Is it a good time to buy more junk?

[ERD50]

@Texas Proud +1.

So, ERD50, is this a good time to sell junk?

Very likely. Something I've been meaning to check, but I will just review my AA and let that be the guide (again, using a 50-50 allocation for my junk fund).

-ERD50

 

[nun]

I suppose the basic question I'm asking is what would be your bond AA going into 2011. What %age corporate vs Government or even international...anyone spinning the wheel of Greek or Irish debt or AAA vs BBB

 

[brewer12345]

Personally, I like CDs best at this time. However, I also own a fund that holds convertibles and preferreds, and if I start nibbling at the bond fund I would probably do so via the Lehman Agg, which is a roughly 1/3 each mix of treasuries/agencies, agency MBS, and high grade corporates.

 

[nun]

I basically worry that my 30% Total Bond market AA will take a hit in 2011 due to it's emphasis on Gov debt and pressure on interest rates. Maybe I'll sell some and put it into Wellesley, that will increase my dividend equities allocation slightly and the higher interest paid by the corporate debt will buffer me somewhat.

 

[brewer12345]

I basically worry that my 30% Total Bond market AA will take a hit in 2011 due to it's emphasis on Gov debt and pressure on interest rates. Maybe I'll sell some and put it into Wellesley, that will increase my dividend equities allocation slightly and the higher interest paid by the corporate debt will buffer me somewhat.

What is the duration of your bond funds? If we are talking 5 or less, I would be inclined to stick to your AA and let it be, personally. The bonds are there for a reason (I presume), so don't miss the forest for the trees.

 

[braumeister]

Be aware that the loans in this fund [FFHRX] are junk as well. Just like junk bonds, "leveraged loans" also got destroyed in the crash.

Thanks; I was aware of that.
But as I tried to imply above, you can never be sure of anything. As I said, I only buy investment grade individual bonds, but since I nearly got severely burned by an investment grade muni, I don't take anything for granted any more.

Very, very diversified here, and watching everything like a hawk.

 

[nun]

What is the duration of your bond funds? If we are talking 5 or less, I would be inclined to stick to your AA and let it be, personally. The bonds are there for a reason (I presume), so don't miss the forest for the trees.

Average durations are as follows

Wellesley 6.3 years
Total Bond market 4.9 years
High Yield Corporate 5 years

So probably just let it ride or take some of the total bond market and put it in Vanguard Intermediate Investment Grade (duration 5.4 years) if I want to emphasize corporate over Gov bonds.

 

[nun]

Average durations are as follows

Wellesley 6.3 years
Total Bond market 4.9 years
High Yield Corporate 5 years

So probably just let it ride or take some of the total bond market and put it in Vanguard Intermediate Investment Grade (duration 5.4 years) if I want to emphasize corporate over Gov bonds.

I'm 50 yeras old and a couple of years form retirement so I have a 50/50 portfolio with Wellesley and Total Bond market being my income producing investments. In the end I KISSed it. Over the last year the Vanguard High Yield corporate had increase as a %age of my bonds so I rebalanced back into TBM saying to myself that I'm not concerned about interest rates, GDP or economic growth because I have my AA to maintain.

 

[veremchuka]

Suppose one want an asset allocation fo 60% stock and 40% bonds. Would any junk bond folks advocated a 40% holding in junk bonds to the exclusion of other bonds? NO! i am not trying to be snarky here but would you figure in a 6 shot revolver with just 1 bullet that it would be ok to spin the cylinder and fire the gun at your head? hey there are 5 empty chambers and just 1 has the bullet! 40% junk is not a "bond" allocation after all bonds are for stability in your portfolio. they are too risky and you should take risk in equities not fixed income. The portfolio would certainly not have the same risk characteristic of traditional 60:40 portfolio.

Does a portfolio of 60% stocks, 30% investment-grade bonds, and 10% junk bonds behave like a portfolio of 65% stocks and 35% investment-grade bonds? no the vanguard hycbf according to larry swedroe should be treated as 25% equity and maybe as high as 50%

see comments above in red

 

[Gone4Good]

Be aware that the loans in this fund are junk as well. Just like junk bonds, "leveraged loans" also got destroyed in the crash.

A couple of other concerns . . .

1) Huge bank loan refinancing risk in 2013

2) When rates eventually rise, it could hammer the cash flows of some of these borrowers. One of the nice features of this fund is that it is variable rate, so it will theoretically do well in a rising rate environment. That assumes the underlying borrowers can handle the increased payments. I suspect many will have difficulties.

3) Upside is significantly capped. Leveraged loans typically get refinanced at, or near, par with no pre-payment penalty. Considering that this fund is trading with only a couple of points of discount, you're really not going to earn much more than the stated yield at this point even if credit spreads continue to rally. So your upside is about 3%, but your downside is 20-30%. That's pretty negative asymmetric risk.

I like the idea of a floating rate fund with short rates as low as they can go, but I don't care much for the risk / return prospects of this one.

 

[ERD50]

I hope I have the quotes attributed correctly, it's hard when posters do the colors versus quote boxes, as colors don't carry through on a "quote this post". I had to edit and may have made a mistake:

LOL! said: Suppose one want an asset allocation fo 60% stock and 40% bonds. Would any junk bond folks advocated a 40% holding in junk bonds to the exclusion of other bonds?

veremchuka said: NO! .... 40% junk is not a "bond" allocation after all bonds are for stability in your portfolio. they are too risky and you should take risk in equities not fixed income. The portfolio would certainly not have the same risk characteristic of traditional 60:40 portfolio.

see comments above in red

You are correct, it would not have the same risk characteristic of traditional 60:40 portfolio. However, I think you are way overreacting. It would essentially increase your volatility to that of an 80/20 EQ/Bond mix, but some might be OK with that. FIRECALC shows a pretty flat response to EQ/BOND ratios over a 30 year period, all the way from about 35% EQ to 100% EQ.


LOL! said: Does a portfolio of 60% stocks, 30% investment-grade bonds, and 10% junk bonds behave like a portfolio of 65% stocks and 35% investment-grade bonds?

veremchuka said: no the vanguard hycbf according to larry swedroe should be treated as 25% equity and maybe as high as 50%

Isn't the statement from LOL! consistent with the high end of what Swedroe said? Why do you say 'no'? Let's use 50% EQ for junk (50% is what I use, and what charts and calculations seem to indicate):

Trad Bonds:

65% Stock
35% Bonds



Now, lets compare to:

60% Stock
30% Bonds
10% Junk

And let's follow Swedroe and split the Junk to 50/50 EQ/Bonds, cutting the bond allocation of the junk in half to 5%, creating a 5% stock portion, and assigning those 5% points to Stocks and Bonds.

65% Stock
35% Bonds

So, isn't that what LOL! said? Why do you say 'no'?

-ERD50

 

[veremchuka]

sorry for the red text. it was 1:45 am and i was tired and took the fastest way to comment. typically i wouldn't do that.

i hold the vg hycb fund but it is only 5% of my holdings. 40% or 35% in junk bonds is not what i would want but i am retired. is lol 25, 30, 35, 40 years old? i don't know. if lol is young and has 20 or 25+ years to retirement then an equity allocation of 100% may be ok for lol. for a long time i had a 100% equity allocation in my 401k and only changed it to 60/40 4 years before retiring and that was at the urging of a financial review when was told "you are crazy having 100% in equities if you want to retire in 4 years!".

i still maintain bonds are for stability not growth. if lol wants a high risk allocation then maybe junk bonds are ok but imo i'd hold more in equities and not junk bonds as equities should return more than junk bonds. hey if you want risk take the big pay back not the sorta big pay off. but in the final analysis only each of us know or show know what is right for us, me. no 2 investors situations are the same nor are their risk tolerance. some eschew junk altogether and even dislike corporate bond funds instead saying treasuries only, again larry swedroe.

 

[LOL!]

erd50 and myself can do math. veremchuka cannot do math at 1:45 am.

 

[mickeyd]

I like to assume the majority of risk in the equity part (60%) of my AA rather than the FI part of it (40%). For this reason I do not consider junk bonds when constructing/maintaining my AA.