Fixed Income portfolio allocation, 401k options dilemma

[jblack]

Hi all, like many others last year I pulled the trigger and exited my 401k's bond fund and have been rebuilding via its money market fund - which of course has been doing fine since. I'm staying the course for now as it looks like there's no rush but I am starting to wonder what I and likely others in similar positions should do in the future.

I would prefer to stay away from bond funds as I want to prioritize against loss of capital going forward but my 401k options aren't great for such an approach. For FI I'm limited to mixes in target date funds, a passively managed index bond fund (the one I exited), and actively managed bond funds of intermediate (~7yr) & short duration (<3yrs, 0.13 ER).

I can get a bit of my desired 20% FI portfolio mix into a separate Roth IRA at Vanguard but currently have REIT in there, and even if I moved that it would only provide perhaps 5-8% of the 20%. So I think I'm down to these options in my 401k:

1. Stay in MMF until rates look like they're going to go down and then hop into the short-duration bond fund. Accept a bit of capital loss risk for locking in rates.
   
2. Move some of my FI allocation into taxable with munis or whatever is most tax efficient (no state taxes here in TX). I'm currently in a high tax bracket (W2) so that will take a haircut, though.
   
3. Something else simple?

I've searched a number of the FI threads and interested in getting a bit more active in managing this part of our portfolio with CD's & selective corporates but in a bit of a loss of how best. Perhaps my hands are tied until I leave my company and can roll over into an IRA elsewhere, but since there could be many others here that could are in a similar situation I thought I'd go ahead and ask the collective wisdom.

Thoughts? More info needed?

Thanks!

 

[Exchme]

Bonds are yielding much more now than they were in 2021 when you were willing to invest in them, so I think you are making an emotional decision and trying to market time, those things don't lead to success with money.

If you re-buy the fund you had before, then if interest rates stay at today's levels, you will recover your 2022 losses over the average duration of the fund. If interest rates decline, you will recover faster.

The only case that I see for shortening duration is if you genuinely need this money sooner than the duration of the fund, then you should shorten duration to match your need date.

 

[Phroig]

I wouldn’t put fixed income in Roth.
I didn’t understand the bit about staying away from bond funds to prioritize against loss of capital, or the bit about taking a haircut on muni funds since you’re in a high tax bracket. Perhaps you could explain.
Can you share names/tickers for the bond funds in your 401K? Muni funds in taxable actually sounds like a good idea.

 

[pb4uski]

Either idea has merit. Stay in MMF in 401k as long as MMF yields are attractive. If/when they become less attractive then see what other options are in 401k or just shift 20% FI allocation to a muni bond portfolio in your taxable account.

If you do the latter, read through the muni bond thread and create a muni ladder for yourself rather than buy a munibond fund.

 

[jblack]

Thanks Pb4uski - I appreciate you sharing your quick insights and I'll certainly dive deeper into the muni bond thread.

I've learned a ton from everyone here over the past 16+ years and (unfortunately but unsurprisingly) fixed income has been a bit of a smaller black box I haven't dug into while focusing on growing the nest egg as simply/efficiently as possible. The longer threads on FI since last year have opened my eyes quite a bit and TBH it feels good to see how others leveled up in this aspect (albeit with a bit more effort). It may not be for everyone but it makes sense to me and I'm ready to be more actively involved with this smaller part of my overall allocation. I know other BHs may not take this route and that is completely fine, too.

Exchme / Phroig - thanks for your replies. I'm not making an emotional decision and would recommend to everyone interested in checking out the Golden Period of Fixed Income Investing I & II. It's a lot of reading, though ;-)

Hope this helps others who may be in similar 401k situations now or in the future.

 

[jazz4cash]

Maybe I missed it…..can’t you transfer funds from 401k to tIRA which gives you access to many FI options?

 

[jblack]

Varies by plan. I cannot on mine except for a smaller portion that was an original rollover from a prior employer. Everything else has to stay put.