When to switch from short term bond to total bond

[hoops777]

I fully understand the reasoning in many people recommending staying short term because of inflation.What is confusing is when do you switch out of shorter term back to total bond?How do you determine that magic moment?
My other question is after reading so many posts about the inevitable decline of total bond when inflation kicks in,would it not be better in this unique bond environment to be in some well respected managed funds instead like dodge and cox or a pimco?Wouldn't a managed fund be better able to adjust to the inflation factor?It just seems like the total mkt index has no option but to take it's medicine for a few years when the inevitable inflation kicks in.Maybe a better solution would be to split your bond allocation in 3 well respected managed funds 1/3 1/3 1/3.???

[FNK]

Not inflation, interest rates.

[hoops777]

OK, interest rates.Sorry.

[khh]

Looking at the chart from the following link, the 10-year Japanese note dipped below 2% in the late 90s and has not gone above it since. It is currently 0.8%. I guess my point is that who can say when, or even if, interest rates will rise?

http://www.gecodia.com/Japan-Government ... a1305.html

[Aptenodytes]

If you want to shift bond assets like this you probably want to move among funds with distinctively different durations, i.e. short versus medium rather than short versus total. I would stay away from the actively managed funds -- that's the equivalent of a panic move in my opinion.

In Swedroe's book on bond investing he recommends increasing the duration when you can get 20 basis points or better per additional year of duration / conversely decrease the duration when you give up fewer than 20 basis points per year of duration. That's just one approach. I like it because it relies on a formula that takes emotions out of the picture.

The last time I applied the above evaluation short term treasuries beat out intermediate, but for investment grade corporate grade bonds intermediate beat out short term.

[gotherelate]

When the moon is in the Seventh House and Jupiter aligns with Mars. (With all due respect to the Fifth Dimension and songwriters James Rado, Gerome Ragni and Galt MacDermot) I mean, why not?

[Doc]

viewtopic.php?p=1498390#p1498390

The referenced response is kind of weedy but the entire thread gives you some good insight into using the shape of the yield curve to determine a target duration. As I read it the spread between the one and the five greater than 0.2% per year is the break point. Of course I don't think many would recommend shifting ones entire portfolio when the spread changed from 0.19 to 0.21.

Such a strategy is easy to implement if you have a bond ladder. You just roll maturing bonds into short or intermediate based on the slope of the yield curve. If you are talking about only a short fund and a TBM fund portfolio maybe you could establish something like changing 20% of the total per year based on the 1-5 brake point.

[STC]

If anyone knew the answer to this, they would be a billionaire. Unfortunately, predicting the rate curve is a futile endeavor.

[Doc]

If anyone knew the answer to this, they would be a billionaire. Unfortunately, predicting the rate curve is a futile endeavor.

No that's not true. Larry Swedroe has stated that their is evidence that the best estimate of future yield curve is the current yield curve albeit it is not a very good one. If one had zero transaction costs one can make money by "riding the yield curve". That is buying longer notes in a rising yield curve environment and selling them before they mature. You can also see this strategy implemented in index funds. Just compare the theoretical yield difference between a 1-5 and a 0-5 Treasury index with a positive sloped yield curve. The 1-5 wins by more than can be accounted for by the duration difference. The thread I referenced earlier builds on this concept.

[ResNullius]

Since reallocating my portfolio a number of years ago to have around 60% in fixed assets, I have read quite a bit about the various ideas on how to invest fixed assets, both in general and with respect to current conditions. While I think it's a major error to try to time the market, I find myself doing a little of that with my fixed portfolio. I've been about 50% in short investment grade and about 50% in intermediate investment grade. My thought is that if rates start going up in what appears to be a long-term upward swing (i.e., Fed rate increases in response to high inflation), then I just might move my intermediate term into the MM while rate go up a few percentage point, then move it back into intermediate. If rates continue to go up and then inflation is brought under control, I might then move most of my short term into long term. The fact is I probably won't do anything, because I've seen too many people lose far too much money by jumping around and trying to time the market. I don't fully understand bonds or bond funds, which is why I'm staying shorter and why I'm probably just going to stay the course. I'm fully retired, so our portfolio is where we get our financial support, in addition to SS, so I want to be conservative, but still try to get a real rate of return of at least 1.5% (more would be much better) in our overall portfolio. Our withdrawal rate is around 1.5% per year, hence the desire to at least maintain a stable perpetual net asset value portfolio, adjusted for inflation and adjusted for our yearly withdrawals. Good luck.

[investor.saver1]

Why not just do a CD ladder with 1-5 year terms? I presume you are in short term bonds because you do not want to take on price risk. Unless you are willing to buy risk (ie junk bonds) you will do equally well with CDs and have no risk.

[midareff]

Since reallocating my portfolio a number of years ago to have around 60% in fixed assets, I have read quite a bit about the various ideas on how to invest fixed assets, both in general and with respect to current conditions. While I think it's a major error to try to time the market, I find myself doing a little of that with my fixed portfolio. I've been about 50% in short investment grade and about 50% in intermediate investment grade. My thought is that if rates start going up in what appears to be a long-term upward swing (i.e., Fed rate increases in response to high inflation), then I just might move my intermediate term into the MM while rate go up a few percentage point, then move it back into intermediate. If rates continue to go up and then inflation is brought under control, I might then move most of my short term into long term. The fact is I probably won't do anything, because I've seen too many people lose far too much money by jumping around and trying to time the market. I don't fully understand bonds or bond funds, which is why I'm staying shorter and why I'm probably just going to stay the course. I'm fully retired, so our portfolio is where we get our financial support, in addition to SS, so I want to be conservative, but still try to get a real rate of return of at least 1.5% (more would be much better) in our overall portfolio. Our withdrawal rate is around 1.5% per year, hence the desire to at least maintain a stable perpetual net asset value portfolio, adjusted for inflation and adjusted for our yearly withdrawals. Good luck.

Res.. I did a spread sheet comparing ITIG, GNMA and Hi-Yield under the following conditions. Interest rates went up .75% annually (on the first of the year although it makes little difference if spread through the year) with resultingly, fund value decreased by the interest rate rise (.75%) X the fund's duration. I then increased the fund value for the rest of the year based on the previous year closing SEC + the interest rate rise of .75%. I repeated the exercise for 5 years and then took the resulting increases/decreases in absolute fund value and then applied 15% (5 years of 3% inflation) to get a "in real dollars" answer. Maybe my methods are off but it sure does not look like intermediate term anything will be a place to be.

[dbr]

Why do you feel that you need to switch at all?

[mephistophles]

Do it now. Trying to time the bond, or any market, is a losers game.

[ofcmetz]

Do it now. Trying to time the bond, or any market, is a losers game.

^ditto

I prefer to use Intermediate Term Bond Funds and Stable Value Funds. As long as my time horizon is longer than the funds duration then I don't fret. Those that tried to time things by going short in duration have been wrong so far. They will be wrong until they are right.

[STC]

If anyone knew the answer to this, they would be a billionaire. Unfortunately, predicting the rate curve is a futile endeavor.

No that's not true. Larry Swedroe has stated that their is evidence that the best estimate of future yield curve is the current yield curve albeit it is not a very good one. If one had zero transaction costs one can make money by "riding the yield curve". That is buying longer notes in a rising yield curve environment and selling them before they mature. You can also see this strategy implemented in index funds. Just compare the theoretical yield difference between a 1-5 and a 0-5 Treasury index with a positive sloped yield curve. The 1-5 wins by more than can be accounted for by the duration difference. The thread I referenced earlier builds on this concept.

If momentum plays like this worked, then funds would start to play it, nullifying the effect. That is the nature of the market. So even if you can prove that this strategy did work, I would not go on betting that it will continue to work.

[sscritic]

When the moon is in the Seventh House and Jupiter aligns with Mars. (With all due respect to the Fifth Dimension and songwriters James Rado, Gerome Ragni and Galt MacDermot) I mean, why not?

I prefer the Hair soundtrack version.

Oops. I meant the Original Cast version.

[kenyan]

I just stick with IT. Many have been advocating short-term for about 3 years now. Thus far, they've missed on that bet every year. Eventually, they will be right, but who knows if they'll make up the lost ground (20% over 3 years and counting) when that occurs. I don't think I can time the markets well in either direction, so I'm staying the course.

[z3r0c00l]

Sadly, we only know the best time after it has passed. The best time to have done this was years ago, followed by most days after that point, years ago. The best answer you can get is that you should maximize your time in the market by investing all of your investable money today, at a set asset allocation, and adjust that allocation as you age, and hold to the plan until you die. It sounds boring, even a bit depressing, but it works.

[Aptenodytes]

The way I'd summarize the responses so far, you have some people saying don't even bother trying and some saying to base your duration on the yield curve.

I don't think anyone is supporting your original proposal of shifting in and out of total bond market, which itself has a blend of durations in it.

So either shift or don't. If you do, make use of the information contained in the yield curves, and use funds with narrowly defined duration bands, not total bond market.

[Doc]

If momentum plays like this worked, then funds would start to play it, nullifying the effect. That is the nature of the market. So even if you can prove that this strategy did work, I would not go on betting that it will continue to work.

This is fixed income not equities. It is not a momentum play. It is based on the fact that the bond yield curve is usually upwardly sloping. In order to work the trading costs have to be lower than the amount that can be gained. The main point that is different than equities is that all players in the game do not have the same goals for their FI investments. Some invest in FI for the guaranteed income. Some to meet known future cash flow needs. Some are traders out for immediate trading profit rather than the coupons. Some are just using them to counter equity variance and hence it is variance not return that is their objective. Bond funds often are trying to come close to matching some bogie and can't tolerate tracking error. All these factors are what makes the bond market more complex than the equity market despite the simple arithmetic calculations of bond yields.

Ridng the Yield Curve.

[tadamsmar]

I fully understand the reasoning in many people recommending staying short term because of inflation.What is confusing is when do you switch out of shorter term back to total bond?How do you determine that magic moment?
My other question is after reading so many posts about the inevitable decline of total bond when inflation kicks in,would it not be better in this unique bond environment to be in some well respected managed funds instead like dodge and cox or a pimco?Wouldn't a managed fund be better able to adjust to the inflation factor?It just seems like the total mkt index has no option but to take it's medicine for a few years when the inevitable inflation kicks in.Maybe a better solution would be to split your bond allocation in 3 well respected managed funds 1/3 1/3 1/3.???

How long have you been in short bonds? People were saying this was a unique bond environment back in 2010 and TBM gained 7+% in 2011 and beat the heck out of short bonds. In 2012, I think TBM is doing OK compared with short bonds, but I have not checked that closely.

So, the point (if there is one) where one needs to switch out of TBM is still in the future, and you are asking when to switch back to TBM!!!

[mickeyd]

What does your IPS say to do?

Follow that.

Next problem...