Moving from stocks to bonds - how?

[HealthyFuture]

Thanks for such a vibrant, well-informed and generous-with-your-insight community.

I am getting close to pulling the plug. DW did earlier this year; I expect to do so within the year once I plot my exit strategy, which includes making sure I have clear activities/goals lined up for myself.

For the entirety of my 25+ years of investing, I have put most of my individual earnings into stocks. I have never been diversified between asset classes. (My retirement accounts are roughly 85% stock at age 50; not sure what the full picture is since I also have some cash and non-retirement equities accounts, but I’m going to guess it’s still roughly 85+% stock.) We moved asset allocation of my older DW’s retirement account down to 60/40 stock/bond a few years ago. I had envisioned leaving my allocation more high-risk since I’m younger than she is (by 10 years) and was planning to continue working for the foreseeable future. But that has changed.

We have three-plus years of cash, which seems like plenty to weather any sequence of returns risk. (I recently wondered if we should use some of it to purchase i bonds based on another thread.) And yet, in spite of having a very high risk tolerance (“set it and forget it”) for the last several decades, I’m no longer as confident that is a prudent thing to continue. How do we know (for example) that the US stock market won’t go the route of the Japanese market some day and stay that way? Until now, I often said to DW that the higher-risk approach was ‘safe’ for the long-term because we wouldn’t need the money for a long while. But now that the time horizon isn’t in fact so long — and as I watch the very real effects of aging in my parents and others and expect to need long-term care myself at some point that will be quite expensive — it seems more prudent to back off the risk, at least a bit. (There are no pensions in our future; SS yes. No heirs to leave money to, but a desire to donate generously as long as our health and that of family members are taken care of first).

However, I’ve never ‘traded’ from one asset class to another, and therefore haven’t a clue if I just log in to my account and send 25% (or whatever figure) over to bonds if that gets taxed this year, or only when I take it out. (I assume the latter.) Or if that’s even smart to do in one fell swoop (I learned the ‘dollar cost averaging’ approach to investing to not put everything into a fund at one time). And I’m not entirely certain what trusted resources to consult (‘trading asset classes’ search on the internet seems to bring up a lot of definitions but not necessarily how-to’s).

I welcome any input. I think I’m not ready to drop to 50-50 (maybe 65/35 or 70/30?) But how to do it is a bit beyond me.

 

[chassis]

In practical terms, sell the equity holding and buy the bond holding. In which custodian/platform are your assets held? It’s generally a few mouse clicks.

What is your rationale to move into bonds?

 

[RunningBum]

Your retirement accounts (401K, traditional IRA, Roth, etc) are pretty much a black box as far as taxes go. It doesn't matter what happens inside the account (other than possible wash sale situations); the money you withdraw (except from Roth) gets fully taxed as regular income. So you can freely rebalance inside of your retirement account.

"How" depends on the account custodian, but usually you can do an exchange between accounts. Worst case you sell some of the stock holding and then buy bond holdings, which an exchange can do in one step.

I don't have anything to offer for what your asset allocation (stock:bond mix) should be. It depends on your risk tolerance. It does make sense to be looking at this as you are getting ready to pull the plug. Personally I switched over to a "bucket" approach rather than a ratio. I have a short-term bucket which holds cash-like investments to cover the shortage of cash not covered by dividends and interest in my taxable accounts for the next 3-5 years. Then a medium bucket that I have chosen to invest 40:60 for the 5-7 years following. A long term bucket to take me to age 100 that I invest 90:10. Finally a legacy bucket that I never expect to use that I currently have at 90:10, that I will probably reduce as my heirs get older. This just makes more sense to me than to just choose a 60:40 or whatever AA just because that's what people do and it "feels" safe.

 

[OldShooter]

Your thinking is sound, IMO. And if you have weathered a few dips in the market with a heavy equity bias you clearly understand that volatility is not risk, where SORR is definitely risk.

Regarding the mechanics, you will have to sell stock in roughly the dollar amount that you want to move to bonds and (in a taxable account) pay any taxes that result. Then you will have to choose your bond strategy. Basically there are bond funds that are very popular holdings and probably right for you. There are also individual bonds, which may be corporate, government conventional or government TIPS. You can read about these and consider them at your leisure. As you have found, there are also I-bonds which are probably the best deal going except for the small purchase limits and having to add a TreasuryDirect account. Bond funds can be bought online just like stock funds or, of course, by calling your broker. IMO individual bonds and TIPS are best bought using your broker's bond desk. We use Schwab and the bond desk has provided excellent support at zero or near-zero cost.

For trusted resources, here are my two favorites and suggested good starts:
"The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ (This is Bill's first book; read it before reading his second one.)


"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

You didn’t mention the types of equity you are buying, but Charles Ellis' "Winning the Loser's Game" is well worth a read. Be sure to get the latest May 2021 edition.

The deep end of the pool is https://www.bogleheads.org/. There is some good introductory material there but I find the discussions to be too much and too intense for me as a passive investor.

 

[clifp]

Good question.

First, I'd say you may not want. I'm very much in the Warren Buffett camp, that I think bonds offer return-free risk. As overvalued as I believe the stock market it, I think bonds are much worse.

30 year Treasury bond is at 1.98% and 10 year is at 1.2%. Why anyone would want to loan Uncle Sam money for that long at such a tiny interest rate is beyond me.

I'd also say with 3 years in cash, and wifes having 40% in bonds. It seems to me you are in reasonable shape to survive a bear market.

Now having said this, I should say I've been consistently wrong about bond bear market happening soon for nearly ten years. So why anyone would listen to me on this particular subject is also beyond me. . As you know conventional wisdom is you should have bond in your portfolio, another reason to not listen to me.

Now, how you do it is relatively straightforward. First of all I would definitely do the retirement account, there is no reason to pay taxes to Uncle Sam until you have to.
You also should do it gradually, go to 80/20 this year or next year and then if you follow my advice you'll work your way down to 65/35 over the next few years.

Step 1 sell stocks in your IRA
Step 2 buy bonds. The go to bond fund is Vanguard Total Bond market, if you aren't a Vanguard customer easily purchased in the ETF form as BND. Now you can try and get fancy, and buy short-term, intermediate-term, maybe even International. But honestly, you aren't an expert at this stuff, and even if you guess right you are only going make a one or two percent more on what is 20% of your portfolio, It is going be a rounding error.
However, there is a reasonable alternative and that is to buy the Vanguard Wellesley Fund. Wellesley is balanced fund that is roughly 35% stocks and 65%, which has 40-year history of outperforming bonds, but with a risk profile closer to bonds.

My recommendation is as you spend cash in retirement you increase your bond portfolio by selling stocks in your IRA until you reach you target AA.

 

[HealthyFuture]

Your retirement accounts (401K, traditional IRA, Roth, etc) are pretty much a black box as far as taxes go. It doesn't matter what happens inside the account (other than possible wash sale situations); the money you withdraw (except from Roth) gets fully taxed as regular income. So you can freely rebalance inside of your retirement account.

"How" depends on the account custodian, but usually you can do an exchange between accounts. Worst case you sell some of the stock holding and then buy bond holdings, which an exchange can do in one step.

I don't have anything to offer for what your asset allocation (stock:bond mix) should be. It depends on your risk tolerance. It does make sense to be looking at this as you are getting ready to pull the plug. Personally I switched over to a "bucket" approach rather than a ratio. I have a short-term bucket which holds cash-like investments to cover the shortage of cash not covered by dividends and interest in my taxable accounts for the next 3-5 years. Then a medium bucket that I have chosen to invest 40:60 for the 5-7 years following. A long term bucket to take me to age 100 that I invest 90:10. Finally a legacy bucket that I never expect to use that I currently have at 90:10, that I will probably reduce as my heirs get older. This just makes more sense to me than to just choose a 60:40 or whatever AA just because that's what people do and it "feels" safe.

Runningbum- thanks for the info. The retirement accounts I’m seeking to rebalance are all tax-deferred accounts, so helpful to have confirmed that the taxes will be paid later. I like your bucket approach, and it seems consistent with how I’m beginning to think of this next phase of planning out the withdrawals which always seemed like a loooong way off. I will play with that concept and see what I come up with! I’ll give the exchange stock/bond action a try with perhaps a smaller amount to see how it works before I fully commit.

 

[HealthyFuture]

In practical terms, sell the equity holding and buy the bond holding. In which custodian/platform are your assets held? It’s generally a few mouse clicks.

What is your rationale to move into bonds?

Chassis, thank you. My goal is not so much to move into bonds per se, but to reduce overall portfolio risk while also not increasing inflation risk substantially. I assumed bonds might help with that goal. How would you approach this?

 

[HealthyFuture]

Your thinking is sound, IMO. And if you have weathered a few dips in the market with a heavy equity bias you clearly understand that volatility is not risk, where SORR is definitely risk.

Regarding the mechanics, you will have to sell stock in roughly the dollar amount that you want to move to bonds and (in a taxable account) pay any taxes that result. Then you will have to choose your bond strategy. Basically there are bond funds that are very popular holdings and probably right for you. There are also individual bonds, which may be corporate, government conventional or government TIPS. You can read about these and consider them at your leisure. As you have found, there are also I-bonds which are probably the best deal going except for the small purchase limits and having to add a TreasuryDirect account. Bond funds can be bought online just like stock funds or, of course, by calling your broker. IMO individual bonds and TIPS are best bought using your broker's bond desk. We use Schwab and the bond desk has provided excellent support at zero or near-zero cost.

For trusted resources, here are my two favorites and suggested good starts:
"The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ (This is Bill's first book; read it before reading his second one.)


"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

You didn’t mention the types of equity you are buying, but Charles Ellis' "Winning the Loser's Game" is well worth a read. Be sure to get the latest May 2021 edition.

The deep end of the pool is https://www.bogleheads.org/. There is some good introductory material there but I find the discussions to be too much and too intense for me as a passive investor.

Thanks, OldShooter - a great list of resources. I will check them out. I buy index funds mostly, but I do have some money in a ‘you will retire in this year’ fund too. That’s likely the one I want to get out of one way or another as the fees are higher than I prefer. If I could have everything in Vanguard, I would, but that’s not the option my current employer has for retirement account. I do not buy individual stocks; I’m a passive/index fund investor as I guess I don’t like work. [emoji1] I’ve wondered how risky it is to buy i bonds in the sense that I might lose track of them given the time horizon. (It seems prudent at some point to be consolidating rather than spreading things out!)

 

[HealthyFuture]

Good question.

… bonds offer return-free risk. As overvalued as I believe the stock market it, I think bonds are much worse.
…
I'd also say with 3 years in cash, and wifes having 40% in bonds. It seems to me you are in reasonable shape to survive a bear market.

Now having said this, I should say I've been consistently wrong ….

You also should do it gradually, go to 80/20 this year or next year and then if you follow my advice you'll work your way down to 65/35 over the next few years.

Step 1 sell stocks in your IRA
Step 2 buy bonds. The go to bond fund is Vanguard Total Bond market, if you aren't a Vanguard customer easily purchased in the ETF form as BND. Now you can try and get fancy, and buy short-term, intermediate-term, maybe even International. But honestly, you aren't an expert at this stuff, and even if you guess right you are only going make a one or two percent more on what is 20% of your portfolio, It is going be a rounding error.
However, there is a reasonable alternative and that is to buy the Vanguard Wellesley Fund. Wellesley is balanced fund that is roughly 35% stocks and 65%, which has 40-year history of outperforming bonds, but with a risk profile closer to bonds.

My recommendation is as you spend cash in retirement you increase your bond portfolio by selling stocks in your IRA until you reach you target AA.

clifp- Your self-effacing humor made me laugh. I appreciate the perspective/ question about why would someone want to loan the government money for such little return on the investment. I’ll do some additional thinking on that point. I appreciate the advice to do it slowly, and a couple of specific funds to look at, too. Great food for thought. Thanks for making the time to reply!

 

[chassis]

Chassis, thank you. My goal is not so much to move into bonds per se, but to reduce overall portfolio risk while also not increasing inflation risk substantially. I assumed bonds might help with that goal. How would you approach this?

I agree with the earlier post that bonds offer returns-free risk.

Bonds are a close facsimile to rubbish in this market.

I would continue dancing with the girl that I came to the dance with. In this case the girl is equities.

If you want to reduce risk, try a total market equity index fund. Or try a utilities-oriented equity fund. Also quantify your definition of risk and the acceptable level of risk to you. There is no such thing as zero risk. If you think you are getting zero risk, you are likely experiencing loss of purchasing power to inflation.

Here's one I recently learned about from the portfolio of a modest-means octagenarian: FIW - First Trust Water etf. Have a look at it.

The market is going higher. Inflation is in play now. Equities are where money should be invested.

 

[yakers]

I’m with clifp, consider VG Wellesley, it looks like a good fit to me.

 

[pb4uski]

Fixed income is a really difficult area these days. Yields are pathetically low and interest rate risk would seem to be significant (though many of us have been thinking that for years now).

But on the other hand, fixed income is portfolio ballast.... the intent is more to preserve capital than to generate income.

Bank CDs are attractive in that there is no interest rate risk and no credit risk if you stay under the FDIC or NCUA limits but yields are pathetic... 1% at best. Online savings accounts are similar but rates float more.

For a little more yield, look at short duration investment grade corporate bond funds.

Another way to mitigate equities risk is to substitute long-term equity anticipation securities (LEAPs... essentially just a long term call option) on a broad based equities index like SPY as an equities substitute.

Buying LEAPs: Investors can purchase a LEAP call option contracts instead of shares of stock in order to get similar long-term investment benefits with less capital outlay. Substituting a financial derivative for a stock is known as a Stock Replacement strategy, and is used to improve overall capital efficiency.

Another alternative that I find intriguing and own is SWAN... 90% of the portfolio is in medium term US treasuries and 10% in invested in SPY one year call options (5% June and 5% December). YMMV.

 

[FLSUnFIRE]

Fixed income is a really difficult area these days. Yields are pathetically low and interest rate risk would seem to be significant (though many of us have been thinking that for years now).

But on the other hand, fixed income is portfolio ballast.... the intent is more to preserve capital than to generate income.

Bank CDs are attractive in that there is no interest rate risk and no credit risk if you stay under the FDIC or NCUA limits but yields are pathetic... 1% at best. Online savings accounts are similar but rates float more.

For a little more yield, look at short duration investment grade corporate bond funds.

Another way to mitigate equities risk is to substitute long-term equity anticipation securities (LEAPs... essentially just a long term call option) on a broad based equities index like SPY as an equities substitute.



Another alternative that I find intriguing and own is SWAN... 90% of the portfolio is in medium term US treasuries and 10% in invested in SPY one year call options (5% June and 5% December). YMMV.

Being nearly 100% equities, I can't bring myself to buy corporate bonds (funds) in this environment. One thing I look at is that the S&P 500 earnings yield is currently 3.38%, these earnings should eventually make it to me as owner of the companies and hopefully they will continue to grow. AAA rated bonds seem to be yielding around 2.5%. Yes, the stock portfolio is subject to market valuation/volatility but so are the bonds (especially funds which I can't choose to hold to maturity and could have to sell if too many shares are redeemed). Even if I view stocks as more risky than bonds (I really don't feel that way given rate risk), 35% difference in yields is a nice premium for that risk.

 

[Badger]

I’m with clifp, consider VG Wellesley, it looks like a good fit to me.

+1 From what the OP has posted this seems like a good choice that doesn't require a lot of heavy thought or work since you have said "...I buy index funds mostly." and "...I’m a passive/index fund investor as I guess I don’t like work." This is what we have done with our tIRAs and Roths but with the addition of a portion in Wellington to achieve closer to 60/40. We also have some in taxable individual stock but that will be inherited instead of used by us and some in cash to ride out and blips in the market. Our investments continue to increase in spite of our spending even though we are no longer concerned about accumulation. We sleep well.
Some background to put this in perspective: we are in our early 70s with no debts, own our modest home, have small pensions, SS, Medicare and Tricare. Good luck with what ever plans you choose.



Cheers!

 

[mrfeh]

Runningbum- thanks for the info. The retirement accounts I’m seeking to rebalance are all tax-deferred accounts, so helpful to have confirmed that the taxes will be paid later. I like your bucket approach, and it seems consistent with how I’m beginning to think of this next phase of planning out the withdrawals which always seemed like a loooong way off. I will play with that concept and see what I come up with! I’ll give the exchange stock/bond action a try with perhaps a smaller amount to see how it works before I fully commit.

First, read this: https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

After you're comfortable with those concepts, then read this: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[swaneesr]

First, read this: https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

After you're comfortable with those concepts, then read this: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

Mrfeh

Does the first link work for you? Perhaps my phone browser. Second link works.

Swanee

 

[mrfeh]

Mrfeh

Does the first link work for you? Perhaps my phone browser. Second link works.

Swanee

Works for me (from a PC browser). Make sure you are clicking on the text and not copy/pasting.

There is an unusual character in the URL. Might just want to google "bogleheads investing startup kit".

 

[pb4uski]

Being nearly 100% equities, I can't bring myself to buy corporate bonds (funds) in this environment. One thing I look at is that the S&P 500 earnings yield is currently 3.38%, these earnings should eventually make it to me as owner of the companies and hopefully they will continue to grow. AAA rated bonds seem to be yielding around 2.5%. Yes, the stock portfolio is subject to market valuation/volatility but so are the bonds (especially funds which I can't choose to hold to maturity and could have to sell if too many shares are redeemed). Even if I view stocks as more risky than bonds (I really don't feel that way given rate risk), 35% difference in yields is a nice premium for that risk.

Might work for you but that wasn't the question.... the OP has already decided that they don't want to be 100% equities... so if someone doesn't want to be 100% equities like you are then what do you suggest?

P.S. The S&P 500 dividend yield is currently only 1.27%, not 3.38%. At the same time AAA bonds only 2.5% if you go out to 20 years on the yield curve and then they have loads of interest rate risk. So no 35% premium at all... the 10 year Treasury would provide a better income yield.

https://www.multpl.com/s-p-500-dividend-yield