I can identify with the comments about getting overwhelmed on building the bond ladder. I definitely overcomplicated things initially. I was struggling with my beliefs around govt vs corporate bonds, where and how CD's fit in, where and how alternative fixed income like private debt funds fit in, how high yield fit in, the role of bonds vs bond ETF's, and how to build the ladder given the current yield curve inversion. I tried to do some paper trading but finally just gave up and started buying, chasing what looked attractive.
The whole process was chaotic and suboptimal. BUT, after almost two years I finally am zeroing in on what works for me. I'm 90% to where I want to be. I'm left with some investments I can't sell yet due to losses or lock-ins so I'm riding those out. A few things I discovered about me, that might help others decide how to do it:
1. What You Need - start with what you need in terms of income. I was very nervous because I'm too young for social security and had no pension. I went overboard chasing income. I now have too much. I'm trying to bring that down to a level that is closer to my spending requirements.
2. Bonds vs Bond ETFs - I really personally liked the certainty of locking in a rate of return for a period of time, and being able to invest along the yield curve where I felt prices were most attractive. So for my total fixed income allocation, it's 75% bonds. For the remaining 25%, it is in broad intermediate bond ETF's BIV and VCIT. I purposely stayed away from long-term bonds because I just don't like the current interest rate and inflation uncertainty. I also bought some high yield closed end bond funds and that was painful due to rising interest rates. If I had it to do over again, I obviously wouldn't have put hardly anything in high yield, or probably even CEF's.
3. Mix - I mixed in corporate bonds, Treasuries, CD's, iShares iBonds, Treasury iBonds, TIPS, and a bit of high yield bonds in my ladder, along with some private debt. I still am trying to tweak the percentages of each. In general I wanted about half govt and half corporate debt. I set a YTM target of 5% or higher for most investments because that aligns with my overall return objectives and cash needs.
4. Ladder - I've setup the ladder at 10 years, but years 8-10 are not fully funded. I'm too heavy in short term (1-2 year) investments. I just worried too much about rising interest rates and couldn't make myself pull the trigger. And the shorterm rates are too enticing. But, at least I have a ladder. And because my bond ETF's are at the end of the ladder with maturity periods of 6-9 years, they will automatically be buying more intermediate bonds along the way. That part of the "ladder" is automated.
5. Inflation concerns - my biggest concern overall is having a very small percentage of inflation friendly fixed income. I just can't add a lot of TIPS because most of my funds are in after-tax accounts and it would be a hassle. Plus the returns of TIPS are not 5% or better, unless inflation runs wild (which it might). If you really want to hedge inflation, you have to commit hard to TIPS and iBonds. I just couldn't make myself do it. At least I have a short ladder and can commit more to inflation bonds along the way if it makes sense to do so.
6. Specific Corporate Bonds to Buy - I developed my own criteria for what was a good bond for me. Besides reading the Moody reports, I developed other important criteria. I have a mix of A-rated and BBB-rated corporate bonds.
Have I done it perfectly? No. But I'm getting smarter every day.
The whole process was chaotic and suboptimal. BUT, after almost two years I finally am zeroing in on what works for me. I'm 90% to where I want to be. I'm left with some investments I can't sell yet due to losses or lock-ins so I'm riding those out. A few things I discovered about me, that might help others decide how to do it:
1. What You Need - start with what you need in terms of income. I was very nervous because I'm too young for social security and had no pension. I went overboard chasing income. I now have too much. I'm trying to bring that down to a level that is closer to my spending requirements.
2. Bonds vs Bond ETFs - I really personally liked the certainty of locking in a rate of return for a period of time, and being able to invest along the yield curve where I felt prices were most attractive. So for my total fixed income allocation, it's 75% bonds. For the remaining 25%, it is in broad intermediate bond ETF's BIV and VCIT. I purposely stayed away from long-term bonds because I just don't like the current interest rate and inflation uncertainty. I also bought some high yield closed end bond funds and that was painful due to rising interest rates. If I had it to do over again, I obviously wouldn't have put hardly anything in high yield, or probably even CEF's.
3. Mix - I mixed in corporate bonds, Treasuries, CD's, iShares iBonds, Treasury iBonds, TIPS, and a bit of high yield bonds in my ladder, along with some private debt. I still am trying to tweak the percentages of each. In general I wanted about half govt and half corporate debt. I set a YTM target of 5% or higher for most investments because that aligns with my overall return objectives and cash needs.
4. Ladder - I've setup the ladder at 10 years, but years 8-10 are not fully funded. I'm too heavy in short term (1-2 year) investments. I just worried too much about rising interest rates and couldn't make myself pull the trigger. And the shorterm rates are too enticing. But, at least I have a ladder. And because my bond ETF's are at the end of the ladder with maturity periods of 6-9 years, they will automatically be buying more intermediate bonds along the way. That part of the "ladder" is automated.
5. Inflation concerns - my biggest concern overall is having a very small percentage of inflation friendly fixed income. I just can't add a lot of TIPS because most of my funds are in after-tax accounts and it would be a hassle. Plus the returns of TIPS are not 5% or better, unless inflation runs wild (which it might). If you really want to hedge inflation, you have to commit hard to TIPS and iBonds. I just couldn't make myself do it. At least I have a short ladder and can commit more to inflation bonds along the way if it makes sense to do so.
6. Specific Corporate Bonds to Buy - I developed my own criteria for what was a good bond for me. Besides reading the Moody reports, I developed other important criteria. I have a mix of A-rated and BBB-rated corporate bonds.
Have I done it perfectly? No. But I'm getting smarter every day.
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