Need Advice for Bond Portion of Our AA

[Cheesehead]

We met with our new CFP and for the bond portion he suggested the following and I wanted to get the opinion of the people on this forum. I do not have the mental capacity to buy individual bonds. He is a stay the course type advisor. I had a similar allocation last year but put it into cash when bonds started to decline. Here is what he recommends:

25% Inflation Protected TIPS Fund
25% Vanguard Total Bond Index
25% Investment Grade Corporate Bond Fund
25% High Yield Corp

Thank you for your opinion.

 

[Ready]

Is this for a taxable or tax deferred account? If all tax deferred, it's a pretty vanilla recommendation, so not much to poke holes at. If part of it is taxable, you may also want to look at a municipal bond fund.

You won't get much yield from these investments, but you won't lose much if rates go up either.

 

[Hopeful]

Is this for a taxable or tax deferred account? If all tax deferred, it's a pretty vanilla recommendation, so not much to poke holes at. If part of it is taxable, you may also want to look at a municipal bond fund.

You won't get much yield from these investments, but you won't lose much if rates go up either.

I too struggle with the FI portion of our portfolio. I guess I am lucky to have a stable value fund in our 403b that pays 3%. I have a large CD that is coming due. I would like to keep this portion in our taxable accounts. Since it is too late for the PenFed CD, I am thinking perhaps a municipal bond fund as you point out. Like the OP I am in Wisconsin. Any recommendations on specific funds?

 

[Ready]

Since it is too late for the PenFed CD, I am thinking perhaps a municipal bond fund as you point out. Like the OP I am in Wisconsin. Any recommendations on specific funds?

I would go with either Vanguard's VWIUX or VWLUX. VWLUX is long term, but only 7.1 years duration, which is only two years longer than VWIUX, and you get a full additional percentage yield for the extra two years duration. You might also want to split your funds between the two. These are both Admiral Shares, but if you are investing less than $50K, they have an Investor Share equivalent that only requires a $3K minimum in return for a slightly higher expense ratio.

 

[Cheesehead]

Hi Ready,

Of all our investable assets I would say about 85% are in tax protected retirement accounts. Are you saying that the money we have to invest that is outside a taxable account should be in municipal bonds? If so, are municipal bond funds acceptable?

The CFP did ask us about what money is tax protected but I did not ask him for where it should be allocated in regards to our FI portion, perhaps I will ask now.

Thanks

 

[Ready]

Hi Ready,

Of all our investable assets I would say about 85% are in tax protected retirement accounts. Are you saying that the money we have to invest that is outside a taxable account should be in municipal bonds? If so, are municipal bond funds acceptable?

The CFP did ask us about what money is tax protected but I did not ask him for where it should be allocated in regards to our FI portion, perhaps I will ask now.

Thanks

For your taxable accounts, you just want to avoid investments that generate interest or lots of dividends. So you would not want to put any of those bond funds your CFP recommended in taxable accounts as their main vehicle for generating yield is interest payments, which are taxed at earned income tax rates rather than the lower capital gains rates.

If you find that you still need to buy bond funds to keep your overall AA in balance, and you want to put some in taxable accounts, I would go with the municipal bond funds I just recommended in my last post. If your tax bracket is reasonably high, you will find them to be a better investment anyway. For example VWLUX has an SEC yield of 3.10% tax free. So if your tax bracket is 35%, the after tax equivalent yield would be 4.77%. That's quite a bit higher than most of the funds from your CFP's list.

 

[Hopeful]

I would go with either Vanguard's VWIUX or VWLUX. VWLUX is long term, but only 7.1 years duration, which is only two years longer than VWIUX, and you get a full additional percentage yield for the extra two years duration. You might also want to split your funds between the two. These are both Admiral Shares, but if you are investing less than $50K, they have an Investor Share equivalent that only requires a $3K minimum in return for a slightly higher expense ratio.

Thanks. I will look into those.

 

[galeno]

TIPS are too expensive. I'd rather own more equities vs high yield (junk) bonds. FI for us is to provide ballast. I'd go 100% TBM or 75% TBM + 25% Corporate bonds.

 

[ERhoosier]

I would go with either Vanguard's VWIUX or VWLUX. VWLUX is long term, but only 7.1 years duration, which is only two years longer than VWIUX, and you get a full additional percentage yield for the extra two years duration. You might also want to split your funds between the two. These are both Admiral Shares, but if you are investing less than $50K, they have an Investor Share equivalent that only requires a $3K minimum in return for a slightly higher expense ratio.

Duration is an important point. Since we an in a historically low interest rate environment, rates are likely to rise in coming months/years- perhaps by a lot. Assuming equal & unchanging quality, rule of thumb is that for every 1% change in rates, your bond fund changes by roughly it's duration in principle value (i.e. 1% rise = 5% drop in principle for 5yr duration fund). This boosts returns as rates fall but hurts as rates rise. Who knows what interest rates will do in the future, but I am keeping my bond allocation durations short. I made some good $$ on bonds as rates fell and & sure do not want to loose that much if rates pop again

 

[pb4uski]

Like ERhoosier and many others, I'm quite concerned about interest rate risk. I jumped on the PenFed 3% CD back in December. I cashed out bond funds in 2013 and have been sitting in MM but am selectively purchasing 2020 target maturity bond funds and also put some of my FI allocation in Merger Fund. Pickings are slim though, but I'm ok with giving up a bit of income to avoid the interest rate risk.

 

[Travelwanted]

I am prepping to dump my FA and return to VG.

Most of my assets are in taxable accounts - over 90%. That's great but, how would you suggest I purchase the bonds? Mostly (or all) short duration and tax-free? I'm planning 60% stocks, 40% bonds. Some of the bonds will be part of Wellington and Wellesley Income Fund.

I, too, believe rates are heading up in the next 1-2 years.

 

[Dash man]

I've decided to avoid bods completely. I keep my fixed income in cash assets. To me bond interest rates are not worth the risk since for intermediate term funds will lose 15% for a 2% interest rate increase. With debt levels at record highs, it's only a matter of time before rates go up. If you do insist on bonds, use an ETF and set a stop loss trade limit on it. Mutual funds don't allow you to react quickly enough.