Investment Allocation - 54 yr old couple

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dkeeney
Posts: 9
Joined: Thu May 24, 2018 1:50 pm

Investment Allocation - 54 yr old couple

Post by dkeeney » Thu May 24, 2018 5:05 pm

This week's Barron's cover story on Jack prompted me to check in here and I've spent most of the day surfing through. I'm interested in the community's thoughts about how to manage interest rate sensitivity of the bond portion of our portfolio.

Emergency funds: Yes. Cash and equivalents total $350K
No Debt
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 11% State
State of Residence: Oregon
Age: 54
Desired Asset allocation: 55% stocks / 45% bonds
Desired International allocation: 40% of stocks -- perhaps more.

Household income of $250K
Vanguard portfolio total: $2.6 million (allocation see below)
Wife 401K: $180K (80/20 stocks/bonds)
Real estate holdings: $1.4 million

Philosophically, we are comfortable with a conservative portfolio because an extra few percentage points in potential growth is less appealing than the added risk of loss of principle. That being said, below is the target allocation:

12% - Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares
9% - Vanguard Short-Term Investment-Grade Fund Admiral Shares
19% - Vanguard Total Bond Market Index Fund Admiral Shares
10% - Vanguard Total International Bond Index Fund Admiral Shares
16% - Vanguard Total International Stock Index Fund Admiral Shares
33.5% - Vanguard Total Stock Market Index Fund Admiral Shares
0.5% - Individual stocks

I have been generally comfortable with this, but am not wild about the prospect of a prolonged erosion of the NAV of the bond funds as interest rates return to historical norms. I'm interested in your thoughts.

balbrec2
Posts: 80
Joined: Mon Nov 13, 2017 3:03 pm

Re: Investment Allocation - 54 yr old couple

Post by balbrec2 » Thu May 24, 2018 5:35 pm

No one knows how far interest rates might rise any further, if they do! I am assuming you are
referring to longer term rates. They may go back to "historic norms" whatever that means.
They may go past it or they may go back down. No one really knows for sure. The advice is the same
as for stocks. Stick to your allocation and rebalance if things get too out of whack. Guessing where
rates are headed to be able to decide which end of the yield curve you want to be on, amounts to
market timing. You might get lucky! Or not! Good luck however you decide to approach this.
Given your portfolio, I'd say you have little to worry about.


If it ain't broke, don't fix it !

livesoft
Posts: 61944
Joined: Thu Mar 01, 2007 8:00 pm

Re: Investment Allocation - 54 yr old couple

Post by livesoft » Thu May 24, 2018 5:50 pm

dkeeney wrote:
Thu May 24, 2018 5:05 pm
[...]
I'm interested in the community's thoughts about how to manage interest rate sensitivity of the bond portion of our portfolio.
[...]
12% - Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares
9% - Vanguard Short-Term Investment-Grade Fund Admiral Shares
19% - Vanguard Total Bond Market Index Fund Admiral Shares
Others around here won't like this, but here goes anyways.

I manage interest rate sensitivity by having a plan -- an asset allocation plan. I don't have 100% Total US Bond Market Index.

Instead, I split my bond assets much like you do between intermediate and short-term funds. I rebalance between them in three ways:

Method 1: I simply look at the percentage in each and if one gets enough above my desired asset allocation, I exchange it for the other. This doesn't happen that often because bond funds don't really move very much. Also one cannot use a 5% rebalancing band either for the same reason. That is, one would never rebalance by Method 1 if the trigger was 5%.

Method 2: Whenever a bond ETF drops by around 0.5% in a day or less, I buy some of it to rebalance. The shorter duration bond funds don't drop by this amount in a day, so they are not the ones I buy. Last week, I bought a lot of Total US Bond Market index because it did drop a lot in one day and I bought more when it dropped some more on the subsequent days.

Method 3: Whenever a bond ETF goes up by around 0.5% in a day or less -or- it recovers somewhat after a Method 2 rebalancing, I sell some of it to rebalance. This is the other half of Method 2.

One basically has to be out in front of changes in bond fund prices. For me that meant going to a higher percentage allocation to shorter durations earlier this year when the FOMC told us what they were going to do in 2018. I shifted percentages of Total US Bond Index and Short-term Corporate Bond Index, FLRN, and BIL based on that.

One is not going to make a killing rebalancing by this method. Maybe 0.1% to 1.0% a year extra or even less than that, such as -0.5% to 0.0%. One has to decide ahead of time how much more over VBTLX one wants to get, then go back to VBTLX in order not to have tracking regret. If VBTLX is performing at -2.5% YTD, then one should be satisfied if their fixed income portfolio is performing at -1.5% YTD or better.

Plus one has to be very good at tracking performance versus a benchmark. Otherwise, how would one even know if their rebalancing had a positive effect or not?

Call it Market Timing if you want to.
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dkeeney
Posts: 9
Joined: Thu May 24, 2018 1:50 pm

Re: Investment Allocation - 54 yr old couple

Post by dkeeney » Thu May 24, 2018 6:10 pm

balbrec2 wrote:
Thu May 24, 2018 5:35 pm
"historic norms" whatever that means
Thanks. Value your thoughts. Since 2009, the 10-year treasury note has been below 3% (http://www.multpl.com/10-year-treasury- ... le/by-year). As that table shows, from 1871 thru 1934 (the Great Depression) the 10-year was consistently above 3%. Prior to these past 8 years, the only period of time the 10-year was below 3% was from 1935 through 1956. The 10-year is now beginning to nibble at the edges of 3% and I don't think you really need to be a soothesayer to anticipate that interest rates have a high likelihood of being higher in the coming years than they've been in the past 9 years. I appreciate the market timing caution, but in this case when we've experienced a prolonged period of rates kept artificially near zero through government intervention, it doesn't seem to me as though future interest rate increases are hard to anticipate.

But I suppose I could just say, "IF we were to enter a period of rising interest rates, how might I adjust my allocation to protect against downside NAV risk in the bond portion of my portfolio?"

balbrec2
Posts: 80
Joined: Mon Nov 13, 2017 3:03 pm

Re: Investment Allocation - 54 yr old couple

Post by balbrec2 » Thu May 24, 2018 9:51 pm

I'm actually wondering why you have this concern over the income portion but not
the equity portion of your portfolio. You are likely to eventually see even more
significant declines there. As long as you are happy with your AA, let the markets do their thing and rebalance.

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