Why do I need bonds, or do I?

[Senator]

I am beginning to see a small need for bonds. Not because I think need them, but because everyone says I need some. My Fidelity rep, my co-workers, etc. When everyone thinks you are crazy but you, you must be crazy…

I do not need bonds for income. My rentals provide ~4X what I need for income. Well over $150K per year. I am 56 now. I have a ~$1,260 monthly pension at 65, SS of $3,000+ at 70. VA Disability of $133 a month which includes free healthcare.

I do not need bonds for a reallocation strategy so I can avoid selling for income. My dividends are right at $2,000 per month currently, all reinvested. If I had to, I could take that $2K, plus my pension at 56, and live on it (no new truck or travel).

My Equities, compared to my total NW, are ~35%. Rental equity is ~60%. Cash 5%. I have paid off many rental properties and put large down payments on them, with interest rates of over 5%. Buying bonds would only make equities a smaller percentage of my total NW. My Equities are all mostly index ETFs. IVV, IVW, DVY, QQQ, IWM, etc.

At ~62, I plan on selling some real estate and putting that money in some sort of bond fund.

If I bought bonds, it would likely be a Minnesota Bond fund, like SMTFX, that gives ~2.4% tax free. My tax rate would be 25%. That is a better return than my S&P or DVY. Just no growth.

Why do I need bonds?

 

[RobbieB]

I have a half mill in CA muni's, about 50-50 bonds and funds and they give me 20 grand a year tax free.

I'm going to increase this over time as part of my AA.

 

[Which Roger]

You don't. You already have 4 times the income you need coming from the rentals, and a lot more income coming soon from pension and SS. You can live on a 0% withdrawal rate, so the size of your portfolio and your asset allocation do not matter.

 

[gayl]

I do not need bonds for a reallocation strategy so I can avoid selling for income. My dividends are right at $2,000 per month currently, all reinvested. If I had to, I could take that $2K, plus my pension at 56, and live on it (no new truck or travel ) . .... Why do I need bonds?

GREAT question!! I started putting some into CA tax free bonds bc others said I should but I never felt the need to. I live on pension, put seasonal income into Roth & other investments, and average 700 month in dividends (covers family vacation).

Waiting for others to convince me I need to keep them

 

[RobbieB]

As said before, you don't need them. You have a ton of real estate.

I just have my house that I don't pay for and I like bonds for the income and am buying more of them.

Maybe sell a rental or 2 and buy some bonds for diversity? I dunno.

 

[gayl]

As said before, you don't need them. You have a ton of real estate.

Should I have bonds in my portfolio? I have 2300 m net pension after taxes / HC + 700m dividends. Only real estate = my house that I live in. HELP!!

 

[RobbieB]

I really like my muni's, they are only about 17% of my investment bag of which the rest are equities but provide 30% of my investment income. The equities income is qualified dividends which are tax favored, but the muni's are tax free.

At age 61 me thinks I'll increase the muni's at the expense of the equities.

 

[gayl]

K. I get it. Will try to learn about them in order to get my portfolio to work harder for me

 

[Another Reader]

"I am beginning to see a small need for bonds. Not because I think need them, but because everyone says I need some. My Fidelity rep, my co-workers, etc. When everyone thinks you are crazy but you, you must be crazy…"

I don't see any need for bonds either. My father refused to buy them because he believed the risk was consistently mispriced, and I agree. So there are two opinions counter to the others.

Like you, I own a lot of real estate. My net worth is over 80 percent in real estate. I get a couple of relatively small pensions and took SS at 62 to "invest" in mortgage debt payoff and because family history favored that bet. At 62, I am paying off debt and trimming the rental portfolio to fix a couple of dumb mistakes I made early on and to streamline things. My properties are largely managed because most of the properties are out of state and I'm not handy anyway. I acknowledge a drag on results beyond the management fee and I watch the managers like a hawk.

I had a government 457 plan that I rolled over in stages. The first 60 percent went to mutual funds. The timing was good, and they have done very well. The last 40 percent stayed in the stable value fund at Prudential until I turned 60, could access my IRA's without penalty, and the Great Recession was declared over. I decided I "should have some bonds" and rolled that over to Wellington at the beginning of 2014. Dead money ever since.

Any cash I raise by selling is going to pay off mortgages, bulk up my reserves, and "invest" in FDIC insured CD's. Bond risk is too high and the premium over CD's too low to get my money. Equities seem high as well, and the very safe 6 percent interest I'm getting by paying off the highest rate mortgages is pretty attractive.

I will keep Wellington because the long history of good results outweighs my bad timing but I'm not in any hurry to buy any more debt positions. My guess is we will have another opportunity (or two) to pick up distressed assets in the next 10 years, and cash and cash-like investments will come in handy.

 

[dallas27]

I am beginning to see a small need for bonds. Not because I think need them, but because everyone says I need some. My Fidelity rep, my co-workers, etc. When everyone thinks you are crazy but you, you must be crazy…



I do not need bonds for income. My rentals provide ~4X what I need for income. Well over $150K per year. I am 56 now. I have a ~$1,260 monthly pension at 65, SS of $3,000+ at 70. VA Disability of $133 a month which includes free healthcare.



I do not need bonds for a reallocation strategy so I can avoid selling for income. My dividends are right at $2,000 per month currently, all reinvested. If I had to, I could take that $2K, plus my pension at 56, and live on it (no new truck or travel).



My Equities, compared to my total NW, are ~35%. Rental equity is ~60%. Cash 5%. I have paid off many rental properties and put large down payments on them, with interest rates of over 5%. Buying bonds would only make equities a smaller percentage of my total NW. My Equities are all mostly index ETFs. IVV, IVW, DVY, QQQ, IWM, etc.



At ~62, I plan on selling some real estate and putting that money in some sort of bond fund.



If I bought bonds, it would likely be a Minnesota Bond fund, like SMTFX, that gives ~2.4% tax free. My tax rate would be 25%. That is a better return than my S&P or DVY. Just no growth.



Why do I need bonds?

How many of these people have the means to retire 4 times over?


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[papadad111]

How many of these people have the means to retire 4 times over?


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+1

It's kinda like saying all advisors think u need 80 percent of pre retired income in retirement or that a 4% WR is defacto.

You're better NOT listening to those folks. You've done well senator by following your own path ... No sense starting to listen to the crowd now.

PS. I don't own any bonds either. Had munis years ago but dumped them in 2007.

Now Dividends + side hustle income + rental income + future SS (no future pension) + small WR are so far 1 year in, covering and hopefully will cover what we need to cover.

My FIL at 77 owned bonds only once - lost his ass on them - never bought a bond again.

Broad market dividend yield: 2.5% and taxed at 15%

10 year bond yield 1.75% and taxed at ordinary income tax rates.

You're better off holding cash especially in your case that a sweet real estate bargain comes along that U want to swoop up.

 

[Senator]

You're better off holding cash especially in your case that a sweet real estate bargain comes along that U want to swoop up.

I did just pick up a property on 12/30/15 for less than 40% of what Zillow say's it is worth. It should bring in about $6K a year on a $40K investment.

How many of these people have the means to retire 4 times over?

Actually, it will be only about 2x when I ramp up my travel. I am hoping to spend about double what I do now. A new truck is in the works.

 

[scrinch]

I decided I "should have some bonds" and rolled that over to Wellington at the beginning of 2014. Dead money ever since.

Wellington has grown about a cumulative 13% in the past two years, if you assume reinvested dividends. Not dead money at all, especially for a relatively low-risk holding.

Many people hold bonds not for income, but as an asset class that is not highly correlated with stocks and that has relatively (compared to the stock market) low risk. They hold the bonds, reinvest the dividends, and let the pile grow. Part of the low risk profile is that stocks are subordinate to bonds on the corporate funding chain. They are also usually held unleveraged, which differentiates them from real estate which often has the additional risk of leverage (mortgage).

Real estate is another asset class that is also not particularly correlated with the stock market, and depending on the owner's familiarity and comfort with the real estate market, can be a reasonable alternative to bonds (or a supplement). Putting a large percentage of one's net worth in any one investment type can expose the investor to a higher level of risk than a more diversified portfolio. There's just a greater exposure to a single element of the US economy.

Do you have to buy bonds? No. Don't feel that they can only be used for income generation though.

 

[target2019]

Senator,
I would do as you propose, and go with tax free muni when you sell off some real estate.

It is interesting that your track record is the result of individual decisions, yet there is still the pull of group wisdom. Eventually you must surrender, at least a little.

As another option, that could complement the tf, consider investing in individual utility stocks.

 

[Another Reader]

Hmmmm....Digging through Vanguard's crap records, you are probably right. The account was converted to a brokerage account in August of last year. Looks like all of the calculations might be based on that. Their cost basis shows a loss, but their calculation of that number is not obvious.

Historically, bonds have not been correlated to equities. We are in a low return market for all paper asset classes now. When interest rates rise, I think we will find the haircut will be across the board.

Properties I bought in 2009-2012 have all more than doubled in value. Rents have gone up substantially over the last 8 years. Building in liberal vacancy and collection losses and repair/improvement costs reduces the risk of being overly optimistic.

I will pass on the bonds, at least for now.

 

[Totoro]

You don't. You already have 4 times the income you need coming from the rentals, and a lot more income coming soon from pension and SS. You can live on a 0% withdrawal rate, so the size of your portfolio and your asset allocation do not matter.

+1

I'd simplify in your case. 1 index fund for equities, that's it.

Once you are tired of landlording, hire a replacement or convert to either equities or bonds, as you are planning. If you set up a bond fund, just do one (maybe two for pre-tax/after-tax things).

And get your estate planning in order, you'll need it.

 

[pb4uski]

I'm in the minority but I think the issue for you is more concentration in real estate rather than not owning bonds though that may be different versions of the same concern. I suspect that your real estate investments are likely not diversified geographically or by property type and that concentration results in risk that a local issue for that type of properties could cause you hardship... but it sounds like you have enough to weather any storm.

 

[Another Reader]

Real estate rentals should probably be viewed as a business rather than an asset class. Diversifying into other property types or geographically means starting new businesses with additional costs and risks. My "business" is operating single family rentals primarily in one market. Yes, there is business risk. Some of it can be insured. If terrorists explode a dirty bomb in Phoenix or an earthquake takes out the Bay Area properties, the income disappears.

Diversification into paper asset classes with net income and sale proceeds is an objective. Being 100 percent in the paper asset market is not for me. Those risks are too high, at least in my mind.

 

[pb4uski]

I guess that I have a different view. I view real estate as an asset class and like other asset classes it is prudent to avoid concentration. In the case of real estate... concentration is geographic and by property type... so having 60% of NW in residential rental properties in a single geographic area would be similar to having 60% of net worth in a single S&P sector in a single geographic area... for example... in small-cap tech in the western US.... and we know how that worked out!

 

[Another Reader]

Real estate has relatively consistent income attached and it does not have the volatility of equities. Unless you are in the City of Detroit, the value and income producing capacity are not likely to go to zero. Once you recognize the trend, you usually have time to get out before your losses are huge.

The risk of concentration in small cap tech companies in Silly Valley is considerably higher, as has been demonstrated more than once. To me, buying those equities is speculation, not investment.

 

[pb4uski]

I have a portfolio of residential real estate in Flint, MI for sale if anyone is interested.

 

[Another Reader]

I have a portfolio of residential real estate in Flint, MI for sale if anyone is interested.

"Once you recognize the trend, you usually have time to get out before your losses are huge. "

It's much easier to understand real estate and trends in the rental and sale markets than those businesses, pieces of which you buy in the equity market. An astute buy and hold real estate investor would have gotten out of those years ago. Another astute real estate investor has a business plan to take that portfolio off your hands at a very low price and make money with it.

 

[dallas27]

Actually, it will be only about 2x when I ramp up my travel. I am hoping to spend about double what I do now. A new truck is in the works.

Distinction w/o difference.


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[scrinch]

I'm hearing here that market timing is easier in the real estate market than in the stock market. Very good. There must be more suckers in the real estate market, given that it's easier to see when it's time to get out, but getting out requires finding a buyer who doesn't see that it's time to get out. [emoji6]

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[Lucantes]

Like some others around here the only bonds that I have are through Vanguard Wellesley and Wellington Admiral shares, I think it makes my total allocation to bonds out to be around 13% overall.