Author Topic: Need to Increase Bond Allocation--Your Thoughts?  (Read 4816 times)

oldtoyota

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Need to Increase Bond Allocation--Your Thoughts?
« on: January 03, 2014, 01:41:59 PM »
My goal is to put more into bonds and international stocks in order to achieve my ideal-for-me asset allocation.

Focusing on bonds first, my question is about the best way to do this.

Options:

1. Invest more into bonds via my IRA contributions and decrease contributions to stocks until target is achieved.
2. Sell stock funds and buy bond funds (my least favorite idea) to quickly achieve target.
3. Buy bonds via taxable account (my least least favorite idea).

Right now, I am seeing option #1 as the only and the best for getting more exposure in bonds. Is there anything I am missing or need to consider here?

I figure I'll take care of getting more international exposure after I get the bond/stock ratio figured out, and I'll do that by investing more in international.


KingCoin

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #1 on: January 03, 2014, 03:15:34 PM »
#1 sounds fine to me, unless your allocation is way off. If you're rebalancing in your IRA, there shouldn't be any tax consequences.

oldtoyota

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #2 on: January 04, 2014, 09:24:21 AM »
#1 sounds fine to me, unless your allocation is way off. If you're rebalancing in your IRA, there shouldn't be any tax consequences.

Cool. Thanks. I appreciate your response!

Saverocity

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #3 on: January 04, 2014, 11:04:14 AM »
I think you are crazy! :) 

I'm really not a fan of bonds right now, but perhaps if you can find good short term ones then it's OK.  You didn't quite give enough info in your original post.

If you sell losing stocks/funds in your taxable account and use that money to buy bonds it's a great idea, you capital loss harvest and rebalance at the same time, offers a lot of value.

If you sell appreciated stocks within a non taxable account that is fine too.

Just don't sell appreciated positions in a taxable account unless you have a cap loss to cover it.

aj_yooper

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #4 on: January 04, 2014, 01:33:03 PM »
Door number 1 seems like the best choice. 


daverobev

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #5 on: January 04, 2014, 03:38:22 PM »
Assuming no tax consequences and the allocation is seriously out of whack, the 'correct' thing to do is to put in whatever new money you have available, and sell + buy til you're straight.

Bonds might be expensive now... but who says stocks aren't moreso? That's the point of the asset allocation doobie in the first place - it tells you (or you tell it!) where you want to be. When you get out of sync, you reset.

If there is a 50% stock crash and bonds go down 5% tomorrow.. and your asset allocation called for 30% bonds but you had 90 equities/10 bonds.. you'd be pretty annoyed (right?).

But yeah, adding new money to get you straight is fine too. It just depends (IMHO) how far out you are on your allocation.

Joel

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #6 on: January 04, 2014, 03:42:14 PM »
Keep in mind it's best to have your bonds in your 401k or traditional IRA.

If the funds are in your taxable account, the interest is taxed at ordinary income rates.

oldtoyota

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #7 on: January 06, 2014, 09:04:53 AM »
Keep in mind it's best to have your bonds in your 401k or traditional IRA.

If the funds are in your taxable account, the interest is taxed at ordinary income rates.

Thanks! That's why I was thinking it made sense to add more to bonds via my IRA. I could probably add more to bonds via my 401K. I should look into that too. At first, I was thinking the online system would be too clunky, but I should at least give it a try.

I created a projection and see that even if spouse and I put all of our 2014 IRA contributions into bonds, we'll still be out of whack at the end of 2014. Putting the IRA money into bonds made me nervous about "missing out" on stocks. However, I have consoled myself with the idea that we're contributing to mostly stocks via our 401Ks. And, I am also contributing to a taxable account, which is all stocks.

In the end, my projections just further proved I need more in bonds to even things out!




mlipps

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #8 on: January 06, 2014, 10:14:26 AM »
All other things being equal, some people prefer to put the highest earning assets in their Roth IRA's because those funds are never taxed again, so putting your bonds there might not be the most optimal thing. However, it's far better than holding bonds in taxable & many people's 401k's don't have good options for bonds. Just another thing to consider at least before making any changes.

oldtoyota

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #9 on: January 06, 2014, 10:42:40 AM »
All other things being equal, some people prefer to put the highest earning assets in their Roth IRA's because those funds are never taxed again, so putting your bonds there might not be the most optimal thing. However, it's far better than holding bonds in taxable & many people's 401k's don't have good options for bonds. Just another thing to consider at least before making any changes.

Thank you! I am at about 90% stocks. I think this is pretty bad. My target is 70%. Given how oversubscribed I am with stocks, I'll have to suck it up as far as bonds in the IRA. My IRAs (including rollovers from former 401Ks) hald a lot of stocks already, so that is one good thing. =-)


the fixer

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #10 on: January 06, 2014, 10:43:19 AM »
I was about to say what mlipps did. You might be interested in reading this to understand the difference in approaches: http://advisorperspectives.com/newsletters13/pdfs/Optimizing_Asset_Location.pdf

TL;DR any tax-deferred accounts like a traditional IRA can be treated as an investment partnership between you and the government. The government will get X% of the assets from taxes, but that also means they hold X% of the risk. So keeping high-risk, high-return assets in an IRA reduces the level of risk you bear personally at the cost of slightly less returns. The article also discusses how much of a difference asset location really makes, which isn't much.

oldtoyota

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #11 on: January 06, 2014, 02:40:27 PM »
The article also discusses how much of a difference asset location really makes, which isn't much.

I am glad I asked about this here. Thank you. I will read the article later.

Mr Mark

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Re: Need to Increase Bond Allocation--Your Thoughts?
« Reply #12 on: January 06, 2014, 09:44:23 PM »
It depends.  How close to FIRE  are you? How disciplined is your investment decision making?

90% equity, 10% bonds right now if you're savings rate is <75% seems ok to me. Certainty never sell to rebalance, just use cash and direct savings until balance. Diversify elsewhere maybe. Rentals. Local businesses.

As the Fed do their thing, bonds look a poor investment long term. You just need enough to survive 3- 4 years of a massive stock slump, plus enough to double down on equities!

aj_yooper

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