Transitioning part of portfolio into fixed income?

[haha]

Quote:

Originally Posted by 2B I'm an equity junky and had been way over in my equity allocation even though I'm also on the short track to retirement. Earlier this year, I decided I needed to be 40% in fixed income and was, at the time, at 5%. I decided what my "best" asset allocation should be and decided it was 40% fixed, 30% US large cap, 10% US small cap, 20% foreign. Once the decision was made, I just did it.

Did this rather large change cause you to realize a lot of capital gains?

Ha

[2B]

Quote:

Originally Posted by haha Did this rather large change cause you to realize a lot of capital gains? Ha

None at all. The fixed income bulge was created in my IRA. That really wasn't a problem because about 80% of my net worth is in my IRA.

Even if it did create capital gains, it needed to be done. I've seen too many people screw up their investments trying to avoid taking capital gains. I think it makes sense to minimize taxes through tax efficient index mutual funds but getting asset allocations "right" trumps the tax even if it was all in taxable funds.

[Marc]

I have a similar quandry. I just turned 50 and am still 100% in equities. I plan on retiring in eight years so I need to start building up a bond portfolio. Except for 200K in ETF, all of my money is in tax deferred acccounts. I have decided to change all of my future contributions (around 40k per year) into bond funds. I am also thinking of taking $5K per quarter and transfering it out of two of my mid-cap funds as I am very overweighted in mid-caps. This $60K per year should get me to around 20% bonds by the time I am ready to retire. This means that I will never be buying stocks or stock funds for the rest of my life.

Does this make sense? It seems strange that I will never be buying any more stocks or stock funds. As for allocation, I am putting the lion's share into Fidelity Total Bond and about a quarter in Fidelity Capital and Income; are these funds reasonable? Should I be moving funds over at a faster pace?

Thanks in advance for all advice.

Marc

[Ed_The_Gypsy]

As Marc, I am almost all equities and starting to plan for distribution for retirement.

In-Control uses a 4-year distribution buffer (bucket?) of MM and CDs to smooth out the ups and downs of his equities.

Galeno, an early poster on this board, used a similar technique (until he went back to w*rk ). He had one bucket of 100% equities, took 4% out of it every hear and fed it into a 6-year sequence (IIRC) of CDs and a MM fund to smooth out the market cycles. His fixed income strategy seemed a little elaborate at first but I think he simplified it later on.

I plan to use Galeno's approach. I figure that my Social Security will be my 'bond component' of my pot.

I haven't quite figured out if I should be setting up the second bucket of CDs/MMs yet. I figure to work for 5 or 6 years yet. By accident, I am accumulating dividends in a MM account at the moment, so I guess I actually have started.

[Ed_The_Gypsy]

Marc,

I don't like bonds because a) you can lose principle, and b) hot ones can be called. So, why bother?

Bonds another asset class for investment. They are a play on interest rates to make capital gains, which has value if this is out of phase with the equities market, but over the long run bonds don't return as much as equities, so I am not interested. I want a stable buffer, not another asset class.

My point of view.

[Ed_The_Gypsy]

OK, I just found a post by Twaddle that may influence me to change my mind.

I followed a link to a Morningstar article, "You Don't Have to Retire from Aggressive Investing", by Peter Di Teressa, 09-16-02, who described a strategy devised by Frank Armstrong. I have high regard for Frank, so I accept it on face value.

Quote:

A Longer-Lasting PortfolioTo make your retirement portfolio last, follow this strategy devised by financial planner Frank Armstrong. 1. Divide your assets into three parts: cash, bonds, and stocks. 2. Keep one year's worth of living expenses in cash. That's the money you'll be living off of, so a money-market account will be fine. You want a year's worth of expenses because you don't want to dip into investments when they're down. You don't want to put much more in the cash pile, though--you could miss out on some of the gains you'd get from investing. 3. Put between five and seven years' worth of living expenses in a short-term bond fund. This is the key to the strategy: Seven years would have carried you through the longest stock-market declines in U.S. history. This should allow you to survive a down market without selling your stock funds. 4. The rest of your portfolio stays in stock funds.

He goes on to advise not to let growth be your only asset type.

I have to think about this more.

Cheers,

Ed

[REWahoo]

Isn't Armstrong's strategy essentially the same as the Ray Lucia "Bucket Strategy" so often discussed here?

[Nords]

Quote:

Originally Posted by Ed_The_Gypsy I have high regard for Frank, so I accept it on face value. He goes on to advise not to let growth be your only asset type. I have to think about this more.

Frank's one of the few guys who writes without sales pressure (kinda like Rick Ferri, Bernstein, & Swedroe) so I trust him too.

This strategy could put 4% of your ER portfolio in cash and another 20-28% in bonds, leaving you with at best 76% in stocks. And some of that probably could be sliced off into commodities & REITs & international equities, which Frank's writing doesn't really cover.

In fact those three asset classes haven't really accumulated enough of a history for anyone to be able to definitively cover. But you might be able to push the stocks more toward small/value, certainly if you have the other three asset classes covered, and especially if you hold all those years of expenses in bond funds.

[Ed_The_Gypsy]

Nords, like Galeno, Frank puts it in terms of years of expenses instead of % of portfolio. It should amount to the same thing, but another way of looking at it.

REW, yup. Another way to look at buckets. Ray gets big points from me for popularizing the idea.

I like looking at it as a strategy for the sequence of drawing funds instead of %s of allocation. It appeals to my simple mind. I can visualize it better.

[2B]

I think it's important to look at portfolio allocation based on FIRECalc survival data (and other sources). The key is to get that % of fixed income up to the 5 to7 year range which creates a "bucket #1" or whatever you want to call it. It gives you the financial stability to actually live off your investments.

If you're 100% equities and everything tanks, your retirement becomes threatened very quickly. If you're 60% equities but the fixed income is only 6 months of living expenses, you can't afford retirement.

Just my thoughts. I hate to see things too overly analyzed having already done that myself on most topics.

[mathjak107]

i 2nd rays system, easy to understand and works well. it can get as complex as you want using index linked annuities to bolster income or as simple as you want.

[2B]

Quote:

Originally Posted by mathjak107 i 2nd rays system, easy to understand and works well. it can get as complex as you want using index linked annuities to bolster income or as simple as you want.

Please, don't turn this into an annuity discussion. Index annuities (IMHO) are always the wrong choice.

[mathjak107]

your right about not having another annuties discussion as we had enough of those. however the idea is not using them as a proxy for a stock investment as they suck at that but using them to boost the return on your cash. by using them to bolster the cash bucket you are generating higher returns than your safe money normally would and still have next to no downside risk. guaranteed floors on the interest rate that are index linked on the upside are a good way to add another point or 2 with no risk to your cash bucket. you mix in another type too. the other type to mix in guarantee you your principal and are index linked too but pay a higher rate than the guaranteed floor type and by mixing the 2 you get very little risk and about a point or better than cd's or a money market since the market goes up 2/3 of the time your usually at the higher end of both. again dont confuse using them in this fashion as opposed to the stock proxy with no risk they sell them as. when used in that fashion your returns suck in exchange for the guarantees but since all we need to do is get a percent or so higher than our cash they pull it off well. we can start another topic if you want more detail.