Fixed income strategies

[FIRE_hopeful]

I’ve been retired for 8 years now, 63 YO, and have a nest egg hovering around 70-80% in low-ER stock ETFs & individual stocks, and the balance in money market funds that are yielding close to 5% today. I feel like we’ve pretty much “made it”, and I’d like to transition us to 30/70 growth / fixed income. I’m comfortable with the growth part, but I have major ignorance where the fixed income part is concerned. Would love the fixed income portion to at least beat by a couple percent inflation like what we’ve just experienced these last couple of years, but I don’t know if that’s possible.

What are folks doing for the fixed income part of your portfolio?

 

[pb4uski]

I transitioned from 60 stock/40 fixed to 0 stock/100 fixed a few years ago, but today I am 1% common/19% preferred/80% fixed income. The 1% common was inherited.

I have 37 different bond positions, mostly investment grade corporate bonds with some agency bonds and brokered CDs. I also have a portfolio of about 36 preferred stocks, most of which are investment grade and many pay qualified dividends that receive preferential tax treatment.

I think of my preferreds as fixed income though they are little more volatile than bonds but a lot less volatile than stocks. The preferreds are the risk part of my portfolio sicne I don't have any common stock investments. My weighted average yield for the preferreds is 6.9% and for the fixed income (bonds, CDs MM) is 5.2% so I think they will outpace inflation.

 

[Lsbcal]

Some of one's FI can be made of up TIPS. That is, *if* you have enough in tax free (Roth) or deferred (IRA) $'s.

See the current TIPS yields here:
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value=2024

and an article about TIPS here:
https://tipswatch.com/

I am referring to TIPS bond purchases and NOT about TIPS funds. One can make up a bond ladder of TIPS with the attractive rates available today (around 2.0%).

I personally have a 50/50 mix of inflation indexed and intermediate term bonds. On the non-indexed side I use a strategy of moving between Treasuries and Investment Grade Bonds (VCIT) based on whether equities are moving below a moving average. But one could just go with intermediate Treasuries like VGIT and that would be fine.

 

[pb4uski]

I've never used it but found this site interesting. https://www.tipsladder.com

Below is a TIPS ladder designed to provide ~$30,000 annually in inflation adjusted income for 10-years... 2025 to 2034

 

[Car-Guy]

I'm about 10 years older than the OP, but as most of you know who read my posts in the CD and fixed income threads, I got completely out of stocks about two years ago. I'm ~90% in brokered CD's and various bonds these days and could not be happier about it. The rest is cash.

No more watching the financial news all day, buying and selling and worrying. I spend very little time these days managing my investments.

Overall I've been averaging close to 7% in returns the past 2 years. At my age, good enough!

 

[pb4uski]

I'm about 10 years older than the OP, but as most of you know who read my posts in the CD and fixed income threads, I got completely out of stocks about two years ago. I'm ~90% in brokered CD's and various bonds these days and could not be happier about it. The rest is cash. Overall I've been averaging close to 7% in returns the past 2 years. At my age, good enough!

Averaging close to 7% on a portfolio of ~90% brokered CDs? Sounds too good to be true. Can you elaborate?

I only have one corporate bond that yields 7% and average is far below 7% so I want to know your secret.

 

[Car-Guy]

Averaging close to 7% on a portfolio of ~90% brokered CDs? Sounds too good to be true. Can you elaborate?

I only have one corporate bond that yields 7% and average is far below 7% so I want to know your secret.

I think I have answered that before in one of the fixed income threads but I'm too lazy to look it up.

So a summary; I have settled down to two buckets of fixed income investments. One is my self managed tIRA that is (today) made up of about 85% brokered CD's and 15% MM SWVXX. Combined they have been returning me just over 5.2% in the past year. My other larger bucket is in my 401k that is professionally managed in a stable value fund. (100's of CD's, treasuries and other bonds) and is basically at no management cost to me - a perk from my past employer. It's averaged about 8% the past two years. I did notice a slight drop last quarter so I'm waiting now to see what happens this quarter. Added together and it's close to 7% the past two years.

I'd move more of my tIRA to the 401k if I was allowed to.

 

[Lsbcal]

I think I have answered that before in one of the fixed income threads but I'm too lazy to look it up.

So a summary; I have settled down to two buckets of fixed income investments. One is my self managed tIRA that is (today) made up of about 85% brokered CD's and 15% MM SWVXX. Combined they have been returning me just over 5.2% in the past year. My other larger bucket is in my 401k that is professionally managed in a stable value fund. (100's of CD's, treasuries and other bonds) and is basically at no management cost to me - a perk from my past employer. It's averaged about 8% the past two years. I did notice a slight drop last quarter so I'm waiting now to see what happens this quarter. Added together and it's close to 7% the past two years.

I'd move more of my tIRA to the 401k if I was allowed to.

If we have a surge in inflation from the current 3% or so, isn't your tIRA with 85% brokered CD's a bit risky? Or do you have a strategy (ladder, etc.) to cover that risk? Probably you do as 2022 was certainly a wake up call for many.

Actually in my switch plan for the non-inflation adjusted part, I am exposed to rate risk. Luckily in 2022 I had pulled the plug on bonds. Of course, over the longer term they would probably work out but when you are a pretty old investor the long term is shorter then for younger investors.

 

[Car-Guy]

If we have a surge in inflation from the current 3% or so, isn't your tIRA with 85% brokered CD's a bit risky? Or do you have a strategy (ladder, etc.) to cover that risk? Probably you do as 2022 was certainly a wake up call for many.

Actually in my switch plan for the non-inflation adjusted part, I am exposed to rate risk. Luckily in 2022 I had pulled the plug on bonds. Of course, over the longer term they would probably work out but when you are a pretty old investor the long term is shorter then for younger investors.

Yep, a 6 to 18mo ~10 rung ladder at this time. And at my age, I've got a much shorter investment time horizon.

 

[Lsbcal]

Like many investors I have a difficult time deciding on the level of risk to take i.e. first on the AA and then on the level of risk within the categories of stocks/bonds/cash. However, I believe my level of risk will get me through the worst of times like those starting after 1929 or 1966.

I want to get through the worst of times (very low probability events) with plenty of spending money to enjoy travel and experiences and material items. For me that means especially the next 5 to 10 years.

 

[mathjak107]

i use a bucket system.

only each bucket is dedicated to the time frame i want the money

i use a 25% equity income portfolio for the short term bucket .

it has assorted shorter term bond funds and a floating rate high yield fund plus more conservative equity funds

bucket 2 is intermediate term money and is a 60/40 mix. more aggressive equity funds then bucket 1

bucket 3 is a mix of vti and berkshire and that is long term money

over all it’s a 50/50 pretty much as a whole .

i just like dedicated portfolios for each time frame

 

[Happyras]

After my golf on Friday with my friend of 55 years past, I always come away with better confirmation of my own investment direction. I am approaching 70 this year after 8 years of so called retirement from my career. With only a limited number of good years to go, I focus on making the most of what we have accumulated. It is far more than enough, but why loose it in the short fewer years left to enjoy it.

I invest mostly in FI at present. I have some longer term agency bonds, but I expect them to be called within 2 to 3 years, but they yield nearly 6% and are considered low risk. I used to play with preferred, but only have a some Wells Fargo perpetual which yields 6.4%. The lion share of our holdings are in a few cd's we picked up at the peak, but mostly we roll Treasuries to get 5.35% currently. We still have some stocks and funds, but only about 10% of our investments outside of real estate.

As I said, I get a lot of support from my one friend who is on the board of a few major corps still, and has a pretty clear handle on the world economy. He worked for the Koch brothers and did their bond trading, along with his oil work. As he states, there will be something to bring more risk into the equity market and the valuations are pretty high. Rolling short duration treasuries provides a decent yield for now until the yield curve corrects back. At our age, why take the risk.

I would like to buy more longer term corp bonds, but I think we may be in for more fun with inflation having lived through the Volker years.

 

[pb4uski]

I think I have answered that before in one of the fixed income threads but I'm too lazy to look it up.

So a summary; I have settled down to two buckets of fixed income investments. One is my self managed tIRA that is (today) made up of about 85% brokered CD's and 15% MM SWVXX. Combined they have been returning me just over 5.2% in the past year. My other larger bucket is in my 401k that is professionally managed in a stable value fund. (100's of CD's, treasuries and other bonds) and is basically at no management cost to me - a perk from my past employer. It's averaged about 8% the past two years. I did notice a slight drop last quarter so I'm waiting now to see what happens this quarter. Added together and it's close to 7% the past two years.

I'd move more of my tIRA to the 401k if I was allowed to.

Sorry if I didn't remember. A SVF hat returned 85 over the last couple years is incredible. Lucky you! And I agree with you on the last part... I'd go all-in to that high yielding SVF.

 

[pb4uski]

If we have a surge in inflation from the current 3% or so, isn't your tIRA with 85% brokered CD's a bit risky? Or do you have a strategy (ladder, etc.) to cover that risk? Probably you do as 2022 was certainly a wake up call for many.

Actually in my switch plan for the non-inflation adjusted part, I am exposed to rate risk. Luckily in 2022 I had pulled the plug on bonds. Of course, over the longer term they would probably work out but when you are a pretty old investor the long term is shorter then for younger investors.

Probably not since if inflation increase then it is likely that interest rates would increase as well either naturally since expected inflation is the base for interest rates or because the Fed would raise rates to slow down inflation as they did in 2022 so maturities would be reinvested at those higher rates.

 

[Lsbcal]

Probably not since if inflation increase then it is likely that interest rates would increase as well either naturally since expected inflation is the base for interest rates or because the Fed would raise rates to slow down inflation as they did in 2022 so maturities would be reinvested at those higher rates.

Yes, I was just wondering if the strategy included such a thought process. For instance, if the person were 75 and had long dated CD's (how far out I don't know) then that would be a bit painful. In general if one has bought at reasonable historic real bond rates like now then a sudden move up from here is probably not a problem.

 

[Lorenzo]

Some of one's FI can be made of up TIPS. That is, *if* you have enough in tax free (Roth) or deferred (IRA) $'s.

See the current TIPS yields here:
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value=2024

and an article about TIPS here:
https://tipswatch.com/

I am referring to TIPS bond purchases and NOT about TIPS funds.

...

Could you explain (or point me to an explanation) of the pros and cons of TIPS as individual bonds versus TIPS ETFs? Thank you.

 

[Lsbcal]

Could you explain (or point me to an explanation) of the pros and cons of TIPS as individual bonds versus TIPS ETFs? Thank you.

TIPS ETFs buy these bonds as money comes into the fund in some set strategy. If real rates are low then they will be buyers and if real rates move up as in 2022 then they will suffer along with other buyers who bought at low rates. You may see articles written about how bad TIPS ETFs performed in a rising inflation environment and that may be referring to the ETFs that bought at low rates. Sometimes I think the writers of these articles do not understand these concepts.

I would not be a buyer of TIPS if the rates were at very low levels and then when they are at reasonable levels (like 2% for the 5year) I buy individual issues so that I can hold to maturity and get the guarantee of a good real rate of return. I will not have to worry about fluctuations in the current rates and if rates go up then my bonds will price lower but since I hold to maturity they will eventually give me the real return on purchased them for.

Caveat, I am no bond expert.

 

[mathjak107]

after taxes , tips are guaranteed to fall behind inflation

 

[pb4uski]

after taxes , tips are guaranteed to fall behind inflation

Wrong if held in a Roth IRA!

 

[Lsbcal]

Wrong if held in a Roth IRA!

Yes, my TIPS are in tIRA and Roth Ira accounts.

 

[Out-to-Lunch]

after taxes , tips are guaranteed to fall behind inflation

Wrong if held in a Roth IRA!

+1
And, even if in taxable, also wrong depending on the fixed rate and your tax rate.

 

[Lsbcal]

+1
And, even if in taxable, also wrong depending on the fixed rate and your tax rate.

Assume you are talking about tIRA's as Roth's you get to keep tax free. In that case many retirees are in a very low tax situation. I am because my taxes are determined by SS and RMD's and pretty low for Federal and State is almost zero as SS not taxed.

Plus one does not necessarily hold the TIPS forever as they get mixed with stocks and such over the years before the RMD's kick in. Pretty complex to get a solid number.

 

[mathjak107]

Wrong if held in a Roth IRA!

in reality taxes were just paid up front on it.

figuring the cost of those taxes actually does effect after tax returns

 

[Lsbcal]

in reality taxes were just paid up front on it.

figuring the cost of those taxes actually does effect after tax returns

Once you have a Roth dollar it is a matter of what the returns will be without considering taxes. Yes you have paid up front but that dollar is yours now and no tax consequences apply to whatever investment you choose.

 

[pb4uski]

in reality taxes were just paid up front on it.

figuring the cost of those taxes actually does effect after tax returns

Once the money is in the Roth if it is invested in TIPS then it provides a real return... inflation plus the fixed rate... and is tax free.

You'd be better off to just admit that you are wrong on that rather than continue to make yourself look foolish.

I agreed with you that you were right if the TIPS were held outside of a Roth that they would be guaranteed to fall behind inflation after taxes. .