nun
Thinks s/he gets paid by the post
- Joined
- Feb 17, 2006
- Messages
- 4,872
I suppose this isn't the tread to say
"Psst, Wellesley"
"Psst, Wellesley"
The way I looked at it when establishing my AA, was to look at what my bond allocation would generate in income at today's rates. I was in short, and intermediate bond funds.
I figured that if interest rates rise, that while the principle diminished, I would get a higher % on a smaller principle, but my income would remain steady. As the older bonds matured out of the fund, and that money bought newer bonds, they would not buy as much, but would get a higher rate.
Is that wrong?
BTW, I decided that was too much work, and moved my $ to a titration of Wellington and Wellesley, to duplicate my desired AA, and now I let them worry about it.
The way I looked at it when establishing my AA, was to look at what my bond allocation would generate in income at today's rates. I was in short, and intermediate bond funds.
I figured that if interest rates rise, that while the principle diminished, I would get a higher % on a smaller principle, but my income would remain steady. As the older bonds matured out of the fund, and that money bought newer bonds, they would not buy as much, but would get a higher rate.
Is that wrong?
I expect interest rates to increase, causing my bonds to drop in value. But I don't sweat it too much - here is why:
1. Bonds are in my portfolio for ballast, to reduce the volatility of the equities in the portfolio. This is their primary function.
2. If bonds have dropped, when I rebalance I will add more to the lower bonds.
3. If something drastic happens to equities, bonds usually rise in value. Interest rates usually drop during a recession that causes equities to be hit hard. If you have high quality bonds, they will rise in value during this period. And you can rebalance using some of your bonds to buy stocks.
I have had a large position in bond funds since I retired in 1999. There have been many interest rate up and downs since then. The average duration of my bond funds are around 5 years, so they gradually catch up with major interest rate changes, and in the meantime rebalancing is an opportunity to add when bonds are down, and trim from them when they are up.
BTW - my bond funds are still up about 5% YTD even though there has been a recent increase in interest rates causing almost 2% decline over the past month. The thing is we're just back to where interest rates (10 year treasury) started at the beginning of the year.
My guess is the market has fully discounted the December hike. But other discounts may be looming and really nobody knows....Generally speaking, should I assume the predicted interest rate hike is baked in at this point and in a perfect world should hold steady for the moment... barring all the other things in the world that effect our markets?
Sounds like a decent strategy but nobody can guarantee anything about the future working out with this strategy. We are sometimes asking each other in these forums (1) what are you doing? (2) does this sound reasonable? (3) is this or that guru on the right track? But the reality is we are all alone with our investments when the bell sounds. Well, when the market tanks that is how I feel.- So, in regards to my opening post on this thread after reading thru the responses, if the assumptions above are somewhat correct, should I find peace in 1) staying with intermediate to short term bond ETF's/funds while in a slow predictable interest rate growth environment, 2) continue to let my distributions buy new shares at today's pricing, and 3) continue to rebalance staying the course with my AA (70/30) as I am buying even more shares at today's pricing (as long as my equities continue to grow beyond the 70%)?
Perhaps I am a Boglehead after all!!
Interesting as it is hard to get such data unless one owns the fund and watches the strategy of some years. Did the reduction in LT bonds affect average duration?Wellesley reduced down to 1/3 of the bond portfolio in long term bonds over 15 years . it used to be half . balanced is about 25% . they also used to be well up there in long term bonds
Interesting as it is hard to get such data unless one owns the fund and watches the strategy of some years. Did the reduction in LT bonds affect average duration?
I meant it is hard to see a fund's bond strategy over a period of years without following it. For the current fund stats M* is good or the VG site.I get it off morningstar
Apparently the best bet is that today's yield curve is the best future predictor we have. If that is true, then the 11 year yield today is what we should expect for the 10 year yield a year from now. So interperlating off the 10yr and 20 yr yields we would get 2.60% + .09 = 2.7% for next year's 10yr Treasury. But take that with a grain of salt.If the 10 year Treasury makes it to 3% by Jan 1, I will feel like next year's rate rises are well baked in. The 10 year crossed 2.6% yesterday before pulling back slightly, so it's well on its way. The 5 year similarly crossed 2.1% yesterday, the highest rate in five years!
We could get a recession next year, or the next, you never know. Recessions push intermediate and long rates back down, even if the Fed doesn't do anything on the short end.
It's still adjusting though. Have to let it settle down.Apparently the best bet is that today's yield curve is the best future predictor we have. If that is true, then the 11 year yield today is what we should expect for the 10 year yield a year from now. So interperlating off the 10yr and 20 yr yields we would get 2.60% + .09 = 2.7% for next year's 10yr Treasury. But take that with a grain of salt.
From time to time I check the real Treasury rates (TIPS) here: https://www.treasury.gov/resource-c...rest-rates/Pages/TextView.aspx?data=realyield...
Interestingly, I find that interest rates tend to rise as the year end approaches. Just like stocks typically have a Santa Claus rally. This makes early Jan rebalancing good from a timing perspective.
I notice that the Fidelity Inflation Protected Bond Premium class FSIYX with duration of 5.73 years is quoting 30 day yield of 2.21%. It was 2.78% on 11/30/16.From time to time I check the real Treasury rates (TIPS) here: https://www.treasury.gov/resource-c...rest-rates/Pages/TextView.aspx?data=realyield
Right now the 5 year rate is 0.32% ... actually positive for a change. A few years back I see:
12/16/15 0.55%
12/24/14 0.50%
12/30/13 0.07%
So at least in recent years late December has given us relatively higher rates.
I was tempted to buy 5 year TIPS (held to maturity) last December but did not. But now that I look back at the fund I held instead, VFIDX (intermediate investment grade), for the 12 months it has returned 2.89%. The inflation has been about 1.6% I think. So better then the TIPS I could have bought even with the recent bond selloff.