How to weather the upcoming bond crash in my 401k

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thisismyusername123
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How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

I'm 36 and have $230k in my Fidelity 401k, plus another $100k in Roths and taxable accounts. About $40k (17%) of my 401k is in Pimco Total Return (PTTRX). The remainder of the 401k is in Fidelity Spartan indices: S&P 500 (41%), Extended Market (16%) and International (25%). I have $7k of BSV (short-term bond ETF) in my Roth IRA and no other bond exposure. Across all investments, I'm in bonds to the tune of 14%.

The consensus is that we're all about to get hosed in the long and intermediate bond market. Hence my question: should I stick with PTTRX for the long haul or diversify into one of the other available 401k bond funds (or alternatively, rebalance into more stocks.) The other bond choices are:
- Fidelity GNMA (FGMNX)
- Fidelity Intermediate Bond (FTHRX)
- Fidelity Strategic Income (FSICX)
- Fidelity Government Income (FGOVX)
Only FSICX had a positive return last year (.38%).
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Re: How to weather the upcoming bond crash in my 401k

Post by KyleAAA »

Of those I suppose I like the PIMCO fund best, but I'm not at all convinced there's going to be any sort of bond crash.
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Re: How to weather the upcoming bond crash in my 401k

Post by livesoft »

With only a 14% allocation to bonds, if they drop 10% (more than they have in quite a few decades), then your portfolio will be down 1.4%, right? Already, your portfolio has taken 1.4% hits in the last month, right?

Anyways, the 2013 bond crash came and went with not much to show for itself. Why should the next upcoming bond crash be any different? These are serious questions I am asking you. What are your answers?
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G-Money
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Re: How to weather the upcoming bond crash in my 401k

Post by G-Money »

thisismyusername123 wrote:The consensus is that we're all about to get hosed in the long and intermediate bond market.
Ignore the noise. By definition, the market already reflects whatever consensus there is about the direction of future interest rates. If significantly higher interest rates was a sure thing, the market prices and yields of fixed income would reflect it.
thisismyusername123 wrote:Hence my question: should I stick with PTTRX for the long haul or diversify into one of the other available 401k bond funds (or alternatively, rebalance into more stocks.) The other bond choices are:
- Fidelity GNMA (FGMNX)
- Fidelity Intermediate Bond (FTHRX)
- Fidelity Strategic Income (FSICX)
- Fidelity Government Income (FGOVX)
You don't provide expense ratios for any of these funds. Despite its history of relatively good performance, I'm not a huge fan of the PIMCO fund because Bill Gross has so much latitude in terms of what the fund invests in. I prefer knowing and controlling my risk exposure.

I'm not a huge fan of GNMA funds because of the negative convexity. Plenty of threads on this board about the virtues and drawbacks of MBS bond funds.

Not a fan of the Strategic Income fund, since 40% is typically in high yield and another 15% in emerging market bonds. That's more credit risk than I'd like to take in a bond fund.

That leaves either Fidelity Intermediate Bond or Government Income. The decision there depends largely on whether you want any credit risk (choose Intermediate Bond) or practically none (choose Government Income).

It bears noting that if you are worried about rising interest rates, none of these appear to be short-term bond funds, which would (at least in theory) be less exposed to term risk.
thisismyusername123 wrote:Only FSICX had a positive return last year (.38%).
This is irrelevant. Choose the bond fund based on its risk/expected return characteristics, not last year's performance.

Two more points:

1. At 14% fixed income, bond risk really shouldn't be among your top concerns. The performance of stocks (good or bad) will dominate your portfolio's return.

2. If you have a lower cost equity fund in your 401(k), you can choose any bond fund you like in your IRA.
Don't assume I know what I'm talking about.
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thisismyusername123
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Re: How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

With only a 14% allocation to bonds, if they drop 10% (more than they have in quite a few decades), then your portfolio will be down 1.4%, right? Already, your portfolio has taken 1.4% hits in the last month, right?
Well, 1.4% plus the opportunity cost of not having more equity exposure. It takes 5 minutes to rebalance my 401k so I'm not sure what you're getting at.
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Re: How to weather the upcoming bond crash in my 401k

Post by Call_Me_Op »

I continue to be amazed that people with stock-heavy portfolios are worrying about their bonds.
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thisismyusername123
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Re: How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

Call_Me_Op wrote:I continue to be amazed that people with stock-heavy portfolios are worrying about their bonds.
We're talking about 50 large here. Surely it's not unreasonable to ask.
You don't provide expense ratios for any of these funds.
All are .45% except for FSICX which is .70%.
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Re: How to weather the upcoming bond crash in my 401k

Post by mhc »

thisismyusername123 wrote:
With only a 14% allocation to bonds, if they drop 10% (more than they have in quite a few decades), then your portfolio will be down 1.4%, right? Already, your portfolio has taken 1.4% hits in the last month, right?
Well, 1.4% plus the opportunity cost of not having more equity exposure. It takes 5 minutes to rebalance my 401k so I'm not sure what you're getting at.
If you are worried about bonds crashing, you should be scared to death over equities.

Bonds normally do not crash. Plot a bond fund over time and look at the volatility. Now do the same for an equity fund. I think people do not agree with your statement about a consensus.

Listing the ER's for the funds would be helpful.
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Re: How to weather the upcoming bond crash in my 401k

Post by John3754 »

thisismyusername123 wrote:Well, 1.4% plus the opportunity cost of not having more equity exposure.
So your plan is to avoid bond risk by taking on more equity risk?
Last edited by John3754 on Thu Jan 09, 2014 10:34 am, edited 1 time in total.
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Re: How to weather the upcoming bond crash in my 401k

Post by mhc »

If you are still worried about a bond crash, then shorten the duration.

I would choose - Fidelity Intermediate Bond (FTHRX) probably, because I am not concerned with a bond crash, so I keep an intermediate duration.

I don't like Pimco funds because I do not understand what is in them.
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thisismyusername123
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Re: How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

Is 14% exposure too low? I'm not risk averse and have no short term need for cash beyond an emergency fund.
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Re: How to weather the upcoming bond crash in my 401k

Post by bengal22 »

thisismyusername123 wrote:
With only a 14% allocation to bonds, if they drop 10% (more than they have in quite a few decades), then your portfolio will be down 1.4%, right? Already, your portfolio has taken 1.4% hits in the last month, right?
Well, 1.4% plus the opportunity cost of not having more equity exposure. It takes 5 minutes to rebalance my 401k so I'm not sure what you're getting at.
I think that his point is that you really cannot accurately predict which portions of your portfolio(or investments) is going to go up or go down, or crash, or rise rapidly. Your allocation is relatively small in bonds so it is really there to weather the storm when equities go south. Changing your AA at the whims of talking heads(not sure where the consensus for a bond crash is???) is a loser's game. In other words, hold the course and rest assured that trying to guess your way to wealth won't work.
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kenyan
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Re: How to weather the upcoming bond crash in my 401k

Post by kenyan »

The consensus is not what you think it is. The bond market consensus is already displayed in the yield curve today. If the consensus was that interest rates were about to skyrocket, then they would already be skyrocketing.

i.e. (simplification): If 10-year treasuries are yielding 3%, and 80% of the market is pretty sure that treasury yields will rise to 5% within the next 6 months, while the other 20% is ambivalent...yields will begin rising immediately, because the 80% will be selling like mad, driving prices down and yields up.

Talking heads have been predicting a significant drop in bonds for 4-5 years now. Last year was the first year that bonds suffered, but it was not a "crash." Just because the vocal minority thinks something, don't think that reflects market expectations.

As noted, your stocks might drop 50-60% or even more; your bonds might drop 10%. You should be much more worried about a stock crash than a bond crash. Now, if your asset allocation accurately reflects your risk tolerance, you don't need to worry particularly about either, since you are investing for the long term.
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Re: How to weather the upcoming bond crash in my 401k

Post by livesoft »

What if I asked the following question:
The consensus is that we're all about to get hosed in the US and international equity markets. Hence my question: should I stick with stocks for the long haul or diversify into cash or bonds?
And then let me add, that I only have 14% allocation to equities.

How would you respond to that? Can you help please? What would you tell me?
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thisismyusername123
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Re: How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

Of course I would tell you to stick with stocks for the long haul. Stocks are meant to appreciate while bonds are meant to provide income. That's not remotely an equivalent question to mine, which was whether I should shift bonds away from PTTRX into other funds.
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Re: How to weather the upcoming bond crash in my 401k

Post by camaro327 »

thisismyusername123 wrote:Is 14% exposure too low? I'm not risk averse and have no short term need for cash beyond an emergency fund.
Since you seem to enjoy risk and are convinced of the Bondpocalypse, you could move your 401k bonds to cash and use money in your emergency fund or a HOLEC if available to short either a bond etf or the 10yr treasury. :beer
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Re: How to weather the upcoming bond crash in my 401k

Post by livesoft »

thisismyusername123 wrote:Of course I would tell you to stick with stocks for the long haul. Stocks are meant to appreciate while bonds are meant to provide income. That's not remotely an equivalent question to mine, which was whether I should shift bonds away from PTTRX into other funds.
Hmmm, I see.

Wait a minute. No, I don't see.

Did you see this poll from last March: http://www.bogleheads.org/forum/viewtop ... 1&t=112412
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Re: How to weather the upcoming bond crash in my 401k

Post by Jeff7 »

I can't help but think that I've been hearing "bond market crash" for years now.


I did find this thread, talking about the "crash" of 1994.


Here's the Morningstar chart for Vanguard Total Bond Market (VBMFX). If necessary, click on Maximum.
I notice a bit of a bump in the road around 1994.
"Crash" isn't exactly the word that comes to mind.


Some thoughts that do come to mind:
- "Stay the course."
- If you're worried about losing money in your bonds, is your risk tolerance really what you think it is?
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Re: How to weather the upcoming bond crash in my 401k

Post by White Coat Investor »

thisismyusername123 wrote:I'm 36 and have $230k in my Fidelity 401k, plus another $100k in Roths and taxable accounts. About $40k (17%) of my 401k is in Pimco Total Return (PTTRX). The remainder of the 401k is in Fidelity Spartan indices: S&P 500 (41%), Extended Market (16%) and International (25%). I have $7k of BSV (short-term bond ETF) in my Roth IRA and no other bond exposure. Across all investments, I'm in bonds to the tune of 14%.

The consensus is that we're all about to get hosed in the long and intermediate bond market. Hence my question: should I stick with PTTRX for the long haul or diversify into one of the other available 401k bond funds (or alternatively, rebalance into more stocks.) The other bond choices are:
- Fidelity GNMA (FGMNX)
- Fidelity Intermediate Bond (FTHRX)
- Fidelity Strategic Income (FSICX)
- Fidelity Government Income (FGOVX)
Only FSICX had a positive return last year (.38%).
There's a bond crash coming? Why didn't anyone tell me!
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Re: How to weather the upcoming bond crash in my 401k

Post by whoshighpitch »

I get what your saying, why invest in an asset class that will probably tread water at best or likely get it's ass kicked. I was asking myself the same question a couple years ago. I'm no expert but from what I read we're at a 30 year low in interset rates, meaning rates will almost certainly go up which means the price of bonds comes down. I've seen countless interviews with people like Bill Gross who didn't refute that but would finish the interview by saying "but we believe that bonds still have a place in your portfolio". Why exactly? I'm not sure. I'm 39 and put everything into stocks 2 years ago and it's worked out well. I think if you're relatively young it's the way to go. There's no guarantees obviously (before people jump all over me) but I think you gotta play the odds so to speak.
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Re: How to weather the upcoming bond crash in my 401k

Post by Ged »

2 years isn't much experience.

Every decade we have one or two large drops in the stock market. 50% is common.

On the other hand a big drop for an intermediate bond fund is something like 3%.

At your age it's a good idea to have 20-30% of bonds in your portfolio. Their returns are often not correlated with stocks so over the long run they add stability to your investments at little cost in total return. Sometimes the addition of bonds actually increases your return. It's counter-intuitive, but that's how the math works out.

I'd recommend you spend some time reading the books recommended in the wiki.
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Re: How to weather the upcoming bond crash in my 401k

Post by serbeer »

I am much more concerned with stock crash since they are 75% of my portfolio and with run-up we had lately, we will see a correction next year if not this one. And stock corrections are 10+% which is more than I'd expect to see in any kind of bond crash.

All my new savings are going into bonds and TIPS at this time, and have been for nearly a year-- simply because my AA is distorted by stock run up and bonds declined to 23% despite all the new contributions.
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Re: How to weather the upcoming bond crash in my 401k

Post by technovelist »

whoshighpitch wrote:I get what your saying, why invest in an asset class that will probably tread water at best or likely get it's ass kicked. I was asking myself the same question a couple years ago. I'm no expert but from what I read we're at a 30 year low in interset rates, meaning rates will almost certainly go up which means the price of bonds comes down. I've seen countless interviews with people like Bill Gross who didn't refute that but would finish the interview by saying "but we believe that bonds still have a place in your portfolio". Why exactly? I'm not sure. I'm 39 and put everything into stocks 2 years ago and it's worked out well. I think if you're relatively young it's the way to go. There's no guarantees obviously (before people jump all over me) but I think you gotta play the odds so to speak.
I predict we will see more and more posts like this until the next stock market crash, after which some of the same posters will say "no stocks for me ever again".
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Re: How to weather the upcoming bond crash in my 401k

Post by Raybo »

If you are basing your investment decisions on what will go down in the future, you aren't left with much to invest in.
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Re: How to weather the upcoming bond crash in my 401k

Post by whoshighpitch »

[quote]I predict we will see more and more posts like this until the next stock market crash, after which some of the same posters will say "no stocks for me ever again".

You are right about that no doubt. From my standpoint though I started investing in 1999, just in time for the tech bubble to pop, then the Enron accounting scandel, and then the Great Recession. But you know what? The total stock market index is up over 8% from 2000 through today. The actual return if you kept buying regularly during those crashes is even higher. I know myself and know I won't sell if we lose 30-40% during our next bear market. Instead I'll keep buying when it's cheap and should make out just fine. When I'm older I'll add bonds no doubt, but with the current situation it doesn't make sense to me, but that's just my hunch. Hey, if the market crashes and never comes back we're all f#$%@ed.
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Re: How to weather the upcoming bond crash in my 401k

Post by fishnskiguy »

thisismyusername123 wrote:Of course I would tell you to stick with stocks for the long haul. Stocks are meant to appreciate while bonds are meant to provide income. That's not remotely an equivalent question to mine, which was whether I should shift bonds away from PTTRX into other funds.
Most of us around this form would take issue with your statement. Bonds are not meant to provide income, they are meant to preserve capital.

If we were to have a repeat of 2007, your $330K would be worth about $190K. And on the day it hit $190K, you have no idea that this is the bottom. In fact, on the day it hit $190K things looked absolutely bleak. Are you sure could stay the course after losing more than a year's salary?

If you slept well in 2007 with 86% of your retirement portfolio in equities, then maybe you will stay the course the next time the market dives. But remember, it's probably easier on the stomach to lose 40% of a $100K portfolio when you are 30 than to lose 40% of a million when you are 45.

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thisismyusername123
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Re: How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

OK guys. So assuming that my stock/bond allocation stays the same or creeps up to 20%, should I stay in PTTRX/BSV, or move to another fund? As was stated above I'm hampered by lack of short-term bond options in my 401k so I'm trying to make up for that by buying BSV in my Roth IRA.

I'm interested in appropriate diversification for the long run but also accounting for some of the immediate risks posed by rising interest rates. Not trying to time the market or chase past performance, I know better than that.
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Re: How to weather the upcoming bond crash in my 401k

Post by rkhusky »

thisismyusername123 wrote:
I'm interested in appropriate diversification for the long run but also accounting for some of the immediate risks posed by rising interest rates. Not trying to time the market or chase past performance, I know better than that.
If you are in it for the long term, then you don't care if interest rates rise, in fact you will welcome it, because your bond funds will start making more money. Ignore the NAV, just look at the dividend flow. Eventually, the dividend increase will surpass the NAV drop.

If the stock market crashes (much more likely than bond crash), how will you buy stocks on the cheap if you don't have cash or bonds? Some here are recommending CD's instead of bonds right now, but they can be a pain to keep track of and buy/sell quickly.
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Re: How to weather the upcoming bond crash in my 401k

Post by SecretAsianMan »

thisismyusername123 wrote:I'm interested in ... accounting for some of the immediate risks posed by rising interest rates. Not trying to time the market ... I know better than that.
Hmmm. Apparently you and I define "time the market" quite differently then. Because it looks to me like that's exactly what you're trying to do.

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Re: How to weather the upcoming bond crash in my 401k

Post by livesoft »

OTOH, lots of us talk out of both sides of our mouths. Many folks here have shortened the average duration of their fixed income holdings. Some examples are:
1. Exchanging out of intermediate-term TIPS to short-term TIPS.
2. Selling bond funds and buying CDs with maturities of 3, 5, 7-years.
3. Exchanging out of intermediate-term bond funds and buying short-term bond funds.
4. Increasing use of stable value funds and TIAA traditional annuity.
5. Combo of any and all of above.
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Re: How to weather the upcoming bond crash in my 401k

Post by nisiprius »

thisismyusername123 wrote:...The consensus is that we're all about to get hosed in the long and intermediate bond market....
I think it is clear that at least some of the "upcoming bond crash" has already occurred. The 10-year interest rate has about doubled, or risen 1.5%, during the last half of last year, and the effects of it on intermediate-term bonds have already been felt.

So, thisismyusername123, this is a serious question, not rhetorical. In determining that there is a "consensus that we're all about to get hosed," did you actually go look at any interest rate and bond fund performance rate data for yourself? Does this chart show you anything you didn't already know?

If this is already familiar to you, then what is the consensus about how much more the 10-year interest rate to rise, and why? If it were to rise to 4.5%, that would mean the effect we've already seen in Total Bond would be half of the total impact--a loss of less than 10%.

Image

Here is my own prediction. After the "bond crash" is finished, over, and done with, people will continue to ask what to do about the upcoming bond crash...
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Re: How to weather the upcoming bond crash in my 401k

Post by pkcrafter »

I would use VG st-term corporate, VSCSX in the Roth.

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Re: How to weather the upcoming bond crash in my 401k

Post by swaption »

Well, good thing this isn't market timing, because at this point the barn door is wide open and the cows are long gone. The Barclays aggregate bond index return in 2013 was -1.97%, the only negative year this century. The S&P 500 return for 2013 was 32.39%, which also happened to be the highest annual return this century, so that opportunity cost for 2013 was a whopping 34.36%.

In light of the above, I hope this begs at least some self reflection as to why you were not considering such moves a year ago.
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Re: How to weather the upcoming bond crash in my 401k

Post by UALflyer »

Ged wrote:At your age it's a good idea to have 20-30% of bonds in your portfolio.
This is the threshold issue, isn't it? People keep bonds in their portfolios for quite a few reasons. Depending on those reasons, a person in the OP's situation may be well advised to shorten their duration or to move his money out of bond funds altogether, etc...
Their returns are often not correlated with stocks so over the long run they add stability to your investments at little cost in total return.
This is incorrect. Bonds reduce volatility in your investment portfolio at a pretty substantial cost, particularly now, when their yields are so low.
Sometimes the addition of bonds actually increases your return. It's counter-intuitive, but that's how the math works out.
That's actually not how the math works. That's how people's psychological impulses work. Most investors panic during severe market downturns and sell, thus locking in their paper losses. Bonds, which are generally less volatile, reduce the overall portfolio volatility, such that during severe market downturns, those paper losses are less severe, which means that people are less likely to panic and sell. That's it, that's all that's going on. There's no secret math behind it.

If you are not prone to this phenomenon, then mathematically, bonds do significantly and adversely affect your overall performance.
Last edited by UALflyer on Fri Jan 10, 2014 6:39 am, edited 3 times in total.
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Re: How to weather the upcoming bond crash in my 401k

Post by ogd »

thisismyusername123: like others have said, bond prices have already adjusted to higher interest rate expectations and you are eight months too late. What again makes you think you can time the bond market?

Also, you should be much more suspicious of moves away from an asset that has taken a beating recently. Your recency bias might be getting the best of you. This won't hurt much with your bond alloc, but if it does work and you decide that you are a market timing genius and you do the same in the next stock crash, that could really set you back.
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Re: How to weather the upcoming bond crash in my 401k

Post by ogd »

UALflyer wrote:If you are not prone to this phenomenon, then mathematically, bonds to significantly and adversely affect your overall performance.
Only if you don't use risk-adjusted returns. In which case, not leveraging, or even holding boring, large stocks in your portfolio "significantly and adversely" affects it.

If you do use risk-adjusted returns, bonds in a portfolio actually improve them.
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Re: How to weather the upcoming bond crash in my 401k

Post by UALflyer »

bengal22 wrote:... rest assured that trying to guess your way to wealth won't work.
That's true, but you can also rest assured that blindly following some asset allocation formula that you saw somewhere without understanding the rationale behind it and ensuring its applicability to your specific situation won't work well either.

The OP has asked a good question but unfortunately, a lot of posters here are completely missing the boat with their responses. The threshold question that must first be addressed in these types of inquiries is the reason that the investor has any bonds in his or her portfolio. Depending on the person, the answer to that question is going to be different and there's no possible way to even begin addressing the OP's issue without knowing his specific answer to that question.
Last edited by UALflyer on Thu Jan 09, 2014 4:21 pm, edited 1 time in total.
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Re: How to weather the upcoming bond crash in my 401k

Post by UALflyer »

ogd wrote:If you do use risk-adjusted returns, bonds in a portfolio actually improve them.
That's exactly right, but we are talking about absolute returns here.
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Re: How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

The threshold question that must first be addressed in these types of inquiries is the reason that the investor has any bonds in his or her portfolio. The answers to that question are all going to be different and there's no possible way to even begin addressing the OP's issue without knowing his specific answer to that question.
I have bonds for the same reason anyone else has bonds - to reduce volatility in an otherwise risky portfolio. To be clear, I'm not asking whether I should have bonds, I'm asking what types of bonds are best for a retirement investor in my situation.
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Re: How to weather the upcoming bond crash in my 401k

Post by ogd »

UALflyer wrote:
ogd wrote:If you do use risk-adjusted returns, bonds in a portfolio actually improve them.
That's exactly right, but we are talking about absolute returns here.
We're diverging a bit from the thread -- but I think no-one should be talking about absolute returns except as a numerator to be divided by risk. Again, given the possibility of cheap leverage or simply investing in the riskiest stocks it's a pretty meaningless concept.

The OP's message didn't read to me like "what should be my bond allocation" at all. It read "this is my bond allocation, what should I put it in given that I know this or that about the future of bonds". Most posters including myself are pointing out that he doesn't know any of that any better than the market. Edit: and he just confirmed it. :D
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kenyan
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Re: How to weather the upcoming bond crash in my 401k

Post by kenyan »

thisismyusername123 wrote:
The threshold question that must first be addressed in these types of inquiries is the reason that the investor has any bonds in his or her portfolio. The answers to that question are all going to be different and there's no possible way to even begin addressing the OP's issue without knowing his specific answer to that question.
I have bonds for the same reason anyone else has bonds - to reduce volatility in an otherwise risky portfolio. To be clear, I'm not asking whether I should have bonds, I'm asking what types of bonds are best for a retirement investor in my situation.
I think that most people think your existing bond fund choices are fine. PTTRX is actively managed, and you never know quite where Gross will go with it, but he certainly has the track record. FSICX may have had a positive return last year, but it's a junk bond fund with equity-like characteristics. Check what it did in 2008 - not what you want from your safe funds. Some experts are ok with junk bonds, but you need to increase your overall bond allocation to make up for holding it.

If you feel strongly that you know more than the market consensus and/or feel that intermediate term bonds are not worth the very minor risk they pose for a long-term investor, then you might be best served by loading up on short-term bonds in your Roth/taxable accounts, selling your PTTRX for spartan equity funds to keep your overall AA constant.


Disclosure - I temporarily sold my IT TIPS fund for ST TIPS last year when the yield spread between the two became less than 10 basis points per year of duration. I bought the IT TIPS when the spreads increased. Market timing in a way, or just feeling that I wasn't being adequately compensated for duration risk.
Retirement investing is a marathon.
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Re: How to weather the upcoming bond crash in my 401k

Post by Grt2bOutdoors »

thisismyusername123 wrote:I'm 36 and have $230k in my Fidelity 401k, plus another $100k in Roths and taxable accounts. About $40k (17%) of my 401k is in Pimco Total Return (PTTRX). The remainder of the 401k is in Fidelity Spartan indices: S&P 500 (41%), Extended Market (16%) and International (25%). I have $7k of BSV (short-term bond ETF) in my Roth IRA and no other bond exposure. Across all investments, I'm in bonds to the tune of 14%.

The consensus is that we're all about to get hosed in the long and intermediate bond market. Hence my question: should I stick with PTTRX for the long haul or diversify into one of the other available 401k bond funds (or alternatively, rebalance into more stocks.) The other bond choices are:
- Fidelity GNMA (FGMNX)
- Fidelity Intermediate Bond (FTHRX)
- Fidelity Strategic Income (FSICX)
- Fidelity Government Income (FGOVX)
Only FSICX had a positive return last year (.38%).
You are not going to get hosed in bonds, equities are another story altogether. You are 36 - are you retiring tomorrow?
Definition of a bond - a security that has a legal indenture or agreement that states "I, the borrower, promise to pay X% per year including all accrued interest and full principal of Y borrowed upon maturity of the bond". The promise to pay can either be implicitly or explicitly backed by assets of the corporation or in the case of Treasuries, the full faith and credit of the US government. It's a claim that is tangible. Now, let's start with common stock - you own x number of shares entitling you to a proportionate share in the earnings, if any, of the company's operations. It doesn't promise you the return of your capital investment, it doesn't promise you a "return on your investment" either! If the company goes bankrupt, you fall nearly dead last in line in terms of getting anything back - do you know who falls first in line? Goverment tax liens, bondholders (oh! :o lo and behold there is some value there afterall!), preferred stock holders, other lien holders - common stock holders: DEAD LAST!!!

Bonus Question: What security bears the most risk? What security offers the highest of returns, usually?
You have 86% of your money in equities - if the market fell 90% tomorrow, you could find your 86% position, being worth 1/2 of what it is today! Talk about being hosed, or taken to the woodshed. Food for thought.
Last edited by Grt2bOutdoors on Thu Jan 09, 2014 4:38 pm, edited 1 time in total.
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UALflyer
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Re: How to weather the upcoming bond crash in my 401k

Post by UALflyer »

thisismyusername123 wrote:I have bonds for the same reason anyone else has bonds - to reduce volatility in an otherwise risky portfolio.
That's just a very general answer, but in what specific way is volatility a problem in your particular situation? I am not trying to suggest an answer by asking this question.

For instance, people who are prone to the risk aversion phenomenon should maintain a higher percentage and higher quality and/or shorter duration bonds in their portfolios than people who aren't. People who are trying to generate a more substantial income stream and are willing to accept interest rate and credit risk in return may want to look at longer duration bonds and/or high yield bonds.

Like I mentioned above, you've asked a good question, but without knowing more, it is just like asking "I've got 50 large that I want to invest in CD's. What CD's should I buy?" With the CD question, people would ask you about your investment horizon, risk appetite, the need and the desire for an income stream and the rest of your holdings. This isn't really any different.
Last edited by UALflyer on Thu Jan 09, 2014 4:49 pm, edited 1 time in total.
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Re: How to weather the upcoming bond crash in my 401k

Post by UALflyer »

ogd wrote:We're diverging a bit from the thread -- but I think no-one should be talking about absolute returns except as a numerator to be divided by risk. Again, given the possibility of cheap leverage or simply investing in the riskiest stocks it's a pretty meaningless concept.

The OP's message didn't read to me like "what should be my bond allocation" at all. It read "this is my bond allocation, what should I put it in given that I know this or that about the future of bonds". Most posters including myself are pointing out that he doesn't know any of that any better than the market. Edit: and he just confirmed it. :D
I agree with everything you just said and am not suggesting that he should or shouldn't be in bonds. What I am saying is that many here are trying to answer his question without knowing any of the background information, which can and should affect the ultimate answer quite a bit.

For instance, people who are pointing out that the equities portion of his portfolio is much more volatile than the fixed income portion are all absolutely correct, but it doesn't necessarily have anything to do with the issue, because the two concerns are not necessarily mutually exclusive.
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Re: How to weather the upcoming bond crash in my 401k

Post by Grt2bOutdoors »

thisismyusername123 wrote:OK guys. So assuming that my stock/bond allocation stays the same or creeps up to 20%, should I stay in PTTRX/BSV, or move to another fund? As was stated above I'm hampered by lack of short-term bond options in my 401k so I'm trying to make up for that by buying BSV in my Roth IRA.

I'm interested in appropriate diversification for the long run but also accounting for some of the immediate risks posed by rising interest rates. Not trying to time the market or chase past performance, I know better than that.
Ahh, but you are trying to time the market! You are saying I know where interest rates are going, you are also saying that equities are a better buy - you think you know something. So, if interest rates go up, do borrowing costs go up too?, all else being equal? Yes, they do. Now, if borrowing costs rise, so does the implicit cost of capital - the same capital that corporations (equities) use to make investments, make payroll, buy back stock, pay over-inflated executive compensation, etc. What happens then? Well, higher borrowing costs equals less operating profit and lowers net income if sales don't rise fast enough to compensate for the increase. Lower operating profit - it does wonder for growth projections, p/e ratios, stock prices. Guess what folks?, we have a potential sale waiting for us in aisle 9 - not only are bonds going to be hosed, but equities are going to "join in the fun" too! (the inevitable market hiccup, everyone is talking about). Where will you run then? Why? - people will run to bonds, driving up bond prices - what does that do to interest rates - it lowers them. When bond prices rise, yields fall to compensate, all else equal.

The bottom line - you don't know what is going to happen and you don't know when either. You can bet though, that when 4th quarter numbers are reported, there will definitely be some companies who where affected by the higher interest rates and not in a rosy manner. I don't know who or where, nor do I care - I own the market, if my allocation in equities is affected negatively and enough, I will sell bonds and buy more equity and vice-versa for fixed income.
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Re: How to weather the upcoming bond crash in my 401k

Post by in_reality »

thisismyusername123 wrote:I'm 36.
I guess then you may not need your some of your bond funds for 30-40 years. Me too.

I could go short, have lower yield, not have NAV fluctuation, and see the bonds recover from unexpected inflation sooner.

I could go long, buy at relatively attractive pricing, have to stomach years of lowered NAV in case of rising rates, not be able to sell to rebalance if desired but could use dividends to do that, and have a little higher yield.

I am buying long at the moment because having looked at how long it would take my bonds to recover from rising interest, I feel I can hold them that long. Of course if rates start rising and keep rising and never stop rising then my funds will never recover. I am not saying my strategy is without risks.

Anyway, where is certainty for rising rates stemming from? It's been globally low for a while. I think it's ideologically based and ideology is divorced from reality. Yes they have to rise but not catastrophically so as some would suggest based on current monetary policy.
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Re: How to weather the upcoming bond crash in my 401k

Post by fishnskiguy »

thisismyusername123 wrote:
The threshold question that must first be addressed in these types of inquiries is the reason that the investor has any bonds in his or her portfolio. The answers to that question are all going to be different and there's no possible way to even begin addressing the OP's issue without knowing his specific answer to that question.
I have bonds for the same reason anyone else has bonds - to reduce volatility in an otherwise risky portfolio. To be clear, I'm not asking whether I should have bonds, I'm asking what types of bonds are best for a retirement investor in my situation.
OK, I'll answer your question. Any low cost, intermediate term investment grade or index fund. After about age 55-60, start shifting some of that fund to a short term investment grade or index fund until it's about 50-50.

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Re: How to weather the upcoming bond crash in my 401k

Post by nisiprius »

fishnskiguy wrote:...OK, I'll answer your question. Any low cost, intermediate term investment grade or index fund. After about age 55-60, start shifting some of that fund to a short term investment grade or index fund until it's about 50-50.

Chris
+1

I would add this: you are already in a below average cost intermediate term investment grade bond fund. Morningstar call the cost "below average," which isn't quite "low," but still. Morningstar's analysts give it a gold badge, which may mean nothing of course. They also give it four stars for past performance which definitely means nothing. The presumption should always be "stay the course," meaning that if you're doing something reasonable you should just keep doing it.

In my opinion you are already doing something reasonable.

As others have suggested, if you have already decided not to stay the course, if you've decided you will not be comfortable unless you Do Something, then one way to shorten duration is to move to bank CDs. I think this makes much more sense than fiddling around with different flavors of bond fund. The withdrawal penalty is always the same no matter how high interest rates go, so this is a very effective way of reducing interest rate risk. I believe that there's no way to reduce bond risk without reducing return, whether you do it by shortening up duration or by moving to CDs, but if you've decide that you are willing to reduce the return of part of your portfolio in order to reduce the risk, then I think the case for bank CDs is awfully good and you should at least look carefully at it.
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Re: How to weather the upcoming bond crash in my 401k

Post by sscritic »

thisismyusername123 wrote: We're talking about 50 large here. Surely it's not unreasonable to ask.
50 large is chump change. Do you seriously think that if you lose 50 large you won't be able to retire for 50 years (that's one year for each of the 50 small that make up your 50 large)?

Why don't you run a poll and see how many lost 50 large in 2008-2009 and lived to tell about it? A good many of us lost 50 large in just one fund.

P.S. When was the last time PIMCO hit zero? What was the last bond fund to lose 100% of its NAV? In other words, your 50 large as a loss is a figment of your imagination.
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Re: How to weather the upcoming bond crash in my 401k

Post by Toons »

"The consensus is that we're all about to get hosed in the long and intermediate bond market"

Great!buy more PTTRX,,,,,,,, :happy
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