a good time for bonds. OTOH, the equity return projections aren't much better.

I couldn't find where Vanguard has any non US fixed income offerings.

I've started buying small amounts of a couple CEF EM debt funds.

With our, hopefully, soon to be received home sale proceeds, hello Ally, Discover and whatever online savings accounts yielding less than 1%. Whoopee! I'm officially an old fart retiree.
Click to expand...
If you looking to bonds to help buffer your portfolio when equities take a dive, you probably don't want emerging market debt.
 
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