The alternatives to Fixed Income (bonds) in 2022 and beyond

[RWTL]

For those of us who are still in the accumulation phase, say 25-30% to FI, does it make sense to drop a tax-advantaged target-date fund that is currently 90/10 in favor of 100% equities? I have been bummed about the 10% bond allocation lately, but it would feel like market timing (selling low, buying high) to trade these bonds for stocks right now.

I stayed at 100% equities until just 3 years before retirement, then added bonds.  IMHO, it depends on how many years you have until retirement.

[DaTrill]

Tough question as higher rates will crash long bonds and also probably crash stocks, nowhere to hide.  I'm just using 3-12 month duration CD/treasuries.  As one up poster mentioned, dividends get cut when earnings fall, they are not fixed and why stocks are riskier than bonds.  if higher rates decrease economic activity, earnings will decrease and first thing to get cut are dividends.     

There aren't really any alternatives to Bonds as cash flows from any other investment is riskier than those from treasuries/CDs.  If you think this is a no-win situation, it is and what the Fed must grapple with in the next few years.  Problem began in 2010 with prolonged low rates well after GFC to make a failing economy look good for political reason (see Yellen) and the bills are slowly coming due. 

There are several alternative bond platforms that advertise, but after looking into some of these platforms, declined to invest for different reasons. 

[Financial.Velociraptor]

I like closed end funds of bonds (when bought at a discount to NAV).  There are some non conventional ones that include more preferreds, convertibles, short duration, and variable coupon that might do better in an inflationary environment.  I'm full up on my FI allocation for  now and not actively scanning that environment.  You might try a search at https://www.cefconnect.com/closed-end-funds-screener.

[vand]

The case against bonds has strengthened, imo, as they traditional argument "hold bonds in case of a stock market crash" doesn't seem to be working.  The inflationary headwinds are make tough sailing for equities, but are deadly for bonds.

My own exposure to the asset class is now down to just 3%, and that's going to be decreasing to 0% by the summer.  I will continue to add more to my solar energy plays which so far have behaved rather beautifully.

[MustacheAndaHalf]

etfdb lists TYO's leverage as "-3x", since it profits 3x off falls in bond prices.
https://etfdb.com/etf/TYO/#etf-ticker-profile

That and another inverse bond fund are 2.7% of my portfolio, giving me a bond exposure of about negative 8%.  The way I look at it, cash goes nowhere and buys 7% less in the future.  Bonds lose money and what's left buys 7% left in the future.

[JAYSLOL]

For those of us who are still in the accumulation phase, say 25-30% to FI, does it make sense to drop a tax-advantaged target-date fund that is currently 90/10 in favor of 100% equities? I have been bummed about the 10% bond allocation lately, but it would feel like market timing (selling low, buying high) to trade these bonds for stocks right now.

I stayed at 100% equities until just 3 years before retirement, then added bonds.  IMHO, it depends on how many years you have until retirement.

Was also about 85/15 stocks/bonds and just switched to 100 stocks, I’m only at 12% and more than 10 years from FI. 

[vand]

Offloaded another chunk of my bonds yesterday, as the bond bloodbath continues with a big move higher in yields today.
Here are the drawdowns in some of the higher duration bond funds:



-31.54% in the EDV fund! Can we call it a -40% real drawdown? And that just gets us to a current yield of 2.3%.

And as today is showing, stocks and bonds can go down together!

[RWTL]

Offloaded another chunk of my bonds yesterday, as the bond bloodbath continues with a big move higher in yields today.
Here are the drawdowns in some of the higher duration bond funds:



-31.54% in the EDV fund! Can we call it a -40% real drawdown? And that just gets us to a current yield of 2.3%.

And as today is showing, stocks and bonds can go down together!

I offloaded about 25% of my bonds last month, but still have significant exposure.  I shudder at the thought of interest rate of 5% or more.   Hopefully it doesn't come to that.

That said, is there a safe haven right now?

[MrGreen]

I still think TIPS are a great alternative right now with the prospect of interest rates rising rapidly. Having moved 3/4 of our bond allocation from BND to VTIP, I'm feeling pretty good about that right now. May not be a long term solution if inflation is brought under control but I'll reassess that then. I still say this thing has the potential to remain out of control for longer than anyone would like.

[uniwelder]

And as today is showing, stocks and bonds can go down together!

I offloaded about 25% of my bonds last month, but still have significant exposure.  I shudder at the thought of interest rate of 5% or more.   Hopefully it doesn't come to that.

That said, is there a safe haven right now?

This might not help the small number of people actively posting in this thread, but for those following along, I previously mentioned TIAA's real estate fund.  Its generally available to non-profit groups, so that might weed out a bunch of people.  The particular fund mentioned is up 22% over the past 12 months, and 5.5% for 2022 so far.  More details are in my post quoted below.

I have a 403b account with TIAA from work and they offer a real estate account QREARX that's comprised of their own properties.  It has a very slow rolling curve that usually has a 6 month delay from market downturns, due to how they reevaluate property values.  For example, in March 2020 the account had lost 1% from its peak, then bottomed out in Sept 2020 2% down.  Money can only be withdrawn or rebalanced once per quarter to avoid people abusing it.  I'm keeping 25% of my 403b money there and the existence of that fund is only reason I haven't transferred the account to Fidelity.

[ChpBstrd]

I still think TIPS are a great alternative right now with the prospect of interest rates rising rapidly. Having moved 3/4 of our bond allocation from BND to VTIP, I'm feeling pretty good about that right now. May not be a long term solution if inflation is brought under control but I'll reassess that then. I still say this thing has the potential to remain out of control for longer than anyone would like.

I'm a little bit perturbed watching TIP (duration: 7.4y) and VTIP (duration: 2y) generate negative YTD returns even as inflation expectations rise at a very fast pace. I'm no bond guru, but one explanation might be that the market expects treasury rates to rise so fast that they outrun the adjustment schedule for TIPS. I.e. the PV of holding cash for a few months until you can lock in higher rates for a longer time is better than holding a TIPS for 2 years.

[FLBiker]

Like a lot of folks I've been bummed by bond performance recently (well, all of my investing life if I'm honest).  I've been 90/10, most of the time, but drifted up towards 80/20 as we near FIRE.  That said, much of our 20% is in "safe" things like I-Bonds and GFICs (the Canadian equivalent of CDs).  And I'm not sweating it too much, as my current plan is to use much of our bond allocation (and perhaps some of our taxable equities) to pay off our house in 3.5 years.  With that short of a time horizon, I can accept that I don't have great options available to me, and I've been pleasantly surprised by the I-bonds.  Most of the rest of our bonds are in LTTs and TIPS.

Once we pay off the house, I'm not sure what I'll do with our FI portion.  My current plan is to be retired, and to keep our AA around 80/20, with half of that 20 in GFICs / high interest savings.  I want more cash because 1) I don't want to have to sell equities low and 2) I don't want to have to exchange currencies at bad times (most of my investments are in USD while we spend in CAD).  We'll see how it all shakes out, though.

[vand]

I still think TIPS are a great alternative right now with the prospect of interest rates rising rapidly. Having moved 3/4 of our bond allocation from BND to VTIP, I'm feeling pretty good about that right now. May not be a long term solution if inflation is brought under control but I'll reassess that then. I still say this thing has the potential to remain out of control for longer than anyone would like.

I'm a little bit perturbed watching TIP (duration: 7.4y) and VTIP (duration: 2y) generate negative YTD returns even as inflation expectations rise at a very fast pace. I'm no bond guru, but one explanation might be that the market expects treasury rates to rise so fast that they outrun the adjustment schedule for TIPS. I.e. the PV of holding cash for a few months until you can lock in higher rates for a longer time is better than holding a TIPS for 2 years.

Personally I haven't invested in TIPS because I didn't understand them very well.. that said I'm getting up to speed on them.

They certainly aren't inflation-hedging "gimmes" that some people seem to think they are, but under certain expectations they can make more sense then normal bonds.

There's an excellent video here recently released by Pensioncraft: https://www.youtube.com/watch?v=NJrtspvT_FU

[MrGreen]

I would be nervous moving my bond allocation into an RE fund right now. With the huge run up of the last two years and the very real possibility that mortgage rates will be above 6% by the end of the year it's not unreasonable to expect a healthy drop in RE prices. I think I'd expect RE prices to drop more than bonds  but I'm just an amateur.

[ChpBstrd]

I would be nervous moving my bond allocation into an RE fund right now. With the huge run up of the last two years and the very real possibility that mortgage rates will be above 6% by the end of the year it's not unreasonable to expect a healthy drop in RE prices. I think I'd expect RE prices to drop more than bonds  but I'm just an amateur.

Mortgage REITs like AGNC and NLY are already falling hard. Their whole business model of taking out short term loans at 1% to finance a portfolio of 30y mortgages at 3% is about to be rocked when they can no longer borrow at below the interest rate on their mortgages. They are still good short or bear spread candidates IMO.

[svosavvy]

I'm not wild about REIT's here.  Late to the party at this point on that stuff imo.  Seems like they could get hit if the market drafts down some.  That being said there is not many good options on the fixed side which really goes without saying.  I have some JPM preferreds (JPM'J) and add a little when they go down.  Could easily see a paper loss of 10%, don't plan on selling. They are not going to "perform" great during rate rises and could really get hit if rates rise aggressively more than these projected .25 & .50 moves.  Currently is yielding 5%+ on a 4.5% coupon.  I also like that it is a qualified dividend instead of just interest tax wise.  That and you are buying at a discount to face value, so if they buy them back you would see a nice gain.  If they are smart they won't call them in.  Also have some TIP which I have a paper loss of 4% or so on, go figure when we are in an inflationary environ.  I have several really long date physical TIPS I have bought along the way the last 13 years or so.  Honestly, banks should perform well in rising rates.  Conservative small allocation of quality bank common might be ok.  JMO, I am not a professional obviously.

[uniwelder]

I would be nervous moving my bond allocation into an RE fund right now. With the huge run up of the last two years and the very real possibility that mortgage rates will be above 6% by the end of the year it's not unreasonable to expect a healthy drop in RE prices. I think I'd expect RE prices to drop more than bonds  but I'm just an amateur.

Mortgage REITs like AGNC and NLY are already falling hard. Their whole business model of taking out short term loans at 1% to finance a portfolio of 30y mortgages at 3% is about to be rocked when they can no longer borrow at below the interest rate on their mortgages. They are still good short or bear spread candidates IMO.

I'm not wild about REIT's here.  Late to the party at this point on that stuff imo.  Seems like they could get hit if the market drafts down some. 

I think all this is being brought up because of my comment on TIAA's real estate fund.  It doesn't behave like a typical REIT and I'm not advocating for REITs in general.  There's a good bit of discussion about this particular fund (QREARX) on the bogleheads forum. 

[vand]

I would be nervous moving my bond allocation into an RE fund right now. With the huge run up of the last two years and the very real possibility that mortgage rates will be above 6% by the end of the year it's not unreasonable to expect a healthy drop in RE prices. I think I'd expect RE prices to drop more than bonds  but I'm just an amateur.

Mortgage REITs like AGNC and NLY are already falling hard. Their whole business model of taking out short term loans at 1% to finance a portfolio of 30y mortgages at 3% is about to be rocked when they can no longer borrow at below the interest rate on their mortgages. They are still good short or bear spread candidates IMO.

I'm not wild about REIT's here.  Late to the party at this point on that stuff imo.  Seems like they could get hit if the market drafts down some. 

I think all this is being brought up because of my comment on TIAA's real estate fund.  It doesn't behave like a typical REIT and I'm not advocating for REITs in general.  There's a good bit of discussion about this particular fund (QREARX) on the bogleheads forum.

Just looking at the chart I am VERY suspicous of this fund (QREARX).  It's a universal law of investing that to earn returns you have to accept risk - I see a lot of return in this fund by no risk.  If something looks too good to be true then it nearly always is.

QREARX has a Sharpe Ratio of 2.66 which is probably way north of anything Bernie Madoff ever claimed to deliver.

[uniwelder]

I would be nervous moving my bond allocation into an RE fund right now. With the huge run up of the last two years and the very real possibility that mortgage rates will be above 6% by the end of the year it's not unreasonable to expect a healthy drop in RE prices. I think I'd expect RE prices to drop more than bonds  but I'm just an amateur.

Mortgage REITs like AGNC and NLY are already falling hard. Their whole business model of taking out short term loans at 1% to finance a portfolio of 30y mortgages at 3% is about to be rocked when they can no longer borrow at below the interest rate on their mortgages. They are still good short or bear spread candidates IMO.

I'm not wild about REIT's here.  Late to the party at this point on that stuff imo.  Seems like they could get hit if the market drafts down some. 

I think all this is being brought up because of my comment on TIAA's real estate fund.  It doesn't behave like a typical REIT and I'm not advocating for REITs in general.  There's a good bit of discussion about this particular fund (QREARX) on the bogleheads forum.

Just looking at the chart I am VERY suspicous of this fund (QREARX).  It's a universal law of investing that to earn returns you have to accept risk - I see a lot of return in this fund by no risk.  If something looks too good to be true then it nearly always is.

QREARX has a Sharpe Ratio of 2.66 which is probably way north of anything Bernie Madoff ever claimed to deliver.

I don't know how far back you looked in its chart history.  The fund doesn't always go up and had a huge drop in the 2008-2010 timeframe, but since its valuation is so slow moving, you can actually do some market timing with it and rebalance accordingly.  Average returns have been something like 6.5% in its 27 year history, so its not super amazing, just slow and steady.  It also has 30 billion dollars of commercial real estate under its ownership.

I don't really know anything about Sharpe ratios, so I had to look it up a little before responding.

The timing of your post is kinda funny because I just looked up my retirement funds earlier today, wondering if I could rebalance yet.  Its nice to have something that has kept going up in value since the start of the year, about 7% year to date.

edited to add--- some useful info about the fund https://fluenttech.tiaa.org/pdf/factsheet/878094200.pdf

edited to add again--- here's a good visual from the bogleheads forum.  Its discussion (2 years old) is here---  https://www.bogleheads.org/forum/viewtopic.php?t=300421  The real estate fund is the blue line with shaded area underneath and has not been smoothed.  They three other lines are the components of the 3 fund portfolio-- US stock, international stock, bonds

[RWTL]

For those of us who are still in the accumulation phase, say 25-30% to FI, does it make sense to drop a tax-advantaged target-date fund that is currently 90/10 in favor of 100% equities? I have been bummed about the 10% bond allocation lately, but it would feel like market timing (selling low, buying high) to trade these bonds for stocks right now.

I personally wouldn't choose a target date fund.  My advice would be to develop your personal investment plan and stick to it during the ups and downs.  As long as you rebalance when your plan calls for it, you're not market timing.

[uniwelder]

Just looking at the chart I am VERY suspicous of this fund (QREARX).  It's a universal law of investing that to earn returns you have to accept risk - I see a lot of return in this fund by no risk.  If something looks too good to be true then it nearly always is.

QREARX has a Sharpe Ratio of 2.66 which is probably way north of anything Bernie Madoff ever claimed to deliver.

I’ve been adding info to my original reply but thought that was dragging on a bit too long.

According to TIAA’s site, they report a Sharpe ratio of 1.2 since inception. I think it’s probably due to different timelines we’re looking at.

[vand]

Just looking at the chart I am VERY suspicous of this fund (QREARX).  It's a universal law of investing that to earn returns you have to accept risk - I see a lot of return in this fund by no risk.  If something looks too good to be true then it nearly always is.

QREARX has a Sharpe Ratio of 2.66 which is probably way north of anything Bernie Madoff ever claimed to deliver.

I’ve been adding info to my original reply but thought that was dragging on a bit too long.

According to TIAA’s site, they report a Sharpe ratio of 1.2 since inception. I think it’s probably due to different timelines we’re looking at.

The S&P has a long term SR of about 0.4, and long term, anything over about 1 is remarkable. 

https://markets.ft.com/data/funds/tearsheet/ratings?s=QREARX
5yr SR 2.55
3yr SR 2.67
1yr SR 12.76

12.76 - ARE YOU KIDDING ME!!?

These guys are either geniuses or some very dodgy accounting is going on. Remember one of the things that tipped people off about Madoff was not his outright returns, it was the apparent consistency of his returns.

[uniwelder]

Just looking at the chart I am VERY suspicous of this fund (QREARX).  It's a universal law of investing that to earn returns you have to accept risk - I see a lot of return in this fund by no risk.  If something looks too good to be true then it nearly always is.

QREARX has a Sharpe Ratio of 2.66 which is probably way north of anything Bernie Madoff ever claimed to deliver.

I’ve been adding info to my original reply but thought that was dragging on a bit too long.

According to TIAA’s site, they report a Sharpe ratio of 1.2 since inception. I think it’s probably due to different timelines we’re looking at.

The S&P has a long term SR of about 0.4, and long term, anything over about 1 is remarkable. 

https://markets.ft.com/data/funds/tearsheet/ratings?s=QREARX
5yr SR 2.55
3yr SR 2.67
1yr SR 12.76

12.76 - ARE YOU KIDDING ME!!?

These guys are either geniuses or some very dodgy accounting is going on. Remember one of the things that tipped people off about Madoff was not his outright returns, it was the apparent consistency of his returns.

I don't think that really means anything, though I can't claim to understand much.  Sharpe Ratio is the return (beyond government bond returns) divided by its volatility.  It has done well in the past year (along with the past 12 years) with very little volatility, therefore Sharpe ratio is very high.  QREARX only exists in a retirement fund with very strict rules about withdrawal, so its price doesn't go up or down due to regular market swings or day trading.  Its price is calculated from the property appraisal values and rental income, which have very slow moving changes, hence the low volatility.

Does anyone else know anything about TIAA's real estate fund?  It gets discussed widely at the Bogleheads forum.

[Radagast]

The TIAA real estate fund is completely trustworthy and not dodgy. It has been around a long time and has had some notable people on its board. David Swenson, manager of the Yale endowment and author of books like "Pioneering Portfolio Management" and "Unconventional Success" (the latter of which I own) has recommended it as the REIT part of a portfolio and also was on it's board. TIAA is non-profit so far as I know.

It appears stable because the fund very rarely marks their assets to market, and only well after the fact. That is why it's owners can market time with it: they just look at big moves in other REITs and then anticipate QREARX will do that in a few weeks. In reality the assets fluctuate like everything else, but just like me checking my net worth, things appear a lot stabler if you rarely tally them up.