Sold some equities last week - changes in AA and Bond Advice?

[pb4uski]

Yup, some have framed it as a shift to a capital preservation strategy.

 

[TechLead]

Now I'll be the first to concede that my strategy may not work out... in fact when I sold equities in March I said that it was an educated guess of the future on my part and might not work out... which is why I didn't necessarily encourage others to sell out.... so far it hasn't worked out too well but we are only on the first laps of a long race.

But I thought that this thread was about what to do in the fixed income space.

The troubles on "Main Street" in small businesses are just beginning (first lap).

The Wall Street is maybe less than 1/2 of the US Economy. That part is holding up thanks to the Fed.

Fed printed 22k+ of new money per US family. Almost all off it went to supporting Wall Street. That is almost all money were indirectly deposited into pockets of equity holders. (And Bond holders as well)

 

[VanWinkle]

You want to guarantee that?

It's math, I don't need to guarantee it. I can't guarantee I'll wake up tomorrow!!!

 

[njhowie]

It's math, I don't need to guarantee it. I can't guarantee I'll wake up tomorrow!!!

If it's math, then you could guarantee it - math is black and white, either right or wrong, no shades of grey.

It's a fund that we're talking about, and there are no guarantees - even if you hold to the fund's approximate duration. There are many reasons why it may not work out and you could lose money.

 

[VanWinkle]

If it's math, then you could guarantee it - math is black and white, either right or wrong, no shades of grey.

It's a fund that we're talking about, and there are no guarantees - even if you hold to the fund's approximate duration. There are many reasons why it may not work out and you could lose money.

From a post by nisiprius on Bogleheads:


It's a rough rule-of-thumb relationship.

Following your comment, "If bonds are for stability, shouldn't I go for short term bonds where the NAV is stable and yields will track changing interest rates?" The NAV is only relatively stable, of course. I would ask, "according to that reasoning, why shouldn't you go for a money market mutual fund or a bank account, where the NAV is perfectly stable?"

The answer for me is that I am balancing risk and return. And that I feel that in the past, intermediate-term bond funds have offered noticeably higher return than cash-like or very-short-term bonds. I feel that in the context of a portfolio that contains any normal allocation to stocks, portfolio risk is dominated by the stocks and there's very little gain in stability by going shorter than intermediate.

The idea of matching bond duration to investment horizon is based on the fact that unlike stocks bonds have a maturity date. Stocks really do seem to have a sort of vague, loosey-goosey tendency to mean reversion, that can be expressed by saying that over holding periods of 20 years or so, the standard deviation--uncertainty of final value--of a stock holding is only about 3/4 of what it would be without mean reversion. But with bonds, you are talking about a contractual commitment. Given investment-grade bonds, the chance of default is very small, and the value is guaranteed to rise or fall to face value at maturity. With a bond, by legal contract, barring default, what goes down must come up--and on schedule.

In practice in a bond fund, if you just visually inspect the growth chart of something like Vanguard Total Bond, what you will see visually is that ups and downs of as much as 5% or so are superimposed on a steady upward loft generated by coupon interest payments from the bond fund. The ups and downs are market-based, and have the same mysteries as any other market, but they are limited in size.

What the bond duration = investment horizon is saying that, both in theory and pragmatically, the bond duration is about right to insure that the steady upward loft from interest payments will exceed that from market ups and downs.

Thus, if you look at Vanguard Total Bond, whose duration has varied but has typically been around six years, you won't find many places where the fund would have lost money if held for six years. (I don't think there are any, in fact).

Over the course of one year, yes. Check in the vicinity of 1994 or 2013. Not a huge loss, but a loss. Over six years, no.

You can read more here:
https://www.bogleheads.org/forum/viewtopic.php?t=259330

 

[Montecfo]

Good stuff, All!

Now may be a good time for me to jump back in.

I know it SOUNDS like market timing, but, but ... given the timelines I am talking about, the political turmoil, and the pandemic, perhaps it is more of a "return to conservative investment policy" than market timing?

And, my core question, again, is more related to those products to move into with better than MM rates, so as increase the "bonds" component of the usually discussed E/B/C.

You know pretty much everyone times the market in one way or another. I'm always intrigued by the self-righteousness of annual rebalancers, who attempt to sell high and buy low.

But I think the base bond AA discussion is more interesting.

 

[mrfeh]

You know pretty much everyone times the market in one way or another. I'm always intrigued by the self-righteousness of annual rebalancers, who attempt to sell high and buy low.

Rebalancing isn't about sell high/buy low. It's about maintaining a desired AA..

 

[Montecfo]

Rebalancing isn't about sell high/buy low. It's about maintaining a desired AA..

Tell me how you do that without selling winners and buying losers and I will agree with you.

 

[jimbee]

Tell me how you do that without selling winners and buying losers and I will agree with you.

It's possible that all your investments lose money and your asset allocation needs to be rebalanced. No winners involved, all losers.

 

[Montecfo]

It's possible that all your investments lose money and your asset allocation needs to be rebalanced. No winners involved, all losers.

But if all lose the same you are balanced.

Otherwise still selling the ones that did better, buying the ones that did worse.

Everyone times the market in some way.

If so called DMTs state they are simply rebalancing based on criteria other than a calendar then that probably makes them rebalancers, not DMTs, right?

 

[TechLead]

Everyone times the market in some way.

I have been buying stock index funds/ETFs for decades now while never selling anything except for ESPP / RSUs given to us by our employers.
Never selling anything unless 401k plan moved funds.

0 market timing

 

[harley]

Rebalancing isn't about sell high/buy low. It's about maintaining a desired AA..

But changing your AA due to unusual economic conditions, age, comfort level, etc. are market timing? I understand. You set your AA at age 40 and never change. That's the only way to go.

 

[Montecfo]

I have been buying stock index funds/ETFs for decades now while never selling anything except for ESPP / RSUs given to us by our employers.
Never selling anything unless 401k plan moved funds.

0 market timing

LOL well so far so good. But you are not rebalancing so that makes u a DMT.

Do stop laughing and go stand in the corner with the other DMTs.

 

[mrfeh]

But if all lose the same you are balanced.

Otherwise still selling the ones that did better, buying the ones that did worse.

Everyone times the market in some way.

If so called DMTs state they are simply rebalancing based on criteria other than a calendar then that probably makes them rebalancers, not DMTs, right?

Rebalancing is not market timing. Sorry if you aren't able to see that.

 

[mrfeh]

But changing your AA due to unusual economic conditions, age, comfort level, etc. are market timing? I understand. You set your AA at age 40 and never change. That's the only way to go.

If you are changing your AA to follow your IPS (ie. "I will maintain an AA of age in bonds, and I will do that on 1/1 every year), that's not market timing.

Changing your AA because you think you know what the market will do in the future is.

 

[Fermion]

Instead of bonds, for my "safer" money I do a mix of holding cash and selling covered calls on solid stocks.

So like if you have $400,000 in cash and you sell calls for a 10% one year premium on $400,000 worth of stocks, then you net a 5% return on the $800,000. I do a bit better than those numbers because I take more risk than a 10% premium would give you.

 

[Montecfo]

If you are changing your AA to follow your IPS (ie. "I will maintain an AA of age in bonds, and I will do that on 1/1 every year), that's not market timing.

Changing your AA because you think you know what the market will do in the future is.

All hail the great definer!

A rose by any other name would...smell.

But in any event I think bond strategy is more interesting.

 

[stephenson]

monte,

You seem, well, less nice than most of the folks on this site ... I appreciate everyone’s comments.

 

[harley]

monte,

You seem, well, less nice than most of the folks on this site ... I appreciate everyone’s comments.

No, he just posts faster. I was thinking the same thing.

 

[stephenson]

Gah - after a couple days of light research, into a regime I am not particularly familiar with, I come up with: now is not a good time to be buying bonds - this seems to be what everyone is saying about sitting on the cash for awhile, and be opportunistic?

Is this the lesson I should be learning?

Checking about 0.45%
Fidelity MMF about 0.5%
One year CDs about 1%
SPTS (St Treasury ETF) about 1.7%
SPSB (ST Corp ETF), IGSB, and other ST and IT Corp Bond ETFs/funds ... is yield really about 2.5%?

I recognize the greater risk in corporate bonds, especially when investment grade, but to interest rate change risk, the NAVs of SPTS, SPSB, IGSB all look pretty stable ...

 

[brewer12345]

Gah - after a couple days of light research, into a regime I am not particularly familiar with, I come up with: now is not a good time to be buying bonds - this seems to be what everyone is saying about sitting on the cash for awhile, and be opportunistic?

Is this the lesson I should be learning?

Checking about 0.45%
Fidelity MMF about 0.5%
One year CDs about 1%
SPTS (St Treasury ETF) about 1.7%
SPSB (ST Corp ETF), IGSB, and other ST and IT Corp Bond ETFs/funds ... is yield really about 2.5%?

I recognize the greater risk in corporate bonds, especially when investment grade, but to interest rate change risk, the NAVs of SPTS, SPSB, IGSB all look pretty stable ...

That is all about right. You could sniff around for an online savings account and get around 1% with no risk whatsoever, but there really is no "fat pitch" in fixed income right now.

 

[stephenson]

Sigh ...

So, given I understand and can live with the higher risk corporate bond holdings, I could put the cash in an ETF with limited NAV fluctuation? Looks like most of those I mentioned have NAVs about 2% higher than last year's "range?"

2.5% (close to inflation) sounds a lot better than 1% ...

 

[brewer12345]

Sigh ...

So, given I understand and can live with the higher risk corporate bond holdings, I could put the cash in an ETF with limited NAV fluctuation? Looks like most of those I mentioned have NAVs about 2% higher than last year's "range?"

2.5% (close to inflation) sounds a lot better than 1% ...

Depends on your goals. With corporates you accept somewhat higher risk for a higher yield. The problem with corporates is that they tend to take a beating when stocks get clobbered. By contrast, treasuries generally rally in times of trouble.

You also want to look at something called SEC yield to see what yield will be going forward rather than looking at historical yield.

 

[VanWinkle]

If you are changing your AA to follow your IPS (ie. "I will maintain an AA of age in bonds, and I will do that on 1/1 every year), that's not market timing.

Changing your AA because you think you know what the market will do in the future is.

+1

 

[mrfeh]

Sigh ...

So, given I understand and can live with the higher risk corporate bond holdings, I could put the cash in an ETF with limited NAV fluctuation? Looks like most of those I mentioned have NAVs about 2% higher than last year's "range?"

2.5% (close to inflation) sounds a lot better than 1% ...

Depends on what your definition of "limited" is.

Bond fund NAVs are higher because interest rates have dropped.