Bond choices, risk vs yield

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ZachFinch76
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Bond choices, risk vs yield

Post by ZachFinch76 » Tue Jul 16, 2019 7:24 pm

Hello

I am potentially going to make a life change in a year or two and am thinking ahead of how I want to shift my portfolio some to generate more fixed income. I was thinking what people think of mixing VBTLX with VWEAX 50/50 to increase the bond yield by about 1.5%. I realize the risk profile with VWEAX is much different than VBTLX hence my idea to blend it with VBTLX. I would still see this as more conservative and less volatile than a higher percentage of stock holdings. I know the idea with bonds is stability and once volatility is introduced a person should be asking themselves why they are not in stocks. But as I said I am thinking about increases fixed income yield without an over exposure to volatility and risk. Please share your thoughts

thanks

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Blueskies123
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Re: Bond choices, risk vs yield

Post by Blueskies123 » Tue Jul 16, 2019 7:38 pm

I take risk with stocks so my bonds have as little risk as possible, for example, US treasuries.

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patrick013
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Re: Bond choices, risk vs yield

Post by patrick013 » Tue Jul 16, 2019 8:43 pm

ZachFinch76 wrote:
Tue Jul 16, 2019 7:24 pm
But as I said I am thinking about increases fixed income yield without an over exposure to volatility and risk. Please share your thoughts

Short and/or Intermediate term funds are the way to go with rates staying low. 3 to 5 year CD's still have some good rates too. For the risk takers ticker USIG and for strategy ticker EDV. Hard to buy long term at least for me. Perhaps in a few years when some bond ladders come due.
age in bonds, buy-and-hold, 10 year business cycle

dbr
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Re: Bond choices, risk vs yield

Post by dbr » Tue Jul 16, 2019 9:01 pm

Generating income and holding the fixed income asset class are two completely different things. Income can be taken from any assets in any portfolio any time you want. If you want the income to be fixed in amount and delivered on a definite schedule you can simply do that yourself or arrange with your broker for a fixed withdrawal plan from about any portfolio.

Is there a reason you want the income to be delivered in the form of dividends from fixed income assets? (Meaning there probably should not be any particular reason to do that.)

Valuethinker
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Re: Bond choices, risk vs yield

Post by Valuethinker » Wed Jul 17, 2019 2:39 am

ZachFinch76 wrote:
Tue Jul 16, 2019 7:24 pm
Hello

I am potentially going to make a life change in a year or two and am thinking ahead of how I want to shift my portfolio some to generate more fixed income. I was thinking what people think of mixing VBTLX with VWEAX 50/50 to increase the bond yield by about 1.5%. I realize the risk profile with VWEAX is much different than VBTLX hence my idea to blend it with VBTLX. I would still see this as more conservative and less volatile than a higher percentage of stock holdings. I know the idea with bonds is stability and once volatility is introduced a person should be asking themselves why they are not in stocks. But as I said I am thinking about increases fixed income yield without an over exposure to volatility and risk. Please share your thoughts

thanks
Hello

With the exception of tax issues (capital gains etc.) you want to think Total Return not income + capital gain.

I don't know the US fund codes so I don't know which funds you are considering.

However it looks like you will get a higher current income, but experience more volatility in value.

It's always worth looking at 2008-09 performance of a bond fund before investing. Imagining what would be your position if you went through that again in your portfolio.

(from an interest rate point of view, 1994 is very instructive as well).

Hot tip: the worry last time was CDOs (US mortgage backed bonds, sliced up into tranches). This time, it's CLOs (leveraged loans made to LBO/ Private Equity transactions, then carved up and sold off by the banks).

Topic Author
ZachFinch76
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Re: Bond choices, risk vs yield

Post by ZachFinch76 » Wed Jul 17, 2019 12:58 pm

I guess what I am playing with is how I can increase dividends or bond payments to give me a bit more fixed income in a bear market, without selling assets too much
Valuethinker wrote:
Wed Jul 17, 2019 2:39 am
ZachFinch76 wrote:
Tue Jul 16, 2019 7:24 pm
Hello

I am potentially going to make a life change in a year or two and am thinking ahead of how I want to shift my portfolio some to generate more fixed income. I was thinking what people think of mixing VBTLX with VWEAX 50/50 to increase the bond yield by about 1.5%. I realize the risk profile with VWEAX is much different than VBTLX hence my idea to blend it with VBTLX. I would still see this as more conservative and less volatile than a higher percentage of stock holdings. I know the idea with bonds is stability and once volatility is introduced a person should be asking themselves why they are not in stocks. But as I said I am thinking about increases fixed income yield without an over exposure to volatility and risk. Please share your thoughts

thanks
Hello

With the exception of tax issues (capital gains etc.) you want to think Total Return not income + capital gain.

I don't know the US fund codes so I don't know which funds you are considering.

However it looks like you will get a higher current income, but experience more volatility in value.

It's always worth looking at 2008-09 performance of a bond fund before investing. Imagining what would be your position if you went through that again in your portfolio.

(from an interest rate point of view, 1994 is very instructive as well).

Hot tip: the worry last time was CDOs (US mortgage backed bonds, sliced up into tranches). This time, it's CLOs (leveraged loans made to LBO/ Private Equity transactions, then carved up and sold off by the banks).

MotoTrojan
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Re: Bond choices, risk vs yield

Post by MotoTrojan » Wed Jul 17, 2019 1:00 pm

You just need to understand the concept of total return and realize a dividend withdrawn is no different than a share sold and withdrawn. This is an inefficient way to get income (really, safe withdrawal).

If you are really stuck on the idea of only spending dividends I would consider mixing in some dividend equity funds before I would add any corporate bonds. Your fund had a 29% drawdown FYI.

ohai
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Re: Bond choices, risk vs yield

Post by ohai » Wed Jul 17, 2019 1:04 pm

If you believe risk is efficiently priced, then increasing credit risk in your bond portfolio should have similar effects to increasing stock exposure.

However, if you're indifferent, you should probably choose stocks over those bonds, since dividends and capital gains are generally more tax efficient than bond coupons.

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Tyler Aspect
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Re: Bond choices, risk vs yield

Post by Tyler Aspect » Wed Jul 17, 2019 1:11 pm

ZachFinch76 wrote:
Tue Jul 16, 2019 7:24 pm
Hello

I am potentially going to make a life change in a year or two and am thinking ahead of how I want to shift my portfolio some to generate more fixed income. I was thinking what people think of mixing VBTLX with VWEAX 50/50 to increase the bond yield by about 1.5%. I realize the risk profile with VWEAX is much different than VBTLX hence my idea to blend it with VBTLX. I would still see this as more conservative and less volatile than a higher percentage of stock holdings. I know the idea with bonds is stability and once volatility is introduced a person should be asking themselves why they are not in stocks. But as I said I am thinking about increases fixed income yield without an over exposure to volatility and risk. Please share your thoughts

thanks
High yield corporate at half of your bond holding for a retired person is a very bad idea. You are only focusing on dividend to the exclusion of all other very important attributes. A retired person's bond holding must provide stability, which total bond market serves relatively well and junk bond does not serve well. Some would even add some Treasury holdings for added safety.

A typical retirement portfolio might have 50% stock / 50% bond for a balance of stability and total return.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

dbr
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Re: Bond choices, risk vs yield

Post by dbr » Wed Jul 17, 2019 1:43 pm

ZachFinch76 wrote:
Wed Jul 17, 2019 12:58 pm
I guess what I am playing with is how I can increase dividends or bond payments to give me a bit more fixed income in a bear market, without selling assets too much

A withdrawal is a withdrawal is a withdrawal. Spending the dividends or selling shares comes to the same thing. The only point in question is what is the rate of withdrawal and what is the return sequence of the portfolio. The evidence based on withdrawal studies is that over a wide range of risk vs return the amount you can safely withdraw is not much changed by taking more or less risk for more or less return. The reason for that is that more return is offset by possible bad sequences of return and mitigating sequence of return problems involves accepting too little return. This is true in the first and second approximations. There may be some optimization in the third order.

In any case yield has nothing to do with it. As others are saying the operative factor is return.

miket29
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Re: Bond choices, risk vs yield

Post by miket29 » Wed Jul 17, 2019 2:40 pm

ZachFinch76 wrote:
Tue Jul 16, 2019 7:24 pm
I was thinking what people think of mixing VBTLX with VWEAX 50/50 to increase the bond yield by about 1.5%. I realize the risk profile with VWEAX is much different than VBTLX hence my idea to blend it with VBTLX. I would still see this as more conservative and less volatile than a higher percentage of stock holdings
My thoughts are that corporate bonds, especially hi-yield ones, stop behaving like bonds when the market tanks and start behaving like stocks. In 2008 the market fell about 55% and VWEAX was down about 35%. So you aren't getting much protection from the market drops and in the meantime you give up all the upside appreciation.

Topic Author
ZachFinch76
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Re: Bond choices, risk vs yield

Post by ZachFinch76 » Wed Jul 17, 2019 6:27 pm

Thanks all. I see the points and I have been swayed. I should not introduce stock like volatility into my bonds just for a potential slightly higher yield.

Explorer
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Re: Bond choices, risk vs yield

Post by Explorer » Wed Jul 17, 2019 6:42 pm

ZachFinch76 wrote:
Wed Jul 17, 2019 6:27 pm
Thanks all. I see the points and I have been swayed. I should not introduce stock like volatility into my bonds just for a potential slightly higher yield.
I do not think there is any bond category that has stock like volatility.

VWEAX has more volatility than VBTLX.... but nothing like stock (indexes).

Just be careful what conclusions you draw from the responses...

All the best.

venkman
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Re: Bond choices, risk vs yield

Post by venkman » Wed Jul 17, 2019 10:15 pm

ZachFinch76 wrote:
Wed Jul 17, 2019 12:58 pm
I guess what I am playing with is how I can increase dividends or bond payments to give me a bit more fixed income in a bear market, without selling assets too much
If you're counting on your portfolio to produce a specific amount of income each year, there's nothing wrong with tilting toward higher-dividend stocks and more long-term/corporate bonds. You could easily get a relatively stable 3% in dividends each year. Another strategy is to have a more traditional broad index portfolio with a small cash bucket (5% should be more than enough). That should throw off at least 2% in dividends. If stocks are up, you sell them off to get the extra 1%. If stocks are down, you take the extra 1% from your cash bucket.

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Re: Bond choices, risk vs yield

Post by MotoTrojan » Wed Jul 17, 2019 10:40 pm

Explorer wrote:
Wed Jul 17, 2019 6:42 pm
ZachFinch76 wrote:
Wed Jul 17, 2019 6:27 pm
Thanks all. I see the points and I have been swayed. I should not introduce stock like volatility into my bonds just for a potential slightly higher yield.
I do not think there is any bond category that has stock like volatility.

VWEAX has more volatility than VBTLX.... but nothing like stock (indexes).

Just be careful what conclusions you draw from the responses...

All the best.
EDV (30 year strips)

bluquark
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Re: Bond choices, risk vs yield

Post by bluquark » Wed Jul 17, 2019 11:41 pm

venkman wrote:
Wed Jul 17, 2019 10:15 pm
If you're counting on your portfolio to produce a specific amount of income each year, there's nothing wrong with tilting toward higher-dividend stocks and more long-term/corporate bonds.
I see plenty wrong with this idea. It’s taking concentrated risk in tax-inefficient assets. Dividends or junk bonds can dry up in a recession and long-term bonds can crash if interest rates rise. With a total return mindset, you can get *more* predictable income because you’re free to make your portfolio more diversified.

Thesaints
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Re: Bond choices, risk vs yield

Post by Thesaints » Wed Jul 17, 2019 11:48 pm

Why not VWEAX and treasuries ? You can get almopst any risk you want by varying the ratio.

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Re: Bond choices, risk vs yield

Post by pkcrafter » Thu Jul 18, 2019 12:32 am

zach, VWEAX will perform pretty much like a 40/60 portfolio is a market drawdown. It lost almost 22% in 2008. You can't get a higher return without increasing the downside risk.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

venkman
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Re: Bond choices, risk vs yield

Post by venkman » Thu Jul 18, 2019 11:16 pm

bluquark wrote:
Wed Jul 17, 2019 11:41 pm
venkman wrote:
Wed Jul 17, 2019 10:15 pm
If you're counting on your portfolio to produce a specific amount of income each year, there's nothing wrong with tilting toward higher-dividend stocks and more long-term/corporate bonds.
I see plenty wrong with this idea. It’s taking concentrated risk in tax-inefficient assets. Dividends or junk bonds can dry up in a recession and long-term bonds can crash if interest rates rise. With a total return mindset, you can get *more* predictable income because you’re free to make your portfolio more diversified.
I was thinking more along the lines of tilting toward things like Vanguard's High-Dividend Yield Index (3.37% yield) and Long-Term Bond Index (3.34%). Dividends aren't guaranteed, but dividend payouts tend to be a lot more stable than stock prices. And rising interest rates might hurt the price of long-term bonds, but it won't affect the payouts.

Total return makes sense for the accumulation phase. But if you're going to be withdrawing from your portfolio, I don't think it's unreasonable to tilt your AA toward asset classes that produce higher, relatively stable income.

That being said, I think you can accomplish pretty much the same thing with a more traditional broad index portfolio and a 5% cash bucket.

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Sandtrap
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Re: Bond choices, risk vs yield

Post by Sandtrap » Fri Jul 19, 2019 4:09 pm

venkman wrote:
Thu Jul 18, 2019 11:16 pm
bluquark wrote:
Wed Jul 17, 2019 11:41 pm
venkman wrote:
Wed Jul 17, 2019 10:15 pm
If you're counting on your portfolio to produce a specific amount of income each year, there's nothing wrong with tilting toward higher-dividend stocks and more long-term/corporate bonds.
I see plenty wrong with this idea. It’s taking concentrated risk in tax-inefficient assets. Dividends or junk bonds can dry up in a recession and long-term bonds can crash if interest rates rise. With a total return mindset, you can get *more* predictable income because you’re free to make your portfolio more diversified.
I was thinking more along the lines of tilting toward things like Vanguard's High-Dividend Yield Index (3.37% yield) and Long-Term Bond Index (3.34%). Dividends aren't guaranteed, but dividend payouts tend to be a lot more stable than stock prices. And rising interest rates might hurt the price of long-term bonds, but it won't affect the payouts.

Total return makes sense for the accumulation phase. But if you're going to be withdrawing from your portfolio, I don't think it's unreasonable to tilt your AA toward asset classes that produce higher, relatively stable income.

That being said, I think you can accomplish pretty much the same thing with a more traditional broad index portfolio and a 5% cash bucket.
Alternatively:
Vanguard Intermediate Term Investment Grade Fund (VFIDX)
plus
Vanguard Total Bond (VBTLX)

Thoughts?
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venkman
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Re: Bond choices, risk vs yield

Post by venkman » Fri Jul 19, 2019 9:24 pm

Sandtrap wrote:
Fri Jul 19, 2019 4:09 pm
Alternatively:
Vanguard Intermediate Term Investment Grade Fund (VFIDX) plus Vanguard Total Bond (VBTLX)
Thoughts?
That should work fine for most people.

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Sandtrap
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Re: Bond choices, risk vs yield

Post by Sandtrap » Fri Jul 19, 2019 9:38 pm

venkman wrote:
Fri Jul 19, 2019 9:24 pm
Sandtrap wrote:
Fri Jul 19, 2019 4:09 pm
Alternatively:
Vanguard Intermediate Term Investment Grade Fund (VFIDX) plus Vanguard Total Bond (VBTLX)
Thoughts?
That should work fine for most people.
I think the other combination I've seen is:

VFIDX - Int Term Investment Grade Fund
+
VBILX - Int Term Bond Index Fund

j
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