Are we taking too much risk with Bonds in our AA?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
big bang
Posts: 19
Joined: Mon Jul 25, 2016 8:33 pm

Are we taking too much risk with Bonds in our AA?

Post by big bang » Wed Oct 11, 2017 1:36 pm

Hi everyone,

I know that some can consider this as market timing....
However, we do know that the federal reserve started unwinding the recession stimulus. Additionally, we know that they are in the path of rising rates.
Those are much more actionable today than in previous years. This stuff is already happening. Meaning that bond yields for sure are going higher.
I feel that this risk is the highest to our asset allocation and that our bond component steadily but surely is getting lower.
I am 60 years old and retired with no pension (35% domestic equities/ 20% international equities/ 35% bonds/ 10% cash).

I am thinking of moving part of my bond allocation to the Stable Value Fund in my 401K. This is not impacting my equity allocation but will provide some protection to the bond portion of the AA.

**additional info**
Those are the options that I have in my 401K:
BLACKROCK U.S. DEBT INDEX M BUDFM (Barclays U.S. Aggregate Bond Index) ER 0.03%
VANGUARD SH TM BOND INDEX PREM VBIPX (Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index) ER 0.04%
VANGUARD TREASURY MNY MRKT INV VUSXX ER 0.09%
TRP STABLE VALUE FUND - N SVF-N ER 0.20%

Performance of:
TRP STABLE VALUE FUND - N SVF-N
0.49% - 3 Month
1.44% - YTD
1.92% - 1 Year
Last edited by big bang on Thu Oct 12, 2017 4:36 pm, edited 1 time in total.
(1) save a lot, (2) select an asset allocation containing both stock and bond asset classes, (3) buy low cost, widely diversified funds, (4) allocate funds tax-efficiently, and (5) stay the course.

visualguy
Posts: 352
Joined: Thu Jan 30, 2014 1:32 am

Re: Are we taking too much risk with Bonds in our AA?

Post by visualguy » Wed Oct 11, 2017 1:54 pm

How much does your stable value fund pay?

I use stable value funds and CDs instead of bond index funds. I've been trying to understand the rationale for going with bond index funds, but so far I don't see how that makes sense if you have access to a good stable value fund and/or CDs.

User avatar
galeno
Posts: 1035
Joined: Fri Dec 21, 2007 12:06 pm
Location: Alajuela, Costa Rica

Re: Are we taking too much risk with Bonds in our AA?

Post by galeno » Wed Oct 11, 2017 2:00 pm

From what I've read the stable value election in a 401K is usually the best choice for bonds.
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%.

btenny
Posts: 4185
Joined: Sun Oct 07, 2007 6:47 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by btenny » Wed Oct 11, 2017 2:20 pm

We know for fact that most bond funds lost money after inflation for many years during the 1970s. But so did investing in the stock market in most cases. I am not sure if stable value funds existed back then. The major way people made out back then was leveraged real estate.

Good Luck.

Buddtholomew
Posts: 964
Joined: Thu Mar 01, 2007 3:29 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by Buddtholomew » Wed Oct 11, 2017 2:26 pm

big bang wrote:
Wed Oct 11, 2017 1:36 pm
Hi everyone,

I know that some can consider this as market timing....
However, we do know that the federal reserve started unwinding the recession stimulus. Additionally, we know that they are in the path of rising rates.
Those are much more actionable today than in previous years. This stuff is already happening. Meaning that bond yields for sure are going higher.
I feel that this risk is the highest to our asset allocation and that our bond component steadily but surely is getting lower.
I am 60 years old and retired with no pension (35% domestic equities/ 20% international equities/ 35% bonds/ 10% cash).

I am thinking of moving part of my bond allocation to the Stable Value Fund in my 401K. This is not impacting my equity allocation but will provide some protection to the bond portion of the AA.

What are your opinions ...?
What happens if raising rates results in equity losses? Where do you think those stock investors are going to go?
I wonder what impact that would have on yields and your bonds then (hint: pretty good).
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

JBTX
Posts: 1700
Joined: Wed Jul 26, 2017 12:46 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by JBTX » Wed Oct 11, 2017 2:52 pm

Stable value funds depending on rates could be good alternative. However I don’t know that they are entirely risk free. Ultimately they have to have some combination of assets to support that stable return and in theory events could play out such that the fund couldn’t pay out its guaranteed return. It admittedly is a remote risk.

runner540
Posts: 437
Joined: Sun Feb 26, 2017 5:43 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by runner540 » Wed Oct 11, 2017 2:59 pm

big bang wrote:
Wed Oct 11, 2017 1:36 pm
Hi everyone,

I know that some can consider this as market timing....
However, we do know that the federal reserve started unwinding the recession stimulus. Additionally, we know that they are in the path of rising rates.
Those are much more actionable today than in previous years. This stuff is already happening. Meaning that bond yields for sure are going higher.
I feel that this risk is the highest to our asset allocation and that our bond component steadily but surely is getting lower.
I am 60 years old and retired with no pension (35% domestic equities/ 20% international equities/ 35% bonds/ 10% cash).

I am thinking of moving part of my bond allocation to the Stable Value Fund in my 401K. This is not impacting my equity allocation but will provide some protection to the bond portion of the AA.

What are your opinions ...?
My opinion is that you have no special information about the direction of bond prices and interest rates, that the rest of the market doesn't have and has priced in.

mega317
Posts: 1263
Joined: Tue Apr 19, 2016 10:55 am

Re: Are we taking too much risk with Bonds in our AA?

Post by mega317 » Wed Oct 11, 2017 3:40 pm

big bang wrote:
Wed Oct 11, 2017 1:36 pm
Those are much more actionable today than in previous years.
They were also actionable yesterday, so you're way behind.
I am thinking of moving part of my bond allocation to the Stable Value Fund in my 401K.
That is totally reasonable.

User avatar
grabiner
Advisory Board
Posts: 20992
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Are we taking too much risk with Bonds in our AA?

Post by grabiner » Wed Oct 11, 2017 5:22 pm

big bang wrote:
Wed Oct 11, 2017 1:36 pm
Hi everyone,

I know that some can consider this as market timing....
However, we do know that the federal reserve started unwinding the recession stimulus. Additionally, we know that they are in the path of rising rates.
Those are much more actionable today than in previous years. This stuff is already happening. Meaning that bond yields for sure are going higher.
The Fed targets changes in short-term rates, which are not the same rates that apply to the bond funds in your investments. If traders are expecting the short-term rate to rise from 1% to 1.25% at the next Fed meeting, they will take that into account in the prices at which they buy or sell bonds, and long-term bond rates may not change at all when the rate is actually increased to 1.25%.

And bond traders already know about the possibility of rate increases, and demand higher yields on longer-term bonds to compensate for that risk. For example, Vanguard Short-Term Bond Index yields 1.72%, while Intermediate-Term Bond Index yields 2.55%; the extra 0.83% is the premium investors receive for holding bonds which will lose more if rates rise. When traders expect rate increases, the premium for longer-term bonds becomes higher, so that you are still properly rewarded for taking the risk.
I am thinking of moving part of my bond allocation to the Stable Value Fund in my 401K. This is not impacting my equity allocation but will provide some protection to the bond portion of the AA.
But this may still be a good deal, depending on the terms of the stable value fund. Here, you are not subject to the market, because your 401(k) fund is not traded there. If you can earn a low-risk 2%, that may be a better deal than a somewhat risky 2.55%.
David Grabiner

dcarste
Posts: 118
Joined: Mon Apr 27, 2015 4:55 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by dcarste » Wed Oct 11, 2017 5:35 pm

Did you "win the game" already, meaning you are retired and you feel you have enough for retirement?

If so, you won the game. Why still play?

I did this exact thing for my parents who won the game...reduce risk as much as possible because you don't need to take risk.

30% Total US Stock Mkt Index
10% Total Int'l Stock Index
60% Short Term Bond Index (duration of 3)

1.5 years of cash based on your expenses, held in Ally no term CD's paying 1.5%. There are always caveats and don't know your total situation but my parents money is pretty simple with not a lot of taxable dollars, just seven figures in IRA's.

The total bond market index historically had a duration of around 4, but since it is market weighted, and the fed distorted the bond market, IMO the closest representation to what "used to" historically be the total bond market index is now the vanguard short term bond index.

If I saw my parents worried about money or markets, or had to adjust their living standards because of a stock market - I would be devastated, given how hard they've worked.

All I can say is this is what I decided in their situation, both around 66 Y.O. and retired.

100-your age in Bonds, down to say 35% in stocks, then hold that steady.

User avatar
Tyler Aspect
Posts: 552
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: Are we taking too much risk with Bonds in our AA?

Post by Tyler Aspect » Wed Oct 11, 2017 7:59 pm

For my bond portion, I am carving out a major portion of it to split into two halves. One half is a CD ladder, while the other half is in VCIT (Intermediate term Corporate bond). This is out of the result of my intensive study of the fixed income markets in US.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

remomnyc
Posts: 358
Joined: Mon Jan 04, 2016 4:27 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by remomnyc » Wed Oct 11, 2017 9:06 pm

In my 401k, I have a 5-year CD ladder with the rest of my fixed income in BND. In the short term, I think stocks are riskier than bonds and bonds are riskier than CDs.

User avatar
ruralavalon
Posts: 11886
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Are we taking too much risk with Bonds in our AA?

Post by ruralavalon » Thu Oct 12, 2017 8:51 am

big bang wrote:
Wed Oct 11, 2017 1:36 pm
I am thinking of moving part of my bond allocation to the Stable Value Fund in my 401K. This is not impacting my equity allocation but will provide some protection to the bond portion of the AA.

What are your opinions ...?
What is the return being paid on the stable value fund?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
oldcomputerguy
Posts: 2099
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Re: Are we taking too much risk with Bonds in our AA?

Post by oldcomputerguy » Thu Oct 12, 2017 9:13 am

dcarste wrote:
Wed Oct 11, 2017 5:35 pm
100-your age in Bonds, down to say 35% in stocks, then hold that steady.
Um, shouldn't that be "100-your age in stocks"? With 100-your age in bonds, your bond allocation would get smaller as you got older.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

User avatar
nisiprius
Advisory Board
Posts: 34350
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Are we taking too much risk with Bonds in our AA?

Post by nisiprius » Thu Oct 12, 2017 9:17 am

big bang wrote:
Wed Oct 11, 2017 1:36 pm
Hi everyone,

I know that some can consider this as market timing....
However, we do know that the federal reserve started unwinding the recession stimulus. Additionally, we know that they are in the path of rising rates.
Those are much more actionable today than in previous years. This stuff is already happening. Meaning that bond yields for sure are going higher.
I feel that this risk is the highest to our asset allocation and that our bond component steadily but surely is getting lower.
I am 60 years old and retired with no pension (35% domestic equities/ 20% international equities/ 35% bonds/ 10% cash).

I am thinking of moving part of my bond allocation to the Stable Value Fund in my 401K. This is not impacting my equity allocation but will provide some protection to the bond portion of the AA.

What are your opinions ...?
Offhand I see no particular reason not to move to a stable value fund, or good competitive bank CDs or many other things. But it is very important that you familiarize yourself with the actual behavior of bonds, because even if it is all true, many people are wildly overestimating the amount of risk they will be facing in an ordinary "core" bond fund.

In effect, the sort of question people are asking is "why should I accept the risk of a 5% drop in the value of my bond fund if I don't need to take that risk?" Depending on peoples' spin, different people will give you different answers as to whether we should be thinking about 5% or whether it could be as bad as 10%; whether chance of such as drop is near-certain or very uncertain; if we decide to do something else, what are the risks of doing something else?

I just want to point out three things. This is a chart of how $10,000 invested in the Vanguard Total Bond Fund has grown or at some points shrunk, since inception. The blue chart is the bond fund. For comparison, the orange line represents stocks, and I'm including it because it's important to see how the semilog scale does make big changes look small... but there is still a dramatic difference between bonds and stocks.
Image

Now, please look at these places on the chart in the blue line.
  • 1993, after the fact was described as a "bond bubble." 1994 was described as a "bond massacre."
  • During the time period 2001-2004, the Fed raised rates from 1% to 5%.
  • In 2010, Jeremy Schwartz and Jeremy Siegel warned of a "Great American Bond Bubble" and described what would happen under various interest-rate scenarios they thought were likely. Over the next eight or so months, interest rates on the 10-year Treasury really did what they warned about.
  • Perhaps most important, notice what the bond fund was doing during the time periods 2008-2009, when stocks lost 50% of their value.
In other words, it is arguable that a shrewd investor might have beaten the results of what I did, which was to just stay put in Total Bond, if they made the right moves at the right time. But even if they did, my point is that the effect of staying in Total Bond was at worst an ego hit--darn it, someone else beat me--not a retirement savings catastrophe.

I don't think it was really as easy all that, though. The former "Bond King," Bill Gross, was so sure there was a Treasury bubble that he took the mutual fund he managed entirely out of Treasuries in 2011. At the time his reputation was so high that this was widely cited as near-proof that everybody else should be doing it to. He was sufficiently wrong that in 2011, his fund underperformed Vanguard Total Bond and it pretty much ruined his reputation. This show you two things. First, do not put too much faith in even the most confident-sounding expert prognostications. Second, even though it was ruinous for the reputation of both Gross and his fund, it wasn't really a big deal either way. I don't have time to post a chart right now, but all that happened to holders of his fund, despite his error, was that they made less money that year than people holding Vanguard Total Bond.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Call_Me_Op
Posts: 6581
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Are we taking too much risk with Bonds in our AA?

Post by Call_Me_Op » Thu Oct 12, 2017 9:38 am

big bang wrote:
Wed Oct 11, 2017 1:36 pm
Hi everyone,

I know that some can consider this as market timing....
However, we do know that the federal reserve started unwinding the recession stimulus. Additionally, we know that they are in the path of rising rates.
Those are much more actionable today than in previous years. This stuff is already happening.
..and everybody already know this, which means it is already factored into bond prices (and thus, yields). Only unexpected events will influence future yields, which means they can go higher or lower. You need to gain a better understanding of how markets work.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Grt2bOutdoors
Posts: 17254
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Are we taking too much risk with Bonds in our AA?

Post by Grt2bOutdoors » Thu Oct 12, 2017 10:10 am

You are 60, let's say you live to 84 (avg. Life expectancy), are rates going to rise in lockstep for next 25 years? Are you withdrawing all assets in each of those years (25)? You stand a higher likelihood of experiencing a 10% decline in value of total portfolio than of bonds declining 10% in any one given day, month or year, provided we are speaking about u.s. treasuries and not some high yield bond fund.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

big bang
Posts: 19
Joined: Mon Jul 25, 2016 8:33 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by big bang » Thu Oct 12, 2017 4:12 pm

Thank you for all your responses.
So where do you think that I should park my bond allocation considering this period of rising rates?
Those are the options that I have in my 401K:
BLACKROCK U.S. DEBT INDEX M BUDFM (Barclays U.S. Aggregate Bond Index) ER 0.03%
VANGUARD SH TM BOND INDEX PREM VBIPX (Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index) ER 0.04%
VANGUARD TREASURY MNY MRKT INV VUSXX ER 0.09%
TRP STABLE VALUE FUND - N SVF-N ER 0.20%
(1) save a lot, (2) select an asset allocation containing both stock and bond asset classes, (3) buy low cost, widely diversified funds, (4) allocate funds tax-efficiently, and (5) stay the course.

MotoTrojan
Posts: 866
Joined: Wed Feb 01, 2017 8:39 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by MotoTrojan » Thu Oct 12, 2017 4:19 pm

big bang wrote:
Thu Oct 12, 2017 4:12 pm
Thank you for all your responses.
So where do you think that I should park my bond allocation considering this period of rising rates?
Those are the options that I have in my 401K:
BLACKROCK U.S. DEBT INDEX M BUDFM (Barclays U.S. Aggregate Bond Index) ER 0.03%
VANGUARD SH TM BOND INDEX PREM VBIPX (Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index) ER 0.04%
VANGUARD TREASURY MNY MRKT INV VUSXX ER 0.09%
TRP STABLE VALUE FUND - N SVF-N ER 0.20%
What does stable fund pay? Otherwise, I'd probably go with Barclays (Total Bond eqv I assume).

Again, the rate hikes are already factored in.

big bang
Posts: 19
Joined: Mon Jul 25, 2016 8:33 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by big bang » Thu Oct 12, 2017 4:33 pm

TRP STABLE VALUE FUND - N SVF-N
0.49% - 3 Month
1.44% - YTD
1.92% - 1 Year
(1) save a lot, (2) select an asset allocation containing both stock and bond asset classes, (3) buy low cost, widely diversified funds, (4) allocate funds tax-efficiently, and (5) stay the course.

itstoomuch
Posts: 4830
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Are we taking too much risk with Bonds in our AA?

Post by itstoomuch » Thu Oct 12, 2017 4:36 pm

It's YMMV. Always remember this. :annoyed
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

itstoomuch
Posts: 4830
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Are we taking too much risk with Bonds in our AA?

Post by itstoomuch » Thu Oct 12, 2017 4:38 pm

We substituted bonds for GWLB Variable annuities with an all equity portfolio (No longer available in what I have seen) (Vanguard GLWB VA annuities are balanced).
I had no pension and wife had only a small pension.
Discretionary is all equity and cash.
YMMV
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

MotoTrojan
Posts: 866
Joined: Wed Feb 01, 2017 8:39 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by MotoTrojan » Thu Oct 12, 2017 4:45 pm

big bang wrote:
Thu Oct 12, 2017 4:33 pm
TRP STABLE VALUE FUND - N SVF-N
0.49% - 3 Month
1.44% - YTD
1.92% - 1 Year
I'm not very familiar with them, but I thought I've seen some closer to 3%. Go Total Bond and call it a day. This is barely keeping up with inflation.

User avatar
ruralavalon
Posts: 11886
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Are we taking too much risk with Bonds in our AA?

Post by ruralavalon » Thu Oct 12, 2017 4:52 pm

BLACKROCK U.S. DEBT INDEX M BUDFM (Barclays U.S. Aggregate Bond Index) ER 0.03%
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

itstoomuch
Posts: 4830
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Are we taking too much risk with Bonds in our AA?

Post by itstoomuch » Thu Oct 12, 2017 4:56 pm

itstoomuch wrote:
Thu Oct 12, 2017 4:38 pm
We substituted bonds for GWLB Variable annuities with an all equity portfolio (No longer available in what I have seen) (Vanguard GLWB VA annuities are balanced).
I had no pension and wife had only a small pension.
Discretionary is all equity and cash.
YMMV
itstoomuch wrote:
Wed Oct 11, 2017 9:54 pm
itstoomuch wrote:
Wed Oct 11, 2017 11:14 am
itstoomuch wrote:
Fri Jul 08, 2016 4:14 pm
In our Discretionary, We do a lot of stuff and strategy. Currently, fairly conservative @60% cash with speculative stocks and Indexes @ 40%. Holdings can vary weekly.
see below notes
It's changed. Bought retirement home which is temporarily a rental. Echanged cash yielding $0.00 for downplay equity.
Just to be clear: We are in retirement mode. I focus our retirement for Income and Income Security and not necessarily for assets or allocation.
Current Income$ is approximately, 55% rental, 37% SS and small pension, and 8% GLWB annuity. We have more future income assets that we have not accessed.
In about 3years (70/73yo) I hope to derive Income$ from approx: 41% rental; 22 GLWB Annuity; 32% SS and NCOL pension; and 5% Discretionary. Not a bond in sight, and IMO more stability.
YMMV
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

PFInterest
Posts: 452
Joined: Sun Jan 08, 2017 12:25 pm

Re: Are we taking too much risk with Bonds in our AA?

Post by PFInterest » Thu Oct 12, 2017 5:47 pm

seeing as the OPs SV has made half of vbmfx....

Post Reply