Rebalancing into VG Fixed Income

[Gearhead Jim]

The nice performance of the stock market has pushed my equity % above my target AA range at Vanguard.

Wanting to move some money into fixed income, the choices at VG look pretty bleak. MM pays almost nothing, short-term bond funds pay darned little and will probably take some losses as interest rates rise. Intermediate term bond funds pay more but will be hurt more as rates rise. GNMA have a nice track record but are subject to influences I don't really understand. We've got CD's on the outside, don't want all our FI eggs in that basket even though it should be safe.

Some folks say I should just put the money in the intermediate term bond funds, don't worry about the losses now; they'll recover as rates eventually stabilize. Problem is, rates are so low now that they could rise for a long time. I shouldn't be trying to time the market, but bond funds look like such a sure loser, or at best a go-nowhere class, that I'm not comfortable with them.

Suggestions? Please keep it simple...

 

[W2R]

Well, I think that (as you point out), the choices available are pretty bleak. When I rebalanced a couple of weeks ago, I put the excess into Vanguard Total Bond Market Index (VBTLX).

This is not a hot pick, though, I agree. I am more of a buy-and-holder, or I guess buy-and-rebalancer and just try to diversify, keeping my risk down if possible. Then, hang on tight and wait out the storms. It could be a long time but hopefully I will be consoled at least somewhat by the dividends in the meantime.

 

[mickeyd]

Hey Jim,

If your AA is out of whack due to an increase in equity and your AA is still correct for YOU, then rebalance. Forget about the short term manifestations of the bond market. In the long term it will all work out. You probably already know this.

 

[nun]

I had the same questions about rebalancing my VG fixed income, but I just reminded myself that my fixed allocation is there for a purpose and that Total Bond Index has a consitent return over the years. My one bit of adjustment was to include some Intermediate Term Investment Grade fund as I like the balance sheet of corporations a lot more than government organizations at the moment, but my bong percentage has stayed the same.

 

[LOL!]

How much do you expect the bit of money you will put into bonds to return this year?
3%?

Let's say you need to move $50,000 from stocks to bonds and expect bonds to go up 3% in 2010. So 3% of $50,000 is $1500. Just let your stocks go up 3% more and then move $51,500 to cash.

 

[Gearhead Jim]

How much do you expect the bit of money you will put into bonds to return this year?
3%?

Let's say you need to move $50,000 from stocks to bonds and expect bonds to go up 3% in 2010. So 3% of $50,000 is $1500. Just let your stocks go up 3% more and then move $51,500 to cash.

Ah, if only my crystal ball worked that well...

 

[LOL!]

You know the YTD return of Vanguard's S&P500 index fund is already 2.9%, so maybe you can think about this another couple of weeks and it will come to pass.

 

[Gone4Good]

CDs are still the best fixed income option in town. A 5-yr CD at Ally Bank yields 2.4% and has a 2 month break fee. It's not possible to calculate a duration for CDs, but I'd say it is less than 0.4 years. Compare that with Vanguard's Total Bond Market fund at a 2.73% yield and a 5 year average duration.

No contest what the better risk / return investment is, in my view.

 

[FIRE'd@51]

CDs are still the best fixed income option in town. A 5-yr CD at Ally Bank yields 2.4% and has a 2 month break fee. It's not possible to calculate a duration for CDs, but I'd say it is less than 0.4 years. Compare that with Vanguard's Total Bond Market fund at a 2.73% yield and a 5 year average duration.

While it may not be possible to calculate a single duration number, one could easily calculate the risk (loss in APR) of paying the break fee in 1 year, 2 years, etc.

 

[nun]

CDs are still the best fixed income option in town. A 5-yr CD at Ally Bank yields 2.4% and has a 2 month break fee. It's not possible to calculate a duration for CDs, but I'd say it is less than 0.4 years. Compare that with Vanguard's Total Bond Market fund at a 2.73% yield and a 5 year average duration.

No contest what the better risk / return investment is, in my view.

You fail to mention that TBM had some price appreciation too and it's total return last year was 5.8%. The CD's defining feature is it's FDIC insurance.

 

[obgyn65]

I agree 100%

CDs are still the best fixed income option in town.

 

[obgyn65]

It is difficult to beat this feature.

The CD's defining feature is it's FDIC insurance.

 

[Gone4Good]

It is difficult to beat this feature.

Unless you add to that a put feature for a nominal cost, say 40bp, that allows you to reset the security at a higher price if rates go up . . . oh, yeah, CDs have that feature too.

 

[easysurfer]

My equity % was also up so I rebalanced early in Jan. To keep it simple, I rebalanced to my FI holdings (Total Bond Market) in a huge chunk all at once and within my IRAs.

I don't look back at rebalancing to see if the investment climate is right, but more as a reminder to keep my target AA on track and keep myself honest.

 

[nun]

CDs are still the best fixed income option in town........

No contest what the better risk / return investment is, in my view.

CDs have a place for short term cash and principal preservation. But, because of their low current returns, they can't fill the income part of a portfolio on their own, so I think there should be a few more caveats in your statement.

 

[nun]

My equity % was also up so I rebalanced early in Jan. To keep it simple, I rebalanced to my FI holdings (Total Bond Market) in a huge chunk all at once and within my IRAs.

I don't look back at rebalancing to see if the investment climate is right, but more as a reminder to keep my target AA on track and keep myself honest.

I did almost the same, but I'm not sanguine about Government debt, so I moved 50% of my TBM into VG Intermediate Term Investment Grade Bond fund

 

[Gone4Good]

CDs have a place for short term cash and principal preservation. But, because of their low current returns, they can't fill the income part of a portfolio on their own, so I think there should be a few more caveats in your statement.

Returns are low on all income products, and CDs currently pay a meaningful premium over like maturity treasuries with the same credit risk (5-yr treasuries yield 1.9%). The only other way to increase yield is to increase risk, either by extending duration or increasing credit risk. Which are you recommending?

 

[RetirementColdHardTruth]

You should buy short term individual treasuries. That way you can hold to maturity and not face losses of the mutual fund. That's what I ended up doing. Low rates but principle safe.

 

[nun]

Returns are low on all income products, and CDs currently pay a meaningful premium over like maturity treasuries with the same credit risk (5-yr treasuries yield 1.9%). The only other way to increase yield is to increase risk, either by extending duration or increasing credit risk. Which are you recommending?

I'm recommending you have an AA inside your fixed income that reflects your tolerance for risk and requirements for income, for short term income products and principal preservation CDs are great.

I'll CD ladder my cash when I ER, not for the amount of the return, but for the guaranteed return. For money that I can let sit a while longer I use an intermediate term bond fund. I'm not dissing CDs, they are the best short term fixed income right now......but there is other fixed income too.

 

[nun]

You should buy short term individual treasuries. That way you can hold to maturity and not face losses of the mutual fund. That's what I ended up doing. Low rates but principle safe.

...just like a CD.....

 

[Gone4Good]

I'm recommending you have an AA inside your fixed income

And when CDs pay the same or higher rates with lower risk than longer-duration products I'd typically use in my AA?

 

[nun]

And when CDs pay the same or higher rates with lower risk than longer-duration products I'd typically use in my AA?

TBM has similar yield to a 5 year CD but has consistently produced returns over 5%, so for money I don't need for 5 years I'd go with TBM. Even if interest rate rises bring TBM NAV down I still like it for 5 year money over a CD, even if it is "riskier". CDs would be my short term choice right now over short term bonds

 

[Lsbcal]

Ah, if only my crystal ball worked that well...

I tend to agree with LOL that equities are the best place right now. Everybody is scratching their heads about dealing with low interest rates and that's exactly what the Fed wants right now -- investment stimulus. The money flows are not yet a stampede into equities but if that happens I personally might then rebalance. Given your response to LOL's post it sounds like you want to rebalance now.

Short term investment grade (VFSUX at Vanguard) is yielding about 2% now and the spread to short term Treasury is pretty wide. If those short rates go up 1% this year then maybe VFSUX will give a net 1% return for the year and it will then be yielding 3%. Not great but not a disaster.

 

[FIREd]

As of October 2009, I had almost no money in CDs and all my fixed income investments consisted of bond funds. Since then, I have loaded up significantly on CDs. My current CD portfolio will pay 4.62% interest for at least the next 7 years. But it is becoming harder to find good rates on CDs.

Currently I am adding money to equities but, on the fixed income side, I am building up my cash position so that I can take advantage of the swoon in munis and/or promotional CD offers at PenFed.

 

[Gearhead Jim]

As noted in my original post, we already have a big chunk of our FI in CD's. Although they should be risk-free, I don't want to have all of our FI in that one basket.

So, though they are good, CD's are out of the picture for this discussion.
My choices are currently self-limited to various choices at Vanguard, and I'm hoping for more comment on those possibilities.