Investing in 2023

[Jerry1]

I’m looking at Fidelity’s site and see three month T-Bills earning just over 4.5%. So I’m asking myself, why shouldn’t I move the bulk of my investments into a short term bond ladder for 2023. Is there any belief that the equities market is going to deliver that level this year? I know we don’t know the future, but 4.5% is pretty good and personally, I don’t feel the market will have a positive return this coming year. Thinking about 75% in a bond ladder.

In a similar vein, I know I’m late to the party (funeral), but I don’t think there’s any reason to believe interest rates are going down and I’m sick of watching my bond funds decrease so at a minimum I need to move everything out of my funds and into individual bonds.

In short, I need a better plan for 2023 than to hold tight and watch my portfolio shrink.

FWIW, 2023 is the start of a new financial reality for DW and I. We both start SS this month and that, with my pension will cover our spending budget. So, other than major lumpy expenses like a new roof or whatever, we should not need to draw from our investments. The house and vehicles are in really good shape so I don’t foresee and significant expenditures in the next few years.

 

[perez99]

Is 75% the fixed income portion of your Stock/Bond allocation? Wondering if you are also changing the stock/bond asset allocation or just the composition of your fixed income?

I did sold all my bonds funds in Q1 to a stable value option in my 401k. More recently move it to a ~5 year bond ladder. I have about 14 individual bonds with 1-3 bonds maturing each year. Goal is to decide what to do as they mature (reinvest or living expenses) depending on stock market performance (while trying to stay between 60%-70% in stocks).
It was a learning experience and didn't find easy to pick individual bonds due to less understanding of credit risk assessment (should I buy California, Illinois municipal bonds?, Can you relay on ratings?)
So for me I hope its worthwhile, but certainly more work than just buying a fund.

 

[Jerry1]

The 75% would be a rebalance. I’m currently around 50/50. As for picking bonds, I’d be focused on Treasury’s so risk and complexity are minimized.

 

[VanWinkle]

Sounds like the horse has already left the barn and you're closing the gate based on what used to be in the barn. I think making changes based on one year's results is a mistake. If you feel changing to 75% fixed income will be a permanent move to help you stay the course, then it could be a good move for you. I still say selling low is not a good way to make money, but sometimes it does soothe the mind. Good luck to you and I hope it works out for you,

VW

 

[Montecfo]

Jerry I think this would have been better if thread title was "Investing in 2022".

Don't disagree with anything you said. It is just a needle threading exercise now.

Can't disagree with a greater tilt toward bonds given market outlook. Having said that, your SS payments are like floating rate bonds, so some might argue a greater tilt to equities is indicated.

Bottom line: I do not think your approach is crazy. But the easy money on a move into bonds has been made in my view.

Now, if inflation comes back and you can lock in some 4.5%+ T-Bonds for 5 years+, that might make it more compelling.

 

[COcheesehead]

I am 70% fixed income. FireCalc, Fidelity’s retirement planner, FICalc, etc all say 100% success with that AA.
My ladders - taxable and tax free generate nearly $200k and we spend $135k.
I built the ladders to take SS at 70 which is in 9 years.
I still have assets in equities, but the market is giving us a phenomenal opportunity in fixed income.

 

[ShokWaveRider]

Staying in Fixed income for 2023 (Same as 2022). Currently generates over 3 x what we actually need/spend with plenty a buffer for emergencies. No need to Gamble.

 

[Lsbcal]

I think moving to 3 month Tbills from equities is still a good move at the present. Don't know how long that situation will last. I would look for the SP500 to go above it's 12 month moving average by maybe 2% to move back to equities. Others will strongly object to this idea.

Regarding bond funds, the bonds have already been repriced in the funds. Hence the yields are up but prices down.

 

[njhowie]

As much as I am one of the biggest proponents of individual bonds on this site, I think you're likely making a mistake.

It's always darkest before the dawn. Stick to your AA and take advantage of the cheap prices we have today. Your equities are down, so buy more. You like yield on fixed income, pick up some more. If you don't have money, then reinvest the cash flow the portfolio is generating. Rebalance what you have according to your AA. Do your selling today while you can take any tax losses in 2022.

If you make a big move to fixed income, you are going to have to make a decision when to revert to your AA, begin picking up equity, how much and over what time frame to move back in...and possibly be stuck with more fixed income than you really want for the longer term.

You never have to make a move. You're getting impatient and letting the market get the best of you and push you around. Let me throw back what most folks around here post - do nothing, history shows that is the best plan, the markets will bounce back and move to new highs, and so on.

If you've never invested in individual bonds, why start now? Folks on this site have bashed the few of us who have spoken up about individual bonds giving us a litany of reasons why bond funds are so much better, why the big change now? Simply because you're down over the short term? It hasn't even been a year - that's very short term. After the greatest bull market in history for the past 10+ years, you're upset because your portfolio is down for one year?

Bottom line, based on your reasoning, you're timing the market and making a big change. It's likely not a good idea.

 

[njhowie]

Staying in Fixed income for 2023 (Same as 2022). Currently generates over 3 x what we actually need/spend with plenty a buffer for emergencies. No need to Gamble.

Ditto. No change. Stick to the game plan. Take maturities, and all cash flow and reinvest in new fixed income instruments.

 

[COcheesehead]

Regarding bond funds, the bonds have already been repriced in the funds. Hence the yields are up but prices down.

The yields are up because the NAVs have dropped, but what is important is the distribution which for most general bond funds like BND or AGG is 2.5% or less. Ouch.

 

[W2R]

Sounds like the horse has already left the barn and you're closing the gate based on what used to be in the barn. I think making changes based on one year's results is a mistake. If you feel changing to 75% fixed income will be a permanent move to help you stay the course, then it could be a good move for you. I still say selling low is not a good way to make money, but sometimes it does soothe the mind. Good luck to you and I hope it works out for you,

VW

+1

I'm not changing anything. Like njhowie says,

do nothing, history shows that is the best plan, the markets will bounce back and move to new highs, and so on.

 

[Freedom56]

The strategy for 2023 should be no different than 2022. The highly speculative stock market bubble will continue to deflate. Meme stocks and Crypto will be the new "pet rocks". If your bond fund earns (in distributions) less than cash in a money market fund, which are now yielding 4.0- 4.25%, they will continue to decline. What 2022 should have taught people is that bond funds are not bonds. They are not fixed income assets. They are bloated with low coupon debt and hidden trading fees and during the past 12 months have been unable to raise their distributions and keep up with rising rates. The financial media is finally starting to catch on to this reality now at the end of 2022:

"Don’t Let Them Fool You—Here’s Why Bond Funds Are Not Bonds"

https://www.forbes.com/sites/chrisc...why-bond-funds-are-not-bonds/?sh=70d9a489484d

 

[njhowie]

"Don’t Let Them Fool You—Here’s Why Bond Funds Are Not Bonds"

https://www.forbes.com/sites/chrisc...why-bond-funds-are-not-bonds/?sh=70d9a489484d

Nice find. It's what the few individual bond proponents on this site have been saying for a long time.

 

[Rianne]

We started our bond ladder in 2022. Right now we're 65% treasuries and CDs and 35% equities. But we're 65 on Medicare and will take DH SS at 70. I bought higher coupon CDs and Ts and averaged 4% YTM. The question is where will rates be when our bonds mature?

We're in the preserve mode at this point. Our equities are still up 7.2% since we have not touched them for 8+ years. You're in your early 60s and may benefit from the equity market coming back. I guess your decision is based on risk. FIREcalc gave us 100% at almost twice our spending rate to 95 yrs. old. Inflation will probably go down in the next 2 years. Our hopeful plan is to lock in long-term treasuries and CDs with decent coupons for cash flow when the ladders mature in 2 years. It's like our own annuity plan excluding an insurance company and fees.

I did a lot of calculating with the help of the bond desk. They were patient and those were long calls figuring out our strategy, YTM, coupons, distribution to our settlement account etc. It was back to school for me. You have the time. It's kind of a puzzle putting the pieces into place for safety and longevity.

 

[marko]

As much as I am one of the biggest proponents of individual bonds on this site, I think you're likely making a mistake.

It's always darkest before the dawn. Stick to your AA and take advantage of the cheap prices we have today. Your equities are down, so buy more. You like yield on fixed income, pick up some more. If you don't have money, then reinvest the cash flow the portfolio is generating. Rebalance what you have according to your AA. Do your selling today while you can take any tax losses in 2022.
.

That's my plan. Stocks go up and down, but my dividends that I live on stay pretty much the same. Out of sheer indecision, I stayed the course in 2008 and I'm so happy that I did.

 

[frayne]

With your investment of T bills paying 4.5% and inflation running at ~7.5% you're still losing 3%. I'm planning to stick to my 60/40 AA with the fixed income position in the highest safe return possible, T-bills or CDs paying +4%. The 60% is staying put in equities for the short and long term. I'd never bet against the US market, too many unknown variables both good and bad but mostly good. Just my two cents.

 

[audreyh1]

Not changing AA for 2023. I’m in the process of buying more equities to get back to my target asset allocation.

 

[Markola]

The last 12 months have been a rare bright(er) spot in for my international holdings. YTD returns for our Vanguard index funds are:

Total US Stock: -19.33%
Total Intl Stock: -15.38%

Total US Bond: -12.90%
Total Intl Bond: -12.42%

Our AA is around 51% stock, 3% Bitcoin, 46% bond. I have no idea about 2023 returns but my gut and my head say we haven’t seen the worst of the markets yet. However, my gut and my head are completely untrustworthy about the future behavior of such complex systems, so I will stick to my asset allocation! [emoji5]

 

[Lsbcal]

The yields are up because the NAVs have dropped, but what is important is the distribution which for most general bond funds like BND or AGG is 2.5% or less. Ouch.

Looking at a bond fund like VBTLX (Vanguard Total Bond Index) we calculate the monthly return as

total return = 100*((distribution + NAV_at_end_of_month)/NAV_at_start_of_month) -1)

So the total return is not just the distribution yield and includes the change in NAV. For the yearly return we multiply each month's total return.

For bond funds like VBTLX the fund bought a lot of bonds at low rates and suffered the consequences of the fast rate rise. You would have a similar outcome with individual bonds if you bought at low rates too. I personally chose not to buy at those low rates. Now we are in a more normal rate regime (I think) withe bonds in those funds having been repriced.

Personally I've only been buying individual TIPS in retirement accounts and Tbills. I would use funds like Treasury funds and short term investment grade funds as trading vehicles since they give me easy access plus diversification when I have no intention of holding to maturity. But that is not what most do here.

 

[njhowie]

You would have a similar outcome with individual bonds if you bought at low rates too.

No, you would very likely not have a similar outcome.

The bond fund would have to sell those bonds for a loss as investor redemptions came flooding in, and continue to. The investor who bought individual bonds has no requirement to sell the bonds for a loss.

 

[Lsbcal]

No, you would very likely not have a similar outcome.

The bond fund would have to sell those bonds for a loss as investor redemptions came flooding in, and continue to. The investor who bought individual bonds has no requirement to sell the bonds for a loss.

OK, yes in the extreme where there are heavy outflows from bond funds all bets are off. Still if you bought a bond at very low rates, it's a dud because you will collect a rotten yield but yes you can hold to maturity. What I like about TIPS is that if you buy at decent real yields, even if real yields move up you are going to get a decent return when held to maturity. Not so clear with nominal bonds.

P.S. I am not a bond expert.

 

[njhowie]

OK, yes in the extreme where there are heavy outflows from bond funds all bets are off.

Isn't that exactly what we've seen over the past 6 months?

Still if you bought a bond at very low rates, it's a dud because you will collect a rotten yield but yes you can hold to maturity.

Here's where all of you folks are continually wrong with this worn out argument. The individual bond investor has already signed up to collect this "rotten" yield the day he/she pressed the buy button. They locked in that yield and are happy with it no matter where rates go - because on the day they made the purchase, the yield was good relative to the market, and more often than not, they were buying with the intent to hold until maturity. So, please, enough with the "...but you have a bond/CD with such a low interest rate".

 

[Lsbcal]

Hey njhowie, can we agree to just have a mild discussion without taking offense? Most of us are not professionals here.

I personally don't have bond funds now and if there were a bunch of redemptions, well I haven't followed that news. Also I just don't like to buy bonds when real rates are very low (like negative) as they were back some months ago. So for 2022 it was MM funds and Tbills. Will stick with maybe 3 month Tbills for the first part of 2023.

 

[njhowie]

I think things have gotten way off the mark from what Jerry was looking for, so I'll bow out at this point. This thread has pretty much run its course.