using high yield in a port.

[fire5soon]

Hello, all!

I had a thought I wanted to run by you all for a portfolio with a relatively low equity allocation, but still might grow over the long term.  Has anyone ever toyed with the idea of using HY bonds in place of a large amount of equity?

For example instead of having a 50stk/50debt ratio, using a 35stk/30HY/35debt mix?  Does it sound insane to have 30% HY?  Would 15-20% be more reasonable?

I've read Swedroe & Bernstein and realize the risk should be taken with the equity portion & use short bonds for the rest... but I'm not comfortable with a large equity slice even though I'm a few decades from RE.  This HY strategy isn't something I'm serious about implementing at this point, but the thought of it doesn't seem all that bad.

Any thoughts?

-Jay

 

[Mr._johngalt]

I have over 30% in HY. Then again, my sanity gets questioned all the time

JG

 

[ex_CFO_now_RVer]

I currently have 13% in High Yield @Vanguard.

13% High Yield Bonds
30% International Equity
48% Domestic Equity
  9% GNMA and Cash

Dave

 

[Mr._johngalt]

I currently have 13% in High Yield @Vanguard.

13% High Yield Bonds
30% International Equity
48% Domestic Equity
  9% GNMA and Cash

Dave

Okay, mine has shifted slightly. Here is the latest direct from
the "fringe" of ER investing theory:

Cash/liquid (net) 5%
Personal prop. 5%
Real estate 45%
Junk/HY bonds 32%
Gov, issue bonds 13%

And, that's everything but the dryer sheets

JG

 

[cute fuzzy bunny]

I have 5% in High Yield

 

[cute fuzzy bunny]

And there are days I think that might be a little too much.

There havent been a lot of defaults in high yield recently, according to some info from vanguard that esrbob got. But thats because we've had a pretty friendly monetary policy. Thats changing.

Also, according to bernstein you want to get 6% over treasuries in exchange for taking a high yield risk; current yield benefits are less than half of that for a broad selection of HY bonds.

Also the money you get out of it is taxed in the current year as a dividend, equity gains are taxed when sold and are at long term capital gains rates...one strategy may or may not be better for you.

As with anything, balance is key. Have some of each.

 

[fire5soon]

Thanks for the replies so far. Looking back over the last 20 years or so Vanguard's HY fund has only had one year losses in the mid single digits which isn't too bad. I would also be holding this in a tax deferred account. In a taxable account I would use Vanguards tax free HY until retirement when I'd be in a lower tax bracket.

 

[cute fuzzy bunny]

The yield on the tax exempt high yield is a LOT lower than the standard high yield, with a longer duration...unless you're in a VERY high tax bracket (40%+) and arent afraid of interest rate risk, I wouldnt recommend it.

 

[BUM]

I have a bit less than 10% in VG H-Y. Owned it for less than a year. Love the divvies but every dang day it leaks a penny

BUM

 

[unclemick]

Vg Hi Yield - 10% of SO's, 2% of combined household - bought back when it was yielding 8% or so as an income booster - she's low tax bracket. May keep it forever.

Or may roll up his and her 'stuff' into Vanguard Target Series by the end of the year - to simplify - not because I don't like it.

 

[fire5soon]

I'm still on the fence...  I like the idea of using them to boost returns instead of a high equity allocation.  I need to noodle this out a little more...   

 

[cute fuzzy bunny]

If you need high current income more than long term, dont care about paying the taxes as you go, and dont mind the increasing prospects of default risk, then they're not a bad bet in small volumes. If you want long term growth of capital, deferral of taxation and dont mind the valuation levels, equities would be a better bet.

 

[fire5soon]

If you need high current income more than long term, dont care about paying the taxes as you go, and dont mind the increasing prospects of default risk, then they're not a bad bet in small volumes.  If you want long term growth of capital, deferral of taxation and dont mind the valuation levels, equities would be a better bet.

I'm a few decades from FIRE & I would hold them in an IRA. Perhaps whatever HY I have should be a small side bet if anything at all.

Thanks for your thoughts.

 

[cute fuzzy bunny]

In that case, 3-6% wouldnt hurt at all. I'd be heavier in equities, particularly good dividend bearing ones because thats where I think you'll be seeing the larger piece of appreciation over the next 10 years. Twenty years is a good long time.

My 20+ years money (In my IRA) is:

Healthcare
Reit
Emerging Markets
Small Cap Value
International Explorer

All reinvest their own gains/dividends except the REIT feeds the small cap value fund.

 

[ESRBob]

Fire5Soon;
I also have a small (3.5%) High Yield allocation in Vanguard's High Yield Corporate fund-- it was higher a year ago - closer to 5%.

It is worth noting that this fund VWEHX, is generally invested in the "Cream of High Yield", and as a result takes on less risk and offers less return than the index. So if you go with this fund, it may not be so risky to be in this asset class as you imagined.