No Bonds – AA rebalancing quandary.

[TOOLMAN]

I am rebalancing my AA which today is; 70% stocks (70%US / 30% International),
2% I-Bonds, & 28% cash. Conventional wisdom says I am missing bonds. But, interest rates seem to have no where to go but up, which I expect that will drive bond fund NAV down. VG’S BSV is yielding only 2%, and has NAV down side risk. Other than a SPIA, I which I am to young for, I have not found a bond with low risk and good yields.

It seems to me that, the Ally’s raise your rate 2 yr CD, at 1.1% is a better space now for low risk money while I wait for the short end of the bond yields to come closer to the S&P returns (S&P has a P/E of 13, or 8% earning to market cap, & a 2% yield).

I reason, if interest rates have no where to go but up, the AA mix of stocks and bonds today does not make uncorrelated asset class mix, as bonds don’t have the room to move both ways.

I have a basket of MLP stocks (now have; RNF, EPD,PAA,ETP, EEP, OKS, KMP,WPZ) which I consider as bond like substitute, and will park most of the cash at Ally. Does this seem reasonable?

 

[Animorph]

I don't see why the cash couldn't work just fine as a short-term substitute for bonds. Longer term I would think the return on bonds would be better than cash. I've got even more stocks in my AA.

 

[LOL!]

I don't think any asset class in "uncorrelated" with others. At least any asset class that has exhibited gains in the past. There are degrees of correlation.

 

[samclem]

Does this seem reasonable?

Yes, it does to me. Not forever, but until the Fed lets interest rates go.

But crunch the numbers on the 4 year Ally Raise-Your-Rate CD compared to the 2 year. It pays a bit more in interest (1.34% vs 1.11%), you can bump the rate up 2 times over the four year term (instead of once for the 2 year CD), and the early termination fee is still just 60 days.
1) If rates happen to be even lower 24 months from now, you'll be happy to have 2 more years to run.
2) With the low termination fee you'll still be money ahead if you get out of the 4 year CD at 2 years.

The one potential "gotcha" with these CDs: You can raise your rate if Ally offers a higher rate on the same product. Now, Ally could fool us all: Tons of folks pile into these products and Ally decides not to raise the rates very much when rates go up. Instead, they offer new 25 Month and 49 Month Raise Your Rate CDs at more competitive rates to continue to attract new money, but all of us already in the old products don't get to raise our rates. I'd be more concerned about this if the termination fee were more than 60 days--the risk seems worth it at this point.

 

[heeyy_joe]

I would put a good portion into exchange traded TIPS. Symbol = TIP.