Portfolio Help - bond fund advice needed

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Posts: 27
Joined: Sat Jan 05, 2013 9:30 pm

Portfolio Help - bond fund advice needed

Post by investnoob13 » Fri Apr 12, 2013 8:36 pm

I am new to Bogleheads family!

Thanks for all valuable investing ideas and information in this forum. I found this forum in late of November last year. I have been studying Bogleheads Buy-and-Hold philosophy. I have sold all my individual stocks on December 31, 2012. I am in a process of aggressively building my portfolio.

Emergency funds: $20K in TIAA-CREF High Saving account
Debt: Mortgage: Paid off one property. One investment property: $250K at 4%. Auto loan: 17K at 0.9%. No other CC or student loans.
Tax Filing Status: Single
Tax Rate: 25% Federal, 9.5% State
State of Residence: Bay Area, California
Age: 33
Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 50% of stocks

Current retirement assets

$60,000 cash (sitting in bank and doing nothing)
$10,000 in iBond (newly contributed)
$30,000 Vanguard Total Stock Admiral Shares (VTSAX / 0.05%)
$23,000 Vanguard Total International Admiral Shares (VTIAX / 0.16%)
$10,000 Vanguard Emerging Market Admiral Shares (VEMAX / 0.18%)
$10,800 Vanguard REIT Index Admiral Shares (VGSLX / 0.10%)
$5000 Vanguard California Long-Term Tax-Exempt (VCITX / 0.20%)

His Roth IRA at Vanguard
9.6% / $10,500 Vanguard Total Bond Admiral Shares (VBTLX / 0.10%) (Newly contributed)

Total: $160K. I don’t have 401K.

1. I want to contribute more into bonds. However, I don’t have much tax-advantage space. What’s the best way to invest bonds in Taxable account? From my reading, it’s California Tax-Exempt funds?

2. I would like to purchase more rental properties down the road. I have $5000 cash to invest monthly basis now. I have read a lot of discussion and debates regarding Interest rate risks about bonds. I am at a loss. I want to build a safe-bond fund that can immediate use to purchase rental. I don't have the timeframe. Due to current house market inflation in Bay Area, I don’t see any opportunities in next 2 years. If there’s no rental opportunity, I will not cash this fund until retirement. What fixed-income fund will you suggest?

3. I am trying to determine if I should continue to build Vanguard California Long-Term Tax-Exempt fund (VCITX) or exchange VCITX with Vanguard California Intermediate-term Tax-Exempt fund (VCAIX / ER: 0.20%) in my case.

Thank you!

Posts: 1308
Joined: Fri Jun 15, 2007 9:42 am
Location: Reno, NV

Re: Portfolio Help - bond fund advice needed

Post by DaveS » Fri Apr 12, 2013 11:06 pm

With interest rates at historic lows the most likely direction for them is to rise at some unknown point in the future. If and when that happens a bond fund will decline by it's duration for each 1% increase in rates. Historically rates average around 5% and are about 2% now. So if rates return to normal in one year your typical short term bond fund with a duration of around 3 will decline by 9% and make a bit of that back by having a higher yield. Your typical intermediate term bond fund with a duration of 6 will go down 18% and yield a bit more after that. Your typical long term fund with a duration of say 20 will go down 60% and yield a bit more after that. Do you now understand why your holding long term bonds is taking a big risk? I would go to intermediate term immediately and maybe short term for the rental down payment money. Dave

Posts: 27
Joined: Sat Jan 05, 2013 9:30 pm

Re: Portfolio Help - bond fund advice needed

Post by investnoob13 » Sat Apr 13, 2013 12:42 am

Thank you for the clear explanation!

Ahh. I will get into the intermediate/short term bond on Monday!


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