Bonds in AA - what type of bonds?

[racy]

Quote:

Originally Posted by mitchjav ... 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]

Quote:

Originally Posted by racy 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]

Quote:

Originally Posted by ArmchairMillionaire23 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]

Quote:

Originally Posted by mrfeh 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]

Quote:

Originally Posted by 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...

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]

Quote:

Originally Posted by pb4uski +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.

[Gearhead Jim]

I should have explained that my previous preference for CD's was due to the combination of FDIC insurance, absence of interest rate risk, and acceptable returns. The CD returns have plummeted but when I look at the 5 year treasuries vs 5 year CD, I can still do slightly better in CD's.

How complicated is it to buy 5 year treasuries through Vanguard? Fees?
Would the actual paper be in Vanguard's name, or mine?

My custodian is mostly Vanguard, but the CD's are directly owned by me.

[ERhoosier]

I also view my AA in "fixed income" rather than "bonds" per se. I lump non-variable annuities, CV life insurance, CDs, etc. with my FI allocation. Along with a couple money market accounts I still have which were locked in at "promo" rates of 2-2.5% (remember those days?). I view my FI AA with safety as #1 priority. Cash is separate, but lately I am questioning the rationality of holding anything other than short term (1-3yrs) bonds. With Federal deficits at record levels and growing, inflationary pressures could explode at most anytime. IMHO- The minimal additional interest paid just ain't worth the risk of holding longer term bonds these days so I have not been reinvesting some bonds as they mature. Thus cash AA has been increasing by default.

[pb4uski]

Quote:

Originally Posted by Gearhead Jim I should have explained that my previous preference for CD's was due to the combination of FDIC insurance, absence of interest rate risk, and acceptable returns. The CD returns have plummeted but when I look at the 5 year treasuries vs 5 year CD, I can still do slightly better in CD's. How complicated is it to buy 5 year treasuries through Vanguard? Fees? Would the actual paper be in Vanguard's name, or mine? My custodian is mostly Vanguard, but the CD's are directly owned by me.

It is no different than if you buy an individual stock... the instrument is held by Vanguard in an account in your name. While I haven't bought CDs or Treasuries through Vanguard, I suspect no fees since they don't charge fees for stocks that I buy.

[big-papa]

I hold bond funds 3 ways:
1. For my primary AA (60/40) I use intermediate treasuries (FUAMX) At Fidelity, primarily as ballast for my stock holdings. In the very long term, they have near zero correlation stocks and since the Volker era they have tended to be strongly anti-correlated to stocks during market stresses (.com bubble, 2008, Covid, for example). I do this even knowing full well that the returns on these are likely to be negative, in inflation adjusted terms, over the next 5-10 years or so. Many instead choose a total bond market approach instead and there's nothing wrong with that, but they haven't tended to react as strongly during market stresses as treasuries have, though they have tended to have slightly better long term returns. You can't have everything...
2. I own Ibonds which I intend to use as an inflation adjusted supplement to Social Security when I turn 70.
3. A TIPs pseudo-ladder which is also intended to be used as an inflation adjustment supplement to Social Security when I turn 70.

[Gearhead Jim]

Quote:

Originally Posted by pb4uski It is no different than if you buy an individual stock... the instrument is held by Vanguard in an account in your name. While I haven't bought CDs or Treasuries through Vanguard, I suspect no fees since they don't charge fees for stocks that I buy.

Thanks for the info.
The issue of bonds at VG being held by them in my account, I consider to be a minus. About 2/3 of our investments are already at VG, with the rest spread around CD's at various institutions.
It's highly unlikely that VG would go belly up or be a victim of massive fraud/hacking/ransomeware. But I've experienced a number of highly unlikely disasters in my life, and will probably keep a least a portion of my investments in separate locations. Those other locations are probably no more secure than VG, but there is a diversification of "disaster risk."

Some people would consider that a tinfoil hat, but I'm ok with it.

If I decide to go with individual bonds, then your info will get me started.

[pb4uski]

A bit funny... as I was reading your post I started thinking "Wow, this guy needs a tin foil hat" and then in the next paragraph you conceded to it.

[kevink]

Quote:

Originally Posted by big-papa I hold bond funds 3 ways: 1. For my primary AA (60/40) I use intermediate treasuries (FUAMX) At Fidelity, primarily as ballast for my stock holdings. In the very long term, they have near zero correlation stocks and since the Volker era they have tended to be strongly anti-correlated to stocks during market stresses (.com bubble, 2008, Covid, for example). I do this even knowing full well that the returns on these are likely to be negative, in inflation adjusted terms, over the next 5-10 years or so. Many instead choose a total bond market approach instead and there's nothing wrong with that, but they haven't tended to react as strongly during market stresses as treasuries have, though they have tended to have slightly better long term returns. You can't have everything... 2. I own Ibonds which I intend to use as an inflation adjusted supplement to Social Security when I turn 70. 3. A TIPs pseudo-ladder which is also intended to be used as an inflation adjustment supplement to Social Security when I turn 70.

I think this is a really smart approach with good diversification across the highest-quality bonds.

The first book on bonds I read some decades ago, Annette Thau's "Investing in Bonds," recommended IT (~5 year) Treasuries as the "sweet spot" default bond choice and that's been echoed by Larry Swedroe and other experts over the years. In addition to performing far better in market panics than TBM funds one needs to remember that Treasuries are exempt from state taxes which often means that their after-tax returns are equal or superior to funds that are composed largely or solely of corporates.

[big-papa]

Quote:

Originally Posted by kevink I think this is a really smart approach with good diversification across the highest-quality bonds. The first book on bonds I read some decades ago, Annette Thau's "Investing in Bonds," recommended IT (~5 year) Treasuries as the "sweet spot" default bond choice and that's been echoed by Larry Swedroe and other experts over the years. In addition to performing far better in market panics than TBM funds one needs to remember that Treasuries are exempt from state taxes which often means that their after-tax returns are equal or superior to funds that are composed largely or solely of corporates.

Thanks. It's a somewhat belt-and-suspenders approach that helps me sleep at night even though I admit that there is at least some "mental accounting" going on.

[big-papa]

Quote:

Originally Posted by kevink I think this is a really smart approach with good diversification across the highest-quality bonds. The first book on bonds I read some decades ago, Annette Thau's "Investing in Bonds," recommended IT (~5 year) Treasuries as the "sweet spot" default bond choice and that's been echoed by Larry Swedroe and other experts over the years. In addition to performing far better in market panics than TBM funds one needs to remember that Treasuries are exempt from state taxes which often means that their after-tax returns are equal or superior to funds that are composed largely or solely of corporates.

By the way, there are at least a couple of schools of thought on how to deal with bonds. In my description I'm doing both, it turns out
1. An income stream approach (that's my Ibonds + TIPs pseudo ladder)
2. Ballast only - that's my FUAMX in my 60/40 portfolio with rebalancing.

There are those who advocate an income stream approach regardless, even for nominal bonds. If you take that approach, you generally start with an overall long duration, then gradually reduce the duration over time in a systematic way. This pretty much eliminates interest rate risk (though not other types of risk). Or you just purchase individual bonds of varying duration which, as long as you don't sell them, are guaranteed to have a certain nominal income stream.

No right choice for everybody...

[OldShooter]

Quote:

Originally Posted by big-papa ... I admit that there is at least some "mental accounting" going on.

I don't think Richard Thaler, who invented the term, has ever said that mental accounting is a bad thing. Indeed, we almost have to do it to survive financially. Simple household budgeting is mental accounting, as is separating our fungible retirement savings dollars from the household operations money. Even to speak of AA is mental accounting.

Once in a while, though, it can lead to bad decisions. The classic is a corporate budget policy that money cannot be moved from an account with a surplus to an account with a deficit, where the money is critically needed. Another classic is "house money," where we humans are risk takers with the fungible dollars we have just won while fiercely protecting the fungible dollars in our wallets. (Richard Thaler on house money: " ... the fact that some of your money has been made recently should not diminish the sense of loss if that money goes up in smoke.")

So the key is not to avoid mental accounting. That's impossible. The key is to understand the benefits of mental accounting and to avoid being led unconsciously astray.