Sold some equities last week - changes in AA and Bond Advice?

[VanWinkle]

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Originally Posted by pb4uski I guess that I'm one of them then. Given that rates are near zero and the Fed has consistently said that they have no interest in going to negative interest rates, then it seems unlikely that they will go down... so the more likely is that they will stay the same or eventually go up. I guess that it is possible that the Fed might change their mind on negative rates, but I doubt they will. Equities is a harder call, but at today's PE ratios if they stay the same or go up then I'm not particularly interested in playing... I like investing but don't like gambling or betting that some greater fool will come along (though I'll be the first to concede that the Fed has made just about everything other than equities unappetizing). Luckily, our retirement is funded well enough that I don't need to play, but if it is a fair game then I will.

I think your choice of VSGDX is a good one given the current yield is not that much different than an intermediate bond fund. Duration of 1.9 is good also. I use VSCSX for short term, but it obviously has more risk.

[njhowie]

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Originally Posted by VanWinkle You will recover from an interest rate hike if you hold the fund for the approximate duration of the underlying bonds.

You want to guarantee that?

[kevink]

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Originally Posted by pb4uski I guess that I'm one of them then. Given that rates are near zero and the Fed has consistently said that they have no interest in going to negative interest rates, then it seems unlikely that they will go down... so the more likely is that they will stay the same or eventually go up. I guess that it is possible that the Fed might change their mind on negative rates, but I doubt they will.

This is not only market timing but also a misunderstanding of the Fed's power. They may not want interest rates to go negative, but they're powerless to prevent them from doing so if the market dictates that negative rates are appropriate. It's already happened in other countries that aren't printing money at anywhere near the U.S. rate.

There's an excellent thread on Bogleheads right now in which the OP is asking the same sort of questions as the OP here about Total Bond Market fund as part of the Three Fund Portfolio. Lots of high-quality answers as well as some along the lines of a few posts here reflecting a simplistic understanding of bond returns that looks only at interest paid to maturity.

Among the best comments:

"No one knows nothing. Beginning 2020 no one knew 7.2% returns half way mark for TBM. Especially, after the 9% returns in 2019. While we can run analysis after the fact and speculate on future, both happens in abundance here, what is likely to happen is that everyone will be wrong again, as has been in the past with nearly everyone predicting future bond returns. Predicting future bond returns are one of the most complex things to do in finance, if not the most complex thing to do, yet it is a favorite hobby around here. I will take the returns as they come, along with the protections they provide, and worry about future when it arrives. A balanced portfolio of stocks and bonds will likely produce the best returns that will beat most people trying to make predictions, why would anyone try the alternative? I do not have need to feel in control, and let the capital markets to their thing. I will take what is on offer minus a low expense, and I will again beat most investors trying to speculate."

https://www.bogleheads.org/forum/vie...?f=10&t=320545

And as an example of "nobody knows nothing" and the value of diversification, here's the YTD returns of the four components of arguably the most diversified defensive portfolio out there, the Permanent Portfolio (25% each Total US Stock Market, 30 Year Treasuries, Treasury MM and Gold):

TLT (Long Term Treasuries) 24.13%
IAU (Gold) 19.24%
BIL (T bills) .42%
VTI (Total US Stock Market) .65%

Delete the "scary" assets that most posters here wouldn't even consider owning and you'd have been better off just sticking the entire pile in an Ally Bank CD account rather than enduring an ulcer-causing roller-coaster ride for nothing.

[pb4uski]

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Originally Posted by kevink This is not only market timing but also a misunderstanding of the Fed's power. They may not want interest rates to go negative, but they're powerless to prevent them from doing so if the market dictates that negative rates are appropriate. ...

No, and it demonstrates the lack of even an elementary understanding of U.S. monetary policy.

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Who sets interest rates in the United States? In the U.S., interest rates are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents...

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The Federal Reserve conducts the nation's monetary policy by managing the level of short-term interest rates and influencing the overall availability and cost of credit in the economy. Monetary policy directly affects short-term interest rates; it indirectly affects longer-term interest rates, currency exchange rates, and prices of equities and other assets and thus wealth. Through these channels, monetary policy influences household spending, business investment, production, employment, and inflation in the United States.

Now I'll be the first to concede that my strategy may not work out... in fact when I sold equities in March I said that it was an educated guess of the future on my part and might not work out... which is why I didn't necessarily encourage others to sell out.... so far it hasn't worked out too well but we are only on the first laps of a long race.

But I thought that this thread was about what to do in the fixed income space.

[stephenson]

Good stuff, All!

Now may be a good time for me to jump back in.

I know it SOUNDS like market timing, but, but ... given the timelines I am talking about, the political turmoil, and the pandemic, perhaps it is more of a "return to conservative investment policy" than market timing?

And, my core question, again, is more related to those products to move into with better than MM rates, so as increase the "bonds" component of the usually discussed E/B/C.

[pb4uski]

Yup, some have framed it as a shift to a capital preservation strategy.

[TechLead]

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Originally Posted by pb4uski Now I'll be the first to concede that my strategy may not work out... in fact when I sold equities in March I said that it was an educated guess of the future on my part and might not work out... which is why I didn't necessarily encourage others to sell out.... so far it hasn't worked out too well but we are only on the first laps of a long race. But I thought that this thread was about what to do in the fixed income space.

The troubles on "Main Street" in small businesses are just beginning (first lap).

The Wall Street is maybe less than 1/2 of the US Economy. That part is holding up thanks to the Fed.

Fed printed 22k+ of new money per US family. Almost all off it went to supporting Wall Street. That is almost all money were indirectly deposited into pockets of equity holders. (And Bond holders as well)

[VanWinkle]

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Originally Posted by njhowie You want to guarantee that?

It's math, I don't need to guarantee it. I can't guarantee I'll wake up tomorrow!!!

[njhowie]

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Originally Posted by VanWinkle It's math, I don't need to guarantee it. I can't guarantee I'll wake up tomorrow!!!

If it's math, then you could guarantee it - math is black and white, either right or wrong, no shades of grey.

It's a fund that we're talking about, and there are no guarantees - even if you hold to the fund's approximate duration. There are many reasons why it may not work out and you could lose money.

[VanWinkle]

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Originally Posted by njhowie If it's math, then you could guarantee it - math is black and white, either right or wrong, no shades of grey. It's a fund that we're talking about, and there are no guarantees - even if you hold to the fund's approximate duration. There are many reasons why it may not work out and you could lose money.

From a post by nisiprius on Bogleheads:


It's a rough rule-of-thumb relationship.

Following your comment, "If bonds are for stability, shouldn't I go for short term bonds where the NAV is stable and yields will track changing interest rates?" The NAV is only relatively stable, of course. I would ask, "according to that reasoning, why shouldn't you go for a money market mutual fund or a bank account, where the NAV is perfectly stable?"

The answer for me is that I am balancing risk and return. And that I feel that in the past, intermediate-term bond funds have offered noticeably higher return than cash-like or very-short-term bonds. I feel that in the context of a portfolio that contains any normal allocation to stocks, portfolio risk is dominated by the stocks and there's very little gain in stability by going shorter than intermediate.

The idea of matching bond duration to investment horizon is based on the fact that unlike stocks bonds have a maturity date. Stocks really do seem to have a sort of vague, loosey-goosey tendency to mean reversion, that can be expressed by saying that over holding periods of 20 years or so, the standard deviation--uncertainty of final value--of a stock holding is only about 3/4 of what it would be without mean reversion. But with bonds, you are talking about a contractual commitment. Given investment-grade bonds, the chance of default is very small, and the value is guaranteed to rise or fall to face value at maturity. With a bond, by legal contract, barring default, what goes down must come up--and on schedule.

In practice in a bond fund, if you just visually inspect the growth chart of something like Vanguard Total Bond, what you will see visually is that ups and downs of as much as 5% or so are superimposed on a steady upward loft generated by coupon interest payments from the bond fund. The ups and downs are market-based, and have the same mysteries as any other market, but they are limited in size.

What the bond duration = investment horizon is saying that, both in theory and pragmatically, the bond duration is about right to insure that the steady upward loft from interest payments will exceed that from market ups and downs.

Thus, if you look at Vanguard Total Bond, whose duration has varied but has typically been around six years, you won't find many places where the fund would have lost money if held for six years. (I don't think there are any, in fact).

Over the course of one year, yes. Check in the vicinity of 1994 or 2013. Not a huge loss, but a loss. Over six years, no.

You can read more here:
https://www.bogleheads.org/forum/viewtopic.php?t=259330

[Montecfo]

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Originally Posted by stephenson Good stuff, All! Now may be a good time for me to jump back in. I know it SOUNDS like market timing, but, but ... given the timelines I am talking about, the political turmoil, and the pandemic, perhaps it is more of a "return to conservative investment policy" than market timing? And, my core question, again, is more related to those products to move into with better than MM rates, so as increase the "bonds" component of the usually discussed E/B/C.

You know pretty much everyone times the market in one way or another. I'm always intrigued by the self-righteousness of annual rebalancers, who attempt to sell high and buy low.

But I think the base bond AA discussion is more interesting.

[mrfeh]

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Originally Posted by Montecfo You know pretty much everyone times the market in one way or another. I'm always intrigued by the self-righteousness of annual rebalancers, who attempt to sell high and buy low.

Rebalancing isn't about sell high/buy low. It's about maintaining a desired AA..

[Montecfo]

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Originally Posted by mrfeh Rebalancing isn't about sell high/buy low. It's about maintaining a desired AA..

Tell me how you do that without selling winners and buying losers and I will agree with you.

[jimbee]

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Originally Posted by Montecfo Tell me how you do that without selling winners and buying losers and I will agree with you.

It's possible that all your investments lose money and your asset allocation needs to be rebalanced. No winners involved, all losers.

[Montecfo]

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Originally Posted by jimbee It's possible that all your investments lose money and your asset allocation needs to be rebalanced. No winners involved, all losers.

But if all lose the same you are balanced.

Otherwise still selling the ones that did better, buying the ones that did worse.

Everyone times the market in some way.

If so called DMTs state they are simply rebalancing based on criteria other than a calendar then that probably makes them rebalancers, not DMTs, right?

[TechLead]

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Originally Posted by Montecfo Everyone times the market in some way.

I have been buying stock index funds/ETFs for decades now while never selling anything except for ESPP / RSUs given to us by our employers.
Never selling anything unless 401k plan moved funds.

0 market timing

[harley]

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Originally Posted by mrfeh Rebalancing isn't about sell high/buy low. It's about maintaining a desired AA..

But changing your AA due to unusual economic conditions, age, comfort level, etc. are market timing? I understand. You set your AA at age 40 and never change. That's the only way to go.

[Montecfo]

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Originally Posted by TechLead I have been buying stock index funds/ETFs for decades now while never selling anything except for ESPP / RSUs given to us by our employers. Never selling anything unless 401k plan moved funds. 0 market timing

LOL well so far so good. But you are not rebalancing so that makes u a DMT.

Do stop laughing and go stand in the corner with the other DMTs.

[mrfeh]

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Originally Posted by Montecfo But if all lose the same you are balanced. Otherwise still selling the ones that did better, buying the ones that did worse. Everyone times the market in some way. If so called DMTs state they are simply rebalancing based on criteria other than a calendar then that probably makes them rebalancers, not DMTs, right?

Rebalancing is not market timing. Sorry if you aren't able to see that.

[mrfeh]

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Originally Posted by harley But changing your AA due to unusual economic conditions, age, comfort level, etc. are market timing? I understand. You set your AA at age 40 and never change. That's the only way to go.

If you are changing your AA to follow your IPS (ie. "I will maintain an AA of age in bonds, and I will do that on 1/1 every year), that's not market timing.

Changing your AA because you think you know what the market will do in the future is.