Author Topic: Rebalancing from 100% equities to 80/20.....I'm scared.  (Read 1869 times)

EchoStache

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Rebalancing from 100% equities to 80/20.....I'm scared.
« on: December 09, 2022, 03:55:53 PM »
Ya honestly thats the best way I can put it.  I'm pretty new to investing and have been 100% S&P500 index fund.  Age 51, goal is to be Lean lean lean lean FI in 5-6 years, and probably work at least part time for as long(or short) as we want beyond that.

The reason I'm bringing this up is @Dicey has this REAAALLLLY long 2x4 and can apparently reach me from anywhere and bonk me over the head to help get me thinking straight.  I was thinking of paying down my mortgage aggressively but have decided to rather funnel all cash into my AA.  Since my AA allocation is 100% equities, I decided to make sure I'm on the right path.  Everything I see from the sources I trust the most(here, Bogleheads, Moneyguy, etc) suggest a stock/bond mix.

Bond funds:  They suck this year.  They suck for 2 years.  And 3. And 5.  And 10.  If I had held bond funds for the past ten years, it would make me wish I hadn't when I could have been all FXAIX.  I'm really struggling with this....even though I know that historically, over longer terms, its been good to hold a mixture of stocks and bonds.  We also hold dear to the fact that past performance does not guarantee future returns!!  Maybe the world has changed and bonds will suck from now on???

Anyway, I see that with rate increases perhaps approaching a slowing, bond funds may turn the corner.  Since I probably *should* have a bond allocation, maybe I'm lucky that this could be a great time to buy bond funds.  Owning individual bonds seems like a WAY bigger PITA than I'd want to mess with as I invest weekly, and will continue to do so over quite a few years.

So today, I rebalance one of my 401k's from 100% FXAIX to 80/20 with the 20 going into FXNAX which is available in both of our current 401k's.  If I determent with confidence that this is the smart and reasonable thing to do, I'll rebalance all retirement accounts in this way.

Thoughts are welcome.

Financial.Velociraptor

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #1 on: December 09, 2022, 04:19:03 PM »
The whole point of bonds is to add a low correlated asset class to diversify market risk.  To me, that doesn't necessarily have to be the conventional BND or US Treasuries.  If my grad school profs read this from me they will *thwap* me.  But I think you should consider a broader set of options that pure bonds.  Maybe part of your 20 in BND and part in a convertibles fund, preferred fund, or less conventional "fixed income" option like MLP fund, BDC fund, or REIT fund. 

I personally like Prefereds right now over bonds.  Note that will likely result in a strong allocation tilt towards finance and insurance as that is who mostly uses prefereds to finance operations.

My reasoning is Bonds are pure interest rate plays.  We've known for decades that interest rate 'should' decline.  That is no longer necessarily true making pure interest rate speculation less attractive.

RWTL

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #2 on: December 09, 2022, 05:31:54 PM »
It's not that big of a change to add 20% bonds.  What are you afraid is going to happen?

In a terrible case outcome, maybe the fed goes to 8% to fight inflation and you take a reduction on your bond principle...but it's only 20% of your portfolio and now you're making substantial interest each month. 

Once the market stabilizes and the fed cuts interest rates, the principle will come back.

I think now is a good time to look at bonds since we're likely close to "the top" of interest rate hikes.  You'll have a better idea this week when the fed meets.


EchoStache

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #3 on: December 09, 2022, 05:38:13 PM »
It's not that big of a change to add 20% bonds.  What are you afraid is going to happen?

In a terrible case outcome, maybe the fed goes to 8% to fight inflation and you take a reduction on your bond principle...but it's only 20% of your portfolio and now you're making substantial interest each month. 

Once the market stabilizes and the fed cuts interest rates, the principle will come back.

I think now is a good time to look at bonds since we're likely close to "the top" of interest rate hikes.  You'll have a better idea this week when the fed meets.

Well, I'm not afraid of catastrophe, I just don't want to look back ten years from now and see this:


RWTL

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #4 on: December 09, 2022, 06:07:10 PM »
It's not that big of a change to add 20% bonds.  What are you afraid is going to happen?

In a terrible case outcome, maybe the fed goes to 8% to fight inflation and you take a reduction on your bond principle...but it's only 20% of your portfolio and now you're making substantial interest each month. 

Once the market stabilizes and the fed cuts interest rates, the principle will come back.

I think now is a good time to look at bonds since we're likely close to "the top" of interest rate hikes.  You'll have a better idea this week when the fed meets.

Well, I'm not afraid of catastrophe, I just don't want to look back ten years from now and see this:

To me it looks like bonds are doing their job....adding stability.  Even if they lost 20% of their value - and that would be some huge rate hikes from here to get that reduction, it's only 20% of 20% of your portfolio.


TomTX

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #5 on: December 09, 2022, 06:15:02 PM »
Buy I-bonds. Seriously. Unless you need to pull cash within 12 months, it's a no-brainer if you want bonds.

Buy the $10k/year now. Buy it again in January. Overpay your federal income tax by $5k, get your refund as paper I-bonds.

Might not be up to 20% of your investments, but you could have $25k in I-bonds pretty quickly.

Dicey

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #6 on: December 09, 2022, 08:22:36 PM »
This is a bit unconventional, but in retrospect, I wish I'd considered my mortgage a "bond" and put everything else in equities. When you live in a HCLOA and have a rather large mortgage, and it's at a fixed rate of interest, and it's not callable, and it's a hedge against inflation, and it's stable AND you have a steady income AND a decent Emergency Fund, AND you're trying to make up for lost time, why not be 100% in equities?

However, the I-Bond rates are pretty great these days, so I also agree with TomTX's suggestion. Even buying the limit on these is nowhere near 20% of your investments (as he noted) but it should be enough to scratch that bond itch.

VanillaGorilla

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #7 on: December 09, 2022, 10:04:01 PM »
If you're 5-7 years from lean-fi then you have nothing to worry about. Do nothing. Read.

For example, you could read this: https://earlyretirementnow.com/2021/03/02/pre-retirement-glidepaths-swr-series-part-43/

You could also read The Simple Path To Wealth, which I love. I strenuously disagree with JL Collin's perspective on home ownership, but the more time goes by the more I appreciate his approach to asset allocation (which is 100% VTI until retirement, then 80/20 with BND).

Or take a gander at this: https://www.gocurrycracker.com/financial-independence-how-long-will-it-take/

I've never held a bond. Paid down my mortgage and held 100% equities. I sort of regret the former but I'm also internet FI, so it seems to have worked out ok.

A good savings rate makes up for any changes in asset allocation. Save 50+% and you're good as long as you invest reasonably. The precise bond ratio or mortgage rate becomes noise.
« Last Edit: December 09, 2022, 10:08:59 PM by VanillaGorilla »

SeattleCPA

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #8 on: December 10, 2022, 07:45:51 AM »
Ya honestly thats the best way I can put it.  I'm pretty new to investing and have been 100% S&P500 index fund.  Age 51, goal is to be Lean lean lean lean FI in 5-6 years, and probably work at least part time for as long(or short) as we want beyond that.

@UltraStache

Here's my thought. I think you've learned something really valuable about your capacity to bear risk. And I'd focus on that new-found insight.

BTW I would not at this point feel compelled to adjust your asset allocation. Right now, all you know really is you had the wrong allocation. You don't know what's right allocation for you and your family.

But you can work on that puzzle over the next few months or quarters.

Personal note: So I've been investing for a long-time and I notice that as I've aged and as my portfolio has grown, my feelings about financial risk have changed. I mention because I think it might be pretty common for our risk sensitivities to increase over time. Not sure whether that's age or wisdom.


RWTL

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #9 on: December 10, 2022, 09:03:11 AM »
Ya honestly thats the best way I can put it.  I'm pretty new to investing and have been 100% S&P500 index fund.  Age 51, goal is to be Lean lean lean lean FI in 5-6 years, and probably work at least part time for as long(or short) as we want beyond that.

@UltraStache

Here's my thought. I think you've learned something really valuable about your capacity to bear risk. And I'd focus on that new-found insight.

BTW I would not at this point feel compelled to adjust your asset allocation. Right now, all you know really is you had the wrong allocation. You don't know what's right allocation for you and your family.

But you can work on that puzzle over the next few months or quarters.

Personal note: So I've been investing for a long-time and I notice that as I've aged and as my portfolio has grown, my feelings about financial risk have changed. I mention because I think it might be pretty common for our risk sensitivities to increase over time. Not sure whether that's age or wisdom.

This is really good advice.  My risk sensitivity is like a bell curve.  Until a few years ago, I was 100% equities.  As I got closer to retirement, I shifted to 60/40.  Right now I'm 70/30.   I retire in about 5 months and have a pension coming in 3 years.  I expect to be back at 100% equities once the pension rolls in.  My driving force for shifting at the time to 60/40 was when the CAPE was > 30 I thought - What would happen if equities dropped by 50%.....


Fru-Gal

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #10 on: December 10, 2022, 09:22:26 AM »
Quote
This is a bit unconventional, but in retrospect, I wish I'd considered my mortgage a "bond" and put everything else in equities. When you live in a HCLOA and have a rather large mortgage, and it's at a fixed rate of interest, and it's not callable, and it's a hedge against inflation, and it's stable AND you have a steady income AND a decent Emergency Fund, AND you're trying to make up for lost time, why not be 100% in equities?

I credit this advice for my being 🔥 now. I think its genius. Im 99.9% equities, also in a VHCOL area.

Sandi_k

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #11 on: December 10, 2022, 10:08:12 AM »
This is a bit unconventional, but in retrospect, I wish I'd considered my mortgage a "bond" and put everything else in equities. When you live in a HCLOA and have a rather large mortgage, and it's at a fixed rate of interest, and it's not callable, and it's a hedge against inflation, and it's stable AND you have a steady income AND a decent Emergency Fund, AND you're trying to make up for lost time, why not be 100% in equities?


I'm going to have to think about this. We are currently 75/25 in our investable assets. If I add in our mortgage (2.625% with 8 years remaining), it's more like 50/50.

I had moved all of our "needed" money for Years 1-5 into TIPS and GNMAE funds, and also plotted some big outlays for home upgrades, which is why we're at 25%.

I've been sad, because we haven't had much cash to deploy in the current environment; my 457 contributions are going 100% to a Total Market fund, but that's it for new money.

We have absolute assurance that I can retire in 3 years, as on top of @Dicey 's list, I will also have a pension. So since I can retire (regardless of the market) - I don't think we have the NEED to take any more risk. What would we do with extra cash?

Car Jack

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #12 on: December 10, 2022, 10:38:56 AM »
As you get closer and closer to leaving the workforce, you want your portfolio to be less volatile.  Bonds help to do this.  As already mentioned, iBonds not only do this but they give you a predictable return and tax advantage when sold.  No state tax. 

I am particularly aware and focused on this now because early next year, I'm done.  Wife is already done.  I've had my portfolio at 50/50 for a while now.  Over the last year or so, I'm also building cash in my 2 online HYSAs, Redneck and Ally.  So when the market tanks (like the last 2 years), my entire portfolio does not tank.  I can rely on my iBonds going up a grand a month.  The rest of my portfolio can be left alone till it does go up and I'll live on cash and savings bonds.

I'm over a decade older than you, but have only really been interested in finances for 10 years.  Before that, I was in Fidelity's second most successful group according to their research publication.  I ignored my investments for decades.  I'm not interested in being in the group that beat me......they were dead.  Not metaphorically dead.....actually dead.

EchoStache

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #13 on: December 10, 2022, 12:33:26 PM »
I do have $30,000 in Ibonds that I purchased this year.  I had some extra cash parked for the purchase of our new EV, but we got 0.9% financing around the time Ibonds were giving 7.12%.  So instead of paying off the EV, I'm making ~8% on my car loan.  It's my logic, ok??  :).  I've since built up $50k cash in brokerage in a good MM fund.  I may will need to buy a 2nd car sometime between March and September of 2023 and WILL NOT be carrying a 2nd car loan.  So it will be a cash purchase for sure, hence the big pile of cash.  The MOST I will spend for the car will be $34k which leaves with me $16k cash and $30k in Ibonds.  This is a really comfortable emergency fund for me.  I suppose the Ibonds would be sufficient but I think of those as almost collateral against the EV loan.

I did rebalance my new 401k that I started this year to 80/20, just to dip my toes into the bond fund waters.  My employer 401k does offer Fidelity's total bond market fund, so I grabbed that.  I've contributed the max to this account this, year i.e. $27k, and there is right at $27k in there....20% if which is now FXNAX.  I'll reevaluate after the first of the year when my retirement contributions resume.

I'm very tempted to grab another $10k in Ibonds before the end of the year.  If so, I'll be done for this year and next i.e. $20k current year, $20k gifts for redemption next year.   This will put my total bond allocation >20% for the time being when excluding cash, so I guess I'm honestly in pretty good shape.  My retirement contributions resume in January so I'll have some time to ponder if I want to continue with 100% into FXAIX or simply do an 80/20 split moving forward.  I suppose the big decision is whether to go with 80/20 now or wait until we are closer to FIRE and rebalance............


nouseforausername

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #14 on: December 10, 2022, 01:51:16 PM »
I thought the max for I Bonds was $10k per year plus an extra $5k if you use a tax refund to purchase them. Plus a spouse can buy 10k?

Or is there a way to load up on more, re: dependents count too?

https://www.thebalancemoney.com/what-are-the-series-i-savings-bond-annual-purchase-limits-357550#:~:text=As%20of%20October%202022%2C%20each,be%20registered%20electronically%20through%20TreasuryDirect.
« Last Edit: December 10, 2022, 02:04:09 PM by nouseforausername »

EchoStache

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #15 on: December 10, 2022, 02:04:23 PM »
You can buy $10k for yourself and $10k gift. The gift starts accruing interest right away at the current rate and can be redeemed by recipient the following year. In this way, we can get the current rate on 40k instead of 20, and it uses next years allotment when we redeem. Then you can of course do another $5k with tax return if youd like.

nouseforausername

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #16 on: December 10, 2022, 02:23:20 PM »
Thanks! Had no idea.

For future reference for others: https://thefinancebuff.com/buy-i-bonds-as-gift.html
« Last Edit: December 10, 2022, 02:27:09 PM by nouseforausername »

Heckler

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #17 on: December 10, 2022, 02:47:03 PM »
*canuckian perspective*

The 30% Canadian bonds we've held since 2014 have added growth and loss on paper, just like the 70% global stocks, except the bonds add stability (literally a max range of +/- $3 per unit price in the past 10 years) so your stomach doesn't flutter like it has been this past year in SP500.  However, they also add income - currently 3% yield with a 4% YTM.

Currently, the interest kicked out makes up 20% of our annual spending.  That's for life, without any sales of capital.


PS - it's not called "rebalancing" when you reassess your risk tolerance and change your asset allocation, which is what you are proposing  (100/0 to 80/20).  Rebalancing is next year, when you buy even more of the scary bonds to keep up your 20%.

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit#Set_your_level_of_risk_tolerance
https://www.bogleheads.org/wiki/Rebalancing

PPS - do you have a good account location plan for taxes, knowing that bonds kick out Interest Income?
 https://www.bogleheads.org/wiki/Tax-efficient_fund_placement#Tax_efficiency_of_bonds
« Last Edit: December 10, 2022, 02:49:49 PM by Heckler »

Heckler

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #18 on: December 10, 2022, 02:58:46 PM »
granted, I also reassessed my asset allocation recently and added (through contribution) a 5% cash for even more stability.  Must be getting old, FML.

EchoStache

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #19 on: December 10, 2022, 04:30:46 PM »
My Ibonds are of course with Treasury Direct, but as I understand the interest is exempt from taxes?  For any other bonds I purchase, it will be within my 401k and or IRA's so yes, tax advantaged.

mastrr

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #20 on: December 10, 2022, 07:12:08 PM »
keep 100% equities.  the market being down is a more of a reason not to change ratios unless theres some other factor playing into your decision. 
Personally, I like when you said aggressively pay off your mortgage and would do that.  It would be a excellent risk mitigation move going into your retirement.
« Last Edit: December 10, 2022, 07:19:00 PM by mastrr »

MustacheAndaHalf

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #21 on: December 10, 2022, 07:47:43 PM »
My Ibonds are of course with Treasury Direct, but as I understand the interest is exempt from taxes?  For any other bonds I purchase, it will be within my 401k and or IRA's so yes, tax advantaged.
Only exempt from state taxes, not Federal.  Each layer of government avoids taxing other layers.  So you will get a 1099-INT for your Treasuries / I-bonds and owe tax to the IRS on that interest.

nalor511

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #22 on: December 11, 2022, 12:00:19 AM »
My Ibonds are of course with Treasury Direct, but as I understand the interest is exempt from taxes?  For any other bonds I purchase, it will be within my 401k and or IRA's so yes, tax advantaged.
Only exempt from state taxes, not Federal.  Each layer of government avoids taxing other layers.  So you will get a 1099-INT for your Treasuries / I-bonds and owe tax to the IRS on that interest.

Ibond interest comes due for taxes only in the year redeemed, so it's tax deferred until then

Dicey

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Re: Rebalancing from 100% equities to 80/20.....I'm scared.
« Reply #23 on: December 11, 2022, 10:33:28 AM »
keep 100% equities.  the market being down is a more of a reason not to change ratios unless theres some other factor playing into your decision. 
Personally, I like when you said aggressively pay off your mortgage and would do that.  It would be a excellent risk mitigation move going into your retirement.
A paid off house always requires money for taxes, insurance, utilities and maintenance. Without sufficient investments to cover those costs, aggressively paying off the mortgage is actually quite risky, especially in the OP's situation.

Fun fact: my parents stayed in their large house long after their many kids were gone. They paid for the house over 30 years. One day, Dad was lamenting that the carrying costs were more than the house payment used to be. I responded by asking him what he was worth now vs. when they bought the house. "Touche", said my dear old "Pops".