Best fixed income instrument for 150K in taxable acct

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jjunk
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Best fixed income instrument for 150K in taxable acct

Post by jjunk » Fri Jun 21, 2019 12:21 pm

I have 150K I need to allocate to fixed income. I hold a very simple two fund portfolio of S&P500 (IVV) and Intermediate Bonds (FXNAX). Normally, this would be an easy decision for me and I'd just drop it into FXNAX and forget about it. However, there's a non-zero chance I might retire in Sept/Oct of this year and, if I did retire, this money would be used for the first 2-3yrs of retirement expenses. I've been considering a couple of options and would like some feedback:

1. Do nothing. Cash pays 2%
2. Buy FXNAX, move on with my life.
3. Buy something shorter duration, like FLOT for lower duration and slightly higher dividend

My brain is telling my #2 is still my best option. It's part of my investment strategy, doesnt leave the money out of the market and comes with a modest amount of downside risk should rates rise. Is there a reason I shouldnt do this? Is there an investment I'm missing?

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Re: Best fixed income instrument for 150K in taxable acct

Post by Dialectical Investor » Fri Jun 21, 2019 12:32 pm

There always was a non-zero chance you would retire this Sept/Oct. Whether it is highly likely or not very likely would inform your decision.

I don't think one is ever "in" or "out" of the fixed income market--the effects are pervasive. What is happening to FXNAX is likely to have some affect on your other fixed income options too.

It doesn't have to be all or none: you could keep some in cash to shorten your fixed income duration.

How okay you are with withdrawing funds during a potential decline in value also would inform your decision. Keep in mind you aren't withdrawing it all in one day, so the value is going to fluctuate anyway.

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Re: Best fixed income instrument for 150K in taxable acct

Post by vineviz » Fri Jun 21, 2019 12:42 pm

jjunk wrote:
Fri Jun 21, 2019 12:21 pm
My brain is telling my #2 is still my best option.
Listen to your brain.

FXNAX is equivalent to Vanguard Total Bond Index, for which the WORST rolling 1-year return was -2.66% and the worst 3-year return was +1.21%. Even if you were 100% sure to spend the money in the next 2-3 years, it's hard to see how FXNAX is unduly aggressive.

Mostly likely the whole $150k shouldn't be in fixed income to begin with . . .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Best fixed income instrument for 150K in taxable acct

Post by KlangFool » Fri Jun 21, 2019 12:45 pm

jjunk wrote:
Fri Jun 21, 2019 12:21 pm
if I did retire, this money would be used for the first 2-3yrs of retirement expenses.
jjunk,

Even if that is true, there is no reason why that 150K should be in the fixed income at all. It is obvious that your total portfolio is greater than 150K.

KlangFool

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Re: Best fixed income instrument for 150K in taxable acct

Post by Dialectical Investor » Fri Jun 21, 2019 12:51 pm

I think the point KlangFool is trying to make is, are you not allocating this money according to your asset allocation? If not, what's going to happen in 3 years if you do retire? Will you withdraw another 3 years of expenses at once and put that in fixed income? (Most people withdraw when they need the money and aim to maintain their desired asset allocation.)

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Re: Best fixed income instrument for 150K in taxable acct

Post by jjunk » Fri Jun 21, 2019 4:32 pm

Dialectical Investor wrote:
Fri Jun 21, 2019 12:51 pm
I think the point KlangFool is trying to make is, are you not allocating this money according to your asset allocation? If not, what's going to happen in 3 years if you do retire? Will you withdraw another 3 years of expenses at once and put that in fixed income? (Most people withdraw when they need the money and aim to maintain their desired asset allocation.)
Sorry, I should have been much clearer. This is going into fixed income as part of my overall AA. I'm out of tax advantaged space so taxable is the only spot I have left. As to how I would handle withdrawals in retirement, I would definitely not be taking out 3yrs. We were planning to do a vacation of some sorts as a celebration before settling down into our normal routines, so I had this money in a CD until now. I'm just going to listen to my investment statement and put it in FXNAX and move on with my day. Thanks everyone!

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Re: Best fixed income instrument for 150K in taxable acct

Post by KlangFool » Fri Jun 21, 2019 4:47 pm

jjunk wrote:
Fri Jun 21, 2019 4:32 pm
Dialectical Investor wrote:
Fri Jun 21, 2019 12:51 pm
I think the point KlangFool is trying to make is, are you not allocating this money according to your asset allocation? If not, what's going to happen in 3 years if you do retire? Will you withdraw another 3 years of expenses at once and put that in fixed income? (Most people withdraw when they need the money and aim to maintain their desired asset allocation.)
Sorry, I should have been much clearer. This is going into fixed income as part of my overall AA. I'm out of tax advantaged space so taxable is the only spot I have left. As to how I would handle withdrawals in retirement, I would definitely not be taking out 3yrs. We were planning to do a vacation of some sorts as a celebration before settling down into our normal routines, so I had this money in a CD until now. I'm just going to listen to my investment statement and put it in FXNAX and move on with my day. Thanks everyone!
jjunk,

I would keep the money in the CD or CASH. Why take the risk of FXNAX and earn close to nothing? Money market fund is paying 2+% now.

https://investor.vanguard.com/mutual-fu ... file/VUSXX

VUSXX is paying 2.34%

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Re: Best fixed income instrument for 150K in taxable acct

Post by jjunk » Fri Jun 21, 2019 5:00 pm

The 30 day yield on FXNAX is sitting ~2.79% right now. Can you help me understand what you mean by saying FXNAX earns close to nothing? Seems like it would be better than cash unless you're saying you think it would be best not to take the duration risk for 70bp.

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Re: Best fixed income instrument for 150K in taxable acct

Post by KlangFool » Fri Jun 21, 2019 5:05 pm

jjunk wrote:
Fri Jun 21, 2019 5:00 pm
The 30 day yield on FXNAX is sitting ~2.79% right now. Can you help me understand what you mean by saying FXNAX earns close to nothing? Seems like it would be better than cash unless you're saying you think it would be best not to take the duration risk for 70bp.
jjunk,

<<30-Day Yield 3
2.79%
5/31/2019
Weighted Avg Maturity
7.90 Years
5/31/2019
Duration
5.54 Years
5/31/2019>>

Why would I take the duration risk of 5+ years just for 70bp? Yes, that is what I am saying. It is not worth the risk.

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Re: Best fixed income instrument for 150K in taxable acct

Post by jjunk » Fri Jun 21, 2019 5:08 pm

KlangFool wrote:
Fri Jun 21, 2019 5:05 pm
jjunk wrote:
Fri Jun 21, 2019 5:00 pm
The 30 day yield on FXNAX is sitting ~2.79% right now. Can you help me understand what you mean by saying FXNAX earns close to nothing? Seems like it would be better than cash unless you're saying you think it would be best not to take the duration risk for 70bp.
jjunk,

<<30-Day Yield 3
2.79%
5/31/2019
Weighted Avg Maturity
7.90 Years
5/31/2019
Duration
5.54 Years
5/31/2019>>

Why would I take the duration risk of 5+ years just for 70bp? Yes, that is what I am saying. It is not worth the risk.

KlangFool
Got it, thanks for your feedback. I appreciate it.

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Re: Best fixed income instrument for 150K in taxable acct

Post by Grt2bOutdoors » Fri Jun 21, 2019 5:08 pm

jjunk wrote:
Fri Jun 21, 2019 5:00 pm
The 30 day yield on FXNAX is sitting ~2.79% right now. Can you help me understand what you mean by saying FXNAX earns close to nothing? Seems like it would be better than cash unless you're saying you think it would be best not to take the duration risk for 70bp.
Better suggestion - create a 3 year rolling ladder of FDIC insured CD's. Ally Bank is currently offering 1 year, 18 month and 3 year CD's for an APY rate of 2.55%. There's your 1-3 years of expenses with no nominal principal fluctuation and no term risk beyond the 3 year window. You buy the intermediate fund, you run the risk of principal loss for no real term premium. A 24 bp higher rate for an additional 4-5 years of duration? I'd pass.
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Re: Best fixed income instrument for 150K in taxable acct

Post by Kevin M » Fri Jun 21, 2019 5:15 pm

KlangFool wrote:
Fri Jun 21, 2019 4:47 pm
VUSXX is paying 2.34%
If you pay state income tax, the taxable-equivalent yield (TEY) is even higher (VUSXX is Vanguard Treasury Money Market fund), as the income is 100% exempt from state income tax. At 2.34% SEC yield, VUSXX has a compound TEY for me of 2.66%.

The Fidelity version is FDLXX, for which SEC yield is only 1.96%. Fidelity MM funds aren't competitive with Vanguard, due to much higher expense ratios.

Kevin
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Re: Best fixed income instrument for 150K in taxable acct

Post by jjunk » Fri Jun 21, 2019 6:01 pm

Grt2bOutdoors wrote:
Fri Jun 21, 2019 5:08 pm
jjunk wrote:
Fri Jun 21, 2019 5:00 pm
The 30 day yield on FXNAX is sitting ~2.79% right now. Can you help me understand what you mean by saying FXNAX earns close to nothing? Seems like it would be better than cash unless you're saying you think it would be best not to take the duration risk for 70bp.
Better suggestion - create a 3 year rolling ladder of FDIC insured CD's. Ally Bank is currently offering 1 year, 18 month and 3 year CD's for an APY rate of 2.55%. There's your 1-3 years of expenses with no nominal principal fluctuation and no term risk beyond the 3 year window. You buy the intermediate fund, you run the risk of principal loss for no real term premium. A 24 bp higher rate for an additional 4-5 years of duration? I'd pass.
I'll look into it. When I was browsing Fidelity earlier, all the brokered CDs were pretty paltry. Might be time to look outside of them.

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Re: Best fixed income instrument for 150K in taxable acct

Post by abuss368 » Fri Jun 21, 2019 6:11 pm

I think you already have your bond fund. Keep it simple and avoid complexity by adding additional funds.

Jack Bogle always said simplicity is the master key to financial success.
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Re: Best fixed income instrument for 150K in taxable acct

Post by abuss368 » Fri Jun 21, 2019 6:13 pm

jjunk wrote:
Fri Jun 21, 2019 12:21 pm
I have 150K I need to allocate to fixed income. I hold a very simple two fund portfolio of S&P500 (IVV) and Intermediate Bonds (FXNAX). Normally, this would be an easy decision for me and I'd just drop it into FXNAX and forget about it. However, there's a non-zero chance I might retire in Sept/Oct of this year and, if I did retire, this money would be used for the first 2-3yrs of retirement expenses. I've been considering a couple of options and would like some feedback:

1. Do nothing. Cash pays 2%
2. Buy FXNAX, move on with my life.
3. Buy something shorter duration, like FLOT for lower duration and slightly higher dividend

My brain is telling my #2 is still my best option. It's part of my investment strategy, doesnt leave the money out of the market and comes with a modest amount of downside risk should rates rise. Is there a reason I shouldnt do this? Is there an investment I'm missing?
Could you invest it according to your asset allocation and would the resulting dividend income fund retirement?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Best fixed income instrument for 150K in taxable acct

Post by Grt2bOutdoors » Fri Jun 21, 2019 6:24 pm

jjunk wrote:
Fri Jun 21, 2019 6:01 pm
Grt2bOutdoors wrote:
Fri Jun 21, 2019 5:08 pm
jjunk wrote:
Fri Jun 21, 2019 5:00 pm
The 30 day yield on FXNAX is sitting ~2.79% right now. Can you help me understand what you mean by saying FXNAX earns close to nothing? Seems like it would be better than cash unless you're saying you think it would be best not to take the duration risk for 70bp.
Better suggestion - create a 3 year rolling ladder of FDIC insured CD's. Ally Bank is currently offering 1 year, 18 month and 3 year CD's for an APY rate of 2.55%. There's your 1-3 years of expenses with no nominal principal fluctuation and no term risk beyond the 3 year window. You buy the intermediate fund, you run the risk of principal loss for no real term premium. A 24 bp higher rate for an additional 4-5 years of duration? I'd pass.
I'll look into it. When I was browsing Fidelity earlier, all the brokered CDs were pretty paltry. Might be time to look outside of them.
The bank may not need a torrential flood of money, so they offer less on the brokerage platform to reduce likelihood of being bombarded with more cash than they need.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Best fixed income instrument for 150K in taxable acct

Post by jjunk » Fri Jun 21, 2019 6:36 pm


Could you invest it according to your asset allocation and would the resulting dividend income fund retirement?
Yes, if I put this into FXNAX it would be inline with my AA and any dividends it produces would be to fund retirement expenses.

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Re: Best fixed income instrument for 150K in taxable acct

Post by ericcohen » Fri Jun 21, 2019 6:43 pm

LLQD and move on.

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Re: Best fixed income instrument for 150K in taxable acct

Post by Grt2bOutdoors » Fri Jun 21, 2019 7:32 pm

ericcohen wrote:
Fri Jun 21, 2019 6:43 pm
LLQD and move on.
Holding correlated assets is a sure-fire way to increase your ability to sleep well at night, especially in the first 3 years of retirement.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Best fixed income instrument for 150K in taxable acct

Post by abuss368 » Fri Jun 21, 2019 9:16 pm

jjunk wrote:
Fri Jun 21, 2019 6:36 pm

Could you invest it according to your asset allocation and would the resulting dividend income fund retirement?
Yes, if I put this into FXNAX it would be inline with my AA and any dividends it produces would be to fund retirement expenses.
That is why I asked that question. I think you just answered your own original question. Simple two fund portfolio. Asset allocation would be in line. Dividends would pay retirement. Done!
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Re: Best fixed income instrument for 150K in taxable acct

Post by ericcohen » Sat Jun 22, 2019 11:25 am

Grt2bOutdoors wrote:
Fri Jun 21, 2019 7:32 pm
ericcohen wrote:
Fri Jun 21, 2019 6:43 pm
LLQD and move on.
Holding correlated assets is a sure-fire way to increase your ability to sleep well at night, especially in the first 3 years of retirement.
Why does the correlation matter if he's using the income stream for retirement? At 4% distribution paid by LLQD, that's about $6,000 a year for retirement for life. He's locked in that income stream regardless of how low the price of the etf goes.

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Re: Best fixed income instrument for 150K in taxable acct

Post by Kevin M » Sat Jun 22, 2019 1:01 pm

ericcohen wrote:
Sat Jun 22, 2019 11:25 am
Grt2bOutdoors wrote:
Fri Jun 21, 2019 7:32 pm
ericcohen wrote:
Fri Jun 21, 2019 6:43 pm
LLQD and move on.
Holding correlated assets is a sure-fire way to increase your ability to sleep well at night, especially in the first 3 years of retirement.
Why does the correlation matter if he's using the income stream for retirement? At 4% distribution paid by LLQD, that's about $6,000 a year for retirement for life. He's locked in that income stream regardless of how low the price of the etf goes.
There are a number of problems with this.

Sounds like OP is looking for something to generate 2-3 years of income totaling $150K, so that's a minimum of $50K/year. If using only LLQD for this, that would require selling shares as well as collecting dividends, so it would indeed matter how low the price of the ETF goes.

OP currently has an intermediate-term investment-grade bond fund in OP's simple portfolio, which is consistent with OP's investment policy. That fund has more than 70% in US government obligations, so very low credit risk, and a duration of about 5.5 years, so moderate term risk. You are suggesting adding a long-term corporate bond fund (96% corporate bonds, with only 3.5% AAA rated), with a duration of almost 14 years, so significantly more credit risk and term risk.

As an indicator of the risk, in its short history (Portfolio Visualizer shows history since Oct 2017), max drawdown of LLQD is -10.24%, compared to FXNAX of -2.39%. Even the intermediate-term version of the ETF, LQD, had a max drawdown of -15.11% in late 2008, compared to -3.99% for VBMFX, which is similar to FXNAX but has a longer history. And that's based on monthly returns--the intra-month drawdown of LQD probably was worse--I remember, since I owned some LQD at the time.

OP seems mostly inclined to keep existing AA, but is considering alternatives with lower risk to cover expenses for the 2-3 year period. Adding a long-term corporate bond fund does not fit into either of those categories.

The $6,000 dividend is not "guaranteed for life". If yields trend lower, the distributions will follow suit with some lag, and vice versa. But this is a relatively minor point, since OP is not looking for $6,000 per year in income, which incidentally is less than $2,000 more per year than the distributions of FXNAX (based on 5/31/2019 distribution and NAV).

Kevin
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Re: Best fixed income instrument for 150K in taxable acct

Post by welderwannabe » Sat Jun 22, 2019 1:08 pm

ericcohen wrote:
Fri Jun 21, 2019 6:43 pm
LLQD and move on.
Long term corporate bonds? Not sure thats the best plan.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Best fixed income instrument for 150K in taxable acct

Post by RetiredAL » Sat Jun 22, 2019 2:12 pm

OP,

If you are considering purchasing a Fixed Income ETF, such as AGG or similar, in the very near future, do it so the settlement date is one day before the date-of-record for the up-coming monthly dividend. You'l get most of the daily computed interest for the month from your Fidelity Cash account plus the entire month's dividend from the ETF.

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Re: Best fixed income instrument for 150K in taxable acct

Post by Grt2bOutdoors » Sat Jun 22, 2019 3:08 pm

Kevin M wrote:
Sat Jun 22, 2019 1:01 pm
ericcohen wrote:
Sat Jun 22, 2019 11:25 am
Grt2bOutdoors wrote:
Fri Jun 21, 2019 7:32 pm
ericcohen wrote:
Fri Jun 21, 2019 6:43 pm
LLQD and move on.
Holding correlated assets is a sure-fire way to increase your ability to sleep well at night, especially in the first 3 years of retirement.
Why does the correlation matter if he's using the income stream for retirement? At 4% distribution paid by LLQD, that's about $6,000 a year for retirement for life. He's locked in that income stream regardless of how low the price of the etf goes.
There are a number of problems with this.

Sounds like OP is looking for something to generate 2-3 years of income totaling $150K, so that's a minimum of $50K/year. If using only LLQD for this, that would require selling shares as well as collecting dividends, so it would indeed matter how low the price of the ETF goes.

OP currently has an intermediate-term investment-grade bond fund in OP's simple portfolio, which is consistent with OP's investment policy. That fund has more than 70% in US government obligations, so very low credit risk, and a duration of about 5.5 years, so moderate term risk. You are suggesting adding a long-term corporate bond fund (96% corporate bonds, with only 3.5% AAA rated), with a duration of almost 14 years, so significantly more credit risk and term risk.

As an indicator of the risk, in its short history (Portfolio Visualizer shows history since Oct 2017), max drawdown of LLQD is -10.24%, compared to FXNAX of -2.39%. Even the intermediate-term version of the ETF, LQD, had a max drawdown of -15.11% in late 2008, compared to -3.99% for VBMFX, which is similar to FXNAX but has a longer history. And that's based on monthly returns--the intra-month drawdown of LQD probably was worse--I remember, since I owned some LQD at the time.

OP seems mostly inclined to keep existing AA, but is considering alternatives with lower risk to cover expenses for the 2-3 year period. Adding a long-term corporate bond fund does not fit into either of those categories.

The $6,000 dividend is not "guaranteed for life". If yields trend lower, the distributions will follow suit with some lag, and vice versa. But this is a relatively minor point, since OP is not looking for $6,000 per year in income, which incidentally is less than $2,000 more per year than the distributions of FXNAX (based on 5/31/2019 distribution and NAV).

Kevin
Exactly! If bonds default, the purchaser of LQD will most certainly see a decline in yield. You can not maintain yield if the underlying issuer fails to make timely payments of interest coupons when due. Corporate bonds tend to track the financial condition of the issuer, when the credit rating is cut, the price of bond receives a market adjustment to reflect higher risk of default. Increased ratings cuts tend to be issued in bulk when there is economic disruption that negatively impacts earnings and stresses already affected balance sheets. That is why you should take risk on the equity side and use the safest instruments for fixed income. Quality matters.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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