Let me also recommend you look into preferred stocks. I know they are technically "equity". However, they act in nearly every way like a bond. You can also find some high quality exchange traded debt. Both of these options offer better yields than CDs and treasuries although of course with more credit risk.
Struggling to Increase the Fixed income Portion of Portfolio
- Thread starter 38Chevy454
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Our bond funds are in tax-deferred where they will sit, reinvesting dividends, for another 13 years at least. I'm sure rates will zig and zag a few times during that period. We don't have a large allocation to bonds (27%), and it's there strictly for some stability. We keep sufficient cash at Ally for 2-3 years of expenses not covered by pensions, dividends, and rental income. I replenish Ally from taxable, which is 100% equities. So, other than rebalancing from time to time when it seems appropriate, I don't pay much attention to our little bond allocation.
audreyh1
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These won’t give you the low correlation with stocks and thus the “stability’ which is the whole point of fixed incone as part of an AA. Better to stick with high quality core bond funds and look to your equity allocation for growth and inflation hedging.
COcheesehead
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Do they really act like bonds? My experience is they are more volatile.
OP seems to be open to a tad more risk. Therefore, for a little more risk, you can get term dated preferreds that'll give you better yield than the bond funds you mention and return of principal, just like the bonds. If you're confident in the issuing company, the share value fluctuations are irrelevant if you plan to hold to maturity (or call).
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Agree, the share price can be more volatile....and can be less in some cases. Especially the some of the more illiquid issues. My comment was more related to how the share price changes in relation to interest rate changes. They act the same as bonds in that sense.
audreyh1
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He’s trying to dial down the risk, and have a chunk of the portfolio for stability to offset the volatility of equity.
Ok, but again, if you're holding 'til maturity (bonds or preferreds) the volatility is irrelevant. In this sense, preferreds are much different than commons.
I think there's a lot to be said for just buying short-term treasuries in this environment. What is often missed in a ultra-low interest rate environment (which we are very slowly emerging from) is the risk of catastrophic losses in longer-maturity bond funds in the event of a flight to safety during a market panic. Given the yield curve you are simply not being compensated for taking on term risk.
This article does a good job of parsing CD/Treasury/MM returns:
https://thefinancebuff.com/treasury-bills-cd-money-market.html
Personally I prefer to take my risk on the equity side - which is why 100% of my 60% fixed income allocation is in 1 year T notes and Vanguard Short Term Treasury.
I also recommend Todd Tresidder's article on the bond market bubble from a couple of years ago. The key take-aways still apply in terms of longer-maturity bonds being arguably riskier than stocks in the current environment. This is also talked about at length in Larry Swedroe's newly-revised edition of "Avoiding the Risk of Black Swans" which focuses on the need for alternative investments in a market in which stocks are overvalued and the bond market's flirtation with an inverted yield curve signals danger ahead.
https://financialmentor.com/investment-advice/investment-strategy-alternative/bond-bubble/9064
This article does a good job of parsing CD/Treasury/MM returns:
https://thefinancebuff.com/treasury-bills-cd-money-market.html
Personally I prefer to take my risk on the equity side - which is why 100% of my 60% fixed income allocation is in 1 year T notes and Vanguard Short Term Treasury.
I also recommend Todd Tresidder's article on the bond market bubble from a couple of years ago. The key take-aways still apply in terms of longer-maturity bonds being arguably riskier than stocks in the current environment. This is also talked about at length in Larry Swedroe's newly-revised edition of "Avoiding the Risk of Black Swans" which focuses on the need for alternative investments in a market in which stocks are overvalued and the bond market's flirtation with an inverted yield curve signals danger ahead.
https://financialmentor.com/investment-advice/investment-strategy-alternative/bond-bubble/9064
COcheesehead
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Is anyone recommending longer term bond funds? Prevailing wisdom is stay short, stay high quality and stay out of funds.
Depends on where you get your "prevailing wisdom." Many Bogleheads and others of like mind suggest that anything other than sticking to an intermediate term total bond index fund is market timing. I don't see all that many people talking about staying under two years (my definition of "short") or 100% Treasuries or FDIC insured CD's (my definition of "quality").
COcheesehead
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The Bogle way (and its forum of Bogleheads) was designed to present an easy to follow, simple, low cost way for the masses to achieve their financial goals. Touching one's portfolio is actually frowned upon. So bond ladders are out, short term bond funds are out. Anything, gasp, related to taking advantage of something short term in the market is out.
VanWinkle
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+1 for sure
VanWinkle
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Your points are generalizations that are not true. Many of the Bogleheads discuss short term bonds, bond ladders, and CDs on a regular basis.
They just don't condone jumping in and out of investments attempting to market time.
VW
COcheesehead
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I am on Bogleheads. I see and participate in the discussions. My hands have been slapped by many a poster for bringing up individual bonds, ST bonds, anything against the Bogle way. They may discuss it, they just don't agree with it.
ncbill
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In the past there was a bias over there towards intermediate-term corporate for bond funds, but I prefer short-duration government/corporate.
VanWinkle
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I agree with you that there is nothing wrong with CDs, individual bonds, and short term bond funds as part of a portfolio's fixed income. I think the CDs and individual bonds take more time and add complexity, but they work fine for those that utilize them. I will stand up for you on Bogleheads next time they try to "slap" you down.
audreyh1
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Personally I don’t get the point of an AA, unless you rebalance. Volatility does matter in rebalancing, you don’t want all your assets to go down the same amount at that same time. Personally I don’t think holding bonds to maturity is very compatible with rebalancing due to impaired liquidity, but others may differ. The models Firecalc runs to determine portfolio survival use bond indexes (i.e., bond funds or constant maturity treasuries marked to market) and rebalance annually.
audreyh1
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No, prevailing wisdom is not to stay out of bond funds. Only some investors see it that way.
Short-term, or even intermediate term and high quality fine.
audreyh1
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So is there still that bias over there? Did it change after 2008?
I don’t use exclusively corporate, not high enough quality bonds IMO - corporate bonds is a subset of the bond market and avoids the highest quality bonds. They are more susceptible to credit quality issues which amazingly tend to happen just when stocks crater, because guess what - they are corporate bonds.
Many of the core index bond funds use a mix of investment grade and govt backed bonds to maintain AA quality overall. The Vanguard intermediate term corporate bond index fund on the other hand has an average credit quality of BBB.
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I'm a long-time Boglehead myself and while Total Bond Market Index is indeed kind of a religion around there (thanks in part to the Three Fund Portfolio) there are plenty of respected voices who favor shorter maturities (William Bernstein and Larry Swedroe being perhaps the most famous among them). And of course even TBM isn't completely sacrosanct over there: Mr. Bogle doesn't like it because he thinks it has too many Treasuries, while others don't think it has enough Treasuries to provide the flight-to-safety protection they desire.
One of the perhaps more minor issues with bond funds is that duration has edged upwards for many of them in recent years in a search for yield. Personally I don't find managing a bond ladder much more work than keeping track of changes under the hood in bond funds.
OP
OP
38Chevy454
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Thanks to all for the great discussion. Here is my follow-up plan to my question.
For now I am just going to stick with lowering my AA to my target of 70/28/2, using a mix of bond funds for increasing the fixed income portion. I am going to use a mix of short-term bonds and high rate bonds to go with my current total bond fund. Stating a desired AA, but then not doing consistent rebalancing, is what I have been doing. Fine when the equities have been going up, but also I need to take some profits out of the equities and put those into the fixed income to provide the stability that I desire. Using rebalancing like I should be doing, instead of lip service and no action.
For now I am just going to stick with lowering my AA to my target of 70/28/2, using a mix of bond funds for increasing the fixed income portion. I am going to use a mix of short-term bonds and high rate bonds to go with my current total bond fund. Stating a desired AA, but then not doing consistent rebalancing, is what I have been doing. Fine when the equities have been going up, but also I need to take some profits out of the equities and put those into the fixed income to provide the stability that I desire. Using rebalancing like I should be doing, instead of lip service and no action.
Rambler
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I feel your pain. During the crisis, I bought a lot of GO muni bonds at deep discounts and with 5-6.5% coupons. A good chunk have been called in the past 12-18 months, and there isn’t really a good replacement for them. During the meltdown, I was running a very big business and actually was able to greatly increase my unit’s profits and profitability thru cost cutting measures (mostly advertising) which led to some very, very good bonuses, so I was able to take good advantage recession-priced bonds as well as stocks, and made out like a charm. The hunting is harder these days. Finding quality issues at a discount just isn’t happening.
COcheesehead
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I may be the lone ranger here but I believe the Fed totally screwed up the bond market with the interest manipulation in the past 10 years. I got totally out of bonds about 8 years ago. Replaced bond allocation with high dividend blue chips that all paid a minimum of 3%+. Of course running into the best bull market in history did not hurt. Bonds no longer go up when stocks go down and vice versa, in my opinion. I don't feel I can trust them anymore. I have gone in another direction, google JL Collins, simple philosophy and strikes me as well thought out and logical.
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