Fixed Income investments too conservative?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
ronnie56
Posts: 8
Joined: Sun Nov 03, 2013 4:14 pm

Fixed Income investments too conservative?

Post by ronnie56 » Wed Jun 06, 2018 9:45 pm

My husband and I are having a disagreement, about how aggressively to invest the fixed income portion of our portfolio.

We are both 62, starting retirement in 6 months. We are conservative investors by nature, with an AA of 30% equities, 70% fixed income. We have ample savings that will last through retirement; Even with a 3% withdrawal rate and current allocation/investments, assets will be left over for our heirs.

My husband simply thinks we're being 'too conservative' and feels we could be getting a higher return, so he recently asked our financial adviser what a fixed income portfolio that earns 3.5%/year would look like.

(Our current fixed income portfolio currently consists of a 3 year CD ladder, plus a diverse group of bond funds with a short duration, all high quality investment grade. It is currently earning 2.4%/yr)

The biggest change in the proposed 'enhanced income portfolio' is simply moving out on the yield curve to intermediate duration (the bulk of our holdings are currently in shorter dated funds). It also added some new asset classes, such as emerging market bonds, a preferred stock fund, a MLP fund, plus some additional REITs ... 30 different funds in all, posted below.

Fellow BH's, my bias is to use fixed income for stability, and not chase yield/take on unnecessary risk -- so I really don't see the need for the exercise. In any case I need to give the advisor some feedback on his recommendation. My gut is that it has too many positions, but I don't really know how else to evaluate it. I've posted the recommended 'enhanced income portfolio' below. Of note, the overall expense ratio is .36%

Thanks in advance for your thoughts.

Fund Name | Call Letters | Percent of fixed income assets
Vanguard Interm-Term Investment-Grde Adm VFIDX 15%
Franklin NY Tax-Free Income Adv FNYAX 10%
Vanguard NY Long-Term Tax-Exempt Adm VNYUX 10%
DoubleLine Total Return Bond I DBLT 9.9%
iShares TIPS Bond TIP 7.5%
Vanguard Interm-Term Treasury Adm VFIUX 7.2%
Vanguard Ltd-Term Tx-Ex VMLTX 5.3%
Nuveen Municipal Value Fund Inc. NUV 5%
T. Rowe Price Instl Emerging Mkts Bond TREBX 5%
Guggenheim Floating Rate Strats Instl GIFIX 4.5%
SPDR® Wells Fargo Preferred Stock ETF PSK 4%
Baird Short-Term Bond Inst BSBIX 2.6%
SPDR® Barclays High Yield Bond ETF JNK 2.5%
JPMorgan Alerian MLP ETN AMJ 2.5%
BlackRock Multi-Asset Income Instl BIICX 2%
Vanguard REIT Index Adm VGSLX 2%
Physicians Realty Trust DOC 2%
RiverNorth Doubleline Strategic Inc I RNSIX 2%
Guggenheim Limited Duration Instl GILHX 1%
Last edited by ronnie56 on Wed Jun 06, 2018 9:56 pm, edited 2 times in total.

anoop
Posts: 710
Joined: Tue Mar 04, 2014 1:33 am

Re: Fixed Income investments too conservative?

Post by anoop » Wed Jun 06, 2018 9:56 pm

I'm 47 and close to 100% fixed income. I have been earning < 1% most of the last few years on my 401k. Outside 401k it has been a bit better at < 2%.

So I think it all boils down to what you are comfortable with. There are others here (a minority for sure) that are also close to or 100% fixed income.

I also don't like funds, so I'm in high yields savings, CDs, and treasuries, and a money market fund (the last one because I can't buy treasuries in my 401k). Your portfolio of funds would be too complex for my taste.

I would be careful about going to intermediate/long term bonds until yields stabilize. We are expecting 2 more rate hikes this year and I suspect they will have some effect on intermediate and long bonds.
Last edited by anoop on Wed Jun 06, 2018 9:57 pm, edited 1 time in total.

tibbitts
Posts: 8101
Joined: Tue Feb 27, 2007 6:50 pm

Re: Fixed Income investments too conservative?

Post by tibbitts » Wed Jun 06, 2018 9:57 pm

Well, my first thought is that if you don't do anything, your bonds might be yielding your target percentage before long. Or not, nobody knows.

Although this might be a little complicated for my preference, I have emerging market bond funds (2!), high yield bond funds (4 of them!), and a floating rate fund, plus the usual suspects like a GNMA fund. I don't understand REITs being included, and MLPs aren't what I would consider bonds.

Also consider stable value if you have that option in some investments. Or TIAA Traditional if you have that choice.

BVRFC
Posts: 27
Joined: Tue Jul 18, 2017 9:26 pm

Re: Fixed Income investments too conservative?

Post by BVRFC » Wed Jun 06, 2018 9:59 pm

It's overly complicated. VTSAX and VBTLX are all you need.

http://jlcollinsnh.com/2012/06/06/why-i ... -advisors/

User avatar
cheese_breath
Posts: 8074
Joined: Wed Sep 14, 2011 7:08 pm

Re: Fixed Income investments too conservative?

Post by cheese_breath » Wed Jun 06, 2018 10:04 pm

My first thought is if you have enough to last you through retirement it really doesn't matter unless you want to leave the excess to someone specific.
The surest way to know the future is when it becomes the past.

RCL
Posts: 310
Joined: Sat Jul 05, 2014 2:48 am

Re: Fixed Income investments too conservative?

Post by RCL » Wed Jun 06, 2018 10:10 pm

Someone more knowledgeable than myself will be alone soon, but I have read many times on this site that those small percentages the adviser wants to put you in are pretty much not going to make too much of a difference individually on your savings.

I think your gut feeling is right on spot. I certainly don't see the point of having that much clutter in an account.

Also, remember that each year you have to take RMD's, the percentage you have to take will increase. Is that factored into your 3% withdrawal rate?

If you already have enough $$ for retirement & still have $$ for heirs, why take on more risk trying to get a higher ROI?

In the end, it is something you and the spouse will have to work out as it's a personal matter
It Is Best To Consult Others Before Taking Unusual Actions

User avatar
galeno
Posts: 1413
Joined: Fri Dec 21, 2007 12:06 pm

Re: Fixed Income investments too conservative?

Post by galeno » Wed Jun 06, 2018 10:14 pm

It's a male thing. Wife and I retired. Both of us is 60 years old.

My wife and older daughter convinced me to go from an "aggressive" 60% equities to a "conservative" 40%.

They are fine with it. Me? Not so much. I'd like to return to 60%.

A 30/70 port is the best risk adjusted asset allocation for retirement.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

BVRFC
Posts: 27
Joined: Tue Jul 18, 2017 9:26 pm

Re: Fixed Income investments too conservative?

Post by BVRFC » Wed Jun 06, 2018 10:17 pm

RCL wrote:
Wed Jun 06, 2018 10:10 pm
If you already have enough $$ for retirement & still have $$ for heirs, why take on more risk trying to get a higher ROI?
If one intends to leave a bequest, the investment horizon can be thought of in terms of the heirs' lifetimes. This would suggest a more aggressive asset allocation strategy.

User avatar
Sandtrap
Posts: 5454
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Fixed Income investments too conservative?

Post by Sandtrap » Wed Jun 06, 2018 10:25 pm

VBTLX (total bond) is enough.
Look for your returns on the equity side.

aloha
j

student
Posts: 2669
Joined: Fri Apr 03, 2015 6:58 am

Re: Fixed Income investments too conservative?

Post by student » Wed Jun 06, 2018 10:33 pm

Sandtrap wrote:
Wed Jun 06, 2018 10:25 pm
VBTLX (total bond) is enough.
Look for your returns on the equity side.

aloha
j
+1.

venkman
Posts: 741
Joined: Tue Mar 14, 2017 10:33 pm

Re: Fixed Income investments too conservative?

Post by venkman » Thu Jun 07, 2018 3:08 am

ronnie56 wrote:
Wed Jun 06, 2018 9:45 pm
My husband simply thinks we're being 'too conservative' and feels we could be getting a higher return, so he recently asked our financial adviser what a fixed income portfolio that earns 3.5%/year would look like.

Fellow BH's, my bias is to use fixed income for stability, and not chase yield/take on unnecessary risk -- so I really don't see the need for the exercise. In any case I need to give the advisor some feedback on his recommendation. My gut is that it has too many positions, but I don't really know how else to evaluate it. I've posted the recommended 'enhanced income portfolio' below. Of note, the overall expense ratio is .36%
How much are you paying your financial advisor? If it's the standard 1-2% yearly AUM fee, then your current 2.4% return on FI is almost certainly not even keeping up with inflation. Your FI portfolio is far more complicated than it needs to be, and your advisor is probably doing it on purpose. Your advisor knows full well you don't need that many different funds; he also knows full well that if your portfolio were simple and easy to understand, you would no longer need the services of an advisor.

I would definitely consider dumping your advisor and moving everything into Vanguard's Target Retirement Income Fund (VTINX). It has a 30/70 allocation in broad stock and bond index funds, and its 0.13% expense ratio will not eat away a huge chunk of your after-inflation returns.

minimalistmarc
Posts: 289
Joined: Fri Jul 24, 2015 4:38 pm

Re: Fixed Income investments too conservative?

Post by minimalistmarc » Thu Jun 07, 2018 3:18 am

anoop wrote:
Wed Jun 06, 2018 9:56 pm
I'm 47 and close to 100% fixed income. I have been earning < 1% most of the last few years on my 401k. Outside 401k it has been a bit better at < 2%.

So I think it all boils down to what you are comfortable with. There are others here (a minority for sure) that are also close to or 100% fixed income.

I also don't like funds, so I'm in high yields savings, CDs, and treasuries, and a money market fund (the last one because I can't buy treasuries in my 401k). Your portfolio of funds would be too complex for my taste.

I would be careful about going to intermediate/long term bonds until yields stabilize. We are expecting 2 more rate hikes this year and I suspect they will have some effect on intermediate and long bonds.
Wow! I don’t want to ask why probably!

jalbert
Posts: 3909
Joined: Fri Apr 10, 2015 12:29 am

Re: Fixed Income investments too conservative?

Post by jalbert » Thu Jun 07, 2018 3:33 am

Vanguard Interm-Term Investment-Grde Adm VFIDX 15%
Franklin NY Tax-Free Income Adv FNYAX 10%
Vanguard NY Long-Term Tax-Exempt Adm VNYUX 10%
DoubleLine Total Return Bond I DBLT 9.9%
iShares TIPS Bond TIP 7.5%
Vanguard Interm-Term Treasury Adm VFIUX 7.2%
Vanguard Ltd-Term Tx-Ex VMLTX 5.3% 
Nuveen Municipal Value Fund Inc. NUV 5%
T. Rowe Price Instl Emerging Mkts Bond TREBX 5%
Guggenheim Floating Rate Strats Instl GIFIX 4.5%
SPDR® Wells Fargo Preferred Stock ETF PSK 4%
Baird Short-Term Bond Inst BSBIX 2.6%
SPDR® Barclays High Yield Bond ETF JNK 2.5%
JPMorgan Alerian MLP ETN AMJ 2.5%
BlackRock Multi-Asset Income Instl BIICX 2%
Vanguard REIT Index Adm VGSLX 2%
Physicians Realty Trust DOC 2%
RiverNorth Doubleline Strategic Inc I RNSIX 2%
Guggenheim Limited Duration Instl GILHX 1
This is ridiculously complex for a fixed income portfolio. And REITs and preferred stock are not fixed income.

If you want a higher expected return, increase your equity percentage.
Risk is not a guarantor of return.

zuma
Posts: 401
Joined: Thu Dec 29, 2016 12:15 pm

Re: Fixed Income investments too conservative?

Post by zuma » Thu Jun 07, 2018 4:01 am

When thinking about risk and return, consider your portfolio as a whole, not just the fixed income portion. As already mentioned, to get higher expected return, simply increase your equity percentage.

Dandy
Posts: 5463
Joined: Sun Apr 25, 2010 7:42 pm

Re: Fixed Income investments too conservative?

Post by Dandy » Thu Jun 07, 2018 6:20 am

You seem to have more than enough so for me that argues for asset preservation vs growth/more risk. I am 70 and am in much the same situation vis a vis having enough assets. I roughly follow Dr. Bernstein's idea of having 20 years worth of draw down money in "safe" products.

I have about 1/3 of my fixed income invested in "no loss of principal" assets e.g. CDs, money markets, Savings accounts, EE bonds, etc. About 1/3 in short term bond funds and about 1/3 in intermediate bond funds. The first 2 categories are my "safe" portfolio i.e. there are enough assets to support our current lifestyle for 20 years. My "risk" portfolio of intermediate bonds and equities is invested about 70/30 but overall I am at 43/57.

My withdrawals come from my TIRA RMDs. I don't target the withdrawals to come from the "safe" portion of my TIRA. I just make sure, periodically, that I continue to hold enough "safe" assets to support our current life style until I am 90 (currently 20 years). This approach has provided peace of mind and makes it easy to have a decent allocation to intermediate bond funds and equities.

mouses
Posts: 3832
Joined: Sat Oct 24, 2015 12:24 am

Re: Fixed Income investments too conservative?

Post by mouses » Thu Jun 07, 2018 6:30 am

I am very conservative financially, and retired. You can do better than 2.4% just in CDs. In my area one credit union is offering two year CDs at 3.0% and another credit union is offering two year CDs at 2.8%.

I have a CD ladder, with a portion maturing about every three months.

I don't see why that complicated mess you have is necessary or desirable.

goblue100
Posts: 734
Joined: Sun Dec 01, 2013 10:31 am

Re: Fixed Income investments too conservative?

Post by goblue100 » Thu Jun 07, 2018 7:01 am

What is the adviser charging? If getting rid of him saves 1% a year then you don't need more risk.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

Call_Me_Op
Posts: 7064
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Fixed Income investments too conservative?

Post by Call_Me_Op » Thu Jun 07, 2018 7:03 am

Why do you need all of those funds? They make it seem like you are much more diversified than you actually are. This is a classic example of unnecessary complexity.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

zuma
Posts: 401
Joined: Thu Dec 29, 2016 12:15 pm

Re: Fixed Income investments too conservative?

Post by zuma » Thu Jun 07, 2018 7:13 am

ronnie56 wrote:
Wed Jun 06, 2018 9:45 pm
My gut is that it has too many positions, but I don't really know how else to evaluate it.
Your gut is correct. A good exercise is to start with a standard three-fund portfolio as a baseline. This approach is simple, low-cost, diversified, and for many Bogleheads it's all they need. If you feel like you need to add additional funds to achieve your objectives, you should be able to explain the role that each one plays in your portfolio. But remember that simplicity should be the default strategy.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Fixed Income investments too conservative?

Post by retiredjg » Thu Jun 07, 2018 7:20 am

The advisor was asked to show you what it would look like to get a higher return from your fixed income side. Well....it's just ugly and I think it would be a poor choice to go that route.

Apparently your husband has an itch that needs to be scratched. Your portfolio could be juiced in better ways. You could change some of your short term funds into intermediate term funds. You could add 10% to your stock allocation and still be conservative. You could keep the 70% in bonds, but put a portion in a high yield bond fund. You could drop the advisor and keep what you are paying in AUM (if you are). Or some combination of these things.

I think it is possible to get a little more from the fixed/bond side of your portfolio, but trying to get 3.5% out of a fixed income portfolio right now isn't reasonable in my opinion. I would not go there.

Ron
Posts: 6386
Joined: Fri Feb 23, 2007 7:46 pm

Re: Fixed Income investments too conservative?

Post by Ron » Thu Jun 07, 2018 7:31 am

BVRFC wrote:
Wed Jun 06, 2018 10:17 pm
RCL wrote:
Wed Jun 06, 2018 10:10 pm
If you already have enough $$ for retirement & still have $$ for heirs, why take on more risk trying to get a higher ROI?
If one intends to leave a bequest, the investment horizon can be thought of in terms of the heirs' lifetimes. This would suggest a more aggressive asset allocation strategy.
Exactly.

We're both age 70 and have a 60/40 AA (60% equities, 40% bonds/cash) within our combined retirement portfolios.

While for most folks our age, we may be a bit more aggressive but due to support of our disabled adult "child" after we're gone, we're subtracting 22 years (our age the year he was born) off our current joint life age and investing as if we were actually age 48.

There is little risk to us in the short term, since income from all our retirement resources, along with required RMD's, greatly exceed our current expenses.

You can say we're investing for the next generation, and our current AA is logical to us, in our situation.

- Ron
Last edited by Ron on Thu Jun 07, 2018 7:45 am, edited 1 time in total.

Grt2bOutdoors
Posts: 19481
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Fixed Income investments too conservative?

Post by Grt2bOutdoors » Thu Jun 07, 2018 7:42 am

Reits , mlps and preferred will be negatively impacted in a rising rate environment. Reits rely on borrowed money to finance transactions, the reit suggested to you is concentrated in healthcare, it’s not a diversified portfolio. Imagine if healthcare reimbursements become capped while financing cost rises, income will get squuezed.

MLPs have both interest rate risk, commodity risk and are economically sensitive. Many MLPs have experienced deterioration in distribution coverage ratio leading to depressed prices, higher yields and outright cuts in distributions. A cut in the distribution is kiss of death. You have no voting rights, the general partner controls everything.

Preferred are not equity with upside, they are not bonds. You take risk in return for a small coupon, but the bond holders sit above you in event of bankruptcy. So in a nutshell, you take risk but you aren’t compensated for it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Dottie57
Posts: 4776
Joined: Thu May 19, 2016 5:43 pm

Re: Fixed Income investments too conservative?

Post by Dottie57 » Thu Jun 07, 2018 7:57 am

Only use tradable Funds.

One stock fund.

One regular total bond fund

One tips fund.

Get rid of the advisor.

Increase stock by 5 - 10 % If more return is desired.

Good luck!

g2morrow
Posts: 43
Joined: Thu Jun 07, 2018 7:23 am

Re: Fixed Income investments too conservative?

Post by g2morrow » Thu Jun 07, 2018 8:06 am

jalbert wrote:
Thu Jun 07, 2018 3:33 am
Vanguard Interm-Term Investment-Grde Adm VFIDX 15%
Franklin NY Tax-Free Income Adv FNYAX 10%
Vanguard NY Long-Term Tax-Exempt Adm VNYUX 10%
DoubleLine Total Return Bond I DBLT 9.9%
iShares TIPS Bond TIP 7.5%
Vanguard Interm-Term Treasury Adm VFIUX 7.2%
Vanguard Ltd-Term Tx-Ex VMLTX 5.3% 
Nuveen Municipal Value Fund Inc. NUV 5%
T. Rowe Price Instl Emerging Mkts Bond TREBX 5%
Guggenheim Floating Rate Strats Instl GIFIX 4.5%
SPDR® Wells Fargo Preferred Stock ETF PSK 4%
Baird Short-Term Bond Inst BSBIX 2.6%
SPDR® Barclays High Yield Bond ETF JNK 2.5%
JPMorgan Alerian MLP ETN AMJ 2.5%
BlackRock Multi-Asset Income Instl BIICX 2%
Vanguard REIT Index Adm VGSLX 2%
Physicians Realty Trust DOC 2%
RiverNorth Doubleline Strategic Inc I RNSIX 2%
Guggenheim Limited Duration Instl GILHX 1
This is ridiculously complex for a fixed income portfolio. And REITs and preferred stock are not fixed income.

If you want a higher expected return, increase your equity percentage.
+1

User avatar
dwickenh
Posts: 1447
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Fixed Income investments too conservative?

Post by dwickenh » Thu Jun 07, 2018 8:10 am

This is a classic case of making a portfolio look so complicated that there is no way you can manage this yourself.

If this were my adviser, I would cut the tie just because of this recommendation.

I'm sure he has made himself a friend and is indispensable in his own mind.

If you want a conservative managed portfolio, check with Wellesley or Wellington funds.

Better yet, use a low cost total stock fund and a Intermediate total bond fund in a percentage that meets your goals.

I hope you take some time to digest all of the advice given to come up with a plan that makes life easier for you.

Best wishes,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

SimplicityNow
Posts: 477
Joined: Fri Aug 05, 2016 10:31 am

Re: Fixed Income investments too conservative?

Post by SimplicityNow » Thu Jun 07, 2018 8:25 am

I agree with the OP's point of view. No need to chase yield.

If you want to make a change however here is a simpler solution. Want the potential for higher return? Increase the percentage of stock funds in your portfolio. Of course that increases risk. I think it is better to take that risk on the equity side.

If you disagree with your husband then meet in the middle. Perhaps start small with a 5% increase in the equity portion of your portfolio and after a year see how it feels.

Personally I don't think there is a need to change anything. The suggestions you received from the advisor is, in my opinion, unnecessarily complicated.

The enemy of a good plan is the search for a perfect one.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Fixed Income investments too conservative?

Post by dbr » Thu Jun 07, 2018 8:30 am

I'll pile on.

0. If you are paying an advisor to help you the most effective change you can make is to stop doing that.
1. What do you want more return for? If it is just to feel like a winner, think again.
2. If you really do want more return, it is really simple to do what people above are saying and invest more in equities.
3. That array of bonds makes no sense. Some of those positions are not even bonds (REIT?, MLP?, preferred stock?, Realty Trust?) You don't even know what he is recommending. My guess is that it has more to do with earning the advisor commissions than getting you a good portfolio.
4. When you say "earns" I fear you are confusing yield and return and your advisor is letting you do it. That is a rookie mistake of the first magnitude.

Nate79
Posts: 3710
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Fixed Income investments too conservative?

Post by Nate79 » Thu Jun 07, 2018 10:02 am

Your "advisor" is really a salesman. Any advice they are giving should be considered as a suspect.

User avatar
galeno
Posts: 1413
Joined: Fri Dec 21, 2007 12:06 pm

Re: Fixed Income investments too conservative?

Post by galeno » Thu Jun 07, 2018 10:12 am

What a complicated mess of a portfolio!

Try this 3 fund 30/70 porfolio:

30% TWSM + 40% TBM + 20% TIPS + 5% CASH

Simpler. Better. Cheaper.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

User avatar
bertilak
Posts: 6158
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Fixed Income investments too conservative?

Post by bertilak » Thu Jun 07, 2018 10:25 am

The advice from your advisor (actually investment product salesman) is bad -- really bad. It is absurd to pay for bad advice. It is questionable to pay more than a token amount even for good advice since that is now basically a commodity. And, even if you got that advice for free it is best to ignore it -- the real price likely will not come if and until you follow it.

Simple advice:

Decide what asset classes you want in your portfolio. Think real hard if you go beyond:
  • Stocks (US and perhaps international)
  • Bonds (high-grade intermediate term, US and perhaps international. Possibly TIPS but probably not)
Each of those classes can be had in very low-cost index funds. Overall risk (and therefore expected returns) can be adjusted using various allocations of those funds. You don't need a paid advisor to tell you that.
Last edited by bertilak on Thu Jun 07, 2018 10:29 am, edited 2 times in total.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

Dottie57
Posts: 4776
Joined: Thu May 19, 2016 5:43 pm

Re: Fixed Income investments too conservative?

Post by Dottie57 » Thu Jun 07, 2018 10:26 am

galeno wrote:
Thu Jun 07, 2018 10:12 am
What a complicated mess of a portfolio!

Try this 3 fund 30/70 porfolio:

30% TWSM + 40% TBM + 20% TIPS + 5% CASH

Simpler. Better. Cheaper.
+1

capjak
Posts: 45
Joined: Fri Sep 22, 2017 8:58 am

Re: Fixed Income investments too conservative?

Post by capjak » Thu Jun 07, 2018 10:36 am

Dottie57 wrote:
Thu Jun 07, 2018 10:26 am
galeno wrote:
Thu Jun 07, 2018 10:12 am
What a complicated mess of a portfolio!

Try this 3 fund 30/70 porfolio:

30% TWSM + 40% TBM + 20% TIPS + 5% CASH

Simpler. Better. Cheaper.
+1
95% where is the other 5%? 30/45/20/5?

Fclevz
Posts: 382
Joined: Fri Mar 30, 2007 11:28 am

Re: Fixed Income investments too conservative?

Post by Fclevz » Thu Jun 07, 2018 10:37 am

anoop wrote:
Wed Jun 06, 2018 9:56 pm
I'm 47 and close to 100% fixed income. I have been earning < 1% most of the last few years on my 401k...
Ouch. Over the last few years like 2016 and 2017, the inflation rate for both years was 2.1%, so, unfortunately no earnings, but rather losses in purchasing power :?

User avatar
bertilak
Posts: 6158
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Fixed Income investments too conservative?

Post by bertilak » Thu Jun 07, 2018 10:42 am

capjak wrote:
Thu Jun 07, 2018 10:36 am
Dottie57 wrote:
Thu Jun 07, 2018 10:26 am
galeno wrote:
Thu Jun 07, 2018 10:12 am
What a complicated mess of a portfolio!

Try this 3 fund 30/70 porfolio:

30% TWSM + 40% TBM + 20% TIPS + 5% CASH

Simpler. Better. Cheaper.
+1
95% where is the other 5%? 30/45/20/5?
Down-payment on the advisor's yacht?
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

alex_686
Posts: 4024
Joined: Mon Feb 09, 2015 2:39 pm

Re: Fixed Income investments too conservative?

Post by alex_686 » Thu Jun 07, 2018 10:49 am

ronnie56 wrote:
Wed Jun 06, 2018 9:45 pm
(Our current fixed income portfolio currently consists of a 3 year CD ladder, plus a diverse group of bond funds with a short duration, all high quality investment grade. It is currently earning 2.4%/yr)

The biggest change in the proposed 'enhanced income portfolio' is simply moving out on the yield curve to intermediate duration (the bulk of our holdings are currently in shorter dated funds). It also added some new asset classes, such as emerging market bonds, a preferred stock fund, a MLP fund, plus some additional REITs ... 30 different funds in all, posted below.
You have a long time horizon. Since the bulk of your wealth is in fixed income I would think you would want to at least beat inflation. This does imply a longer duration than what you currently have.

I think a intermediate bond fund is very appropriate. I also think a moderate amount of preferred stock is appropriate for you but this is a open point of debate.

The other stuff is questionable.

I like REITs but I am not sure why there are here. They have the same level of risk and return as equities. EM bonds and MLP funds could work but it does not sound like they match your risk profile.

Then we have 30 different funds. If you go down the MLP path this makes some sense but I question going down that path. Why so many muni & tax free funds? This could make some sense by targeting different funds of different duration to your goals. But there is a trade off in targeting duration risk and complexity

anoop
Posts: 710
Joined: Tue Mar 04, 2014 1:33 am

Re: Fixed Income investments too conservative?

Post by anoop » Thu Jun 07, 2018 10:54 am

Fclevz wrote:
Thu Jun 07, 2018 10:37 am
anoop wrote:
Wed Jun 06, 2018 9:56 pm
I'm 47 and close to 100% fixed income. I have been earning < 1% most of the last few years on my 401k...
Ouch. Over the last few years like 2016 and 2017, the inflation rate for both years was 2.1%, so, unfortunately no earnings, but rather losses in purchasing power :?
Fully aware of that and it does bother me, but not enough to jump into what I consider an overvalued market after having sat it out all this time.

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Fixed Income investments too conservative?

Post by megabad » Thu Jun 07, 2018 10:57 am

ronnie56 wrote:
Wed Jun 06, 2018 9:45 pm
Fellow BH's, my bias is to use fixed income for stability, and not chase yield/take on unnecessary risk -- so I really don't see the need for the exercise. In any case I need to give the advisor some feedback on his recommendation. My gut is that it has too many positions, but I don't really know how else to evaluate it. I've posted the recommended 'enhanced income portfolio' below. Of note, the overall expense ratio is .36%
You indicated you don't know how to evaluate, but you have already begun doing so and I am in agreement with you. There a lot of positions and the total fees and expenses are high. As discussed in other posts, looks to me like you would have to give away half of your current gains every year in fees and expenses. Half is too big a pill for me to swallow personally, but that decision is for you to make.

You also mentioned the extended duration and maturities of the chosen portfolio. This is very extreme to me as two of the largest holdings will be Vanguard Int Term Inv Grade and the NY Long muni. Int Term may have a maturity of double or triple your current portfolio. NY Long Muni may have one that is five or six times your current portfolio. This portfolio is complicated and confusing and it looks like (I hope) that it includes multiple accounts both tax advantaged and taxable. Would need more info to evaluate much beyond what your analysis seems to have already revealed.

Valuethinker
Posts: 36632
Joined: Fri May 11, 2007 11:07 am

Re: Fixed Income investments too conservative?

Post by Valuethinker » Thu Jun 07, 2018 11:01 am

ronnie56 wrote:
Wed Jun 06, 2018 9:45 pm
My husband and I are having a disagreement, about how aggressively to invest the fixed income portion of our portfolio.

We are both 62, starting retirement in 6 months. We are conservative investors by nature, with an AA of 30% equities, 70% fixed income. We have ample savings that will last through retirement; Even with a 3% withdrawal rate and current allocation/investments, assets will be left over for our heirs.

My husband simply thinks we're being 'too conservative' and feels we could be getting a higher return, so he recently asked our financial adviser what a fixed income portfolio that earns 3.5%/year would look like.

(Our current fixed income portfolio currently consists of a 3 year CD ladder, plus a diverse group of bond funds with a short duration, all high quality investment grade. It is currently earning 2.4%/yr)

The biggest change in the proposed 'enhanced income portfolio' is simply moving out on the yield curve to intermediate duration (the bulk of our holdings are currently in shorter dated funds). It also added some new asset classes, such as emerging market bonds, a preferred stock fund, a MLP fund, plus some additional REITs ... 30 different funds in all, posted below.

Fellow BH's, my bias is to use fixed income for stability, and not chase yield/take on unnecessary risk -- so I really don't see the need for the exercise. In any case I need to give the advisor some feedback on his recommendation. My gut is that it has too many positions, but I don't really know how else to evaluate it. I've posted the recommended 'enhanced income portfolio' below. Of note, the overall expense ratio is .36%

Thanks in advance for your thoughts.

Fund Name | Call Letters | Percent of fixed income assets
Vanguard Interm-Term Investment-Grde Adm VFIDX 15%
Franklin NY Tax-Free Income Adv FNYAX 10%
Vanguard NY Long-Term Tax-Exempt Adm VNYUX 10%
DoubleLine Total Return Bond I DBLT 9.9%
iShares TIPS Bond TIP 7.5%
Vanguard Interm-Term Treasury Adm VFIUX 7.2%
Vanguard Ltd-Term Tx-Ex VMLTX 5.3%
Nuveen Municipal Value Fund Inc. NUV 5%
T. Rowe Price Instl Emerging Mkts Bond TREBX 5%
Guggenheim Floating Rate Strats Instl GIFIX 4.5%
SPDR® Wells Fargo Preferred Stock ETF PSK 4%
Baird Short-Term Bond Inst BSBIX 2.6%
SPDR® Barclays High Yield Bond ETF JNK 2.5%
JPMorgan Alerian MLP ETN AMJ 2.5%
BlackRock Multi-Asset Income Instl BIICX 2%
Vanguard REIT Index Adm VGSLX 2%
Physicians Realty Trust DOC 2%
RiverNorth Doubleline Strategic Inc I RNSIX 2%
Guggenheim Limited Duration Instl GILHX 1%
You are walking into a trap if you do this. Aided and abetted by an adviser who is either unscrupulous or doesn't really understand risk-return (it's more likely the latter, to be honest, advisers are taught how to sell, not what to sell).

My father felt something similar before the Global Financial Crisis of 2008-09.

He loaded up on higher yielding preference shares, high income funds, income trusts (this was in Canada).

Was then down c. 30% during the Crisis. Never fully recovered the lost capital. Fortunately his Defined Benefit Pension Scheme looks after my mother pretty well.

That "superior" interest cost him a lot of capital. I was annoyed, because when he retired (in about 1990) we had set him up with a nice portfolio of stripped coupon bonds (in tax free accounts) yielding c. 8-9%. But as interest rates fell, rather than rolling forward the ladder (one bond expires, so we buy another one say 10 years maturity) he "reached" for yield.

The portfolio discussed above, with your adviser, will drop c. 30% in another crisis (somewhere between 10 and 50%).

Miriam2
Posts: 2345
Joined: Fri Nov 14, 2014 11:51 am

Re: Fixed Income investments too conservative?

Post by Miriam2 » Thu Jun 07, 2018 2:57 pm

ronnie56 wrote: My husband simply thinks we're being 'too conservative' and feels we could be getting a higher return, so he recently asked our financial adviser what a fixed income portfolio that earns 3.5%/year would look like. . . . It also added some new asset classes, such as emerging market bonds, a preferred stock fund, a MLP fund, plus some additional REITs ... 30 different funds in all, posted below.
This type of portfolio is referred to as The More The Merrier !! style of fund picking :D
. . . We are conservative investors by nature, with an AA of 30% equities, 70% fixed income.
Do you have other funds that are in equities? Where are the 30% equities?

2015
Posts: 2156
Joined: Mon Feb 10, 2014 2:32 pm

Re: Fixed Income investments too conservative?

Post by 2015 » Thu Jun 07, 2018 3:05 pm

dwickenh wrote:
Thu Jun 07, 2018 8:10 am
This is a classic case of making a portfolio look so complicated that there is no way you can manage this yourself.

If this were my adviser, I would cut the tie just because of this recommendation.

I'm sure he has made himself a friend and is indispensable in his own mind.

If you want a conservative managed portfolio, check with Wellesley or Wellington funds.

Better yet, use a low cost total stock fund and a Intermediate total bond fund in a percentage that meets your goals.

I hope you take some time to digest all of the advice given to come up with a plan that makes life easier for you.

Best wishes,

Dan
All of this, particularly the first two lines. Best thing I ever did in my PF management was migrate over to Taylor's simple 3 fund portfolio.

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Fixed Income investments too conservative?

Post by retiredjg » Thu Jun 07, 2018 4:20 pm

I don't say this often.....but in the advisor's defense......he was asked to come up with a fixed income portfolio that would yield 3.5%.

I saw no indication it was the advisor's idea to do this or that the advisor thinks it should be implemented. He may have just answered the husband's question and why should he not do that?

User avatar
dwickenh
Posts: 1447
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Fixed Income investments too conservative?

Post by dwickenh » Thu Jun 07, 2018 4:37 pm

retiredjg wrote:
Thu Jun 07, 2018 4:20 pm
I don't say this often.....but in the advisor's defense......he was asked to come up with a fixed income portfolio that would yield 3.5%.

I saw no indication it was the advisor's idea to do this or that the advisor thinks it should be implemented. He may have just answered the husband's question and why should he not do that?
But with that portfolio??? Not even all fixed income, with percentages that mean nothing in some cases.

If it was just advice based on the husband's request, it was still a complicated way to do it.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

retiredjg
Posts: 34372
Joined: Thu Jan 10, 2008 12:56 pm

Re: Fixed Income investments too conservative?

Post by retiredjg » Thu Jun 07, 2018 4:45 pm

dwickenh wrote:
Thu Jun 07, 2018 4:37 pm
retiredjg wrote:
Thu Jun 07, 2018 4:20 pm
I don't say this often.....but in the advisor's defense......he was asked to come up with a fixed income portfolio that would yield 3.5%.

I saw no indication it was the advisor's idea to do this or that the advisor thinks it should be implemented. He may have just answered the husband's question and why should he not do that?
But with that portfolio??? Not even all fixed income, with percentages that mean nothing in some cases.

If it was just advice based on the husband's request, it was still a complicated way to do it.
Maybe that simply indicates what a difficult job it would be to construct something that looks like fixed income that yields 3.5%. :happy

If asked a ludicrous question, you have to expect a ludicrous response.

delamer
Posts: 6387
Joined: Tue Feb 08, 2011 6:13 pm

Re: Fixed Income investments too conservative?

Post by delamer » Thu Jun 07, 2018 4:50 pm

galeno wrote:
Wed Jun 06, 2018 10:14 pm
It's a male thing. Wife and I retired. Both of us is 60 years old.

My wife and older daughter convinced me to go from an "aggressive" 60% equities to a "conservative" 40%.

They are fine with it. Me? Not so much. I'd like to return to 60%.

A 30/70 port is the best risk adjusted asset allocation for retirement.

Baloney — I am a more aggressive investor than my husband, but I don’t claim either of us represents our gender.

But if the OP’s husband wants more return, then increase the stock portion of the portfolio. As others have said, that is where the risk should go.

I am not sure if the OP is correct in characterizing them as “conservative investors by nature.” She may be, but her husband is showing he wants to take more risk. He is just going about it in an odd way.

User avatar
galeno
Posts: 1413
Joined: Fri Dec 21, 2007 12:06 pm

Re: Fixed Income investments too conservative?

Post by galeno » Thu Jun 07, 2018 5:39 pm

It's actually not baloney. Women, as a group, are better investors than men. It's been studied many times. I wish it were otherwise. But there you go.
delamer wrote:
Thu Jun 07, 2018 4:50 pm
galeno wrote:
Wed Jun 06, 2018 10:14 pm
It's a male thing. Wife and I retired. Both of us is 60 years old.

My wife and older daughter convinced me to go from an "aggressive" 60% equities to a "conservative" 40%.

They are fine with it. Me? Not so much. I'd like to return to 60%.

A 30/70 port is the best risk adjusted asset allocation for retirement.

Baloney — I am a more aggressive investor than my husband, but I don’t claim either of us represents our gender.

But if the OP’s husband wants more return, then increase the stock portion of the portfolio. As others have said, that is where the risk should go.

I am not sure if the OP is correct in characterizing them as “conservative investors by nature.” She may be, but her husband is showing he wants to take more risk. He is just going about it in an odd way.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

delamer
Posts: 6387
Joined: Tue Feb 08, 2011 6:13 pm

Re: Fixed Income investments too conservative?

Post by delamer » Thu Jun 07, 2018 6:24 pm

galeno wrote:
Thu Jun 07, 2018 5:39 pm
It's actually not baloney. Women, as a group, are better investors than men. It's been studied many times. I wish it were otherwise. But there you go.
delamer wrote:
Thu Jun 07, 2018 4:50 pm
galeno wrote:
Wed Jun 06, 2018 10:14 pm
It's a male thing. Wife and I retired. Both of us is 60 years old.

My wife and older daughter convinced me to go from an "aggressive" 60% equities to a "conservative" 40%.

They are fine with it. Me? Not so much. I'd like to return to 60%.

A 30/70 port is the best risk adjusted asset allocation for retirement.

Baloney — I am a more aggressive investor than my husband, but I don’t claim either of us represents our gender.

But if the OP’s husband wants more return, then increase the stock portion of the portfolio. As others have said, that is where the risk should go.

I am not sure if the OP is correct in characterizing them as “conservative investors by nature.” She may be, but her husband is showing he wants to take more risk. He is just going about it in an odd way.
Yes, I’ve read that women do better because they trade less frequently.

But that’s different than women being more risk averse.

However, I’ll concede that the two things are probably related. :happy

ronnie56
Posts: 8
Joined: Sun Nov 03, 2013 4:14 pm

Re: Fixed Income investments too conservative?

Post by ronnie56 » Fri Jun 08, 2018 9:26 am

Thank you for your responses, one and all. Will review with my husband this weekend. Should be an interesting convo.

Some takeaways, based on your feedback:
we should clarify the reason for taking on more risk ... there are better (and simpler!) ways to do that.

PS - Regarding the advisor, in his defense my husband has been pushing for more risk, the advisor is simply responding to that. As a matter of the advisor's comp, it's roughly 0.3%. I know that we could save that and DIY, but his planning has been good in many other areas, and we value that.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Fixed Income investments too conservative?

Post by dbr » Fri Jun 08, 2018 9:32 am

ronnie56 wrote:
Fri Jun 08, 2018 9:26 am
Thank you for your responses, one and all. Will review with my husband this weekend. Should be an interesting convo.

Some takeaways, based on your feedback:
we should clarify the reason for taking on more risk ... there are better (and simpler!) ways to do that.

PS - Regarding the advisor, in his defense my husband has been pushing for more risk, the advisor is simply responding to that. As a matter of the advisor's comp, it's roughly 0.3%. I know that we could save that and DIY, but his planning has been good in many other areas, and we value that.
Good. But I differ on the advisor. Coming up with that insane array of investments is, well, insane. Either that or there is some angle on maximizing commissions somehow. I have also seen situations where the agenda is to push certain investments in the interest of the firm. A good advisor would have advised allocating a little more to stocks. There really is no excuse here except to give you a chance to recognize that you don't want to do business with this person.

jalbert
Posts: 3909
Joined: Fri Apr 10, 2015 12:29 am

Re: Fixed Income investments too conservative?

Post by jalbert » Fri Jun 08, 2018 10:36 am

dbr wrote:
Fri Jun 08, 2018 9:32 am
ronnie56 wrote:
Fri Jun 08, 2018 9:26 am
Thank you for your responses, one and all. Will review with my husband this weekend. Should be an interesting convo.

Some takeaways, based on your feedback:
we should clarify the reason for taking on more risk ... there are better (and simpler!) ways to do that.

PS - Regarding the advisor, in his defense my husband has been pushing for more risk, the advisor is simply responding to that. As a matter of the advisor's comp, it's roughly 0.3%. I know that we could save that and DIY, but his planning has been good in many other areas, and we value that.
Good. But I differ on the advisor. Coming up with that insane array of investments is, well, insane. Either that or there is some angle on maximizing commissions somehow. I have also seen situations where the agenda is to push certain investments in the interest of the firm. A good advisor would have advised allocating a little more to stocks. There really is no excuse here except to give you a chance to recognize that you don't want to do business with this person.
+1
Should not be paying an advisor to be an order taker but to be an advisor. The advisor should say that if your goal is to have a portfolio with a higher expected return, then you have to take more risk, and here’s how to do it.
Risk is not a guarantor of return.

User avatar
galeno
Posts: 1413
Joined: Fri Dec 21, 2007 12:06 pm

Re: Fixed Income investments too conservative?

Post by galeno » Fri Jun 08, 2018 12:39 pm

I agree about the advisor. His portfolio for you is a complicated overlapping mess. My advice is normal Boglehead advice. Keep it simple.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

Post Reply