bond allocations in a time of very low interest rates

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bond allocations in a time of very low interest rates

Postby kahnpl » Fri Apr 05, 2013 6:13 pm

I recently received a fairly large windfall from a relative's estate, and I would like to add this new money to the portfolio I have built up over the years. This would normally be divided between a few different equity funds and several bond funds. However, the historically low interest rates now in the market I think present a very serious risk that rates will rise when the Fed begins to reduce its quantitative easing policy, and that means bond prices will fall.

So I am in a quandary as to how to invest this new money and still maintain a reasonable asset allocation. I see several possibililities:

1) invest a small portion of the money on a monthly basis, cost averaging my way into the market, and divide each month's investment among asset classes as usual -- in other words, make no accommodation at all for the historically unusual interest rate environment, but invest slowly and hope this provides some protection from rising rates;

2) cost average as above, but simply hold the monthly bond investment aside in cash, waiting for a time of less price risk;

3) cost average as above, but invest the monthly bond portion in some equity-like bond substitutes, such as dividend stocks, emerging-market bonds, reits, mlp's, etc. Then when interest rates have come down, switch into a conventional bond allocation.

Any thoughts you might have on the these or other strategies would be much appreciated. Thank you!
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Re: bond allocations in a time of very low interest rates

Postby LadyGeek » Fri Apr 05, 2013 6:34 pm

Welcome! First things first. Take your time and do some reading. In particular: Managing a windfall

To answer your question, no one can predict the future. Ignore what you think the market "might" do and invest as you are doing it right now - by ignoring the historical interest rate environment. Doing otherwise is known as "timing the market" and it never works out in the long term. What's a few months of concern over many years?

(BTW, discussions related to economic policy, such as quantitative easing, are off-topic in this forum. PM me if you want to understand why.)
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Re: bond allocations in a time of very low interest rates

Postby john94549 » Fri Apr 05, 2013 6:54 pm

Trying to over-analyze will cause you much distress. Windfalls, be they lottery winnings or inheritances, are best invested just as all else. In accordance with your asset allocation and risk tolerance. Purists will note various tax strategies as one reaches nosebleed levels, but for most, this is not an issue.

Folks skittish with bond funds might note the action in the 10-year. Nothing is "writ in stone". It appears when all else fails (as it seems to do, with regularity), folks just pile into Treasurys.

Makes me want to get on a soap-box. Sorta proud folks around the World see our debt as the refuge.
Last edited by john94549 on Sat Apr 06, 2013 5:59 am, edited 1 time in total.
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Re: bond allocations in a time of very low interest rates

Postby Scooter57 » Fri Apr 05, 2013 9:19 pm

I've been value averaging an inheritance into stocks and CDs with only a small allocation to bonds, and those all short duration. I'm sleeping well at night.

My allocation is different than it was when I had less assets because I have much less need to invest aggressively. I wouldn't suggest following your old investment plan unless you've gone through the process of rethinking your investment goals in light of your new income level. Is preservation more important than growing capital, as it is for me? What will your tax situation be when you are invested in possible scenarios.

It is almost a year since I received my legacy but I'm still figuring out all the ramifications. So my advice to anyone in this fortunate position is take your time. No need to make rash moves! You will feel like you should immediately start investing, but nothing terrible happens if you don't.
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Re: bond allocations in a time of very low interest rates

Postby LadyGeek » Fri Apr 05, 2013 10:16 pm

Scooter57 has mentioned value averaging. That's a different method, refer to the wiki: Value averaging. Value averaging is not recommended unless you understand the risks involved, mainly that you need a cash reserve.

For comparison, and to be sure this is what the OP is doing, see: Dollar cost averaging.
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Re: bond allocations in a time of very low interest rates

Postby Peter Foley » Sat Apr 06, 2013 12:50 am

Perhaps part of the solution lies in the portfolio you have built up over the years. What type of positions do you hold in deferred accounts now? It is best to hold bonds in deferred (or Roth) for tax reasons. Do you have access to a TIPs fund or a stable value fund in a 401k or 403b? Increasing investments there would help guard against unexpected inflation.

Unless the windfall is so substantial that it dwarfs your other investments, you should look for the best non equity prospects within your retirement accounts. If regular bond funds are all you have I would dollar cost average as you propose.
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Re: bond allocations in a time of very low interest rates

Postby Scooter57 » Sat Apr 06, 2013 11:59 am

LadyGeek,

If your goal is to deploy cash into the market you have all the cash reserve you need with Value Averaging. Once the money is fully invested you don't continue averaging in. VA has the advantage for new investment that you buy less as the assets you are investing in rise and more as their value falls. Since the goal is to avoid deploying a once in a lifetime lump sum all at once, the fact you may invest it much faster in a down market is a plus, not a problem.

I don't see VA as a good strategy for people making monthly investments of savings from earnings, but only as a hedge strategy for dealing with lump sums not in stocks or, like mine, in inappropriate stocks and funds that can be cashed out without a major capital gain.
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