Rethinking my asset allocation.

[Time2]

I have had our money money in mutual funds since the late 80s. I have a paid for house, a $250k piece of land that is now for sale and a few other minor assets besides the Mutual fund / ETF portfolio.
At 68 I'm now starting to rethink my asset allocation. It was a great ride 2009 thru 2021. But not as much fun the last couple years. I went through 2001 and 2008 and not all that spooked by this, but at 68 starting to wonder if I should change my AA. We have been in spend down for 5 years, soon we will start SS. This will bring our withdrawal rate to 1% or under. I am mostly investing for my kids future as I feel we have more than enough, even if we had a 50% market plunge. After 5 years of withdrawals our balance is higher then 5 years ago.
We have $1.8M in a mix of mutual funds under SEPS, IRAs, Roths, HSAs and taxable accounts. Of that, about $300k is in high yield MM accounts, $200k after a Roth conversion, I wasn't sure I wanted in the market yet, and $100k in various accounts in MMs, mostly because of lack of action.
I'm leery of bond funds, because IF rates have peaked and do start to fall so will the bond funds. (I have a friend whose portfolio kept dropping as interest rates rose.) So individual bonds would be my choice as I can hold until maturity, but I have never bought a bond, or a CD or a TIP or any fixed income investment. That leaves me lost as to what to do or how to do it and if I should do it. I'm mostly in Vanguard but have an IBKR and a an HSA in Fidelity. I know this is a personal opinion, as there are investors with 100% equities and those with a mix of equities and bonds.
I'd like your comments.

 

[bloom2708]

5+% interest rates should/could make you rethink things. Take only the risk you need.

Lock into a 7 year Treasury Bond over 5%. 10 year is nearing 5%.

 

[pacergal]

What is your current AA?
We do not have as much as many folks on this website, but we have secure income. So our smaller IRAs and taxable are generally for LTC if needed, kids inheritance, or pulling out a little extra for higher priced fun things if we can't cash flow from SI. We have settled on about 70/30. I have been anywhere from 50/50 to 90/10 in the past.
Each person has to decide their own AA.
It depends on your comfort level and "sleep at night" number.

 

[Time2]

What is your current AA?

I'm 93% equities with 7% in MM paying 5%. That's it, no bonds, CDs, or any fixed income assets. I also have other spendable assets although not as quickly liquidated, but sell-able of about $400k, and my home at say $275k. We have no pensions, and will get $60k of SS in 14 months. At this time spending is about $70k a year.

We do not have as much as many folks on this website, but we have secure income. So our smaller IRAs and taxable are generally for LTC if needed, kids inheritance, or pulling out a little extra for higher priced fun things if we can't cash flow from SI. We have settled on about 70/30. I have been anywhere from 50/50 to 90/10 in the past.
Each person has to decide their own AA.
It depends on your comfort level and "sleep at night" number.

No problem sleeping at night, even a nap during the day .That would be different if the market was down 50%. I'd still sleep, but I'd be kicking myself all the way to the bed.

 

[MarieIG]

If you would like to dip your toe in the water, you could put in an order for a small six month treasury over at Vanguard.

 

[Dtail]

If you would like to dip your toe in the water, you could put in an order for a small six month treasury over at Vanguard.

Same concept with a brokered CD.
At Fidelity for example, it is simple to buy it online.

 

[aja8888]

If you would like to dip your toe in the water, you could put in an order for a small six month treasury over at Vanguard.

Buying brokered CDs, treasuries, Gov agencies, Corp/Muni bonds, etc from S/F/V is like shopping on Amazon these days

 

[MarieIG]

Buying brokered CDs, treasuries, Gov agencies, Corp/Muni bonds, etc from S/F/V is like shopping on Amazon these days

 

[FREE866]

My thinking is if the money is for the kids I'm assuming they have 10+ year time horizons so your AA of 93/7 makes sense.

At this point, for you, its just dealing mentally with the optics of the volatility that is a feature of having a high equity allocation.

 

[OldShooter]

... So individual bonds would be my choice as I can hold until maturity, but I have never bought a bond, or a CD or a TIP or any fixed income investment. ... I'd like your comments.

IMO it takes a lot of effort to select, purchase, and manage a diversified portfolio of corporate bonds. Ditto for junk and international. I am on the investment committee of a small nonprofit that does hold a well diversified portfolio of investment grade corporates but we use an FA who is a bond whiz. (Our IPS prohibits using bond funds.) Most of the FA's purchases are $10-30K positions and he is running two or three million on the bond side. So probably over 100 positions carefully monitored to avoid overconcentrations. Not a game that many individual investors can afford to play; too much time and money.

So I would suggest that you stick to govvies (Treasuries, agencies, FDIC CDs, etc.) of one kind or another. Ladders are popular around here -- lots of threads will show up if you search. Pay particular attention to @pb4uski's stuff.

 

[DangerDad]

>>I'm leery of bond funds, because IF rates have peaked and do start to fall so will the bond funds.<<

Don’t bond funds and rates move in opposite directions?

 

[REWahoo]

>>I'm leery of bond funds, because IF rates have peaked and do start to fall so will the bond funds.<<

Don’t bond funds and rates move in opposite directions?

Yes. However, see my sig line below...

 

[audreyh1]

I'm leery of bond funds, because IF rates have peaked and do start to fall so will the bond funds.

If rates have peaked, bond funds will rise, not fall.

 

[Phroig]

Anything that you’re pretty sure is going to the kids might as well be all in equities. That’s my approach.

 

[Time2]

>>I'm leery of bond funds, because IF rates have peaked and do start to fall so will the bond funds.<<

Don’t bond funds and rates move in opposite directions?

Yep, I got it wrong. My buddy had lower rate bond funds and when rates went up, his bond funds went down, his portfolio value dropped.

So as long as I "time interest rates" and buy when rates are high, I'll be good when they go down.

 

[Islandtraveler]

One thing that I have noticed since I have retired (2015) is a change in my risk tolerance. Before retirement, my asset allocation was 90/10 and I slept like a baby during the financial crisis knowing that I had a reliable income. Today, I sit at about 50/50 and I agonize every news headline. I am considering even more bonds and cash. In my mind, I have won the game. With todays high yielding treasury market, why should I chase returns in the equities market. Overall returns may be historically better but certainly not guaranteed. There are many things that we are now facing that we have not seen before. I am now more interested in return of capital verses return on capital.

 

[pb4uski]

...We have $1.8M in a mix of mutual funds under SEPS, IRAs, Roths, HSAs and taxable accounts. Of that, about $300k is in high yield MM accounts, $200k after a Roth conversion, I wasn't sure I wanted in the market yet, and $100k in various accounts in MMs, mostly because of lack of action. ...

I'm 93% equities with 7% in MM paying 5%. That's it, no bonds, CDs, or any fixed income assets. I also have other spendable assets although not as quickly liquidated, but sell-able of about $400k, and my home at say $275k. We have no pensions, and will get $60k of SS in 14 months. At this time spending is about $70k a year. ...

You probably already know this, but if your spending is $70k a year and your SS is $60k a year and since you have substantial assets then you can your AA wherever you want... 0/100 or 100/0 would both be successful. There are two schools of thought. One, you have "won the game" and no longer need to play and could just put the whole shootin match in a rolling CD ladder and withdraw money as you need to. Alternatively, you can shoot for the moon and go to 100/0 and live off of dividends and proceeds from equity sales. Or anything in between.

 

[pb4uski]

....I'm leery of bond funds... So individual bonds would be my choice as I can hold until maturity, but I have never bought a bond, or a CD or a TIP or any fixed income investment. That leaves me lost as to what to do or how to do it and if I should do it. I'm mostly in Vanguard but have an IBKR and a an HSA in Fidelity. I know this is a personal opinion, as there are investors with 100% equities and those with a mix of equities and bonds.
I'd like your comments.

IMO it takes a lot of effort to select, purchase, and manage a diversified portfolio of corporate bonds. Ditto for junk and international. I am on the investment committee of a small nonprofit that does hold a well diversified portfolio of investment grade corporates but we use an FA who is a bond whiz. (Our IPS prohibits using bond funds.) Most of the FA's purchases are $10-30K positions and he is running two or three million on the bond side. So probably over 100 positions carefully monitored to avoid overconcentrations. Not a game that many individual investors can afford to play; too much time and money.

So I would suggest that you stick to govvies (Treasuries, agencies, FDIC CDs, etc.) of one kind or another. Ladders are popular around here -- lots of threads will show up if you search. Pay particular attention to @pb4uski's stuff.

Thank you for the kind words OldShooter.

That is where I ended up: individual bonds.

Now I do much more than I need to because I enjoy it and it is a bit of a hobby and intellectually stimulating, but it can be as easy as creating a rolling CD or UST ladder (the brokerages have tools that you can use for this or the bond desk will propose a bond ladr based on your criteria. Or you can use target maturity bond ETFs to create a ladder.

Also see https://www.ishares.com/us/resources/tools/ibonds

You can buy bond ETFs that mature in stated years. You don't really need to for CDs or Treasuries since there is no credit risk, but it is an interesting tool for corporate bonds and high hield bonds if you are that adventureous.

 

[Sunset]

It's very easy at Vanguard to buy Treasuries.

I buy the auction ones as I like shiny new ones

I just say which one I want and how many thousands of dollars I want to spend, and the order goes in.

They only allow you to buy each week what is for sale.
The page you pick them on this one (but you have to be logged in to actually buy)
I had already clicked the " o Auction" radio button and it jumps to this page:

https://personal.vanguard.com/us/FixedIncomeHome

The indicative yield is their guess what the interest rate will be after the auction. You don't need/able to bid as you just get the best rate achieved by the big boys.

 

[mrfeh]

Yep, I got it wrong. My buddy had lower rate bond funds and when rates went up, his bond funds went down, his portfolio value dropped.

So as long as I "time interest rates" and buy when rates are high, I'll be good when they go down.

You don't buy bonds or bond funds for the change in NAV. You buy them for the dividends they provide.

It sounds to me like you are letting the last couple years affect your decision making. Five years from now, this will be a blip on your long term returns.

 

[target2019]

I'm 93% equities with 7% in MM paying 5%. That's it, no bonds, CDs, or any fixed income assets. I also have other spendable assets although not as quickly liquidated, but sell-able of about $400k, and my home at say $275k. We have no pensions, and will get $60k of SS in 14 months. At this time spending is about $70k a year.

No problem sleeping at night, even a nap during the day .That would be different if the market was down 50%. I'd still sleep, but I'd be kicking myself all the way to the bed.

At age 55, before retirement, I started to reduce equity each year by 1-2%. At 67 we were 50/50.

After two years of retirement we're increasing equity 2-3% each year, to get back to 60/40.

Your MM will surely drop the rate, but we don't know the pace or amount. We have ultra short bond fund and some intermediate.

I prefer the simplicity of a bond fund. YMMV.

 

[Time2]

You don't buy bonds or bond funds for the change in NAV. You buy them for the dividends they provide.

I understand that, but I would not have been happy holding 2.5% bonds when rates went to 5%. The NAV after that would matter. But the low rate on bonds up until the recent past is why I don't have any bonds.

It sounds to me like you are letting the last couple years affect your decision making. Five years from now, this will be a blip on your long term returns.

Nah, went through 2001, 2008 and the Covid drop, without jumping out even a 1st floor window. I do have some concern about the future though. Both Vanguard an Fidelity have said we will have lower growth.
As far as a blip on the chart, I have said that many times when looking back at the drops of 2001 and 2008.
Just doing a checkup after 5 years of living on withdrawals.

 

[GhostofTomJoad]

Ya, in retirement now, I am at 59% stocks, 34% in bonds. 5% cash in the mutual funds. Junk, mostly, for the dividends. Between my 2 junk funds, I'm down by just about -3%. Yawn. Divvies get reinvested. Don't need them yet. Still growing the pie. The heirs will benefit. It makes me happy.

 

[pb4uski]

...I do have some concern about the future though. Both Vanguard an Fidelity have said we will have lower growth....

I was aware of Vanguard was predicting lower yields, but not Fidelity.

I did find an interesting Jan 2023 article on brokerage houses 10-year return forecasts by Morningstar at https://www.morningstar.com/portfolios/experts-forecast-stock-bond-returns-2023-edition

For Fidelity they write:

Fidelity’s capital markets assumptions employ a 20-year horizon (2022-42) and therefore can’t be stacked up neatly against the 10-year returns from other firms in our survey. In addition, the firm states its capital markets assumptions in real (inflation-adjusted) terms; its base-case inflation rate over the 20-year horizon is 2.5%. Finally, the firm’s assumptions are based on data as of April 2022, so they don’t factor in the equity price declines and higher bond yields that came to pass later last year.

The firm is forecasting a 3.0% real return for U.S. equities over the next 20 years, less than half their 6.6% average return from 2001-21. Fidelity cites elevated equity valuations (again, as of April 2022) and reduced earnings potential as constraints on U.S. equity gains. On the fixed-income side, the firm was forecasting 1.9% 20-year real returns for the Bloomberg U.S. Aggregate Bond Index as of April 2022. Like all of the firms in our survey, Fidelity’s research accords a higher return assumption for non-U.S. equities for the next two decades: 3.3% real returns for developed non-U.S. equities and 5.1% for emerging-markets stocks.
​

So that would put Fidelity at 5.5% nominal returns for domestic equities (vs 9.1% historical average) and 4.4% nominal return for bonds over the next 20-years rather than the next 10-years, but still much lower than historical averages

The Morningstar article includes an interesting chart of 10-year forecast asset class returns:

Morningstar, Schwab, Fidelity and Vanguard are all forecasting much lower than historical average nominal returns for equities for the next decade... 4.7-6.7% annual returns vs 10% historical average. For bonds, they are forecasting 4.1%-5.1%. I personally think they're probably right and the premium for investing in stocks isn't commensurate with the increased risk/volatility so while I'm still open to dabbling in equities when conditions warrant, I'm quite comfortable being out of equities right now.

 

[Bruno]

I was like you and have started buy 6 mo Tbills and once interest goes bellow 5% will figure out where to JUMP. AA probably 33% in fixed assets