Help with bond funds

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Help with bond funds

Postby zuga » Tue Dec 25, 2012 3:15 pm

Hi,

I am planing to move around 40k from savings account into index funds.

Here's the current allocation:

Emergency fund: 30k (excluding the amount above)

Debt: Mortgage (~12k / year)

Tax Filling Status: Married, filling jointly
Tax Bracket: 25%
State of residence: WA

401k: ~50k
BlackRock S&P 500 Index Fund: 94%
BlackRock Total Return Fund: 6%

His Roth IRA: ~25k
Vanguard Total Stock Market Adm (ER:0.06): 84%
Vanguard Total International Stock Inv (ER:0.22): 6%

Her Roth IRA: ~25k
Vanguard Total Stock Market Adm (ER:0.06): 84%
Vanguard Total International Stock Inv (ER:0.22): 6%

Taxable: ~30k
Vanguard FTSE All-World ex-US Adm (ER:0.18): 40%
Vanguard Total Stock Market Adm (ER:0.06) : 60%

Desired allocation: 70% stocks (30% international), 30% bonds

My 401k has pretty expensive funds (atleast compared to vanguard). Here is the full list:

Retirement Reserves Money Fund Ticker: MRRXX (ER: 0.68)
BlackRock Total Return Fund - Investor A Class Ticker: MDHQX (FL: 4.0) (ER: 0.87)
Templeton Global Bond Fund - Class A Ticker: TPINX (FL:4.25) (ER: 0.89)
BlackRock Global Allocation Fund, Inc. - Investor A Class Ticker: MDLOX (ER: 1.16)
Franklin Income Fund - Class A Ticker: FKINX (FL: 4.25) (ER:0.63)
Franklin Templeton Conservative Allocation Fund - Class A Ticker: FTCIX (FL: 5.75) (ER: 1.10)
Franklin Templeton Growth Allocation Fund - Class A Ticker: FGTIX (FL:5.75) (ER:1.24)
Franklin Templeton Moderate Allocation Fund - Class A Ticker: FMTIX (FL:5.75) (ER:1.17)
BlackRock Basic Value Fund - Investor A Class Ticker: MDBAX (FL:5.25) (ER:0.86)
BlackRock Equity Dividend Fund - Investor A Class Ticker: MDDVX (FL:5.25) (ER:0.99)
Invesco Comstock Fund - Class A Ticker: ACSTX (FL:5.50) (ER:0.88)
BlackRock S&P 500 Index Fund - Institutional Class Ticker: MASRX (ER: 0.30)
Prudential Jennison 20/20 Focus Fund - Class A Ticker: PTWAX (FL: 5.50) (ER: 1.18)
Goldman Sachs Mid Cap Value Fund - Class A Ticker: GCMAX (FL: 5.50) (ER: 1.16)
Goldman Sachs Growth Opportunities Fund - Class A Ticker: GGOAX (FL:5.50) (ER: 1.35)
MFS International New Discovery Fund - Class A Ticker: MIDAX (FL:5.75) (ER: 1.39)
BlackRock Global Opportunities Portfolio - Investor A Class Ticker: BROAX (FL:5.75) (ER: 1.33)
BlackRock Global SmallCap Fund - Investor A Class Ticker: MDGCX (FL:5.25) (ER: 1.43)
Oppenheimer Developing Markets Fund - Class A Ticker: ODMAX (FL:5.75) (ER: 1.30)
Prudential Global Real Estate Fund - Class A Ticker: PURAX (FL:5.50) (ER: 1.27)
PIMCO CommodityRealReturn Strategy Fund - Class A Ticker: PCRAX (FL:5.50) (ER:1.19)

Most have front load as well. I've picked the Blackrock S&P 500 since due to the low expense ratio and no front load.

I've been planning to start adding some bond funds, like the vanguard total bond market, but I've been worried about the risk of interest rates increasing and buying into the fund at the wrong time.

I am 35 and have a 401k and roth ira accounts, which I max every year.

Any insights on buying bound funds at this time vs continuing with stocks only? Any other recommendations are also greatly appreciated.
Last edited by zuga on Wed Dec 26, 2012 5:37 pm, edited 2 times in total.
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Re: Help with bond funds

Postby Clever_Username » Tue Dec 25, 2012 4:57 pm

Hi zuga,

You will get a much better response if you follow the suggested guidelines for asking portfolio questions: viewtopic.php?f=1&t=6212
Some people set aside money for a rainy day. I'd like to be prepared for the monsoon season.
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Re: Help with bond funds

Postby livesoft » Tue Dec 25, 2012 5:04 pm

A current forum thread started by Larry Swedroe is basically all about bond funds even though it doesn't look like it. Please go read it and the link(s) therein: viewtopic.php?f=10&t=107531 What did you learn from reading the interview with Larry Swedroe?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Help with bond funds

Postby retiredjg » Tue Dec 25, 2012 5:37 pm

Welcome to the forum!

You certainly do need some bonds (or other type of fixed income investment). However, bonds should not be in your taxable account. Instead, they should probably be in your 401k or Roth IRA.

To help you figure out your best approach, more info is needed. See the link below.
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Re: Help with bond funds

Postby zuga » Tue Dec 25, 2012 10:29 pm

retiredjg wrote:Welcome to the forum!

You certainly do need some bonds (or other type of fixed income investment). However, bonds should not be in your taxable account. Instead, they should probably be in your 401k or Roth IRA.

To help you figure out your best approach, more info is needed. See the link below.


Thanks, I've updated my original post with more detailed information on my current allocation.
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Re: Help with bond funds

Postby pingo » Wed Dec 26, 2012 11:42 am

Welcome and thank you for updating your intital post!

We also need to add a couple more things, believe it or not:
1. Tax Filing Status
2. Your Federal & State Tax Rate
3. A list of all fund available in your 401k and any available tickers for those funds.
4. Expense ratios for all 401k fund including the ones you originally list above. (Employer-sponsored plan ERs are often different than we'd find at financial websites.
5. Review the "Answering Potfolio Questions" link to see if there is anything else you can include.

All of the information is pretty important to offering the most appropriate suggestions.

Thank you!
Last edited by pingo on Wed Dec 26, 2012 1:49 pm, edited 1 time in total.
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Re: Help with bond funds

Postby retiredjg » Wed Dec 26, 2012 1:07 pm

zuga wrote:Any other recommendations are also greatly appreciated.

For this question, all the other information mentioned by pingo is needed in order to give you reliable help.

For your original question, your update is somewhat helpful. You could exchange some or all of the 500 Index in your 401k to the bond fund. Use the $40k in cash to buy stocks in your taxable account. This is because you generally want to avoid holding bonds long term in your taxable account.

If that is not enough in bonds, you could exchange some of the stocks in one of the Roth IRAs into a bond fund such as the Total Bond Market INdex.

The question arises, however, why you are putting money into a taxable account? Are you completely filling your 401k? Does your spouse have a 401k or something similar available? Are you filling both Roth IRAs? If you are not using all your available tax-advantaged space, you probably should not be investing for retirement in a taxable account at all.



Your other question is about buying bonds "now". You clearly need some type of fixed income investment. Your portfolio is almost entirely stocks - not a wise position for someone your age. This does not mean your fixed income investment has to be bonds. You could use CDs instead. Or if you use bonds, you could use shorter term bonds which will lose less value when/if interest rates rise. Or you could use money market. Or I Bonds. or whatever.

The point is this. Your portfolio needs something other than stocks. It is unfortunate that none of the fixed income vehicles are paying much, but that does not mean you don't need some.


One last thing....each Roth IRA has two entries for Total International. Is one supposed to be something else?
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Re: Help with bond funds

Postby zuga » Wed Dec 26, 2012 5:43 pm

pingo wrote:Welcome and thank you for updating your intital post!

We also need to add a couple more things, believe it or not:
1. Tax Filing Status
2. Your Federal & State Tax Rate
3. A list of all fund available in your 401k and any available tickers for those funds.
4. Expense ratios for all 401k fund including the ones you originally list above. (Employer-sponsored plan ERs are often different than we'd find at financial websites.
5. Review the "Answering Potfolio Questions" link to see if there is anything else you can include.

All of the information is pretty important to offering the most appropriate suggestions.

Thank you!


Updated original post.
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Re: Help with bond funds

Postby zuga » Wed Dec 26, 2012 5:47 pm

retiredjg wrote:
zuga wrote:Any other recommendations are also greatly appreciated.

For this question, all the other information mentioned by pingo is needed in order to give you reliable help.

For your original question, your update is somewhat helpful. You could exchange some or all of the 500 Index in your 401k to the bond fund. Use the $40k in cash to buy stocks in your taxable account. This is because you generally want to avoid holding bonds long term in your taxable account.

If that is not enough in bonds, you could exchange some of the stocks in one of the Roth IRAs into a bond fund such as the Total Bond Market INdex.

The question arises, however, why you are putting money into a taxable account? Are you completely filling your 401k? Does your spouse have a 401k or something similar available? Are you filling both Roth IRAs? If you are not using all your available tax-advantaged space, you probably should not be investing for retirement in a taxable account at all.



Your other question is about buying bonds "now". You clearly need some type of fixed income investment. Your portfolio is almost entirely stocks - not a wise position for someone your age. This does not mean your fixed income investment has to be bonds. You could use CDs instead. Or if you use bonds, you could use shorter term bonds which will lose less value when/if interest rates rise. Or you could use money market. Or I Bonds. or whatever.

The point is this. Your portfolio needs something other than stocks. It is unfortunate that none of the fixed income vehicles are paying much, but that does not mean you don't need some.


One last thing....each Roth IRA has two entries for Total International. Is one supposed to be something else?


Thanks for the feedback, very helpful.

Yes, funds were not named correctly for the roth iras. I corrected them now.
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Re: Help with bond funds

Postby kenyan » Wed Dec 26, 2012 6:13 pm

zuga wrote:Most have front load as well. I've picked the Blackrock S&P 500 since due to the low expense ratio and no front load.

I've been planning to start adding some bond funds, like the vanguard total bond market, but I've been worried about the risk of interest rates increasing and buying into the fund at the wrong time.

I am 35 and have a 401k and roth ira accounts, which I max every year.

Any insights on buying bound funds at this time vs continuing with stocks only? Any other recommendations are also greatly appreciated.


Wise choice on the S&P 500 fund in your 401k. Nothing else in that list deserves your money.

Being worried about interest rate risk is perfectly fine. However, you need to keep in mind what the relative risk levels are for a typical bond fund versus all the funds you currently own (equities). A quick glance on Vanguard's site of the last 15 years of returns shows a worst-case return for Total Bond Market of -0.82%, which was the only year out of the 15 with negative total return. For Total Stock Market, -37%, -20%, and two -11% years pepper the list.

Going back a bit further with the help of Morningstar.com, we can look at the Barclays US AGG Bond Index, which TBM tracks less its expenses (Vanguard TBM did not exist at the time I'd like to highlight). During the late 70s/early 80s, interest rates were rising, sometimes very rapidly. The index was pretty flat nominally through this period, until 1982 at which point it resumed its rise. From a real (inflation-adjusted) standpoint, performance was poor. However, this is a far cry from the potential loss in the stock market. Past is not necessarily prelude, but it gives you a good picture of what *might* happen.

If you need bonds, and you probably should have some, just buy them and don't worry too much about timing the bond market. If you are seriously worried about interest rates rising, you could opt for short-term bond funds. Just understand that you are likely forgoing some long-term performance in doing so. A 70/30 allocation at age 35 is perfectly reasonable...you could go for slightly more or less bonds if you so choose. Bonds provide the ballast, risk reduction, and capital for rebalancing that is currently missing from your investment portfolio.
Retirement investing is a marathon.
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Re: Help with bond funds

Postby retiredjg » Wed Dec 26, 2012 7:27 pm

So it appears that your portfolio looks like this right now. Total = $170k

    Taxable account 41.2% (70k)
    23.5% (40k) cash
    10.6% (18k) Vanguard Total Stock Market Adm (ER:0.06)
    7.1% (12k) Vanguard FTSE All-World ex-US Adm (ER:0.18)

    401k 29.4% (50k)
    27.6% (47k)BlackRock S&P 500 Index Fund .30%
    1.8% BlackRock Total Return Fund .87%

    His Roth IRA 14.7% (25k)
    12.3% Vanguard Total Stock Market Adm (ER:0.06)
    2.4% Vanguard Total International Stock Inv (ER:0.22

    Her Roth IRA 14.7% (25k)
    12.3% Vanguard Total Stock Market Adm (ER:0.06)
    2.4% Vanguard Total International Stock Inv (ER:0.22)


Most have front load as well. I've picked the Blackrock S&P 500 since due to the low expense ratio and no front load.

If you have not done this already, you need to check on the front loads. Loads are usually waived within a 401k plan. This makes the Blackrock Total Return Fund much more attractive (although still a bit of a pig at .87%)

Assuming that the bond fund does not carry a load, this is a suggestion of how to rearrange what you already have and invest in the future.

Taxable account 41.2% (70k)
23.5% (40k) Vanguard total International Index
10.6% (18k) Vanguard Total Stock Market Adm (ER:0.06)
7.1% (12k) Vanguard FTSE All-World ex-US Adm (ER:0.18)

401k 29.4% (50k)
27.6% (47k)BlackRock S&P 500 Index Fund .30%
1.8% BlackRock Total Return Fund .87%

His Roth IRA 14.7% (25k)
14.7% Vanguard Total Bond Market Index

Her Roth IRA 14.7% (25k)
14.7% Vanguard Total Bond Index

This idea is roughly 69% stocks, 31% bonds, with 44% of stocks (31.6% of portfolio) in international. It is low cost and tax-efficient. If you are worried about rising interest rates, you could use a short term bond fund instead of the total bond index, but the short term bond fund will pay you less.

An alternative is to set things up differently. If you can find good CDs, use your cash to buy the CDs and adjust for more bonds in the 401k. It is unknown if CDs will work out better than bonds. Might. Might not.

I've got an interruption and will have to come back to how to make your contributions to maintain something like this.
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Re: Help with bond funds

Postby retiredjg » Thu Dec 27, 2012 10:14 am

Assuming contributions of $17.5 to the 401k and $5.5k to two Roth IRAs, total = $28.5k

401k: $8.55k to bond, rest to the 500 Index fund
His roth IRA: $5.5k to international
Her Roth IRA: $5.5k to Vanguard's Extended Market (to add mid and small caps to the 500 index in His 401k)
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Re: Help with bond funds

Postby zuga » Mon Dec 31, 2012 1:12 am

Your comments and suggestions were very helpful. Thank you.
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