Bonds in a two fund portfolio

[Jerry1]

So I'm thinking of moving my IRA's to Fidelity and going with a two (maybe three) fund portfolio. In my initial research, the bond fund for Fidelity generally recommended is FXNAX. My concern is the duration of the bonds in that fund - over 6 years.

If you were starting a two fund portfolio today, what fund would you use for your bond allocation? I'm thinking I should get a bond fund with a very short duration - maybe even less than a year.

My allocation is very conservative and would likely be 70% bonds, so this question is very important to how I structure my IRA's going forward. I might go to 60% (40% stocks), but I'm more into keeping what I have than substantially growing my portfolio at this point in time.

Note - I have cash that will last one to two more years before I have to think about liquidating any of my other investments.

Thanks.

[pb4uski]

Just thinking out loud... I wonder if one might do a barbell... 1/2 of bond allocation in 1-2 bond ETF and the rest in a very long bond ETF.

[Jerry1]

I'm struggling to see much (any) value to a long duration fund. I'm certainly willing to listen to the logic of a long fund but I don't understand it now given the current rates of interest and inflation expectations.

[OldShooter]

I think I have read that Fido has some kind of online tool to help with building a ladder. Could that be a better way to meet your needs than a fund?

[Jerry1]

Quote:

Originally Posted by OldShooter I think I have read that Fido has some kind of online tool to help with building a ladder. Could that be a better way to meet your needs than a fund?

They do have a good tool for that. Good point. I'll give that some thought. Just that one of the benefits of the two/three fund portfolio was ease of handling. A ladder would be a little bit more complicated - just a little.

[OldShooter]

Quote:

Originally Posted by Jerry1 They do have a good tool for that. Good point. I'll give that some thought. Just that one of the benefits of the two/three fund portfolio was ease of handling. A ladder would be a little bit more complicated - just a little.

Yeah. DW and I look at bond funds as one-size-fits-none. But we finesse the ladder issue by holding TIPS which don't have much of a yield curve, hence less need for ladders. That is a lunatic fringe strategy though.

[pb4uski]

Quote:

Originally Posted by Jerry1 I'm struggling to see much (any) value to a long duration fund. I'm certainly willing to listen to the logic of a long fund but I don't understand it now given the current rates of interest and inflation expectations.

From Portfolio Visualizer: Vanguard Total Bond vs 50/50 mix of Shoter-Term and Long-Term 3-year rolling returns of the 50/50 mix are consistently better than Total Bond.

https://www.portfoliovisualizer.com/...location3_2=50

[MRG]

I use ISTB in addition to FXNAX.

[ncbill]

For a portfolio as conservative as yours, why not just dump it all into a fund holding intermediate Treasuries?

[Jerry1]

Quote:

Originally Posted by MRG I use ISTB in addition to FXNAX.

I’ll look into ISTB. Thanks.

Quote:

Originally Posted by ncbill For a portfolio as conservative as yours, why not just dump it all into a fund holding intermediate Treasuries?

I guess that’s basically what I was asking whether or not I should do. Re: Intermediate, how many years duration might that be?

[VanWinkle]

Quote:

Originally Posted by pb4uski From Portfolio Visualizer: Vanguard Total Bond vs 50/50 mix of Shoter-Term and Long-Term 3-year rolling returns of the 50/50 mix are consistently better than Total Bond. https://www.portfoliovisualizer.com/...location3_2=50

More risk in the 50/50 mix due to % of treasuries/gov bonds being less in the 50/50 mix compared to total bond. Std dev and draw down are substantially different. I used admiral class long bonds VBLAX vs the Institutional long bond version. You are rewarded for taking more risk with the 50/50 mix.

[Closet_Gamer]

Quote:

Originally Posted by Jerry1 I'm struggling to see much (any) value to a long duration fund. I'm certainly willing to listen to the logic of a long fund but I don't understand it now given the current rates of interest and inflation expectations.

This is a super salient question. Some version of this question is very frequent right now.

I think it comes down to whether or not you're trying to time the interest rate market.

Yes, long yields are awful.

Yes, the duration risk is scary.

Yes, this feels like a lose-lose situation where you either accept some future write down or horrible (below inflation?) returns.

Yes, at some point rates will normalize ...
... but when they do equities will likely get hit even harder than bonds.

Yes, its been that way for over a decade a now and anyone just riding the short end of the curve has left money on the table waiting for rates to normalize.

No, I don't have a better answer than to just stick with my AA and ride it out. I wish I did!

[mrfeh]

Quote:

Originally Posted by Jerry1 If you were starting a two fund portfolio today, what fund would you use for your bond allocation?

FXNAX

If you're following a simple boglehead type portfolio, why would total bond suddenly be no good?

If your answer is "I'm timing the market", don't.

[eytonxav]

Perhaps a mix of FTBFX and FXNAX. Will get a bit more diversification and better yield from former, but at a higher expense ratio.

[rsingh6675]

Fidelity has some Bond-Like better Funds
FNMIX
FAGIX
If anyone knows any other conservative 5*Star Funds, please post them.
Thanks

[ERD50]

I'm going on a small tangent here, but I question the statement: "My allocation is very conservative and would likely be 70% bonds"

While we commonly call that 'conservative', history shows that an AA with a high allocation to fixed income has a higher probability of failure. Success rate starts dropping off ~ 40/60, and is significantly down by 30/70. In that sense (the only one that really matters to a retiree), the term 'conservative' just doesn't seem right. Unless you have significantly more than you need, and really hate volatility (separate from 'risk'), you might want to look into that.

I feel the safest place to be is in the middle of that curve, away from the edges. So if history 'rhymes' we aren't near the drop off points, which might move around a bit. I'd eyeball a flat range around 45/55~90/10, so 70/30 provides a 'buffer' on each end.

-ERD50

rhyme time

[Jerry1]

Quote:

Originally Posted by ERD50 I'm going on a small tangent here, but I question the statement: "My allocation is very conservative and would likely be 70% bonds" While we commonly call that 'conservative', history shows that an AA with a high allocation to fixed income has a higher probability of failure. Success rate starts dropping off ~ 40/60, and is significantly down by 30/70. In that sense (the only one that really matters to a retiree), the term 'conservative' just doesn't seem right. Unless you have significantly more than you need, and really hate volatility (separate from 'risk'), you might want to look into that. I feel the safest place to be is in the middle of that curve, away from the edges. So if history 'rhymes' we aren't near the drop off points, which might move around a bit. I'd eyeball a flat range around 45/55~90/10, so 70/30 provides a 'buffer' on each end. -ERD50 rhyme time

I wouldn't say that I have significantly more than I need (who does ), but I've run FireCalc with a 30% stock allocation, a 40 year time horizon and about 10% more spending than my budget (which is about 40% discretionary) and I still come out with no results that fail (100% success).

I do struggle with this however. It's the struggle of when to quit. The assumption is that I've won the game. Unfortunately, like so many decisions we have to make, we won't know if we made the right decision until we die (or at least it will likely be too late to do anything about). The thing I struggle with is whether or not I should run up the score for my heirs (two adult daughters and three grandkids). In the current environment, I'm good with sitting on the side lines. Yes, that has a sense of market timing implied, but I can live with that.