Fixed income conundrum

[thepalmersinking]

54 yrs old $2.0 million. 99% equities. I am totally confused on bonds, bond mutual funds and bond ETFs. I would like to retire in 3 years and want to get to a 70/30 mix. Even if I sold to raise the 30% I would not know what to put it in. Thoughts/Suggestions?

 

[ERD50]

Just move it into a total Bond Fund/ETF over the three years. FTBFX or BND. Simple, effective. No reason to be confused.

-ERD50

 

[HI Bill]

Many of us here buy bond funds, such as Vanguard's BND. These have an inherent risk of falling in value in economically difficult times, so many here recommend actual bonds.

For equities in taxable accounts: Consider the tax implications of selling equities ($600K worth) to transition to bonds. If you're going to trigger LTCGs, or worse yet, STCGs, it may be better to wait until you have a lower income to complete the transfers to mitigate the taxes. If you're MFJ, and your joint taxable income is less than $78,750, you'll be in the 0% LTCGs tax bracket.

Two ideas:
1) If you have 3 years to go, I'd concentrate on using new savings to invest in bonds, rather than selling equities, unless you have some you want to unload that have losses.
2) If some are in tax-deferred accounts, then you can buy bond funds within those accounts without incurring taxes after selling equities.

 

[24601NoMore]

VBTLX has not done that well over the past 5-10 years. I'd recommend PIMCO Income Institutional (PIMIX) which you can buy in a Vanguard Brokerage account for $25k minimum vs the normal $1M minimum, DODIX (Dodge and Cox Income), VWIUX (VG Intermed Term Tx-Ex), PIGIX (PIMCO Corporate Bond), Vanguard High Yield (VWEHX) and either FNMIX (Fidelity New Markets) and/or DBLEX (Doubleline Emerging Markets) instead. Note that some of these have higher ER's than the usual near rock bottom VG funds, so the BH crew is not going to love the choices - but you can't argue with performance and it's IMHO not all about expense ratios..

Run some M* reports and comparison charts, and you'll quickly see that VBTLX has fallen behind almost every decent bond fund choice out there in terms of performance over the 3, 5 and 10 year periods. I sold totally out of it over 3 years ago after watching it go pretty much nowhere fast. Yield is not that great on it, either..

PS - you may also want to consider being closer to "age in bonds" but depends on your goals and risk tolerance also. This bull market is VERY long in the tooth, and no way I'd personally go 70/30 at the age you'll be in 3 years..age in bonds would put you at 43/57, so maybe consider 50/50 on the outside unless you have a need to take the additional equity risk. The long term average return for 50/50 since 1926 is not that significantly different than 70/30, and you're likely to have a lot smoother ride and far less sleepless nights..but YMMV and JMHO.

 

[pb4uski]

One school of thought is that the 30% in fixed income is "ballast" that you want to take minimal risk and have it maintain its value... and a return equal to inflation is plenty ok.

As a result, CDs are a good choice, as are U.S. Treasuries or even TIPs.

On option might be to combine Wellesley... a Vanguard managed fund that is 40/60 with an equity fund or ETF. For example, let's say you have $1 million. To get $300k of bonds with Wellesley, you would need $500k of Wellesley. The add $500k of Total Stock or your preferred stock funds.

End result is that you have $700k of equities ($500k directly and $200k in Wellesley) and $300k of bonds ($500k of Wellesley * 60% bonds).

 

[Sunset]

54 yrs old $2.0 million. 99% equities. I am totally confused on bonds, bond mutual funds and bond ETFs. I would like to retire in 3 years and want to get to a 70/30 mix. Even if I sold to raise the 30% I would not know what to put it in. Thoughts/Suggestions?

I'm in a similar boat, about 90% stocks, loved the ride but I thinking the train might go off rails soon.

For new money, not in tax shelters (IRA/401K), I'm stuffing it in CD's at Ally bank paying 2.8% for 15 months.

For IRA's I'm doing a mix of BND, SPTS, or SPTL , some treasuries frat my brokerage (learning how to buy them as it's a little confusing).

And there is a class of funds that invest directly in a bunch of stocks , and then end on a certain date and payout everything, example would be BSJM.

So there is lots of choice, and lots to learn.

 

[audreyh1]

Just move it into a total Bond Fund/ETF over the three years. FTBFX or BND. Simple, effective. No reason to be confused.

-ERD50

BND is a US bond index fund, FTBFX is not an index fund. The Fidelity index fund equivalent of Vanguard BND/VBMFX/VBTLX is FXNAX.

 

[audreyh1]

Many of us here buy bond funds, such as Vanguard's BND. These have an inherent risk of falling in value in economically difficult times, so many here recommend actual bonds.

What? No, high credit quality bond funds like BND do not have the inherent risk of falling in economically difficult times, just the opposite. They offer protection during economically difficult times as they tend to rise as interest rates usually drop during such times.

 

[MrLoco]

54 yrs old $2.0 million. 99% equities. I am totally confused on bonds, bond mutual funds and bond ETFs. I would like to retire in 3 years and want to get to a 70/30 mix. Even if I sold to raise the 30% I would not know what to put it in. Thoughts/Suggestions?

Whatever you decide to do....do it NOW! At 99% equities....you could potentially lose half of your portfolio in a few months. How would you react if you wake up six months from now and you have $1 million?



If part of the equities are in a tax deferred/tax free account....then it's easy. Just make the change and there are no tax consequences.
Even if the entire $2million is in a taxable account.....I would still make the shift you want immediately. Maybe you can tax loss harvest a bit but even if you cannot...DO IT! And pay the tax man his cut.
This will be a far less painful scenario than losing a significant portion of your portfolio in a few short months. Remember paying taxes on gains means you made money...never a bad thing. Personally, I would even go to a 60/40 split.


Just remember in a taxable account if you hold bonds....see if municipal bonds make sense for your tax bracket.


Again....don't delay. You are sitting potentially on a ticking time bomb!

 

[mrfeh]

Just move it into a total Bond Fund/ETF over the three years. FTBFX or BND. Simple, effective. No reason to be confused.

-ERD50

+1

We are Fidelity customers and use FXNAX.

 

[freedomatlast]

For fixed income, you could keep 3 to 5 years living expenses in cash such as CDs or Vanguard Prime Money Market Fund (VMMXX) so you can potentially weather any storm without selling stocks at a low point.

 

[VanWinkle]

VBTLX has not done that well over the past 5-10 years. I'd recommend PIMCO Income Institutional (PIMIX) which you can buy in a Vanguard Brokerage account for $25k minimum vs the normal $1M minimum, DODIX (Dodge and Cox Income), VWIUX (VG Intermed Term Tx-Ex), PIGIX (PIMCO Corporate Bond), Vanguard High Yield (VWEHX) and either FNMIX (Fidelity New Markets) and/or DBLEX (Doubleline Emerging Markets) instead. Note that some of these have higher ER's than the usual near rock bottom VG funds, so the BH crew is not going to love the choices - but you can't argue with performance and it's IMHO not all about expense ratios..

Run some M* reports and comparison charts, and you'll quickly see that VBTLX has fallen behind almost every decent bond fund choice out there in terms of performance over the 3, 5 and 10 year periods. I sold totally out of it over 3 years ago after watching it go pretty much nowhere fast. Yield is not that great on it, either..

PS - you may also want to consider being closer to "age in bonds" but depends on your goals and risk tolerance also. This bull market is VERY long in the tooth, and no way I'd personally go 70/30 at the age you'll be in 3 years..age in bonds would put you at 43/57, so maybe consider 50/50 on the outside unless you have a need to take the additional equity risk. The long term average return for 50/50 since 1926 is not that significantly different than 70/30, and you're likely to have a lot smoother ride and far less sleepless nights..but YMMV and JMHO.

You might mention risk vs reward as there is no comparison in quality with those funds. DBLEX- Emerging market bonds.... Just buy 10% more equities if you want more risk. Junk bonds are called "junk" for a reason. Look at 2008 to see the difference between quality and junk.

If it works for you, fine. But for someone just delving into bonds, I would recommend the safety of a 60% plus government bond core fund.

 

[donheff]

Just move it into a total Bond Fund/ETF over the three years. FTBFX or BND. Simple, effective. No reason to be confused.

-ERD50

+1 If you have a 401K or IRA just do it. If everything is taxable, take that into account in planning your transition. But relax a bit. If we crash in the next few months before you can get to your desired AA just tough it out and do nothing until we bounce back. You have three years. As you get more into the bond fund you will have options for withdrawals when equities are way down.

 

[24601NoMore]

Whatever you decide to do....do it NOW! At 99% equities....you could potentially lose half of your portfolio in a few months. How would you react if you wake up six months from now and you have $1 million?

Ditto that as well as the advice up-thread to take a close look at Wellesley.

I posted a chart in another thread that shows the real risk being taken in portfolios with very high equity allocations like OP apparently has. Over the past 100 years or so, there have been several times where it's taken SIXTEEN PLUS YEARS to get back to "even" from "peak" (which, we easily could have been at over the past month, pre market freakout over the trade deal). This is the real risk being taken with high equity positions, and there appears to be a lot of misconception out there that recovery from a tough bear market usually happens "within a few years", so taking risk is no big deal. That is most definitely NOT the case and unless one is comfortable that it literally could take 16+ years for the value of your portfolio to get back to where it was last week or last month after a brutal bear, having a FI allocation based on age and well informed / realistic risk-tolerance would be strongly recommended.

 

[24601NoMore]

You might mention risk vs reward as there is no comparison in quality with those funds. DBLEX- Emerging market bonds.... Just buy 10% more equities if you want more risk. Junk bonds are called "junk" for a reason. Look at 2008 to see the difference between quality and junk.

If it works for you, fine. But for someone just delving into bonds, I would recommend the safety of a 60% plus government bond core fund.

Fair point about risk, but not sure I'd go so far as to see it as comparable to increased equity risk..

PIMIX, for example, was only down 5.47% in 2008. I'll take that small worst-case loss for the significantly higher average 3, 5 and 10 year returns over VBTLX. FNMIX didn't do as well in 2008, but was still only down 18% or so compared to 40+% for many equity funds. In the meantime, it's 3, 5 and 10 year returns (and yield) are compelling..VWEHX is similar to FNMIX in terms of worst case draw-down with significant outperformance otherwise, compared to VBTLX..

Having a "core" bund fund like DODIX (0.29% 2008 loss), coupled with a good quality corporate fund like PIGIX (1.89% 2008 gain) and go-anywhere fund like PIMIX with less $$ in the other, marginally more risky funds (FNMIX/DBLEX, VWEHX) is IMHO the best of all worlds - good upside with only incrementally increased risk, as long as you do your due diligence and understand potential downside in another 2008-like scenario vs opportunity for significantly increased upside over something like VBTLX.

 

[bobandsherry]

Whatever you decide to do....do it NOW! At 99% equities....you could potentially lose half of your portfolio in a few months. How would you react if you wake up six months from now and you have $1 million?

Curious, have you see any analysis of what would happen to bond portfolio if equities dropped a hypothetical 50%? Got to think a drop like that would cause a significant ripple effect in the economy and market.

 

[VanWinkle]

Curious, have you see any analysis of what would happen to bond portfolio if equities dropped a hypothetical 50%? Got to think a drop like that would have implications across the board.

If you look back to 2008, the high quality bond funds actually increased or gained 5-6%(VBTLX 5.15%) or more, while junk bonds(VWEHX -21.29) took a 20% plus loss.

Every time may not be the same, but history is all we have to form an opinion of what may happen in the future.

 

[VanWinkle]

Fair point about risk, but not sure I'd go so far as to see it as comparable to increased equity risk..

PIMIX, for example, was only down 5.47% in 2008. I'll take that small worst-case loss for the significantly higher average 3, 5 and 10 year returns over VBTLX. FNMIX didn't do as well in 2008, but was still only down 18% or so compared to 40+% for many equity funds. In the meantime, it's 3, 5 and 10 year returns (and yield) are compelling..VWEHX is similar to FNMIX in terms of worst case draw-down with significant outperformance otherwise, compared to VBTLX..

Having a "core" bund fund like DODIX (0.29% 2008 loss), coupled with a good quality corporate fund like PIGIX (1.89% 2008 gain) and go-anywhere fund like PIMIX with less $$ in the other, marginally more risky funds (FNMIX/DBLEX, VWEHX) is IMHO the best of all worlds - good upside with only incrementally increased risk, as long as you do your due diligence and understand potential downside in another 2008-like scenario vs opportunity for significantly increased upside over something like VBTLX.

If you look back to 2008, the high quality bond funds actually increased or gained 5-6%(VBTLX 5.15%) or more, while junk bonds(VWEHX -21.29) took a 20% plus loss.

I would agree that anyone with a 99% equities position could likely take the added risk of leveraged or low quality bond funds. You may have a good point there.

 

[COcheesehead]

PTIAX
A go anywhere bond fund
5 star fund
4.75% yield
1.62 Sharpe ratio

 

[VanWinkle]

PTIAX
A go anywhere bond fund
5 star fund
4.75% yield
1.62 Sharpe ratio

Pretty impressive since 2011. I wonder about how it would react under
stress of 2008. Over 30% rated less than BBB so it gets some push from lower quality and extended term (10-20 yr)

Thanks for the info!!

 

[COcheesehead]

Pretty impressive since 2011. I wonder about how it would react under
stress of 2008. Over 30% rated less than BBB so it gets some push from lower quality and extended term (10-20 yr)

Thanks for the info!!

I imagine it would have dipped, but with that coupon, the recovery time would have been shortened and who’s to say the managers may not have tweaked their mix based on the times. Great cash flow.
With that high of a Sharpe you are getting greatly compensated for the risk. FXNAX for example has a Sharpe of only .19. That’s almost like keeping your money in cash.

 

[bobandsherry]

If you look back to 2008, the high quality bond funds actually increased or gained 5-6%(VBTLX 5.15%) or more, while junk bonds(VWEHX -21.29) took a 20% plus loss.

Every time may not be the same, but history is all we have to form an opinion of what may happen in the future.

Yeah, but since that time, the S&P has rebounded. So if we use 2008 as our data point, in the past 10 years VFINX (Vanguard's S&P 500 fund) is up 310%. By comparison VBTLX is up only 43%.



So yes, the original $2.0 million investment in equities could have seen a 50% drop. But since then would have rebounded to be worth over $4.0 million today. By comparison, if $$ held in VBTLX that $2.0 million would be worth about $3.0 million today.

Additionally, point could be made that heading into 2008 the person in equities would have held much larger portfolio vs. VBTLX so would have had more dry powder available to weather that storm.

And agree, past performance is no guarantee of future performance, but it's all that we have to work with to formulate opinions.

This video maybe sums things up...

 

[Huston55]

+1 If you have a 401K or IRA just do it. If everything is taxable, take that into account in planning your transition. But relax a bit. If we crash in the next few months before you can get to your desired AA just tough it out and do nothing until we bounce back. You have three years. As you get more into the bond fund you will have options for withdrawals when equities are way down.

Best advice thus far IMO. I’d add:

- If too much is in taxable accounts to get to 70/30 w/o tax consequences, then look at selling taxable account positions by “lots.” I’d expect your most recent lots (held at least a year) have much less gain than the older ones. This will help reduce the LTCG tax you pay.

- Build up some cash; I recommend ~3 yrs worth; we have a CD ladder, but put it where you’re comfortable.

- Take action soon, but in the context of your plan for the next 3 yrs, and even the 3-5 yrs after that. IOW, have an idea of what you’ll do for income upon FIRE; LTCG harvesting @ 0% tax?; Roth IRA Conversions?; etc.

 

[VanWinkle]

Yeah, but since that time, the S&P has rebounded. So if we use 2008 as our data point, in the past 10 years VFINX (Vanguard's S&P 500 fund) is up 310%. By comparison VBTLX is up only 43%.

View attachment 31466

So yes, the original $2.0 million investment in equities could have seen a 50% drop. But since then would have rebounded to be worth over $4.0 million today. By comparison, if $$ held in VBTLX that $2.0 million would be worth about $3.0 million today.

Additionally, point could be made that heading into 2008 the person in equities would have held much larger portfolio vs. VBTLX so would have had more dry powder available to weather that storm.

And agree, past performance is no guarantee of future performance, but it's all that we have to work with to formulate opinions.

This video maybe sums things up...

I agree with all you said, but why are we comparing the return of the S&P 500 with that of VBTLX? Are you saying we/he should stay at 100% stocks due to the outperformance of stocks over bonds?

VW

 

[pb4uski]

What? No, high credit quality bond funds like BND do not have the inherent risk of falling in economically difficult times, just the opposite. They offer protection during economically difficult times as they tend to rise as interest rates usually drop during such times.

Let's be clear though.... BND has had periodic declines in value and will likely continue to do so... share price has varied between $10.15 and $11.23 over the last 10 years.... and even the value has had periodic declines...see growth of $10,000 chart below.

So BND can decline in value it is just that the value of a portfolio would be much more stable than equities.