Author Topic: Help me with Bond Funds PLEASE  (Read 10296 times)

AZryan

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Help me with Bond Funds PLEASE
« on: July 08, 2015, 12:48:36 AM »
Everything I read says, 'bonds suck', 'give low or even negative returns', 'plunge when interest rates go up, and rates can only go up now', etc...

Say I'm 100% Stocks (call it 100% Total Market VTSAX), but looking to FIRE at a ~3.3% SWR sometime in a few years. I know 100% Stocks is considered SUPER aggressive and risky due to 'sequence of returns'. It could drop 30-40% early into a 40-50 year retirement and set me up to run dry long before my time is up.

I have very little room to cut my SWR below say ~3% in a crash.

Should I flip 15-25% of my port' into a Bond Fund ASAP and thank my stupid luck that I 'caught my mistake' before the next stock crash?

If 'yes', which fund makes the most sense out of Vanguard's Total Bond (VBTLX), Intermediate (VFIUX), and Long-Term Treasury (VUSUX)?

VUSUX looks like the best returns, but will it be the most screwed by a coming Fed interest rate hike? I 'heard' that this hike is already 'baked into' all the Bond Fund prices? Yes/No?

My strategy currently would be to pull from ONLY the Stock Fund so long as the market keeps going up. Then use ONLY the Bond Fund during the next crash/rebound period- whenever that might be. ZERO rebalancing.

Hopefully, the remaining stocks will then be fairly valued, unlikely to crash again immediately after the previous crash, and able to weather the next crash without much (or any) more safety net of bonds. And if things still look bad, I can also tap a bit of a line of credit.

Long Term Treas. (VUSUX) appears to negatively correlate really well- meaning that during most stock crashes, it suddenly kicks ass right when I'd need it. Am I wrong/missing something?
Please don't just tell me to 'diversify', ok. From what I've researched, that seems to be a smart, but almost entirely different strategy.

How would you play a Bond Fund in this market right now starting with 100% Stocks and very close to FIRE? I just can't decide!

Thanks!

johnny847

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Re: Help me with Bond Funds PLEASE
« Reply #1 on: July 08, 2015, 01:00:08 AM »
I'd say yes, you should probably switch some of your stocks to bonds ASAP. From your tone it's apparent that having 100% stocks is causing anxiety for you. A good portfolio should let you SWAN (sleep well at night).

Just use Vanguard's total bond index. It's got short, medium, and long term to balance yield and interest rate risk. It's also got a mix of government and corporate bonds.

Scandium

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Re: Help me with Bond Funds PLEASE
« Reply #2 on: July 08, 2015, 07:48:55 AM »
My strategy currently would be to pull from ONLY the Stock Fund so long as the market keeps going up. Then use ONLY the Bond Fund during the next crash/rebound period- whenever that might be. ZERO rebalancing.

This doesn't sound like a great idea, similar to the problems with the "cash cushion" approach. You'd have to be very good at market timing.

https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/

I'd probably suggest some allocation to bonds, and rebalance annually.

Heckler

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Re: Help me with Bond Funds PLEASE
« Reply #3 on: July 08, 2015, 08:24:54 AM »
http://canadiancouchpotato.com/2013/09/23/how-not-to-prepare-for-a-bear-market-in-bonds/

http://canadiancouchpotato.com/2015/05/07/should-you-replace-bonds-with-cash/



What's your time horizon?   Not when you want to quit contributing, but how long do you need to maintain 3.3%? (Which sounds sketchy to me unless your stashe is so big you only need 3.3% of it)

Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #4 on: July 08, 2015, 08:48:09 AM »
Short to Intermediate term bond funds shouldn't do that badly as the interest rate increases will come pretty slowly. You should be good with those in your portfolio, make the switch now and rebalance quarterly/annually and you'll be fine

Interest Compound

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Re: Help me with Bond Funds PLEASE
« Reply #5 on: July 08, 2015, 09:04:01 AM »
I'd put 20% in Vanguard's Total Bond (VBTLX), don't even consider the other bond funds.

Jack

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Re: Help me with Bond Funds PLEASE
« Reply #6 on: July 08, 2015, 09:05:18 AM »
Say I'm 100% Stocks (call it 100% Total Market VTSAX), but looking to FIRE at a ~3.3% SWR sometime in a few years. I know 100% Stocks is considered SUPER aggressive and risky due to 'sequence of returns'. It could drop 30-40% early into a 40-50 year retirement and set me up to run dry long before my time is up.

Don't forget that having a 40-50 year retirement changes things. Namely, the longer the time horizon, the more you need to rely on portfolio growth (and the less you care about volatility).

Here are some numbers from Firecalc (using all default values except for % stock allocation and # of years):

30 years50 years
75% stocks94.8%82.1%
90% stocks94.8%86.3%
100% stocks93.0%85.3%

As you can see, while for a 30-year portfolio 75% stocks and 90% stocks had the same success rate, when the time horizon was extended to 50 years the more aggressive 90% stock portfolio became the clear winner.

Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #7 on: July 08, 2015, 09:11:28 AM »
After looking at the two vanguard bond indexs, honestly, even the difference between total and intermediate isn't huge - Average maturity for total vs intermediate is 7.9 years vs 5.9 years, and average duration is 5.7 vs 5.3

If you think rates will spike in the next five years, then go with 100% stocks, if you think rates will rise gradually or you don't know what to think, then transfer it now and don't worry too much about it

Just keep in mind a rate increase will also result in PE compression so stocks will go down as well (opportunity cost of investing - investors will demand more return on stocks, which will drive prices down)

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #8 on: July 08, 2015, 12:25:41 PM »
johnny847,
"From your tone it's apparent that having 100% stocks is causing anxiety for you.-"
Sorry, you read that wrong, then. I've always been 100% stocks and rode out the 2000 tech bubble and 2008 crash without even blinking and came out way ahead compared to a generic, 'well-diversified' portfolio because of it. And that's not 'recency bias', either. Back-tested, all-Stocks almost always comes out ahead if you just don't touch it. And I don't... 'cept I will once I retire.

My concern now is in forming a retirement drawdown strategy. And the genuine threat (not 'emotional fear') is that I hit a market crash with ALL-Stocks in the first ~5 years or so of FIRE.

Some strategies to guard against a crash are...
1) 'Just Diversify' (a good and obvious choice I already 'get', but still think I prefer a stock-heavy goal if I can keep it well-rationalized like I have on the 'build-up' phase).

2) Cut WAY back on the withdrawal rate if in ALL-Stocks (I would have wait longer to FIRE so that I gained the headroom I'd need to do that. This isn't necessarily a 'dumb, risky' option 'cuz having ALL-Stocks has gotten me where I'm at faster than if I'd had a big chunk of Bonds in the mix all this time, so waiting a little longer would be plenty fair).

3) Limp through an early crash using a Line of Credit that I pay off whenever Stocks come back (doesn't feel like the smartest bet, but probably ought to work -I reserve it as a solid 'Plan B' vs. everything else).

4) And my main question here of flipping a large chunk of Stocks into Bonds near the start of retirement, and confused how they'd (likely) perform and which Fund would be best for this gamble considering the current environment. Again, not an attempt at market timing, just at market awareness.

You said to do the Total Bond Mkt. I know what it is and how it's mixed, but its long term return is the worst of the three I mentioned, so why do you think it's better than the others in my scenario?

Scandium,
Technically, we all do market timing. We all think it will go up (in our lifetime). What we really mean by a 'market timer' is that their timeframe is too short, so it doesn't match any statistical likelihood of knowing what they're talking about.
Long-term, before and after my approaching retirement date, I think Stocks will go up (i.e. longest timeframe and least amount of market timing possible).

The only BIG question is examining where things are at near this retirement date. Is it market timing to imagine that the market is probably overpriced now? I don't think so. FACT-its had a lot of up years in a row.  Will it keep going up like this for the next 5-8 years? We don't know, but would you go so far as to say you have "no idea"? It might never go down again, but that's probably impossible (as in 'probability'), and some sort of significant downturn within 5-8 years is statistically very likely, isn't it?

The biggest risk in what we're all basically doing here seems to be a crash on Day One of retirement. Each day after lowers that risk until 10-15+ years later none of us even cares if there's another crash because we're so far ahead that we can't lose (statistically speaking).

So that narrow, imminent (for me) window of early retirement years is the focus of my attention. I agree 100% that a large 'cash cushion' is wasteful long-term- maybe even short term, too. But I'm talking about a Bond Fund intended to guard against an inevitable downturn that is most threatening if it happens in the next ~5 years or so.

For example... we didn't know 2008 was going to crash, but 2003-2007 did say, "Dude, it IS coming." didn't it? And that seems to be something like where we are again.
If I don't do a Bond Fund and the market crashes soon, I'll just do nothing and wait 'til it comes back up and then retire on an upswing. I'd like to not take that risk of waiting, though. And I didn't get into Bonds earlier, 'cuz I wasn't close enough to retirement to make it worth it -'cuz most Stock crashes don't take more than about ~3-5 years or so to rebound.

Heckler,
"-how long do you need to maintain 3.3%?-"
I wrote ~40-50 years. The 30 years of these '4%rule' studies just aren't long enough (I hope).
"-(Which sounds sketchy to me unless your stashe is so big you only need 3.3% of it)-"
What do you mean by 'sketchy'?? That usually implies dishonest, criminal, liar, etc.

Because I'm 100% Stocks, I don't think a generic ~70/30 30yr. 4%rule is a safe bet for me. I'm at ~4% right now, but with zero spending headroom, zero cash buffer. One early crash in retirement now and I'd be fairly fucked.

A ~3.3% withdrawal rate seems more reasonable for a long-tooth bull, high P/E, overvalued market. At the point I hit ~3.3%, I could probably drop to ~3% gently enough in a crash, but I'd prefer an even better strategy to guard against an early crash, if I can find one.

Long term, ~100% Stocks ought to pull out way ahead, just like how I hit ~25x annual spending (4%) faster than I would've with that generic, 'well-diversified, annually rebalanced' portfolio I know most recommend.

Aphalite,
"Short to Intermediate term bond funds shouldn't do that badly- "
See... I think I 'get' that. And that the Short will handle rate hikes better than Int., and both better than Long. On the other hand, it seems like Short Term returns the worst in the long run, and even 'negative' returns, while Int. does better, and Long does better still. 10 year returns are 3.31% for Short, 4.4/4.63% for Total Mkt and Int., and 6.05% for Long.
Like you just noted Total Market is effectively an Intermediate Fund. I mostly ruled out doing any Short Term Fund at all. Just using it here to note the progression of returns from Short to Long.

My 'guess' is that rates will probably rise in small increments, slowly 'cuz the Fed seems so afraid to raise 'em at all and seems that's mostly everyone's best guess.

So, say I choose between Short and Long right now. Then say rates hike 1%. Long Term takes a bigger loss than Short, but if the market is still ok-ish, I'm still not touching either Bond Fund. Then there's the next Stock crash (in 0-8 years). It seems like Long Term would spike way up compared to Short -exactly when I'd want to pull from it, and seems more likely than not that it'd be ahead in value vs. weak Short Term returns?

This is basically the paradox that's mindfucking me. I don't want to pick Total or Int. just because I'm too dumb to understand if Short or Long would be better for me.

What if I thought rates will spike within ~5 years, but expect that I couldn't cover my retirement budget if I was still 100% Stocks and there was a 30-40% market drop in that same timeframe? Meaning that I'd be guessing that I was tilting toward an early bust down the line? Should I be in Short, Int. or Long Bonds in that scenario? I'm guessing you'd say Int. (Total Market), but not sure why it's the winner?
Would you prefer to draw those Bonds down to zero to ride out that Stock crash, or would you still drawing big chunks from depressed Stocks just to keep Stocks/Bonds balanced? I'm guessing you'd say 'keep it balanced', but again.. why? That seems weird to keep pulling from crashed Stocks when your Bonds are still up.

Remember, this is all about 'start of retirement' strategy. Not necessarily a long-term strategy.

Jack,
"Don't forget that having a 40-50 year retirement changes things."
Exactly. I agree/know that 100%. That's why I want to be closer to or at 100% Stocks long-term. It's the question of sequence of returns risk at the start of retirement that I'm looking to guard against.
I'm thinking that if I flip ~15-25% Stocks into a Bond Fund, and the market crashes on Day One of FIRE, I've got several years of Bonds to sell off. If it takes longer to hit a crash, fine -all the better. The Bonds can just sit there chugging along until that happens. Zero market timing, just the understanding that a downturn will happen.

After that first crash, the 'next one' wouldn't be imminent and Stocks ought to not be overpriced at that point (implying a much better chance of them going up vs. down in the near-term). I'd hope to then hit 'escape velocity' where my withdrawal rate becomes low enough (~sub 3%?) that I can mostly ignore any further crashes since they'd only spike my spending up to the brief ~5-6% before dropping back to that really low rate.

2Birds1Stone

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Re: Help me with Bond Funds PLEASE
« Reply #9 on: July 08, 2015, 12:39:15 PM »

Long term, ~100% Stocks ought to pull out way ahead, just like how I hit ~25x annual spending (4%) faster than I would've with that generic, 'well-diversified, annually rebalanced' portfolio I know most recommend.


I sense some recency bias here. We lucked out and had one of the nicest bull runs in history the past 6 years. Granted long term 100% stocks has shown the highest historical returns, had you experienced a crash the past few years you might have a different train of thought, even in the accumulation phase.

johnny847

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Re: Help me with Bond Funds PLEASE
« Reply #10 on: July 08, 2015, 12:46:47 PM »
johnny847,
"From your tone it's apparent that having 100% stocks is causing anxiety for you.-"
Sorry, you read that wrong, then. I've always been 100% stocks and rode out the 2000 tech bubble and 2008 crash without even blinking and came out way ahead compared to a generic, 'well-diversified' portfolio because of it. And that's not 'recency bias', either. Back-tested, all-Stocks almost always comes out ahead if you just don't touch it. And I don't... 'cept I will once I retire.

My concern now is in forming a retirement drawdown strategy. And the genuine threat (not 'emotional fear') is that I hit a market crash with ALL-Stocks in the first ~5 years or so of FIRE.

Some strategies to guard against a crash are...
1) 'Just Diversify' (a good and obvious choice I already 'get', but still think I prefer a stock-heavy goal if I can keep it well-rationalized like I have on the 'build-up' phase).

2) Cut WAY back on the withdrawal rate if in ALL-Stocks (I would have wait longer to FIRE so that I gained the headroom I'd need to do that. This isn't necessarily a 'dumb, risky' option 'cuz having ALL-Stocks has gotten me where I'm at faster than if I'd had a big chunk of Bonds in the mix all this time, so waiting a little longer would be plenty fair).

3) Limp through an early crash using a Line of Credit that I pay off whenever Stocks come back (doesn't feel like the smartest bet, but probably ought to work -I reserve it as a solid 'Plan B' vs. everything else).

4) And my main question here of flipping a large chunk of Stocks into Bonds near the start of retirement, and confused how they'd (likely) perform and which Fund would be best for this gamble considering the current environment. Again, not an attempt at market timing, just at market awareness.

You said to do the Total Bond Mkt. I know what it is and how it's mixed, but its long term return is the worst of the three I mentioned, so why do you think it's better than the others in my scenario?

To be more precise, it seems that having 100% stocks heading into retirement is causing a lot of anxiety for you.

By the way, back tested, all stocks almost always comes out ahead during the withdrawal phase as well. Try cFIREsim for yourself.

Ignore past performance of all three funds. It's irrelevant. What's important is the underlying securities.

You say it's not an attempt at market timing. But it is.
Quote from: ARzryan
Everything I read says, 'bonds suck', 'give low or even negative returns', 'plunge when interest rates go up, and rates can only go up now', etc...

You're reading things like these and then thinking well damn
Quote from: ARzryan
VUSUX looks like the best returns, but will it be the most screwed by a coming Fed interest rate hike? I 'heard' that this hike is already 'baked into' all the Bond Fund prices? Yes/No?

You're using anticipated future events to inform your decision. That right there is market timing. If you want the Investopedia definition:
Quote
1. The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data.

2. The practice of switching among mutual fund asset classes in an attempt to profit from the changes in their market outlook.

It's been several years since the Fed hinted at an interest rate hike. And guess what? It still hasn't happened yet. Using this information to time the market failed.

Why Vanguard Total Bond market:
Past performance doesn't matter. This is the single most important fact to keep in mind when investing, but it is the most ignored. It is written on every fund prospectus - past performance is no indication of future results.
What matters is the diversification offered in the total bond market fund. In the long run, this diversification will pay off for you.

Heckler

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Re: Help me with Bond Funds PLEASE
« Reply #11 on: July 08, 2015, 12:48:07 PM »
What do you mean by 'sketchy'?? That usually implies dishonest, criminal, liar, etc.

Because I'm 100% Stocks, I don't think a generic ~70/30 30yr. 4%rule is a safe bet for me. I'm at ~4% right now, but with zero spending headroom, zero cash buffer. One early crash in retirement now and I'd be fairly fucked.

that's exactly what I meant by sketchy.

beltim

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Re: Help me with Bond Funds PLEASE
« Reply #12 on: July 08, 2015, 01:00:23 PM »
At a 3.3% withdrawal ratio, it pretty much doesn't matter.  Your historical success rate is 100% over a 30 year period whether you have 0% bonds or 20% bonds (or 40%).  Over a 50 year period, the historical success rate is 100% with 100% stocks and 99% at 20% bonds.

Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #13 on: July 08, 2015, 01:30:26 PM »
See... I think I 'get' that. And that the Short will handle rate hikes better than Int., and both better than Long. On the other hand, it seems like Short Term returns the worst in the long run, and even 'negative' returns, while Int. does better, and Long does better still. 10 year returns are 3.31% for Short, 4.4/4.63% for Total Mkt and Int., and 6.05% for Long.
Like you just noted Total Market is effectively an Intermediate Fund. I mostly ruled out doing any Short Term Fund at all. Just using it here to note the progression of returns from Short to Long.

My 'guess' is that rates will probably rise in small increments, slowly 'cuz the Fed seems so afraid to raise 'em at all and seems that's mostly everyone's best guess.

So, say I choose between Short and Long right now. Then say rates hike 1%. Long Term takes a bigger loss than Short, but if the market is still ok-ish, I'm still not touching either Bond Fund. Then there's the next Stock crash (in 0-8 years). It seems like Long Term would spike way up compared to Short -exactly when I'd want to pull from it, and seems more likely than not that it'd be ahead in value vs. weak Short Term returns?

This is basically the paradox that's mindfucking me. I don't want to pick Total or Int. just because I'm too dumb to understand if Short or Long would be better for me.

What if I thought rates will spike within ~5 years, but expect that I couldn't cover my retirement budget if I was still 100% Stocks and there was a 30-40% market drop in that same timeframe? Meaning that I'd be guessing that I was tilting toward an early bust down the line? Should I be in Short, Int. or Long Bonds in that scenario? I'm guessing you'd say Int. (Total Market), but not sure why it's the winner?
Would you prefer to draw those Bonds down to zero to ride out that Stock crash, or would you still drawing big chunks from depressed Stocks just to keep Stocks/Bonds balanced? I'm guessing you'd say 'keep it balanced', but again.. why? That seems weird to keep pulling from crashed Stocks when your Bonds are still up.

Remember, this is all about 'start of retirement' strategy. Not necessarily a long-term strategy.

1) In the long run, short term bonds pay the least yield, and long terms pay the most, see http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield. This is why you see "10 year returns are 3.31% for Short, 4.4/4.63% for Total Mkt and Int., and 6.05% for Long". Bond returns for the most part will match their yield, unless something weird happens like the interest rates going to zero. However, when there is interest rate movements up, long term bonds will suffer the most, because now investors can buy a short term bond and it will pay the same interest, or they can buy a new long term bond and get a higher yield. Existing bond PRICES will move down, but if you are holding to maturity, you are not losing on the price decrease, you just get a lower yield in the meantime

2) If you are guessing that rates will rise slowly, then you're safe to allocate some funds to bond. A market crash doesn't have anything to do with bond prices - you're assuming that investors will sell off stocks and buy long term treasuries when there's a crash, but they could just as well buy short term treasuries instead if they're trying to "wait out" the crash. There's no reason that long term bonds will increase in value more so than short term bonds in an equity crash

3) When you talk about the drawdown phase, usually you should be keeping one to two years of cash on hand as part of your allocation. Cash is king when you don't have a monthly source of income. It keeps you flexible and makes it so that you don't have to sell when prices are down. Additionally, both equities and bonds pay out dividends and interest (you should turn off dividend reinvestment once you start the drawdown phase, since now you're pulling cash out and there's no need to reinvest, you're living off the cash), which is usually a source of cashflow that gets you to at least 2%. Here are the yields for Total Market and Total Bond:
VTSAX: SEC yield as of 07/07/2015   1.90%  B
SEC yield as of 07/07/2015   2.16%  A

This means that you're already getting half of your 4%, and your cash cushion should cover the other 2%

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #14 on: July 09, 2015, 12:30:14 AM »
2Birds1Stone,
"I sense some recency bias here."
Nope.
"We lucked out and had one of the nicest bull runs in history the past 6 years."
Agreed.
"Granted long term 100% stocks has shown the highest historical returns,-"
Exactly. Short term, from day one of retirement is my main concern. I don't think the chances are even that the market will go up like this for another 6 years vs. the chance of some form of crash instead. So, I want to hedge my bet with some form of Bond Fund.

"-had you experienced a crash the past few years you might have a different train of thought,-"
Yep, 'cuz that would mean my portfolio value still hadn't hit a ~4% SWR yet (like it's at now), so I'd just be doing nothing until it came back up. And when it did, the market value (P/E ratio and such) would likely be better than it is now, and less chance of another severe crash right after a severe crash. So, I'd consider a different tactic in that case. That's not recency bias.

johnny847,
"-Ignore past performance of all three funds. It's irrelevant."
Why?
The anxiety (your word, not mine) would be the obvious short term risk of having all-Stocks right at Day One of retirement. Long term, I still want all, or mostly all Stocks, so it's a soonish, short timeframe Bond strategy that I'm trying to work out to guard against an early crash.

Your argument of 'that's market timing' is a matter of semantics, I think. It's all a matter of the timeframe and the specificity of the prediction.
"I know the market's gonna crash big-time by the end of the year!" =market timing.
"I thinkthe market will crash sometime in the future." =basically just a very reasonable likelihood.
My timeframe guess is a little more specific than 'sometime' and my prediction is only 'at least more than 50% chance of a crash. If that's market timing to you, is a tremendously slight version of it.

Since I don't know when the market will crash next, I think it's smart to hedge my long term bet on Stocks with some Bond Fund that would carry me through an imminent crash if one happens. I do think this is more likely than not to happen within ~6 years based on the entire history of stock market fluctuations and bull/bear runs, etc.
Trying to evaluate diff Bond Funds as best I can, but fairly confused my them.

"It's been several years since the Fed hinted at an interest rate hike. And guess what? It still hasn't happened yet. Using this information to time the market failed.-"
I read that myself, and personally never used those guesses to try to time the market. And I'm not doing that now really. But hedging a bet at the most critical time near retirement isn't market timing.

"Past performance doesn't matter."
If that was strictly true, then the 4% rule, even as a basic guideline, should be considered pure fantasy since it's 100% based on past performance data. And, how then do you pick what to invest in when you believe (implied by your quote here) that you have no idea what any investment might do in the future? Pure random chance?

I'm well aware of prospectus disclaimers and know past returns are no guaranteeof future returns. But just like I might die tomorrow, I wouldn't bet on it based on 'past returns' of other humans like me and my personal 'performance returns' so to speak. I could totally die tomorrow, but to bet I won't isn't market timing. The market might never crash again, but really that would be a fool's bet to put money on, right?

Heckler,
I wrote my time horizon twice now and we cleared up (kinda) what you meant by 'sketchy'. Do you have any suggestions, then?

beltim,
"At a 3.3% withdrawal ratio, it pretty much doesn't matter."
~3% is my ultimate goal, but I'm at 4% right now, so I'm trying to hold off a severe short term loss if the market crashes soonish, so that I hit that ~3.3% with as little delay as I can manage.

Aphalite,
I get what you're saying about Bond prices and yield in '1)', but don't Bond Funds work differently since they're always turning over bonds and buying new ones? All the info I find seems to be on how Bonds work, not exactly Bond Funds?
"-There's no reason that long term bonds will increase in value more so than short term bonds in an equity crash-"
Am I seeing things, 'cuz it seems like they pretty much always do? Is that really just random chance over and over and over again? It looks so much like a trend that I'd really love a deeper explanation of why it totally isn't?

As for '3)', I do plan on having ~1 year of cash and could draw several years from a line of credit if the market sinks bad. But I think I also want a chunk of Bonds to weather the first crash in retirement -whenever it happens.

I suppose I can just go Total Bond Mkt since I know it's solid and everyone's go-to recommendation, but wanted to understand why Long Term Treasuries Fund wouldn't work better as I intend to use 'em?

clifp

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Re: Help me with Bond Funds PLEASE
« Reply #15 on: July 09, 2015, 03:41:27 AM »
I won't get hung up on a fixed percentage of bond assets.  Mine has varied from high of almost 45% shortly after retiring to a low of 9% now.

I think you are wise to be nervous hitting the retirement red zone with 100% stock portfolio. Some people can handle the volatility, some people can, and fairly large number of people thought they could but found in 2008/2009 that in fact they didn't have the stomach.  I did handle it fine, and more or less did I what I was suppose to do sell bonds and bought stocks during the crash. But reflecting afterwords.  found that I'd sleep better in the future if I had several years of spending in a low volatility asset class.

The purpose of having this asset class is both practical : don't have to sale (much) stocks in down market, a lot psychologically (sleeping better at night), and some statistically slightly lower failure rates with a small amount of bonds.

If you have 75% or more  of your assets in stocks you'll have some bumpy rides as the Chinese investors are finding out this last month (down 30%)
So your remaining assets need to be in something less scary than stocks.
The characteristic of this asset class are
1. Low volatility ideally never go down in a real terms. I think most people can handle inflation, (e.g. cash in your home safe). Many people are ok with losing 10-15% in a year.
2. Low or preferable negative correlation  with stocks.
3. High reliable income.

Now traditionally bonds filled this role perfectly and nice mix like Total bond market was perfect.
I'd argue that bond market has changed in recent years and total bond market like BND isn't a great choice.
1. With a duration of 5.6 year a 2% rise in interest rates would result -9% loss a 4% rise (unlike but has happen in a year) would mean a 20% loss. Now bonds are still much lower volatility than stocks.
2. Generally bonds have a negative correlation to stocks. But they don't always. I'd argue that rising interest or inflation rates may very possibly result in both the stock market and the bond market suffer.
3. The SEC yield on BND is 2.47% pretty pathetic. The good news is I think it is more likely to go up than down.

I think there are some better alternatives. In order of preference.
For government workers the G fund.
Stable value funds. The principal is protected while the interest payment will generally go up .
CDs. Right now Capital One is offering a 5 year CD with a 2.25% rate. nothing to get excited about virtually the same as BND, but with no interest rate risk.

I also would be too concerned with the percentage of bonds/cash/stable value fund, as much as making sure you have the right amount.  I'd say at least 2 years of expenses, many people like as much as 5 years, and few people want 7.



Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #16 on: July 09, 2015, 06:47:00 AM »
Aphalite,
I get what you're saying about Bond prices and yield in '1)', but don't Bond Funds work differently since they're always turning over bonds and buying new ones? All the info I find seems to be on how Bonds work, not exactly Bond Funds?
"-There's no reason that long term bonds will increase in value more so than short term bonds in an equity crash-"
Am I seeing things, 'cuz it seems like they pretty much always do? Is that really just random chance over and over and over again? It looks so much like a trend that I'd really love a deeper explanation of why it totally isn't?

Bond funds do work somewhat differently, but think about it this way, it still takes longer for a fund to turnover bonds if it has bonds of longer maturities. In a rapidly rising interest environment, short term bond funds are not as sensitive to interest rate risk.

If you're talking about 2000 and 2008, each time there was a market crash, interest rates also went way down as investors flocked to treasuries for safety. Because interest rates are going down, the primary beneficiaries will be the bonds that have the highest interest rate, which will be the longest term bonds.

Check out this link: http://www.advisorperspectives.com/newsletters12/pdfs/Must_Bond_Investors_Fear_Rising_Interest_Rates.pdf
" in the 1963-1981 period discussed above, when interest rates tripled, 20-Year
Treasury bonds offered a 1.28% annual return5
 and 10-Year Treasury bonds returned
3.37% annually over the same period.6
 The higher return for the shorter duration 10-Year
Treasury bond is what we expect in a rising interest rate environment.
Reaching back earlier than 1963, between 1950 and 1980, a period when 10-Year
Treasury bonds rose from 2.32% to 10.80% – a near-fivefold increase – the 10-year
compounded returns on 10-Year Treasury bonds were 7.7%, 13.9%, and 40.75%
respectively for the decades of the 1950s, 1960s, and 1970s. (Note the escalating net
compounded returns as rates increased over the 30 years.) This is a striking indictment
against the fear mongering of the “bond bubble” alarmists.
"

There's also a table on page 6 showing your total return even as bond prices went down due to increases in interest rates. So remember that you're looking at TOTAL RETURN here, you will have cash in hand and will not have to sell off as much as you think

I suppose I can just go Total Bond Mkt since I know it's solid and everyone's go-to recommendation, but wanted to understand why Long Term Treasuries Fund wouldn't work better as I intend to use 'em?

Nothing wrong with long term treasuries if that's your cup of tea, but as you said, if you hold long term treasuries, you don't get the benefit of turnover in bond funds if interest rates do rise. However, the total bond market actually does hold 63.5% treasuries. See https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT#tab=2

10 year+ holdings is less than 15%

Clifp's post has a lot of good points I agree with, especially 2. Generally bonds have a negative correlation to stocks. But they don't always. I'd argue that rising interest or inflation rates may very possibly result in both the stock market and the bond market suffer.. I think what you need to work on is your fear that everything will go to shit. Use optimism to combat it. Life is good, you're financially independent. Worst case scenario: you pick up a part time job to make up the other 2% you're missing (2% already being paid out to you in cash, as we've discussed)
« Last Edit: July 09, 2015, 06:51:05 AM by Aphalite »

johnny847

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Re: Help me with Bond Funds PLEASE
« Reply #17 on: July 09, 2015, 07:34:00 AM »

johnny847,
"-Ignore past performance of all three funds. It's irrelevant."
Why?
The anxiety (your word, not mine) would be the obvious short term risk of having all-Stocks right at Day One of retirement. Long term, I still want all, or mostly all Stocks, so it's a soonish, short timeframe Bond strategy that I'm trying to work out to guard against an early crash.
Then I'm confused as to why we're having this discussion. You're saying that you want to have basically 100% stocks, but because we have a crash coming up, you want to hold some bonds. And then, once the crash is over, you'll switch back to stocks.

We can get all hung up on the semantics of market timing. Whether we agree on the definition, your strategy has all the pitfalls of market timing.
We both agree that there will be a stock market crash sometime in the future. And assuming you don't die of some random accident, it will be in your lifetime. To prepare for this crash, you want to hold some bonds to weather the crash.
But neither of us (and I doubt anybody out there really) knows when the stock market will crash. So you want to hold some bonds now. But bonds' returns lag stocks' returns most of the time, so your portfolio will in all likelihood return of a 100% stock portfolio up to the moment of the crash. Then of course, during the crash, your portfolio with bonds will do better.
But will you come out ahead? That depends on how soon the crash is, which as we both agree, we do not know.

So what does this tell me? Well I conclude that one of the following is true:
1) You were okay with the risk of 100% stocks in the accumulation phase, but you are not for the withdrawal phase. Now that you're about to start your withdrawal phase, you should adjust your portfolio for that change in risk tolerance permanently.
2) You believe you know with reasonable certainty that the market will crash soon enough that switching to bonds in the short term will be better for you financially.

If it actually is the latter, which you say it is not, then I will gladly pay a lot of money for your crystal ball.

"Past performance doesn't matter."
If that was strictly true, then the 4% rule, even as a basic guideline, should be considered pure fantasy since it's 100% based on past performance data. And, how then do you pick what to invest in when you believe (implied by your quote here) that you have no idea what any investment might do in the future? Pure random chance?

I'm well aware of prospectus disclaimers and know past returns are no guaranteeof future returns. But just like I might die tomorrow, I wouldn't bet on it based on 'past returns' of other humans like me and my personal 'performance returns' so to speak. I could totally die tomorrow, but to bet I won't isn't market timing. The market might never crash again, but really that would be a fool's bet to put money on, right?

When I said past performance doesn't matter, this was in the context of choosing a particular fund. As I said in my post,
Quote from: johnny847
Ignore past performance of all three funds. It's irrelevant. What's important is the underlying securities.
So let me be perfectly clear: the past performance of any particular fund is irrelevant. The only thing that is important is the underlying securities.

Bonds are a safer investment than stocks because there is a contractual obligation to pay back the value of the bond, and the nominal return on the bond is fixed upon purchase. Yes, the company may go under, as we all know. We account for this risk as default risk. But also, bondholders are the first priority in getting paid from the bankruptcy proceedings. The stockholders are not entitled to anything. The laws around bonds are constructed in a way that minimizes your risk as an investor.
Stocks on the other hand, have no performance guarantees. But stocks can provide, in theory, near infinite return. Obviously no stock achieves this, but the point is, the potential gain is essentially unlimited unlike that of a stock. Furthermore, any company will try desperately to survive and grow. The potential return is higher than that of bonds, and companies are motivated to do the best they can.

The above reasoning explains why we should prefer stocks over bonds for long term growth. This is how I choose what to invest in.

Furthermore, the way that cFIREsim (and of course, the 4% rule, because it is a result of a few cases you can run in cFIREsim) results should be used:
First, you set a threshold for success rate. Most people will say 80-85%, because anything above that doesn't really mean to much. It is, after all, past data, and the past doesn't guarantee anything about the future.
Suppose cFIREsim spits out a 95% success rate for your inputs. This meets the typical 80-85% threshold. By following a retirement that conforms to those inputs, you are betting that with high probability, the future is going to be no worse that the past. cFIREsim uses data all the way back from 1871. That's 144 years of data, which for a 30 year retirement, is 115 retirement cycles. There's enough data points there for me to draw reasonable conclusions.

But this is different from what you're trying to do. You're letting the past performance of these three bond funds inform your decision as to which bond fund, if any, to choose:
Quote from: AZryan
VUSUX looks like the best returns, but will it be the most screwed by a coming Fed interest rate hike? I 'heard' that this hike is already 'baked into' all the Bond Fund prices? Yes/No?

This is not the same thing as using cFIREsim. There is no notion of using the past returns to bet that the future is not going to be worse than the past. By using past returns of the three funds, you're implicitly saying that VUSUX has done better than the other funds in the past and this will probably be true going forward. We have no idea if this will actually be the case.

So why do I recommend total bond? Again, because of diversification.

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #18 on: July 10, 2015, 02:02:48 AM »
clifp,
Not sure why people keep thinking that I'm scared to hold 100% Stocks? It's not fear or 'don't have the stomache for it'. It's, as you noted in one of your own points, because of the long term failure risk if you hit a crash early on in retirement. It's just a logical concern over a strong statistical possibility. I have zero fear about 'sleeping well at night' or 'freaking out' and stupidly fleeing the market when it's in the dumper.

That being said, thanks for the input. I'm not really clear what you suggest though in place of the Total Bond Mkt?
I'm not a Gov. worker, so that seems to make the 'G fund' (whatever that is?) irrelevant to me.
Next, you suggest 'Stable value funds'. What does that mean? It sounds like a Large-Cap Value Stock fund, but I can't tell?
Lastly, I totally understand the CD suggestion, and thanks for the update on the low, but improving rates. I've been considering a CD ladder myself. The problem is that I intended to flip ~15% or so of my RothIRA from a Stock Index Fund into some sort of Bond Fund -instant, painless, and tax free.
It'd be more difficult to pull out a big pile of cash to buy all those CDs.

Aphalite,
So you're saying it was really the fact that interest rates fell during those big crashes that made Long Term Bonds jump up like that? If that's the case, I suppose I don't see that as being very possible again with nowhere for rates to drop any time soon. Very good to know -if I understood you right?

"-Nothing wrong with long term treasuries if that's your cup of tea-"
But I'm here basically asking if I might like tea, and which flavor goes best with my stock market sandwich that I plan on eating slowly... for like 50 years. heh

"-I think what you need to work on is your fear that everything will go to shit.-"
Once again... I have ZERO fear of that. Just trying to guard against a possible big crash near start of retirement to mitigate a reasonable concern over a sequence of returns failure by having so much in volatile stocks.
Long term, I think the research shows all-stocks are the best/safest bet. It's just that first ~6-7 years or so that needs to be gotten past. If there's no big crash like that in the next 8 years, I probably won't ever have any use for bonds -statistically speaking, not crystal ball predictions.

Speaking of which...

johnny847,
That 'crystal ball' line was a little weird since you know I'm not pretending I know anything that I can't know.
"-I'm confused as to why we're having this discussion-"
Is it because you're putting words in my mouth, then saying those words are wrong?

"-but because we have a crash coming up, you want to hold some bonds.-"
As you know I said... I don't know if a crash is coming. I couldn't 've been more clear. I only think it's more likely than not statistically speaking. So I want to prepare for a near term crash and for no crash at all -because I'm 100% sure that one of the two will happen.
That's just an obvious fact.

Far from the early years of retirement I didn't care (and won't care) about crashes 'cuz the long term average statistically (and in past actuality) says it's very probably gonna be a good-to-great result.
It's only the critical sequence of returns risk of a crash in early retirement dipping my portfolio too low to recover enough to last the rest of my life at my supposed 'safe' withdrawal rate that I need to deal with. This is not market timing.

The risk of an early crash is significantly more threatening than a later date crash, making this rational concern (not 'psychological fear') a short(-ish) term risk.

So I don't see the logic in keeping a significant bond allocation as a permanent, long term change of strategy as you suggest. After passing the timeframe of the early risk, I would have increasingly less need for the protection of bonds. And I would have an increasingly smaller percentage of bonds as time progressed if I didn't bother to rebalance. Seems fine to me.
Then, whenever the first or next crash does come during retirement, I use up the bonds until they run out or stocks recover -whichever comes first.
By then, my stocks would very likely be far enough ahead that my withdrawal rate would be statistically pretty bulletproof.

I'm not trying to guess if having some bonds makes me more money long term than all stocks. I already know that chances are, it won't. But it very well might if it takes me through an early crash. That seems worth a small loss long term.

"-why do I recommend total bond? Again, because of diversification."
All Funds have diversification by definition of being a 'collection of stocks and bonds'.
A World Bond Fund would have the most diversification if 'most' is what decides funds for you. It appears 'the U.S.' is another factor for you. I'd agree that it's the Nation to place the biggest bet on, but you shouldn't if you claim past performance indicates nothing to you.

"-stocks can provide, in theory, near infinite return.-"
That's as useful to picking stocks as saying that I'm buying a car because cars have the potential to go hundreds of thousands of miles per hour... I just need NASA to launch them into space.
Meaning that you don't actually factor in this 'impossible potential' into your own investing choices.

"-Furthermore, any company will try desperately to survive and grow.-"
First, you know that's not always true. Plenty of companies have taken the money and gone bust because it basically was just a scam or ploy for easy money. That's part of the benefit of a Large Cap company vs. some unknown Small or Micro Cap.
Second, that's you factoring in past performance to judge risk -just like everyone else does. But you keep saying that you don't.
You simply can't use the term 'risk' unless you're factoring in past performance to help determine risk. You should attempt to own an equal share of every company on Earth if you can't know anything else about their potential future performance other than 'any company tries real hard' and that they all have the same exact 'theoretically infinite potential'.
But I'm sure you don't do that.

"-By using past returns of the three funds, you're implicitly saying that VUSUX has done better than the other funds in the past-"
Well... that would be a known fact since it already happened, but go on...
"-and this will probably be true going forward. We have no idea if this will actually be the case.-"

That probably will be true going forward if you allow a long enough timeframe to make a decent statistical determination. We're not arguing if the past guarantees the future. Everyone knows it doesn't. But you step over the line of reasoning to say the past gives us 'no idea'.
It gives us 'some idea', and in many cases we can determine just how strong or weak those ideas are. That's statistical probability, not crystal ball fabrication.

Go to a restaurant. Your food could be poisoned. If past performance tells you nothing, you ought to get it tested before you eat it, right? We both agree that it could be poisoned. But past performance (of the restaurant in question, of restaurants in general, rates of food poisoning, etc.) gives you 'some idea' that it is safe to eat, right?

Your evaluation and acceptance of the results of cFIREsim is based on past performance, too.

"-But this is different from what you're trying to do.-"
Sort of. Picking a Bond fund is not the same thing as using cFIREsim. I never said it was. But they are similar in that they're both making a bet on future performance based on lots of data points of past performance of funds.
The sim is just using even more data points and evaluating an entire portfolio. But technically, you could pick that apart and look at smaller pieces of it and see the result of just the bond element, or swap in a different bond fund instead. And that's pretty much what I'm trying to do.

johnny847

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Re: Help me with Bond Funds PLEASE
« Reply #19 on: July 10, 2015, 06:31:40 AM »
clifp,
Not sure why people keep thinking that I'm scared to hold 100% Stocks? It's not fear or 'don't have the stomache for it'. It's, as you noted in one of your own points, because of the long term failure risk if you hit a crash early on in retirement. It's just a logical concern over a strong statistical possibility. I have zero fear about 'sleeping well at night' or 'freaking out' and stupidly fleeing the market when it's in the dumper.

...

"-I think what you need to work on is your fear that everything will go to shit.-"
Once again... I have ZERO fear of that. Just trying to guard against a possible big crash near start of retirement to mitigate a reasonable concern over a sequence of returns failure by having so much in volatile stocks.
Long term, I think the research shows all-stocks are the best/safest bet. It's just that first ~6-7 years or so that needs to be gotten past. If there's no big crash like that in the next 8 years, I probably won't ever have any use for bonds -statistically speaking, not crystal ball predictions.

You know why? Here's the output of cFIREsim for 100% US stocks 3.3% SWR, for a 50 year retirement:
Quote from: cFiIREsim
Failed 1 times out of 95 cycles, for a 98.95% success rate.

So basically, you're saying that you want bonds to guard yourself against something that has essentially never happened in the past. You're saying that the future is going to be so bad that it will be worse than essentially all of history. (If you're curious, the failure year was 1965). Can it happen? Yes. Will it? It's incredibly unlikely. There's no point in trying to guard against this.

Your purported reason for switching some of your stocks to bonds just doesn't align with reality. Which is why I and others are assuming that there is some other reason for you to want to switch to bonds.


Until you address this point I'm not going to put in the time to respond to all your other points because I only have limited time - if you were to accept what I just said above, this entire conversation is moot.

Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #20 on: July 10, 2015, 07:40:13 AM »
So you're saying it was really the fact that interest rates fell during those big crashes that made Long Term Bonds jump up like that? If that's the case, I suppose I don't see that as being very possible again with nowhere for rates to drop any time soon. Very good to know -if I understood you right?

Correct, interest rates go down because investors are buying up fixed income vehicles, which also in turn drives the price of fixed income vehicles up. For a short term look at this phenomenon, look at the daily treasury curves in the past week as the world dealt with the Greek nonsense that's been going on. Rates go down when there's uncertainty and people are looking for safe places to stash their money. US treasuries just happen to be backed by the largest taxing power in the world

Once again... I have ZERO fear of that. Just trying to guard against a possible big crash near start of retirement to mitigate a reasonable concern over a sequence of returns failure by having so much in volatile stocks.
Long term, I think the research shows all-stocks are the best/safest bet. It's just that first ~6-7 years or so that needs to be gotten past. If there's no big crash like that in the next 8 years, I probably won't ever have any use for bonds -statistically speaking, not crystal ball predictions.

Like I've said before, if you have a cash cushion of 2 years expense, it will last you 4 because you will only need to use half of it each year, with diviends/interest covering the other half (2% yield covering half of the 4% withdraw rate). Each year, you rebalance your cash by selling some of your stocks, if there's ever a down year, well you can wait 4 years for the market to catch back up before you rebalance again. If 4 years isn't enough of a safety margin, then go with 3 years expense, which will last you 6 years, and so on

There's no need to worry about crashes if you're holding enough cash
« Last Edit: July 10, 2015, 07:42:33 AM by Aphalite »

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #21 on: July 10, 2015, 11:15:20 AM »
johnny847,

I know all the sims tell me I probably can't fail. But it really is based on a very low amount of runs (~95) to be worth as much as you act like it is. That's why your claim that I'm 'not aligned with reality' is way out of line.
And that's why people use Monte Carlo sims with many thousands of runs. But those are hindered by non-historical data. Basically, I think the facts say the Stock Market is really just too young to really know anything with that much certainty.

And it's so weird to say that to you, 'cuz you keep noting that past performance is literally no indicator for future performance?? But cFIREsim is past performance telling you that 3.3% is a near total, guarantee lock?? When you're contradicting yourself, I can't know which half of you to listen to.

I'm not thinking of buying some Bonds now because I have an irrational fear of failure in 100% Stocks. I'm considering that maybe I don't have it all figured out and there's an even better strategy than what I have now -seeing as having bonds is part of damn near everyone else's strategy.
Does it really seem so disingenuous that I'm trying to improve on something that seems, hopefully, probably, ok enough, as is? I don't think so.

Here's another way to look at it... by you own words, you shouldn't own any bonds, either.
All-stocks have beaten any allocation of bonds long term, meaning you'd hit a 'can't lose' withdrawal rate faster than with some bonds in the mix, and at end of retirement, you'd end up richer.

So why do you own any bonds? You can't claim 'diversification' again 'cuz you just said all stocks can't lose, so there's nothing you're hedging against in your opinion.
Or are you 'timing the market' to say that in retirement 'all stocks can't lose', but in the build-up, they can? 'Cuz that's typically the exact opposite opinion most people have.

Aphalite,

Thanks. I was basically considering a ~5 year or so Bond cushion looked better than a Cash cushion, but didn't know quite how Bond Funds 'work in practice'. Maybe now I'm thinking a couple years of RothIRA Stocks flipped into a Money Market (effectively cash) or Short term Bonds and ~3 more years into Int. term based on your info on rate hikes and Bond term lengths.

Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #22 on: July 10, 2015, 11:37:09 AM »
Thanks. I was basically considering a ~5 year or so Bond cushion looked better than a Cash cushion, but didn't know quite how Bond Funds 'work in practice'. Maybe now I'm thinking a couple years of RothIRA Stocks flipped into a Money Market (effectively cash) or Short term Bonds and ~3 more years into Int. term based on your info on rate hikes and Bond term lengths.

I don't think you need the 3 years of int bonds if you are planning on keeping 100% stock allocation in the future. Just the 2 or 3 year cash cushion should provide everything you need (just remember to rebalance each quarter or year so you have that cushion to use when the market does go down). No sense in starting a bond allocation and then getting rid of it a few years down the line, that's market timing in the truest sense of the word. Think about it, you're not getting any benefit in safety, since your safety cushion is the cash you're holding. It's just creating redundancy that you're planning on reversing in a couple of years anyways.

h2ogal

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Re: Help me with Bond Funds PLEASE
« Reply #23 on: July 10, 2015, 02:03:14 PM »
I have some $ in treasury I bonds (not a fund)   this is a small % of total portfolio but I look at it as a safety net. I don't see many folks here ivestting in bonds vs bond funds.  Not sure why. 

scojo

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Re: Help me with Bond Funds PLEASE
« Reply #24 on: July 10, 2015, 02:09:55 PM »
This is a really interesting discussion, and I'd love to hear more people's thoughts.

I can definitely see where AZryan is coming from by claiming that this isn't market timing.

Everyone seems to generally accept that your risk tolerance can change over time.  Suggestions such as Age In Bonds are a testament to this.  Nobody seems to take issue with increasing your bond position as you get closer and closer to retirement and your risk tolerance changes.

AZryan is just suggesting that maybe his Risk Tolerance isn't ever decreasing.  Sequence of Returns risk is not present in the accumulation phase, and is then highest early in the withdrawal phase - steadily decreasing until your portfolio becomes statistically too big to fail.

If Sequence of Returns risk is your biggest concern, can't it make sense to have your asset allocation adjust over time to help you tolerate that risk?

Again, people don't seem to question increasing your bonds as you get closer to withdrawal, but decreasing them as Sequence of Returns risk diminishes doesn't seem like market timing to me.

Anyway, following for more interesting discussion.

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #25 on: July 10, 2015, 02:27:31 PM »
Aphalite,

"-No sense in starting a bond allocation and then getting rid of it a few years down the line, that's market timing in the truest sense of the word.-"

At the time of the first crash during retirement, I'd use up Bonds. After that, they'd just shrink as a % of my total -if not already gone.
I make no claim to know when the market is going to do whatever -other than to assume 'it probably will crash again sometime ('cuz it always has), and the longer this (or any) bull run lasts, the more likely that is'.

I can see if I said, "Man, this market's had it's run! I'm flipping into Bonds now before the crash right around the corner hits us! Then, I'll get back into Stocks when I see that it's ready to start going up!"That's market timing. I'm not doing that.

"-Think about it, you're not getting any benefit in safety, since your safety cushion is the cash you're holding.-"

A bit of Bonds just extends that cushion to ~5 years rather than 2-3 -which seems like a better safety net based on how long recoveries have typically lasted and typical volatility of Stocks. I don't see how a ~5 year Cash/Bond cushion is 'redundancy', but a 2-3 year Cash-only cushion is not?
Why's yours sound and mine's 'market timing'?

If the market goes up, I spend from Stocks and don't rebalance anything because both Cash or Bonds would probably remain pretty much the same 2-5 years of spending they started at.

If the market goes down, I spend Cash or Bonds for as long as they last, or as long as the Stock downturn lasts. From there, I might refill a few more years of Cash/Bonds depending on how early and severe the first Stock crash was. But that's not rebalancing.

2-5 years of Cash/Bond would remain a stable cushion, but would keep changing its % in the portfolio as Stocks constantly moved around.
So, I don't see how rebalancing Cash/Bonds to follow volatile Stocks would make sense to retain a stable bunch of years spending buffer?

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Re: Help me with Bond Funds PLEASE
« Reply #26 on: July 10, 2015, 02:41:00 PM »
This thread motivated me to initiate a $10k position into Vanguard Total Bond Market Index Admiral Shares today.

That makes up 10% of my investable assets, till now I had maybe $2k in bonds through 401k

beltim

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Re: Help me with Bond Funds PLEASE
« Reply #27 on: July 10, 2015, 02:56:34 PM »
beltim,
"At a 3.3% withdrawal ratio, it pretty much doesn't matter."
~3% is my ultimate goal, but I'm at 4% right now, so I'm trying to hold off a severe short term loss if the market crashes soonish, so that I hit that ~3.3% with as little delay as I can manage.

So the question is really: what is the optimal allocation to be able to retire ASAP with a 3% (or 3.3%) withdrawal rate.  The answer of course depends on your contribution rate, but it also depends on your risk tolerance.  A 100% stock allocation will on average get you there fastest, but with the widest range of outcomes. 
http://www.ritholtz.com/blog/2013/07/historical-returns-by-holding-period/
http://fc.standardandpoors.com/ondemand/public/products/chartsource/chart.vm?topic=5899&siteContent=7616

I think you want to find a calculator that would let you optimize this, but I'm not sure what the appropriate calculator is.

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #28 on: July 10, 2015, 03:00:32 PM »
scojo,

Thanks -seriously. You clearly understand exactly what I'm getting at and I was getting worried that no one really was.

Now maybe my line of reasoning is wrong. That'd be fine by me. I only want to be right, and don't care if I 'just am', or if someone has to 'fix my wonky logic' to get me there.

But getting called a 'market timer' when I repeat that I don't think I know what the market will do, or hear that I'm clearly 'afraid of stocks' when I said I'm 100% stocks and rode out the tech bubble and '08 crash without blinking was starting to drive me nuts.

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Re: Help me with Bond Funds PLEASE
« Reply #29 on: July 10, 2015, 03:08:50 PM »
johnny847,

I know all the sims tell me I probably can't fail. But it really is based on a very low amount of runs (~95) to be worth as much as you act like it is. That's why your claim that I'm 'not aligned with reality' is way out of line.
And that's why people use Monte Carlo sims with many thousands of runs. But those are hindered by non-historical data. Basically, I think the facts say the Stock Market is really just too young to really know anything with that much certainty.

And it's so weird to say that to you, 'cuz you keep noting that past performance is literally no indicator for future performance?? But cFIREsim is past performance telling you that 3.3% is a near total, guarantee lock?? When you're contradicting yourself, I can't know which half of you to listen to.

You clearly did not read my previous post where I explained the distinction between using the previous performance stats of any particular fund, and using cFIREsim.

Here's another way to look at it... by you own words, you shouldn't own any bonds, either.
All-stocks have beaten any allocation of bonds long term, meaning you'd hit a 'can't lose' withdrawal rate faster than with some bonds in the mix, and at end of retirement, you'd end up richer.

So why do you own any bonds? You can't claim 'diversification' again 'cuz you just said all stocks can't lose, so there's nothing you're hedging against in your opinion.
Or are you 'timing the market' to say that in retirement 'all stocks can't lose', but in the build-up, they can? 'Cuz that's typically the exact opposite opinion most people have.
Guess what, I don't have any bonds. And I have no plans to ever hold any. Even during my withdrawal phase.


You clearly don't want to listen to anything I have to say, so I don't see the point of me continuing on this thread any further.

Alphalite,
I don't think you need the 3 years of int bonds if you are planning on keeping 100% stock allocation in the future. Just the 2 or 3 year cash cushion should provide everything you need (just remember to rebalance each quarter or year so you have that cushion to use when the market does go down). No sense in starting a bond allocation and then getting rid of it a few years down the line, that's market timing in the truest sense of the word. Think about it, you're not getting any benefit in safety, since your safety cushion is the cash you're holding. It's just creating redundancy that you're planning on reversing in a couple of years anyways.

I don't know why AZryan can't see this. It's like talking to a brick wall. I tried to explain that even if he doesn't want to call it market timing, it has all the pitfalls of market timing, but he just doesn't listen. *sigh*

Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #30 on: July 10, 2015, 03:13:25 PM »
At the time of the first crash during retirement, I'd use up Bonds. After that, they'd just shrink as a % of my total -if not already gone.
I make no claim to know when the market is going to do whatever -other than to assume 'it probably will crash again sometime ('cuz it always has), and the longer this (or any) bull run lasts, the more likely that is'.

If you're not going to sell bonds to buy stocks, and just gonna use it as a "cash" buffer, then that's fine. My point is it's the same as using a cash buffer, except you're just betting that bonds will outperform cash in the meantime, which is a fair assumption that I can't fault you for (I personally don't see the upside in holding 2% yielding bonds in a interest environment I'm assuming will rise in the future, which would result in pricing downside - I can get 2% on my cash/bank holdings). I thought your exclusive intention with holding bond funds was to wait the next crash, then quickly move all of your bond holdings into stock, which would be my definition of market timing

From there, I might refill a few more years of Cash/Bonds depending on how early and severe the first Stock crash was. But that's not rebalancing.

Sorry, you're right, I meant to say refilling instead of saying rebalancing
« Last Edit: July 10, 2015, 03:17:48 PM by Aphalite »

Aphalite

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Re: Help me with Bond Funds PLEASE
« Reply #31 on: July 10, 2015, 03:15:16 PM »
I don't know why AZryan can't see this. It's like talking to a brick wall. I tried to explain that even if he doesn't want to call it market timing, it has all the pitfalls of market timing, but he just doesn't listen. *sigh*

I think maybe we're just misunderstanding his intentions, if he's using bonds as a substitute for cash buffer and not as a part of his allocation, then I don't see any problems with his logic - I just think to myself, why not hold cash for your cash buffer? I think it's needlessly complicated to switch to some bonds when you can just hold cash

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #32 on: July 10, 2015, 03:28:12 PM »
beltim,
"So the question is really: what is the optimal allocation to be able to retire ASAP with a 3% (or 3.3%) withdrawal rate.  The answer of course depends on your contribution rate,-"

That can't be true. ASAP means pretty much 'now'. That makes any past contribution rate irrelevant 'cuz it is what it is at this point.
My own timeframe to retire is 'hopefully soon-ish' 'cuz I'm just at ~4% now, and bull run, overvalued market and 50 yr. timeframe doesn't seem to have enough evidence to call 4% very safe.
I know sims say it is, but that data's very, very limited.

I've actually stopped contributing as of now 'cuz there's very little compound interest effect on a few years of contributions. What 'would've been' contributions will either be saved as a growing cash cushion, or used to like go on a trip or something until I decide I am retired.

The question at hand here is what to do right at or near retirement. Most seem to think that point in time is irrelevant to an investor. Makes sense 'cuz we should logically all be 'long term' investors and here's me bringing up some 'short term' risk claim.

But I think that it's unique and the single biggest risk point in an investors life, since it's where you're most likely to get spun into a sequence of returns 'death spiral' (which you may not even realize for decades so we're all somewhat flying blind).

Related to your calculator comment, the 'back-tested' portfolio link I found here is pretty cool.
https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults
Sadly limited to 1972 on up, but still... first pointed me to really thinking that all-stocks is probably best, but a stable buffer on/near Day One might be a smart move, too.

If I'm wrong I want that idea destroyed so I don't do something dumb. And I'm pretty ok with being wrong 'cuz as soon as I'm shown how I'm wrong, I'm instantly as right as the person who just corrected me.

beltim

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Re: Help me with Bond Funds PLEASE
« Reply #33 on: July 10, 2015, 03:32:16 PM »
beltim,
"So the question is really: what is the optimal allocation to be able to retire ASAP with a 3% (or 3.3%) withdrawal rate.  The answer of course depends on your contribution rate,-"

That can't be true. ASAP means pretty much 'now'. That makes any past contribution rate irrelevant 'cuz it is what it is at this point.
My own timeframe to retire is 'hopefully soon-ish' 'cuz I'm just at ~4% now, and bull run, overvalued market and 50 yr. timeframe doesn't seem to have enough evidence to call 4% very safe.
I know sims say it is, but that data's very, very limited.

Maybe you could clarify: are you definitely retiring at a given time, regardless of the size of your portfolio?  In your first post you said you would retire at a 3.3% withdrawal rate, but you also say you're at 4$ now.  So what is the 3.3% based on?

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #34 on: July 10, 2015, 03:44:42 PM »
Aphalite,

"...-just gonna use it as a "cash" buffer, then that's fine.-"

Cool. I was getting confused there.

"-I personally don't see the upside in holding 2% yielding bonds in a interest environment.....'"

Great point. And that's why I was kinda ignoring Short Term bonds, thinking Long Term had better returns. You showed me how I was not thinking right. Maybe saved me from making a big mistake.

I think we cleared up the 'market timing' thing, too. Great!

AZryan

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Re: Help me with Bond Funds PLEASE
« Reply #35 on: July 10, 2015, 04:47:33 PM »
beltim,
"-are you definitely retiring at a given time, regardless of the size of your portfolio?"

I'm not 100% sure, but I am trying to factor in some reasonable concept of 'value'.

Have you read this story... two twins have $1 Mil. each invested in the same stuff. One retires this year and starts pulling $40k (4%). Next year, the market crashes 50%. The second twin retires and also need $40k... but that's 8% because he only has $500k now!! But that first twin has even LESS than $500k himself, so aren't they still pretty much in the exact same boat?
4% is pretty much totally safe and 8% is pretty much certain failure. But is that really where they each are??
This apparent HUGE contradiction needs to be resolved, and I think it somehow rests on evaluating 'actual value'. But maybe that can't ever be known?? I dunno?

But this story shows that the EXACT day you hit 4% can be almost nonsensical as a hard n' fast point to call a 'finish line' on.

Going by current vs. historic P/E ratios (and Shiller P/E-10) and the typical range, it seems like the 4% rule looks much safer when those indicators are near the average. They're redlining now like over 60%. Yeesh.
Is this the new normal, or is that super high like it looks? I feel it's reasonable to drop my goal down to ~3.3% 'cuz 4% is still supposed to be safe regardless of this talk of 'value', and on average it should take about 2-3 years to go from 4% to 3.3%. I'd prefer 3%, but that's only one statistical year longer. I could gamble on that being 'close enough' to the same thing.

Meanwhile...
I've also been flipping stocks for tax gain harvesting to reset my cost basis to zero, so I can't really owe any taxes once retired.

You flip Total Stock Mkt into the 500 Index (close enough to be called 'same thing') and pay 0% tax on your gains (ONLY by being in a low tax bracket). A year later, you flip it back and pay 0% on any gains again. Eventually, you can get your entire portfolio to appear as if you just bought it yesterday and haven't made a dime offa' it.
Then, even if they change how Cap Gains/Dividends are taxed, I still wouldn't really owe anything. I actually think it's totally unfair and cheating, but technically totally legal, so it's silly not to take advantage of the way things are.
I need like ~3 more years to flip through all of it, so that lines up with getting to ~3.3% from 4% now.

Now, what does the market actually do in that time? Maybe it crashes and I'm technically at 5 or 6% instead of 3.3%. But should I logically consider myself in a much worse position? I'm not so sure.
I'd probably still retire and start Day One using a Cash or Bond buffer, drop my spending, and ride that till Stocks rebound, rather than say, 'Well, now I've gotta wait like 9 more years to retire!'
That would suck though, timing-wise to start in a crash.

You see, it's not set in stone, but it's not totally up in the air. I wish there was a good calculator for dealing with this. Hell, maybe P/E's or CAPE doesn't mean jack? I really don't know.
Maybe I'm stupid and should be retired today @ 4%, but I have no cash buffer or headroom to cut spending now, so that seems stupid.
Maybe I've been on this forum all day and I AM retired?
« Last Edit: July 10, 2015, 04:52:52 PM by AZryan »

Ziggurat

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Re: Help me with Bond Funds PLEASE
« Reply #36 on: July 10, 2015, 08:16:37 PM »
To take a bit of a different perspective here, I found this post in another thread very interesting (emphasis added):
I think the main issue with FIRE simulators is the use of historical input. Historical data cannot represent rare events correctly. If there are lots of possible rare events (with low possibilities so that they happen on average every 200 years in a modern world), many of these possible rare events will not have happened in our timeline yet. You do not find a trace of them in historical data but you should expect to see some of these events happen during your lifetime for the first time ever.

Diversification protects you not only against known risks, but also against unknown risks - if you experience a Black Swan event which permanently wipes out a large part of your equity portfolio, other assets can help soften the blow.

I also disagree that an equity wipeout is only thinkable in apocalyptic settings. Stocks are leveraged investments, because most companies finance between 50% and 70% of their assets with debt. If an economic or financial crisis makes all company assets lose just 30% of their value (which would set us back a few decades but not to the stone age), then the losses would be almost completely absorbed by equity, with stocks losing most of their value.

And a couple posts later, responding to a query about stocks coming back after a crisis:

No, if the equity is completely wiped out the company can continue to operate, and ownership goes to the creditors, e.g. bond owners.

As an example, consider General Motors. Their assets are financed by 26% equity and 74% corporate debt. When GM loses 30% of its assets, equity goes to zero, and GM has to file bankruptcy. Your stocks are wiped out, because the assets are worth less than the corporate debt. You are now out of the game, and the remaining assets are completely owned by the creditors. The creditors may decide to continue operating the company. If the company improves afterwards, your stocks don't come back, as the creditors own the entire business now.
...
Stocks are, by construction, more risky than bonds, because in a crisis, equity investors lose their entire investment before a bond holder loses even the first cent.

I think these are very good arguments for diversification in general.  Pure stocks vs mostly-stocks+some bonds get very similar success rates in cFiresim and the like, within the massive uncertainties of using past data to predict the future.  But, theoretically at least, the risk of a huge loss and portfolio failure, even with "new" events never seen in the historical data, should be reduced by adding bonds and other diversification.

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Money Badger

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Re: Help me with Bond Funds PLEASE
« Reply #38 on: July 12, 2015, 06:13:54 AM »
@AZryan,   The opinions of the market are endless, that's why it's a market...  here is some useful data to consider on your question...

 Try a google search for "John Bogle Apen Institute" about the patron of individual investor index investing and his thoughts on the next 10ish years of the stock and bond markets...   In short, the stock market overall P/E and total returns will revert to the mean after a period of extraordinary stimulus.  Thats not a good thing for a retiree 100% in the market...

Check Vanguard BSV (short term bond fund) and BND (overall bond index) for the SWAN portion you want to have... 

For a bit more tax advantaged  income and risk, check MHI, JMF and check muni bond funds exempt from federal and your specific state's income tax rates if applicable.   I use NKG in my home state.    Now is a historically good time to dollar cost average into these as the upcoming rate increases are already factored into the prices and oil prices are factored into JMF even though it's return has very little to do with commodity prices...  This offsets some of the risk of reductions in payouts from some of them as they inevitably age older high interest bonds for newer market rate bonds... 

To FIRE, we all of course have to keep a significant growth allocation in the stock market as well, but this is SWAN money we're talking about here.   Good luck!

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spokey doke

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Re: Help me with Bond Funds PLEASE
« Reply #40 on: July 12, 2015, 07:34:43 AM »
A timely piece:

http://online.barrons.com/articles/a-new-approach-to-bonds-1436592932

Requires paid subscription.....

Nope, just like all the WSJ restricted articles, I just google the title and click on the link from the search results and the full article comes up (for me at least).