Bond Allocation

[dblaace]

I asked this in another forum and did not get much of a response so I thought I would try here.

I retired 12/31 and am in the process of rolling over my 401k to my Fidelity IRA and reallocating the investments. Targeting a 60/40 split.

What is the best way to invest the bond allocation? Single Bond fund, multiple bond funds(type/duration), individual bonds?

[SeattleCPA]

I asked this in another forum and did not get much of a response so I thought I would try here.

I retired 12/31 and am in the process of rolling over my 401k to my Fidelity IRA and reallocating the investments. Targeting a 60/40 split.

What is the best way to invest the bond allocation? Single Bond fund, multiple bond funds(type/duration), individual bonds?

"Best" is going to be a slippery concept. But here's what David Swensen, the former manager of the Yale University endowment fund, would have suggested as an example of something smart.

First, he'd say rather than 40% in bonds (which will mean a certain percentage in corporate bonds which do force you to bear risks), he'd say 30% in US Treasuries (which theoretically let you avoid risks).

Second, he'd have you put half of that 30% into a intermediate term Treasury bond fund (ideally one where duration of fund matches duration of market)... and then other half into a TIPS fund so you have some real assets to protect you against inflation.

So, two funds or ETFs.

This is what I do, for what that's worth.

P.S. If you have taxable and tax-deferred, I think bonds go in the tax-deferred space. Reason: Because if you put a stock fund in the taxable space, you'll get qualified dividends tax treatment and long-term capital gains treatment. Also if you want to look really long term, your heirs will get the Section 1014 step-up in basis.

[NorCal]

You'll get widely different answers depending on who you ask.  I also think the strategy should be different for those in or nearing FI than those far from it.

Of the 20% of my portfolio in Bonds, I allocate it as follows:

60% SCHZ- A broad bond fund. 
20% SPTL- Long Term Treasuries
20% PHB- High Yield Bonds (Note that I would trade these for a Preferred Stock Fund if I had them in a taxable account)

For those nearing FI, I'd recommend the "Asset Dedication" strategy.  To oversimplify a bit, you're directly buying bonds that mature in time periods that you need the cash.  This helps avoid drawing down your equity portfolio during a market downturn.

[cool7hand]

We use VGLT and VGIT for government bonds

[MustacheAndaHalf]

What is the best way to invest the bond allocation? Single Bond fund, multiple bond funds(type/duration), individual bonds?

What is your risk tolerance in bonds?  Maybe you could take the current YTD losses for each duration of bond fund and triple those to get an idea.

Short term bond (BSV) -0.5% x 3 = -1.5%
Intermediate term bond (BIV) -1.6% x 3 = -5% (rounded)
Long term bond (BLV) -3.34% x 3 = -10%

The Fed is likely to do 4 rate hikes, but bonds have only incorporated one of them.  So if you dislike a -10% loss, you might pick between short or intermediate term.  Those are Vanguard ETFs, but others will be similar.

Personally I'm waiting for a bit more carnage in the bond market before I switch back from cash to bonds.

[dblaace]

What is the best way to invest the bond allocation? Single Bond fund, multiple bond funds(type/duration), individual bonds?

What is your risk tolerance in bonds?  Maybe you could take the current YTD losses for each duration of bond fund and triple those to get an idea.

Short term bond (BSV) -0.5% x 3 = -1.5%
Intermediate term bond (BIV) -1.6% x 3 = -5% (rounded)
Long term bond (BLV) -3.34% x 3 = -10%

The Fed is likely to do 4 rate hikes, but bonds have only incorporated one of them.  So if you dislike a -10% loss, you might pick between short or intermediate term.  Those are Vanguard ETFs, but others will be similar.

Personally I'm waiting for a bit more carnage in the bond market before I switch back from cash to bonds.

Thanks for the replies. I think I will DCA in over the next month or 2. I put 5% in today in Short term FUMBX.

[franklin4]

"It is a terrible mistake for investors with long-term horizons – among them, pension funds, college
endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds
to stocks. Often, high-grade bonds in an investment portfolio increase its risk."

"I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far
riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio
of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible
multiple of earnings relative to then-prevailing interest rates."

WEB Berkshire Hathaway Annual Report 2017
There's more discussion about risk but the above is the wrap up.

[The 585]

I keep it simple and my 20% bond allocation stays in BND (Vanguard Total Bond) just like my IPS says. Anything else is market timing.

[KarefulKactus15]

Good timing to read this. 

I keep some semi emergency semi liquid funds in VASIX. It has performed worse than everything I have, which is expected.... except that it has provided a negative return so far not using inflation adjusted metrics.  If we look at inflation adjusted I was better off stuffing cash under a mattress.  Strange times.

Mistake on my part, I thought it would be pretty stable and match inflation and nothing more, clearly a lack of understanding on my part on how the bond market works. (lesson learned)   Its about 55% total bond market and 25 % total international bond market.

[Dicey]

Something else I wish I'd considered early on. Mortgages act as bonds. So does the value of a pension*, if you have one. Cash flowing rental properties also add portfolio stability. We have all three. Conventional wisdom says we should lower our exposure to equities in proportion with our age. I'm thinking that's ass-backwards.

*I know they're not common, but we have a lot of folks here with military pensions, for example. In our case, DH has a Defined Benefit Pension, including COLA. It will replace 60% of his salary when he activates it this year. How is that so different than a bond? FWIW,  it's rock-solid, and we could still maintain our lifestyle with ease if it disappeared.

[FLBiker]

Something else I wish I'd considered early on. Mortgages act as bonds.

I've recently come around to this way of thinking as well.  As I transition out of the workforce, I'm now leaning towards paying off my mortgage before shifting to a more conservative asset allocation.  I'm about 80/20, but a chunk of that 20 is now in "high" interest savings and I-bonds that I intend to put towards our mortgage in 3.5 years.  Full disclosure -- I'm in Canada with a 5 year fixed rate mortgage, so my mortgage will mature in 3.5 years (with 20 years of amortization remaining) at which point a new interest rate would be set.  If rates are good, I might sign on for another 5 years.  Otherwise, I'll pay it (or at least way down).

[MustacheAndaHalf]

What is the best way to invest the bond allocation? Single Bond fund, multiple bond funds(type/duration), individual bonds?

What is your risk tolerance in bonds?  Maybe you could take the current YTD losses for each duration of bond fund and triple those to get an idea.

Short term bond (BSV) -0.5% x 3 = -1.5%
Intermediate term bond (BIV) -1.6% x 3 = -5% (rounded)
Long term bond (BLV) -3.34% x 3 = -10%

The Fed is likely to do 4 rate hikes, but bonds have only incorporated one of them.  So if you dislike a -10% loss, you might pick between short or intermediate term.  Those are Vanguard ETFs, but others will be similar.

Personally I'm waiting for a bit more carnage in the bond market before I switch back from cash to bonds.

Thanks for the replies. I think I will DCA in over the next month or 2. I put 5% in today in Short term FUMBX.

It's so quaint to look back 4 months ago to 4 rate hikes.  Current market expectations are 2022 ends with 3.25% Fed Funds rate, suggesting treasury yields over 4%.  My current view is 4.00% by year end and 5% treasury yields (hi future me!  how'd I do?).

BSV, Short-term bonds -4.1% YTD
https://etfdb.com/etf/BSV/#performance

BIV, Intermediate-term bonds -9.6% YTD
https://etfdb.com/etf/BIV/#performance

BLV, Long-term bonds -20.0% YTD
https://etfdb.com/etf/BLV/#performance

Earlier I preferred cash over bonds, which has been right so far.  That's still true, but I'm now going further than that: I bought inverse bonds, giving me a negative bond exposure.  I'm so confident bonds will lose money that I've bought their opposite.