Stable Value vs Bonds

[BlueberryPie]

I have access to a Stable Value Fund in my 401(k) that guarantees a 2.25% return for the first quarter of 2021, then change quarterly.

Currently, bonds are hovering around 1% and could go lower with inflation threat, but with interest rates so low, there is little room for them to fall even lower.

So does it make sense for me to move my bond allocation into the Stable Value fund until the Bond return exceeds whatever the current Stable Value return is at the time?

If yes, since my portfolio is mostly split between a 401k and an IRA, should I "transfer" all the fixed income my moving most of the 401k into stable value and most of the IRA bonds into stocks to maintain my Asset Allocation (65/35)

 

[pb4uski]

Yes... great plan... I wish I had access to a stable value fund... not to mention one paying 2.25%! But if I did what you propose is exactly what I would do.

 

[Ready]

If I could get a guaranteed 2.25% right now I would definitely choose that over bond funds, especially for a tax deferred account.

 

[tulak]

I did this a few months ago for an SV fund that yields 2%.

 

[tdv2]

My belief is that it's impossible to time or predict anything in the financial markets and that includes interest rates. If I had listened to talking heads in the financial media back in 2018 when they said rates were going to 5%, it would have been a huge mistake to leave my bond funds. One thing you need to remember, the world we live in is highly uncertain. I choose to diversify my holdings and that for me includes holding a portion in bonds. I re-balance with rules and take what the market gives me...good and bad. Sure I could take a wild guess on the direction of anything in the markets...not for me.

 

[jazz4cash]

Yes... great plan... I wish I had access to a stable value fund... not to mention one paying 2.25%! But if I did what you propose is exactly what I would do.

I agree with this also and did the same many yrs ago until some promo CDs beat the SVF. I never had much in bonds anyway. Taking it one step further I used my 401k for foreign allocation and put almost nothing in DWs plan because her global fund options were lousy.

 

[Big_Hitter]

When I rebalanced my k plan last year, I moved 40% into the stable value fund (same as yours, around 2%) and the remainder in various equity funds

 

[sengsational]

My entire bond allocation has been in the SVF for many years. If I didn't have access to it, I'd buy individual bonds.

 

[Big_Hitter]

My entire bond allocation has been in the SVF for many years. If I didn't have access to it, I'd buy individual bonds.

yep, I have a managed, muni bond portfolio as well

 

[GalaxyBoy]

We’ve been heavily invested in bond index funds and I have also been thinking of moving much of our bond allocation to the stable value fund in DW’s 457 plan. Last year the total bond index fund increased in value by more than 7.5% but I can’t see that continuing. The SVF is currently yielding 1.87% but has an expense ratio of 0.24% for a net of 1.63%. Part of me says stay the course, but another part says the purpose of this portion of our asset allocation is preservation. Decisions, decisions.

 

[Dtail]

I currently get a net 3.58% net yield on my Stable Value. I wish I knew more about it before retirement, as would have moved all my tIRA to my 401k which also has low cost Vanguard index funds.
So yes good plan.

 

[BlueberryPie]

OK, so I asked someone who if a financial advisor (CFA) what they thought about it, and he thought it was not a good idea, because to him it's market timing.

Bond Funds generate returns in 2 primary ways - price appreciation of the bonds and their yields/interest payments, which have an inverse relationship - as interest rates go down, prices go up, and vice-versa. Stable Value funds are more or less designed to help you keep up with inflation, but not necessarily add growth beyond that.

For example, VBILX fund has a 19-year average annual return of 5.09%, which is more compelling than locking in a lower yield. This is where timing can be difficult (which is why you shouldn't try to time) - if you use the Stable Value fund now and wait until rates change to move back to a bond fund - you will likely have missed out on the price movements in the Bond Funds, making it harder to determine when the next entry point would be.

The first paragraph is how I was thinking of bond too, not as much an income stream but as a less volatile investment that is somewhat negatively correlated with stocks.

Thoughts? Counter arguments?

 

[corn18]

OK, so I asked someone who if a financial advisor (CFA) what they thought about it, and he thought it was not a good idea, because to him it's market timing.



The first paragraph is how I was thinking of bond too, not as much an income stream but as a less volatile investment that is somewhat negatively correlated with stocks.

Thoughts? Counter arguments?

Maybe he/she should look back farther than the 20 year bull run for bonds. Ask him to show you the data from 1941-1971 where bonds average -1.4%. For 30 years.

 

[Dtail]

OK, so I asked someone who if a financial advisor (CFA) what they thought about it, and he thought it was not a good idea, because to him it's market timing.



The first paragraph is how I was thinking of bond too, not as much an income stream but as a less volatile investment that is somewhat negatively correlated with stocks.

Thoughts? Counter arguments?

Don't necessarily agree with the first paragraph, as my current yield and past yields on my Stable Value fund has always been more than the inflation rate.

 

[pb4uski]

OK, so I asked someone who if a financial advisor (CFA) what they thought about it, and he thought it was not a good idea, because to him it's market timing.

Bond Funds generate returns in 2 primary ways - price appreciation of the bonds and their yields/interest payments, which have an inverse relationship - as interest rates go down, prices go up, and vice-versa. Stable Value funds are more or less designed to help you keep up with inflation, but not necessarily add growth beyond that.

For example, VBILX fund has a 19-year average annual return of 5.09%, which is more compelling than locking in a lower yield. This is where timing can be difficult (which is why you shouldn't try to time) - if you use the Stable Value fund now and wait until rates change to move back to a bond fund - you will likely have missed out on the price movements in the Bond Funds, making it harder to determine when the next entry point would be.

The first paragraph is how I was thinking of bond too, not as much an income stream but as a less volatile investment that is somewhat negatively correlated with stocks.

Thoughts? Counter arguments?

Thoughts? Initial thought is that the CFA is a not thinking it through.

The principal reason that bond returns have been so good over the last 20 years is because interest rates have declined, which makes existing bonds more valuable... as you know, when interest rates go down the value of bonds go up. However, with interest rates so low there isn't much room for them to go lower. Some would argue that interest rate could go negative like they have in Europe, but the Fed seems dead set against that. IMO there is a higher risk that as the economy recovers that interest rates drift up... in which case the value of bonds will decline but the value of your stable value will be stable.

It's not anywher near market timing because as I understand your plan the amount that you hold in equities would be unchanged, it is just where those equities are located that would be different.

 

[MarieIG]

At this point in time, if I had access to a SVF - I would take it over a bond fund.

Unfortunately, my 401k was too expensive and unwieldly and I had to transfer out due to the fees.

 

[BlueberryPie]

It's not anywher near market timing because as I understand your plan the amount that you hold in equities would be unchanged, it is just where those equities are located that would be different.

I literally moved the 40% of my 401(k) that was in intermediate term bonds (VBILX) into the SVF. yes, the deed is done, at least in the 401(k)
Rest of the 401(k) unchanged (60% equities from misc cap-centric and international funds because my 401(k) has nothing like a VTI or other whole market fund)

My 401(k) is only 1/6 of my overall portfolio though. What I am debating is literally trading all stock fund in the 401(k) for Stable Value (1/6 of the portfolio) and selling some of the bonds my IRA to buy the equivalent amount in stock funds (I have access to VTI in my IRA). Basically exact same portfolio and AA just "moved" into different accounts (both tax deferred).

I still contribute the 401(k) so the SVF would grow, and I also invest in a taxable account where I would buy VTI/VXUS (global stock market) to offset the additional money in the Stable Value and keep the AA constant, but 401(k) entirely in the SVF.

Some bonds would remain in the IRA to make up the rest of 40% fixed income of the total portfolio (I don't want it to grow past that)

 

[BlueberryPie]

To make sure I understand it, let me try out things another way:

Bond funds can be looked at as fixed income (yield) or as speculative assets (something you invest for in for its future market value)

If you look at the fixed income aspect, SVF is almost twice the yield.

If you look at it as a speculative asset:

- the only reason bond funds have been offering around 5% long term returns is because interest used to be higher, but also because the general decline in interest rates since the 89s inflates the value of bond funds.
- unless you think interest rates will go much lower (we are close to the bottom), this is a case of past history definitely not being an indication of the future, and we have a pretty good crystal ball for the future of bond, at least for a horizon of several years.
- if the market continues going up or interest rates increase, the value of bond funds is further depressed. This makes buying them as a speculative instrument attractive, eventually rates will go down again, and your very cheaply bought shares will become more valuable.

I think this is NOT how Modern Portfolio Theory thinks about bonds, but how the CFA thinks about it?

In am academic exercise, I can understand how bond speculation might work. But I'm looking at my own case:

I want to retire in 10 years at 62. I will need to bridge the income gap to SS for 8 years minimum. The way I look at it, that's what bonds in my portfolio are for. I do want supplemental income when I get SS, but it will be mostly discretionary income, so less stress about market swings.

I think if we look at the speculative aspect of bonds, I would need to wish that rates go up in the next 8-10 years so I buy cheap bond funds, then hope the trend reverses in 10 years so that the shares go up and provide more income. That's a lot to ask for, but if things don't shape up that way, I am better off with a stable value, at least until bond yield surpasses SVF?

 

[rkser]

Any Stable Value Fund Substitutes for an IRA ??

Nearing retirement in a few months with a truck load of Total Bond Index (VBTLX) & waking up now to rising interest rate scenario.

Our Fixed income Funds are -
Total Bond Index VBTLX - 41% - IRA
Tax Ex. Intermediate Term VWIUC - 37% - Taxable Account
International Bond Index VTABX - 22% - IRA

- Overall Asset Allocation being 60/40

I am seeking advice/opinions for any of the following kind of Funds to exchange some of the VBTLX with -

1) Stable Value Fund
2) Short Term Bond Fund
3) Anything Else ??

Thankyou in advance

 

[Dtail]

Nearing retirement in a few months with a truck load of Total Bond Index (VBTLX) & waking up now to rising interest rate scenario.

Our Fixed income Funds are -
Total Bond Index VBTLX - 41% - IRA
Tax Ex. Intermediate Term VWIUC - 37% - Taxable Account
International Bond Index VTABX - 22% - IRA

- Overall Asset Allocation being 60/40

I am seeking advice/opinions for any of the following kind of Funds to exchange some of the VBTLX with -

1) Stable Value Fund
2) Short Term Bond Fund
3) Anything Else ??

Thankyou in advance

What is your current net yield in the SV fund?

 

[rkser]

What is your current net yield in the SV fund?

I am sorry if I was not clear in my post -

I am seeking a Stable Value LIKE Fund to buy in IRA in exchange for some of my Bond Index

At present I do not have a Stable Value Fund nor do I have access to a 401k, all my tax deferred funds are in IRAs.

 

[GenXguy]

I currently get a net 3.58% net yield on my Stable Value. I wish I knew more about it before retirement, as would have moved all my tIRA to my 401k which also has low cost Vanguard index funds.
So yes good plan.

Nice. Mine is 3% - no fees/admin charges on it. It's been 3% for years. I really bumped up my contributions to it this year. Not retired, yet.

 

[Dtail]

Nice. Mine is 3% - no fees/admin charges on it. It's been 3% for years. I really bumped up my contributions to it this year. Not retired, yet.

Good rate. The key is to keep your 401k after retirement, so you can continue to use the SV fund vs. transferring all balances to an IRA.

 

[Bogart99]

If you don't have access to a SVF and don't want to buy bonds then would buying a Utilities ETF be a reasonable replacement?

 

[audreyh1]

No. Equities are not a reasonable replacement for stable value fund or cash equivalent.