Question on Bond Portion of AA

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BogleBoogie
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Question on Bond Portion of AA

Post by BogleBoogie » Sun Oct 01, 2017 8:37 am

Quick question on stable value fund versus bond index fund. My employer is going to soon allow me access to a stable value fund that has a 3.40% return. I understand bonds and know that sometimes they do better than this and sometimes worse. I am very open to opinions on if I should put my conservative bond portion of my allocation in this stable value fund, or a blend, or not at all. Let's assume the stable value fund is safe in the sense that it won't default and it isn't a pain to withdraw with complicated rules.

So really the question is should I accept 3.40% for my "bond allocation" or attempt to better with a bond index fund...

Dude2
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Re: Question on Bond Portion of AA

Post by Dude2 » Sun Oct 01, 2017 8:41 am

What about half stable value and half to a fund that is mapped to the Aggregate Bond Index? Best of both worlds.

BogleBoogie
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Re: Question on Bond Portion of AA

Post by BogleBoogie » Sun Oct 01, 2017 8:43 am

Dude2 wrote:
Sun Oct 01, 2017 8:41 am
What about half stable value and half to a fund that is mapped to the Aggregate Bond Index? Best of both worlds.
Thanks for the suggestion. This is what I was leaning towards, but wanted to make sure there wasn't something I am missing. :sharebeer

alex_686
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Re: Question on Bond Portion of AA

Post by alex_686 » Sun Oct 01, 2017 8:46 am

I think that the Aggregate Bond Index has a SEC yield of 2.5%? If rates spike upwards that yield could fall. The stable value fund has a yield of 3.4%. I would go all in on the stable value fund.

btenny
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Re: Question on Bond Portion of AA

Post by btenny » Sun Oct 01, 2017 11:14 am

Be careful with stable value funds as many have lock up your money issues for long periods. This lock up is in the fine print. This can happen if interest rates change and the fund needs to hold cash for while to recover.

btenny
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Re: Question on Bond Portion of AA

Post by btenny » Sun Oct 01, 2017 11:19 am

Also see what happened to Chrysler employees in 2009 with their stable value fund. They only got 89 percent of their money. Do a Internet search.

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Kevin M
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Re: Question on Bond Portion of AA

Post by Kevin M » Sun Oct 01, 2017 11:43 am

I would go 100% with the SV fund.

For fixed income, Treasuries are the gold standard, so I start my comparisons there, then consider the additional credit risk and the difference in term risk. Yield on the 5-year Treasury is 1.92% and yield on the 10-year is 2.33%. Even the 30-year yield is only 2.86%. So your SV fund has a much higher yield than even a 30-year Treasury, but with no term risk. There is some credit risk in an SV fund, but it is minimal.

I was aware of the Lehman SV fund that lost a small amount (but was actually ahead for the year), but I hadn't heard of the Chrysler situation. However, Chrysler was unusual compared to most 401k plans. From one of the WSJ articles on it:
Chrysler's precarious financial situation exacerbated investors' problems with the stable-value fund. The Chrysler Salaried Employees' Income Deferral Plan, which offered the fund, isn't subject to Erisa, the law governing many pension and benefit plans. One key distinction: The fund's assets must be made available to creditors in the event of Chrysler's bankruptcy.
Kevin
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Call_Me_Op
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Re: Question on Bond Portion of AA

Post by Call_Me_Op » Mon Oct 02, 2017 5:48 am

alex_686 wrote:
Sun Oct 01, 2017 8:46 am
I think that the Aggregate Bond Index has a SEC yield of 2.5%? If rates spike upwards that yield could fall.
Say what? An increase in rates will increase the yield (and drop the value).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

alex_686
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Re: Question on Bond Portion of AA

Post by alex_686 » Mon Oct 02, 2017 8:21 am

Call_Me_Op wrote:
Mon Oct 02, 2017 5:48 am
alex_686 wrote:
Sun Oct 01, 2017 8:46 am
I think that the Aggregate Bond Index has a SEC yield of 2.5%? If rates spike upwards that yield could fall.
Say what? An increase in rates will increase the yield (and drop the value).

You are right. I was being lazy and substituted yield when I really meant return.

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welderwannabe
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Re: Question on Bond Portion of AA

Post by welderwannabe » Mon Oct 02, 2017 8:42 am

Chrysler's plan structure was not that unusual. A lot of them are just another general obligation of the insurance company running them.

I am with dude2. Go with 50/50 and don't look back. Best of both worlds.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Crisium
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Re: Question on Bond Portion of AA

Post by Crisium » Mon Oct 02, 2017 8:44 am

I wish my stable value was that good; it's yielding only 1.91% as of end of Q2.

Unless there's fine print that is concerning, I would probably go 100%. While keeping a small amount in an aggregate bond fund wouldn't be a bad choice, it would return less money and have higher volatility.

Rupert
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Re: Question on Bond Portion of AA

Post by Rupert » Mon Oct 02, 2017 9:09 am

When my company switched plan providers a few years ago, we discovered in the very very fine print that the old provider was allowed to hang onto to any money in the stable value fund for a long time after all the other funds were transferred to the new plan. We advised everyone to move their money out of that fund before we made the switch. So do pay careful attention to the fine print and the fine fine print.

hacker258
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Re: Question on Bond Portion of AA

Post by hacker258 » Mon Oct 02, 2017 9:12 am

I agree with the last post - 3.4% is almost too good to be true. My stabel value yields about 2% NET OF .75% EXPENSES. Are you sure 3.4 is net?

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midareff
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Re: Question on Bond Portion of AA

Post by midareff » Mon Oct 02, 2017 9:34 am

BogleBoogie wrote:
Sun Oct 01, 2017 8:37 am
Quick question on stable value fund versus bond index fund. My employer is going to soon allow me access to a stable value fund that has a 3.40% return. I understand bonds and know that sometimes they do better than this and sometimes worse. I am very open to opinions on if I should put my conservative bond portion of my allocation in this stable value fund, or a blend, or not at all. Let's assume the stable value fund is safe in the sense that it won't default and it isn't a pain to withdraw with complicated rules.

So really the question is should I accept 3.40% for my "bond allocation" or attempt to better with a bond index fund...
Without knowing the credit quality, duration or management fees of the bond fund the answer is not readily possible. A stable value fund that can not loose value and yields 3.4% may be an excellent choice for a bond allocation.

BogleBoogie
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Re: Question on Bond Portion of AA

Post by BogleBoogie » Wed Oct 04, 2017 10:01 pm

hacker258 wrote:
Mon Oct 02, 2017 9:12 am
I agree with the last post - 3.4% is almost too good to be true. My stabel value yields about 2% NET OF .75% EXPENSES. Are you sure 3.4 is net?
Yes, I am sure. Triple checked!

Call_Me_Op
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Re: Question on Bond Portion of AA

Post by Call_Me_Op » Thu Oct 05, 2017 7:38 am

alex_686 wrote:
Mon Oct 02, 2017 8:21 am
Call_Me_Op wrote:
Mon Oct 02, 2017 5:48 am
alex_686 wrote:
Sun Oct 01, 2017 8:46 am
I think that the Aggregate Bond Index has a SEC yield of 2.5%? If rates spike upwards that yield could fall.
Say what? An increase in rates will increase the yield (and drop the value).

You are right. I was being lazy and substituted yield when I really meant return.
If rates spike, the value will dip near-term but the return will eventually be greater due to the higher yield.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

alex_686
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Re: Question on Bond Portion of AA

Post by alex_686 » Thu Oct 05, 2017 8:14 am

Call_Me_Op wrote:
Thu Oct 05, 2017 7:38 am
If rates spike, the value will dip near-term but the return will eventually be greater due to the higher yield.
And the stable fund will keep on chugging upwards. In an environment of unexpected increasing rates a stable fund should outperform a long bond fund. In a chaotic environment a stable fund should also be more stable.

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