Author Topic: Should I move my bond etf to money market fund or CD? (Read 1983 times)

duyen · « **on:** June 16, 2020, 10:32:35 PM »

Here is my allocation:

Pre-Corona: 96% stock etfs, 4% bond etfs
From June 1st: 60% stock etfs, 40% blv (vanguard long term bond etf)

Whenever in the future there is a 20-30% market correction, I plan to convert those bonds to stocks

With the recent announcement that Fed won't increase the interest rates, I am worried if bonds might lose value. Should I move some of the bond etf (blv) into money market accounts or cds?

waltworks · « **Reply #1 on:** June 17, 2020, 03:54:52 AM »

You are simultaneously trying to market time and not understanding how bonds work (if interest rates did rise, your bond holdings would indeed likely lose value, so the Fed statement should reassure you, in theory).

I would advise buying some kind of blended fund (ie lifestrategy, target retirement, etc) and then *NOT LOOKING AT IT* while continuing to contribute new money whenever you can.

Randomly changing AA in response to short term news/events is a sure recipe for losing money, just like any other market timing strategy.

-W

MustacheAndaHalf · « **Reply #2 on:** June 17, 2020, 08:40:12 AM »

Quote from: duyen on June 16, 2020, 10:32:35 PM

Pre-Corona: 96% stock etfs, 4% bond etfs
From June 1st: 60% stock etfs, 40% blv (vanguard long term bond etf)

Holding 96% stocks is appropriate for someone decades from retirement, while 60% stocks is more suited to someone near/in retirement. Just curious - what triggered this change on June 1st?

If you're scared of stock volatility, Vanguard Long-Term Bond ETF (BLV) probably won't help. Morningstar's website has a "Risk" tab for each ETF, where it shows the "standard deviation", or how much that ETF typically gains and loses. Here's what I see:
VTI (total stock) +/- 17.7% std dev
BLV (long bond) +/- 9.0% std dev
BND (tot bond) +/- 3.3% std dev

Why pick the more volatile BLV, unless... are you trying to "chase performance" by picking the ETF that gained +20% in one year instead of the one that gained +9%?

RWD · « **Reply #3 on:** June 17, 2020, 09:02:10 AM »

Quote from: duyen on June 16, 2020, 10:32:35 PM

Whenever in the future there is a 20-30% market correction, I plan to convert those bonds to stocks

Why didn't you convert to stocks in March?

duyen · « **Reply #4 on:** June 17, 2020, 09:58:35 AM »

Quote from: waltworks on June 17, 2020, 03:54:52 AM

You are simultaneously trying to market time and not understanding how bonds work (if interest rates did rise, your bond holdings would indeed likely lose value, so the Fed statement should reassure you, in theory).

I would advise buying some kind of blended fund (ie lifestrategy, target retirement, etc) and then *NOT LOOKING AT IT* while continuing to contribute new money whenever you can.

Randomly changing AA in response to short term news/events is a sure recipe for losing money, just like any other market timing strategy.

-W

Right, that's the recommended strategy. I was 96% stocks till June 1st but then felt this corona time is too dicey and I need more bond allocation to be safe during this time. I am 40 but will probably FIRE after 5 years. I might continue in rare case working at a low stress job for 5 more years. My strategy is to leave some cash for 2 years (to use during market downtime) and invest rest in all stocks.

Given all of the above, what is my best allocation in the next 5-10 year period? Will it be okay to be 100% stock? I want to just wait till end of the year or vaccine announcement and then move to 100% stocks and stay put

duyen · « **Reply #5 on:** June 17, 2020, 09:59:35 AM »

Quote from: MustacheAndaHalf on June 17, 2020, 08:40:12 AM

Quote from: duyen on June 16, 2020, 10:32:35 PM
Pre-Corona: 96% stock etfs, 4% bond etfs
From June 1st: 60% stock etfs, 40% blv (vanguard long term bond etf)
Holding 96% stocks is appropriate for someone decades from retirement, while 60% stocks is more suited to someone near/in retirement. Just curious - what triggered this change on June 1st?

If you're scared of stock volatility, Vanguard Long-Term Bond ETF (BLV) probably won't help. Morningstar's website has a "Risk" tab for each ETF, where it shows the "standard deviation", or how much that ETF typically gains and loses. Here's what I see:
VTI (total stock) +/- 17.7% std dev
BLV (long bond) +/- 9.0% std dev
BND (tot bond) +/- 3.3% std dev

Why pick the more volatile BLV, unless... are you trying to "chase performance" by picking the ETF that gained +20% in one year instead of the one that gained +9%?

BLV has higher volatility than BND but I noticed that its returns are higher too. But not sure why it is dropping in value in the last two days though (1% each day)

RWD · « **Reply #6 on:** June 17, 2020, 10:26:02 AM »

Quote from: duyen on June 17, 2020, 09:58:35 AM

I was 96% stocks till June 1st but then felt this corona time is too dicey and I need more bond allocation to be safe during this time.

facepalm · « **Reply #7 on:** June 18, 2020, 04:30:52 AM »

Quote from: duyen on June 16, 2020, 10:32:35 PM

Here is my allocation:

Pre-Corona: 96% stock etfs, 4% bond etfs
From June 1st: 60% stock etfs, 40% blv (vanguard long term bond etf)

Whenever in the future there is a 20-30% market correction, I plan to convert those bonds to stocks

With the recent announcement that Fed won't increase the interest rates, I am worried if bonds might lose value. Should I move some of the bond etf (blv) into money market accounts or cds?

What's your reason for owning bonds in the first place? I'm not trying to be an asshole, but i'm not seeing a clear reason.

habanero · « **Reply #8 on:** June 18, 2020, 05:27:30 AM »

I *think* we are getting near the point where some AA rules will be rewritten. Long-dated bonds are looking more and more like risk with almost no returns. Yes, rates can fall more and even go negative and there might be some capital gains in long-dated bonds but the risk/reward is getting pretty skewed.

And if Fed were to hike rates (which I personally don't see happen anytime soon) both bonds and equities will get abseloutely hammered, ditto if inflation expectations go up.

If we look back the last 10 years both equities and bonds have had stellar returns. If you held S&P 500 or bonds for the 20 years makes not much difference in terms of returns. If you 20 years ago invested 100 in the S&P 500 you would today have 310. If you did the same in the Barclays Global Aggregate Bond Index you would have 245 (granted, the starting point of a 20y-history is near the peak of the .com - bubble). If you do the last 10 years the numbers are 343 and 133 respectively. The Vanguard Long Bond ETF has had 8% annualized return last 10 years compared to 13% of the S&P 500.

These instruments have not really moved in opposite directions in a quite some time and it's hard to see why they suddenly should start doing so now given where yields are down to.

And the opportunity cost of holding cash (or very short-term bonds) has never been lower. In treasuries you can get 0% yield short-term or 0.70% for 10 years, so there isn't that much yield you forego by holding cash or cash-equivalents as the "safe" part of a portfolio these days. On the other hand if you own the 30y treasury yielding 1.5% and yield goes to zero you get 45% capital gains.

duyen · « **Reply #9 on:** June 18, 2020, 01:26:29 PM »

Quote from: facepalm on June 18, 2020, 04:30:52 AM

What's your reason for owning bonds in the first place? I'm not trying to be an asshole, but i'm not seeing a clear reason.

On June 1st, I felt market is too high and it is risky for me to be in all stocks. Hence I sold 40% and moved them to bonds. When the market crashes (sometime this year) the bonds won't crash as bad as stocks and then I plan to sell bonds and put the money in all stocks.

duyen · « **Reply #10 on:** June 18, 2020, 01:30:37 PM »

Quote from: RWD on June 17, 2020, 10:26:02 AM

Quote from: duyen on June 17, 2020, 09:58:35 AM
I was 96% stocks till June 1st but then felt this corona time is too dicey and I need more bond allocation to be safe during this time.

So you're saying you think the market is overvalued?

1/2013 [SP500 = 1462]
https://forum.mrmoneymustache.com/investor-alley/is-now-a-bad-time-to-invest-in-stock-index-funds/
5/2013 [1583]
https://forum.mrmoneymustache.com/investor-alley/starting-today!/
https://forum.mrmoneymustache.com/investor-alley/$80k-sitting-in-cash-bc-scared-of-high-flying-stock-mkt-punch-me/

Yeah, I feel it is overvalued and also feel due to covid it might go down further. I looked at the crash period (2008) and noticed that for next four years the average return of 60% stocks was higher than 100% stocks. During good times (2015-2019), 60% stocks had say 11% return while 100% stocks had 13% return. With this covid uncertainity why take the risk for slightly higher return (of all all stocks)?

RWD · « **Reply #11 on:** June 18, 2020, 01:52:21 PM »

Quote from: duyen on June 18, 2020, 01:30:37 PM

Quote from: RWD on June 17, 2020, 10:26:02 AM
Quote from: duyen on June 17, 2020, 09:58:35 AM
I was 96% stocks till June 1st but then felt this corona time is too dicey and I need more bond allocation to be safe during this time.

So you're saying you think the market is overvalued?

Yeah, I feel it is overvalued and also feel due to covid it might go down further. I looked at the crash period (2008) and noticed that for next four years the average return of 60% stocks was higher than 100% stocks. During good times (2015-2019), 60% stocks had say 11% return while 100% stocks had 13% return. With this covid uncertainity why take the risk for slightly higher return (of all all stocks)?

And I feel it already went down and now it's coming back up. Who's to say which of us is right. But lots of people have had good reason for predicting a market decline in the past (the links I posted) and were wrong. You might be right this time but there's really no more basis for it than in the past.

It's fair to re-evaluate your desired asset allocation and risk tolerance. If 96% stocks is too volatile for your tastes then by all means update your IPS to include more bonds. But I wouldn't recommend pulling back and putting back in based on your feelings on the value of the market.

Where did you get those return numbers? I'm seeing 11.1% for 100% stocks and only 7.9% for 60% stocks (Jan 2015 - Dec 2019) from Portfolio Visualizer. That is a big difference for even only 5 years (69% vs 46% total return). There's also splitting the difference and going for a 80% stocks portfolio which had a 9.5% return (58% total return).

duyen · « **Reply #12 on:** June 18, 2020, 07:01:28 PM »

Quote from: RWD on June 18, 2020, 01:52:21 PM

And I feel it already went down and now it's coming back up. Who's to say which of us is right. But lots of people have had good reason for predicting a market decline in the past (the links I posted) and were wrong. You might be right this time but there's really no more basis for it than in the past.

It's fair to re-evaluate your desired asset allocation and risk tolerance. If 96% stocks is too volatile for your tastes then by all means update your IPS to include more bonds. But I wouldn't recommend pulling back and putting back in based on your feelings on the value of the market.

Where did you get those return numbers? I'm seeing 11.1% for 100% stocks and only 7.9% for 60% stocks (Jan 2015 - Dec 2019) from Portfolio Visualizer. That is a big difference for even only 5 years (69% vs 46% total return). There's also splitting the difference and going for a 80% stocks portfolio which had a 9.5% return (58% total return).

So if market goes up from here with 60% stocks as you say I lose 3.2% of gains (Jan 2015 - Dec 2019). If the market goes down (Jan 2000 - Dec 2004) I will have 4% gains. And if I can move the bonds to stocks when it does crash, I can make much more than 4%. Given the current unprecedented situation, I see odds are in favor of it going down than up. But nobody knows what will happen

The advantage with my approach is it is conservative; it preserves my money.

K-ice · « **Reply #13 on:** June 28, 2020, 10:47:42 AM »

I get your logic, it seams reasonable, I’ve just never tried to time the market.

My spouse is conservative 50:50. But in the 50% bond side they have a CD ladder & some in a high interest savings account. ~25bonds:25cash.

With COVID I’ve kept some more cash around. It’s also part of a sinking fund I may need. My allocation has changed from 85:15 to 75:25. I’ve still contributed into equity ETFs every month. The cash is in a 2% savings account and will be invested back in the market, not at any particular Market low, but when I feel I don’t need all that cash.

I don’t think a CD ladder really works for you, not liquid enough. If you’re not happy with the return in a savings account, bonds or equities are probably best. Maybe dabble with 5-10% in Gold or REIT. But I don’t directly invest in them & cant really predict if they will stay up or down compared to the market. I think REITs could face some major hurdles with government COVID eviction freezes.

MustacheAndaHalf · « **Reply #14 on:** June 28, 2020, 12:42:48 PM »

@duyen - There's two things going on, and since others are focused on market timing I'll focus on what they're not pointing out: you probably shifted to a more appropriate allocation. You said you might retire in 5 years, and switched to 40% bonds. That's a close match for Vanguard Target Retirement 2025, which holds 38% bonds. So maybe it was market timing, but since you said you plan to retire in 5 years, 40% bonds is a more suitable asset allocation, as shown by how Vanguard allocates bonds for those retiring soon.

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Author Topic: Should I move my bond etf to money market fund or CD? (Read 1983 times)

duyen

Should I move my bond etf to money market fund or CD?

waltworks

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MustacheAndaHalf

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RWD

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duyen

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duyen

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RWD

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facepalm

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habanero

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duyen

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duyen

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RWD

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duyen

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K-ice

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MustacheAndaHalf

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