Will high interest cause you to revisit your AA?

[Closet_Gamer]

I like to think about big financial things in advance (what ifs) so as to avoid decision making in the moment).

This is in the what-if category...

Not long ago we had a number of threads that bonds yields were so low it was essentially impossible to make real returns on bonds. Real yields were negative and the opportunity to take rates lower/drive bond value were negligible. We are now experiencing this reality come to fruition.

So, the flip side question comes into view:

Is there a long term rate (10 or 30 year govt bonds) that will make you revisit your AA to increase bond mix because you are happy to lock in that rate and reduce future portfolio volatility?

Note that I'm not asking "Will your AA cause you to pick up more bonds if interest rates rise?" -- mechanically that is exactly what an AA is supposed to do.

Rather, the question is more like:
"If 30 year rates hit 8%, would you consider moving from 70/30 to 60/40 stock/bond weighting to lock in that nominal interest rate for the long term."

Personally, I'm currently at 85/15 in my retirement portfolio. If we see 6% on the 10 year, i'd likely move that to 75/25. 8% on the 30 year? I might go to 50%+ on bonds. Essentially locking in a long-term cash flow stream that would fund my retirement and dramatically reduce volatility.

Curious if others are pondering this or something similar?

 

[VanWinkle]

The yield on bonds would not make me change my asset allocation. I invest in bonds for the diversification and ballast during times like the current decline in equities. My bonds are down, but only half as much as my equities. This year is unusual with bonds being re-calibrated by rising interest rates. I call it
a re-calibration since the income is actually increasing with the reinvestment into more shares every month. I'm getting 2.75 on cash and 3.75 on bonds.
I still want to have the ballast of government bonds.

VW

 

[jebmke]

Nope.

 

[TheCaptain67]

"If 30 year rates hit 8%, would you consider moving from 70/30 to 60/40 stock/bond weighting to lock in that nominal interest rate…

Personally, I'm currently at 85/15 in my retirement portfolio. If we see 6% on the 10 year, i'd likely move that to 75/25. 8% on the 30 year? I might go to 50%+ on bonds. Essentially locking in a long-term cash flow stream that would fund my retirement and dramatically reduce volatility.

Curious if others are pondering this or something similar?

I am still working but plan to retire in under 10 years. We were basically 95/5 recently, are currently 88/12 currently and if 10 year hits 5% we will probably go 60/40.

 

[Koolau]

Probably not as I don't use bonds for growth as such. Now, under certain very high yield conditions, I might buy in a little, but not enough to change AA more than a % or 2. In today's environment, we probably need to be a bit (but not TOO) flexible when it comes to investments. Stay the course, for the most part. YMMV

 

[audreyh1]

The yield on bonds would not make me change my asset allocation. I invest in bonds for the diversification and ballast during times like the current decline in equities. My bonds are down, but only half as much as my equities. This year is unusual with bonds being re-calibrated by rising interest rates. I call it a re-calibration since the income is actually increasing with the reinvestment into more shares every month. I'm getting 2.75 on cash and 3.75 on bonds.
I still want to have the ballast of government bonds.

VW

Ditto. I just use bonds for rebalancing.

I’m a total return investor, so yields don’t factor in.

 

[SnowballCamper]

When the 30 year gets to 12% I'll probably go all in as much as I can. I'm still well under 60, and most of the egg is in IRA & TSP so most of it will stay.

It seems to me that to get Bernie Madoff returns with govt. guarantee is a no brainer. And to lock it in for 30 years... there were some very lucky/smart/wise people in the early 80s.

 

[Closet_Gamer]

Interesting, so even if the yield on bonds closes in on the long-run growth rate of equities, several of you would stick to the AA in expectation that the stock market would recover more and generate higher returns.

I'm more with Snowball.

 

[jollystomper]

I also look at bonds as a component of AA. I still plan to maintain equities in the 30-40% range, and prefer keeping a coupe of years cash requirements on hand for now, so that would limit what I would do. of course, this is my view at this snapshot in time, and is subject to change. For example, once I start taking SS our fixed income will exceed our expenses, so that will mean reducing our cash and investing more in stocks and bonds.

 

[Sunset]

When the 30 year gets to 12% I'll probably go all in as much as I can. I'm still well under 60, and most of the egg is in IRA & TSP so most of it will stay.

It seems to me that to get Bernie Madoff returns with govt. guarantee is a no brainer. And to lock it in for 30 years... there were some very lucky/smart/wise people in the early 80s.

+1

I recall when I as a young fella had my Mom buy a $10K bond (it was probably about 20% of her savings). A few years later, after collecting interest payments, I had her sell it for $14K as interest rates had dropped. She was amazed someone would pay more than the face value of it since she had also gotten payments from it.

 

[aja8888]

At age 79, and with no pension (other than SS), higher interest rates will allow me to lock in a very good fixed income stream in my retirement accounts for the next decade. I plan to keep a low percentage of equities and the rest in CDs, bonds (not bond funds), and treasuries. It's safe and I like safe things.

After age 90, well, I'll have another look. With family longevity history, I'm not sure looking will connect with very many active brain cells at that time.

 

[jebmke]

Interesting, so even if the yield on bonds closes in on the long-run growth rate of equities, several of you would stick to the AA in expectation that the stock market would recover more and generate higher returns.

I'm more with Snowball.

If I wanted to move from equity to bonds the tax hit would dwarf any advantages. My plan is to start draining bonds off the map when I start RMDs.

 

[Koolau]

At age 79, and with no pension (other than SS), higher interest rates will allow me to lock in a very good fixed income stream in my retirement accounts for the next decade. I plan to keep a low percentage of equities and the rest in CDs, bonds (not bond funds), and treasuries. It's safe and I like safe things.

After age 90, well, I'll have another look. With family longevity history, I'm not sure looking will connect with very many active brain cells at that time.

I still want SOME equities, but this sounds like a reasonable strategy for us super-seniors. Only problem is that we lose buying power to inflation until we WIN (Whip Inflation Now.) At that point (may it be soon!) we are as golden as our age.

 

[aja8888]

I still want SOME equities, but this sounds like a reasonable strategy for us super-seniors. Only problem is that we lose buying power to inflation until we WIN (Whip Inflation Now.) At that point (may it be soon!) we are as golden as our age.

I said I will keep some equities....like 10% now (energy MLPs, pipeline companies). They spin off good dividends/distributions also. And energy ain't goin' away anytime soon.

 

[CyclingInvestor]

No, staying at 100% equities.

 

[Koolau]

I said I will keep some equities....like 10% now (energy MLPs, pipeline companies). They spin off good dividends/distributions also. And energy ain't goin' away anytime soon.

Sounds reasonable - especially at our ages. I'd like to think I could cash in everything, put it under my mattress and STILL come out okay. (I'd never do that for lots of reasons, but it's a nice fantasy.) YMMV

 

[Chuckanut]

I still want SOME equities, but this sounds like a reasonable strategy for us super-seniors. Only problem is that we lose buying power to inflation until we WIN (Whip Inflation Now.) At that point (may it be soon!) we are as golden as our age.

+1

There's the rub. If inflation remains high, 4 or 5% after taxes won't keep up. The Rule of 72 makes it clear that current inflation rates will cut the value of each dollar in more than half in less than a decade. Even a 4% inflation will cut the value of a dollar in half in only 18 years. And that assumes no taxes paid on the interest. So for the not too senior seniors and those who are blessed with a long life that can begin to cause problems in under a decade.

 

[W2R]

"If 30 year rates hit 8%, would you consider moving from 70/30 to 60/40 stock/bond weighting to lock in that nominal interest rate for the long term."

No.

Right now I'm at 45/55. At age 74 I had been slowly moving out of equities anyway, as many do when they grow older. But that is due to my age, and has nothing to do with interest rates. Right now I'm doing absolutely nothing; during scary economic times I prefer to hang on to what I've got like a piranha.

Once equities start recovering and become a higher percentage of my portfolio (in a few years?), I will probably sell some to keep the percentage down where it is right now.

My normal spending doesn't come from my portfolio anyway; other income sources cover it (SS, mini-pension, etc). I have a wad of cash to handle erratic expenses like replacing the roof next year.

 

[jebmke]

No.

Right now I'm at 45/55. At age 74 I had been slowly moving out of equities anyway, as many do when they grow older. But that is due to my age, and has nothing to do with interest rates. Right now I'm doing absolutely nothing; during scary economic times I prefer to hang on to what I've got like a piranha.

Once equities start recovering and become a higher percentage of my portfolio (in a few years?), I will probably sell some to keep the percentage down where it is right now.

I also try to put things into perspective. I'm also around 45/55 and I noticed over the weekend I'm still above where I was at the end of 2019 so it hasn't been that big a deal compared to some historical cycles .... yet.

 

[W2R]

I also try to put things into perspective. I'm also around 45/55 and I noticed over the weekend I'm still above where I was at the end of 2019 so it hasn't been that big a deal compared to some historical cycles .... yet.

Good point! Same here.

 

[Closet_Gamer]

If I wanted to move from equity to bonds the tax hit would dwarf any advantages. My plan is to start draining bonds off the map when I start RMDs.

Good point on the tax hit.

 

[MarieIG]

Well, I did not have have a set AA.

I had a small amount in bond funds, equities, and a cash cushion in preparation for my (12/31/21) retirement.

The higher interest rate caused the ejection of the bond funds, and further has been prompting me to buy individual treasuries which I had never done before. So, it appears that my bond allocation has risen due to the increase in interest rates. Also, the plan is to slowly slowly increase equities depending on prices and market drops.

 

[Dtail]

When the 30 year gets to 12% I'll probably go all in as much as I can. I'm still well under 60, and most of the egg is in IRA & TSP so most of it will stay.

It seems to me that to get Bernie Madoff returns with govt. guarantee is a no brainer. And to lock it in for 30 years... there were some very lucky/smart/wise people in the early 80s.

I am with you. I do not have any bond funds, so for me it is MYGA/CD type yields.
If yields go this high on long term investments, it will probably outlast the high inflation rates over time.

 

[USGrant1962]

No change in AA. But will look at extending the duration/term of my fixed income component. Most of my FI is currently in short-term, ultra-short, or cash. Will probably move back to intermediate term some day.

 

[copyright1997reloaded]

So far (quickly going through the thread), I haven't seen anyone post the obvious (at least to me).

It isn't the nominal return that is important, it is the REAL -> After inflation, after taxes return.

If I can get a REAL return on bonds near the 3% mark (e.g. close to 4% minus tax consequences), I would be jumping into them like a pig in sh*t.

Why?
Assuming these are things like TIPS, it would mean I could guarantee for life (well, assuming a 30 year lifespan which is unlikely given my age) a great SWR income stream.

Now, assuming the above is not realistic - if the real return becomes positive (e.g. 5% bonds w/a 3% inflation rate), I would change my current short term allocation to be a more normal bond ladder (e.g. extend out the weighted maturity/duration).