Bonds in AA - what type of bonds?

[mrfeh]

One comment - think "fixed income", not bonds.

Our fixed income breakdown:
75% total bond index
15% TIPS
5% short-term bond index
5% CDs

 

[foxfirev5]

Very little in bond funds. Just enough to rebalance equities in Roth accounts. Otherwise:

70% CD's - Brokered and Online Bank 2.74% Avg yield ladder

15% High Yield - VWEAX, VGEBX, PFF, PFFR

15% Cash - High Yield Savings, Brokerage MM. This is higher than normal but what's the difference?

 

[pb4uski]

Everything got temporarily whacked during a brief panic in March. Even US treasuries! Margin investors were scrambling to cover investments gone bad and liquidity had temporarily seized up. Thus the extreme Fed actions.

Yeah, looking at the 50-day moving average it looks like it was trading steadily ~$50.08 prior to March, dipped dramatically and took its sweet time coming back and is now $49.90.

 

[audreyh1]

That’s not so favorable considering that for most high quality bond funds NAV has increased quite a bit.

I’m not so crazy about ultra-short bond funds, as they often seem to get into trouble during credit crises, and I have avoided them since 2008. Most are probably loaded up on corporate bonds. Fidelity FCONX is an example. Fidelity created that fund after their original ultra-short bond fund crashed and burned 2008-2009 and was subsequently closed. FCONX was their “more conservative” answer. Like everything else it blipped down in March. I don’t know how well it recovered, but with a current SEC yield of only 0.05% it’s not worth touching a mostly corporates bond fund.

 

[FREE866]

That’s not so favorable considering that for most high quality bond funds NAV has increased quite a bit.

I’m not so crazy about ultra-short bond funds, as they often seem to get into trouble during credit crises, and I have avoided them since 2008. Most are probably loaded up on corporate bonds. Fidelity FCONX is an example. Fidelity created that fund after their original ultra-short bond fund crashed and burned 2008-2009 and was subsequently closed. FCONX was their “more conservative” answer. Like everything else it blipped down in March. I don’t know how well it recovered, but with a current SEC yield of only 0.05% it’s not worth touching a mostly corporates bond fund.

Thx Audrey
So for my mom, who has a CD maturing next month what would you suggest as a replacement?

 

[audreyh1]

Gosh that depends on so many things. When she might need the money, what do her other investments look like, does she need funds from her investments to supplement her income, how risk averse is she. Generally to maintain the same risk profile, another FDIC account would be appropriate - another CD or a high yield savings account paying a decent rate.

 

[FREE866]

Gosh that depends on so many things. When she might need the money, what do her other investments look like, does she need funds from her investments to supplement her income, how risk averse is she. Generally to maintain the same risk profile, another FDIC account would be appropriate - another CD or a high yield savings account paying a decent rate.

Sorry, should have given more info ha
Shes at 70/30 mix so this is part of the 30 bucket. Not so much for income but just as a way to stabilize return. 2 years ago she could get 2.75% in CD, then we rolled it into this CD yielding 1.7%

now a 2 year is like .15!!!

 

[audreyh1]

Online high yield savings are around 0.5% with a few a bit higher. No point in buying a much lower yielding CD. Ally Bank is currently offering a 15 month CD at 0.65%.

https://www.depositaccounts.com/ gives a good overview of the offerings both for savings accounts and CDs.

 

[FREE866]

Online high yield savings are around 0.5% with a few a bit higher. No point in buying a much lower yielding CD. Ally Bank is currently offering a 15 month CD at 0.65%.

https://www.depositaccounts.com/ gives a good overview of the offerings both for savings accounts and CDs.

thx!
Yeah--she has all her money at schwab so I'd really like to avoid opening up another acct

 

[kevink]

One comment - think "fixed income", not bonds.

Our fixed income breakdown:
75% total bond index
15% TIPS
5% short-term bond index
5% CDs

Exactly: "fixed income" not just bonds - especially at a time when "cash" in the form of online bank CDs or (best by far) iBonds offers far better returns than high-quality nominal bonds.

Not mentioned but it seems to me of the utmost relevance is that it only makes sense to look at fixed income in the context of the entire portfolio, while also taking into account today's unprecedented low interest rates.

Historically intermediate (5 year) Treasuries were the risk:return sweet spot to balance diversified equities (Total Stock/Total International) in a classic 50/50 or 60/40 portfolio but with rates so low Treasuries of any duration not only offer a negative real yield but very limited downside protection in the event of another market crash. And of course Total Bond Market funds let alone pure corporates of any type offer much less and no protection respectively.

I've posted this Jonathan Clements piece before but it seems relevant here:

https://humbledollar.com/2020/06/farewell-yield/

In a nutshell: bonds are for ballast, not return, in this environment. Clements uses a barbell of Short Term Treasuries and Short Term Tip (VTIP) but as he points out the argument for just holding stocks and a decent allocation to cash in the form of T-bills or a Treasury MM account and jettisoning bonds altogether are also compelling.

Personally I'm not willing to go that far so I hedge my bets by having a good-sized chunk of my bond allocation in actively-managed Vanguard Wellesley (which uses high-quality intermediate corporates) bookended by a roughly equal portfolio comprised of iBonds and Treasury MM funds (40%) along with equally-weighted Total U.S./Total International Stock Index funds and a substantial slice of gold to help with sequence-of-returns risk.

 

[friar1610]

One comment - think "fixed income", not bonds.

Our fixed income breakdown:
75% total bond index
15% TIPS
5% short-term bond index
5% CDs

It’s taken me a long time, but I’ve come around to “fixed income” not bonds.

In my case:

IRAs
- VG Total Bond Index
- VG ST Treasury
- CDs

Taxable
- VG Total Bond Index
- CDs
- I-Bonds

 

[Montecfo]

I dunno... at first blush it looks pretty good... 0.6 duration, 1.5 average maturity, decent SEC and distribution yields.

However, why there could be a ~$2 difference between the 52-week high of $50.14 and low of $48.10 at NAV is a bit of a mystery... that's a 4% swing... I wouldn't expect such a swing in an ultra-short bond fund.

Well, when everything is selling off that happens.

 

[mitchjav]

Thanks all for the responses - for those who've listed what their bond portfolios consist of - curious how you arrived at that allocation - was it intentional or just sort of happened based upon assets acquired over the years. I've got a mix of government bonds (27.5% of bond portfolio, corporate bonds (40%), a small slice of muni's (2.5%), global bonds (10%) and other securitized assets (e.g. MBS) (20%). Just sort of evolve over time. What I'm wondering is there any guidance as to what one SHOULD have? How about in taxable vs. IRA accounts? or does it just not matter so much if the bond portfolio is just diversified across types of bonds and maturities?

 

[doneat54]

Thanks all for the responses - for those who've listed what their bond portfolios consist of - curious how you arrived at that allocation - was it intentional or just sort of happened based upon assets acquired over the years. .....

Mostly just a function of a glidepath through 3 megacorps over 30+ years. In my list you see one holding listed twice, both DW and I worked at the same mega corp for a long time, we both have Prudential hosted 401Ks. Between corporate rollovers and megacorp rolling 401K houses it kind of all got scattered. We did hire a FA a couple times who recommended some moves to more bond/cash type investments which we followed.


I am FIRE'd, DW is working 1.5 more years so we are around a 36/64 AA and I want to move toward a 30/70 in the next couple years.


VERY happy with the returns on (most of) the bond funds this year.

 

[audreyh1]

Thanks all for the responses - for those who've listed what their bond portfolios consist of - curious how you arrived at that allocation - was it intentional or just sort of happened based upon assets acquired over the years. I've got a mix of government bonds (27.5% of bond portfolio, corporate bonds (40%), a small slice of muni's (2.5%), global bonds (10%) and other securitized assets (e.g. MBS) (20%). Just sort of evolve over time. What I'm wondering is there any guidance as to what one SHOULD have? How about in taxable vs. IRA accounts? or does it just not matter so much if the bond portfolio is just diversified across types of bonds and maturities?

Many folks (Swedroe, Armstrong among others) recommend using the highest quality bond funds to diversify against stocks. This includes a large dose of government and government backed bonds. Lower yielding, overall, but high credit quality and generally behave much better when equities get hit hard. Corporate bonds, high yield bonds are much more economically sensitive and tend to suffer during bear markets - yield spreads widen compared to treasuries. Global bonds - well that's a whole other ball of wax and I haven't seen anything showing that global bonds improve a portfolio's risk profile.

So I stick with bond index funds which have low ER and high credit quality (AA generally) - mostly intermediate duration, but I also have some short-term bond index funds (also high quality) and some cash in various forms, including CDs. I like to have some laddering of duration in my fixed income in case I have to draw on fixed income for a few years during a bear market.

 

[racy]

... is there any guidance as to what one SHOULD have? ....

Good question! Vanguard has Life Strategy funds and Target Date funds. You can see what the "professionals" do by looking at those. They typically put about 2/3rds of their bonds in Total Bond Market Index and the other 1/3rd in Total International Bond Index.
Is that what you should do? I don't know...

 

[Montecfo]

I'm a return *and* ballast guy. Treasuries are so low yield it seems a bit too much to put all or most of your portfolio there.

But I don't reach for yield with investments that are equity or trade like it.

 

[ArmchairMillionaire23]

Good question! Vanguard has Life Strategy funds and Target Date funds. You can see what the "professionals" do by looking at those. They typically put about 2/3rds of their bonds in Total Bond Market Index and the other 1/3rd in Total International Bond Index.
Is that what you should do? I don't know...

I looked into diversifying my 40% total bond allocation by moving 25% to 50% of that into a Total International (non-US) Bond Index but since I'm still w*rking for the next 4 years or so and about 80% of our net worth is in 401(k) plans. Unfortunately neither of my plans offer any international bond index funds.

But I plan on adding some international funds after retirement.

 

[mrfeh]

I looked into diversifying my 40% total bond allocation by moving 25% to 50% of that into a Total International (non-US) Bond Index but since I'm still w*rking for the next 4 years or so and about 80% of our net worth is in 401(k) plans. Unfortunately neither of my plans offer any international bond index funds.

But I plan on adding some international funds after retirement.

There are many threads over on bogleheads.org regarding ex-US bonds if you want to get a variety of opinions.

Personally, while 1/3 of our equities are ex-US, our bond holdings are purely US.

 

[SnowballCamper]

My "bond" portion of my asset allocation is TSP G fund, and some BND ETF fund.

 

[ArmchairMillionaire23]

There are many threads over on bogleheads.org regarding ex-US bonds if you want to get a variety of opinions.

Personally, while 1/3 of our equities are ex-US, our bond holdings are purely US.

I do check out Bogleheads from time to time. My equities are also 1/3 non-US as well. Thanks for the info, though.

 

[Gearhead Jim]

I'd be happy to buy bonds if I could conveniently buy and hold govt bonds myself in my IRA. But everything seems to be funds instead of individual bonds and therefore has interest rate risk, or complicated.

So I've been using CD's for the last 10 years and quite happy with them.
Until now...

 

[Out-to-Lunch]

I'd be happy to buy bonds if I could conveniently buy and hold govt bonds myself in my IRA. But everything seems to be funds instead of individual bonds and therefore has interest rate risk, or complicated.

So I've been using CD's for the last 10 years and quite happy with them.
Until now...

May I ask who your IRA custodian is? You can certainly buy individual bonds with many, many custodians.

 

[pb4uski]

+1 I could have easily bought individual bonds in either my Vanguard or Fidelity tIRAs... I chose not to because the yields sucked, but that is a different reason.

 

[OldShooter]

+1 I could have easily bought individual bonds in either my Vanguard or Fidelity tIRAs... I chose not to because they yields sucked, but that is a different reason.

+2 With Schwab it's easy too. You can do it on their web site or (my preference) you can call the bond desk and talk to an expert who is not paid commissions. He can advise on trends, bonds, brokered CDs and other aspects of fixed income. I brokerchecked the guy I like to talk to and he has been in the business for 17 years. Fee for meat-based buying is $25 but IIRC they have usually waived it for me. Web orders don't have fees at all.

At any of the three mentioned (and many others) one can buy pretty much the universe of financial assets, including thousands of funds and thousands of stocks and bonds. @GearheadJim, I suggest that you find a better IRA custodian. This is doubly true if you are paying significant fees to your current custodian, something that seems to often go hand-in-glove with bad custodians.