Fixed Income is hard..... do not know which way to go

[rkser]

I need help in investing our fixed income, the 30% in our 70/30 Portfolio, which is in money market funds at present.

Been a basic 3 index fund - VTI, VXUS & BND (& VWIUX) investor all along, till the interest rate hikes & bond fund losses came knocking & I jumped ship on the bond BND Etf.

Our money markets are both in taxable & tax deferred accounts, & I realize these high rates will not last long

I am looking into -

1) MYGAs
2) Individual Corporate Bonds investment grade or Treasuries Bonds
3) Ishares Ibond, the term specific Bond ETFs
4) We do have some CDs at present
5) I dont know what I dont know - some other kind of Fixed Income suggestions are welcome ??

Fixed Income is hard......

I am 67, DW is 62, we are financially independent & retired early, we spend from taxable accounts & Roth convert in our IRAs. I would prefer not going any more aggressive with the Asset Allocation.

Ideally I would prefer an invest & forget type investment, but I realize some upkeep will be involved. I do not want an immediate Annuity.

If I cannot figure out Bonds/Fixed Income my myself, our local Fidelity no fee Service Rep. has suggested the individual bond service Fidelity provides for a fee.

Our Taxable are with Fidelity & almost out of Vanguard & Tax Deferred accounts are with Schwab.

I will appreciate any guidance/help in showing me the way. I thankyou in advance

 

[Al18]

Non callable CD’s in an IRA or a brokerage account. I can build a 3 year CD ladder with about 9 mouse clicks at Fidelity - shouldn’t take more than 5 minutes.

 

[rkser]

I do have some in CD Ladders at Fidelity & Schwab, still have much left in the money market funds.
Our CDs are mostly short term, I want to extend the fixed income time period duration to 5 to 7 yrs.

If I cannot understand/figure out the rest of the fixed income options available, I can put some more in CDS which are something I understand.
Maybe I should look at them again for longer terms, rather than going to investment grade individual bonds/treasuries thru a fee based program.

I was looking at MYGAs for extending time duration & the tax deferral benefit but have not decided yet.

Thanks

 

[Echard]

There are quite a few people on the internet that claim investments into treasuries and CD’s are all that is needed. They point to studies that show better long term performance, than a portfolio that mixes treasuries with corporate bonds. The reason is corporate bond’s correlation with stocks.

However, I struggled to accept this logic. Given that corporate bonds have higher returns over time, several simulations I ran showed better performance from a mix of treasuries and corporate bonds.

As far as the types of securities, I decided to mix individual securities for the predictability of income, with also etf’s for the ease of management. The CD’s were purchased at a time when they were yielding higher than comparable corporate bonds.

The BND approach you had was probably fine, as long as you don’t have specific time periods where you need to sell that fund. If you do, use CD’s, ishare iBonds, or individual corporate bonds. Or, move some of the money into a short term bond fund.

These are my opinions and not investment advice.

 

[Al18]

You can build CD ladders to 5 or 7 years, but they are currently paying less APR than 2 or 3 year CD’s. I keep an eye on the interest rates and when they exceed the shorter terms I’ll go longer.

Treasuries are more desirable if you’re in a high tax bracket

 

[rkser]

You can build CD ladders to 5 or 7 years, but they are currently paying less APR than 2 or 3 year CD’s. I keep an eye on the interest rates and when they exceed the shorter terms I’ll go longer.

Treasuries are more desirable if you’re in a high tax bracket

Thankyou,

Treasuries are state & local tax exempt, we live in Florida so that is not a factor in our case.

Yes, keeping an eye out for higher 5 yr old CDs

 

[rkser]

There are quite a few people on the internet that claim investments into treasuries and CD’s are all that is needed. They point to studies that show better long term performance, than a portfolio that mixes treasuries with corporate bonds. The reason is corporate bond’s correlation with stocks.

However, I struggled to accept this logic. Given that corporate bonds have higher returns over time, several simulations I ran showed better performance from a mix of treasuries and corporate bonds.

As far as the types of securities, I decided to mix individual securities for the predictability of income, with also etf’s for the ease of management. The CD’s were purchased at a time when they were yielding higher than comparable corporate bonds.

The BND approach you had was probably fine, as long as you don’t have specific time periods where you need to sell that fund. If you do, use CD’s, ishare iBonds, or individual corporate bonds. Or, move some of the money into a short term bond fund.

These are my opinions and not investment advice.

Thankyou for your opinions, points well taken,
When I bought the CDs, I did not know what the corporate bond rates were so I do not know the answer whether they were higher/lower.

I am new to & honestly feel overwhelmed in buying Treasuries on the particular days of different auctions...., that is my problem.

I have read many times that corporate bonds behave like stocks during the flight to safety & I have never bought a bond in my life.. that is second problem ....

Not that I intend to, but I can go & buy back the BND in our IRAs, as the price is still lower than what I sold it for.
It was my lazy way of investing in bonds for a long time till the sudden rise in interest rates. Apart from selling BND for Roth conversions, at the present time there was/is no need to sell BND and use the money.

 

[pb4uski]

Well, to begin with if you are 70/30 AA, is your tax-deferred more than 30% of your total? IOW, is it your tax-deferred that should have the 30% in fixed income in the interest of tax efficiency?

I view brokered CDs, US Treasuries and even GSE's as being pretty equivalent from a credit risk perspective. I tend to select from those three whatever has the best yield at the time. For a while, CDs were better than US Treasuries and at other times US Treasuries were better than CDs. I also keep an eye on GSEs and corporate bonds and will pick those up when they are attractive yields. There are periods of time that corporate bonds are attractive and other periods of time that they are not.

You could do a lot worse than just having a 5 or 7 year rolling ladder of CDs and Treasuries. Add in GSEs and highy rated corporates if you want to add a little spice.

 

[rkser]

Thanks for your reply Pb4,

BNDs in IRAs were less than 30% of AA, which were gradually being changed to Roth which is all in VTI.
That is the reason, I needed bonds in taxable to get the fixed income up to 30% of AA

Now BND in IRA & VWIUX in Taxable have been converted to CDs & Money Market as they stand today.

I will post all my investments soon to get your & forums opinions to proceed from here on.

Thankyou for your feedback

 

[pb4uski]

^^^ I wish that my tax-deferred was less than 30% of the total. I've n doing pretty aggressive Roth conversions for almost 10 years and the tax-deferred balance is relatively unchanged... not complaining though.

 

[rkser]

Our fixed income (30%) is 50% in CDs & 50% in Money Market(close to a million) of a 70/30 portfolio, I want to explore if we could do any better than investing the money market in CDs.

Right now, the Money Markets at Fidelity & Schwab are doing well but they may not hold that too long, if nothing looks better than I will invest the rest in CDs.

Thanks in advance for your feedback

 

[COcheesehead]

What are your goals for fixed income? The answer to the question will determine next steps.

 

[Montecfo]

I think extending duration is wise here. The vehicle is less important.

BUT I would make sure I know what I am getting with BND or any Agg linked vehicle.

You are getting the most from the most prolific issues. Not necessarily the credits you wish to hold, in my view. And can't sell just treasuries or just corporates.

Given your market experience I would probably be looking at a split of CDs, maybe a Treasury index or mutual fund, and a good corporate bond fund. The latter two to facilitate easy rebalancing, assuming your rebalance.

 

[enjoyinglife102]

I'm one who values simplicity and questions if all this time, complexity and effort will produce results better than your original strategy using bnd. Not for me, I'll stick to my 3 fund approach rebalancing annually and spending my time on other things.

 

[jazz4cash]

MYGA’s are a good supplement to your other Fixed Income products if you are positive the surrender charges won’t be an issue. They get a bad rap I think by being lumped in with other annuity products. Blueprint Income is a great source for learning sbout MYGA’s.

 

[Echard]

To add on to my other comment, while I always had a pretty deep knowledge of financial management, I had not paid much attention to bonds. They were always in my portfolio because my financial advisor told me to have them. However, they were a very small portion of the portfolio. I kept a lot of my wealth in cash because I was running a startup company I founded.

As I transitioned into semi-retirement (I still consult), I went on a deep learning exercise for fixed income. This forum helped a lot, as did Bogleheads and some other resources. I found that everyone has a different view of fixed income. Here are some generic categories of "people" I found when it came to fixed income philosophy:

1. Index Fund People - Put it all in index funds like BND and ride it out. Maybe mix in TIPS funds or different maturities. The downside of this approach is potentially having to sell when the fund is down, or never getting the "full" return due to changing interest rates.

2. Ladder People - They hate the unpredictability of funds and like the cash certainty of ladders. The downside of this appraoch is there is a fair amount of work to manage it, and individual security risk.

3. Safety People - Treasuries, CD's and agency bonds only, either individually or in funds. The downside of this approach is pretty low yields.

4. Corporate People - Reach for the extra yield of corporate bonds, either in funds or ladders. The downside of this approach is that it doesn't provide as good a stock correlation counter-balance as other fixed income categories.

5. Alternate Asset People - They put their money into alternative fixed assets like private debt funds, mezzanine real estate funds, etc. The downside of this approach is the extra risk of putting your money into an opaque investment with potentially long time period commitments.

6. Mix People - This is me. Corporate, Treasuries, Agencies, High Yield Corporate, Investment Grade Corporate, ETF's, Ladders, Preferred Stock, Baby Bonds. They use all of the fixed income categories, because of the unique benefits and disadvantages of each fixed income class. The downside of this approach is complexity and extra management.

 

[Spock]

One thing to point out is that you don't need to eat (understand) the fixed income elephant all in one bite, or even all in one sitting.
A unique characteristic about bonds is you get your money back at maturity and you can start over with something else. Say you build a shortish duration ladder now with just CDs, as they mature while you're getting comfortable with other bonds you can roll the maturing $ into whatever you have gotten familiar with, if it's better.


So no need to boil the ocean and try to understand MYGAs AND Treasuries AND Corporates AND whatever else all at once. Start with CDs while keeping a little play money back to dabble with Treasuries to gain experience. Wash-rinse-repeat with GSEs, then Municipals, and then corporates. You can stop at any point of the risk curve or complexity level you wish.

 

[COcheesehead]

One thing to point out is that you don't need to eat (understand) the fixed income elephant all in one bite, or even all in one sitting.
A unique characteristic about bonds is you get your money back at maturity and you can start over with something else. Say you build a shortish duration ladder now with just CDs, as they mature while you're getting comfortable with other bonds you can roll the maturing $ into whatever you have gotten familiar with, if it's better.


So no need to boil the ocean and try to understand MYGAs AND Treasuries AND Corporates AND whatever else all at once. Start with CDs while keeping a little play money back to dabble with Treasuries to gain experience. Wash-rinse-repeat with GSEs, then Municipals, and then corporates. You can stop at any point of the risk curve or complexity level you wish.

Smart. I started with munis because of my income and type of account I was buying them in. I laddered munis for at least a couple years before venturing into anything else. Now munis to me are so intuitive and laid the groundwork to understand other types of bonds.

 

[dobig]

I think extending duration is wise here. The vehicle is less important.

BUT I would make sure I know what I am getting with BND or any Agg linked vehicle.

You are getting the most from the most prolific issues. Not necessarily the credits you wish to hold, in my view. And can't sell just treasuries or just corporates.

Given your market experience I would probably be looking at a split of CDs, maybe a Treasury index or mutual fund, and a good corporate bond fund. The latter two to facilitate easy rebalancing, assuming your rebalance.

Agree.


If you want some duration ideas focused on income, here's a few.


JPM 20 year non callable notes with 5.625% coupon. Trading below par at $96.80 for an effective yield of 5.9% (cusip 46625HJM3)


WFCPRL and BACPRL - Wells Fargo and Bank of America perpetual preferreds. Wells Fargo pays annual dividend of $75 for an effective yield of 6.55% and BAC pays annual dividend of $72.50 for an effective yield of 6.45%.


Federal Farm credit bond - (cusip 3133EPTP0). 5% coupon trading below par at $98.49 for an effective yield of 5.12%.

The risk with the above as with treasuries and cds is if rates continue up your nav or base value goes down. If all you care about is the income and never plan to sell, it shouldn't be a concern.

 

[Montecfo]

Treasury has managed or mismanaged issuance such that half the portfolio is due in the next 3 years.

For investors that means there will be a LOT of inventory and some additional upward pressure on rates.

Which could or should push all rates higher. An interesting trend to watch if you have cash maturing over that time period as ladder people will.

 

[rkser]

What are your goals for fixed income? The answer to the question will determine next steps.

1) Safety is important , not more than 3% loss of money,

(Total Bond Market Fund loss of 13% had me go crazy & I got out, a mistake on my part to think of it as a safe investment)

2) Equal to (or above) 4% gain, I.e do not lose to inflation

3)If an insurance company is involved than not below a A rated company

4) Should not need much involvement on my part, invest & forget type, do not want to keep looking for next investment.

5) It may not be possible in fixed income but something like VTI & VXUS which I do not worry (yet ) about, they do their thing on their own. No not BND again.

6) Risk is the name of the game as far as Stocks are considered, yes VTI & VXUS will go down but will come up,
I do not want my FIXED Income do that

I cannot thank you enough Cocheesehead for making me put on paper what I had my mind.

Thankyou

 

[COcheesehead]

1) Safety is important , not more than 3% loss of money,

(Total Bond Market Fund loss of 13% had me go crazy & I got out, a mistake on my part to think of it as a safe investment)

2) Equal to (or above) 4% gain, I.e do not lose to inflation

3)If an insurance company is involved than not below a A rated company

4) Should not need much involvement on my part, invest & forget type, do not want to keep looking for next investment.

5) It may not be possible in fixed income but something like VTI & VXUS which I do not worry (yet ) about, they do their thing on their own. No not BND again.

6) Risk is the name of the game as far as Stocks are considered, yes VTI & VXUS will go down but will come up,
I do not want my FIXED Income do that

I cannot thank you enough Cocheesehead for making me put on paper what I had my mind.

Thankyou

I guess my question should have been simpler: do you need current income from your fixed income ( are you taking money out to live on) or is capital preservation more important? I think I know the answer.

 

[rkser]

I think extending duration is wise here. The vehicle is less important.

BUT I would make sure I know what I am getting with BND or any Agg linked vehicle.

You are getting the most from the most prolific issues. Not necessarily the credits you wish to hold, in my view. And can't sell just treasuries or just corporates.

Given your market experience I would probably be looking at a split of CDs, maybe a Treasury index or mutual fund, and a good corporate bond fund. The latter two to facilitate easy rebalancing, assuming your rebalance.

Thanks for your post, but I am trying to understand your suggestion -
Do you suggest something like VGSH - short term Treasury index fund etf & the VTC

 

[rkser]

I guess my question should have been simpler: do you need current income from your fixed income ( are you taking money out to live on) or is capital preservation more important? I think I know the answer.

Our current yearly income needs of $150 k to $175 k are met by -

1) DW SSI
2)Dividends around $100k
3)Draw from taxable, rebalancing & keeping the AA 70/30 - Pass on to kids with step up basis, when we pass
4) Use IRAs for Roth conversions only
5) Roth accounts to be used in future for Nursing Home money or pass on to kids

Hope I answered your question

 

[DrRoy]

I buy investment grade corporate bonds for my fixed income portion. The market value of these bonds fell with the rise in interest rates, but they still will mature at par.