Author Topic: Fixed Income Allocation  (Read 975 times)

signhere

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Fixed Income Allocation
« on: November 17, 2022, 07:24:09 PM »
My investment management expertise has been limited to shoveling into VTSAX for a couple of decades but have recently been handed the responsibility of managing my parents' retirement and need some guidance.

Background: Parent is 60 years old and doesn't NEED the monthly income for day-to-day use right now but likely will be relying it on in the near future. I can always step in and help if there's a catastrophic collapse.

My target allocation is will be something like:

~70% Fixed Income
~30% Equities [Currently allocated to FDGFX (Dividend Growth Fund)]
w/ annual max-out to RothIRA and Series I bonds

My question is what's best for the 70% Fixed Income portion? Even after some research I feel like I don't appreciate much of a difference between a bond fund, CDs, TBills. Any guidance or suggestions would be much appreciated thank you!

Financial.Velociraptor

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Re: Fixed Income Allocation
« Reply #1 on: November 18, 2022, 02:01:33 PM »
What is risk tolerance of the parent?   This is the most important thing to understand.

Least risky is t-bill, Ibond, whole life insurance, single premium fixed annuity (my father is in 100% SPIA because zero risk tolerance).  Then there are bond funds of varying "durations" (longer is higher yield but riskier), municipals, foreign bonds, convertibles, and even Preferred shares.  Do you need want a "cash" or equivalent bucket such as money market, CD ladder?  Is the reason for such a high Fixed percentage the intent for a 'zero capital gains' portfolio?  That bears consideration of Dividend centric etf's and maybe a larger allocation to REIT. 

Universal advice as you explore this...do NOT ever 'chase yield'.  This is just as true in fixed income as it is in equity.  High yield stuff is shiny and kind of sexy but it is the market signaling it smells high risk.  The market is usually right on that point. 

NOTE: 70% is about the max for fixed income if you believe in the CAPM and EMH.  Above 72%, you are actually become more risky instead of less with higher fixed allocation as your portfolio is becoming so highly correlated.  Math and stuff...

FIKris

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Re: Fixed Income Allocation
« Reply #2 on: November 18, 2022, 02:23:07 PM »
I'd also appreciate people's thoughts on this too. Asking for myself, not family though.

I've got some cash coming in, and I'd like to put it into reasonably safe investments that will give me approximately $50k per year for 2024-2029.  (I've got plenty in equities, but wont start drawing on them until 2030, not really interested in purchasing more equities at the moment; my bills are relatively immune to the major drivers of inflation these days with the exception of food prices.)

I'm considering either brokered CDs or investment grade bonds through vanguard: https://personal.vanguard.com/us/FixedIncomeHome.  Thoughts appreciated. I've never really invested in bonds before, but some folks are starting to suggest they are more attractive these days.




MustacheAndaHalf

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Re: Fixed Income Allocation
« Reply #3 on: November 19, 2022, 12:34:41 AM »
Vanguard has 7 trillion under management, and their target retirement funds become the following allocation several years after their target date.  Vanguard is using 30% stocks and 70% bonds of various types.
https://investor.vanguard.com/investment-products/mutual-funds/profile/vtinx#portfolio-composition


BicycleB

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Re: Fixed Income Allocation
« Reply #4 on: November 23, 2022, 01:37:36 AM »
@FIKris, I read on another bond thread that you can directly buy nice safe bonds direct from the US Treasury in periods of 2, 3 and 5 years. I think you could choose the maturity dates to meet your needs, more or less, without going through (or paying) a middle man, basically.

Will defer to wiser posters.

index

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Re: Fixed Income Allocation
« Reply #5 on: November 23, 2022, 08:41:15 AM »
@BicycleB is on the money with buying 3-month to 3-yr treasuries from a brokerage that charges 0 commission like Fidelity. Bond funds are tough. Corporate bonds are not compensating you for the risk over treasuries right now so I would just avoid them entirely. If you are looking for a fund, it is hard to do much better than PIMIX. Just make sure it is in a tax advantaged account. I wouldn't stick to 30/70. Mix at least 10% alternatives in there. Look at gold (GLDM or IAUM), merger and arbitrage (MRGR, ARB), and buy-write (DIVO) for a 30/60/10.

If I wanted a stable retirement portfolio with the above guidelines:

10% VPU - Utilities
10% VDC - Consumer Staples
10% VHT - Healthcare
30% VGSH - Short term treasuries (or better a DIY ladder)
30% PIMIX - Pimco bond flagship
4%   IAUM - Gold
3%   MRGR - Merger Alternative
3%   DIVO - Buy-Write

index

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Re: Fixed Income Allocation
« Reply #6 on: November 23, 2022, 08:54:26 AM »
Here is a short back-test. The returns aren't fantastic, but you won't go broke!

Heckler

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Re: Fixed Income Allocation
« Reply #7 on: November 24, 2022, 05:02:25 PM »
Does that backtest include interest and dividends?

Funny how 70/30 is on the top of the pile till interest rates started to climb out of the hole.  It will be on top again in 8.8 years once BNDs YTM of 4.9% fills the hole, especially now that bonds are on sale!


index

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Re: Fixed Income Allocation
« Reply #8 on: November 24, 2022, 06:46:56 PM »
I should state, that was 30% vti, 70% bnd and yes it does count interest and dividends. That was the entire point of the post. Short term treasuries are yielding the same as bnd right now so there is no reason for the extra risk. An active manager like Pimco can add something compared to an unleveraged bond fund.

SeattleCPA

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Re: Fixed Income Allocation
« Reply #9 on: November 25, 2022, 07:25:44 AM »
David Swensen, the Yale Endowment fund manager for decades, basically suggested one use intermediate term treasuries and TIPs for one's bonds.

His logic, elaborated upon in "Unconventional Success" boils down to just buying the highest quality bonds you can. I think that's really practical, easy and smart.

P.S. I also personally like Vanguard's LifeStrategy funds for older investors who want to keep their "bond allocation" decision easy.

ChpBstrd

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Re: Fixed Income Allocation
« Reply #10 on: November 28, 2022, 03:49:42 PM »
The O.P. doesn't mention a targeted withdraw rate which is something I think we need to know in order to design a portfolio that will last the parent's lifetime.

Most of the advice here is spot-on for a retirement portfolio near the 4% rule. I'll address what to do if the WR is more like 6-7%.

According to https://www.immediateannuities.com/ a 60-year-old in most states can buy an annuity with annual payouts (yield) amounting to 7.27% and that's with a beneficiary receiving the payments for 10 years after the parents' death. That's not a bad return to lock in for maybe the next 10-25 years, no matter what happens. You might consider putting a solid chunk of their funds in an annuity to serve as a reliable base income. 

You mention that you could help out the parents if they needed it. If, say, the stock/bond markets go down and stay down for the next 5 years, that might cause your parents to need your help, but you'd be withdrawing the help from your own depleted portfolio! That's not a good place to be - essentially doubling your Sequence of Returns Risk. Prevent that scenario today, while annuity yields are high.