Suggestions on "bond" allocation

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Topic Author
101invest
Posts: 28
Joined: Fri Jan 11, 2019 10:58 pm

Suggestions on "bond" allocation

Post by 101invest » Sun Nov 17, 2019 9:28 am

Looking for advice on the best investment for our 20% "bond" allocation. With a constant flow of new money to invest does it make sense to park the money in bonds, CDs or Money Market? There is no immediate need for the money so no concerns with it being liquid. Our Federal tax rate is 37%, State 6.5%. Capital gains rate of 20% + 3.8%.

Available options we're considering:

CD's

Money Market:
1. Vanguard Prime Money Market Fund (VMMXX)
2. Vanguard Federal Money Market Fund (VMFXX)
3. Vanguard Municipal Money Market Fund (VMSXX)

401Ks (still have room to reallocate larger percentage to bonds):
1. Metropolitan West Total Return Bond Fund (MWTNX)
2. Vanguard Total Bond Market Index Fund (VBTLX)
3. Fidelity U.S. Bond Index Fund (FXNAX)
4. Fidelity Investment Grade Bond Fund (FBNDX)

Taxable Account (pretty confident this option wouldn't be considered until the 401K space is full)
1. Vanguard Tax-Exempt Intermediate Term Bond Fund (VWIUX)

?? Any other better options available?

Does the answer change for short term vs long term money? Would be interested in hearing feedback on both options.
With interest rates at a very low level, should I be concerned with purchasing bonds. Interest rates will rise and the bonds will decline in value.

Appreciate the feedback!

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

Re: Suggestions on "bond" allocation

Post by dbr » Sun Nov 17, 2019 11:35 am

If it is important to you for short term money to know exactly what you will get back at any particular time then CDs and savings accounts are fine. So are T-bills for that matter, thought the interest may be less. Interest does not matter much in the short term.

I think a generic answer for long term savings in tax deferred accounts is intermediate term diversified bond funds. In special cases a person may have to investigate tax exempt bond funds in taxable.

It is also perfectly feasible to hold fixed income in CDs as well. For some people with the opportunity to build up the asset I bonds are inflation indexed and the earnings are tax deferred for 30 years. Other choices can work as well.

You can read a jillion discussions of your question already posted on the forum. After doing that you will have no more definitive an answer than when you started, but something may cause you to decide on one thing or another.

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ruralavalon
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Location: Illinois

Re: Suggestions on "bond" allocation

Post by ruralavalon » Sun Nov 17, 2019 12:06 pm

101invest wrote:
Sun Nov 17, 2019 9:28 am
Looking for advice on the best investment for our 20% "bond" allocation. With a constant flow of new money to invest does it make sense to park the money in bonds, CDs or Money Market? There is no immediate need for the money so no concerns with it being liquid. Our Federal tax rate is 37%, State 6.5%. Capital gains rate of 20% + 3.8%.

Available options we're considering:

CD's

Money Market:
1. Vanguard Prime Money Market Fund (VMMXX)
2. Vanguard Federal Money Market Fund (VMFXX)
3. Vanguard Municipal Money Market Fund (VMSXX)

401Ks (still have room to reallocate larger percentage to bonds):
1. Metropolitan West Total Return Bond Fund (MWTNX)
2. Vanguard Total Bond Market Index Fund (VBTLX)
3. Fidelity U.S. Bond Index Fund (FXNAX)
4. Fidelity Investment Grade Bond Fund (FBNDX)

Taxable Account (pretty confident this option wouldn't be considered until the 401K space is full)
1. Vanguard Tax-Exempt Intermediate Term Bond Fund (VWIUX)

?? Any other better options available?

Does the answer change for short term vs long term money? Would be interested in hearing feedback on both options.
With interest rates at a very low level, should I be concerned with purchasing bonds. Interest rates will rise and the bonds will decline in value.

Appreciate the feedback!
You said "There is no immediate need for the money so no concerns with it being liquid."

My suggestion is "401Ks (still have room to reallocate larger percentage to bonds):
. . . . .
2. Vanguard Total Bond Market Index Fund (VBTLX)
3. Fidelity U.S. Bond Index Fund (FXNAX)" .

What state do you pay state income taxes to?

For short-term money my suggestion would be different.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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

Re: Suggestions on "bond" allocation

Post by retiredjg » Sun Nov 17, 2019 12:23 pm

101invest wrote:
Sun Nov 17, 2019 9:28 am
Available options we're considering:

CD's

Money Market:
1. Vanguard Prime Money Market Fund (VMMXX)
2. Vanguard Federal Money Market Fund (VMFXX)
3. Vanguard Municipal Money Market Fund (VMSXX)
I don't see a point in using any of these. If you want a money market fund, you should be using a tax-exempt money market fund.

401Ks (still have room to reallocate larger percentage to bonds):
1. Metropolitan West Total Return Bond Fund (MWTNX)
2. Vanguard Total Bond Market Index Fund (VBTLX) <----
3. Fidelity U.S. Bond Index Fund (FXNAX) <----
4. Fidelity Investment Grade Bond Fund (FBNDX)
Use the lower cost one. They are essentially the same thing.

Taxable Account (pretty confident this option wouldn't be considered until the 401K space is full)
1. Vanguard Tax-Exempt Intermediate Term Bond Fund (VWIUX)
Yes, when all 401k space is full....unless you are in a high tax state in which case you should probably use a state fund.


?? Any other better options available?
I Bonds? These are inflation protected bonds that do not pay out taxable income until you sell them or 30 years have passed (at which time your income may be lower). See the Wiki for more information.

Does the answer change for short term vs long term money? Would be interested in hearing feedback on both options.
With interest rates at a very low level, should I be concerned with purchasing bonds. Interest rates will rise and the bonds will decline in value.
For short term money, you should usually consider a shorter term bond.

averagedude
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Re: Suggestions on "bond" allocation

Post by averagedude » Sun Nov 17, 2019 12:24 pm

It seems you are still in the accumulation phase so I would recommend VBTLX. Odds are that when the stock market has a bear market, CD's will have no appreciation. You will get the yield and new money when CD's mature will be at lower rates. Money market yields will go down. With bonds though you should get appreciation, since most of the time when stocks decline, interest rates go down. In investing it is good to have asset classes that move opposite of each other. Of course there is no guarantee that this will happen like this in the future, but the odds are in your favor that they will.

retired@50
Posts: 1761
Joined: Tue Oct 01, 2019 2:36 pm

Re: Suggestions on "bond" allocation

Post by retired@50 » Sun Nov 17, 2019 12:24 pm

101invest wrote:
Sun Nov 17, 2019 9:28 am
Looking for advice on the best investment for our 20% "bond" allocation. With a constant flow of new money to invest does it make sense to park the money in bonds, CDs or Money Market? There is no immediate need for the money so no concerns with it being liquid. Our Federal tax rate is 37%, State 6.5%. Capital gains rate of 20% + 3.8%.

Available options we're considering:

CD's

Money Market:
1. Vanguard Prime Money Market Fund (VMMXX)
2. Vanguard Federal Money Market Fund (VMFXX)
3. Vanguard Municipal Money Market Fund (VMSXX)

401Ks (still have room to reallocate larger percentage to bonds):
1. Metropolitan West Total Return Bond Fund (MWTNX)
2. Vanguard Total Bond Market Index Fund (VBTLX)
3. Fidelity U.S. Bond Index Fund (FXNAX)
4. Fidelity Investment Grade Bond Fund (FBNDX)

Taxable Account (pretty confident this option wouldn't be considered until the 401K space is full)
1. Vanguard Tax-Exempt Intermediate Term Bond Fund (VWIUX)

?? Any other better options available?

Does the answer change for short term vs long term money? Would be interested in hearing feedback on both options.
With interest rates at a very low level, should I be concerned with purchasing bonds. Interest rates will rise and the bonds will decline in value.

Appreciate the feedback!
Use the green options noted above. If you can achieve your total bond allocation in 401k, do that. If not, or when not, use the taxable account. For emergency cash cushion, the Federal money market fund should keep you away from your state tax burden, since the bulk of the interest is from U.S. government obligations which generally aren't taxable at the state level.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

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anon_investor
Posts: 1200
Joined: Mon Jun 03, 2019 1:43 pm

Re: Suggestions on "bond" allocation

Post by anon_investor » Sun Nov 17, 2019 12:27 pm

For your situation VBTLX in your 401k makes the most sense, and definitely better than CDs (not tax deferred growth) or I Bonds (can be a pain to deal with if you are making regular contributions).

Topic Author
101invest
Posts: 28
Joined: Fri Jan 11, 2019 10:58 pm

Re: Suggestions on "bond" allocation

Post by 101invest » Wed Nov 20, 2019 9:00 pm

Thanks for all of the feedback. I like the comment on having asset classes that move opposite of each other in your portfolio. Hence the reason to hold bonds.

"ruralavalon" - curious to hear your (or anyone else) advice on what would be the best option for short-term cash in my situation. Money Market, Bank Savings account, etc. Keeping in mind my federal and WI state tax rates. "retiredjg" mentioned using a tax-exempt money market fund. I'm guessing that would be something like Vanguard Municipal Money Market Fund (VMSXX)? I'm not sure I know how to properly calculate the true rate of return between a taxable and tax-exempt money market fund. Is there an on-line calculator available or am I overthinking the math? Also I see Vanguard offers 3 taxable money market funds, why would one pick one over the other? Appreciate your help as I become more educated in the world of investing.

retired@50
Posts: 1761
Joined: Tue Oct 01, 2019 2:36 pm

Re: Suggestions on "bond" allocation

Post by retired@50 » Wed Nov 20, 2019 9:09 pm

101invest wrote:
Wed Nov 20, 2019 9:00 pm
Thanks for all of the feedback. I like the comment on having asset classes that move opposite of each other in your portfolio. Hence the reason to hold bonds.

"ruralavalon" - curious to hear your (or anyone else) advice on what would be the best option for short-term cash in my situation. Money Market, Bank Savings account, etc. Keeping in mind my federal and WI state tax rates. "retiredjg" mentioned using a tax-exempt money market fund. I'm guessing that would be something like Vanguard Municipal Money Market Fund (VMSXX)? I'm not sure I know how to properly calculate the true rate of return between a taxable and tax-exempt money market fund. Is there an on-line calculator available or am I overthinking the math? Also I see Vanguard offers 3 taxable money market funds, why would one pick one over the other? Appreciate your help as I become more educated in the world of investing.
I believe Vanguard has a taxable equivalent yield calculator to compare taxable vs. muni bonds. I suppose you might be able to adapt it to money market funds that are "muni" in nature. California has a tax free money market fund VCTXX as an example.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

retiredjg
Posts: 40012
Joined: Thu Jan 10, 2008 12:56 pm

Re: Suggestions on "bond" allocation

Post by retiredjg » Thu Nov 21, 2019 7:59 am

101invest wrote:
Wed Nov 20, 2019 9:00 pm
I like the comment on having asset classes that move opposite of each other in your portfolio. Hence the reason to hold bonds.
Don't take this too literally.

It is not that things move opposite each other...it's more like "things might not move together". Or they "may move the same way but different amounts".

dbr
Posts: 32263
Joined: Sun Mar 04, 2007 9:50 am

Re: Suggestions on "bond" allocation

Post by dbr » Thu Nov 21, 2019 10:10 am

retiredjg wrote:
Thu Nov 21, 2019 7:59 am
101invest wrote:
Wed Nov 20, 2019 9:00 pm
I like the comment on having asset classes that move opposite of each other in your portfolio. Hence the reason to hold bonds.
Don't take this too literally.

It is not that things move opposite each other...it's more like "things might not move together". Or they "may move the same way but different amounts".
Yes, and it is not just that two asset classes are uncorrelated or a little bit negatively correlated but also that it doesn't help unless they both move by similar amounts. Among bonds the only asset class that is volatile enough to start to have usefully large movement is long bonds. That is why of all the ways to play that game probably only long treasuries combined with high stock allocations have both a chance at negative correlation and enough movement to help. Most bonds reduce risk in portfolios because they don't move at all. That is also why in mixed portfolios of stocks and bonds it matters how much one holds in bonds but does not matter if those bonds gain or lose a little in value.

RubyTuesday
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Joined: Fri Oct 19, 2012 11:24 am

Re: Suggestions on "bond" allocation

Post by RubyTuesday » Thu Nov 21, 2019 10:15 am

Double check to see if you have access to a TIPs fund in 401(k) also. If you do, consider using it as well. Otherwise choose the cheapest of the 4 in 401(k) followed by Tax Exempt in taxable.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu

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