Reducing bond terms with age

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InvestInLife
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Reducing bond terms with age

Post by InvestInLife » Tue Mar 06, 2018 7:56 am

My bond allocation is divided equally between FSITX (Total Bond Fund) and FLBAX (Long-term Treasury Fund). I am 36, and understand that length until maturity is a goal when choosing a bond or bond fund to invest in. Thirty years out seems about right. But as one ages, wouldn't it be a good idea to shift one's allocation increasingly toward shorter term bonds? And if so, what is a good plan? Perhaps aiming to have all in short-term by age 70? Any special case during a rising interest rate environment?

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midareff
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Re: Reducing bond terms with age

Post by midareff » Tue Mar 06, 2018 8:14 am

Typically, a lower duration bond fund will have less volatility and be less subject to NAV changes due to interest rate changes by the FED. OTOH, bond returns have varied over time in relation to CPI, which would be a great concern to seniors. Bengen noted in his study (October 1994) that intermediate term treasuries had returned 5.1% vs. 3% inflation, or 2.1% real. With today's five year treasury returning 2.65% and the ten year treasury returning about 2.9%, and a rolling 12 month CPI-U of 2.1% and >, it seems things look a bit different on that side of the fence. Larry Swedroe (I believe) once placed the sweet spot for interest rates vs. duration at 20 basis points per year of duration. At that, plainly the 5 year looks more attractive at this time. I believe some things will look more attractive at different times due to market factors, interest rates and such. To make an out and out policy to be adhered to regardless of circumstances that may change with time is not in the individuals best interests. One day if interest rates return to 17% you may want to sell you equities and buy the longest 17 %CDs you can get. I believe the individual investor has to do what is right for them at the time of their life and market cycles. Just my 2 cents, YMMV.

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spdoublebass
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Re: Reducing bond terms with age

Post by spdoublebass » Tue Mar 06, 2018 8:39 am

I’m only commenting because I’m interested in this topic, not because I am one who should be giving advice. Also, please correct anything I write that isn’t true.


The thing that’s been discussed on this forum before is that while you are usually safe if you hold a bond fund for twice its duration, it’s still a bond “fund”.

What I’m saying is that yes on paper if you hold a 17 year average duration for Long Treasuries for 34 years you will be ok, you still have to get out of it at some point. If you just shorten your duration by adding Short term bonds, what you’ve accumulated in the long bonds could drop still later on.

I hope that made sense I’m really generalizing here.

When I’ve read others discuss this topic...it was usually recommended to have funds you are ok with holding forever. Then if you want to shorten up later in life do so. Because, you still might have 20 years to go after you hit 70. So if you have IT bonds and then add some shorter ones that works out well.

If you still want Long Treasuries, from what I’ve read, allot a portion to them and stay the course.

Again, only commenting because I was curious about this as well and this is what I’ve read so far. Not an authority on this topic in any way.
I'm trying to think, but nothing happens

dbr
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Re: Reducing bond terms with age

Post by dbr » Tue Mar 06, 2018 9:38 am

InvestInLife wrote:
Tue Mar 06, 2018 7:56 am
My bond allocation is divided equally between FSITX (Total Bond Fund) and FLBAX (Long-term Treasury Fund). I am 36, and understand that length until maturity is a goal when choosing a bond or bond fund to invest in. Thirty years out seems about right. But as one ages, wouldn't it be a good idea to shift one's allocation increasingly toward shorter term bonds? And if so, what is a good plan? Perhaps aiming to have all in short-term by age 70? Any special case during a rising interest rate environment?
No. That concept applies to someone wanting certainty of recovering an amount of money at a point in time. You have no point in time as you have thirty years to retirement and another thirty or forty years after that. During retirement there is no point in time where you recover all the money. Rather there are withdrawals of dribs and drabs over a very long time. As far as that goes the money is invested in dribs and drabs over a very long time.

A better approach to this is to recognize that investments have an expected return and a dispersion of results around that return and set the portfolio for the best compromise between the expected return and the uncertainty of what return you will actually get. Longer duration bonds have higher expected return and higher risk, but the actual handle on the issue is the stock/bond allocation. As to long bonds it is a common assessment that the increased dispersion is not worth the extra return and that if you want more return allocate a little more to stocks.

I think this canard of matching duration to when you want the money is so seldom relevant to most investors here that it should be dropped. There are a few special cases, most often someone saving to buy a house or something when it applies, and then it is pretty obvious.

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patrick013
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Re: Reducing bond terms with age

Post by patrick013 » Tue Mar 06, 2018 12:59 pm

InvestInLife wrote:
Tue Mar 06, 2018 7:56 am
But as one ages, wouldn't it be a good idea to shift one's allocation increasingly
toward shorter term bonds? And if so, what is a good plan? Perhaps aiming to
have all in short-term by age 70? Any special case during a rising interest rate
environment?
I disagree with dbr a bit. It's not really age but what the market is
telling us. Go short when rates are rising and go long when rates are
high and go long when rates are high and falling. That's as old as any
market in a long term trend. They say nobody knows but they've been
doing it for centuries. They say prices are baked but watch the day after
an interest rate increase when all the NAV's decline. They say it's short
term market timing but it's really adjusting bond AA to the future perceived
trend for several or more years. Markets believe or don't believe just
like anyone else does.

2.7 = duration of BSV short term bond index

15.2 = duration of BLV long term bond index

Your investment will break even when reinvested interest
recoups that loss. Assuming that the long term will
keep the new interest rate in the market. Every indication
indicates the upward interest rate adjustments will be kept
as long as possible in this market. Need to define duration.

By using a target date approach with a 3 year CD you can
reinvest at the higher interest rate without having to
recover a market paper loss first. The 2020's could be a
bond buyer's market with longer term maturities very attractive.

A good advisor would do this but many won't. Probably too
many clients or they already have ample separate ST bonds
and CD's and funds in their accounts.

BSV would make up the loss much quicker and allow liquidity
at a better price for withdrawals, or to swap for BLV if in fact
rates had risen or peaked according to market information. So
in that perspective it would be better in old age to have more short
term bond assets.

Applies to bonds only, not index stocks held long term.
My perspective.
age in bonds, buy-and-hold, 10 year business cycle

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