How to create a system to continuously invest interest and dividends in 100 pct fixed income portfolio

[JJpop]

How to manage and reinvest in 100 pct fixed income portfolio.
I am 72 and trying to create a system to reinvest our CD and different types of bonds interest.
I would like to go out maybe 4 or 5 years if possible at the best rates and was thinking of using ishares defined maturity etfs.

 

[pb4uski]

What I do, and it works well with an inverted yield curve and 5%+ money market rates, is to move interest and maturities into the money market and then occasionally use the money market to buy additional fixed income investments.

 

[marko]

What I do, and it works well with an inverted yield curve and 5%+ money market rates, is to move interest and maturities into the money market and then occasionally use the money market to buy additional fixed income investments.

+1. Me too, except I draw upon the MM for living expenses.

 

[Car-Guy]

I keep it simple (well to me it's simple). 2+ years ago I moved everything in my IRA out of equities to CD's. My 401k was already in a stable value income fund that is managed by my former employer and has been paying out over 7%. Anyway, in my IRA, I've been buying brokered CD's in a 9 to 18mo laddered range and that pays monthly interest. I reinvest the monthly interest payments in SWVXX. As the CD's mature, I just buy another. My effective rate of return is well over 5%. Recently, I've been stretching my new CD's out to 2 and 3 yr's as I reinvest since I think rates will start dropping soon. Simple to manage and doing it this way I effectively compound the CD interest. Oh, and I make sure the brokered CD's are in FDIC insured banks and I also make sure I never invest more than 250k in any one bank.

 

[pb4uski]

^^^ Good plan, but I just don't see the magic of monthly interest. In fact, it would be a PITA for me as I would have to sweep money from my brokerage settlement account to SWVXX much more often.

 

[Chuckanut]

I also started doing the 3 month to 18 month treasures and CD investing due to the inverted yield curve. I have enough savings in the 3 to 5 year range. And, I have a hard time giving up 1% more interest on say a 6 month CD compared to a 4 or 5 year CD.

I did make an small exception for a two year, call protected, 5% CD I bought earlier this week. But, I only give up about 0.4% extra interest compared to about 1% on a 4-5 year CD or treasury.

If the yield curve goes back to more normal , I'll adjust.

 

[Car-Guy]

^^^ Good plan, but I just don't see the magic of monthly interest. In fact, it would be a PITA for me as I would have to sweep money from my brokerage settlement account to SWVXX much more often.

If I have a 1yr 250k CD paying 5% at maturity that's $12,500. If I take that 5% in 12 equal monthly payments instead of in one payment at maturity, I can reinvest that interest along the way, into something like SWVXX and earn interest on that money too. Rinse and repeat with ~10 big CD's and it starts to mount up. Being retired, an extra ~5 mins effort once a week is no big deal for me. Not a lot of money(~$300 more per 250k CD per yr, IIRC) but hey it's free and easy.

 

[JJpop]

Thanks for the replies.
I was thinking more of a way to lock in longer rates.
Probably a stupid idea but I have a lot of random 100,200 300 400 etc. payments coming in mostly in my SEP and Roth accounts.
I was thinking of investing those in ishares defined maturity etf’s going out 4,5,6 years.
The corp bond etf is good quality and over 5% ytm and they pay monthly I think.

Example…I receive 500 dollars interest from a cd and put 250 in the corp bond and 250 in the tips etf, or something like that.

 

[aja8888]

Thanks for the replies.
I was thinking more of a way to lock in longer rates.
Probably a stupid idea but I have a lot of random 100,200 300 400 etc. payments coming in mostly in my SEP and Roth accounts.
I was thinking of investing those in ishares defined maturity etf’s going out 4,5,6 years.
The corp bond etf is good quality and over 5% ytm and they pay monthly I think.

Example…I receive 500 dollars interest from a cd and put 250 in the corp bond and 250 in the tips etf, or something like that.

What corp bond ETF are you talking about?

 

[JJpop]

IBDU 2029 or IBDV 2030 or IBDW 2031 maturity years.
Our total mix of brokered CD’s, treasuries, I Bonds, corp bonds, a few muni’s and a couple MYGA’s are providing almost 80K the next 12 months. Our SS covers all our basic day to day expenses because we are lucky to have 77,000 in combined SS.
My concern is rates dropping down to 2 pct or so on all of the above in a couple years and cutting our income in half.

 

[audreyh1]

I have mostly T-bills set to automatically rollover. The interest obviously goes into MM fund which is paying almost the same anyway. Occasionally I add to the T-bill pile. The T-bills only pay out when they mature.

For anything over 2 years duration I use index bond funds. However I tend to take all the dividends in cash during the year. At the beginning of the next year I pull out the annual spending money and rebalance as needed.

Generally I only have to "do something" once a year.

 

[JJpop]

Everything ie easy now with mm funds paying over 5% and short term treasuries the same.
It was a very short time ago when mm funds were paying practically nothing.
Nobody knows what rates are going to do, but I feel better locking in close to 5 % for longer terms.
For me 5% give or take a bit is great.
At 72 the longer you can get that yield with access to the money lowers the reinvestment risk the way I look at it, because we are increasing our savings and also shortening our lifespan. Guaranteeing we will have x amount at 80 is comforting .
Of course we could have a major life changing event that flips everything financially.
I do not like bond funds or ETF’s like BND and prefer knowing what we are getting.

 

[audreyh1]

Overall I don’t sweat the details so much as I get older. I prefer to keep things simple and actually do something as few times as possible.

 

[Badger]

What I do, and it works well with an inverted yield curve and 5%+ money market rates, is to move interest and maturities into the money market and then occasionally use the money market to buy additional fixed income investments.

Pretty much what we do. Interest and dividends accumulate into MM accounts. The past couple of years we have been buying 1, 2, and 3 yr CD's. When they mature then it is more CD's until the rates go down too much. After that I am not sure but there are only so many years left and it will all go to the grown children anyway. I just hope they use it wisely.

 

[snappytom]

If I have a 1yr 250k CD paying 5% at maturity that's $12,500. If I take that 5% in 12 equal monthly payments instead of in one payment at maturity, I can reinvest that interest along the way, into something like SWVXX and earn interest on that money too. Rinse and repeat with ~10 big CD's and it starts to mount up. Being retired, an extra ~5 mins effort once a week is no big deal for me. Not a lot of money(~$300 more per 250k CD per yr, IIRC) but hey it's free and easy.

I am following a very similar strategy. Brokered CD's are so easy to manage with the biggest downside is that the interest is not compounding. Each monthly coupon payment is able to add to MM balances. While not true compounding, it works for me.
Lately I have also been buying call protected CD's with a monthly coupon. The rates may be a bit lower but knowing it will pay to maturity simplifies things.

 

[JJpop]

So it seems like none of you are concerned about trying to extend the durations out as far as possible without locking up the money like a 10 year treasury or longer.
It would be nice if rates stayed close to what they are now but I am fixated on those pretty recent 1 pct 5 year CD’s and the like.
The reason I like the Blackrock IShares defined maturity ETFs is because you can go out 4,5,6 7 years and they pay monthly with ytm of 5.4 give or take. No junk bonds either. They do have a high yield at about 7.5% or so that has junk.
They are also easy to sell at any time.

 

[Gumby]

Overall I don’t sweat the details so much as I get older. I prefer to keep things simple and actually do something as few times as possible.

Same here. I have interest and maturities go into my Vanguard settlement account, which is VMFXX. When enough gathers there, I buy new brokered CDs or Treasuries.

 

[Al18]

I don’t understand the concept of locking in an interest rate thru a bond mutual fund (price changes daily) and a bond ETF (price changes every minute). CD will pay interest payments on a set schedule and will refund the initial deposit according to a set schedule. As long as you keep your balance under the $250K FDIC limit, there’s virtually no chance of loosing money.

 

[JJpop]

I am looking at it from a viewpoint of a 5yr cd or treasury is paying about 4.5 and the bond etf that actually matures like a cd in 5 years is paying 5.4.
The bond ETFs have excellent history as to performing as advertised and are very low risk. Since I own practically no stocks a very small risk in these seems reasonable for a higher return. They also pay monthly and can be traded like a stock if needed or wanted.

 

[Al18]

I just checked the performance of these Blackrock iShares iBonds ETF. The price varies up and down like a stock ETF - nothing like a CD.

 

[aja8888]

I just checked the performance of these Blackrock iShares iBonds ETF. The price varies up and down like a stock ETF - nothing like a CD.

Exactly, NAV moves up and down with interest rate changes.

 

[JJpop]

That is true. However have you ever seen how much the value of your brokered cd can change over time? Treasuries as well.
Mostly what matters is what you get when they mature. You can sell one of these in 5 seconds if you want and as mentioned before they pay monthly.
They also have defined maturity TIPS and treasuries. The TIPS are all over 2 % plus inflation. Better to just buy TIPS themselves unless you just want the convenience and more frequent distributions.
The only downside I see is if you believe the bonds will default which is very unlikely looking at their holdings.

 

[pb4uski]

Exactly, NAV moves up and down with interest rate changes.

I just checked the performance of these Blackrock iShares iBonds ETF. The price varies up and down like a stock ETF - nothing like a CD.

The iBonds are nothing more than a basket of bonds maturing in a specified year so the value of the bond portfolio will also move up and down with interest rate changes.

If you've been paying attention, brokered CD prices move up and down with interest rate changes as well.

While bank CDs don't have a price per se, there are always those pesky early ithdrawal penalties.

 

[JJpop]

Pb4uski, what do you think of using these defined maturity bonds?
They obviously are not guaranteed like a brokered cd but they have attributes that make them attractive to me at least. Higher yields, easily traded and monthly payments.only downside I see is default risk which is very low.Am I missing something?
Thanks

 

[pb4uski]

I'm lukewarm on them. IMO definitely better than conventional bond funds because you can precisely manage interest rate risk and match maturities to cash flow needs more precisely if needed, but not as good as individual bonds IMO.

I wouldn't use the Treasuries version.. just buy Treasuries that mature when you want them to mature and avoid the management fee. IOW, I don't see that the iBond structure gains you anything for Treasuries.

I would consider them for corporates, municipals and if I invested in high yield, for those too. The main benefit is greater and easier diversificaton of credit risk.

I have an allocation to corporate bonds of 20% of the total portfolio and limit the investment in any one bond to 1% of the total portfolio, so 20 corporate bonds isn't too much to manage but if I had 100 corporates to manage I might consider iBonds instead since it would be easier.

I don't have an munis or high yield bonds.