Should I buy CDs, Tres or the Total Bond Fund

[Woodman53]

I am getting ready to rebalance my portfolio and need to move about $40,000 from stocks to bonds (or some other fixed income vehicle). I am considering using this rule to determine if I should buy the Vanguard Total Bond Fund (VBTLX) or a CD/Tres/MYGA.

Here it the rule;

If the distribution yield of the VBTLX fund (currently it is 3.49% as of 12/1/2023) is greater than available five-year CD/Tres/MYGAs then buy the fund. If not buy a 5-year CD/Tres/MYGA. If distributions and CD/Tres/MYGAs get ridiculously low like they were a couple of years ago I would rethink this rule.

I am trying to keep it simple and not try to guess where interest rates are going. If I was I would just leave it in the Fed MM fund that is paying over 5%. I am far from a bond expert. I have about a million dollars in equities, CDs and MYGA in total right now. This money is all in Traditional and Roth IRAs. My target allocation is 60% stocks (Total Stock Index Fund)/40% bonds. The 40% portion can be CDs/Tres/Bonds/MYGAs. Currently the 40% is in a five-year ladder with four CDs that are paying about 5% each and one MYGAs that is yielding 3%.

So, if I would follow this rule today, then I would buy a 5-year CD/Tres/MYGA with the $40,000. As I say I am not a bond expert and shy away from corp bonds.

What do you think of this rule or how else should I determine what do with this money. I do not need the money as my pension and Social Security cover all my expenses with some excess that is being used to pay taxes on Roth conversions. I would like to keep the 60/40 allocation.

Any help would be greatly appreciated.

 

[rayvt]

I would personally just buy BND or AGG and not sweat about the hassle of trying to decide among these other fixed income things. The fixed income allocation is for safety and low volatility; it's the equity allocation where you are trying to make profits.

But then, my preferred allocation is more like 99/1 than 60/40, so I don't have a dog in that fight.

 

[mrfeh]

I am getting ready to rebalance my portfolio and need to move about $40,000 from stocks to bonds (or some other fixed income vehicle). I am considering using this rule to determine if I should buy the Vanguard Total Bond Fund (VBTLX) or a CD/Tres/MYGA.

Here it the rule;

If the distribution yield of the VBTLX fund (currently it is 3.49% as of 12/1/2023) is greater than available five-year CD/Tres/MYGAs then buy the fund. If not buy a 5-year CD/Tres/MYGA. If distributions and CD/Tres/MYGAs get ridiculously low like they were a couple of years ago I would rethink this rule.

No comment on your rule, but I don't know why you would use the distribution yield of VBTLX. That is backward-looking; you care about the future.

In that vein, I would use the 30 day SEC yield.

 

[DrRoy]

I do buy investment grade corporate bonds. You can lock in the rate and duration that you want, and they pay better than CD's.

 

[Closet_Gamer]

There have been loads of discussion on the merits of bond funds vs. specific bonds/CDs/MYGAs. You may want to search for some of those.

I tend to agree with not looking at backwards yield. What's it paying vs. what are the others paying.

I would, however, think about whether you have a specific need/expectation of value in a few years. If you're really just playing for an income stream regardless of future value, a yield-centric view makes sense. If, however, you need that money to have a guaranteed value in x years so you can pay off a mortgage, fund a college payment, etc then you cannot rely on a bond fund. The NAV moves around with no guaranteed value or maturity date. We all just lived through some wild swings on that point.

Blackrock's ibonds products are a good mixed approach.

 

[pb4uski]

I would advise that you just buy individual bonds rather than bond funds, especially of you expect to be needing cash flow from your bonds.

I prefer the control of holding a bond ladder vs a bond fund. With a ladder if I have an upcoming cash flow need then I can just use maturity proceeds or sell bonds near to maturity. If I have a bond fund and sell shares then I am effectively redeeming pro rata across all bonds held by the fund.

If you prefer to keep it simple you can focus on just brokered CDs and/or US Treasuries. At any given time, one will yield more than the other and IMO they are functionally equivalent so just select the higher yielding instrument.

Or as DrRoy does, you could delve into investment grade corporate bonds or buy the Blackrock iBond target maturity ETFs for treasuries or corporate bonds. Though I think Treasuries would be preferable to the Blackrock treasury product.