Need advise on a balanced fund idea

[FANOFJESUS]

What do you guys think of this idea? All the funds are at Vanguard. I am trying to get a 60/40 mix.

40% Short-Term Bond Index Inv
30% Total Int'l Stock Index
30% Total Stock Mkt Idx Inv

 

[LOL!]

This is a good allocation, but could possibly be improved upon. If this is taxable account, you probably should use the Vanguard FTSE all-world ex-US international fund which is better than the total international fund you selected. Also do not have your fixed income funds in a taxable account.

For more info, please see www.bogleheads.org

 

[FANOFJESUS]

This is 99% in a taxable account. We have a very small roth and no longer work. We are lucky enough to be in the lowest tax bracket. Right now we have nine balanced funds the performance in about 0.4% ahead of this way so far this year. But with a high ER of .90 over time I am guessing that I would fall behind this new way. By doing it this new way we would cut our taxes by about 2/3 each year. Another idea came to me last night. How about buying 2 year CD's that yield about 4.2 for the 40% that is in the Short-Term Bond Index Inv? Either way we would still be in the lowest tax bracket. I have doing something like this for the first time so I welcome ALL OF YOUR ADVICE. We have owned balanced funds for many years but this is our first time at doing it this way. Thanks LOL! for your advice.

Updated

40% Short-Term Bond Index Inv or 2 year CD's yielding 4.2
30% FTSE All-World ex-US Inv
30% Total Stock Mkt Idx Inv

 

[DblDoc]

rec7 another variation for the bonds would be to include TIPS for inflation protection. Otherwise what you propose is a nice, simple and balanced portfolio.

DD

 

[FANOFJESUS]

What percent in TIPS would you advise?

 

[cute fuzzy bunny]

Also do not have your fixed income funds in a taxable account.

Unless you want them there for the many good reasons for doing so.

TIPS are kind of expensive right now. Unless your personal rate of inflation closely matches or is lower than the CPI, you might do better with the short term investment grade fund, especially since its likely that rates will be heading higher soon.

The bond camp is sort of mixed on opinion. Guys like Bernstein think you oughta pick up short term high quality bonds and leave it at that. Some other guys think all you need is TIPS.

 

[FANOFJESUS]

So far the short term investment grade fund is in last place of the short term bond funds YTD. So I am thinking the short term index might be better. I have heard that TIPS are expensive right now from several people. I am looking for ideas from everyone. We are lucky because if we do the balanced mix this way we will each have about 10k of extra room the the lowest tax bracket before it is used up.

Originally Posted by LOL!
Also do not have your fixed income funds in a taxable account.

You are right but since we are not working, we have to do the best we can with what we have got. Thank GOD we are in the lowest tax bracket.

 

[cute fuzzy bunny]

I dont think I'd use a single YTD number as a reason to buy one fund over another.

 

[FANOFJESUS]

You are right, I should not do that. Alot of times I look at 10 year returns when buying funds. Do you think short term high quality bonds would beat a 4.2 CD in the next two years?

 

[FinanceDude]

You are right, I should not do that. Alot of times I look at 10 year returns when buying funds. Do you think short term high quality bonds would beat a 4.2 CD in the next two years?

Define "short-term"...........

 

[cute fuzzy bunny]

I'm going to guess that in the context of the thread, the poster means the sub 3 year bonds as are typical in the fund we were discussing.

Absolutely no idea. Using my magic 8-ball it says "theres some chance"

At this point, good cd's are king unless you're up for the whole "check the cigar butt on the sidewalk" thing. Under 5% I'm not thrilled.

 

[Spanky]

You are right, I should not do that. Alot of times I look at 10 year returns when buying funds. Do you think short term high quality bonds would beat a 4.2 CD in the next two years?

No idea - if your horizon is less than 2 years, you are probably better off with CD or money market.

 

[ats5g]

You are right, I should not do that. Alot of times I look at 10 year returns when buying funds. Do you think short term high quality bonds would beat a 4.2 CD in the next two years?

You can create your own version of a ST bond fund, like Vanguard's ST investment grade (VFSTX) with CD's if you so choose since the ST bond fund is just a ladder of 0-5 year bonds [granted with about 800 bonds to manage credit risk]. For example, if you averaged current offerings of 1,2,3,4 + 5 year CDs, you'd likely get an average yield of about 4.65% or so, which is roughly what VFSTX is yielding. But you wouldn't be taking any credit risk.

VFSTX has done the worst of the ST bond funds simply b/c there's been a flight to quality, meaning that everybody's been fleeing towards treasury and US agency bonds. Note the very good relative performance of all of Vanguard's treasury/TIPS funds vs. similar maturity bond funds with corporate bonds.

- Alec

 

[cute fuzzy bunny]

Ding, ding, ding.

 

[FANOFJESUS]

You can create your own version of a ST bond fund, like Vanguard's ST investment grade (VFSTX) with CD's if you so choose since the ST bond fund is just a ladder of 0-5 year bonds [granted with about 800 bonds to manage credit risk]. For example, if you averaged current offerings of 1,2,3,4 + 5 year CDs, you'd likely get an average yield of about 4.65% or so, which is roughly what VFSTX is yielding. But you wouldn't be taking any credit risk.

VFSTX has done the worst of the ST bond funds simply b/c there's been a flight to quality, meaning that everybody's been fleeing towards treasury and US agency bonds. Note the very good relative performance of all of Vanguard's treasury/TIPS funds vs. similar maturity bond funds with corporate bonds.

- Alec

I was thinking along these lines using two year CD's the yield is around 4.2 but I would not lose any principal like the bond funds if rates went up. The short term bond index is 2.5 years.

 

[ats5g]

I was thinking along these lines using two year CD's the yield is around 4.2 but I would not lose any principal like the bond funds if rates went up. The short term bond index is 2.5 years.

Don't get me started on the whole bond fund vs. ind bond issue.

IMO, a 1-5 year CD ladder is better than putting all the 40% of your portfolio set for bonds into a 2 year CD. That is, unless you know you have to spend all of the money at the end of year 2.

Income Risk - The CD ladder has less income risk than the 2 yr CD, which I'm assuming you'd be rolling over into a new 2 yr CD every 2 years. This is because the CD ladder is a mix of CDs from various years with various interest rates, thus smoothing out any sudden changes in CD yields.

Ideally what I'd want is a ladder of 1-10 year CDs. Hey, I can manage my own int term bond fund without a CFA [and that's not Chick Fillet for you Southerners ].

Also if you have a CD maturing each year, or even every 6 months if you so choose, you have to worry less about early withdrawal penalties.

Even though TIPS have done very well lately, and LT TIPS are yielding about 2%, I think I'd still want to hold some in case the s@*t really hits the fan, and inflation really takes off with ST CD rates not really keeping up. Especially if I have very high inflation risk.

- Alec

 

[FANOFJESUS]

What percent in TIPS would you advise?

 

[innova]

I use 50% TIPS and 50% intermediate treas for all of my fixed holdings. However, I'm still in accumulation phase.. I would imagine a retiree or near-retiree would want 2-5 years in cash as to be able to ride out a down market without selling equities.

If you were in a higher bracket you would probably see muni's recommended. Since you aren't, the cash vs. bonds question has to be carefully considered. For folks in a higher bracket I doubt CDs would be a good choice - but this is good discussion.

 

[cute fuzzy bunny]

I'd still want to hold some in case the s@*t really hits the fan, and inflation really takes off with ST CD rates not really keeping up. Especially if I have very high inflation risk.

Yahbut, that means only 'some' of your portfolio would be inflation protected, and then only during the relatively rare periods that we experience high inflation. The rest of the time that hunk of money invested in tips would perform roughly the same as treasuries of the same duration. Yes?

 

[FANOFJESUS]

I am not sure if I should use TIPS. I notice that Target Retirement 2005 and 2010 are the only one's that use TIPS. So if your time horizon is longer than about two years Vanguard does not use them. But if you are retired the 2005 has about 14% TIPS in it. I don't need to draw down any of the money right now. It may be five years or more before I need some of the money. Just something to think about.

 

[charlie]

Hi Rec7,

I personally am using Vanguard's Wellington, Tax Managed Small Cap and the
FTSE All world ex Us for my taxable account. If taxable income makes you
squirm, consider using Tax Managed Balanced for Wellington. Adjust ratios
to suit.

Cheers,

Charlie

 

[huskerblue]

David Swensen of Yale {top performing endowment in 2007 at 28% return} knows his stuff and here is his advice on how us schmucks should invest:

http://www.nytimes.com/2008/02/17/business/17swensen.html?_r=1&oref=slogin

I am moving this way with some minor tweaks to the diversifiers {no way I place 20% in real estate}. If you look at his 20% in RE and 15% in TIPs recommendation, that is 35% in diversifiers {absolute return, real assets}, 15% simple bonds, 30% domestic equities and 20% foreign equities with some emerging markets. Seems really solid to me.

 

[cute fuzzy bunny]

Sounds like the Managed Payout funds?

Although I dont think those have taken up a REIT position yet, but they're supposed to. Theres still the specter of a "hedge-type fund" that doesnt exist yet that the fund may take a small position in, should it come into existence.

TIPS holdings are a little lighter than 15%, but I dont really mind that they didnt go in whole hog given the current prices.

 

[ats5g]

Yahbut, that means only 'some' of your portfolio would be inflation protected, and then only during the relatively rare periods that we experience high inflation. The rest of the time that hunk of money invested in tips would perform roughly the same as treasuries of the same duration. Yes?

Most likely if inflation is tame, TIPS and nominal treasuries of the same maturity would perform roughly the same. If you're subject to serious inflation risk though, I think you'd want to hedge that risk with TIPS, not nominal bonds.

If you have an inflation adjusted pension/SS that makes up a significant portion of your income, or you can make your spouse work longer , you probably aren't at serious inflation risk and can probably make due with nominal bonds. This is why I don't really think the TSP needs a TIPS fund, but my company's 401(k) does [we've got a non-cola'd pension].

- Alec

 

[huskerblue]

Hadn't looked at the managed payout funds for any of these groups yet, just took a quick look===query: why pay Vanguard 58 bps to send you a monthly check?

EDIT: whoops, I see where their market neutral fund has a 2.79% expense ratio...that drives up the average cost of the underlying funds pretty good!