Bond ETF suggestions

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Atravelor
Posts: 8
Joined: Sun Mar 25, 2018 11:37 am

Bond ETF suggestions

Post by Atravelor »

We are about 5 years out from retirement. I need to increase our fixed income allocation to get us back to a 40 bond/60 stock allocation. We already have BND and TIP. I am considering adding VCSH (short term corporate) for the shorter duration and exposure to more corporate and hopefully a little better yield. Would you agree with VCSH or what would you add to increase fixed income? I hesitate to buy more BND because of the duration. Because of the rising interest rate environment, would you buy in all at once today or dollar cost average over the year? This is held in an IRA. Secondly, also thinking of adding some VNQ for the yield. I know its not considered fixed income and I would decrease stock allocation to allow for it. I like the yield and would like to add a small % (5?). However, I am concerned this might be a bad time to buy into a REIT also because of the interest environment.
mega317
Posts: 5705
Joined: Tue Apr 19, 2016 10:55 am

Re: Bond ETF suggestions

Post by mega317 »

Welcome to the forum.
You have hit the ground running like a true Boglehead--you hit a lot of issues that draw a ton of discussion around here:
1. How rising interest rates should affect your bond investing
2. Lump sum or DCA
3. Dividends vs. total return
4. Portfolio tilting
(You're just missing a question about buying a car, and one on credit card rewards.)
As a result, there is a lot to be learned by browsing/searching old threads.

Here are attempted answers:
1. You seem to have conflicting goals in changing your bonds. You want to reduce risk (duration) and also increase risk (corporates, and looking for more yield). IMO the expected increase in interest rates is already priced in, and no one knows what will happen unexpectedly, and fed changes don't necessarily affect intermediate-term bonds, so you should put all of that out of your mind. There is no way to be smarter than everyone else about it. Also, rising rates are good for bonds because yields go up. You shouldn't worry about temporary decreases in NAV since it will be compensated with more interest. Your horizon isn't 5 years unless you plan to die on your retirement day. Also forget about volatility. Look at a growth chart of total bond vs short-term corporate and compare both to a stock fund.

2. For stocks, lump sum investing is expected to produce greater return than dollar cost averaging about 2/3 of the time. I actually have no idea what happens with bonds but since bonds have generally low yields and are fairly stable, I bet it doesn't really matter. Plus you're talking about moving from one bond fund to another, not investing new cash, right?

3. "I like the yield" What does this mean? It sounds like you are considering dividends as separate from price appreciation (the two together being "total return"). I suggest we ignore that part of the OP's question, no need to risk the thread taking this issue and running with it for multiple hundred posts. You could go read some of those instead.

4. I don't really know about REITs, I'm happy with what I have in total stock funds, but someone else can answer that. I'm guessing a 5% tilt to anything won't make an appreciable difference.
livesoft
Posts: 85971
Joined: Thu Mar 01, 2007 7:00 pm

Re: Bond ETF suggestions

Post by livesoft »

Forget about VNQ for now.

I use Total Bond and short-term corporate bond. I rebalance between them according to my IPS. I think VCSH is a fine fund, but you should have a plan for how much you will have and how/when you will rebalance between VCSH and BND.

BTW, yield means nothing whether in retirement/withdrawal or working/accumulation, so don't fall into going for yield such as your idea about VNQ. Go for Total Return.
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littlebird
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Location: Valley of the Sun, AZ

Re: Bond ETF suggestions

Post by littlebird »

livesoft wrote: Sun Mar 25, 2018 3:07 pm BTW, yield means nothing whether in retirement/withdrawal or working/accumulation, so don't fall into going for yield such as your idea about VNQ. Go for Total Return.
Respectfully, I don't agree with this when it comes to bond funds. I think over the long term most of the return from bond funds comes from yield. Prices are cyclical ( although the cycle may be very long) and not very volatile. When held for the long term, I think bond fund prices can be largely ignored and decisions made on yield/risk characteristics.
livesoft
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Re: Bond ETF suggestions

Post by livesoft »

littlebird wrote: Sun Mar 25, 2018 3:24 pmWhen held for the long term, I think bond fund prices can be largely ignored and decisions made on yield/risk characteristics.
I agree with you about bond funds, but the risk in bond funds has shown up in the past half year which has affected bond fund prices, too (but you did write "largely"). I guess I was not clear that I was commenting mostly about VNQ with respect to total return / yield. Sorry.
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Tyler Aspect
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Re: Bond ETF suggestions

Post by Tyler Aspect »

Atravelor wrote: Sun Mar 25, 2018 12:06 pm We are about 5 years out from retirement. I need to increase our fixed income allocation to get us back to a 40 bond/60 stock allocation. We already have BND and TIP. I am considering adding VCSH (short term corporate) for the shorter duration and exposure to more corporate and hopefully a little better yield. Would you agree with VCSH or what would you add to increase fixed income? I hesitate to buy more BND because of the duration. Because of the rising interest rate environment, would you buy in all at once today or dollar cost average over the year? This is held in an IRA. Secondly, also thinking of adding some VNQ for the yield. I know its not considered fixed income and I would decrease stock allocation to allow for it. I like the yield and would like to add a small % (5?). However, I am concerned this might be a bad time to buy into a REIT also because of the interest environment.
Short term bond is not necessarily bad when you expect the intermediate term yield to be going up. Such decisions have an end point where you are going to move back to the intermediate term duration, for example before the next recession. When a recession arrives the short term yield is likely to drop at a steep clip.

Keep in mind that not all market timing decisions will turn out as you expected. Backfiring is definitely possible.
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