Should I take Profits on Bond Funds?

[Marc]

As market has been increasing this year, I have been selling stock funds in $20K increments to build up cash position. So far, I have in cash all monies required for 2019 and enough to get me through June 2020; so, current turmoil does not bother me.

Now, I am looking at my bond funds. FCBFX (Corporate bond) has returned over 12% this year. This is a small part (maybe 10-15%) of my bond portfolio, FTBFX making up the preponderance. Would it be smart to start taking profits on this fund? Maybe $20K now and another $20K if it continues to rise?

I have never been a market timer; I have always stayed 100% invested. Now that I am retired and need to start liquidating funds for living expenses, I realize there are a multitude of schemes that I can use for choosing which funds to sell and when. I have been pleased with my selling so far and am glad that I have a good part of next year's funds in cash; however, I wonder if it is now time to start selling bond funds too.

Current AA 57% stocks, 38% bonds, 5% cash (according to Fidelity analysis)

Target AA has been 60% stocks, 40% bonds

Future desired AA 55% stocks, 40% bonds, 5% cash (realizing that with a 5% SWR that does not give me a large enough cash portion of portfolio).

thanks,

Marc

 

[Dtail]

Why start market timing now? Then again I just look at the AA, not by specific buckets for living expenses.
Also are you using a 5% SWR over many years and if so, did you run those numbers through Firecalc?

 

[Marc]

Why start market timing now? Then again I just look at the AA, not by specific buckets for living expenses.
Also are you using a 5% SWR over many years and if so, did you run those numbers through Firecalc?

Using 5% SWR until I start taking SS at 70. I added PV of SS to my assets and SWR comes in under 4%.

Marc

 

[Dtail]

Using 5% SWR until I start taking SS at 70. I added PV of SS to my assets and SWR comes in under 4%.

Marc

Okay makes more sense.
Doing/hope to do the same thing here with projected 4.8% SWR for 8 years before SS kicks in.

 

[njhowie]

Bonds and bond funds have done very well this year due to the plunging interest rates. I have slowly been selling a number of my bonds which had been trading well in excess of fair value.

You need to make a decision as to where you see interest rates going and at what point your bonds or bond funds become overvalued. The gains they've had are only paper profits that you will never capitalize on unless you sell. The moment interest rates begin going back up, those gains will disappear.

Now, there's a group of folks out there who believe US rates are going back to zero and likely negative. If you believe that line of thinking, then there is still more profit to be squeezed out of bonds and bond funds.

Understand, that as interest rates continue lower, and as bonds funds have to replace maturing bonds with new ones, the interest rates paid on those new bonds will be going down, and thus you can expect to see bond fund distributions begin to go lower. So, again, you need to decide (yes, timing the market) if you believe that interest rates will continue lower. The effective yield you get from the interest distributions are worth years of the profit to be locked in if you sold (some). Again, should (longer term) interest rates head back higher, any paper profits you currently see will begin to disappear.

This is a difficult decision to make, but, we are in extremely unusual times as it relates to interest rates.

 

[Dtail]

Bonds and bond funds have done very well this year due to the plunging interest rates. I have slowly been selling a number of my bonds which had been trading well in excess of fair value.

You need to make a decision as to where you see interest rates going and at what point your bonds or bond funds become overvalued. The gains they've had are only paper profits that you will never capitalize on unless you sell. The moment interest rates begin going back up, those gains will disappear.

Now, there's a group of folks out there who believe US rates are going back to zero and likely negative. If you believe that line of thinking, then there is still more profit to be squeezed out of bonds and bond funds.

Understand, that as interest rates continue lower, and as bonds funds have to replace maturing bonds with new ones, the interest rates paid on those new bonds will be going down, and thus you can expect to see bond fund distributions begin to go lower. So, again, you need to decide (yes, timing the market) if you believe that interest rates will continue lower. The effective yield you get from the interest distributions are worth years of the profit to be locked in if you sold (some). gain, should (longer term) interest rates head back higher, any paper profits you currently see will begin to disappear.

This is a difficult decision to make, but, we are in extremely unusual times as it relates to interest rates.

@njhowie - you follow interest rates very closely for your own portfolio based on your posts.
What are your thoughts as to the direction of rates?
Just last year when the 10 year was creeping upwards past 3%, Grundlach and others were touting ever higher rates.

 

[njhowie]

@njhowie - you follow interest rates very closely for your own portfolio based on your posts.
What are your thoughts as to the direction of rates?
Just last year when the 10 year was creeping upwards past 3%, Grundlach and others were touting ever higher rates.

At this time, there's no sense in making predictions - there is little rhyme or reason to what is taking place.

If it is claimed that the economy is so strong ("strongest in all of history"), you do not lower interest rates.

Further, this new global norm of zero and negative interest rates is a farce. I challenge anyone to find a college finance textbook which discusses negative interest rates. What it means is that things are so terrible economically that instead of being responsible, tempering spending for a while, paying down debts, global governments are being irresponsible taking on ever larger debts which they know will never be repaid - they will just keep lowering interest rates to allow them to afford the interest payments. It is upside down logic. As your debt grows, you become a bigger credit risk, the interest charged on any new debt should be higher, not lower. That investors are pouring money into longer term bonds at this time is a sign that they are very worried about the financial/economic situation to the point where they are willing to accept lower rates because they believe rates are likely going even lower...meaning things get a lot worse going forward.

As you know I am a big fixed income investor, and this entire situation keeps me up at night and it really shouldn't. As a result of what's taking place, at some point there is going to be a global financial disaster. Everyone, whether invested in stocks or bonds is going to take a beating.

 

[Montecfo]

I am expecting short rates to go lower. I am not levered to long rates except munis which have rallied but are less correlated to rates than treas pr corporate.

Over weeks and months will continue to look reduce rate risk. What goes down (rates) will eventually rise.

 

[RunningBum]

OP, I think you need to decide whether you are sticking with your current AA, or moving toward your target AA, and sell or hold (or even buy more) per that choice.

All bonds are not equal. Are those high-yield, AKA junk bonds? In that case you might switch them out for safer bonds if you decide to stay with bonds.

Or if you want to start market timing, take your best guess, but I have no advice there.

 

[NW-Bound]

Regarding market timing on bonds, I would wait a little while before taking profits. Central bankers around the world are still lowering rates.

Investors are running amok looking for a safe place for their money. Gold and bitcoins are rising. Crazy time.

 

[Freedom56]

Rates are headed lower. Watch for the 30 year yield to break through 2%. The 10 year yield broke through the 2016 low this morning. I have been saying for the past two years that the economy is not that strong and not too different from the recovery started back in 2011. A strong economy does not shutter 8000 retail stores, shut down auto plants, lay off tens of thousands of workers. The problem now is the record levels of consumer, corporate, and government debt. I sold all my baby bonds and preferred stocks that I purchased last December and realized gains as much as 19%. Many of my medium term notes are up 12-14% plus the coupon payments. I am selectively selling the one's with the lowest coupons who's yield are dropping below 2.3%. This feels a lot like the summer of 2007. During the summer of 2007 I sold off everything and moved my portfolio to 100% 10 year notes. I watched the market continue to climb into late 2007 then it collapsed. Keep in mind, with all the deregulation, corporate fraud is no doubt on the rise.

 

[gwraigty]

Bonds and bond funds have done very well this year due to the plunging interest rates. I have slowly been selling a number of my bonds which had been trading well in excess of fair value.

I've been selling many individual bonds with big gains over the past couple of weeks. My main goal is to simplify our tax prep and cut down on the ongoing research required when buying individual issues. I've been gradually transitioning to ETFs in corporate bonds, preferred stocks, and dividend stocks.

To the OP: My main goal was not to lock in gains for the sake of the gains. It simply provided an advantage to do this shift in my investment methodology now. You should sell only if you have a clear cut picture of where you want to put the money that makes sense to you. Based on your desired asset allocation, you're still underweight in bonds by 2%. That would suggest not selling bonds right now.

I use IGLB (ISHARES LONGTERM CORPORATE BOND ETF), which trades commission-free at Fidelity and Schwab, as one component of my bond ETF portfolio. History shows that it's paid more income than FCBFX since 2011, and more than FTBFX since 2013. Point being, you could juice up your income a bit, if that would appeal to you.

 

[Marc]

Thanks to all the great replies. I have sold $230k of stock funds this year (170K for 2019 and 60K for 2020) and anticipate selling another $110K for next year. This, plus an approximate $20K ROTH conversion should take me to top of 22% bracket both years. From the advice, sounds like I should hold off doing any more selling for now but consider selling stock if my allocation is above my new target.

I will look at IGLB, sounds like that would be a smart move.

Again, thanks for all the advice.

Marc

 

[Dtail]

At this time, there's no sense in making predictions - there is little rhyme or reason to what is taking place.

If it is claimed that the economy is so strong ("strongest in all of history"), you do not lower interest rates.

Further, this new global norm of zero and negative interest rates is a farce. I challenge anyone to find a college finance textbook which discusses negative interest rates. What it means is that things are so terrible economically that instead of being responsible, tempering spending for a while, paying down debts, global governments are being irresponsible taking on ever larger debts which they know will never be repaid - they will just keep lowering interest rates to allow them to afford the interest payments. It is upside down logic. As your debt grows, you become a bigger credit risk, the interest charged on any new debt should be higher, not lower. That investors are pouring money into longer term bonds at this time is a sign that they are very worried about the financial/economic situation to the point where they are willing to accept lower rates because they believe rates are likely going even lower...meaning things get a lot worse going forward.

As you know I am a big fixed income investor, and this entire situation keeps me up at night and it really shouldn't. As a result of what's taking place, at some point there is going to be a global financial disaster. Everyone, whether invested in stocks or bonds is going to take a beating.

Thanks for the reply.
It's just that as bond yields were rising, I moved that portion to CD's. Eventually the CD renewals will bring lower yields and I didn't get any further upside on bond yields decreasing.
Perhaps not diversified enough. lol

 

[gwraigty]

Thanks for the reply.
It's just that as bond yields were rising, I moved that portion to CD's. Eventually the CD renewals will bring lower yields and I didn't get any further upside on bond yields decreasing.
Perhaps not diversified enough. lol

When bond yields are rising, bond prices are falling. That's a good time to put more into bonds, if you're comfortable with them, and alternatives aren't more appealing.

 

[OldShooter]

Re "taking profits:" The behavioral economists like Richard Thaler talk about the "house money" phenomenon. A gambler goes in with a stake of like $200 and immediately wins another $200. He puts his stake back into his pocket and proceeds to go wild and crazy with the $200 "house money." There is, of course, no difference between the house money and the money in his pocket and there is no objective reason to treat it differently.

As @njhowie points out: "There is no sense in making predictions." This is a Universal Investing Truth. The Air Force teaches: "Plan your flight and fly your plan." The profit dollars are no different than any other dollars you hold. Stick to your plan, whatever it may be.

 

[njhowie]

Thanks for the reply.
It's just that as bond yields were rising, I moved that portion to CD's. Eventually the CD renewals will bring lower yields and I didn't get any further upside on bond yields decreasing.
Perhaps not diversified enough. lol

Well that's completely about timing. You had reasons for doing the swap at the time, and you shouldn't play Monday morning quarterback after the fact. If the reason was logical and correct for you at the time, that's all that matters. What happened after is almost irrelevant, because by the same token, right after you swapped, interest rates could have spiked higher, the bonds could have fallen in value, and you'd be happier that you could roll the CD over into a higher yielding one at maturity.

Additionally, I think we had discussions about this on some of the CD threads as yields were rising...how many folks were throwing down on the 2 to 3 year CD "sweet spot" at the time? Well, sure enough, when those mature, rates will likely be significantly lower. A couple of us did suggest diversifying and purchasing some longer-dated CD maturities even though they weren't giving the same bang for the buck as the 2 to 3 year ones at the time - specifically so the reinvestment risk wouldn't be there. As rates were rising, folks only believed they'd keep going higher and they wanted to reinvest at higher rates, not considering that they could head back down.

 

[kgtest]

folks only believed they'd keep going higher and they wanted to reinvest at higher rates, not considering that they could head back down.

Bingo.