Willing to take a bit more risk in my bond fund portfolio

[Mr._Graybeard]

If you examine PIMIX (the institutional version of PONDX), it has been virtually a "magical" fund. Since inception in 2007 it has had less much volatility than total bond index (AGG) with returns that actually beat total stock market over the period. It's only drawback during that time for being a good bond proxy is the moderate .57 correlation with equities.

I find the fact that it has been "magical" for a decade that includes the 2008 meltdown and the huge bull bounce that followed to be very interesting. I also find the idea that it has been "magical" during the period to be a warning that past performance doesn't indicate future returns.

I personally have 50% of my FI in PIMIX and have had since 2010. I don't recommend anyone do the same and don't expect the next decade to resemble the last for PIMIX. I do think it is very likely that PIMIX total returns
will handily beat total bond market over the next 10 years but for most people that isn't the reason they hold bonds.

I'm with you, bro! (Although not nearly at 50%, more like 5%.) That 5.5% dividend is pretty sweet.

 

[LOL!]

So you're an unabashed stock market timer (per LOL's Market Timing Newsletter) but prefer indexing on the fixed-income side. I would argue that indexing is the way to go in equities but a well-run managed fixed-income fund (specifically PONDX/PIMIX) will deliver an optimal return from the debt market. Diffrent strokes.

I only own index ETFs and index funds for both equities and fixed-income. I market-time buying and selling of bond index ETFs, but also have bond index mutual funds that I rarely have transactions with.

I prefer not to take manager risk.

And thanks for reading my newsletter, too.

 

[Mr._Graybeard]

I only own index ETFs and index funds for both equities and fixed-income. I market-time buying and selling of bond index ETFs, but also have bond index mutual funds that I rarely have transactions with.

I prefer not to take manager risk.

And thanks for reading my newsletter, too.

To be honest, I never really looked at exactly what you were trading, because I'm buy and hold on the equity side. So now I have a clearer picture of what you've been doing. Sorry for mischaracterizing it.

DW and I have bunch of individual muni bonds we loaded up on during the 2013 taper tantrum -- they make up 25%-30% of our investments. The rest of our fixed-income holdings are managed by Pimco, Wellington and Fidelity ... none of that money is indexed, with the exception of a target-date fund I rolled over from a 401k.

As I see it, equity indexes are biased toward success -- the better a company does, the greater its stock's weight becomes in various indexes. That bias doesn't apply to bond indexes. So what makes bond indexing compelling? Low fees? It sure isn't the yield.

We have some fixed-income money in low-fee instruments -- CDs. They're low volatility, too.

 

[RobLJ]

I also have been looking at PIMIX to replace my junk bond fund (Strategic Income) and Fidelity Investment Grade bond fund, but have been held back by the 100k minimum at Fidelity. I still may do it, however, since the minimum isn't a whole lot more than these two funds combined if I sell them.
I'm also looking at TIPS fund after selling them 4 years ago when yields went highly negative.
Some of you might be interested in this article on non-correlation with large-caps since this an issue for PIMIX, although I don't think the table will surprise many of you.
Alternatively, I could just keep the high cash level.

https://www.financial-planning.com/news/a-new-approach-to-the-old-60-40-portfolio

There is yuge management risk in PIMIX, however.

 

[pb4uski]

This article was shared on another thread earlier this week.... general consensus was that it was bunk.

 

[audreyh1]

This article was shared on another thread earlier this week.... general consensus was that it was bunk.

What was bunk about it?

 

[RobLJ]

What was bunk about it?

I think one critique was that the base stock portfolio was US Large Caps, although I think the Bogles and many using the S&P index are constructing portfolios almost exactly as the article described. While I hold a lot of other stocks funds, their correlation to US Largecaps has increased over the last 20-30 years, so the diversification here is a bit suspect.

Old Shooter's critique of the recent returns of TIPS is perhaps correct, but then one might then have to throw out the last 15 year returns of all groups, to take this criticism to its logical extreme--why should we just throw out TIPS returns and worship everything else? (Inflation may indeed be permanently dead or it may not be dead, if one believes in reversion to means.)

The table with the lack of large Cap's correlation to TIPS led me to rethink the role of TIPS, although I sold them in '13 after the negative yield went crazy (after buying in mid '08 to '09 for what was a 35% return, which I thought was nuts. I figured I would take my returns and be grateful.) I already have a big allocation to cash and am building up intermediate Treasury funds despite my thought that long-term that they aren't a good investment (the lack of correlation to large caps is the key, as many have noted.)

 

[audreyh1]

I found the chart in the article very useful and had no trouble with US large caps as the reference since that is a very common core holding. Many AA/efficient frontier studies start with that.

 

[audreyh1]

I already have a big allocation to cash and am building up intermediate Treasury funds despite my thought that long-term that they aren't a good investment (the lack of correlation to large caps is the key, as many have noted.)

That’s always the rub, isn’t it? Outlook for a given asset class may not look great by itself, but if you are owning it as part of an AA, how the parts interact matters a great deal. If you are seeking diversification, you want your asset mix to have low correlation.

The correlation study helped reinforce my fixed income biases.

 

[pb4uski]

What was bunk about it?

See for yourself: http://www.early-retirement.org/forums/f28/a-new-approach-to-a-60-40-portfolio-89534.html

 

[audreyh1]

See for yourself: http://www.early-retirement.org/forums/f28/a-new-approach-to-a-60-40-portfolio-89534.html

I participated in that thread. Which is why I didn’t understand your characterization of it as bunk or that there was even a consensus to that effect.

 

[VanWinkle]

This article was shared on another thread earlier this week.... general consensus was that it was bunk.

The article was about correlation of different assets, not on how to invest. It all depends on your bias before reading the article. I saw it as an interesting take on assets and confirmed my "bias" that equity risk is best anchored by high quality bond funds made up of Government and investment grade corporate bonds. It also confirmed that the correlation between US and Foreign developed equity has narrowed over the last 15 years or so.

"Cash produced a 15-year return of 1.25% with very little volatility (the standard deviation was 1.64%). Next were non-U.S. bonds with a 15-year correlation of 0.06, then U.S. bonds with a 15-year correlation of minus 0.09, and finally commodities with a 15-year correlation of 0.32 and a 15-year return of 4.85%."(from the article)

No one should read an article and change their investment strategy based on one man's opinion.

I think substituting various types of equity and high yield bonds for safe bonds is a big mistake. But that is just my opinion. I will listen to other opinions without taking offense.

VW

 

[mathjak107]

the newsletter i follow finally made same changes in the bond holdings this week .

short term bond funds went to even shorter term with a portion of the bond budget . also the core total bond fund was reduced by quite a bit in exchange for
a lot more of a go anywhere type bond fund which while investing in some high yield , international , and emerging market type bonds is actually less interest rate sensitive , has a higher yield and better performance .

on one end we went more conservative while the other end went a little riskier . at this point in time credit risk and default risk is not much of a worry .

this is the first real fixed income side change in years .

 

[mrfeh]

Bonds are for safety. It would have been easier to stick with Total US Bond and up your stock percentage to 60% or 65%.

+1000

Also, even if this was a decent approach, you shouldn't draw conclusions from numbers over the last 7 years.

 

[OldShooter]

... Old Shooter's critique of the recent returns of TIPS is perhaps correct, but then one might then have to throw out the last 15 year returns of all groups, to take this criticism to its logical extreme--why should we just throw out TIPS returns and worship everything else? (Inflation may indeed be permanently dead or it may not be dead, if one believes in reversion to means.) ...

I agree with your points. I just wasn't clear or detailed enough in my post.

First, TIPS. I didn't mean to imply that they are anything special. Without actually checking I am sure that long bond funds and long bonds behaved pretty much the same as our TIPS. We just don't hold those so I used the example I had.

Re past performance not being predictive, I was objecting specifically to the troll's statement that "... the past [in bonds] is a good indicator of the future. ..."

Re "worshiping" everything else. Of course not. In fact, I don't believe that historical equity performance, except over long, long periods, is predictive at all. So I don't predict. I just run my copilot checklist: "Sit down, shut up, and hang on."