Fixed Allocation - Ballast or Yield Driven?

[DawgMan]

Reading a few threads this am I always find it interesting to hear about the fight for dismal yield in either cash instruments (i.e. money markets, high yield savings) or bonds/CDs. Personally, I have conceded my thinking that my fixed allocation will be generating any real yield to being for the most part a pure ballast for equities. I have stayed with short and intermediate bond funds which have surprisingly performed relatively well from a total return perspective. That said, I do cheat a little with a small allocation of preferreds . I realize that some folks here structure their portfolios to ideally live only off dividends and interest, but that pursuit (at least today) seems like allot of brain damage to fight for a .5% yield over a .45% yield. Not judging anyone's approach, but just curious as to how many of you look at your fixed allocation as a ballast or as a yield provider?

 

[VanWinkle]

Ballast and safe money to keep from selling equities when they are depressed. I supplement the yield with personal mortgages at 3%. I am 100% intermediate bonds/mortgages as I have a 6 year time horizon before RMDs require me to start taking from the tax deferred part of my portfolio.

VW

 

[pb4uski]

Yes.... both.

Mostly ballast, but my fixed is yielding 2.9% if I include only CDs or 3.6% if I include CDs and preferred stocks.

I go back and forth on whether the preferreds are fixed or a separate category in-between fixed and stocks. They have an attractive 5.6% yield but do have a little price volatility... particularly last March... they declined 8.9% from the end of January to the end of March but fully recovered by June... Vanguard Intermediate Term Investment Grade declined 3.8% in March but almost fully recovered in April...so I dunno.

I feel lucky that I scooped up some 3.0-3.5% 5-year CDs in 2019 that are now 40% of my portfolio and have a weighted average APR of 3.3%.

 

[pb4uski]

Ballast and safe money to keep from selling equities when they are depressed. I supplement the yield with personal mortgages at 3%. I am 100% intermediate bonds/mortgages as I have a 6 year time horizon before RMDs require me to start taking from the tax deferred part of my portfolio.

VW

How do you do personal mortgages in your tax-deferred portfolio?

 

[jollystomper]

I look our cash allocation in fixed as "ballast" as the intent is to spend it down, which regardless of what it is yielding reduces the actual interest it generates.

 

[GravitySucks]

Ballast. Slowly moving from corporates to treasuries just so I can see something go up when equities go down.
At these negative real rates I'm also going shorter durations so seeing even less yield.

 

[38Chevy454]

Fixed is intended to be for stability and ballast. If you chase yield with the fixed side, you end up in junk bond and similar categories, where the risk is equal (or more potentially) than regular equities. So advice is to avoid chasing yield as that defeats the purpose of fixed being used as ballast. If you can get some reasonable and safe fixed income return, like pb4uski did, that is good. Just be aware that fixed is never intended to keep up with equities on an income basis.

 

[OldShooter]

... how many of you look at your fixed allocation as a ballast or as a yield provider?

Neither. I look at it as SORR insurance. I consider the fact that it is also ballast to be unfortunate, as I do not consider volatility to be risk.

 

[audreyh1]

Always been ballast (rebalancing) for me. Don’t care about yield. Care about high credit quality and low correlation to equities.

 

[Dtail]

I care about both, but a little more so on the ballast side.

 

[Green Papaya]

I consider my fixed allocation as ballast against selling equities in a down market. Since I am a lazy investor, they are in either MM accounts or Total Bond Index fund.

 

[Out-to-Lunch]

Ballast. I am not old enough to remember when yield meant much!

 

[RobbieB]

All of my fixed income is CA muni bonds. I pay my credit cards with them. Well a small portion thereof. I don't care about yield. They just stay level during equity tumult, what they're supposed to do me thinks and I don't have to pay income tax.

Now is not a good time to be thinking about making money with bonds.

 

[Sunset]

It's ballast, but I want enough yield that it keeps up with inflation, otherwise I'm effectively losing money.

I don't compare my ballast return to my stock return, each stock is quite varied in it's return.

 

[audreyh1]

It's ballast, but I want enough yield that it keeps up with inflation, otherwise I'm effectively losing money.

I don't compare my ballast return to my stock return, each stock is quite varied in it's return.

I don’t insist that my fixed income keeps up with inflation. There are time periods where it won’t. Keeping up with inflation is why I have a large enough exposure to equities in the AA. It’s the equities’ job for the whole portfolio over the long term, boosting total return enough to keep up with inflation. Insisting that the high quality fixed income by itself keeps up with inflation can have you chasing yield and taking on more credit risk at the wrong times.

I focus on total return of the whole over the long term and don’t worry about component return. It’s how it all works together with rebalancing that matters. There are periods where any component may lose money inflation-adjusted.

 

[Montecfo]

So those who answer "ballast" I assume you are mostly in CDs or US Treasury securities?

My answer is "both" ballast and return (not just the yield).

But while I care about return, preferred securities and junk bonds, when I hold them, are in the equity portfolio, not the fixed income.

 

[DawgMan]

I don’t insist that my fixed income keeps up with inflation. There are time periods where it won’t. Keeping up with inflation is why I have a large enough exposure to equities in the AA. It’s the equities’ job for the whole portfolio over the long term, boosting total return enough to keep up with inflation. Insisting that the high quality fixed income by itself keeps up with inflation can have you chasing yield and taking on more credit risk at the wrong times.

I focus on total return of the whole over the long term and don’t worry about component return. It’s how it all works together with rebalancing that matters. There are periods where any component may lose money inflation-adjusted.

^This
However, I do continue to wonder how I will feel about this strategy when interest rates start on a true trajectory upwards?? I know we all have been saying this for a number of years and the Fed has signaled they will stay silent for some time, but wonder when the day comes, if laddering individual bonds/CDs will be a better strategy? But then again, who can really predict these things, right?

I will stay the course... until I don't I suppose

 

[big-papa]

That's always the dilemma. Many people think of their bond/fixed income as "ballast" in order to smooth over shorter term volatility in their portfolio. Very important for them to be able to sleep at night and there's nothing wrong with that. Others consider it another asset class for the long term and are mainly interested in yield/returns and wonder why anybody would invest in something that is guaranteed to lose money, in inflation adjusted terms?

I admit that I do both. In my "main" portfolio, I hold intermediate treasuries for volatility dampening accepting the fact that such dampening will likely result in somewhat reduced long term returns and that the bond portion of my portfolio may lose money over the long run, in inflation adjusted terms. I can live with that. In parallel, I hold Ibonds and a TIPs ladder both of which I'll tap into as an inflation adjusted income stream to supplement SS when I turn 70.

Are there other and possibly better ways to do this? No doubt. This suits me. Only change I'm considering, which may be a few years away, is to increase the duration of the bond holdings in my "main" portfolio...

 

[Time2]

A few years ago, I thought I diversified when I bought REIT preferred stocks, with 10% or 15% of my nest egg. This Covid thing really shook them. They were down 45% to 90% during March, The have come back and I'm down maybe 10% on average, but still no fun.
I'm 65 and about 80/20, so still pretty high stock ratio, which has been great, but, we have enough, the market is high and anything gained now is for the kids.
Bonds yields are so low that they just don't interest me, although I do understand the, buy bonds to not lose money if/when the stock market drops, then move the bonds back into stocks after the drop. Great strategy, IF the market does cycle in a reasonable amount of years.
There was a resent post in another thread that suggested SWAN, a 90% treasuries and 10% “in-the-money” calls (options with a strike price below the market price on the S&P 500).
It has done well, dropping less than 1% during March (Covid) yet up over 12% for the year. It made money in 2008 and only lost 3% in 2009.
My stock holdings are all VTSAX or VTI, except for the 5 REITs.
Any feedback about SWAN, positive or negative.

 

[Lsbcal]

Neither. I look at it as SORR insurance. I consider the fact that it is also ballast to be unfortunate, as I do not consider volatility to be risk.

Do you have other income sources besides your stock/bond portfolio? Like pensions? Just guessing. If the market went down +50%, are you not concerned that you might have your retirement permanently affected?

 

[audreyh1]

^This
However, I do continue to wonder how I will feel about this strategy when interest rates start on a true trajectory upwards?? I know we all have been saying this for a number of years and the Fed has signaled they will stay silent for some time, but wonder when the day comes, if laddering individual bonds/CDs will be a better strategy? But then again, who can really predict these things, right?

I will stay the course... until I don't I suppose

While bonds were appreciating, like this year, I buy less, or sell some to buy equities. When bonds are dropping in value I buy more from equities. For me rebalancing really takes care of gains and losses, and I don’t worry about it beyond that.

It’s likely that when bonds depreciate, the economy is charging ahead a because the economy is doing well, and bonds appreciating can happen because there is concern about a struggling economy and equities do poorly. Of course that doesn’t cover the situation we are in now where bonds have appreciated considerably yet equities are flying because the Fed has essentially backstopped everything.

We went through a big interest rate increase 2017-2019. Overall my bond funds did very well. Any slumping periods were brief. This seems to be a common pattern and folks seem to be surprised that bonds don’t do as poorly as expected.

I’ll take advantage of good CD deals with new money on occasion, but that’s usually part of my cash allocation.

 

[OldShooter]

Do you have other income sources besides your stock/bond portfolio? Like pensions? Just guessing.

Well, $800/month from a stint at a megacorp. Other than that, just SS. About 75% of our gross income is drawn from our IRAs.

If the market went down +50%, are you not concerned that you might have your retirement permanently affected?

I really don't worry about that. The market goes down all the time and has always recovered. Hence my view that enough "ballast" to protect against SORR is all I need. We probably have 6-8 years of ballast as we sit right now. Probably a little too much.

And, truthfully, if the market went down 50% and stayed permanently down 50% for the rest of our lives, the impact would be on our estate, not on our retirement. We have been very lucky in life. I suppose we might cut back spending a bit, principally on international travel and on charities, but that's about it. But again, there's nothing in the (post-1929) historical record that would make me worry much about such a scenario. With inductive reasoning Taleb's turkey always lurks, but inductive reasoning is all we have for planning.

 

[Lsbcal]

Oldshooter, I see the logic of your thoughts and they seem sound. Each investor must first know themselves and what works for one may not work for another. We too could absorb a 50% hit and still continue a nice lifestyle.

Knowing how I felt in the depths of the 2009 market, I'd be really really worried should we get that again. I am probably too emotional to be a stellar investor but I do alright. We had a minor replay of panic driven markets in March. You don't know where the bottom is at such a point and all you have is the past history and the hope that past repeats. History is somewhat of a guide but it is not a proof. Hence I invest differently then some others here.

 

[OldShooter]

... Knowing how I felt in the depths of the 2009 market, I'd be really really worried should we get that again. ...

Well if its any consolation we've been riding these roller coasters since 1987, never selling, and each ride makes the next one easier. So I'd expect that will be your experience as well. IOW I don't think you need to worry.

 

[Lsbcal]

Well if its any consolation we've been riding these roller coasters since 1987, never selling, and each ride makes the next one easier. So I'd expect that will be your experience as well. IOW I don't think you need to worry.

Oh I've been on the roller coaster well before 1987. Come to think of it, this could be a good Twilight Zone episode.

For me it doesn't get any easier but my methods are better now.