Bond portion of asset allocation

[Brat]

Several of us have been mulling this issue. It hardly seems worth the trouble, and risk, to enter the mid-long market when we look at the return. Short term fixed income (5 or less years), IMHO, are there for security so need to be CDs or Treasury funds.

I am wondering what others think of substituting DLN, DTD (dividend ETFs) or a utility ETF like XLU..

Comments, please, guys & gals

 

[FIREd]

Some dividend-paying stocks are interest rate-sensitive too. So, if you fear rising interest rates, it may not be a good time to add a lot of money to utilities, REITs, or MLPs.

 

[Brat]

My thought is that diversification would cushion that. Utilities would probably be impacted more than industrials.

 

[pb4uski]

I had to take a had look at this a few months ago when I rolled over my 401k to my IRA since my 401k was a large part of my bond allocation. I wasn't keen on long bonds and the amount of government bonds in Vanguard Total Bond made it less appealing to me.

I ultimately decided to go 74% Intermediate term Investment Grade, 16% High Yield Corporate Fund and 10% GNMA Fund. At the time, that mix had a weighted average yield of 3.75% and a weighted average duration of 4.8 compared to the Total Bond which at the time has a duration of 5.1 but a yield of only 2.17%. I decided that I was willing to accept the additional credit risk for the additional yield and that the slightly shorter duration was a bonus.

I also looked at the Guggenheim Bullet Share series (both corporate and high yield) and they were tempting but I wasn't quite ready to jump into those.

While in theory, an increase in interest rates would accompany a revived economy so any interest rate loss on my 40% bond allocation should be made up by my 60% equity allocation, there is some risk that interest rates could climb and equities would not increase.

 

[MichaelB]

Looking for higher yields means more risk, but I am also shifting some of the fixed income allocation to preferred equities. All of the higher yielding options have been increasing in price, so it is challenging, but when prices decline I buy. My target is somewhere between 5%-10% of the portfolio. We're at 5 and will increase when the price is right.

One interesting alternative is floating rate preferreds. Not many options to choose but most trade below par, which reduces call risk, and give effective yields that are competitive with other preferreds, and also offer better inflation risk because of the floating rate.

 

[target2019]

This is personal experience, not advice. About 18 months ago I took a sizable chunk of my total bond mkt fund and purchased high yield fund. I believe the move was 5% of our total portfolio.

F-I-L has had something like 10% of his port in VZ and T. The dividend payout has been very good the last 7 years.

 

[Brat]

Using Fidelity's portfolio tools isn't easy!!! Whatever happened to the 'what if?" tool I used to find. After entering our numbers in a spreadsheet I found that our % in stocks is about what I expected but in that group mid-cap holdings are lower than I expected.

I think I will buy enough FSBIX to top off bucket 1, some DVY (mid-cap blend dividend payers) for Bucket 2 (intermediate term investment) with my excess MM holdings.

Now to play with my Buckets of Money spreadsheet.

 

[LOL!]

I have been pleasantly surprised by the performance of the Vanguard short-term corporate bond index fund (ticker: VCSH). I do not worry if this short-term bond fund drops in value. If I needed it to replace cash, then I would have a 10% higher allocation to allow for a 10% drop. That is, if it dropped 10%, I would still have the cash I needed. For example instead of having $500,000 in this fund, I would have $550,000 in this fund.

YTD return is 3.5% which is very nice for a short-term bond fund. Compare that to Vanguard Total Bond Market: 3.6% or the PIMCO Total Return of 7.3% YTD (it is reverting-to-the-mean after its debacle in 2011).

 

[prototype]

I have been pleasantly surprised by the performance of the Vanguard short-term corporate bond index fund (ticker: VCSH). I do not worry if this short-term bond fund drops in value. If I needed it to replace cash, then I would have a 10% higher allocation to allow for a 10% drop. That is, if it dropped 10%, I would still have the cash I needed. For example instead of having $500,000 in this fund, I would have $550,000 in this fund.

YTD return is 3.5% which is very nice for a short-term bond fund. Compare that to Vanguard Total Bond Market: 3.6% or the PIMCO Total Return of 7.3% YTD (it is reverting-to-the-mean after its debacle in 2011).

LOL! I am not very knowledgeable of when it comes to the financial world, But how does a 10% drop in the share value of a fund turn a $500K investment into $550K? I could very well be misunderstanding your post.

 

[LOL!]

I can see how you can read my post that way.

If I started with $500,000 in a fund and it dropped by 10%, then I would only have $450,000 which would not be enough to cover my cash needs (I might need to pay a $500,000 ransom tomorrow). But if instead ...
If I have $550,000 in a fund and it dropped, then it would be at $500,000, so the ransom payment would be no problem.