Trying to understand Total Bond fund

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Chip Shot
Posts: 128
Joined: Tue Apr 30, 2019 5:42 am

Trying to understand Total Bond fund

Post by Chip Shot »

I am considering lowering the risk in my portfolio by selling some Total Stock and buying Total Bond. I think that I am too dense to understand bonds.. :?
Right now the yield on Total Bond is 2.05%. Does that mean that is the return that I should expect?,

If that is the case, I would think that rising yields would be a good thing for bond investors at some point. I guess the question is at what point?
If interest rates go up, that means that yields will rise, correct? If that is true, it seems like the future would look bright for bond investors.

I know I am missing something here, because most things that I read are saying to avoid the bond market.

In the end, I am going to lower my portfolio risk, I am just trying to decide if I should move into Total Bond, or just tuck it away in the money market fund
User avatar
Wiggums
Posts: 4067
Joined: Thu Jan 31, 2019 8:02 am

Re: Trying to understand Total Bond fund

Post by Wiggums »

As interest rates rise, the NAV will decrease because the current bonds in the bond fund (with lower interest rates than the current rate) are worth a little less. In other words, there is an inverse relationship between the interest rate and the NAV. So you must be willing to hold bonds for the duration. As new bonds are added to the bond fund, they will have the higher interest rate.

Conversely, if you already had a bond fund and the Fed drops the rate, the NAV will increase because the bond fund is holding bonds with higher interest rates making it more valuable.

Selecting a bond fund with a bond duration that is appropriate for you is important. If you select ten year bonds, you must be willing to hold them ten years to get the most out of the bond. If the interest rate rises 1%, you would expect the existing ten year bond to lose 1%.
RubyTuesday
Posts: 904
Joined: Fri Oct 19, 2012 11:24 am

Re: Trying to understand Total Bond fund

Post by RubyTuesday »

Chip Shot wrote: Fri Jun 25, 2021 5:30 am I am considering lowering the risk in my portfolio by selling some Total Stock and buying Total Bond. I think that I am too dense to understand bonds.. :?
Right now the yield on Total Bond is 2.05%. Does that mean that is the return that I should expect?,

If that is the case, I would think that rising yields would be a good thing for bond investors at some point. I guess the question is at what point?
If interest rates go up, that means that yields will rise, correct? If that is true, it seems like the future would look bright for bond investors.

I know I am missing something here, because most things that I read are saying to avoid the bond market.

In the end, I am going to lower my portfolio risk, I am just trying to decide if I should move into Total Bond, or just tuck it away in the money market fund
Vanguard Total Bond has SEC yield of 1.36% which is the best prediction of yield going forward.
It has an average duration of 6.7.

If interest rates go up, yield will rise, correct.
But the yield rising is initially the result of capital loss. The bonds in the fund are now worth less because they are competing with newly issued bonds at higher yield. The fund also starts buying higher yield bonds as new money comes in and as existing bonds are sold or mature.

The average duration is a measure of the bonds price sensitivity to interest rate changes. For every percent of rate change you will see a change in value of the duration %. In this case a 1% increase in rate will cause ~6.7% loss in fund value. In the absence of additional rate changes, the duration also tells you how long you would have to hold the fund to recover the loss in value.

If the duration of the fund matches your holding period, and you’re reinvesting dividends, then you will be indifferent to the rate change.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
RubyTuesday
Posts: 904
Joined: Fri Oct 19, 2012 11:24 am

Re: Trying to understand Total Bond fund

Post by RubyTuesday »

Wiggums wrote: Fri Jun 25, 2021 5:55 am
Selecting a bond fund with a bond duration that is appropriate for you is important. If you select ten year (duration) bonds, you must be willing to hold them ten years to get the most out of the bond. If the interest rate rises 1%, you would expect the existing ten year (duration) bond to lose 1% 10%
Not quite accurate. A ten year bond (its term is 10 years) would have a duration less than 10 unless it has no coupon (a zero). Also the bond with duration of 10 would lose 10% value on 1% rate increase.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
RubyTuesday
Posts: 904
Joined: Fri Oct 19, 2012 11:24 am

Re: Trying to understand Total Bond fund

Post by RubyTuesday »

Chip Shot wrote: Fri Jun 25, 2021 5:30 am
In the end, I am going to lower my portfolio risk, I am just trying to decide if I should move into Total Bond, or just tuck it away in the money market fund
Adding bonds is a perfectly rational way to lower your portfolio risk. Tucking away into mmf / cash is rational for short term needs (emergency funds, near term expenses), but is not rational for longer term investment / liabilities.

To dial it in better, You really need to think about the duration of your future liabilities and match the duration of your portfolio to this. If you are very young and have long term goals, consider less bonds but longer duration bonds. If you are near retirement, consider more bonds and intermediate term bonds.

Many choose to not worry about optimizing duration and simply go with intermediate term, and total bond works just fine for many.

Edited to add: you also should explore what risks you are trying to lower…
- portfolio volatility
- inflation
- interest rate

For most saving for retirement, the main risk is having enough in future real dollars. For me in early retirement this means having plenty in stocks (overall about 65%) and plenty in inflation protected intermediate/ longish duration bonds and only cash for immediate needs.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
UpperNwGuy
Posts: 5677
Joined: Sun Oct 08, 2017 7:16 pm

Re: Trying to understand Total Bond fund

Post by UpperNwGuy »

The following bond funds should all work for you:
Total Bond Index
Intermediate Bond Index
Intermediate Treasury Bond Index

Once you've made your choice, don't fret if the price of the fund shares goes down as the yield goes up. The price will come back up if you hold the fund long enough.
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: Trying to understand Total Bond fund

Post by retiredjg »

Chip Shot wrote: Fri Jun 25, 2021 5:30 am In the end, I am going to lower my portfolio risk, I am just trying to decide if I should move into Total Bond, or just tuck it away in the money market fund
I would use a bond fund over money market. The intermediate term funds mentioned by UpperNwGuy are all good choices.
dbr
Posts: 36362
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to understand Total Bond fund

Post by dbr »

It might be helpful to view a bond fund the same as any other asset as having an expected return and a risk. The expected return is the average value of what all the future returns might be and the risk is the standard deviation of the annual returns. The expected return can be estimated from a set of historical returns subject to the proviso that past history is not always a good estimate if future behavior. Past standard deviation of annual returns is probably a good estimate of the future risk. As mentioned there are reasons why the present SEC yield is an estimate of future expected return. This more or less assumes that while future interest rates vary they won't systematically increase or decrease. If there is a systematic increase then the future return over time longer than the duration will increase.

The present historical CAGR of VBMFX is 5.8%, which is higher than one should expect going forward. The standard deviation of annual returns is 3.8% which means very roughly 2/3 of the time the annual return would be the expected return +/-4% and the rest of the time could be a larger variation than that. I'm lazy to calculate the difference between the CAGR and the expected return which is estimated by the arithmetic average of the past returns. It is a little higher than the CAGR.

Statistically what is going on in the historical average over a couple of decades being a bad estimate of expected return is that the return distribution is not stable. It can vary from one period of a few decades to a different period. You can see here that interest rates have had successive 40 year periods of increase and then decrease: https://www.bing.com/images/search?view ... ajaxserp=0
Gaston
Posts: 198
Joined: Wed Aug 21, 2013 7:12 pm

Re: Trying to understand Total Bond fund

Post by Gaston »

UpperNwGuy wrote: Fri Jun 25, 2021 6:57 am Once you've made your choice, don't fret if the price of the fund shares goes down as the yield goes up. The price will come back up if you hold the fund long enough.
This is a good reminder. Medium to long term investors do not need to rush to short term bond funds if rates rise.
dbr
Posts: 36362
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to understand Total Bond fund

Post by dbr »

Note that cash is not risk free. The investment definition of risk is standard deviation of annual returns. The return on cash is the interest paid on a savings account, money market fund, or CD and that varies. As illustration that this is real, investors who bought CDs paying 4%-5% some years ago assuming this to be a source of income cannot renew those CDs except at 2% or even 1%. Thus the variation in return is perhaps 2% around a mean of 3%.

All of this does not even touch inflation risk and doing the math in real dollars.
UpperNwGuy
Posts: 5677
Joined: Sun Oct 08, 2017 7:16 pm

Re: Trying to understand Total Bond fund

Post by UpperNwGuy »

Gaston wrote: Fri Jun 25, 2021 7:24 am
UpperNwGuy wrote: Fri Jun 25, 2021 6:57 am Once you've made your choice, don't fret if the price of the fund shares goes down as the yield goes up. The price will come back up if you hold the fund long enough.
This is a good reminder. Medium to long term investors do not need to rush to short term bond funds if rates rise.
Exactly! There's been too much rushing to short term bonds and cash around here recently.
UpperNwGuy
Posts: 5677
Joined: Sun Oct 08, 2017 7:16 pm

Re: Trying to understand Total Bond fund

Post by UpperNwGuy »

dbr wrote: Fri Jun 25, 2021 7:44 am investors who bought CDs paying 4%-5% some years ago assuming this to be a source of income cannot renew those CDs except at 2% or even 1%.
Good luck finding a CD at 2% or even 1% these days. Most are lower than 1%.
dbr
Posts: 36362
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to understand Total Bond fund

Post by dbr »

UpperNwGuy wrote: Fri Jun 25, 2021 8:19 am
dbr wrote: Fri Jun 25, 2021 7:44 am investors who bought CDs paying 4%-5% some years ago assuming this to be a source of income cannot renew those CDs except at 2% or even 1%.
Good luck finding a CD at 2% or even 1% these days. Most are lower than 1%.
All the more making the point. Cash is risky because the return is variable.
AnEngineer
Posts: 710
Joined: Sat Jun 27, 2020 4:05 pm

Re: Trying to understand Total Bond fund

Post by AnEngineer »

dbr wrote: Fri Jun 25, 2021 7:19 amThe expected return can be estimated from a set of historical returns subject to the proviso that past history is not always a good estimate if future behavior.
For bonds, a much better estimate of return is the interest rate of the bonds when you buy them. If you hold to maturity, that's the exact (nominal) return you'll get for each bond. You could sell early and get more or less, but only if you then buy something else.
dbr
Posts: 36362
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to understand Total Bond fund

Post by dbr »

AnEngineer wrote: Fri Jun 25, 2021 8:40 am
dbr wrote: Fri Jun 25, 2021 7:19 amThe expected return can be estimated from a set of historical returns subject to the proviso that past history is not always a good estimate if future behavior.
For bonds, a much better estimate of return is the interest rate of the bonds when you buy them. If you hold to maturity, that's the exact (nominal) return you'll get for each bond. You could sell early and get more or less, but only if you then buy something else.
Yes, I said that and don't necessarily disagree. I'm just giving a definition of expected return in a statistical model of investment behavior. The flaw in the statistical model is that the statistics may not be stable, as would be indicated by selecting the current interest rate as a better estimate.
Topic Author
Chip Shot
Posts: 128
Joined: Tue Apr 30, 2019 5:42 am

Re: Trying to understand Total Bond fund

Post by Chip Shot »

Thanks for the feedback so far.
I should have added that I am 3yrs away from retirement.
My Investments currently
Stock. (VTSAX and VFIAX) 42%
Bonds (VBTLX and VTABX) 26%
Cash,CDs, etc 32%

I want to bring my stock allocation down to 35% now and 30% next year. Concerned about sequence of return risk. At this point, I am more concerned about keeping what I have than I am about reaching for more return.
dbr
Posts: 36362
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to understand Total Bond fund

Post by dbr »

Chip Shot wrote: Fri Jun 25, 2021 9:01 am Thanks for the feedback so far.
I should have added that I am 3yrs away from retirement.
My Investments currently
Stock. (VTSAX and VFIAX) 42%
Bonds (VBTLX and VTABX) 26%
Cash,CDs, etc 32%

I want to bring my stock allocation down to 35% now and 30% next year. Concerned about sequence of return risk. At this point, I am more concerned about keeping what I have than I am about reaching for more return.
Unless you are planning very high expenditures for the first few years and a reduction later to take SS or some such thing I wonder if a reduction to 30% stocks is not extreme and counter productive. It does depend on what withdrawal rates you intend in the first place. Sequence of returns risk is already accounted for in safe withdrawal rate estimates and it is dubious that strong shifts to bonds are actually helpful, all scenarios taken into account. CDs and intermediate bond funds are all fine, but I would not expect any special reason to prefer cash. This also might be counterproductive in the long run.
AnEngineer
Posts: 710
Joined: Sat Jun 27, 2020 4:05 pm

Re: Trying to understand Total Bond fund

Post by AnEngineer »

Chip Shot wrote: Fri Jun 25, 2021 9:01 amAt this point, I am more concerned about keeping what I have than I am about reaching for more return.
You know that your bonds and cash are losing real value, right?
Topic Author
Chip Shot
Posts: 128
Joined: Tue Apr 30, 2019 5:42 am

Re: Trying to understand Total Bond fund

Post by Chip Shot »

AnEngineer wrote: Fri Jun 25, 2021 9:29 am
Chip Shot wrote: Fri Jun 25, 2021 9:01 amAt this point, I am more concerned about keeping what I have than I am about reaching for more return.
You know that your bonds and cash are losing real value, right?
I do realize that. I am hoping that the 30% in stock will keep my portfolio above the inflation rate.
Topic Author
Chip Shot
Posts: 128
Joined: Tue Apr 30, 2019 5:42 am

Re: Trying to understand Total Bond fund

Post by Chip Shot »

dbr wrote: Fri Jun 25, 2021 9:19 am
Chip Shot wrote: Fri Jun 25, 2021 9:01 am Thanks for the feedback so far.
I should have added that I am 3yrs away from retirement.
My Investments currently
Stock. (VTSAX and VFIAX) 42%
Bonds (VBTLX and VTABX) 26%
Cash,CDs, etc 32%

I want to bring my stock allocation down to 35% now and 30% next year. Concerned about sequence of return risk. At this point, I am more concerned about keeping what I have than I am about reaching for more return.
Unless you are planning very high expenditures for the first few years and a reduction later to take SS or some such thing I wonder if a reduction to 30% stocks is not extreme and counter productive. It does depend on what withdrawal rates you intend in the first place. Sequence of returns risk is already accounted for in safe withdrawal rate estimates and it is dubious that strong shifts to bonds are actually helpful, all scenarios taken into account. CDs and intermediate bond funds are all fine, but I would not expect any special reason to prefer cash. This also might be counterproductive in the long run.
Thanks for the reply. That actually is my situation. I will be funding my portfolio 100% from my investments for the first 5 yrs of my retirement. After that SS kicks in and my withdrawal rate drops significantly. Initial withdrawal rate is 4.3% Drops to 2.1% after SS kicks in
RubyTuesday
Posts: 904
Joined: Fri Oct 19, 2012 11:24 am

Re: Trying to understand Total Bond fund

Post by RubyTuesday »

Chip Shot wrote: Fri Jun 25, 2021 9:01 am Thanks for the feedback so far.
I should have added that I am 3yrs away from retirement.
My Investments currently
Stock. (VTSAX and VFIAX) 42%
Bonds (VBTLX and VTABX) 26%
Cash,CDs, etc 32%

I want to bring my stock allocation down to 35% now and 30% next year. Concerned about sequence of return risk. At this point, I am more concerned about keeping what I have than I am about reaching for more return.
What is your age (or if you prefer), what is your anticipated retirement length? Do you have a good estimate of your retirement expenses, including healthcare and taxes and how it compares to retirement income (Social Security, etc) and portfolio value?

These factors (length of retirement and retirement income needs) should drive your asset allocation, duration of fixed income, need for inflation protected assets, potential benefit of immediate or deferred income annuities, etc.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
coachd50
Posts: 644
Joined: Sun Oct 22, 2017 10:12 am

Re: Trying to understand Total Bond fund

Post by coachd50 »

AnEngineer wrote: Fri Jun 25, 2021 9:29 am
Chip Shot wrote: Fri Jun 25, 2021 9:01 amAt this point, I am more concerned about keeping what I have than I am about reaching for more return.
You know that your bonds and cash are losing real value, right?
He may be. But also, isn't that a fairly predictable loss as compared to the potential loss in equities.
Depending on the OP's situation, I could see where that would be more desirable than the unpredictable nature of other investments.
retiredjg
Posts: 44825
Joined: Thu Jan 10, 2008 12:56 pm

Re: Trying to understand Total Bond fund

Post by retiredjg »

I would not drop to 35% or 30% because of the possibility of sequence of returns risk. I would drop it to 35% or 30% if there is where my willingness to take risk resides.

A 4.3% withdrawal rate for 30 years might be too high during some time periods. Expecially with less than a 40% stock allocation. But I would not expect any problem doing 4.3% for 5 years and then reducing it.
dbr
Posts: 36362
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to understand Total Bond fund

Post by dbr »

Chip Shot wrote: Fri Jun 25, 2021 9:56 am
dbr wrote: Fri Jun 25, 2021 9:19 am
Chip Shot wrote: Fri Jun 25, 2021 9:01 am Thanks for the feedback so far.
I should have added that I am 3yrs away from retirement.
My Investments currently
Stock. (VTSAX and VFIAX) 42%
Bonds (VBTLX and VTABX) 26%
Cash,CDs, etc 32%

I want to bring my stock allocation down to 35% now and 30% next year. Concerned about sequence of return risk. At this point, I am more concerned about keeping what I have than I am about reaching for more return.
Unless you are planning very high expenditures for the first few years and a reduction later to take SS or some such thing I wonder if a reduction to 30% stocks is not extreme and counter productive. It does depend on what withdrawal rates you intend in the first place. Sequence of returns risk is already accounted for in safe withdrawal rate estimates and it is dubious that strong shifts to bonds are actually helpful, all scenarios taken into account. CDs and intermediate bond funds are all fine, but I would not expect any special reason to prefer cash. This also might be counterproductive in the long run.
Thanks for the reply. That actually is my situation. I will be funding my portfolio 100% from my investments for the first 5 yrs of my retirement. After that SS kicks in and my withdrawal rate drops significantly. Initial withdrawal rate is 4.3% Drops to 2.1% after SS kicks in
I was thinking something more similar to 6%-7% dropping to 3%-4%. Your withdrawal rates are low enough you don't need to worry about this stuff and could probably have any asset allocation you want. I think all in all 40/60 is perfectly fine and doesn't need messing with. As a sop to current conditions it is fair that the near term prospects for bonds are lousy, and 60% bonds is already a pretty hefty backstop against volatility in 40% stocks.

We have gone through some similar period with delayed SS and just set everything at 50/50 before, at, and through 14 years of retirement.
etfan
Posts: 207
Joined: Sun May 16, 2021 4:22 pm

Re: Trying to understand Total Bond fund

Post by etfan »

I've read the opinion that any bond funds that hold corporate bonds don't make sense because of the added risks. If you want to take on the risk for higher rewards from corporate investments, the right place to do it is stocks, not bonds.

So that leaves you with government bonds and municipal bonds, and your bond allocation should be focused on them, both of which having the added benefit of tax efficiency (for taxable accounts).

Municipal bonds have the added risk of defaults (many cities have defaulted on their debt in the past). In the future, one can also expect city defaults to correlate with a downward trend and worsening economy (which lead to cities losing their local sources of income).

So one way to see it is: you're getting your biggest reward and also your biggest risk from equities, therefore your bonds should just be in federal government bonds, which offer the least volatility and most relative safety.
Explorer
Posts: 667
Joined: Thu Oct 13, 2016 7:54 pm

Re: Trying to understand Total Bond fund

Post by Explorer »

Chip Shot wrote: Fri Jun 25, 2021 9:01 am Thanks for the feedback so far.
I should have added that I am 3yrs away from retirement.
My Investments currently
Stock. (VTSAX and VFIAX) 42%
Bonds (VBTLX and VTABX) 26%
Cash,CDs, etc 32%

I want to bring my stock allocation down to 35% now and 30% next year. Concerned about sequence of return risk. At this point, I am more concerned about keeping what I have than I am about reaching for more return.
OP - Excellent strategy. I am also a couple of years away from retirement and I am bringing my equity % down as well.
DS1986
Posts: 35
Joined: Thu Aug 17, 2017 3:20 pm

Re: Trying to understand Total Bond fund

Post by DS1986 »

How do you find out the actual duration of the bonds in, for example, VBLAX? If I bought most of my VBLAX shares 4-5 years ago, it makes sense to still hold for a while longer?
User avatar
David Jay
Posts: 11333
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Trying to understand Total Bond fund

Post by David Jay »

dbr wrote: Fri Jun 25, 2021 10:37 amI was thinking something more similar to 6%-7% dropping to 3%-4%.
I am currently taking ~ 7% for 7-8 years (depending on some variables), beginning @ age 62. Then we expect to drop to something under 2%.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
ruud
Posts: 558
Joined: Sat Mar 03, 2007 1:28 pm
Location: san francisco bay area

Re: Trying to understand Total Bond fund

Post by ruud »

DS1986 wrote: Fri Jun 25, 2021 6:23 pm How do you find out the actual duration of the bonds in, for example, VBLAX? If I bought most of my VBLAX shares 4-5 years ago, it makes sense to still hold for a while longer?
The average duration is listed on the fund's Portfolio page. It is currently 15.8 years.
.
User avatar
David Jay
Posts: 11333
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Trying to understand Total Bond fund

Post by David Jay »

DS1986 wrote: Fri Jun 25, 2021 6:23 pmHow do you find out the actual duration of the bonds in, for example, VBLAX? If I bought most of my VBLAX shares 4-5 years ago, it makes sense to still hold for a while longer?
I'm having a hard time understanding the context of your question.

For general context, one should hold bond funds with a duration less than the intended withdrawal time. So if you are thinking about holding "a while longer" - say a few years - then I would not be in a long term bond fund. The fund NAV will drop as interest rates rise and not recover for many years. In my opinion, the only money that should be in a bond fund with a >15 year duration is money that will not be transferred out of the fund for the next 15 years.

If you are trying to time something (interest rates, spending needs, etc.) then you should probably be in something like a short term bond fund, or at most an intermediate term bond fund.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
dbr
Posts: 36362
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to understand Total Bond fund

Post by dbr »

David Jay wrote: Sat Jun 26, 2021 10:33 am
DS1986 wrote: Fri Jun 25, 2021 6:23 pmHow do you find out the actual duration of the bonds in, for example, VBLAX? If I bought most of my VBLAX shares 4-5 years ago, it makes sense to still hold for a while longer?
I'm having a hard time understanding the context of your question.

For general context, one should hold bond funds with a duration less than the intended withdrawal time. So if you are thinking about holding "a while longer" - say a few years - then I would not be in a long term bond fund. The fund NAV will drop as interest rates rise and not recover for many years. In my opinion, the only money that should be in a bond fund with a >15 year duration is money that will not be transferred out of the fund for the next 15 years.

If you are trying to time something (interest rates, spending needs, etc.) then you should probably be in something like a short term bond fund, or at most an intermediate term bond fund.
I would probably reinforce this with the concept that one holds bonds like this in a portfolio that is imagined to be perpetual, or at least on going for an indefinite length of time. This would actually be the common case here as that would be what a person investing and accumulating money over a lifetime of employment and then withdrawing from that accumulation in retirement is actually doing. This includes the likelihood that such a person imagines what is left when they pass will be given to someone else.

So the question is what is this asset being held for?
Nohbdy
Posts: 51
Joined: Mon May 10, 2021 12:48 pm

Re: Trying to understand Total Bond fund

Post by Nohbdy »

Chip Shot wrote: Fri Jun 25, 2021 9:56 am
dbr wrote: Fri Jun 25, 2021 9:19 am
Chip Shot wrote: Fri Jun 25, 2021 9:01 am Thanks for the feedback so far.
I should have added that I am 3yrs away from retirement.
My Investments currently
Stock. (VTSAX and VFIAX) 42%
Bonds (VBTLX and VTABX) 26%
Cash,CDs, etc 32%

I want to bring my stock allocation down to 35% now and 30% next year. Concerned about sequence of return risk. At this point, I am more concerned about keeping what I have than I am about reaching for more return.
Unless you are planning very high expenditures for the first few years and a reduction later to take SS or some such thing I wonder if a reduction to 30% stocks is not extreme and counter productive. It does depend on what withdrawal rates you intend in the first place. Sequence of returns risk is already accounted for in safe withdrawal rate estimates and it is dubious that strong shifts to bonds are actually helpful, all scenarios taken into account. CDs and intermediate bond funds are all fine, but I would not expect any special reason to prefer cash. This also might be counterproductive in the long run.
Thanks for the reply. That actually is my situation. I will be funding my portfolio 100% from my investments for the first 5 yrs of my retirement. After that SS kicks in and my withdrawal rate drops significantly. Initial withdrawal rate is 4.3% Drops to 2.1% after SS kicks in
Hello. It looks like you have enough cash (& equivalents) to weather a great depression type of event without touching other investments. Depending on your withdrawal strategy and inflation adjustments it looks to me like you have enough cash to not touch stocks&bonds for the better part of a decade. That cash could totally mitigate some of the worst SORR events in history. I am having difficulty relating to the perspective that you need to reduce risk by increasing bond/cash.

You seem very concerned about the market volatility. You could just keep 5 years cash to help ignore the noise, and then split the rest 50/50 and once a year pull from whichever is greater to maintain the 5 year cash allocation.

As others have alluded to, you could also re-allocate your bonds to gov’t treasury funds which are less correlated to stocks than corporate bonds. Reducing correlation might help reduce risk. It looks like VBTLX is more than half government already though: https://investor.vanguard.com/mutual-fu ... file/VBTLX

My understanding with bond duration (which I would defer to other posters in your thread) is that you want to match duration with your holding time because over time the increased yield of the longer duration helps mitigate the volatility in the fund. I personally would not hold onto a bond fund simply because my holding time has not matched the duration yet. I would be more patient with nav volatility for a longer duration fund, though.
Post Reply