Bond Alternatives if Inflation is here to stay?

[pb4uski]

Its not insignificant in terms of the angst if it went poof down the toilet, but in terms of structuring a portfolio even if you invested $20k a year for 10 years that would only be $200k. Something to consider but I'll admit considering it but at the same time wondering if it is worth the effort not to speak of two additional his and her accounts.

 

[38Chevy454]

Wow. Some of the comments here. I know plenty of decamillionaires and can't think of one who would say that 10k is insignificant.

Context. The comments are discussing the alternatives for the $10K investment. Not whether the $10K itself is significant or not.

 

[Cayman]

I appreciate NJHowie's insight, have for years.

I'm not heavily into bonds (8%)

The potential fire sale issue with bond funds is troublesome imo.

 

[foxfirev5]

Context. The comments are discussing the alternatives for the $10K investment. Not whether the $10K itself is significant or not.

And those alternatives are ?

 

[foxfirev5]

Its not insignificant in terms of the angst if it went poof doen the toilet, but in terms of structuring a portfolio even if you invested $20k a year for 10 years that would only be $200k. Something to consider but I'll admit considering it but at the same time wondering if it is worth the effort not to speak of two additional his and her accounts.

Only 200k. I'm absolutely blown away by the big shots we have here. I guess it's time to find another forum.

Furthermore, DM worked for a stockbroker for 50 + years, who was worth far more than anyone here and had a constant mantra of watch the pennies and the dollars will follow.

On top of that - If you have the energy to spend considerable time posting here yet don't have enough incentive to maximize your $ ...

 

[audreyh1]

On top of that - If you have the energy to spend considerable time posting here yet don't have enough energy to maximize your $ ...

Describes me quite well.

Trade-offs and priorities. A lot of financial things are way too much trouble, so I like to keep it simple.

 

[MichaelB]

Let’s all remember we’re among friends, so let’s please keep a civil tone.

 

[jazz4cash]

Wow. Some of the comments here. I know plenty of decamillionaires and can't think of one who would say that 10k is insignificant.

That’s what I was thinking also. I automatically double the limit for a couple so 20k per year just to hedge inflation is significant to many households. Maybe it’s a small %age of folks with smaller nest eggs but those are the ones that really need the info.

 

[WestUniversity]

I’m Temporary market panics are simply a rebalancing opportunity.

+1

 

[ERD50]

Only 200k. I'm absolutely blown away by the big shots we have here. I guess it's time to find another forum.

Furthermore, DM worked for a stockbroker for 50 + years, who was worth far more than anyone here and had a constant mantra of watch the pennies and the dollars will follow.

On top of that - If you have the energy to spend considerable time posting here yet don't have enough incentive to maximize your $ ...

I think what you are missing is that this is not guaranteed to maximize your $ over the time it would take to accumulate significant amounts. iBonds might under-perform other fixed income alternatives in the future.

I'm guessing those same people, if they were able to buy $200K of something that outperformed their fixed income, with no future risk (IOW, they could get out w/o a penalty if something better came along), would jump at it.

-ERD50

 

[GenXguy]

Only 200k. I'm absolutely blown away by the big shots we have here. I guess it's time to find another forum.

Furthermore, DM worked for a stockbroker for 50 + years, who was worth far more than anyone here and had a constant mantra of watch the pennies and the dollars will follow.

On top of that - If you have the energy to spend considerable time posting here yet don't have enough incentive to maximize your $ ...

Well said. Except for finding another forum. Some things just need to be ignored.

 

[Closet_Gamer]

I do think this is a very important topic. Inflation, fed, duration, AA, absolute return, risk...its all in here.

To me, the root question is whether the 30 year bull market in bonds will end. Cause of death could be any number of things but if it does die (particularly if it dies quickly), there should be big ramifications that are potentially long lasting.

A few things always go through my head...

1) The Fed has been price-fixing the most important financial instruments in the world for over a decade.

The price of every other asset in the world eventually finds its way back to the relative risk/reward offered by the 10 year Treasury. Price fixing that asset can't end without a big disruption.

2) Markets are broadly efficient so risk and reward are related. Always.

As we look for higher yields, we have to acknowledge there is higher risk. REITs are a good example. I've always held a REIT fund (SCHH) for diversificaiton & yield. Due to covid, its only yielding 2.8% and has only recently recovered its Jan 1 2018 price level. Ouch. Yes, I bought during those down period consistent with my AA. But still. Ouch.

3) At what point are bonds -- funds or individual -- just the greater fool theory?

If real returns on neutral or negative, then the ONLY way to actually make money on them is to sell them to someone who will buy for an even greater loss. Hmmm.

4) For all that, there aren't really other good options.

Door 1: Hold cash and hope to time the bond implosion. No thanks.

Door 2: Go to 100% equities. Rising bond yields will hit equities even harder.

Door 3: Hold alternatives like REITs and Preferreds. Yes, though risk point should be noted. Ultimately the market prices yield for these assets. Interest will drive those down as well.

Door 4: Bet big on inflation through other assets. Commodities, Gold, currencies, crypto...ugh. I'm not smart enough to go there.


So...I retreat to an AA and do some yield-seeking with Preferreds (PFFD) and taking duration risk on bonds. Hoping that the cumulative returns eventually out-run inflation + the future interest rate correction.

 

[audreyh1]

Good big picture view Closet_Gamer!

Even if one chooses to go mostly shorter on bond duration waiting for the big rise, it’s not clear that will win, because if it takes long enough, for example, the accumulated higher yields on intermediate may overcome the higher drop compared to short. Can’t know this in advance.

 

[Closet_Gamer]

Good big picture view Closet_Gamer!

Even if one chooses to go mostly shorter on bond duration waiting for the big rise, it’s not clear that will win, because if it takes long enough, for example, the accumulated higher yields on intermediate may overcome the higher drop compared to short. Can’t know this in advance.

Thank you.

Yes, the duration thing is a muddle.

In the fixed income portion of my AA, I'm currently invested:

Taxable:
SWAGX (duration 6.3, 2.25%)
PFFD (yield 5.1%)

Tax Free:
MLN (duration 8.4, yield 2.6%)
VTEB (duration 5.3, yield 1.9%)

All trying to find the balance of risk/return +/- tax efficiency and account placement.

 

[audreyh1]

I always have a bit of a duration ladder in my fixed income. Some cash equivalents, some short-term bond funds and the remainder in intermediate bond funds. This facilitates drawing on fixed income during equity downdrafts as well as rebalancing against equities. Since I can never predict relative performance of duration in any given year I pretty much stick with this and rebalance between the fixed income asset classes as needed. I mostly stick with high credit quality bond index funds.

 

[Markola]

I’m happy with my total bond index fund. Up 7.7% in 2020! Just because it’s down 2.6% so far this year in only May, I’m not willing to chuck my entire investing philosophy out the window.

A third of our bond portfolio is in an international bond index for diversification.

 

[friar1610]

I posted something similar on a BH thread:

My wife and I have the overwhelming majority of our IRAs in VG Total Bond Fund. We are past RMD age. As I see it, these are our options in the current bond environment. (Note: fairly conservative with a current 53/42/5 AA. 55 equity is probably our upper limit.)

1. Suck it up and stay the course.
2. Make our bond allocation a bit more aggressive by increasing corporates beyond what TBF already has.
3. Exchange TBF for one of the VG LS/TR funds with 20%-30% equities. This would push our equity allocation modestly above 55% and would add some international bonds which we really don’t see the need to.)

This year’s RMDs (don’t need them for living expenses) will probably go to I-Bonds.

Don’t want preferreds or REITs at this stage of our investing lives.

Any other suggestions not already offered?

 

[pb4uski]

Has anyone considered floating-rate bonds/funds/ETFs?

Or a bond barbell?

I haven't seriously considered either but am wondering if others have.

Just for fun, I compared Total Bond with a 50/50 blend of Vanguard Short and Long-Term Bond funds to simulate a barbell.... the blend seemed to consistently outperform Total Bond for most 3 and 5 year rolling periods... ~1% better return on average.

https://www.portfoliovisualizer.com...location2_2=50&symbol3=VBIRX&allocation3_2=50

 

[njhowie]

Has anyone considered floating-rate bonds/funds/ETFs?

Or a bond barbell?

I haven't seriously considered either but am wondering if others have.

My view on the underlying floating rate instruments I've analyzed (bonds and preferreds) is that there is generally no benefit to the purchaser - all benefit is to the issuer.

You may get a reasonable return for the risk when issued, but the moment interest rates change all benefit flows to the issuer. If rates go higher, issuer simply exercises call feature to redeem if the rate at the time is above their then-current cost of capital from other sources. On the flip side, should interest rates go lower, issuer again reaps the benefit as they pay less - purchaser gets less.

All of the floating rate instruments I've seen have call features built in so the issuer can redeem when it is beneficial/advantageous to them.

I haven't looked into longer term performance of floating rate funds that are comprised of the underlying instruments, but I'd have to believe that it is efficient and there aren't outsized gains to be had. I suppose it would be possible for a closed end fund/ETF to outperform simply on technical parameters. If looking to invest in floating rate instruments, that would be the way I'd do it - through a closed end fund or ETF at a point where it was relatively low.

 

[audreyh1]

Has anyone considered floating-rate bonds/funds/ETFs?

Or a bond barbell?

I haven't seriously considered either but am wondering if others have.

Just for fun, I compared Total Bond with a 50/50 blend of Vanguard Short and Long-Term Bond funds to simulate a barbell.... the blend seemed to consistently outperform Total Bond for most 3 and 5 year rolling periods... ~1% better return on average.

https://www.portfoliovisualizer.com...location2_2=50&symbol3=VBIRX&allocation3_2=50

I avoid floating rate bond funds. They are holding very low credit quality bonds.

I’ve also been burned a few times. They get you when you least expect it. It’s sudden and vicious, and once down can be prolonged.

 

[Chuckanut]

Has anyone considered floating-rate bonds/funds/ETFs?

Or a bond barbell?

I haven't seriously considered either but am wondering if others have.

Just for fun, I compared Total Bond with a 50/50 blend of Vanguard Short and Long-Term Bond funds to simulate a barbell.... the blend seemed to consistently outperform Total Bond for most 3 and 5 year rolling periods... ~1% better return on average.

https://www.portfoliovisualizer.com...location2_2=50&symbol3=VBIRX&allocation3_2=50

Geeze, PB. You just gave me another thing to think about when I am trying to simplify my life.

 

[Koolau]

Where is unclmick when we need him. Shall I say it? Psssst. Wellesley. IOW let the folks who know how to deal with bonds deal with them for you if you are in doubt. Yes, equities are in there too. Yes, you pay for mgmt. But I also pay to have my toilet switched out and that's much simpler.

Not for all (maybe not for unclmick anymore) but got DW into psssst a long time ago and she's hard to please and even less knowledgable than I about bond (heck) investing.

Other than that, I still rely on my other "old" stuff: Old SPDAs (yielding a constant 4.5% - true that inflation may overtake that.) Old insurance with a more or less similar investment vehicle (4.5% "guaranteed.") Old I bonds I've faithfully held since they used to pay interest PLUS inflation ca. early 2000s. Old GIF - yeah, probably a guaranteed loser right now, but will adjust upward (lagging) inflation but also beating inflation for a while if we ever WIN (you oldsters know what that means). PMs 'cause they have worked in the past though all the ugly things people say about them are also true - so just don't over-do it if you do it - oh, and do it (like I did) back when you didn't need to do it, heh, heh.

Be old. One of the few advantages of being old is inflation is less scary unless you are truly on the proverbial "fixed income." My modest pension is "fixed" but SS is not. MC isn't fixed either, though it's like Prego - you don't know why it tastes the way it does, but it's in there. At 74, only true run away inflation will affect me since I have more than "enough" now.

IOW I'm still dancing with the one I brung.

I've wondered if younger folk have considered borrowing a bunch of money (maybe a refi with fixed rate they will pay back with inflated dollars.) They can add to current mix of investments with the cash or buy some lumber or TP, etc. or maybe some TIPS or commodities, etc. etc.

I've always feared going back to the 70s/80s inflation, but now fear only the Zim/Argentine/Weimar existential inflation we all fear but assume won't happen here - unless it's different this time.

IOW it's all a big YMMV crapshoot so down on your knees and "baby needs a pair of shoes."

 

[Montecfo]

I avoid floating rate bond funds. They are holding very low credit quality bonds.

I’ve also been burned a few times. They get you when you least expect it. It’s sudden and vicious, and once down can be prolonged.

I own a floating rate bank loan closed end fund that I have been buying this year. This appears to be the right time based on where we are in economic cycle and with rates rising. Buy Credit, Sell Duration.

It has performed well but my plan is to own in this year and reassess.

 

[Koolau]

I own a floating rate bank loan closed end fund that I have been buying this year. This appears to be the right time based on where we are in economic cycle and with rates rising. Buy Credit, Sell Duration.

It has performed well but my plan is to own in this year and reassess.

Not surprisingly, I'm not aware of this nor how it works. I understand the concept of closed end (main feature, IIRC) is some - or maybe even a fair amount of leverage. Doesn't sound like a "buy and hold." Since YMMV, can you give us a bit more detail? Or, I could just look it up. Naaaahhhh!

 

[BeachOrCity]

Great thread...

I am of the firm belief that REAL interest rates in the US will be negative for years going forward. That and money printing will lead to a structural decline of the dollar, which will feed inflation....rinse repeat. Nothing is certain, but that is my theory.

I keep a lot of Cash / Bonds (I lump them together) as ballast like many with my allocation. While because of timing, what I have are all currently beating inflation (not after taxes though), I know that won't continue.

Still trying to figure out alternatives, and can't find one that has the appropriate low risk ballast attributes, yet doesn't lose value to negative rates after inflation.

I view it as a war on savers, by the Fed. The only solution is to buy risk assets.

Thoughts?

P.S. One poster mentioned mortgage reits. My view on that is the leverage makes them much more risky than they 1st appear to be.