How should I increase my bond allocation?
- Petrocelli
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How should I increase my bond allocation?
As I approach retirement, I would like to start increasing my bond allocation by about 1% a year for 5 years, and then 2% a year for 5 years.
Do you think I should do it at 1% a year (and rebalance), or wait 5 years and increase it 5%?
Does it make a difference?
Thanks in advance.
Do you think I should do it at 1% a year (and rebalance), or wait 5 years and increase it 5%?
Does it make a difference?
Thanks in advance.
Petrocelli (not the real Rico, but just a fan)
Re: How should I increase my bond allocation?
If the stock market drops, you will have wished/been glad you did 5% all at once. If the stock market goes up, 1% each year would work out better. How well is your crystal ball working?
- Petrocelli
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Re: How should I increase my bond allocation?
The performance of the stock market is not a consideration. I am asking for opinions as to whether one approach is better than the other.sport wrote:If the stock market drops, you will have wished/been glad you did 5% all at once. If the stock market goes up, 1% each year would work out better. How well is your crystal ball working?
Petrocelli (not the real Rico, but just a fan)
Re: How should I increase my bond allocation?
I think it is entirely unnecessary to go in small steps. Bigger steps at five and ten years make sense.
Re: How should I increase my bond allocation?
"Better" in what regard? If you are a little uncomfortable about your allocation, you might want to start increasing bonds earlier. If you are somewhat reluctant to reduce your equities, you might be happier to wait and do it all at once. It is really a personal preference. Other than market performance in the interim, you end up at the same place.Petrocelli wrote:The performance of the stock market is not a consideration. I am asking for opinions as to whether one approach is better than the other.sport wrote:If the stock market drops, you will have wished/been glad you did 5% all at once. If the stock market goes up, 1% each year would work out better. How well is your crystal ball working?
Re: How should I increase my bond allocation?
Vanguard target retirement funds do it gradually. As Taylor often says, these funds are "designed by experts".
How about directing all new contributions to bonds, and narrowing rebalancing bands?
How much good would it do to direct all new contributions to bonds? Say you currently have 20 times estimated residual living expenses (RLE) in your retirement portfolio, with a 70/30 AA (so 6 years of RLE in bonds). With a savings rate of 15%, assuming RLE is 80% of salary, and assuming no change in market values, your portfolio would be 20.19 times RLE after one year (15%/80% = 0.19) with 30.65% (6.19/20.19) in bonds. That doesn't get you the incremental 1%, so you have to do some additional rebalancing.
The fly in the ointment is what to do if stocks drop and don't come back within a year. Just wait, or go ahead and move some from stocks to bonds anyway?
I think my inclination would be to move 5% now, since stocks have not dropped a lot lately, so I'd probably want to take some risk off the table before they do. Then maybe direct all new contributions to bonds and rebalance for the next 10 years until you hit your target for fixed income at retirement.
Kevin
How about directing all new contributions to bonds, and narrowing rebalancing bands?
How much good would it do to direct all new contributions to bonds? Say you currently have 20 times estimated residual living expenses (RLE) in your retirement portfolio, with a 70/30 AA (so 6 years of RLE in bonds). With a savings rate of 15%, assuming RLE is 80% of salary, and assuming no change in market values, your portfolio would be 20.19 times RLE after one year (15%/80% = 0.19) with 30.65% (6.19/20.19) in bonds. That doesn't get you the incremental 1%, so you have to do some additional rebalancing.
The fly in the ointment is what to do if stocks drop and don't come back within a year. Just wait, or go ahead and move some from stocks to bonds anyway?
I think my inclination would be to move 5% now, since stocks have not dropped a lot lately, so I'd probably want to take some risk off the table before they do. Then maybe direct all new contributions to bonds and rebalance for the next 10 years until you hit your target for fixed income at retirement.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Re: How should I increase my bond allocation?
I vote for gradual. Because otherwise you will be forced to make a market timing decision on the exact date to plop that 5% . If you are fretting about the decision now, it won't get easier in 5 years.
Unlike DCA where you have some money not in the market , here all your money is invested. So gradual doesn't hurt.
Unlike DCA where you have some money not in the market , here all your money is invested. So gradual doesn't hurt.
Re: How should I increase my bond allocation?
I also vote for gradual. I invested at too-infrequent intervals and found myself with market timingish thoughts and stress as I tried to ease 60k chunks into the market at the right point. Rebalancing would give me the same stress if it was done in too large increments!
- House Blend
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Re: How should I increase my bond allocation?
I use a gradual approach combined with 5% rebalancing bands. As a result, trading is usually not required if/when I shift my target allocation by 1% or 2%.
Re: How should I increase my bond allocation?
You will likely get very slightly higher higher returns by waiting 5 years and doing 5%. This is because you'll have a very slightly higher stock allocation on average and stocks outperform bonds a majority of the time.
I personally consider doing 5% moves to be very gradual. Several years ago I moved from 75/25 to 60/40, and I viewed doing that over a 3 year period (5% per year) to be very gradual.
If you are thinking now that you want to be more conservative, I would move 5% now and then look again in 5 years if you want to move 5% more.
I personally consider doing 5% moves to be very gradual. Several years ago I moved from 75/25 to 60/40, and I viewed doing that over a 3 year period (5% per year) to be very gradual.
If you are thinking now that you want to be more conservative, I would move 5% now and then look again in 5 years if you want to move 5% more.
Re: How should I increase my bond allocation?
I do it gradually. I started two years ago, when I was 100% net stock (I count my mortgage as a negative bond), and am increasing my bond allocation by 2% per year until it reaches 20%. At that point, I will have a better idea of my retirement plan.
The time it makes sense to make a sudden change in your asset allocation is when there is a significant change in your financial situation: buying a house (I changed my allocation when I did this), new job, actually retiring from a job, birth of a child, receiving an inheritance, etc.
The time it makes sense to make a sudden change in your asset allocation is when there is a significant change in your financial situation: buying a house (I changed my allocation when I did this), new job, actually retiring from a job, birth of a child, receiving an inheritance, etc.
- Petrocelli
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Re: How should I increase my bond allocation?
Thank you for all your responses. They were all helpful to me.
Based on ypour responses, I will decide to increase my bond allocation gradually. I think that is the more conservative approach. And I as I get closer to retirement, I want to err on the side of being conservative.
Thanks again for taking the time to help me out.
Based on ypour responses, I will decide to increase my bond allocation gradually. I think that is the more conservative approach. And I as I get closer to retirement, I want to err on the side of being conservative.
Thanks again for taking the time to help me out.
Petrocelli (not the real Rico, but just a fan)
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Re: How should I increase my bond allocation?
I suggest a slow steady, consistent change each year. Its what I'm doing. I figure anything else would get too mental, and risk mind games for timing the market.Petrocelli wrote:As I approach retirement, I would like to start increasing my bond allocation by about 1% a year for 5 years, and then 2% a year for 5 years.
Do you think I should do it at 1% a year (and rebalance), or wait 5 years and increase it 5%?
Does it make a difference?
Thanks in advance.
Re: How should I increase my bond allocation?
I doubt it will make much difference. The ratio of your investments changes every day. If you are using rebalancing bands and change your band by 1% each year, it is possible you will hardly ever have to do a true rebalance (sell something to buy something). Just changing the ratio of your new money once each year might be all you need to do.
I guess that's a vote for gradual.
I guess that's a vote for gradual.
Link to Asking Portfolio Questions
Re: How should I increase my bond allocation?
Carefully.
We are in a period where the future is uncertain, some expect Fed policy shifts, some are holding more cash.
If you consider Bonds, give some thought to actual bonds, CDs, or iBonds as you can control the principal loss by holding.
If you do a 5-year CD, you can do 5% of portfolio - why not? And that reduces stock risk as well.
We are in a period where the future is uncertain, some expect Fed policy shifts, some are holding more cash.
If you consider Bonds, give some thought to actual bonds, CDs, or iBonds as you can control the principal loss by holding.
If you do a 5-year CD, you can do 5% of portfolio - why not? And that reduces stock risk as well.
- LAlearning
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Re: How should I increase my bond allocation?
The future is always uncertain...TBillT wrote:Carefully.
We are in a period where the future is uncertain, some expect Fed policy shifts, some are holding more cash.
If you consider Bonds, give some thought to actual bonds, CDs, or iBonds as you can control the principal loss by holding.
If you do a 5-year CD, you can do 5% of portfolio - why not? And that reduces stock risk as well.
I know nothing!
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Re: How should I increase my bond allocation?
Are you certain?LAlearning wrote:The future is always uncertain...TBillT wrote:Carefully.
We are in a period where the future is uncertain, some expect Fed policy shifts, some are holding more cash.
If you consider Bonds, give some thought to actual bonds, CDs, or iBonds as you can control the principal loss by holding.
If you do a 5-year CD, you can do 5% of portfolio - why not? And that reduces stock risk as well.
The true acid test is whether you would keep your decisions regardless of Fed policy shifts..
Re: How should I increase my bond allocation?
My conservative bond guru is economist A. Gary Shilling, and he is reportedly heavy on cash right now, because he is uncertain as to direction.LAlearning wrote:The future is always uncertain...TBillT wrote:Carefully.
We are in a period where the future is uncertain, some expect Fed policy shifts, some are holding more cash.
If you consider Bonds, give some thought to actual bonds, CDs, or iBonds as you can control the principal loss by holding.
If you do a 5-year CD, you can do 5% of portfolio - why not? And that reduces stock risk as well.
If Shilling is uncertain, then I am uncertain. That's my definition of uncertainty.
Re: How should I increase my bond allocation?
I'd argue it makes relatively little difference, particularly the first series of 1% changes. A 5% change in allocation is really pretty small -- the distinction between say 60/40 and 55/45 isn't particularly huge. That said, no harm in doing it when you rebalance, or work towards it with contributions and/or non-reinvested dividends as needed...Petrocelli wrote:As I approach retirement, I would like to start increasing my bond allocation by about 1% a year for 5 years, and then 2% a year for 5 years.
Do you think I should do it at 1% a year (and rebalance), or wait 5 years and increase it 5%?
Does it make a difference?
Re: How should I increase my bond allocation?
When you decide to make your move, then do it in one shot like the Money managers Do.dribs and drabs get tiresome . I was doing $20k a month buying stock funds in 2011 and their NAV kept rising. Finally I just invested the remaining monies in one shot and wished that I'd of done it to start with. Of course the opposite could happen also.
SeeMoe..
SeeMoe..
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}
Re: How should I increase my bond allocation?
5% in one year.
Done Deal.
Done Deal.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: How should I increase my bond allocation?
"Dynamic Allocation Strategies for Distribution Portfolios: Determining the Optimal Distribution Glide Path" by David Blanchett looks at this and provides conclusions backed by evidence, as opposed to feelings and opinions.
His main finding was that glidepaths weren't very useful. But his secondary finding was that if you're going to change things the gradual approach won out.
His main finding was that glidepaths weren't very useful. But his secondary finding was that if you're going to change things the gradual approach won out.
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Re: How should I increase my bond allocation?
Yes it makes a difference, but only in an extreme stock market situation would it make a noticeable difference.Petrocelli wrote:As I approach retirement, I would like to start increasing my bond allocation by about 1% a year for 5 years, and then 2% a year for 5 years.
Do you think I should do it at 1% a year (and rebalance), or wait 5 years and increase it 5%?
Does it make a difference?
Thanks in advance.
You are, generally, better to do it 1% p.a.
Re: How should I increase my bond allocation?
If this is in a taxable account and you're rebalancing from stocks to bonds, you might also want to take a quick look at the tax implications and whether an "all at once" approach would throw you into a higher bracket vs. a more gradual approach.
Re: How should I increase my bond allocation?
I don't think it makes much of a difference. I tend to avoid major shifts in allocations. Interest rates and inflation are more likely to rise -- sometime during that 5 year window so that could affect your choice of timing or products. I would consider expanding your possibilities by also looking beyond bonds/bond funds e.g. FDIC products, I Bonds, Stable Value Fund etc. I favor a mix of fixed income rather than "just" a good intermediate bond fund especially in or near retirement if the goal of the fixed income is safety/asset preservation.