60% Total Stock Fund and 40% Total Bond Fund or Balanced Mutual Fund?

[bloom2708]

I use VBIAX rather than the two separate funds in my Roth IRA. My goal is to never access the Roth and to leave it as a legacy. So it’s simpler to just to have the one fund. The older I get the better simplicity is looking.

If you are never going to touch it, 100% stocks is better in Roth. Shoot for the moon.

Our Roth accounts have 70% Total US and 30% Mid-Cap Index.

Put bonds in Traditional/Pre-tax places.

 

[RunningBum]

On the last part, the OP also said that these are all in an IRA, so I don't see your point.

I was giving more general guidance to people viewing this thread who might be deciding between the two strategies. I know the OP said IRA. I said if it was in taxable.

 

[Koolau]

I think it's been touched on but just about any way the balancing gets done will probably be okay IF you have cash (or equivalent) to cover living expenses during big downturns. Downturns have a habit of hitting both stocks and bonds at the same time (IOW correlation approaching 1). Certainly that's not always true. But having living expenses set aside helps you ride out the storm and come out the other side in better shape. YMMV as always.

 

[Magus]

Retiring soon and most of the money in my IRA is a balanced mutual fund that is 60% stocks and 40% bonds. I wonder if I made a mistake and should have broken the investments into two funds. (Like 60% VTI and 40% FTBFX).

That way if the stock market crashes and I have to withdraw funds I can take money only out of my bond fund (FTBFX) until the market recovers. Vs if I only have money in a balanced mutual fund I will be forced to sell an investment that is 60% stocks locking in my losses.

Anyone here scared of owning only balanced funds during terrible bear markets?

(Or do you prefer a balanced fund because you don't have to worry about rebalancing your investments?)

Bonds are more over-valued than stocks at the moment.

https://www.cnbc.com/2021/10/20/pau...rkets-and-society.html?&qsearchterm=inflation

I agree 100% with PTJ assessment. Personally I'd sit on more cash than that much in bonds (unless inflation protected) if you don't want to go above 60% stocks...or you could put some in real estate passively like Fundrise

 

[GravitySucks]

Downturns have a habit of hitting both stocks and bonds at the same time (IOW correlation approaching 1).

I keep seeing this statement, both in this forum and in others, but when I compare an intermediate treasury bond fund against a total stock fund (FUAMX vs. FSKAX) I don't see it. Am I missing something?

 

[Markola]

It seems very difficult to puncture the myth that either spending one’s cash or bonds during a stock bear market makes some kind of difference. It does not, in the long run, if one is committed to a particular asset allocation, because you simply rebalance later back to the place you would have been if you’d spent all assets proportionally throughout the downturn, like a mutual fund does.

Even worse, sitting on cash means that part of one’s allocation is causing a drag on the rest during stock bull markets, i.e. most of the time. Holding substantial cash is really just a form of bucket strategy, whose benefit is psychological but whose damage long term is mathematical.

 

[Magus]

The main problem with bonds today vs historical is in the past when bonds were at 4, 7 or 10% yield, you could make money on both the principal and the interest, or theoretically lose on principal and just gain the interest (at least in a fund, not necessarily individual bonds). Additionally, that interest expense was higher than inflation.

Today, however, bonds principal at best is likely to stay flat and has a real chance to drop and the interest is 1-2% and well below inflation. If your treasury fund is yielding 1.5% today, and interest rates rise to 2.5%, you just lost nearly 10% of your principal with bonds, or 6+ years of interest. That's why I'd rather be somewhat in cash/CD/MM at ~0.5% than bonds at 1.5%. Interest rates rising to 3.5% and you lost 17.5% of principal.

Stocks have had a lot of coverage talking about how over-valued they are but I think bonds are way more over-valued than bonds.

 

[mrfeh]

That's why I'd rather be somewhat in cash/CD/MM at ~0.5% than bonds at 1.5%. Interest rates rising to 3.5% and you lost 17.5% of principal.

You aren't losing anything unless you sell.

Again, for long term holders, rising interest rates is a good thing.

 

[Magus]

You aren't losing anything unless you sell.

Again, for long term holders, rising interest rates is a good thing.

This is true for individual bonds, but not bond funds, especially if you do usually sell some of your bonds to offset losses in stocks (you'd have principal down on both). The value of your BND fund will drop from 84/sh to 77/sh with interest rates up one percent. Rising interest rates are good for acquiring NEW bonds, but lowers the value of existing bonds. Most folks today only know interest rates in one direction - down. It's hard for that to continue to go down from the current rates, especially with inflation at 5+%

 

[mrfeh]

This is true for individual bonds, but not bond funds, especially if you do usually sell some of your bonds to offset losses in stocks (you'd have principal down on both). The value of your BND fund will drop from 84/sh to 77/sh with interest rates up one percent. Rising interest rates are good for acquiring NEW bonds, but lowers the value of existing bonds. Most folks today only know interest rates in one direction - down. It's hard for that to continue to go down from the current rates, especially with inflation at 5+%

Bonds are sold and bought in bond funds constantly. Newly purchased bonds will benefit from the higher rates.

I'm not going to bother explaining - it's been done over and over on bogleheads.org for those that are willing to investigate.

 

[Markola]

^^^ You’re missing mrfeh’s “long term” comment. Average duration of the Vanguard total bond index is around 6-7 years. There will be a gradual lag behind individual bonds but, someday, the index fund will reflect the market’s higher-yielding issues. And then there will be a 6-7 year lag to the better someday when interest rates are cut again. My life expectancy is about 40 years and I invest accordingly, so short term investment noise bothers me less.

 

[Magus]

Bonds are sold and bought in bond funds constantly. Newly purchased bonds will benefit from the higher rates.

I'm not going to bother explaining - it's been done over and over on bogleheads.org for those that are willing to investigate.

Yes, but cash to buy new funds is only 4% in a typical bond fund. Meanwhile the principal of 96% of their portfolio just dropped 9% for each 1% rise in ratse. You do realize thats why bond funds drop in value? If what you are suggesting is the case bond funds would never drop in value.

I don't really care what some idiot on bogleheads says. I have an MBA, am a senior exec in finance in corp America and have personally issued $10 billion in debt, largely bonds (also CMBS and term loans), in the last 7 years and dealt with hundreds of bond and equity portfolio managers.

 

[Magus]

^^^ You’re missing mrfeh’s “long term” comment. Average duration of the Vanguard total bond index is around 6-7 years. There will be a gradual lag behind individual bonds but, someday, the index fund will reflect the market’s higher-yielding issues. And then there will be a 6-7 year lag to the better someday when interest rates are cut again. My life expectancy is about 40 years and I invest accordingly, so short term investment noise bothers me less.

Yes, but the "long term" comment is irrelevent with regards to the allocation with the bonds providing safety when equities drop if you need to sell bonds to cover expenses before your 6-7 year time frame in your example and the bonds have dropped 10-30% of principal in the market to sell because YTM have risen from 1.5% to 2.5% to 4.5%. You also have to hope your bond fund manager doesn't do anything stupid. If you are talking a 6-7 year period anyway, you should be far higher in equities since the # of periods where equities have dropped over 6-7 years is very small.

We've never had bonds valued as highly as they are now and people simply do not realize the risk. The Value of your bonds drop much more per 1% increase in rates with a 1.5% YTM than it does when it was at 6%.

 

[Markola]

^^^^ I can’t argue that bonds are way overvalued and in uncharted territory. However, I have at least eliminated manager risk by being an index fund investor. Second, what are the alternatives to bonds? U.S. stocks are at their second highest CAPE 10 values in history, Real estate is also at a peak and I’m exposed because I own a house, I don’t buy gold, no one knows what will happen to Bitcoin in a major recession, and cash is a certain loser. The only hint at a safe harbor that I can feel comfortable with is to stay diversified about 40% in international stock and bond index funds. I’m also keeping my professional network warm and earning a little consulting income, which could be scaled if the SHTF. Thoughts on hedged international bonds and bond index funds relative to U.S. ones?

 

[Koolau]

I keep seeing this statement, both in this forum and in others, but when I compare an intermediate treasury bond fund against a total stock fund (FUAMX vs. FSKAX) I don't see it. Am I missing something?

It's true that the general theory of investing in stocks and bonds is that they "tend" to balance each other and that their correlation is typically not 1. For the long run, that's a very good assumption or else, by now, we would have come up with another theory. Now, having conceded that balancing off stock vs bonds is a good idea over time, the question on the table is "balanced fund vs two funds." My point was that "just when you need the theory to work" it may not. Over time, it will but when you need to take money from your funds, correlation could be 1 and not .5. SO, I suggested having enough outside funds (cash equivalents) to cover that period of time until correlation (and sanity in the markets) returns. This would be true whether using balanced OR 2 funds. Hope that helps as YMMV.

 

[Out-to-Lunch]

I keep seeing this statement, both in this forum and in others, but when I compare an intermediate treasury bond fund against a total stock fund (FUAMX vs. FSKAX) I don't see it. Am I missing something?

Treasuries typically don't manifest this property of high correlation in downturns. Presumably, this is due to the "flight to quality." This is why I hold only Treasuries.

 

[Markola]

I…SO, I suggested having enough outside funds (cash equivalents) to cover that period of time until correlation (and sanity in the markets) returns. This would be true whether using balanced OR 2 funds. Hope that helps as YMMV.

Respectfully, I have run scenarios on Portfolio Visualizer enough to convince myself that cash is a guaranteed loser to inflation and drag on portfolio results over any period of years, so I can’t personally be on board with that certain plan to lose ground vs. what might seem “likely”. I just stay fully invested and diversified and hope for the best. Cheers.

 

[Koolau]

Respectfully, I have run scenarios on Portfolio Visualizer enough to convince myself that cash is a guaranteed loser to inflation and drag on portfolio results over any period of years, so I can’t personally be on board with that certain plan to lose ground vs. what might seem “likely”. I just stay fully invested and diversified and hope for the best. Cheers.

Whatever works for you is good. I've made every investing mistake in the book and still have "enough." That's my definition of success. Much of the issue is psychological. Taking money out when the port. is down (especially BOTH equities and bonds) is mentally difficult for some - even though FIRECalc says it should be survivable. Having cash on the side makes many of us more comfortable with our Port. I'm sure it's cost me money, but not much sleep. So as always, YMMV.

 

[aleabo]

I prefer balanced funds. Less hassle with rebalancing and easy to withdrawal when time comes.

 

[mijoy]

FTBFX is -0.64% YTD

Honest question ,what am I missing? In this ultra low interest rate market why not x% stock y% cash?

I’m all stock and cash.

 

[2177V]

Retiring soon and most of the money in my IRA is a balanced mutual fund that is 60% stocks and 40% bonds. I wonder if I made a mistake and should have broken the investments into two funds. (Like 60% VTI and 40% FTBFX).

That way if the stock market crashes and I have to withdraw funds I can take money only out of my bond fund (FTBFX) until the market recovers. Vs if I only have money in a balanced mutual fund I will be forced to sell an investment that is 60% stocks locking in my losses.

Anyone here scared of owning only balanced funds during terrible bear markets?

(Or do you prefer a balanced fund because you don't have to worry about rebalancing your investments?)

My two cents: When you retire, you will be liquidating your assets. Remember to "buy low and sell high". Your retirement withdrawal strategy should be to "sell high".

Here is a breakdown of Vanguard total bond fund portfolio:
65% Treasury Bonds
9% AAA Bonds
16% BBB Corp Bonds

Here is a breakdown of Vanguard total stock market Index fund portfolio:
13% Health Care
13% Industrial
27% High Tech
13% Financial

Let's assume next year you want to withdraw 6 months to1 year of living expenses but only the High Tech, and BB Corp Bonds hits an all time high....while the other sectors under perform relative to other sectors.

When you withdraw an total market stock or bond index fund, you have to withdraw money from all the sectors which means you are NOT selling high for the sectors that are relatively high compared to the other sectors.

I do not co-mingle my assets and I only sell that sector that is relatively higher compared to my other sectors. It can make a difference in making your portfolio last longer because you are allowing time for the under performing assets to recover and then sell those assets when the time is right.

Before I retired, I partition my total stock market fund and my total bond funds to simulate the index fund into the different sectors. People have different withdrawal strategies in retirement while other people have no withdrawal strategy whatsoever and simply withdraw their money without thinking about selling high. Another valid withdrawal strategy is to keep money in separate short term treasuries or money market funds that are ready for withdrawal...so they do not have to play this game of selling high.

 

[Koolau]

FTBFX is -0.64% YTD

Honest question ,what am I missing? In this ultra low interest rate market why not x% stock y% cash?

I’m all stock and cash.

I guess I treat them almost interchangeably (cash or bonds). I have way more in cash-like investments than in bonds. Heh, heh, and most of my actual bonds are in balanced funds.

I'm sure that's not the way the theoretical equities vs bonds "dance" was supposed to be carried out. So, I guess I'll listen for one of our resident theorists to respond. I do recall that equities balanced by bonds has worked rather well over time. Not sure what the current market does to the theory.

I feel fairly comfortable using cash-like investments instead of bonds since most of my cash earns considerably more than bonds have been growing recently. During "normal" times, I'm probably on the losing end of that playing of the game. YMMV

 

[Chuckanut]

Honest question ,what am I missing? In this ultra low interest rate market why not x% stock y% cash?

That's near where I am at now. Years ago I read an study that showed that 80% stocks and 20% government insured CD's and savings accounts, did as well as 60/40 portfolios with less overall risk. I wish I could find it.

 

[OldShooter]

I guess I treat them almost interchangeably (cash or bonds). ...

Yup. Our fixed income tranche contains assets with varying degrees of liquidity, varying degrees of volatility and varying degrees of risk depending on when the asset are likely to be needed. Cash is what I have in my wallet.