Portfolio

[mikelee]

Hi, new here and looking around for some perspective from other investors...

I am self-employed with no debt, 55 and have a portfolio comprised of primarily mutual funds and ETFs. Early on, i alternated between self-managing and working with percentage-of-assets fee based advisors before settling on
using someone who i've been with for several years who works with me on an 'as-needed' hourly-rate basis. He is a former fund manager and a CFP.

My investment/cash assets are presently around 1.3M.

For about 6 years - basically since '08 - I have been heavily in bond funds -
Right now about 55% in Fixed Income - largest positions - Vanguard Intermediate and Vanguard Short Term - roughly 10% each of total PF...

I will meet with my advisor for a year end review around the middle of the month.
The current environment is confusing to navigate - the whole prospect of
seeing principal erosion when economic news is coming in positive - and the whole rising interest rate scenario has me somewhat spooked.

I feel an inclination to 'do something' as my exposure to the bond market remains pretty much at the same level as it has been through the stable years when it acted as a sort of hedge - and subsequent run-up of the last few years.

I guess I'm questioning whether this advisor is perhaps a little too passive...
and generally, whether it is in fact time to make some major allocation adjustments. BTW I would guess that my timeframe/horizon for actual retirement is still perhaps 5-7 years but, possibly shorter. My income fluctuates but after tax is typically in the realm of 60-75k.

I know this is all rather general, and subjective but would welcome any dialogue about moves I should be making or otherwise if I should worry less about the allocation of my portfolio. I do recognize that so much financial media hype is designed to scare the typical main street investor but the fact remains that it does create irrational volatility - and generate real buying and selling on 'the news.'

Thanks for any thoughts or questions!

Mike in Mich

 

[seraphim]

Hey Mike. Welcome to the forum.

There's a lot of concern about bonds, interest rates and equity returns in the short term, from what I've been reading, and no one has a crystal ball. I think you'll find most people here not market timers, but mostly a buy-and-hold group. Most of my fixed income is in stable value accounts, which I'm fortunate to have. I'm about your age, financially similar, but have already retried. I'm 60% in equity fund, and my fixed income is about 1/4 VG total bonds and 3/4 SV earning about 2.5%.

For my taste, I think you are overly invested in bonds, but that's just my opinion. There's a lot of talk about current retirees needing a higher equity holding due to expected lower returns in the future. I used a more aggressive AA than most retirees because DW and I have pensions. Your situation may be different.

Personally, I'd start putting all my new money in equities to slowly make the the AA more aggressive. I think this a poor time to be putting new money into bonds, close to retirement. Would I sell bonds in your situation to alter the AA? I'm not against modifying an AA for well thought out reasons, but wouldn't sell bonds unless I was harvesting returns. I wouldn't lock in any losses to do so. I think most people expect interest rates to rise some time in the next year, bond values to drop, and SEC yields to rise. Dependent on how soon and how quickly that happens, there may be a buying opportunity in bonds sometime in the next year.

A lot about your portfolio also depends on how you plan to make withdrawals, as well. Something I'm sure you've discussed with your advisor.

Just a few thoughts. You'll hear many others. But again, welcome to the forum.

 

[seraphim]

If you do decide to harvest some bond returns, it may not hurt to hold some money in a cash account for future purchases, or for post retirement withdrawal should the whole market go south. I don think you'll find much in the way of undervalued equities at the moment.

 

[pb4uski]

It seems to me that the OP has two issues. First, what is his target AA? Second, how to structure the fixed income portion of the portfolio to reduce interest rate risk.

On the AA, 45/55 is probably a little conservative to me (as it is to seraphim). My target is 60/40. OP just needs to decide what target AA works best considering his appetite for risk and ability to sleep at night.

On the bonds, I have recently shifted some of my fixed income holdings to 2% 3 year and 3%, 5 year PenFed CDs and also to near term (2018-2020) target maturity bond funds (Bulletshares and iSharesBond Corporates and High Yield). While the target maturity bond funds still have some interest rate risk, their duration shorten over time so I think holding them to maturity and rolling over the proceeds will do better than a bond fund if interest rates rise. (I realize that others have different views).

 

[haha]

I think you have not really asked a question, or said how you see it. You have basically said: "investing is hard, please discuss.""

If you are paying an FA, why not work it out with him? Presumably you have told him your complete needs, obligations on and off book, and preferences. People often compare low but positive interest returns on conservative fixed income to very unusually attractive current equity returns, and decide, time to make some changes!

This is not necessarily a good idea. In fact, my hunch is that it might turn out to be a bad idea, especially for a business owner (equity holder) who additionally has contingent plans to retire soon.

Knowing almost nothing about you, I might vote for standing pat.

There has been a lot of back patting recently about how the great unwashed are making this or that mistake. Well, advisor bullishness is at all time highs, so investing in equities is not exactly a stealth play currently.

As usual, people should do what they want.

Ha

 

[jIMOh]

If you will consider retirement in less than 5 years, consider holding about $280k (4 years expenses for you) in cash. Possibly take the interest the bonds pay and allocate it here, and use this as an opportunity fund if you see a market correction as well.

 

[mikelee]

Hi and thanks, Seraphim, pb4 and others who may reply. I definitely will be asking the advisor to maximize whatever profits can/should be logically taken for tax loss harvesting purposes and appreciate that point. The big 'pain factor' right now is this news cycle that is generating fear and volatility based on the inevitable tapering.. the 10-year rate, etc.,
and seeing, at least near-term, some of the year's gains being wiped out by nature of this AA - where i am seeing declines in 'both' bond and equity, seemingly in concert with one another. The bond funds served their purpose to offset volatility in the past but of course now it's a different story and - at least whatever is intermediate or longer term - is now at risk of losing principal... It's certainly not a question of 'if - but when - as far as the QE taper - i'm really wondering if i should be taking action immediately to pare back at least on things like VFIDX/Intermediate Bond ... ETFs such as BABS... ACG... and other smaller-percentage holdings that are interest-rate sensitive - and shift proceeds into something like OSTIX or other relatively less-volatile fixed income fund positions...

To an extent yes, i guess i'm engaging in a little timing but i rather consider it just tactical allocation - (semantics?). One could argue that my advisor should have suggested moving out of bond funds around May/June of this year rather than essentially riding this market down for the rest of the year - the charts do not lie : )

I've become more sensitive to the notion of capital preservation in the past few years.
I also probably pay too much attention to the day to day market activity than I should - at least that's likely what my F.A. would say - but in the end, it's the old axiom - nobody going to care more about my money than me.

I agree that this AA is too conservative and i can tolerate a higher allocation in stock/equity funds/ETFs.

 

[Ready]

You might want to consider a 60/40 AA, but for the 40%, you could keep half in bonds, and half in a ladder of CDs with varying maturity dates. With PenFed paying 3% on 5 year CDs, these rates are equal to or higher than the returns on short term bonds. For my taste, I don't want all 40% in bonds, but I don't want to pull out of bonds completely...so splitting it in half allows me to sleep at night while still having good exposure to a variety of investments.

If rates do go down significantly, and bond values drop, you can always withdraw some of the CD money to buy bonds again. You will lose a year worth of interest, but that's not worth worrying about if you can buy bonds for a much lower price a few years from now.