7 Years' Living Expenses Largely in Short-Term Bond ETF: Thoughts?

[ikubak]

I sleep better at night knowing I have a year's worth of cash available, so that's what I do. I don't try and time the market; I just like having cash and knowing in an emergency or on a whim, I can do what I want.

[audreyh1]

Quote:

Originally Posted by papadad111 I like this approach. Dividend income and top off with cash for x years. I think 3-4 years is reasonable too ...7 feels like s long duration and probably missing out on some alpha / beta in equities.

I never felt that 7 years needed to all be in cash. If you have at least that many years in fixed income, which includes a little in cash, and a little in short-term, I think you are fine having a good chunk of it in intermediate high-quality bond funds. Those are precisely the kinds of funds that tend to rise in value when stocks (and riskier bonds) get whacked. Also, that way you are matching the duration of the funds to the time you might need them, which always made the most sense to me.

And, lo-and-behold, most investors already have that covered by their fixed income in their asset allocation. And I think in terms of the years in expenses, you should just account for after-tax expenses, because when we go through periods of market drops, taxable income tends to drop significantly from equity mutual funds and the fixed income mostly generates taxes by making additional money - capital gains tend to be small.

If you are covering those years of expenses from an IRA/401K, I guess you have to account for it pre-tax.

[Chuckanut]

Anybody care to recommend a good intermediate bond fund?

[Mulligan]

Quote:

Originally Posted by audreyh1 I never felt that 7 years needed to all be in cash. If you have at least that many years in fixed income, which includes a little in cash, and a little in short-term, I think you are fine having a good chunk of it in intermediate high-quality bond funds. Those are precisely the kinds of funds that tend to rise in value when stocks (and riskier bonds) get whacked. Also, that way you are matching the duration of the funds to the time you might need them, which always made the most sense to me. And, lo-and-behold, most investors already have that covered by their fixed income in their asset allocation. And I think in terms of the years in expenses, you should just account for after-tax expenses, because when we go through periods of market drops, taxable income tends to drop significantly from equity mutual funds and the fixed income mostly generates taxes by making additional money - capital gains tend to be small. If you are covering those years of expenses from an IRA/401K, I guess you have to account for it pre-tax.

Audrey you all a well informed person and I enjoy your posts, so I would like to toss a question at you (or anyone else, too) concerning income. Why do you not choose to invest in Preferreds or exchange traded debt, collect the income and not worry about the daily movements of the security?
I frequent an income and investing forum and one recently posted a spreadsheet showing returning 6.5% with a 4% draw and 3% inflation would provide nearly 40 years of income before drawing down.
I have wadded in a lot into these issues, all which are mostly investment grade. I am getting closer to 50/50 in my asset base of index and preferred. I love the income dividends and the 15% tax as bonds pay less and tax me more.
Many investment gurus suggest preferred's to occupy 10-20% of a portfolio, yet outside of a few people on this forum, no one wants to involve or really even discuss these. I was curious as to why you have chosen not to.
Some people revolve their entire portfolio around these issues, and just collect the dividends and are not concerned with the price movement of the issue.


Sent from my iPad using Tapatalk

[mathjak107]

Quote:

Originally Posted by Chuckanut Anybody care to recommend a good intermediate bond fund?

I like fidelity corporate bond fund. It is more volatile than total bond but has produced higher returns

[mathjak107]

Quote:

Originally Posted by Mulligan Audrey you all a well informed person and I enjoy your posts, so I would like to toss a question at you (or anyone else, too) concerning income. Why do you not choose to invest in Preferreds or exchange traded debt, collect the income and not worry about the daily movements of the security? I frequent an income and investing forum and one recently posted a spreadsheet showing returning 6.5% with a 4% draw and 3% inflation would provide nearly 40 years of income before drawing down. I have wadded in a lot into these issues, all which are mostly investment grade. I am getting closer to 50/50 in my asset base of index and preferred. I love the income dividends and the 15% tax as bonds pay less and tax me more. Many investment gurus suggest preferred's to occupy 10-20% of a portfolio, yet outside of a few people on this forum, no one wants to involve or really even discuss these. I was curious as to why you have chosen not to. Some people revolve their entire portfolio around these issues, and just collect the dividends and are not concerned with the price movement of the issue. Sent from my iPad using Tapatalk

For anyone not concerned about the price as long as they get their interest or dividend i will gladly pay them a bit more but i keep their principal.

[pb4uski]

Quote:

Originally Posted by Chuckanut Anybody care to recommend a good intermediate bond fund?

What I have been doing lately because of my concerns about interest rate risk is target maturity bond funds since I maxed out on the PenFed 3% 5-year CD special from back in late 2013.

I'm in the IBond and Bulletshare Corporate target maturity bond funds that mature in 2020. The former currently yields 2.12% and the latter 2.38% based on Friday's closing prices with durations of 4.12 and 4.75 respectively. I view them as a CD substitute and the returns are about the same as the highest 5 year CD rates but much better than average 5 year CD rates. I prefer these because I hold my fixed income allocation in my IRA and I don't have to have numerous IRA accounts as I would if I used CDs. I made an exception to that for the PedFed special because 3% was too good to pass up.

I'm giving up a little yield compared to the Vanguard Intermediate-Term Corporate Bond fund which yields 2.91% but has a much longer duration of 6.3.

[pb4uski]

Quote:

Originally Posted by Mulligan ....so I would like to toss a question at you (or anyone else, too) concerning income. Why do you not choose to invest in Preferreds or exchange traded debt, collect the income and not worry about the daily movements of the security?....

I guess my issue with preferreds in the current low interest rate environment is interest rate risk and once interest rates "normalize", I might well consider some. My understanding is that their value will get hammered much more than bonds if/when rates rise.

[Mulligan]

Quote:

Originally Posted by mathjak107 For anyone not concerned about the price as long as they get their interest or dividend i will gladly pay them a bit more but i keep their principal.

If you investment grade rated and can give me 7% lets get the paperwork going! Seriously though, I am not suggesting they are any better or worse than any other plan, just curious as to why they do not get serious consideration from most members here as a least a sliver of portfolio.
Most of the ones I own have been around 20-50 years, and tracking their prices during these periods shows very little price movement other than the short 2008 blip and early 90s.


Sent from my iPad using Tapatalk

[Mulligan]

Quote:

Originally Posted by pb4uski I guess my issue with preferreds in the current low interest rate environment is interest rate risk and once interest rates "normalize", I might well consider some. My understanding is that their value will get hammered much more than bonds if/when rates rise.

And that is a valid concern. I seen charts that are showing near historical spread difference between preferreds and the 10 yr. treasury. No guarantee they won't get crushed in price, but at times on some of my issues, the preferred yield was within 1% of treasury. Now they are over 4%. The caveat is though that I am not buying the actively traded listed utility preferreds like Southern Co. that are in the 5's but delisted ones that are investment grade utilites from shares that are mostly locked up in a pension fund vault in the 6's such as Baltimore Gas, Northeast Util, and Ameren.


Sent from my iPad using Tapatalk

[audreyh1]

Quote:

Originally Posted by Chuckanut Anybody care to recommend a good intermediate bond fund?

I have a large amount in DODIX. Some in MWTRX. There are a lot of "core" diversified intermediate bond funds out there. Many "total bond" funds qualify - they are usually intermediate, and Vanguard has them as well as others. There are ETFs available for this class of investment as well. I recommend reading up on options on Morningstar.

[audreyh1]

Quote:

Originally Posted by Mulligan Audrey you all a well informed person and I enjoy your posts, so I would like to toss a question at you (or anyone else, too) concerning income. Why do you not choose to invest in Preferreds or exchange traded debt, collect the income and not worry about the daily movements of the security? I frequent an income and investing forum and one recently posted a spreadsheet showing returning 6.5% with a 4% draw and 3% inflation would provide nearly 40 years of income before drawing down. I have wadded in a lot into these issues, all which are mostly investment grade. I am getting closer to 50/50 in my asset base of index and preferred. I love the income dividends and the 15% tax as bonds pay less and tax me more. Many investment gurus suggest preferred's to occupy 10-20% of a portfolio, yet outside of a few people on this forum, no one wants to involve or really even discuss these. I was curious as to why you have chosen not to. Some people revolve their entire portfolio around these issues, and just collect the dividends and are not concerned with the price movement of the issue. Sent from my iPad using Tapatalk

a) I choose not to own individual securities.
b) I am a total return investor.
c) The models I studied for portfolio survival and safe withdrawal rates over long periods didn't include preferred among the asset classes they examined.

[Texas Proud]

I have owned a few preferred or exchange traded debt.... heck, there was a big discussion of SLM's.... the only one I can remember if JSM...


But, you are in a spot that is not quite a bond and not quite a stock... if there is no conversion into stock, then basically you have a bond that is lower in the pecking order than a bond.... IOW, during BK you can lose much more than a real bond... now, you might be paid for this risk, but I would not ignore it....

SOOO, if you have the choice between a 5% bond or a 5% preferred, all else being equal you would pick the 5% bond...

[2B]

I have one year of cash in my plan which is the year I'm spending it in. I don't even include it in my asset allocation because it is supposed to disappear before my next rebalancing. The remainder is 55/45. The fixed income is entirely in a CD ladder. My CD ladder is effectively at the interest rate I purchased the CD at even if it is maturing during the coming year. Most of this will be reinvested out a nominal 5 years to slow slog forward to its next eventual redemption.

[Mulligan]

Quote:

Originally Posted by Texas Proud I have owned a few preferred or exchange traded debt.... heck, there was a big discussion of SLM's.... the only one I can remember if JSM... But, you are in a spot that is not quite a bond and not quite a stock... if there is no conversion into stock, then basically you have a bond that is lower in the pecking order than a bond.... IOW, during BK you can lose much more than a real bond... now, you might be paid for this risk, but I would not ignore it.... SOOO, if you have the choice between a 5% bond or a 5% preferred, all else being equal you would pick the 5% bond...

That is defintiely true, Texas. The trouble is for me anyways in the sandbox I'm playing in, the companies that have 6% plus preferreds are issuing their senior debt at 3-4%. Right or wrong I made decision to buy lower capital structure "debt" from higher rated companies, than senior debt from lower rated companies.
Audrey, thanks for sharing your reasons.


Sent from my iPad using Tapatalk

[Texas Proud]

Quote:

Originally Posted by Mulligan That is defintiely true, Texas. The trouble is for me anyways in the sandbox I'm playing in, the companies that have 6% plus preferreds are issuing their senior debt at 3-4%. Right or wrong I made decision to buy lower capital structure "debt" from higher rated companies, than senior debt from lower rated companies. Audrey, thanks for sharing your reasons. Sent from my iPad using Tapatalk

Yes... a preferred from a higher rated company is better than a bond from a low rated one...

Is the premium really 2 to 3% That seems a bit high to me.... but I do not know... just a gut feeling..

[Mulligan]

Quote:

Originally Posted by Texas Proud Yes... a preferred from a higher rated company is better than a bond from a low rated one... Is the premium really 2 to 3% That seems a bit high to me.... but I do not know... just a gut feeling..

One example I own is Ameren (AEE). They recently issued 2 debt offerrings. A 2025 maturity paying 3.25% and another due 2044 at 4.3%. I recently purchased some of their cummulative preferred paying 6.4% (AILLL). The preferred was Baa3 rated, so obviously the notes were higher rated than the preferreds. Like I mentioned, I read the the "spread" between bonds and treasuries are unusually high in relation to preferreds. Not a defimitive reason to justify purchases, but a good sign none the less.


Sent from my iPad using Tapatalk

[Sunset]

Quote:

Originally Posted by audreyh1 I actually wasn't responding to you, I know you know what you are holding. I was responding to the OP's choices of using VCSH a to hold 6 years of cash, and to Sunset.

I totally admit I bought VCSH simply because it was not stock.

My stock allocation is pretty high, I justify this in my mind by counting rentals as bond equivalents.

Now that I'm selling a rental I wanted to get more bonds in case stocks plunge again, I'll have something I can sell over a few years.

Any suggestions , and where to read on them ?
Should I directly buy bonds to guarantee capital preservation (like 2-4 yr bonds if they are available ? ) from Cities/States/Feds ?

[audreyh1]

Quote:

Originally Posted by Sunset I totally admit I bought VCSH simply because it was not stock. My stock allocation is pretty high, I justify this in my mind by counting rentals as bond equivalents. Now that I'm selling a rental I wanted to get more bonds in case stocks plunge again, I'll have something I can sell over a few years. Any suggestions , and where to read on them ? Should I directly buy bonds to guarantee capital preservation (like 2-4 yr bonds if they are available ? ) from Cities/States/Feds ?

If you are looking to balance against your large stock position, you probably don't want to hold only corporate bonds, as like stocks they are vulnerable to economic downturns. You might consider a more broadly diversified bond ETF like BSV. Or don't worry about staying short-term, if it's not a cash substitute, and pick something intermediate duration like BIV or BND if you plan on holding the position for the long term anyway. You can always hold both some short and some intermediate.

I don't know anything about capital preservation other than cash or treasuries/IBonds.

[Sunset]

These two vanguard intermediate bond investments look pretty close,
VBILX (which is also available as etf BIV)


BND (an etf)




I can't really see to prefer one over the other, but maybe someone else has a reason I should pick one vs the other ?


https://personal.vanguard.com/us/fun...FundIntExt=INT
vs
https://personal.vanguard.com/us/fun...FundIntExt=INT



I think there are two questions here

etf comparison BIV vs BND

and Why pick a fund over etf for bonds when supposedly the same content ?