Lower my Bond exposure?

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Lower my Bond exposure?

Postby atDev » Sun Feb 10, 2013 3:45 pm

I am currently 30 years old and have about 20% of my portfolio in BND (Vanguard Total Bond Market ETF).

Does anyone have any thoughts on my current exposure when considering the current low interest rates? I am considering lowering my exposure due to how low rates are (and have been) and the possibility of those rates rising.
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Re: Lower my Bond exposure?

Postby Call_Me_Op » Sun Feb 10, 2013 3:47 pm

Do you have a separate emergency fund?
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Re: Lower my Bond exposure?

Postby livesoft » Sun Feb 10, 2013 3:56 pm

I guess it depends on what you do when you lower your Bond exposure. Will you raise your CD or Stable Value exposure by the same amount?
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Re: Lower my Bond exposure?

Postby grabiner » Sun Feb 10, 2013 5:37 pm

atDev wrote:I am currently 30 years old and have about 20% of my portfolio in BND (Vanguard Total Bond Market ETF).

Does anyone have any thoughts on my current exposure when considering the current low interest rates? I am considering lowering my exposure due to how low rates are (and have been) and the possibility of those rates rising.


I wouldn't recommend this. Stocks have higher expected returns than bonds, but you chose not to hold 100% stock, probably because you don't want the risk of a 100% stock portfolio (few investors do). If you reduce your bond exposure and buy more stocks, you will increase the risk of your portfolio.

You could also reduce your bond exposure and buy other types of fixed income, such as CD's, I-Bonds (which track inflation and can be redeemed after one year with little penalty), or a stable value fund if your 401(k) offers one. In this case, you wouldn't be changing the risk of your portfolio much, so the question is whether the new bond options have a better risk-return trade-off.
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Re: Lower my Bond exposure?

Postby RyeWhiskey » Sun Feb 10, 2013 5:57 pm

atDev wrote:I am currently 30 years old and have about 20% of my portfolio in BND (Vanguard Total Bond Market ETF).

Does anyone have any thoughts on my current exposure when considering the current low interest rates? I am considering lowering my exposure due to how low rates are (and have been) and the possibility of those rates rising.


If you are truly concerned about rising interest rates then the solution would be to shorten the duration of your bond fund rather than cutting the allocation. Bonds play an important role in a portfolio, both to dampen overall volatility and to provide steady income payments. Cutting this allocation does not hedge against risk, it increases it.

BND has a duration of 4.97 years which is very manageable and right in the 'intermediate' range. For ever 1% increase in interest rates, the fund will lose about 5% of the NAV. But remember that it will acquire the new bonds at higher rates and so in time will make up that loss fairly easily. It's current SEC yield is 1.64 which isn't terrible, and remember that reaching for yield often means reaching for risk. I'd say stay the course - you're bond allocation is pretty low in my mind (I'm 26 and have 30% in bonds). :beer
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Re: Lower my Bond exposure?

Postby mickeyd » Sun Feb 10, 2013 6:02 pm

I am considering lowering my exposure due to how low rates are (and have been) and the possibility of those rates rising.


What does your IPS direct you to do in this situation?
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