Author Topic: Asset allocation- cash vs bonds for next 10 years  (Read 3025 times)

aperture

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Asset allocation- cash vs bonds for next 10 years
« on: November 09, 2016, 02:28:13 PM »
I am planning retirement in 2018 and have a 70/30 portfolio of US Stock Index/US bond index. It occurs to me that cash may be a better hedge than bonds at this point due to the probable future increases in Fed borrowing rates. My thought is to transfer all my bonds to a money market (earning almost nothing) and then have it available to buy equities in the event of a significant downturn (20% or more) or to buy back into bonds in the future when returns have normalized.

Can someone smarter than me give feedback? Thanks, aperture.

aperture

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #1 on: November 09, 2016, 03:22:13 PM »
Thanks LL. Goals I have for my bond assets are as a hedge on equities to preserve wealth in a market downturn and perhaps offer an opportunity through rebalancing to capitalize on any unequal movements between equities and bonds. I am asking whether there is a reasonable argument to be made for holding substantial cash in place of bonds to fulfill that role. I agree that a change in my asset allocation may be market timing, but I am learning and had not previously considered that cash could serve this role without the risk rising interest rates could pose to bonds. I know that permanent portfolio holds 25% cash. I am looking to better understand the long term strategy of holding significant cash. Thanks, aperture.

jjcamembert

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #2 on: November 09, 2016, 03:53:38 PM »
I hear you, I don't think bonds are worth the risk, and cash is pretty much a guaranteed loser.

Trying to time the market (i.e. when the market goes down, I'll just put the rest of my money in) is rarely a good idea. If/when it goes down, are you going to have the courage to sink more in when the rest of your portfolio is down 20%? What if it drops lower? And when will bond rates normalize?

Anyway, some ideas:
You could add commodities to your portfolio, but this is usually hard/expensive to do with a fund.
You could add a position in gold (GLD). Typically it will offset a down move in markets.
You could buy TIPS (TIP).
You could go long bonds (TLT) and sell covered calls against it (requires some management).
You could go short bonds (TBT) and sell puts against it (requires some management).

aperture

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #3 on: November 09, 2016, 04:37:51 PM »
Thanks jjcmb and LL for your thoughts. I will continue to research and update when I decide on a course of action (probably do nothing). Thanks- aperture

AlmstRtrd

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #4 on: November 09, 2016, 05:19:08 PM »
Are you happy with that 70% stock allocation over the long term? If so, maybe just switch to a 70/20/10 (stock/bond/cash) bucket system. Live off the cash bucket and let the bonds and stocks do their thing. Then rebalance when your cash stash gets low. I personally run a permanent portfolio but it's certainly not for everyone. One thing I like about the bucket system is that you can make it fairly mechanical. If you are living off, say, 4% of your investments, you'd only need to refill it every two years or so.

The other thing about interest rates is that it's not a given that they will head higher... at least not on any predictable schedule (despite today's shellacking!).

daverobev

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #5 on: November 09, 2016, 05:29:57 PM »
Diversify outside the US stock market. Maybe get some preferred shares. Maybe some gold (just a few percent) rather than just stock and bonds.

jjcamembert

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #6 on: November 09, 2016, 05:46:34 PM »
This isn't for everyone, but here are some alternative ETFs to think about as well:

https://www.wisdomtree.com/etfs/alternative

I'm a little concerned about their liquidity, but I have small amounts of capital in PUTW and WDTI.

PUTW is an S&P500 investment so it will correlate with your existing stock position, but I am interested in it because I have seen several studies (http://www.cboe.com/micro/put/default.aspx) where it could have a smaller standard deviation but higher return than a plain-old SPX holding.

mgarf

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #7 on: November 09, 2016, 10:05:16 PM »
If you're in short-term bonds (1-5 year maturities), you should do fine. They really don't move much with interest rates.

I'd change your bond allocation to something like VCSH.

MustacheAndaHalf

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #8 on: November 10, 2016, 01:57:46 AM »
You could switch from a bond fund to CDs without sacrificing too much.  You would be giving up +0.5% of yield to gain the safety of a certificate of deposit (CD).  If rates fall, nothing happens.  If rates rise enough, you can afford the CD penalty with the higher rates you get.  So that's one approach with safety, but not too much loss of yield.

Make sure you avoid junk bonds, since your purpose is buffering your stock portfolio.  Junk bonds acted like stocks during past crashes, losing a lot of value quickly.  If your entire value loses value, that's not much of a buffer.

force majeure

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Re: Asset allocation- cash vs bonds for next 10 years
« Reply #9 on: November 10, 2016, 02:58:16 AM »
High-yield bond funds / ETFs. Let me tell ye how they work;

The dividend yield keeps falling, check the last 3 years for HYG or IHYG.

Bond ETFs do not distribute exactly the coupons received. Rather, adjustments are made to better reflect market yield levels and purchases above/ below par. The distributions from the fund are adjusted to be in line with the weighted average yield to maturity (YTM) of the assets in the fund when they were purchased. If the average coupon is higher than the YTM the bonds will trade at a premium. Amortises this premium over the remaining time to maturity and revises the distribution down to be in line with the weighted average YTM of the assets in the fund when they were purchased. If they were to pay out the full coupon it would eat into the capital of the fund and the net asset value (NAV) would go down over time.