Bond Alternatives if Inflation is here to stay?

[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/...location3_2=50

[njhowie]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by 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/...location3_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]

Quote:

Originally Posted by 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/...location3_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]

Quote:

Originally Posted by audreyh1 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]

Quote:

Originally Posted by Montecfo 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.

[RobLJ]

For a while I've had Fidelity Floating Rate fund as about 20% of my bond allocation. 5 year return has been 3.9%; it was down about 15% at the worst of the pandemic but pretty quickly snapped back. It traditionally invests a bit more conservatively than most floating funds, so somewhat lower yield but also lower volatility.

I don't think it's a bad way to invest for higher yield particularly if you think that interest rates/inflation are going up, but I wouldn't allocate too high a percentage. I'm skeptical inflation will last much longer than a year or two, but as my grandfather always said, "We will see."
YMMV.

Quote:

Originally Posted by njhowie 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.

[Lsbcal]

I have read through the answers here. Some good comments and some questionable ones too.

I concluded in August 2020 that bonds were OK as a holding but not to expect much. Maybe they keep up with inflation or are slightly in the looser category. So most of our bonds are in short term investment grade. If rates go up ST IG will not suffer too much and ST IG will be OK in a recession too although as things deteriorate (far in the future I hope) I might buy intermediate Treasuries. The breakdown:

40% short term investment grade (VFSUX)
28% TIPS (about 1% real return bought Oct 2018)
24% iBonds (2001 purchase, 3.4% fixed + inflation)
9% cash (includes RMD for this year)

The major action was to boost equities to the max level I can tolerate and that has paid off very well. I want to gradually reduce equities because we personally have never been so well off and as the business cycle matures I want to be in a more neutral position.

[Koolau]

Quote:

Originally Posted by Lsbcal I have read through the answers here. Some good comments and some questionable ones too. I concluded in August 2020 that bonds were OK as a holding but not to expect much. Maybe they keep up with inflation or are slightly in the looser category. So most of our bonds are in short term investment grade. If rates go up ST IG will not suffer too much and ST IG will be OK in a recession too although as things deteriorate (far in the future I hope) I might buy intermediate Treasuries. The breakdown: 40% short term investment grade (VFSUX) 28% TIPS (about 1% real return bought Oct 2018) 24% iBonds (2001 purchase, 3.4% fixed + inflation) 9% cash (includes RMD for this year) The major action was to boost equities to the max level I can tolerate and that has paid off very well. I want to gradually reduce equities because we personally have never been so well off and as the business cycle matures I want to be in a more neutral position.

Other than the stupid mistakes I made - back in the day (abusive tax shelters and Willie Nelson sad songs come to mind) my biggest regret is not buying $60K of I bonds a year when they first became available. I salute you!

If I could magically go back in time to 1998 and start buying I-bonds, I'd probably be something like 25% (total) I bonds at between 3 and 4% plus the inflation on that portion. (I'd have quit buying when they dropped below 3% fixed.) Since there would be no trading in or out, I'd have the other cash equivalents I still have from the era (GIF, SPDAs, etc.), PMs, which would get me to 50%. From there, I'd just add a mix of virtually every equity available, world wide. Then, I'd put my feet up and enjoy retirement - worrying only about black swans (and the boogeyman). Come to think of it, not so different than now - except I DIDN'T overweight on I-bonds. Regrets are for fools, but, every once in a while I wonder "what if?" YMMV

[Lsbcal]

Hi Koolau, you are not an investor if you don't have regrets. Let's see, there was Microsoft, Apple, Netflix, ... and on and on. Most of my regrets are in the equity space. Still we are doing well and enjoying life.

[DrRoy]

Quote:

Originally Posted by Dash man Investment grade corporate and taxable municipal bonds with 2-7 years maturity set up in a ladder is my approach.

I do the same but with about 5 more years maturity.

[GaryInCO]

Quote:

Originally Posted by audreyh1 I just don’t sweat my bond funds. Most of them I’ve held since 1999/2000 when inflation was much higher. As stocks go up I buy more. As stocks drop, which usually coincides with a drop in interest rates as well, I sell bonds to buy stocks. Rinse and repeat.

This approach, as well as the standard 80/20 or 60/40 models, rests on the assumption that equities and bonds are uncorrelated. When stocks drop, bonds rise, and vice versa.

That's usually true. It's been true for decades. BUT if inflation rears its ugly head, it may not be true any longer. Goldman Sachs says the stock/bond correlation goes POSITIVE for inflation greater than about 3-3.5%.

[audreyh1]

Yeah, they both go down for a while. That’s fine, I stay invested for the long term and rebalance as needed. Things come and go.

[Lsbcal]

Quote:

Originally Posted by audreyh1 Yeah, they both go down for a while. That’s fine, I stay invested for the long term and rebalance as needed. Things come and go.

I wonder about what the long term is for us. Any thoughts?

Are there special considerations at 60? What about 70? and 80? I suppose a lot of this has to do with desired lifestyles and factors beyond our control.

Example:

Quote:

What if a wildfire wipes out our home and at around that time we have a bad recession or depression. These are uncorrelated events that a long time ago I would have given little concern to. Now in California the fires are a real concern and I know people who chose not to rebuild. So you don't get fully compensated for the loss of home by the insurance company, at least not quickly. Then suppose in the same year a 1970's economy occurs. This was bad for both stocks and bonds. Running the VPW app shows that bonds were perhaps only slightly better performers but I'm sure it depends on your actual holding choices. I haven't even gotten into a more severe pandemic that does not find a quick medical solution. And war ... , nah not possible.

I think this is a decent argument for having a portfolio with a fair amount of stocks for growth in good times.

[Lsbcal]

Quote:

Originally Posted by GaryInCO This approach, as well as the standard 80/20 or 60/40 models, rests on the assumption that equities and bonds are uncorrelated. When stocks drop, bonds rise, and vice versa. That's usually true. It's been true for decades. BUT if inflation rears its ugly head, it may not be true any longer. Goldman Sachs says the stock/bond correlation goes POSITIVE for inflation greater than about 3-3.5%.

The VPW app that I regularly run has shown that a 60/40 portfolio and a 40/60 portfolio were not much different for the nasty retirement year range of 1966 to 1982. In 1982 bonds and stocks both started performing well.

But people currently now running the Fed and Treasury have lived through that period. Hopefully they are well aware of the consequences of sustained periods of high inflation.

[audreyh1]

Quote:

Originally Posted by Lsbcal I wonder about what the long term is for us. Any thoughts? Are there special considerations at 60? What about 70? and 80? I suppose a lot of this has to do with desired lifestyles and factors beyond our control. Example: I think this is a decent argument for having a portfolio with a fair amount of stocks for growth in good times.

Decades still.

I'm sure as we reach 70 and 80 we may well choose to dial back on the exposure to more volatile assets. Then again, maybe not.

In the meantime stocks go up and down, interest rates go up and down. I'm happy to keep rebalancing occasionally when I withdraw funds and otherwise sit on my hands.