Need to make major rebalance to bonds - help

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bironology
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Need to make major rebalance to bonds - help

Post by bironology » Tue Sep 11, 2018 1:19 pm

Hello,

I'm quite lightweight in my actual bond allocation due to two factors:

1) I simply have been buying too little in the past
2) the growth of US and international equities

Long story short, I need to rebalance about $80k of US small-midcap funds to a bond allocation. This is all within my 401k plan. My IRA is already nearly 100% bonds, but because I only recently discovered the magic of backdoor Roth, the balance in the IRA is just a fraction of the 401k.

I'd much rather correct the allocation slowly through contributions, but even with my new contributions to the 401k at 100% bonds, it's never going to get to where it needs to be without a rebalance. Literally may never happen, unless there's a stock market correction (gulp).

I have two concerns about doing this rebalance:

1) buying such a large lump of bond funds without DCA. I realize this is market timing and I should shrug it off, but it still bugs me. I can get over that though
2) I do not love the fund selections in my 401k. They are:
-PIMCO Total Return A (ER = 0.89%)
-Blackrock Inflation protected Bond Fund (treasury notes) (ER = 0.60%)
-PIMCO High Yield A (ER = 0.57%)

My taxable portfolio at Schwab, on the other hand, presents much better opportunities for buying slabs of bonds with surplus income, bonuses, etc. at desirable expense ratios.

Should I bite the bullet and rebalance in my 401k, or consider the sub-optimal placement of some bond funds in my taxable account, or perhaps a mix of the two?

ADDITION: This is also likely to be an ongoing "challenge" as my annual bonus is a substantial component of my overall compensation, so without a means to efficiently buy bonds in taxable, I'll need to constantly rebalance my 401k. Someday the 401k may be 100% bonds...

thanks for any thoughts.

banhbao
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Re: Need to make major rebalance to bonds - help

Post by banhbao » Tue Sep 11, 2018 1:54 pm

It sounds like you don't like the bond fund options in your 401k, and that makes sense because they have high expense ratios.
Why not use the 401k to invest in stocks and the Schwab account for bonds? It might be possible to open a traditional IRA at Schwab and transfer the excess. Or just use your existing Schwab account to balance your "complete" investment portfolio.

bironology
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Re: Need to make major rebalance to bonds - help

Post by bironology » Tue Sep 11, 2018 1:58 pm

I cannot contribute or rollover to a traditional IRA, I'm still employed at the employer with the 401k plan.

You're correct that I need to "complete" my portfolio in my taxable account. This will become more and more of a necessity as surplus income beyond what I can contribute tax-deferred needs to be invested (nice problem to have).

I suppose this is not a unique situation. A total bond market fund in a taxable account will generate taxable dividends, but c'est la vie I guess.

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goingup
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Re: Need to make major rebalance to bonds - help

Post by goingup » Tue Sep 11, 2018 2:08 pm

Any good blended or balanced funds in your 401K? Sometimes the ER is lower than solo bond funds. Also, muni bond funds, especially Vanguard's are low cost and can help solve your problem.

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Dale_G
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Re: Need to make major rebalance to bonds - help

Post by Dale_G » Tue Sep 11, 2018 3:01 pm

bironology wrote:
Tue Sep 11, 2018 1:58 pm
I suppose this is not a unique situation. A total bond market fund in a taxable account will generate taxable dividends, but c'est la vie I guess.
If your marginal federal tax rate is at or above 24%, consider using a municipal bond fund.

Dale
Volatility is my friend

bironology
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Re: Need to make major rebalance to bonds - help

Post by bironology » Tue Sep 11, 2018 3:25 pm

goingup wrote:
Tue Sep 11, 2018 2:08 pm
Any good blended or balanced funds in your 401K? Sometimes the ER is lower than solo bond funds. Also, muni bond funds, especially Vanguard's are low cost and can help solve your problem.
well, I'm not sure how to assess "good". my choices are

Fidelity Stable Pool Fund (ER 0.49%)
PIMCO Total Return A (0.80%)
PIMCO High Yield A (0.91%)
Blackrock Inflation Protected Bond Fund (0.53%)

All with abysmal real returns after the high ERs.

Looking at Schwab's bond fund offerings, yes the ERs are low but the returns are still less than my Ally bank high yield savings account and CDs, with no price volatility in this (potentially) rising interest rate environment.

Hey, I understand "don't time the market", but buying into that stuff seems dumb right now.

If I'm going to hold something in my taxable account, right now that Ally Savings account (1.85%!! and going up each month) is looking pretty good, and the 4 yr "raise your rate" CD at 2.55% even better.

I'm thinking "high yield savings and CDs" as my "bonds". What am I missing?

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Starchild
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Re: Need to make major rebalance to bonds - help

Post by Starchild » Tue Sep 11, 2018 10:00 pm

bironology wrote:
Tue Sep 11, 2018 3:25 pm
goingup wrote:
Tue Sep 11, 2018 2:08 pm
Any good blended or balanced funds in your 401K? Sometimes the ER is lower than solo bond funds. Also, muni bond funds, especially Vanguard's are low cost and can help solve your problem.
well, I'm not sure how to assess "good". my choices are

Fidelity Stable Pool Fund (ER 0.49%)
PIMCO Total Return A (0.80%)
PIMCO High Yield A (0.91%)
Blackrock Inflation Protected Bond Fund (0.53%)

All with abysmal real returns after the high ERs.

Looking at Schwab's bond fund offerings, yes the ERs are low but the returns are still less than my Ally bank high yield savings account and CDs, with no price volatility in this (potentially) rising interest rate environment.

Hey, I understand "don't time the market", but buying into that stuff seems dumb right now.

If I'm going to hold something in my taxable account, right now that Ally Savings account (1.85%!! and going up each month) is looking pretty good, and the 4 yr "raise your rate" CD at 2.55% even better.

I'm thinking "high yield savings and CDs" as my "bonds". What am I missing?
I hear ya. I'm using a PIMCO income fund that loses money penny by penny a day. It's frustrating, but I keep reinvesting the dividends and the return goes up each month. I'm not looking to use it for another 20 years, so I figure stick with it and will hopefully balance out. But no, I'm not adding additional funds to it. A large part of my savings/portfolio is earning 1.85% in MM.

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BL
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Re: Need to make major rebalance to bonds - help

Post by BL » Wed Sep 12, 2018 1:06 am

Fidelity Stable Pool Fund (ER 0.49%)
?
What interest rate does this pay? It might work as a "bond".

It is ok to have some bonds in a Roth.

I-bonds defer taxes up to 30 years and are state tax-exempt.

bironology
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Re: Need to make major rebalance to bonds - help

Post by bironology » Wed Sep 12, 2018 4:46 am

BL wrote:
Wed Sep 12, 2018 1:06 am
Fidelity Stable Pool Fund (ER 0.49%)
?
What interest rate does this pay? It might work as a "bond".
"The Fund invests in the Stable Return
Fund, a stable value collective fund
advised by Galliard Capital Management.
The Fund is primarily comprised of
investment contracts issued by financial
companies including Guaranteed
Investment Contracts (GICs), Separate
Account GICs, and Security Backed
Investment Contracts.

...
Stable value investments seek capital preservation, but they do carry potential risks. Stable
value investments may be comprised of or may invest in annuity or investment contracts issued
by life insurance companies, banks, and other financial institutions. Stable value investments
are subject to the risk that the insurance company or other financial institution will fail to meet
its commitments,"

I don't like this. 1yr return in 0.86%. 3-yr is 1.6%. More importantly it sounds exotic and I don't like to buy stuff I do not understand.
It is ok to have some bonds in a Roth.
I-bonds defer taxes up to 30 years and are state tax-exempt.
In my Roth IRA I do hold Schwab U.S. Aggregate Bond Index Fund. But as I previously mentioned my Roth IRA is small compared to my 401k and taxable balances, and my contribution is limited to $5500/yr, so I need to park more bonds somewhere else.

I've looked at I-Bonds in the past but shied away because of the need to open a TreasuryDirect account (yet another account, and my wife already complains to me that our finances are too complicated).

Is there an alternative to buying I-Bonds at TreasuryDirect? Can I buy them in my Schwab account?

PaulF
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Re: Need to make major rebalance to bonds - help

Post by PaulF » Wed Sep 12, 2018 8:36 am

bironology wrote:
Tue Sep 11, 2018 3:25 pm
goingup wrote:
Tue Sep 11, 2018 2:08 pm
Any good blended or balanced funds in your 401K? Sometimes the ER is lower than solo bond funds. Also, muni bond funds, especially Vanguard's are low cost and can help solve your problem.
well, I'm not sure how to assess "good". my choices are

Fidelity Stable Pool Fund (ER 0.49%)
PIMCO Total Return A (0.80%)
PIMCO High Yield A (0.91%)
Blackrock Inflation Protected Bond Fund (0.53%)

All with abysmal real returns after the high ERs.

I think "going up" meant something like a Target Retirement Date fund, but with a target date of, say, 2005. Some vendors have the logical conclusion of this, typically called an "Income Fund." These have a high bond component, and some such funds have a low ER.

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BL
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Re: Need to make major rebalance to bonds - help

Post by BL » Wed Sep 12, 2018 8:45 am

PaulF wrote:
Wed Sep 12, 2018 8:36 am
bironology wrote:
Tue Sep 11, 2018 3:25 pm
goingup wrote:
Tue Sep 11, 2018 2:08 pm
Any good blended or balanced funds in your 401K? Sometimes the ER is lower than solo bond funds. Also, muni bond funds, especially Vanguard's are low cost and can help solve your problem.
well, I'm not sure how to assess "good". my choices are

Fidelity Stable Pool Fund (ER 0.49%)
PIMCO Total Return A (0.80%)
PIMCO High Yield A (0.91%)
Blackrock Inflation Protected Bond Fund (0.53%)

All with abysmal real returns after the high ERs.

I think "going up" meant something like a Target Retirement Date fund, but with a target date of, say, 2005. Some vendors have the logical conclusion of this, typically called an "Income Fund." These have a high bond component, and some such funds have a low ER.
Yes, Vanguard Target Retirement Income Fund has 70% fixed income.
Without seeing all the 401k choices along with ERs, we might be missing something.

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goingup
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Re: Need to make major rebalance to bonds - help

Post by goingup » Wed Sep 12, 2018 8:50 am

PaulF wrote:
Wed Sep 12, 2018 8:36 am
bironology wrote:
Tue Sep 11, 2018 3:25 pm
goingup wrote:
Tue Sep 11, 2018 2:08 pm
Any good blended or balanced funds in your 401K? Sometimes the ER is lower than solo bond funds. Also, muni bond funds, especially Vanguard's are low cost and can help solve your problem.
well, I'm not sure how to assess "good". my choices are

Fidelity Stable Pool Fund (ER 0.49%)
PIMCO Total Return A (0.80%)
PIMCO High Yield A (0.91%)
Blackrock Inflation Protected Bond Fund (0.53%)

All with abysmal real returns after the high ERs.

I think "going up" meant something like a Target Retirement Date fund, but with a target date of, say, 2005. Some vendors have the logical conclusion of this, typically called an "Income Fund." These have a high bond component, and some such funds have a low ER.
Yes, thanks--I did mean to suggest a fund that contains both bonds and equity. This could be a Target Date fund or a balanced fund such as American Balanced Fund or Vanguard Wellington fund.

Personally, I would not hold bonds in a Roth IRA, and save that space for only equity funds.

rgs92
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Re: Need to make major rebalance to bonds - help

Post by rgs92 » Wed Sep 12, 2018 8:58 am

The Stable Pool from Fidelity would be my answer. Just look at the return rate and ignore the expense ratio. That's how you have to look at stable value funds. It's a floating rate fund, which is basically good (unless you are in a dramatically decreasing rate environment, where bonds are better).

If the rate of return is around what you would get in an Ally savings account (say 1.6% at least), it's fine.

And you have been making good gains from your high stock allocation so far, so take the profits by rebalancing into stable value and don't worry about anything.

reddison
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Re: Need to make major rebalance to bonds - help

Post by reddison » Wed Sep 12, 2018 10:58 am

I recently faced the same issue and used Vanguard Target Retirement 2020 (VTWNX). It is 46% Bonds, with a combination of VG Total Bond Mkt II Index Fund (29%), VG Total Int'l Bond (12%) and VG Short-term inflation protected securities (5%). I was doing this in my 401k and we didn't have a good bond fund offering either.

aristotelian
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Re: Need to make major rebalance to bonds - help

Post by aristotelian » Wed Sep 12, 2018 2:02 pm

Definitely do not do the High Yield (also known as "junk" bonds). Very risky and correlated with stocks.

In addition to I Bonds, you might also look at Muni Bonds such as Vanguard Intermediate Tax Exempt (VWITX). You mention being in a high tax bracket, so those would be good choices even in a taxable account.

Also agree that Target Date with a low expense ratio would be a good solution for the 401k. Balanced Index is another possibility.

bironology
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Re: Need to make major rebalance to bonds - help

Post by bironology » Thu Sep 13, 2018 4:19 am

rgs92 wrote:
Wed Sep 12, 2018 8:58 am
The Stable Pool from Fidelity would be my answer. Just look at the return rate and ignore the expense ratio. That's how you have to look at stable value funds. It's a floating rate fund, which is basically good (unless you are in a dramatically decreasing rate environment, where bonds are better).

If the rate of return is around what you would get in an Ally savings account (say 1.6% at least), it's fine.

And you have been making good gains from your high stock allocation so far, so take the profits by rebalancing into stable value and don't worry about anything.
The Stable Pool is 1.82%, right there with Ally savings (which bumped from 1.75 to 1.85 a few months ago, so almost exactly there with it!).

thanks! I feel better about that one now.

bironology
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Re: Need to make major rebalance to bonds - help

Post by bironology » Thu Sep 13, 2018 4:27 am

reddison wrote:
Wed Sep 12, 2018 10:58 am
I recently faced the same issue and used Vanguard Target Retirement 2020 (VTWNX). It is 46% Bonds, with a combination of VG Total Bond Mkt II Index Fund (29%), VG Total Int'l Bond (12%) and VG Short-term inflation protected securities (5%). I was doing this in my 401k and we didn't have a good bond fund offering either.
interesting, however my plan - administered by Transamerica Retirement Systems (TRS), does not have target date funds available. Instead, there's a feature TRS calls PortfolioExpress, whereby I select a target date and a risk profile and it blends the funds available in the plan, using only the bond funds I previously mentioned.

bironology
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Re: Need to make major rebalance to bonds - help

Post by bironology » Thu Sep 13, 2018 4:37 am

aristotelian wrote:
Wed Sep 12, 2018 2:02 pm


In addition to I Bonds, you might also look at Muni Bonds such as Vanguard Intermediate Tax Exempt (VWITX). You mention being in a high tax bracket, so those would be good choices even in a taxable account.

Yes, I have parked cash in Schwab Tax-Free Bond Fund (SWNTX) in the past for mid-term savings for home improvement projects. The volatility over the last year for muni funds did scare me off a bit, but that was for 2-yr savings objectives, for long term investment I think it makes more sense. Thanks for that.

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welderwannabe
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Re: Need to make major rebalance to bonds - help

Post by welderwannabe » Thu Sep 13, 2018 6:32 am

I would park half in the stable value and half in the PIMCO total return fund. It isn't a horrible bond fund.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

bironology
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Re: Need to make major rebalance to bonds - help

Post by bironology » Fri Sep 14, 2018 4:26 am

welderwannabe wrote:
Thu Sep 13, 2018 6:32 am
I would park half in the stable value and half in the PIMCO total return fund. It isn't a horrible bond fund.
agreed, and I did exactly that. Yesterday bit the bullet and reallocated in my 401k to 30% bonds total, with 15% in stable value and 15% in Pimco Total, bringing that account in line with my overall AA.

As for my taxable balance in my Schwab account, when I receive my annual bonus I will split some of it to my high yield Ally Savings paying 1.85% (and getting raised every quarter, lately) and some to SWNTX (intermediate muni bonds), which will bring my non-tax-advantaged accounts also in line with my overall AA.

What I've learned is that while it is a lovely idea to prefer tax-advantaged accounts for bonds, practical matters such as 401k and 529 plan options are sometimes an impediment to that.

Which brings me to a general nitpick with the Bogleheads advice on the main site and publications: the 3-fund/4-fund, etc. simplified approaches sound fantastic, but imply that one's entire portfolio exists within a single account, and that single account happens to have the Vanguard or equivalent index funds available. In my situation, which cannot be unique, I have a spouse who has no access to an employer sponsored retirement plan, together we are above the threshold for traditional IRA deductions, and I've been with my employer for a long time (pretty much the entire part of my career that I've been contributing to retirement plans - not long enough at my age, but hey at least I smartened up in my mid 30s).

So I have

- (1) 401k plan with about 40% of my overall investments
- (1) taxable brokerage account with another 40% overall
- (2) 529s for college savings with about 10%
- (2) Roth IRAs for my wife and I, which I've been backdooring making up the remaining 10%
- (1) savings account with emergency fund and short term savings for home projects, vacations, etc. which I generally do not count in my AA since it isn't investment (yet...)

This distribution is a result of a relatively late start (we are both mid-40s, started investing seriously mid-30s, only discovered backdoor Roth a few years ago), but due to some nice windfalls of investable cash and substantial surplus income, the taxable savings is far outpacing tax-advantaged.

I have no complaints about my situation, but you can clearly see that I have a necessarily long list of accounts (7) in which to allocate my overall portfolio, and the available options for index funds are inconsistent across them.

So mine is a real world situation that makes the simple "hold three funds" approach untenable.

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