Lsbcal
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Use a barbell to lower interest rate risk?
I've been seriously thinking of lowering the duration of our bond funds i.e. lower the interest rate sensitivity of the overall fixed income portfolio.
William Bernstein has advocated a barbell approach for the FI part of the portfolio, i.e. maybe 80% in Tbills and 20% in an intermediate bond fund. Here is a link that I think works for that WSJ article: Taking the Reins to Cut Down on Risk - Wall Street Journal - WSJ.com
Here is another recent Bernstein article: Bill Bernstein: Make Peace With T-Bills
Yes, I think moving to another FI portfolio is market timing and it is tricky indeed. I think one would have to be satisfied with lowering portfolio rate sensitivity and not necessarily beating the market unless one got lucky.
We are in a remarkable period where the Fed is trying to manage the overall yield curve, not just the short end. So to me it might be sensible to move to this posture for 1 to 3 years. Also should we have a sudden inflation spike, unanticipated by the market inflation, Tbills would be the place to be for awhile.
What do other people here think of this barbell idea?
I've been seriously thinking of lowering the duration of our bond funds i.e. lower the interest rate sensitivity of the overall fixed income portfolio.
William Bernstein has advocated a barbell approach for the FI part of the portfolio, i.e. maybe 80% in Tbills and 20% in an intermediate bond fund. Here is a link that I think works for that WSJ article: Taking the Reins to Cut Down on Risk - Wall Street Journal - WSJ.com
Importantly I think he is referring to nearly or fully retired folks.For example, someone who wanted a one-percentage-point rise in interest rates to cause their fixed-income portfolio to drop by only 1% would put 80% of their money allocated to bonds into Treasury bills or a similar cash-like product, if their 401(k) plan offers one, and 20% in a low-cost bond index fund.
Here is another recent Bernstein article: Bill Bernstein: Make Peace With T-Bills
Another thought, one could lower the duration of the FI by going to a short term bond fund like VFSUX short term investment grade. But note that in past rate rise periods the spread narrowed between intermediate and short term bonds so one did not get the full effects of reduced duration. For instance, in May 2004 to Mar 2006 the 5yr Treasury went up 2.2% but the 2yr Treasury went up 3.4%.Bernstein: Get over the low expected returns of fixed-income instruments, because you don’t have a choice. If you’ve saved up enough assets to retire on, you still want to put it into relatively riskless assets—T-bills, CDs, things like that that have relatively short maturities. If things mean-revert, you’ll be fine; you’ll be back up to the normal historical yields. The yields we’re looking at are obviously artificially low, and will inevitably reverse.
Yes, I think moving to another FI portfolio is market timing and it is tricky indeed. I think one would have to be satisfied with lowering portfolio rate sensitivity and not necessarily beating the market unless one got lucky.
We are in a remarkable period where the Fed is trying to manage the overall yield curve, not just the short end. So to me it might be sensible to move to this posture for 1 to 3 years. Also should we have a sudden inflation spike, unanticipated by the market inflation, Tbills would be the place to be for awhile.
What do other people here think of this barbell idea?
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