Too early now but are intermediate term bond funds the way to go when Fed is cutting?

[Graybeard]

I overfund my ladders by about 30%. That is one of my inflation fighters. Earn more than you need.
As you age, you need to time to recover. Equities are not pulling their weight and may not for years. So there’s that. Time frame matters too. I retired in 2020. Equities are doing nothing to keep up with inflation. My ladders are throwing off over 5% - most of which is tax free.

I retired in 2007 just before the party ended. My net worth has doubled in almost 16 years, time in the market generally makes money. The problem is I don't have 16 years to ride up again from a huge crisis like 4Q2007 to 1Q2009. I think 50% in equities is too high and would prefer 40% or 35% but for the most part I am investing for my sister who'll inherit the bulk of my investments. This has kept me at 50% despite not being 100% comfortable with that especially in lieu of how things are going now.

 

[COcheesehead]

I retired in 2007 just before the party ended. My net worth has doubled in almost 16 years, time in the market generally makes money. The problem is I don't have 16 years to ride up again from a huge crisis like 4Q2007 to 1Q2009. I think 50% in equities is too high and would prefer 40% or 35% but for the most part I am investing for my sister who'll inherit the bulk of my investments. This has kept me at 50% despite not being 100% comfortable with that especially in lieu of how things are going now.

You get it.

 

[Echard]

I overfund my ladders by about 30%. That is one of my inflation fighters. Earn more than you need.
As you age, you need to time to recover. Equities are not pulling their weight and may not for years. So there’s that. Time frame matters too. I retired in 2020. Equities are doing nothing to keep up with inflation. My ladders are throwing off over 5% - most of which is tax free.

How are your ladders throwing off 5% given how long interest rates have been until 2022? Were you having to drop down into Baa1/BBB+ bonds a lot?

I could see if someone built a ladder in October-December it would be easy with A3/A- or better.

 

[Echard]

So, I had planned to address roughly half of my fixed income target with individual bonds, treasuries, and CD's and the other half with bond funds. The rationale was diversification, less management, and the fact I wouldn't need the bond fund money anytime in the next 10+ years.

However, the more I look at the history of bond funds like BND and VCIT they just have a terrible 1Y, 3Y, 5Y, 10Y record, less than 1% returns. Now given the jump in rates I can understand how that hurts the performance. But my point is this. If we are about to return down to rates like from 2010 and beyond, really whats the point? Let's say you can earn 3-3.5% instead of 1%. It just doesn't seem worth it to tie up 40 or 50% of a portfolio in something earning 3-3.5%, especially with the uncertainties of inflation down the line in the next few years.

 

[copyright1997reloaded]

So, I had planned to address roughly half of my fixed income target with individual bonds, treasuries, and CD's and the other half with bond funds. The rationale was diversification, less management, and the fact I wouldn't need the bond fund money anytime in the next 10+ years.

However, the more I look at the history of bond funds like BND and VCIT they just have a terrible 1Y, 3Y, 5Y, 10Y record, less than 1% returns. Now given the jump in rates I can understand how that hurts the performance. But my point is this. If we are about to return down to rates like from 2010 and beyond, really whats the point? Let's say you can earn 3-3.5% instead of 1%. It just doesn't seem worth it to tie up 40 or 50% of a portfolio in something earning 3-3.5%, especially with the uncertainties of inflation down the line in the next few years.

If you think that rates are going down and will stay down, you should be buying long term strips or a long dated target date fixed income fund. These will have the most leverage if rates fall dramatically. (I don't own any and don't know if Fido/Ameritrade/Vanguard/Schwab make them available to retail investors as the the striping of the coupons isn't done by the US Treasury.)

Disclaimer: I did look at these, long long ago in the mid 80's with rates > 9/10%. I didn't buy because way back then I had no way to make these tax-deferred (only had a 401K at the time).

If you think that inflation will continue or will come back with a vengeance, going longer term on fixed is NOT a good investment. Instead, you should look for asset classes which tend to do well in an inflationary environment.

 

[Echard]

If you think that rates are going down and will stay down, you should be buying long term strips or a long dated target date fixed income fund. These will have the most leverage if rates fall dramatically. (I don't own any and don't know if Fido/Ameritrade/Vanguard/Schwab make them available to retail investors as the the striping of the coupons isn't done by the US Treasury.)

Disclaimer: I did look at these, long long ago in the mid 80's with rates > 9/10%. I didn't buy because way back then I had no way to make these tax-deferred (only had a 401K at the time).

If you think that inflation will continue or will come back with a vengeance, going longer term on fixed is NOT a good investment. Instead, you should look for asset classes which tend to do well in an inflationary environment.

I can't predict interest rates and don't want to make bets. The problem is low returns at low interest rates, or losses if inflation surges and rates rise. I'm struggling to see how to get a decent predictible return using funds.

 

[Montecfo]

I can't predict interest rates and don't want to make bets. The problem is low returns at low interest rates, or losses if inflation surges and rates rise. I'm struggling to see how to get a decent predictible return using funds.

Unless you are methodically laddering, every purchase is a bet on rates.

 

[copyright1997reloaded]

Unless you are methodically laddering, every purchase is a bet on rates.

And even laddering is a bet on rates. A bet that says "I know enough to know I know nothing".

 

[audreyh1]

And even laddering is a bet on rates. A bet that says "I know enough to know I know nothing".

That’s always the bet I take!

 

[COcheesehead]

How are your ladders throwing off 5% given how long interest rates have been until 2022? Were you having to drop down into Baa1/BBB+ bonds a lot?

I could see if someone built a ladder in October-December it would be easy with A3/A- or better.

My ladders collectively generate $194,000 on $3,800,000 in fixed income assets or 5.1% current yield. There are about $38,000 in mark to market unrealized losses all in my taxable account which doesn’t matter because they will be held to maturity.

The taxable ladder was built in the last 8 ish months and although some bonds yield in the low 7% range, everything is investment grade with a handful of issues having a BBB+ or baa rating.

The ladder in the taxable account is the older of the two. A big chunk of it was added during the fire sale in muni bonds in early March 2020. I also added significantly to it since last June. All investment grade with some BBB+ and baa’s in the credit quality.

Never had a default so far.

 

[Echard]

My ladders collectively generate $194,000 on $3,800,000 in fixed income assets or 5.1% current yield. There are about $38,000 in mark to market unrealized losses all in my taxable account which doesn’t matter because they will be held to maturity.

The taxable ladder was built in the last 8 ish months and although some bonds yield in the low 7% range, everything is investment grade with a handful of issues having a BBB+ or baa rating.

The ladder in the taxable account is the older of the two. A big chunk of it was added during the fire sale in muni bonds in early March 2020. I also added significantly to it since last June. All investment grade with some BBB+ and baa’s in the credit quality.

Never had a default so far.

Ah, got it. I essentially fully retired in 2020 after FIRE'ing in 2011 but still working off and on with startups. I didn't realize in 2020 that I was retiring, so I wasn't thinking about building up my fixed income positions at that time.

I was still in a barbell strategy of equities and cash, with some alternative investments, and a few bond funds. I didn't realize muni bond rates got so attractive in 2020. That would have been an ideal move. I understand so much more today that I did two years ago, eventhough I've always been pretty knowledgeable about investing, except for bonds and bond funds.

I had blindly followed investment advisor advice without fully understanding the complexities of fixed income investing. I think 95% of the population doesn't really understand the full complexities of asset allocation, inflation, interest rates, fixed income, and the interplay between them all. I'm finally getting a handle on it. My not-retired friends have a huge surprise coming as they start figuring all this out.