Author Topic: Which, or any bad bond options?  (Read 2619 times)

Scandium

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Which, or any bad bond options?
« on: February 27, 2015, 06:55:53 AM »
Our new 401k plan is a vast improvement on the old as it has three Vanguard funds (S&P, extended and international). Unfortunately the rest of the funds are pretty awful. For equities I don't care as the vanguard funds have everything I need. I currently have no bonds, and intended to stay that way until 35 years old (2 years), but recently I've been thinking maybe I should add 20% bonds a little sooner. Fee like I might be a bit too risky. Especially since the majority of my investing was post-2009..

At any rate, the bond options look pretty bad. There are only two:

NEZYX    LOOMIS SAYLES STRAT INCOME Y.  ER = 0.70%
MWTIX    MET WEST TOTAL RETURN BOND I. ER= 0.45%
http://portfolios.morningstar.com/fund/summary?t=MWTIX&region=usa&culture=en-US
http://portfolios.morningstar.com/fund/summary?t=NEZYX&region=usa&culture=en-US

I also pulled some (I think) important numbers from M*

- MWTIXNEZYX
assets60 B19B
Turnover255%26%
Credit QualBBBBB
Avg Maturity8.6yrs5.7yrs
Portfolio %--
Gov31%27%
Corp14%61%
Securitized41%3.5%
NEZYX is also 30% international.
Now I don't really like what I see. I'd prefer just some intermediate govt bonds, these have majority either corporate bonds or MBS etc. In addition to high fees and turnover. And for what it's worth NEZYX is rated high risk by M*. (they're also 5 stars, but who cares). I would probably stay at just 20% bonds until closer to retirement, in 15-20 years from now so might not matter too much at this point.

So do I just go with the lowest fee; MWTIX? Or should I just skip the bonds for now, maybe hope that our plan add some better options? When are bad bonds better than no bonds?

I could also talk to our HR guy who deals with this and see if he can request some more vanguard funds, but don't have high hopes. I haven't read much about bonds yet so appreciate any advice.

Dodge

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Re: Which, or any bad bond options?
« Reply #1 on: February 27, 2015, 11:18:34 AM »
You can use your IRA for bonds, or even put tax exempt bonds in taxable:

https://personal.vanguard.com/us/funds/snapshot?FundId=0042&FundIntExt=INT

skyrefuge

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Re: Which, or any bad bond options?
« Reply #2 on: February 27, 2015, 12:57:56 PM »
Note that bond funds tend to have higher ERs than stock funds. Vanguard's Total Bond Market (Investor class shares) is 0.20%, so 0.45% really is pretty good for some non-Vanguard fund in a 401(k). So MWTIX probably wouldn't be the worst choice in the world.

NEZYX, on the other hand, looks like pure insanity. Its volatility is nearly what you'd expect from a stock fund (and in fact, it can hold up to 35% in stocks), so I don't see any reason why anyone would want that fund rather than just keeping their stock allocation higher.

So, like Dodge said, hold your bond allocation in an IRA if you can, but if for some reason you cannot, MWTIX wouldn't be the worst.

Dodge

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Re: Which, or any bad bond options?
« Reply #3 on: February 27, 2015, 01:29:54 PM »
Agreed, the fee on MWTIX isn't the worst, but it's a long term bond fund, so it depends on how strongly you feel about staying away from long term bond funds.

Scandium

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Re: Which, or any bad bond options?
« Reply #4 on: February 27, 2015, 01:33:53 PM »
Thanks. I agree the fee for MWTIX is acceptable for a 401k. I really don't like that it's 30-40% mortgage backed securities and stuff like that, but suppose that should be ok. Don't know if that is better or worse than more corporate bonds..? NEZYX does look really wacky, will stay away from that one.

Messed around with my allocation spreadsheet now, and the trouble is my 401k contribution is nearly $30k per year (thanks to a good match), while my taxable contribution is much lower, especially next few years with baby and daycare expenses.. So I'd end up with my taxable almost full of bonds. Now in theory it's all one pot, but I've kept 401k+roth and taxable allocations separate for now. Mainly since I figure they have different timelines (taxable first 5 years of FIRE), not to mention investment options.

I think I'll move some over to MWTIX, and keep bugging HR about better bond funds. And hope for the best (only one mortgage crisis per lifetime right...?)

edit: another thought is to split it. Do 10% in MWTIX, and 10% in muni bonds in taxable. That's not as huge a percent of my taxable in bonds, and should make rebalancing easier, and give some diversification too.
« Last Edit: February 27, 2015, 01:46:43 PM by Scandium »

skyrefuge

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Re: Which, or any bad bond options?
« Reply #5 on: February 27, 2015, 02:12:06 PM »
You briefly mentioned your Roth IRA, but didn't indicate that you would fill that with bonds...any reason? That would seem to make more sense than putting them in taxable. In other words:

1) move all existing Roth money to bonds
2) if that's not enough to meet your allocation, then complete it with the bonds in your 401(k), or taxable (I wouldn't do both, just because of complexity).

Also, MWTIX appears to have about the same balance (including mortgage-backed securities) as Vanguard's Total Bond, so nothing too unusual there.

But yeah, it might be worth talking to your 401(k) people...it seems a bit strange to have such a nice set of Vanguard stock funds, and then this non-Vanguard wackiness in the bond fund area. Could be just because someone once asked for the Vanguard stock funds, but had no interest in bonds at that time.

neil

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Re: Which, or any bad bond options?
« Reply #6 on: February 27, 2015, 03:08:36 PM »
II would stay away from NESYX.  There's no real reason to buy corp bonds and take sub-AAA rated individual company risk.  You get better compensated doing that in stock.  The gains tend to perform like bonds but the losses perform like stocks.  Kind of a worst of both worlds kind of thing.  The main reason to have AAA bond coverage is to own an asset that performs opposite to stock.

Scandium

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Re: Which, or any bad bond options?
« Reply #7 on: February 27, 2015, 08:56:17 PM »
Yeah bonds in the roth is an option, but that account is 10% of my total. And due to contribution limits that will go down as the others grow more. If the portfolio of MWTIX is sensible I'll probably stick most of the bonds there. Nice and clean.

Our 401k is t-rowe, so a whole bunch of junk except the 3 vanguard funds at the end. Seemed like they hoped nobody would notice them..