Investing in 2023

[Markola]

…Looking at a bond fund like VBTLX (For bond funds like VBTLX the fund bought a lot of bonds at low rates and suffered the consequences of the fast rate rise...

The flip side is, rates will fall again someday. When they do, VBTLX will remain chock-full of higher-yielding issues for a while afterward. What I’ll have to predict correctly and then act upon at that time is….exactly nothing.

 

[daylatedollarshort]

There is a difference between selling stocks / stock funds low and bond funds low. Stocks to tend to go up over time and long term, keep up with inflation. This is not necessarily true for bond funds. You can see this by the performance stats and looking at the NAVs. For bond funds to fully recoup their recent NAV losses, yields would have to go to near zero again, which may happen or never happen again in our lifetimes.

To see this for yourself, type BND into Google, and look at the price graph. Click "MAX" at the top to see the NAVs since inception. The first NAV price listed in 2007 was $74.91. The most recent NAV is $71.83. Bond fund NAVs do not always rise over time. Prices may recover or may go even lower, even over long periods of time, even since the fund inception.

Do the same Google chart for VTI. VTI, a stock fund, does go up over time. It does make sense to not sell VTI low. It makes no logical sense to avoid selling bond funds "low". Look at the performance charts. The math and logic are all there in visual form. The stock fund goes up and up over time. The bond fund NAV may drop over the years, even since inception of the fund.

 

[daylatedollarshort]

"Don’t Let Them Fool You—Here’s Why Bond Funds Are Not Bonds"

https://www.forbes.com/sites/chrisc...why-bond-funds-are-not-bonds/?sh=70d9a489484d

From the article, "Individual bonds tend to be a safer investment for retirement portfolios because you’re guaranteed to get your full principle back, capitalize on interest, and hold it until your bond matures. With bond funds, there tends to be greater risk associated with volatile interest rates. With bond funds, if the price falls, your principal investment may also decline.”

 

[audreyh1]

I don’t care about the distribution yield because I am a total return investor meaning that I don’t care about any dividend income stream. In fact in taxable accounts lower distribution yield is better as that is less taxable income.

 

[Car-Guy]

Staying in Fixed income for 2023 (Same as 2022).


No need to Gamble.

I've been invested in fixed income for a very long time within my 401k.... It really paid off this year returning about 8%.

I also moved most of my cash in my IRA to fixed income this year too and will leave it there as long as I can get rates like I can today. I fully expect that to remain true thru 2023.

 

[Lsbcal]

I don’t care about the distribution yield because I am a total return investor meaning that I don’t care about any dividend income stream. In fact in taxable accounts lower distribution yield is better as that is less taxable income.

What fixed income do you like to hold in your taxable accounts?

I've been struggling with that lately. Have everything in Tbills except for the old keeper iBonds that mature in 2031.

 

[daylatedollarshort]

As far as BND total return, this site says the BND distribution yield currently is 2.52% (https://ycharts.com/companies/BND/dividend_yield), lower then money markets, and the NAV is down from 2007 inception when it was $74.9 to $71.83 in December 2022, so the total return isn't looking too rosy.

 

[Jerry1]

There is a difference between selling stocks / stock funds low and bond funds low. Stocks to tend to go up over time and long term, keep up with inflation. This is not necessarily true for bond funds. You can see this by the performance stats and looking at the NAVs. For bond funds to fully recoup their recent NAV losses, yields would have to go to near zero again, which may happen or never happen again in our lifetimes.

To see this for yourself, type BND into Google, and look at the price graph. Click "MAX" at the top to see the NAVs since inception. The first NAV price listed in 2007 was $74.91. The most recent NAV is $71.83. Bond fund NAVs do not always rise over time. Prices may recover or may go even lower, even over long periods of time, even since the fund inception.

Do the same Google chart for VTI. VTI, a stock fund, does go up over time. It does make sense to not sell VTI low. It makes no logical sense to avoid selling bond funds "low". Look at the performance charts. The math and logic are all there in visual form. The stock fund goes up and up over time. The bond fund NAV may drop over the years, even since inception of the fund.

This is about what I was thinking. I may reconsider changing my AA, but I think it’s way past time to get out of the bond funds. It does seem that, unlike stocks, I’m just redeploying money to a similar investment that has a better expected return.

 

[copyright1997reloaded]

I’m looking at Fidelity’s site and see three month T-Bills earning just over 4.5%. So I’m asking myself, why shouldn’t I move the bulk of my investments into a short term bond ladder for 2023. Is there any belief that the equities market is going to deliver that level this year? I know we don’t know the future, but 4.5% is pretty good and personally, I don’t feel the market will have a positive return this coming year. Thinking about 75% in a bond ladder.

In a similar vein, I know I’m late to the party (funeral), but I don’t think there’s any reason to believe interest rates are going down and I’m sick of watching my bond funds decrease so at a minimum I need to move everything out of my funds and into individual bonds.

In short, I need a better plan for 2023 than to hold tight and watch my portfolio shrink.

FWIW, 2023 is the start of a new financial reality for DW and I. We both start SS this month and that, with my pension will cover our spending budget. So, other than major lumpy expenses like a new roof or whatever, we should not need to draw from our investments. The house and vehicles are in really good shape so I don’t foresee and significant expenditures in the next few years.

The answer to this questions requires knowledge of where the market is going ...FROM HERE, not from the peak. Your 2022 losses are irrelevant and except for tax loss harvesting should not have ANY influence on your go-forward decision. This is a lesson that I continually have to re-teach myself, and even harder to make the go-forward decision unemotionally.

So the question you should be asking yourself is where you think the market do going forward, not only in 2023 but in future years.

I am under 40% equities, reduced from close to 70% a year and a half ago. Some of the change was late 2021 and early 2022, and then another 10% or so around Nov 23 when I transferred a 401k->Rollover IRA (went cash vs. in-kind to speed the transfer as most of the equities were funds not publicly traded).

I don't think that the downtrend is over, but then again I will not know (except in the rear view mirror) when then market will stop going down. I think that the economic situation will continue to deteriorate. For the most part, I am in "Don't fight the fed" mode.

Having said that, I am slowly nibbling at equities and slowly increasing my equity allocation, simply because more and more things are starting to get interesting in terms of potential bargins. If the market continues to drop, I *WILL* lose money on these purchases, at least for awhile, and I will be buying more. Eventually the carnage will be over and well run companies will recover and do well. In the LONG RUN (we are all dead), but economic wealth will increase and that will likely be reflected in higher equity prices.

That's a long winded way of saying that I would be careful about NOW cashing out of equities.

 

[target2019]

I’m looking at Fidelity’s site and see three month T-Bills earning just over 4.5%. So I’m asking myself, why shouldn’t I move the bulk of my investments into a short term bond ladder for 2023. Is there any belief that the equities market is going to deliver that level this year? I know we don’t know the future, but 4.5% is pretty good and personally, I don’t feel the market will have a positive return this coming year. Thinking about 75% in a bond ladder.

In a similar vein, I know I’m late to the party (funeral), but I don’t think there’s any reason to believe interest rates are going down and I’m sick of watching my bond funds decrease so at a minimum I need to move everything out of my funds and into individual bonds.

In short, I need a better plan for 2023 than to hold tight and watch my portfolio shrink.

FWIW, 2023 is the start of a new financial reality for DW and I. We both start SS this month and that, with my pension will cover our spending budget. So, other than major lumpy expenses like a new roof or whatever, we should not need to draw from our investments. The house and vehicles are in really good shape so I don’t foresee and significant expenditures in the next few years.

We have two SS deposits as well as a pension. Those cover our expenses also. Where we might differ is asset allocation. Ours is 50/50, with more fixed income taking over the bond allocation in 2022. Today the bond index funds are less than 15% of the portfolio.

I haven't looked at year-end, and what happened in all aspects, but I'm fine with letting the 50% equity run up or down without rebalancing.

At the end of November the total portfolio was down about 10%. So I don't feel that a big change is required in overall strategy.

 

[Markola]

As far as BND total return, this site says the BND distribution yield currently is 2.52% (https://ycharts.com/companies/BND/dividend_yield), lower then money markets, and the NAV is down from 2007 inception when it was $74.9 to $71.83 in December 2022, so the total return isn't looking too rosy.

Zoom out.

 

[Lsbcal]

So total bond market losses puts you even with year 2010? Ugly.

 

[Markola]

So 2 years of recency bias outweighs the prior 35 years of bond index fund returns to you? Ok, but not to me. I was taught to expect 4% nominal returns from bonds. The index fund yield alone is slowly approaching that, though the price is down. That fund has a 6.5 year average duration and we have two consecutive down years of bond returns behind us, which is nearly unprecedented. I’m looking forward to see what fund price 2023 brings.

 

[Lsbcal]

So 2 years of recency bias outweighs the prior 40 years of bond index fund returns to you? Ok, but not to me.

It is not really recency bias, I think. One always has to accept that when buying out in duration in nominal bonds that inflation can bite. That is what has come to pass and we do not know when it will recede. It's a world wide phenomena at this point and although I do not expect a 1970's replay, it would be a worry for me. Inflation seems to be a very difficult thing for the Fed to model so it's hopeless for the average investor.

My guess is this reverses and yes, total bond goes up perhaps a lot. But Treasury yields and real rates are not all that high versus years of historical averages. The 5 year TIPS pay decently but they are not a total bargain so I wonder about nominals with durations like VBTLX (duration = 6.5 years).

Markola, you mention 40 years but that takes us to the peak in rates and from 1982 the ride was very nice for decades. But if one goes back that was an outlier. Here is a picture of the 10 year Treasury for a longer term:

 

[Markola]

^^^ Yes, I corrected my 40 year comment to 35 years, which is all the data the PV site has. Thanks for the extended Treasuries picture. One difference with today is total ballooning national and corporate debt, which puts some cap TBD on how high yields and rates can go this time before debt payments spiral so that payments eat everything. Whatever that number is, it’s well below 1980s peak yields/rates. On the other hand, I hear smart people saying the govt will settle at 4% - 5% monetary inflation as a painless (for lawmakers) way of paying down the debt through financial repression. But I digress.

 

[audreyh1]

What fixed income do you like to hold in your taxable accounts?

I've been struggling with that lately. Have everything in Tbills except for the old keeper iBonds that mature in 2031.

I have cash and short-term and intermediate-term bond index funds as I have had for over 20 years. A lot of the fixed income is in tax deferred, but not all. I have T-bills and IBonds in part of my cash allocation

 

[Lsbcal]

I have cash and short-term and intermediate-term bond index funds as I have had for over 20 years. A lot of the fixed income is in tax deferred, but not all. I have T-bills and IBonds in part of my cash allocation

Thanks. Most of our liquid assets are in tax deferred. For taxable, I might get my courage up to move from Tbills to short term Treasury (VFIRX) or even short term investment grade (VFSUX) as we proceed down the 2023 road.

 

[daylatedollarshort]

So 2 years of recency bias outweighs the prior 35 years of bond index fund returns to you? Ok, but not to me. I was taught to expect 4% nominal returns from bonds. The index fund yield alone is slowly approaching that, though the price is down. That fund has a 6.5 year average duration and we have two consecutive down years of bond returns behind us, which is nearly unprecedented. I’m looking forward to see what fund price 2023 brings.

What I wrote about BND stands. The NAV is down since inception, the distribution yield is lower than money markets, and it is subject to more market risk than money markets or individual bonds held to maturity.

Bond funds' NAVs go up when interest rates are declining, which they were globally since the 80s. But now interest rates are going up worldwide and that trend is reversing. This is why many of us owned bond funds up until the beginning of this year but sold when The Fed planned 6 - 7 rate increases. This is explained in this Forbes article - https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309, "To be sure, bonds can still be excellent investments. It is just that bond funds are not good proxies for individual bonds – at least not in the same way equity funds are good proxies for individual equities....With the Fed in a rate-hiking mission, bond funds are doomed to continue their money-losing record. This may be hard to accept for some market participants, because they have had a good run with bond for 40 years. Since 1982, the super-cycle of declining interest rates gave bond portfolio managers the built-in advantage of buying their fund constituents at low prices (high rates) and selling them at higher prices (lower rates). This trend is now starting to reverse, and is turning this process-driven bonanza into a curse."

 

[Al18]

I got out of all my bond funds in Q2 this year. Now own a lot of brokered CD’s with maturities from 6 months to 4 years. I didn’t touch my stock funds this year. I don’t see any reason to change my stock/fixed income ratio next year.

 

[NW-Bound]

I anticipate no change in my AA: 60% stocks, 2% bonds, 38% short-term Tbill.

When the inflation subsides, I will go back to 70-80% stocks.

 

[pb4uski]

Sounds like the horse has already left the barn and you're closing the gate based on what used to be in the barn. ...

I'd frame it a little differently, that some horses have left the barn and the OP is closing the gate to prevent the remaining horses from leaving the barn.

I decided that equities were overpriced back in 2020 and decided that I had enough and wasn't going to play the game anymore and went into capital preservation mode. I am currently 5% equities, was about 15% at the beginning of the year and was previously 60% equities (Dec 31, 2019 and prior).

I actually tried to sell about 1/2 of my 5% in equities today... I put in limit orders this morning and was off golfing and shopping and they didn't execute, so I'll try again next week.

I'll concede to a bit of FOMO for part of 2020 and 2021 when stocks were on a tear, but not so much in 2022. Early returns suggest 2022 will be -4.4% vs -17% or so for a 60/40 AA.

My bond ladder is 44% GSEs, 42% CDs and UST, 8% IBonds and 6% high quality IG corporates. Maturities are skewed to 2023 and 2024, with 28% and 21%, respectively. I have 16% maturing in 1Q23 and will split the reinvestment between filling out 3Q2023-1Q2024 rungs and then the rest will go into 2026-2027 maturities, which are currently light rungs of the ladder.

I'm trying to gradually have fairly equal rungs each quarter for the next 20 quarters in CDs/UST/corporates and then I have some agency bonds and IBonds for 2028 and beyond.

I do believe in domestic equities and may reenter at some point, but even with the downturn in 2022 I think they are still overpriced so I'm out for now. If I never get back in that is ok.

 

[Katoslake]

I have cash and short-term and intermediate-term bond index funds as I have had for over 20 years. A lot of the fixed income is in tax deferred, but not all. I have T-bills and IBonds in part of my cash allocation

How do you track overall performance ?
I’ve been untangling from a Fido managed bond account and am trying to find a spreadsheet or calculator that allows me to input different fixed assets and get an overall view of data.

 

[pb4uski]

This is about what I was thinking. I may reconsider changing my AA, but I think it’s way past time to get out of the bond funds. It does seem that, unlike stocks, I’m just redeploying money to a similar investment that has a better expected return.

I agree. The way I think of it is that with a bond ladder I have more control than with a bond fund. In theory, a rolling bond ladder and a bond fund should perform similarly over a long period of time. But with a rolling bond ladder I have more control and know what is in the portfolio... with BND or a bond mutual fund there are more moving parts than I like.

My fixed income ladder has 25 issues... very manageable. Heck, even if you did a 20 rung quarterly rolling ladder with equal rungs that would be very manageable 20 issues. I don't worry much about credit risk diversification because most of my bonds are either risk-free, Aaa or highly rated corporates.

The fair value of my fixed income ladder will vary some as interest rates change, but since I intend to hold to maturity any variabilitin value don't bother me at all.

Also, if a good fixed income opportunity comes along and I have some dry powder available I can take advantage of it... I can't do that with a bond fund.

 

[audreyh1]

How do you track overall performance ?
I’ve been untangling from a Fido managed bond account and am trying to find a spreadsheet or calculator that allows me to input different fixed assets and get an overall view of data.

Quicken has all my invested assets which are kept up to date so it’s a simple report that I copy into a spreadsheet. Most items come from quotes but I do have to occasionally update my IBonds and T-bills manually as well as quarterly interest from CDs and monthly interest from savings.

In terms of tracking performance everything is lumped together. I don’t care about the performance of individual components, just the performance of the retirement assets as a whole.

 

[pb4uski]

How do you track overall performance ?
I’ve been untangling from a Fido managed bond account and am trying to find a spreadsheet or calculator that allows me to input different fixed assets and get an overall view of data.

Mine is a DIY spreadsheet.

I track my investments in Quicken and copy and paste a Portfolio Value report by Account into a spreadsheet and then have formulas to allocate each holding to domestic equities, international equities, domestic fixed income, international fixed income and liquidity, calculate percentages, etc.

For performance, my retirement investments are ring fenced and I have an online savings account that is the "gatekeeper"... the only withdrawals from the portfolio are transfers from the online savings account, mostly to a checking account that we use to pay bills.

I have a seperate worksheet that includes the beginning of period value of my portfolio as a positive value, then withdrawals for each transfer out and then the end of period portfolio value as a positive and I use the XIRR function to calculate the overall return.

Like audrey, I focus on overall return.