Replace Bond allocation with 4% fixed?

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Replace Bond allocation with 4% fixed?

Postby syrdave » Sat Jan 26, 2013 10:31 am

Hi,

I'm thinking of replacing my bond allocation with the 4% fixed account offered in my retirement plan.

I've read lots about how interest rates can't go much lower and can't stay this low forever, so I'm considering sitting out the bond drama and grabbing 4%.

Background: 15 years until retirement, current allocation 93% equities (27% of which are international), 7% bonds

I realize that I'm trying to market time, and that's a loser's game in the end, and that if I grab the 4%, I'll still need a strategy for re-entry when the interest rate environment changes or the fixed rate option drops, but I'm still considering such a move.

Anyone else considering such a move? Or maybe already done such?

Thanks!
Dave
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Re: Replace Bond allocation with 4% fixed?

Postby dbr » Sat Jan 26, 2013 10:39 am

A lot of people have taken advantage of stable value funds in 401K plans. However, there are many varieties of such funds and usually great difficulty obtaining information on exactly how the money is managed in any given fund. In my 401K the fund is invested mostly through an array of synthetic GIC's, which some people say is one of the better ways to do this. Currently the yield is about 3%. You would want to investigate what your fund is doing and look for an explanation for the higher 4% yield, which seems high. You should also investigate any restrictions that may exist on making withdrawals from the fund. Keep in mind that you are investing in a fund that is specific to your company and has idiosyncratic risk. I set a rule for myself of not more than 15% of assets in such a fund for that reason and because it is so difficult to determine exactly where the fund is invested.

You can read more here assuming your fund actually is a stable value fund and not something else such as a disguised annuity contract or other undesirable deal:

http://stablevalue.org/

disclaimer: This is an industry website.
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Re: Replace Bond allocation with 4% fixed?

Postby Call_Me_Op » Sat Jan 26, 2013 10:41 am

Dave,

93% is a very high equity allocation for 15 years to retirement. I suppose you feel you need that degree of risk?

With only 7% in fixed, don't think it will matter much.
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Re: Replace Bond allocation with 4% fixed?

Postby dbr » Sat Jan 26, 2013 10:43 am

Call_Me_Op wrote:Dave,

93% is a very high equity allocation for 15 years to retirement. I suppose you feel you need that degree of risk?

With only 7% in fixed, don't think it will matter much.


Yes, I overlooked that. Stop worrying about your bonds. It absolutely does not matter.

I agree that you should worry a lot about having so much in stock.
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Re: Replace Bond allocation with 4% fixed?

Postby pkcrafter » Sat Jan 26, 2013 10:43 am

93% equity and you're worried about bond drama? Something doesn't add up.


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Re: Replace Bond allocation with 4% fixed?

Postby sscritic » Sat Jan 26, 2013 10:53 am

pkcrafter wrote:93% equity and you're worried about bond drama? Something doesn't add up.

At least it's 7%. You should see the threads about the 30% part of the 50% of the 10% part that might return 1% less. That's a loss of 0.0015% on the portfolio, but the weeping and gnashing of teeth will keep you up all night.

[10% of the portfolio is treated separately; 50% of that is equity; 30% of that is international; Emerging Markets might underperform; oh woe, what should I do? Oops, I see I left out another 25%, the 25% of the international that is emerging markets. Let me correct myself:
You should see the threads about the 25% part of the 30% part of the 50% of the 10% part that might return 1% less. ]
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Re: Replace Bond allocation with 4% fixed?

Postby syrdave » Sat Jan 26, 2013 11:57 am

Thanks for all the replies.

93% equity and you're worried about bond drama? Something doesn't add up.

Perhaps the term "drama" was a poor choice of words.

What "doesn't add up" is that I feel comfortable with a high equities allocation and maybe others don't. The main purpose of my question was to see if others had gotten out of bonds into a fixed option.

Hijacking my own thread here - I'm a projected 15 years from retirement. I've been/am heavily weighted towards equities on purpose, as I was/am willing to accept the risk of such a portfolio this far from retirement. I am making a concerted effort to significantly increase my bond allocation. 35% of new monies each year are now allocated to "Retirement 2025" funds, 17% of new monies are invested in bond funds, and I am DCA another 4% of my portfolio from a S&P 500 fund to a "Retirement 2025" fund. I feel like the above plan will move me significantly towards a more traditional 60% equities/40% bond portfolio in 12 or so years. (Then again, if equities go a large bull market run, I would need to move much more aggressively towards my bond allocation to get anywhere near a 60/40 split. That would be a nice problem to have.)
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Re: Replace Bond allocation with 4% fixed?

Postby Peter Foley » Sat Jan 26, 2013 12:17 pm

Because of the interest rate environment we are in, I use stable value as the main component of my bond allocation. That certainly doesn't mean that this is the right approach - I certainly would have been better off in Total Bond over the past couple years. Going forward, who knows? A stable value that is beating inflation by a couple percentage points per year is an attractive component of a bond AA, not necessarily an "all in". At 7% of total, I would use stable value.
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Re: Replace Bond allocation with 4% fixed?

Postby Dandy » Sat Jan 26, 2013 4:14 pm

yikes - 93% equities is quite aggressive and you are worried about your bonds? Frankly I like stable value funds for their nice yield and stability. I don't know that I would put all my fixed income in a stable value fund but then again since it only amounts to 7% of your total portfolio even if it goes to zero that will not affect your long term success much.
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Re: Replace Bond allocation with 4% fixed?

Postby FinancialDave » Sat Jan 26, 2013 7:00 pm

syrdave wrote:Thanks for all the replies.

93% equity and you're worried about bond drama? Something doesn't add up.

Perhaps the term "drama" was a poor choice of words.

What "doesn't add up" is that I feel comfortable with a high equities allocation and maybe others don't. The main purpose of my question was to see if others had gotten out of bonds into a fixed option.

Hijacking my own thread here - I'm a projected 15 years from retirement. I've been/am heavily weighted towards equities on purpose, as I was/am willing to accept the risk of such a portfolio this far from retirement. I am making a concerted effort to significantly increase my bond allocation. 35% of new monies each year are now allocated to "Retirement 2025" funds, 17% of new monies are invested in bond funds, and I am DCA another 4% of my portfolio from a S&P 500 fund to a "Retirement 2025" fund. I feel like the above plan will move me significantly towards a more traditional 60% equities/40% bond portfolio in 12 or so years. (Then again, if equities go a large bull market run, I would need to move much more aggressively towards my bond allocation to get anywhere near a 60/40 split. That would be a nice problem to have.)


I am definitely in the minority here, as at age 60 and retired, I have never really had a bond allocation, and for income now I use my own "bond like" dividend paying stocks to generate the income I need.

One of the things for you to think about has to do with whether you will have any other pensions to supplement your SS, or if you will be living 100% off your retirement plan + SS only. You see, part of the reason I could go 100% equities on the risk scale is that my pensions + SS already give me almost an 80% fixed income allocation, so that way I could concentrate on getting the absolute (theoretically) total return from 100% equities (as it is well know that bonds do not increase your return in the long term.)

As far as the fixed income, you haven't really said what it is made of, if it is not a bond, is it some kind of annuity - what are the details of this investment.

There have been many other threads here on the dangers of bond funds going forward in the next decade and this does have me a bit worried for you, loading up on them right now. One way to lengthen the glide path would be to use a longer term TDF like a 2030 or 2035 fund. It's totally up to the risk you think you can take going into retirement.

fd
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Re: Replace Bond allocation with 4% fixed?

Postby Mitchell777 » Sat Jan 26, 2013 7:25 pm

If it is a stable value fund you want to understand the rules for switching money from the SV fund to any other "fixed income" fund in the plan. Many plans do not allow direct transfers. So, if interest rates were to begin going up, there will be quite a lag as the SV return will not increase as fast. Also, and this is rare, SV funds can lose value depending if one of the insurance company were to go into bankruptdy. It's rare, but it happned to me. Eventually I got the money back but it took years and there was no guarantee
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Re: Replace Bond allocation with 4% fixed?

Postby syrdave » Sat Jan 26, 2013 7:30 pm

Thanks for the reply FinancialDave.

You see, part of the reason I could go 100% equities on the risk scale is that my pensions + SS already give me almost an 80% fixed income allocation,

I am also expecting a pension. I have 17 years in a State Retirement Fund, which as of a report at 12/31/2011 was 100% funded. That is one of several reasons why I have harbored such a high equity weighting.

The 4% return is a "variable contract" backed by a very large insurance company. I've never considered allocating any $$$ to the GIC option, so I was seeking some feedback. Unfortunately, my asset allocation derailed much of the conversation.

One way to lengthen the glide path would be to use a longer term TDF like a 2030 or 2035 fund.

Would that offer a smoother ride by having more exposure to bonds with longer durations or is that a TDF 2035 would have less exposure to bonds than a TDF 2025?
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Re: Replace Bond allocation with 4% fixed?

Postby FinancialDave » Sun Jan 27, 2013 1:05 am

On the TDF question the answer is no, the Vanguard target date funds all use the same bond fund, just in different percentage allocations. I was just trying to lengthen out your glide path so you would get to the final allocation a little later. I am just a little worried about the drop in bond fund prices likely to occur sometime in the next 5 years (IMO). Then again with your smaller allocation, it should not matter a lot. I would be much happier loading up more on bonds after they dropped than before, or at least after they started to drop.

You are not locked into any one TDF -- if you decide you want to change your bond allocation in the future, just transfer out of say the 2035 back to the 2025, or just buy the bond index that the TDF uses outright to change your allocation -- many ways to do it.

As far as the GIC goes, my only problem is probably the fact that I think you will be locked into the contract for some number of years ? How would you feel about the guaranteed rate of 4%, 5 years down the road, if interest rates had gone up and bonds were doing 6%? If you can sell it anytime without a penalty and there aren't high fees, then I don't have a problem with it.

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Re: Replace Bond allocation with 4% fixed?

Postby YDNAL » Sun Jan 27, 2013 3:47 pm

syrdave wrote:I'm thinking of replacing my bond allocation with the 4% fixed account offered in my retirement plan.

I've read lots about how interest rates can't go much lower and can't stay this low forever, so I'm considering sitting out the bond drama and grabbing 4%.

Background: 15 years until retirement, current allocation 93% equities (27% of which are international), 7% bonds
syrdave wrote:Perhaps the term "drama" was a poor choice of words.

What "doesn't add up" is that I feel comfortable with a high equities allocation and maybe others don't. The main purpose of my question was to see if others had gotten out of bonds into a fixed option.

No, syrdave, what doesn't add up is that you consider sitting out the bond drama while accepting perhaps a 50%, 60% reduction at any moment in 93% of your investable Assets. But, again, everyone is responsible to make their own decisions based on willingness, ability and need to take risk.
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Re: Replace Bond allocation with 4% fixed?

Postby FinancialDave » Sun Jan 27, 2013 4:26 pm

YDNAL,
What you seem to have missed in the OP's profile is that he already probably has over a 50% allocation in "bonds" due to his state pension.

Let's dispense with the scare tactics - there has NEVER been a 15 year period, between 1950-2009, that has done worse than +4% annual returns (Malkiel 2011, A Random Walk). Of course that doesn't mean it can't happen - but I personally think you will be extremely lucky if you could even do +4% in the bond market over the next 15 years.

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Re: Replace Bond allocation with 4% fixed?

Postby YDNAL » Sun Jan 27, 2013 5:52 pm

FinancialDave wrote:YDNAL,
What you seem to have missed in the OP's profile is that he already probably has over a 50% allocation in "bonds" due to his state pension.

How do you know what I missed or didn't miss?

Regardless, when his 93% allocation to Equities goes in the crapper, tell me how [edit: physically non-existent] 50% in Bonds is going to be beneficial!!!!

I invest investable Assets according to Ability and Need for risk, and suggest you do the same - but, of course, it is up to you.
Last edited by YDNAL on Mon Jan 28, 2013 12:44 pm, edited 2 times in total.
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Re: Replace Bond allocation with 4% fixed?

Postby OnTheFly » Sun Jan 27, 2013 6:16 pm

Interesting 2011 article that offers some perspective:

http://articles.marketwatch.com/2011-01-28/commentary/30802692_1_broad-bond-market-bond-funds-bond-investors

"According to Vanguard’s research, “the worst 12-month return for U.S. bonds since 1926 was [negative] 9.2%, while the worst 12-month return for U.S. stocks was [negative] 67.6%...The worst calendar year for the broad bond market was 1994, when due to an unexpected [rise] in interest rates, the bond market returned [negative] 2.9%.”

So, the worst decline we’ve seen in bonds was chump change compared with the shellacking we’ve just experienced in stocks. And he adds that historically “a 3.5% bond is fairly valued.” That’s about where 10-year Treasury notes are trading now." (From page 2)
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