Best mix of short-term and intermediate-term bond funds?

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Nightowl99
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Joined: Mon Feb 26, 2018 7:49 pm

Best mix of short-term and intermediate-term bond funds?

Post by Nightowl99 »

I recently sold my townhouse, which caused a sizable increase in my taxable account. Now my plan is to keep mostly bond funds in my traditional IRA and stock funds in my taxable account because of the more favorable capital gains tax on dividends. My question is, what is the best way to determine the percentage of short-term and intermediate-term bond funds to keep when interest rates are expected to rise sometime in the future? Do you base this decision on how soon you'll need to withdraw the money or on some other factor? I realize intermediate-term bond funds will fall in price when interest rates rise but the yield on short-term bonds is so low that it hardly seems worthwhile to have 100% of my bond allocation in short-term bonds.

I am 61 and retired, with a pension, so I'm thinking that it wouldn't bother me too much to lose a little in the short term if the price of the more intermediate bond funds (Total Bond Market and Intermediate-Term Corporate Bond Fund, for example) will go back up again over time, maybe in about the same number of years as their duration (?). In addition to a mix of other short and intermediate-term bond funds and a couple of c.d.s, I also have some Intermediate-Term Tax-Exempt fund in the taxable account, for now, but want to exchange most of it for more of the Total Stock Market fund.

I like being diversified in the types of bonds I have, so, just to mix it up, in case interest rates don't rise too quickly, I have the idea of keeping roughly half of my bond funds short-term and the other half intermediate-term. My portfolio is currently about 10% cash, and 45% stocks, 45% bonds because I'm still trying to invest the proceeds from the sale of the townhouse. I've been investing on my own for several years now with pretty good results, but suddenly needing to invest a lot of cash is making me wish for a little guidance. Thanks in advance for any words of wisdom you can provide.
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Mors
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Re: Best mix of short-term and intermediate-term bond funds?

Post by Mors »

I believe that in the long term a total bond fund will overperform a short term fund, despite the rising rates currently.
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patrick013
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Re: Best mix of short-term and intermediate-term bond funds?

Post by patrick013 »

I think there's going to be alot of interest rate risk the next
several years as the talk of rates increases continues. When
they start raising rates they usually raise them. A short
term CD of 2-3 years should target the peak rate. You won't
lose any money. Then I'd go into the CD's or bond funds
with longer maturities. But rates have to go up to make it
happen.
age in bonds, buy-and-hold, 10 year business cycle
dbr
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Re: Best mix of short-term and intermediate-term bond funds?

Post by dbr »

Nightowl99 wrote: Mon Feb 26, 2018 9:02 pm My question is, what is the best way to determine the percentage of short-term and intermediate-term bond funds to keep when interest rates are expected to rise sometime in the future? Do you base this decision on how soon you'll need to withdraw the money or on some other factor?
To make a calculation like that you need to predict the shape of the yield curve over time on all the possible choices you want to evaluate as a function of how far out you want to look. Since such a prediction is not possible the calculation you want can't be done other than as a speculation on future interest rates. This is generally not a productive speculation. It is true that if a person wants all the money for sure at a specific time, then the investment should not be in bonds longer than the need. That condition would be pretty unusual and does not apply to you.

As the post above suggests the long term prospects for bond holders are that higher interest rates will be to their benefit. I would recommend a course of moderation simply holding a diversified bond fund of average intermediate duration and leave it alone. If you really can't stand the prospect of a bond fund losing value at some point in time an alternative is CDs. That does not mean CD returns will be an optimum for you.
3funder
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Re: Best mix of short-term and intermediate-term bond funds?

Post by 3funder »

dbr wrote: Mon Feb 26, 2018 10:28 pm
Nightowl99 wrote: Mon Feb 26, 2018 9:02 pm My question is, what is the best way to determine the percentage of short-term and intermediate-term bond funds to keep when interest rates are expected to rise sometime in the future? Do you base this decision on how soon you'll need to withdraw the money or on some other factor?
To make a calculation like that you need to predict the shape of the yield curve over time on all the possible choices you want to evaluate as a function of how far out you want to look. Since such a prediction is not possible the calculation you want can't be done other than as a speculation on future interest rates. This is generally not a productive speculation. It is true that if a person wants all the money for sure at a specific time, then the investment should not be in bonds longer than the need. That condition would be pretty unusual and does not apply to you.

As the post above suggests the long term prospects for bond holders are that higher interest rates will be to their benefit. I would recommend a course of moderation simply holding a diversified bond fund of average intermediate duration and leave it alone. If you really can't stand the prospect of a bond fund losing value at some point in time an alternative is CDs. That does not mean CD returns will be an optimum for you.
+1, although I'm not really a CD guy.
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rkhusky
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Re: Best mix of short-term and intermediate-term bond funds?

Post by rkhusky »

Note Vanguard's summary of Total Bond:
This fund is designed to provide broad exposure to U.S. investment grade bonds. Reflecting this goal, the fund invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues). As with other bond funds, one of the risks of the fund is that increases in interest rates may cause the price of the bonds in the portfolio to decrease—pricing the fund’s NAV lower. Because the fund invests in all segments and maturities of the fixed income market, investors may consider the fund their core bond holding.
So, you don't really need to worry about the best mix. The index that Total Bond follows has already made a judgement on that, having a mix of different maturities, with the average duration being 6.1 years.

Vanguard's Intermediate Bond has only intermediate bonds (5-10 years).
radiowave
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Re: Best mix of short-term and intermediate-term bond funds?

Post by radiowave »

OP, if you want to go really short, Treasury Bills 3 and 6 month are approximately 1.6 and 1.8% annual return at the moment. You could set up a T-bill ladder in your brokerage account if that is of interest.
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ruralavalon
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Re: Best mix of short-term and intermediate-term bond funds?

Post by ruralavalon »

dbr wrote: Mon Feb 26, 2018 10:28 pm
Nightowl99 wrote: Mon Feb 26, 2018 9:02 pm My question is, what is the best way to determine the percentage of short-term and intermediate-term bond funds to keep when interest rates are expected to rise sometime in the future? Do you base this decision on how soon you'll need to withdraw the money or on some other factor?
To make a calculation like that you need to predict the shape of the yield curve over time on all the possible choices you want to evaluate as a function of how far out you want to look. Since such a prediction is not possible the calculation you want can't be done other than as a speculation on future interest rates. This is generally not a productive speculation. It is true that if a person wants all the money for sure at a specific time, then the investment should not be in bonds longer than the need. That condition would be pretty unusual and does not apply to you.

As the post above suggests the long term prospects for bond holders are that higher interest rates will be to their benefit. I would recommend a course of moderation simply holding a diversified bond fund of average intermediate duration and leave it alone. If you really can't stand the prospect of a bond fund losing value at some point in time an alternative is CDs. That does not mean CD returns will be an optimum for you.
I agree and will add that people have been agonising about the impact of imminent interest rate increases on bond values since 2009. Anyone who went from intermediate-term to short-term bond funds in 2009 has lost significant amounts of return over the last 9 years, illustrating the futility of trying to predict these things.
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patrick013
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Re: Best mix of short-term and intermediate-term bond funds?

Post by patrick013 »

And the people with 5 year CD ladders are in great strategic shape,
alot better than a static bond index with a huge percent in long term.
A bond strategy is not expensive but cannot be static. Has to be able
to go short term or long term as the value of information becomes perfect.
Just heard on TV the Fed could go with 4 increases this year, higher
than the promised 3 increases just this year. Nothing is baked into
anything as the spreads would be higher if they were. Here's the short
answer. Too much money involved in my account not to, usually
75% bonds, targeted to go long term in the 2020's as the secular trend
is for a steady and higher secular FFR, no info after. It's easy.

When bonds are expected to have higher interest rates lower bond
maturities, and when bonds are expected to have lower interest
rates lengthen bond maturities. So when the long term trend has
that expectation I'm following this proverb. The trend will be
your friend.

So I don't think TBM is the 500 of the bond market like many BH's do.
age in bonds, buy-and-hold, 10 year business cycle
Ron Scott
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Re: Best mix of short-term and intermediate-term bond funds?

Post by Ron Scott »

You can ask them yourself but Vanguard typically advises 30-40-30, long, intermediate, short, with your long is a state fund if you can get one at reasonable fees.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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