If my Asset Allocation is Telling me to Buy Bonds, Should I?

[nico08]

Based on my current asset allocation, compared to my goal asset allocation, I should purchase bonds in order to get the right mix of stocks and bonds.

However, I listen financial talk shows on the radio, I am getting a pretty clear message that now is not the time to purchase bonds.

So, what do I do? Purchase bonds (funds) now to get the asset allocation on target, or keep my target asset allocation imbalanced and wait for bonds to become a more attractive asset?

Thanks for your insight.

 

[W2R]

I am no financial guru by any means, but I would buy bonds if my asset allocation was far enough off to trigger rebalancing. I have written criteria of how far off it has to be before I rebalance.

If you have a lot to buy before getting to your desired asset allocation, you might want to consider dollar cost averaging (or not). For me this helps in stress reduction.

 

[foxfirev5]

Over at Boglehead there's a thread going about long term investment grade bond funds now in the 5% range. If you are in for just income this is begining to look interesting when compared to a SPIA annuity. At age 58 the annuity has a payout of approx 6% vs the 5 % distribution of the bond fund. However the bond fund would have some residual value regardless of interest rate increases, vs a zero residual for heirs with the annuity.

 

[pb4uski]

First, I would go to bonds to maintain my target AA even if it means temporarily going with short term bond funds to avoid significant interest rate risk.

Consider Guggenheim Bulletshares which are a maturity date bond fund so you get diversification benefits against credit risk compared to individual bonds but at a 24bp cost. While the value of these will decline when rates go up, you will get the maturity proceeds in the year of maturity. While they are not perfect, I think they are a sensible medium between owning individual bonds and a bond fund. The 2022 Corporate version had a yield to worst after fees of ~4% if purchased at the bid/asked midpoint. While these do have interest rate risk and would decline in value as interest rates increase OTOH one would expect to get the maturity value of the underlying portfolio in the year the bonds mature. I look at them as a substitute for a CD albeit with some credit risk.

Alternatively, you could temporarily park the money in a medium term CD.

Best of all if you have access to a stable value fund through a 401k or 403b then those are a very attractive alternative to bonds right now.

YMMV

 

[dtbach]

Look for some solid dividend paying stocks in defensive sectors (food, utilities, etc) that are in the 3.5 to 4% range. They will most likely keep their value or not dive too much. Bonds will definitely go down when interest rates go up, and they will go up. Sooner than later.

Buying bonds (esp long term) now is like buying tech funds in 2000.

 

[jebmke]

I'd quit listening to the financial radio.

 

[gcgang]

I'd quit listening to the financial radio.

+1

 

[Which Roger]

I'd quit listening to the financial radio.

+1
The talking heads have been warning us for a couple years that the bond bubble is going to burst. I rebalanced into bonds a couple months ago, when the "why would anybody buy bonds now?" discussions were at their peak on this forum. The value of my funds has increased since then.

 

[Lsbcal]

...(snip)...
So, what do I do? Purchase bonds (funds) now to get the asset allocation on target, or keep my target asset allocation imbalanced and wait for bonds to become a more attractive asset?

Thanks for your insight.

I think intermediate bonds would be OK based on the current interest rate difference (spread) between the 5 year Treasury and 3 month Treasury. By intermediate I mean a duration for the fund of somewhere around 5 years. That is how I see it anyway after having studied past bond market history.

The last time rates rose (2004 to 2007), there was no carnage just somewhat lousy real returns. We can expect a bit lousier real returns because rates are starting from a lower level. But one has to compare the alternatives like cash (safe but no yield) and stocks (maybe good returns but plenty of risk).

The rise in rates may take years to play out. During that time 12 month returns will swing between somewhat negative and somewhat positive. We can be sure the financial press will play this up to dramatize their stories.

 

[Jsore13194]

This is a very common dilemma for many people, including myself right now. You want to keep a reasonable asset allocation, yet conventional wisdom says to avoid bonds. I am putting my "non-equity" allocation into short-term bonds and high-yield savings. If you go individual bonds, and you hold them to maturity, you'll get your principal back. There are also some high-yield savings accounts out there (GE Capital .90% and American Express .85%) that provide the a place to park your cash, and it's also FDIC insured to $250,000.
Eventually interest rates will rise, and you can put some of that cash to work in longer term bonds or bond funds.

 

[karluk]

Based on my current asset allocation, compared to my goal asset allocation, I should purchase bonds in order to get the right mix of stocks and bonds.

However, I listen financial talk shows on the radio, I am getting a pretty clear message that now is not the time to purchase bonds.

So, what do I do? Purchase bonds (funds) now to get the asset allocation on target, or keep my target asset allocation imbalanced and wait for bonds to become a more attractive asset?

Thanks for your insight.

+1 to the responses that say you should stop listening to financial talk shows. Sometimes one gets good advice from them; more often they just echo today's scary headlines and give listeners anxiety attacks they would be better off without.

I suggest you stick to your asset allocation and buy or sell whatever it takes to get within your target allocation. I personally have been a significant net purchaser of bonds this year for that exact reason.

 

[RobLJ]

+1 below--short term, Guggenheim, actual bonds (if you have enough money to diversify on direct buys), some in short or even Floating Rate.
I allow myself to go 7% outside my allocation if I think a sector is extremely over/under valued, but violating your portfolio allocations subjects you to risk. I've gotten it right 3 out of 4 times so far. I'm allowing cash to build up, but the CD suggestion is a nice compromise.

I felt better about bond prices a month ago and bought some muni and emerging markets, but the latter is more like stocks really.

First, I would go to bonds to maintain my target AA even if it means temporarily going with short term bond funds to avoid significant interest rate risk.

Consider Guggenheim Bulletshares which are a maturity date bond fund so you get diversification benefits against credit risk compared to individual bonds but at a 24bp cost. While the value of these will decline when rates go up, you will get the maturity proceeds in the year of maturity. While they are not perfect, I think they are a sensible medium between owning individual bonds and a bond fund. The 2022 Corporate version had a yield to worst after fees of ~4% if purchased at the bid/asked midpoint. While these do have interest rate risk and would decline in value as interest rates increase OTOH one would expect to get the maturity value of the underlying portfolio in the year the bonds mature. I look at them as a substitute for a CD albeit with some credit risk.

Alternatively, you could temporarily park the money in a medium term CD.

Best of all if you have access to a stable value fund through a 401k or 403b then those are a very attractive alternative to bonds right now.

YMMV

 

[modhatter]

The higher rates rise, the lower the value of the bond fund. So, mathematically it becomes a guessing game of how soon they will start to escalate and how high the rate might go. It becomes difficult to put a number on it because we don't know the time frame nor the increase in rate. However, I think most feel that it would not be very prudent for the government to let rates rise too quickly while we are still in a recovery mode.

If it moved very slowly over many years, it would probably be worth going in now. If it rose sharply in a shorter time frame, then it would be better to hold out naturally. So maybe the best answer is to start putting in a certain amount every other month or quarterly, so your getting started, but still holding back somewhat and entering more slowly. Maybe break your entries down into six quarters (1 1/2 years) If rates should rise sharply in this time frame (unlikely I would think) you could go all in with the balance. If it is a slower more modest rise then you will have gained a little by going in gradually.

 

[bUU]

I agree with the recommendations to move toward shorter terms. I just moved everything around as part of an effort to start the move away from actively managed funds, and to become more tax efficient, and to make my asset allocation more aggressive since we were previously too conservative to have any hope of achieving financial independence. As part of that, I needed to pick new bond funds, specifically those available to me in 401ks. I bought JDTRX in one 401k (short-term corporate) and STIRX (multi-sector intermediate) the other, the latter of which which I'm not happy with, but it is the best offered. In my IRAs I've chosen THOPX (short-term corporate) and EAFAX (floating-rate), thought really most of my bond exposure in IRAs now comes from VWENX.

 

[Alan]

The VG and Fido computers do the rebalancing for me in my target date and balanced funds. I never have to make any adjustments these days.

 

[clifp]

I've been a huge bond bear for the last several years. However, a lot has changed the 10 year treasury yield has gone from 1.7x% in April to 2.7x% recently a full 1% increase.
So while bonds are hardly cheap, with the Fed's announcement I don't see rates rising a lot more any time soon. So on a absolutely basis a 2.7% for 10 year or 3.8% for 30 year isn't great, but it isn't as awful as it was just a few months ago.

Meanwhile the S&P 500 is up 21% this year. So on a relative basis bonds maybe some what cheaper. If your AA is saying buy bonds,they you should buy bonds or maybe sell stocks (if you need the money.)

 

[photoguy]

However, I listen financial talk shows on the radio, I am getting a pretty clear message that now is not the time to purchase bonds.

The financial media is always talking about how it's time to buy/sell asset X. Did you change your plans in the past due to this? if so, how did it turn out? if not, why did you decide not to listen them?

 

[fritz]

The VG and Fido computers do the rebalancing for me in my target date and balanced funds. I never have to make any adjustments these days.

+1 Hold Wellsley and Welligton for this reason (also low exposure to treasuries).

 

[Animorph]

Just go to cash or really short bonds if you don't want to buy bonds. That's no excuse for letting your equity allocation go wild.

 

[haha]

Just go to cash or really short bonds if you don't want to buy bonds. That's no excuse for letting your equity allocation go wild.

+1. If bond interest rates increase meaningfully, equities will very likely fall too, given a little time.

I look at this asset allocation as fixed vs. equities. Fixed can be anything from cash to 30 year governments, and laterally to include high yield, corporate investment grade, EM, etc. When the allocation suggests more fixed, you can choose which fixed income vehicles seem most promising. Of course this is not anywhere near a science, but IMO it beats making yourself buy a long term bond when it really doesn't seem all that prudent.

Ha

 

[easysurfer]

I'd buy bonds to get the AA right, for the same reason that in a stock market downturn, I'd continue to buy stocks. AA is your friend to get emotions out of the equation.

 

[MRG]

AA is your friend to get emotions out of the equation.

Thank you for that. For some reason that simple statement makes more sense then all the talking heads, and some investment books.

MRG

 

[brewer12345]

+1. If bond interest rates increase meaningfully, equities will very likely fall too, given a little time.

I look at this asset allocation as fixed vs. equities. Fixed can be anything from cash to 30 year governments, and laterally to include high yield, corporate investment grade, EM, etc. When the allocation suggests more fixed, you can choose which fixed income vehicles seem most promising. Of course this is not anywhere near a science, but IMO it beats making yourself buy a long term bond when it really doesn't seem all that prudent.

Ha

Funny, I do exactly the same thing, albeit with a constraint. I try to keep at least a chunk in bond index funds just to avoid completely second guessing my chosen allocation. But I have been comfy keeping part of my fixed income position in cash, CDs, I bonds and more recent a foreign bond CEF trading at a discount to par (GIM). When I bail on the job and lose certain employment-related investment restrictions, I will probably start shopping for individual floating rate and step-up bonds.

 

[bamsphd]

Based on my current asset allocation, compared to my goal asset allocation, I should purchase bonds in order to get the right mix of stocks and bonds.

Then do so.

The last time I didn't maintain my asset allocation was near the end of the Bush presidency. I let my stock percentage get up to around 85% because I didn't want to pay capital gains taxes, and we seemed so close to "our number." Mr market was nice enough to restore my target asset allocation for me. Though he overshot forcing me to sell some of my few bonds to buy stocks.

Nowadays, my rule is that I can adjust my target allocation for stocks down when the market has recently been setting one year or better highs, and I can adjust my target allocation for stocks up when equities have recently been hitting one year or lower lows. Other than that, I stay within a few percent of my target subject only to a "calamity" bond ladder emergency reserve. I've learned my lesson.

I'd quit listening to the financial radio.

+1

I'd buy bonds to get the AA right, for the same reason that in a stock market downturn, I'd continue to buy stocks. AA is your friend to get emotions out of the equation.

+1

 

[hotwired]

maybe too simple?

Wouldn't it be a prudent move to simply add short or VERY intermediate term (or even GNMA) funds/bonds to the mix which would A.) satisfy the AA requirements, keeping your "rules based" vs. "emotion based" investing in tact and B.) mitigating the investment rate risk. (i.e. shorter term securities will weave less when interest rates bob).