Rates up, so shift intermediate bonds to short-term bonds?

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Shaoya
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Rates up, so shift intermediate bonds to short-term bonds?

Post by Shaoya » Mon Jan 06, 2014 12:11 am

As Bogleheads have really straightened us out in the past, I'd appreciate comments on a little tweak I'm thinking about to our bond allocation as we start 2014. Our desired/actual AA is 70/30 equities/bond. About 63% of that bond stake is comprised of intermediate bonds, either VG Total Bond Market or Intermediate Bond Option in his 457B.

Given that interest rates can only go up, does it make sense to lessen the impact on our bond stake by shifting a portion of those intermediate bonds to a short-term bond fund or something else entirely?

If so, should it be VG Short-term Bond Index (VBIRX)? What percentage?

Any insights/comments on this idea (or other aspects of what we're doing below) are greatly appreciated.

Thank you! - Shaoya

Percent Investment Portfolio as of 12-29-13

Taxable
22.5% Vanguard Total Stock Mkt Idx - Admiral (VTSAX) (0.05%)
16.5% Total Int'l Stock Index - Admiral (VTIAX ) (0.16%)

Tax-advantaged

Roth IRA
3.4% Vanguard REIT Index Adm (VGSIX) (0.10%)
4.1% Vanguard FTSE All-World Except US (VFWIX) (0.15%)
3.4% Vanguard Short-term Bond Index Admiral (VBIRX) (0.10%)
6.1% Windsor II (VWNFX) (0.35%)
2.5% Vanguard Total Stock Mkt Idx (VTSMX) (0.09%)
7.5% Vanguard Inflation-Protect Sec (VIPSX) (0.20%)
7.7% Vanguard Total Bond Market Index – Admiral (VBTLX) (0.10%)

Her 457 (City of Portland Deferred Compensation - ING)
6.6% Vanguard Total Bond Market Index Fund – Institutional (VBTIX) (0.07%)
3.0% Vanguard Institutional Index Fund – Institutional (VIIIX) (0.04%)
1.3% Vanguard Small Cap Index - Institutional (VSCIX) (0.08%)

His 457 (Oregon Growth Savings Plan)
4.4% Intermediate Bond Option (compilation) (0.09%)
2.5% Large Company Value Stk Option (compilation (0.395%)
1.3% Stock Index Option (tracks BlackRock Russell 3000 Index) (0.035%)

529 Funds (Oregon College Savings Plan) for Classes of 2030 & 2032)
3.3% TIAA-CREF Equity Index Fund (TINRX) (0.32%)
3.8% Total Int'l Stock Index -Investor (VTIAX) (0.37%)
100.0% TOTAL

Stable jobs in local/state government with an annual gross income of ~$108K. Expect this to increase incrementally (not dramatically) relative to inflation later in our careers. Intend to stay in our current house/city indefinitely.

Debt
Mortgage –30 year fixed at 3.87% (refi’d Nov 2010)
Credit card debt – none
Student – 1.6% fixed @ $130 a month ($13K remaining)
Car – no debt

Emergency Fund – 6-9 months living expenses in Ally Savings (0.90%) & CD (1.48%) (not included in portfolio)

Tax Filing Status
Married, filing jointly – 15% Fed in 2012; 9% Oregon (2012)
Age
Hers – 38
His – 41
Son (b. 2008), Daughter (b. 2010)

Monthly Investment: we allocate $1916 from salaries across five accounts in these proportions:

Pre-tax
457b Plans:

[*]$300 to Vanguard Institutional Index Fund – Institutional (VIIIX) (0.04%)
[*]$300 to Large Company Value Stock Option (0.39%) [blend of Black Rock Russell 1000 Value Index; Dodge & Cox Stock Fund (DODGX); MFS Value (MEIIX); LSV Value Equity (LSVEX). = (0.39%)]

Post-tax
[*]$300 to college funds [$150 to each child's 529's I.e.
VG International Stock Index (VGTSX) (0.38%
& $100 to taxable VG Total Stock Market Index (VTSAX) (0.05%)

[*]$458 to Her Roth IRA – Windsor II (VWNFX) (0.35%)
[*]$458 to His Roth IRA - Total Stock Mkt Idx Admiral (VTSAX) (0.05%)
Last edited by Shaoya on Mon Jan 06, 2014 2:11 pm, edited 1 time in total.

livesoft
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Re: Rates up, so shift intermediate bonds to short-term bond

Post by livesoft » Mon Jan 06, 2014 12:14 am

Lots of folks shifted to short-term bonds about 9 months ago and reported on it. That was before rates went up.

See this thread: http://www.bogleheads.org/forum/viewtop ... 1&t=112412

Although VBIRX is OK, you could use VSCSX or even CDs. It turns out Vanguard has at least 6 or 7 short-term bond funds of varying credit quality levels, so of various risk levels.
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Jack
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Re: Rates up, so shift intermediate bonds to short-term bond

Post by Jack » Mon Jan 06, 2014 12:50 am

livesoft wrote:Lots of folks shifted to short-term bonds about 9 months ago and reported on it. That was before rates went up.
Lots of folks shifted to short-term bonds about five years ago and waited for rates to go up. Some of them are still waiting.

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galeno
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Re: Rates up, so shift intermediate bonds to short-term bond

Post by galeno » Mon Jan 06, 2014 12:59 am

As long as you hold your intermediate bonds for their duration the higher yield will compensate for the drop in NAV.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.4%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

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fishnskiguy
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Location: Sedona, AZ

Re: Rates up, so shift intermediate bonds to short-term bond

Post by fishnskiguy » Mon Jan 06, 2014 1:06 am

Jack wrote:
livesoft wrote:Lots of folks shifted to short-term bonds about 9 months ago and reported on it. That was before rates went up.
Lots of folks shifted to short-term bonds about five years ago and waited for rates to go up. Some of them are still waiting.
If I remember correctly, and I think I do, Dr. Jim back on the old M* forum, went to cash with all his fixed income in 2001 and swore anything else was a fool's errand. For all his genius, he has been sucking big time hind t*t for a long, long time. :happy

Set your bond allocation at some combination of relatively short and relatively intermediate and stay the course.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."

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ogd
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Re: Rates up, so shift intermediate bonds to short-term bond

Post by ogd » Mon Jan 06, 2014 1:24 am

Shaoya wrote:Given that interest rates can only go up, does it make sense to lessen the impact on our bond stake by shifting a portion of those intermediate bonds to a short-term bond fund or something else entirely?
It's not a given. Furthermore, there is an expectation of gentle rises built into the prices and you have to guess better than the market.

Market timing is hard. As evidence, here you are, 8 months too late. Others, as pointed out, were years too early and still woefully behind.

Stay the course.

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Munir
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Re: Rates up, so shift intermediate bonds to short-term bond

Post by Munir » Mon Jan 06, 2014 7:58 am

Some think that you can stay in intermediates if you do not plan to touch the assets for at least 10 years (about twice the length of the duration). If not, a change to a short term bond fund such as Short Term Investment Grade or at least a mix of short and intermediate would be a consideration.

billyt
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Re: Rates up, so shift intermediate bonds to short-term bond

Post by billyt » Mon Jan 06, 2014 8:17 am

If you want to shift duration, you need to go to short term before the rate increase and shift back to intermediate term after the rate increase.

So far, you have missed a substantial rate increase.

Market timing almost never works consistently. You might get lucky once or twice, or you might not.

If you are investing for the long term, you will most likely earn about .8% in Vanguards short term bond index or 2.8% in Vanguards intermediate term bond index.

In the short term, the intermediate term fund will be more volatile.

Which return do you prefer?

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Shaoya
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Re: Rates up, so shift intermediate bonds to short-term bond

Post by Shaoya » Mon Jan 06, 2014 2:10 pm

Thanks - all of you - for your advice on this. I'll "stay the course." Take care - Shaoya

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