Bonds: for peace of mind or rebalancing

[I am He]

Curious who actually uses the safe side of your portfolio to rebalance (such as last March or in '08)?

I know the research says to do it (feel the fear, but do it anyway to stay "perfectly" allocated), but it seems harder than I'd likely do. I think I'd rather stick to a chunk of change on one side and just let the stock-side fluctuate.

 

[MichaelB]

Curious who actually uses the safe side of your portfolio to rebalance (such as last March or in '08)?

<raise hand>. I have done so multiple times.

 

[Out-to-Lunch]

I rebalance. (Caveat: I am still w*rking.)

 

[Whisper66]

We rebalanced. Our plan allows a range of asset allocation from 60/40 to 90/10. We were at 65/35 before the March drop. Rebalanced to 82/18 in March by selling bond funds and buying broad equity index funds. By 2020 YE, the purchases were up by 41%. We plan to rebalance back toward more heavy into fixed assets in the upcoming months.

Back in 2008 I was still working and had ~95% in equities anyway so no rebalancing then.

 

[Freedom56]

At one point in the investing world, bonds like CDs were for income. Like CDs you buy a bond for the coupon payments at a return of you principal at maturity. Since Wall Street didn't make any money while you held a bond to maturity, they created bond funds. They pushed out this misinformation that somehow a diversified bond fund is safer than individual bonds. Bond funds don't offer any stability and don't offer a return of principal. They are designed to extract fees whether they perform or not. Right now money continues to flow into these bond funds as they decline as some investors believe they are getting better yields but they are not. The funds are buying bonds at historically low coupon rates that will replace those with higher coupons in their portfolio that are maturing. This years is becoming more and more like 2013 where low coupon investment grade bonds are facing the reality of rising treasury yields and the funds that hold those bonds are depreciating fast. When the inflows into these bond funds turn into outflows, it will really get ugly for bonds funds and those low coupon investment grade issues. LQD is already down 6.46% YTD yet the average YTM is only 2.57%. So it has a long way to fall to make yields attractive versus risk. I'm watching the bond market carefully now and waiting for the bond fund investors to hit the exit doors. That should start if the 10 year note crosses 2%.

 

[Golden sunsets]

<raise hand>. I have done so multiple times.

+1

 

[Whisper66]

...This years is becoming more and more like 2013 where low coupon investment grade bonds are facing the reality of rising treasury yields and the funds that hold those bonds are depreciating fast........ LQD is already down 6.46% YTD yet the average YTM is only 2.57%......

Freedom56 brings up a good point. When rebalancing back into fixed income, I'm actually just buying money market funds that have almost no return but will hold their dollar value. I used to have a lot of $$ in intermediate term bond funds but don't see them as a good asset to have in the "safe side" of our portfolio for now.

 

[Dtail]

On a side note, the poll is public.

 

[jimbee]

<raise hand>. I have done so multiple times.

+1

+2

 

[SecondCor521]

I mechanically rebalance to my target AA but I do it on a lazy/opportunistic basis. I rebalanced from bonds to stocks on 2/26, 2/28, 3/10, 3/11, 3/12, and 3/13/20.

I also did a Roth conversion on 3/17/20 for about half of my 2020 targeted amount. Normally I wait to do them at the end of the year, but this seemed like a worthwhile opportunity. I then did two more conversions in December 2020.

I generally keep my AA target the same for long periods of time as it's designed to maximize historically safe WR. I've been between 100/0 and 90/10 since 1987 at least. Currently my method depends on how much I'm spending, but hovers around 97/3.

I read with interest the various commentaries here about bond funds, bond prices, interest rates, the Federal Reserve, MYGAs, interest rate risk, etc. Since I'm lazy and not as bright as those commentators here, I just stick my bond allocation in VBTLX and call it a day. Maybe not the smartest move but not likely to cripple my financial plan.

I also remember how "everyone" knew that rates were on the rise and had to continue to rise about two years ago in the spring. Stuff happened and the rates have fallen ever since. Maybe "everyone" knows now that rates will stay low then go up in the near future, but I am not convinced given the recent lack of accuracy in everyone's predictions.

 

[SnowballCamper]

I'd say the greatest idea to come out of the personal finance field is to rebalance to your Asset Allocation. EDIT: after LBYM.

This basic idea is to sell appreciated assets high, and buy depreciated assets low (relative to recent prices). I can think of no reason not to do this (except if the transaction cost exceeds the overall gains). The other caveat would be the studies that show that rebalancing too often isn't optimal... I generally wait till I'm at least a full percentage point off on each of four buckets.

 

[MarieIG]

I probably voted too quickly. Said no; but not sure that is correct. Anyway, I'm not loading up on bonds right now.

 

[RobbieB]

Not me. I just let 'em coast. The Rock. Just stays the same.

I draw heavy on the equities, but they just replenish themselves.

 

[Animorph]

I over balance. My AA is normally 75/25 but I'll take it as far as 100/0 in a deep recession. Usually five steps of 5% (of total portfolio) from bonds to stocks, one step each time the market drops another 5%, starting with an official bear market. I average SPY+EFA to get my "market" drop percentage, so a little out of step with other metrics.

 

[street]

Never rebalanced in 40 years. I'm ~ 80% equities and just ride the waves up and own and seems to work for me.

There has been analyses done on this very subject and if I remember correctly I beleive not balancing has done as well as rebalancing.

 

[audreyh1]

I liquidate bonds and/or cash to buy stocks when rebalancing, if stocks are down.

When stocks are climbing, as they have for many years, I liquidate some to buy bonds and cash, even if bonds are dropping in value.

 

[jazz4cash]

At one point in the investing world, bonds like CDs were for income. Like CDs you buy a bond for the coupon payments at a return of you principal at maturity. Since Wall Street didn't make any money while you held a bond to maturity, they created bond funds. They pushed out this misinformation that somehow a diversified bond fund is safer than individual bonds. Bond funds don't offer any stability and don't offer a return of principal...

That’s a very interesting and uncharitable description of bond funds. Maybe that’s why I ended up with CDs and a couple individual bonds instead of a fund.

 

[DrRoy]

Not me. I just let 'em coast. The Rock. Just stays the same.

I draw heavy on the equities, but they just replenish themselves.

I am overfunded and do not feel the need to rebalance back toward equities in a downturn. I would hate seeing them fall more after a buy.

 

[iloveyoga]

I rebalance quarterly.

 

[Chuckanut]

I re-balance yearly. But, with the Feds keeping interest rates so very low, I decided to limit my bond holding and buy a few more CD's and some short term bond funds that are near cash equivalents. All my mid and long term bond holdings are whatever is in Vanguard Wellesley.

Balancing between stocks and bonds is still a good idea, IMHO. But, with the Feds extreme interfering with interest rates I think they have tilted the playing field a bit against bonds. Maybe more than a bit.

 

[Sojourner]

When rebalancing back into fixed income, I'm actually just buying money market funds that have almost no return but will hold their dollar value.

Not sure this makes sense (to me, at least). If a MM fund has "almost no return", i.e. near 0% APY, then how can it hold its dollar value relative to inflation? Or did you mean hold its dollar value literally, meanwhile losing ground to inflation?

Personally, I haven't been rebalancing and don't plan to anytime very soon. My target AA is something like 70/30, but in order to get up to 30% on the FI side, I'd have to buy more bonds, which I'm not eager to do right now. Ray Dalio's recent comments about the terribleness of the current bond market really resonated with me. https://www.linkedin.com/pulse/why-world-would-you-own-bonds-when-ray-dalio/

 

[Whisper66]

Not sure this makes sense (to me, at least). If a MM fund has "almost no return", i.e. near 0% APY, then how can it hold its dollar value relative to inflation? Or did you mean hold its dollar value literally, meanwhile losing ground to inflation?

Correct - Each dollar invested in the MM fund (VMMXX) holds it's dollar value literally but loses buying value over time to inflation.

We moved most of our fixed assets from VBTLX to VMMXX to slow fixed asset losses. VBTLX is Vanguard's Total US Bond Market fund with an average duration of 6.6 yrs. YTD return on VBTLX is a loss of 3.74%..... a significantly higher loss than VMMXX inflation loss.

 

[tdv2]

Since I am disciplined in keeping you asset allocation in check, then the answer to this question for me is both. The markets will determine where the money flows. In my case I withdraw funds for spending in January and re-balance if necessary at that time. If for example my allocation is at nominal in the beginning of the year, I will liquidate funds from both stocks and bonds in the proportion they are held in my accounts for spending.

 

[big-papa]

Both actually - currently I hold intermediate treasuries bond funds and I rebalance in/out of them as my AA drifts, but I do maintain a floor below which I will sell no additional bonds during rebalancing.

But I also have an income stream portfolio composed of Ibonds and TIPs funds where the ratio of 2 TIPs funds of differing durations are set to match the timeframe over which I need the money.

Some people do something similar with a standard 60/40 portfolio with nominal bonds in that they set the ratio of 2 bond funds of differing effective durations to match the timeframe over which they need the money. They still rebalance in/out as needed, but the total effective duration itself is still reduced over time.

Cheers.

 

[scrabbler1]

In my rollover IRA, an account I have had since I ERed in 2008 (from my old 401k) but can't really access until I turn ~60 in 2 years, I have rebalanced many times, usually from its one stock fund to its one bond fund, the stay near my desired AA which has gradually drifted toward more bonds as I have aged.

I have rebalanced from its bond fund to its stock fund a few times, not nearly as often as from stocks to bonds. I did rebalance twice from bonds to stocks in March of 2020, however, when the stock amount fell a lot.

In my taxable account, I rarely rebalance because that account has to generate enough income from the bond side to pay my bills. That consideration is the one which most drives any decision to rebalance, not its AA.