Bond Alternatives in the time of Zero rates

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
User avatar
Topic Author
Compass
Posts: 6
Joined: Sun Sep 01, 2019 7:01 am
Location: Arizona

Brighthouse Shield Annuities.

Post by Compass »

I'm considering using these products in my traditional IRA to replace a portion, not all, of my bond mutual funds. These got a bad rap on our forum when comparing them to no load index stock mutual funds mostly because they don't pay dividends. But the commenters did not discuss them as an alternative to bond mutual funds. With interest rates near zero, any bond mutual funds probably will loose within 6 years as rates can only go up. This seems like it could solve that problem by transferring all of the bonds in a my traditional IRA to a combination of CDs and this annuity. With Bond Mutual funds posed to loose over the next 6 years, the strategy is to reallocate the to these locked up term Shield annuities for some stability and some returns and keep some CDs/cash to re-balance with when stocks crash.

There are 2 Shield products in particular. 1st is the 6 year term Sheild 25 with a 125% Cap based on the S&P index this is recommended for stability. The 2nd is the 1 year term Shield 10 with over a 9% Step return. This one is more of a gamble but with decent odds.

I'd appreciate your opinion on this strategy on using these Brighthouse Shield Annuity contracts, not as an alternative to Stock mutual funds, but as as an alternative to Bonds with a mix of cash.
User avatar
Topic Author
Compass
Posts: 6
Joined: Sun Sep 01, 2019 7:01 am
Location: Arizona

Bond Alternatives in the time of Zero rates

Post by Compass »

Has anyone found good alternatives to holding Bonds in a portfolio. My current target allocation is 25% Bonds/75% stocks, but I am concerned that the no load index bond mutual funds that I own for 25% of my portfolio are destined to have negative returns as interest rates will have to go up from near zero over the next few years.

I understand the theory of long term investing and avoiding market timing, but in this case, if conditions are such that bonds are almost certain to loose value in the mid to long term, doesn't it make sense to find alternatives for them for the next 2-7 years? Avoiding long term bonds and bond mutual funds is one strategy, but there must be something better than simply buying shorter term bond securities and waiting through years of certain losses.
User avatar
LadyGeek
Site Admin
Posts: 66464
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Bond Alternatives in the time of Zero rates

Post by LadyGeek »

Welcome! I merged your two questions together as they are both asking about bond alternatives for your portfolio.

May I suggest you post your portfolio information in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

If you have any questions, ask them here.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
nedsaid
Posts: 13851
Joined: Fri Nov 23, 2012 12:33 pm

Re: Bond Alternatives in the time of Zero rates

Post by nedsaid »

I have thought this over long and hard and so far I have not found an alternative to bonds as a diversifier to stocks. We will have to learn to live with less yield from bonds and probably lower returns from stocks as well. We have been in a bond bull market since 1982 and most of us have not experienced a bond bear market. Purchasers of World War II War Bonds found that they lost 50% of purchasing power by buying these bonds, pretty much Uncle Sam paid for World War II with inflation. We could perhaps see something like this again where bond yields don't even cover for inflation. We had a lengthy bond bear market from about 1946-1982. Bond returns eventually adjust for inflation though it might take a generation to do it.

If you are young, just keep investing and don't worry about it as over an investing lifetime all of this should even out. If you are a retiree or a near retiree, you should be much more concerned about this. In my mind, inflation is public enemy number one for investors, even a benign 2% inflation rate will erode the purchasing power of a dollar by 22% over a decade. One thing I am considering is shifting some of my bonds into Treasury Inflation Protected Securities or TIPS. I suspect that Federal Agency Bonds and Mortgage Backed Securities will become more popular in a low-yield environment. You can also reach for yield a bit in both stocks and bonds, reach for yield a bit but by not too much.
Last edited by nedsaid on Wed Aug 12, 2020 11:11 am, edited 1 time in total.
A fool and his money are good for business.
User avatar
whodidntante
Posts: 9137
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Bond Alternatives in the time of Zero rates

Post by whodidntante »

I don't wish anyone losses but it would be interesting to see how a bond bear market would change the bond heavy allocations often recommended here. It's pretty easy to own a lot of an asset that mostly goes up.

I doubt you want to buy an annuity.

Some experts are now recommending higher stock allocations and high dividend stocks.

Do you have debt you can prepay? The yield could be a lot higher. If you sell bonds to prepay debt, you end up with a portfolio with a lower level of leverage but the same level of risk.

One Boglehead had bought long-dated oil futures and precious metals as a store of value.
DanFrancis
Posts: 61
Joined: Wed Jun 21, 2017 12:38 am

Re: Bond Alternatives in the time of Zero rates

Post by DanFrancis »

You seem so certain that you would lose money in bonds over the next 6 years...I'm not sure you are correct. It's a guess...but nothing more than a guess. I'm trying to think of any 6 year period where bonds went down every year. I can't off the top of my head. Some CD's would be okay...but that is basically a form of a bond. I hate annuities...too expense for the product. I would have a balanced portfolio, not know what the future really holds.
grok87
Posts: 9153
Joined: Tue Feb 27, 2007 9:00 pm

Re: Brighthouse Shield Annuities.

Post by grok87 »

Compass wrote: Sat Jul 04, 2020 6:19 pm I'm considering using these products in my traditional IRA to replace a portion, not all, of my bond mutual funds. These got a bad rap on our forum when comparing them to no load index stock mutual funds mostly because they don't pay dividends. But the commenters did not discuss them as an alternative to bond mutual funds. With interest rates near zero, any bond mutual funds probably will loose within 6 years as rates can only go up. This seems like it could solve that problem by transferring all of the bonds in a my traditional IRA to a combination of CDs and this annuity. With Bond Mutual funds posed to loose over the next 6 years, the strategy is to reallocate the to these locked up term Shield annuities for some stability and some returns and keep some CDs/cash to re-balance with when stocks crash.

There are 2 Shield products in particular. 1st is the 6 year term Sheild 25 with a 125% Cap based on the S&P index this is recommended for stability. The 2nd is the 1 year term Shield 10 with over a 9% Step return. This one is more of a gamble but with decent odds.

I'd appreciate your opinion on this strategy on using these Brighthouse Shield Annuity contracts, not as an alternative to Stock mutual funds, but as as an alternative to Bonds with a mix of cash.
Hello Compass and welcome to the forum,
As far as i can tell the shield annuity product is an equity-indexed annuity. i'm not an expert on these but they have been widely discussed on the forum. the consensus being that they are complicated and expensive.

as far as bond replacements, i am currently using savings bonds: Ibonds and traditional EE bonds.

cheers,
grok
RIP Mr. Bogle.
jayoco
Posts: 21
Joined: Tue Jan 05, 2016 6:01 pm

Re: Bond Alternatives in the time of Zero rates

Post by jayoco »

DanFrancis wrote: Sat Jul 04, 2020 11:26 pm You seem so certain that you would lose money in bonds over the next 6 years...I'm not sure you are correct. It's a guess...but nothing more than a guess. I'm trying to think of any 6 year period where bonds went down every year. I can't off the top of my head. Some CD's would be okay...but that is basically a form of a bond. I hate annuities...too expense for the product. I would have a balanced portfolio, not know what the future really holds.
I think on a real basis he likely will. I’ve got the same concern and I’ve researched annuities very thoroughly. Bottom line...it doesn’t matter which flavor you buy, the carrier is going to pay about 3 to 3.5% per year in cash value. An income rider over the long term won’t be much better. Say 3.6%.

My personal action? I’m going to move more money into international value equities as the dividend is comparable to the annuity return and those stocks have not had the run up of US stocks over the past decade. Not doing so with all bond money but with 20% or so.
Prettyfrtnt
Posts: 212
Joined: Fri Aug 23, 2019 6:28 pm

Re: Bond Alternatives in the time of Zero rates

Post by Prettyfrtnt »

jayoco wrote: Sun Jul 05, 2020 5:32 am
DanFrancis wrote: Sat Jul 04, 2020 11:26 pm You seem so certain that you would lose money in bonds over the next 6 years...I'm not sure you are correct. It's a guess...but nothing more than a guess. I'm trying to think of any 6 year period where bonds went down every year. I can't off the top of my head. Some CD's would be okay...but that is basically a form of a bond. I hate annuities...too expense for the product. I would have a balanced portfolio, not know what the future really holds.
I think on a real basis he likely will. I’ve got the same concern and I’ve researched annuities very thoroughly. Bottom line...it doesn’t matter which flavor you buy, the carrier is going to pay about 3 to 3.5% per year in cash value. An income rider over the long term won’t be much better. Say 3.6%.

My personal action? I’m going to move more money into international value equities as the dividend is comparable to the annuity return and those stocks have not had the run up of US stocks over the past decade. Not doing so with all bond money but with 20% or so.
What fund would you use for international value?
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Bond Alternatives in the time of Zero rates

Post by dbr »

Low interest rates right now are a fact of life people are going to have to live with. Complaining about our "sad" fate will not change the situation nor is there a solution to be found by being somehow more clever than people have ever been before.
User avatar
patrick013
Posts: 3020
Joined: Mon Jul 13, 2015 7:49 pm

Re: Bond Alternatives in the time of Zero rates

Post by patrick013 »

Compass wrote: Sat Jul 04, 2020 6:37 pm Has anyone found good alternatives to holding Bonds in a portfolio. My current target allocation is 25% Bonds/75% stocks, but I am concerned that the no load index bond mutual funds that I own for 25% of my portfolio are destined to have negative returns as interest rates will have to go up from near zero over the next few years.
Risk neutral approach could be done with a fixed annuity. "A" rating or better
and yield for 3 or 4 years 3% or slightly more. Rates change all the time so if
not as good as last week check next week. (blueprintincome.com)

If you check ticker VPU in the last bear dividends actually went up slightly. This
time they seem to be going up a few pennies as well. If interest rates go up stock
price may decline but current rate isn't bad. At 3.5% yield it's usually a bargain.

Neither "alternative" should lose any money in the next few years.
age in bonds, buy-and-hold, 10 year business cycle
Explorer
Posts: 481
Joined: Thu Oct 13, 2016 7:54 pm

Re: Bond Alternatives in the time of Zero rates

Post by Explorer »

DanFrancis wrote: Sat Jul 04, 2020 11:26 pm You seem so certain that you would lose money in bonds over the next 6 years...I'm not sure you are correct. It's a guess...but nothing more than a guess. I'm trying to think of any 6 year period where bonds went down every year. I can't off the top of my head. Some CD's would be okay...but that is basically a form of a bond. I hate annuities...too expense for the product. I would have a balanced portfolio, not know what the future really holds.
Bold highlight is mine. As other posters said, right after world war II, bond yields started going up rapidly causing bondholders lose a heck of a lot of value on their bonds. Do not assume bonds are safe.. in the current environment they are a safe way to lose money.
Explorer
Posts: 481
Joined: Thu Oct 13, 2016 7:54 pm

Re: Bond Alternatives in the time of Zero rates

Post by Explorer »

Compass wrote: Sat Jul 04, 2020 6:37 pm Has anyone found good alternatives to holding Bonds in a portfolio. My current target allocation is 25% Bonds/75% stocks, but I am concerned that the no load index bond mutual funds that I own for 25% of my portfolio are destined to have negative returns as interest rates will have to go up from near zero over the next few years.

I understand the theory of long term investing and avoiding market timing, but in this case, if conditions are such that bonds are almost certain to loose value in the mid to long term, doesn't it make sense to find alternatives for them for the next 2-7 years? Avoiding long term bonds and bond mutual funds is one strategy, but there must be something better than simply buying shorter term bond securities and waiting through years of certain losses.
OP - You are right on the money here; there are three outcomes possible: 1) Fed is forced to adopt negative interest rates, in which case the net asset value will go up a little; 2) Fed is forced to stay at zero rates longer, in which case the net asset value will basically tread water and drift lower as maturing bonds are replaced by newer lower yielding bonds; 3) Fed is forced to raise interest rates due to inflation, in which case net asset values will drop.

So, bond index funds may prove to be a safe way to lose value over time...
livesoft
Posts: 73369
Joined: Thu Mar 01, 2007 8:00 pm

Re: Bond Alternatives in the time of Zero rates

Post by livesoft »

I am curious what the OP did for 2018 when bond funds lost money for the calendar year 2018. What did you do back then?

So far in 2020, bond funds are up more than 6%, so they would have to lose more than they ever have in the next year in order to have a losing year. I don't think that can happen because the people in power don't like to have bonds lose money, so they change things so that bonds don't lose money. That is, there is always a counterbalancing force of some kind to prevent the most obvious dire future from coming true.
Last edited by livesoft on Sun Jul 05, 2020 10:26 am, edited 1 time in total.
Wiki This signature message sponsored by sscritic: Learn to fish.
tibbitts
Posts: 11967
Joined: Tue Feb 27, 2007 6:50 pm

Re: Bond Alternatives in the time of Zero rates

Post by tibbitts »

jayoco wrote: Sun Jul 05, 2020 5:32 am
DanFrancis wrote: Sat Jul 04, 2020 11:26 pm You seem so certain that you would lose money in bonds over the next 6 years...I'm not sure you are correct. It's a guess...but nothing more than a guess. I'm trying to think of any 6 year period where bonds went down every year. I can't off the top of my head. Some CD's would be okay...but that is basically a form of a bond. I hate annuities...too expense for the product. I would have a balanced portfolio, not know what the future really holds.
My personal action? I’m going to move more money into international value equities as the dividend is comparable to the annuity return and those stocks have not had the run up of US stocks over the past decade. Not doing so with all bond money but with 20% or so.
I would be concerned that:

1. owning international value has been mostly the same kick-in-the-teeth experience for a while now that owning U.S. value has been, relative to growth - of course that may not predict the future;

2. yields on funds are stale and may not - almost surely won't - reflect reality going forward.
bluewater23t
Posts: 18
Joined: Tue Jan 07, 2020 9:31 am

Re: Bond Alternatives in the time of Zero rates

Post by bluewater23t »

Could someone please explain?

Weren't interest rates essentially at the same level from 2009-2015 as they are now? Did bonds lose a lot of value during this time frame?

Backtracking through portfolio visualizer, it doesnt seem like bonds did terribly bad then. I am confused.

Thanks
livesoft
Posts: 73369
Joined: Thu Mar 01, 2007 8:00 pm

Re: Bond Alternatives in the time of Zero rates

Post by livesoft »

bluewater23t wrote: Sun Jul 05, 2020 10:26 amI am confused.
I don't think you are confused, but some others may be.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
arcticpineapplecorp.
Posts: 6213
Joined: Tue Mar 06, 2012 9:22 pm

Re: Bond Alternatives in the time of Zero rates

Post by arcticpineapplecorp. »

livesoft wrote: Sun Jul 05, 2020 10:23 am I am curious what the OP did for 2018 when bond funds lost money for the calendar year 2018. What did you do back then?

So far in 2020, bond funds are up more than 6%, so they would have to lose more than they ever have in the next year in order to have a losing year. I don't think that can happen because the people in power don't like to have bonds lose money, so they change things so that bonds don't lose money. That is, there is always a counterbalancing force of some kind to prevent the most obvious dire future from coming true.
lost what? 0.03% "for the calendar year 2018"?

or are you really meaning "during the calendar year 2018" because they fell 3% during the calendar year 2018?

or are you talking "after inflation return for the calendar year 2018?"

Image

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
jayoco
Posts: 21
Joined: Tue Jan 05, 2016 6:01 pm

Re: Bond Alternatives in the time of Zero rates

Post by jayoco »

tibbitts wrote: Sun Jul 05, 2020 10:25 am
jayoco wrote: Sun Jul 05, 2020 5:32 am
DanFrancis wrote: Sat Jul 04, 2020 11:26 pm You seem so certain that you would lose money in bonds over the next 6 years...I'm not sure you are correct. It's a guess...but nothing more than a guess. I'm trying to think of any 6 year period where bonds went down every year. I can't off the top of my head. Some CD's would be okay...but that is basically a form of a bond. I hate annuities...too expense for the product. I would have a balanced portfolio, not know what the future really holds.
My personal action? I’m going to move more money into international value equities as the dividend is comparable to the annuity return and those stocks have not had the run up of US stocks over the past decade. Not doing so with all bond money but with 20% or so.
I would be concerned that:

1. owning international value has been mostly the same kick-in-the-teeth experience for a while now that owning U.S. value has been, relative to growth - of course that may not predict the future;

2. yields on funds are stale and may not - almost surely won't - reflect reality going forward.
I agree. The problem is that there is no yield on treasuries. 10 year bond returns are basically 90% correlated with current yield. The means no return. Let's say yield numbers are overstated by a 30%. I'd rather take a 2.5 to 3.0% yield and perhaps some equity upside as we all know that foreign outperforms US roughly 50% of the time over long periods.
jayoco
Posts: 21
Joined: Tue Jan 05, 2016 6:01 pm

Re: Bond Alternatives in the time of Zero rates

Post by jayoco »

Prettyfrtnt wrote: Sun Jul 05, 2020 8:17 am
jayoco wrote: Sun Jul 05, 2020 5:32 am
DanFrancis wrote: Sat Jul 04, 2020 11:26 pm You seem so certain that you would lose money in bonds over the next 6 years...I'm not sure you are correct. It's a guess...but nothing more than a guess. I'm trying to think of any 6 year period where bonds went down every year. I can't off the top of my head. Some CD's would be okay...but that is basically a form of a bond. I hate annuities...too expense for the product. I would have a balanced portfolio, not know what the future really holds.
I think on a real basis he likely will. I’ve got the same concern and I’ve researched annuities very thoroughly. Bottom line...it doesn’t matter which flavor you buy, the carrier is going to pay about 3 to 3.5% per year in cash value. An income rider over the long term won’t be much better. Say 3.6%.

My personal action? I’m going to move more money into international value equities as the dividend is comparable to the annuity return and those stocks have not had the run up of US stocks over the past decade. Not doing so with all bond money but with 20% or so.
What fund would you use for international value?
I'm looking at these: 1. VYMI. 2.DEM on the emerging side. 3. VTRIX - I've had a long term allocation here so I'll add. 4.FNDF - Schwab's offering.
User avatar
Horton
Posts: 749
Joined: Mon Jan 21, 2008 3:53 pm

Re: Bond Alternatives in the time of Zero rates

Post by Horton »

For Vanguard Total Bond, the chart below shows the yield, six year forward looking return, and rolldown return (return - yield) for the past 25 years. The rolldown return averages about 0.20%. Take Total Bond's current yield (1.37%) plus an estimate of the rolldown return (0.20%) and you have an estimate of the 6-year return (1.57%).

Image
3funder
Posts: 1458
Joined: Sun Oct 15, 2017 9:35 pm

Re: Bond Alternatives in the time of Zero rates

Post by 3funder »

As far as I'm concerned, there are stocks and there are bonds. I'm not interested in other investment classes.
User avatar
ruralavalon
Posts: 19478
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Bond Alternatives in the time of Zero rates

Post by ruralavalon »

Compass wrote: Sat Jul 04, 2020 6:37 pm Has anyone found good alternatives to holding Bonds in a portfolio. My current target allocation is 25% Bonds/75% stocks, but I am concerned that the no load index bond mutual funds that I own for 25% of my portfolio are destined to have negative returns as interest rates will have to go up from near zero over the next few years.

I understand the theory of long term investing and avoiding market timing, but in this case, if conditions are such that bonds are almost certain to loose value in the mid to long term, doesn't it make sense to find alternatives for them for the next 2-7 years? Avoiding long term bonds and bond mutual funds is one strategy, but there must be something better than simply buying shorter term bond securities and waiting through years of certain losses.
Prepaying principal on higher interest debt becomes even more attractive than normal.

Treasury bond funds and total bond market index funds are still the best diversifiers to equities.

Long-term higher interest rates are good for the bond investor.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
jayoco
Posts: 21
Joined: Tue Jan 05, 2016 6:01 pm

Re: Bond Alternatives in the time of Zero rates

Post by jayoco »

livesoft wrote: Sun Jul 05, 2020 10:29 am
bluewater23t wrote: Sun Jul 05, 2020 10:26 amI am confused.
I don't think you are confused, but some others may be.
The starting yield on the 10Y treasury was 3%. Today it's 70bps. That's a very large difference and likely to produce negative real returns.
livesoft
Posts: 73369
Joined: Thu Mar 01, 2007 8:00 pm

Re: Bond Alternatives in the time of Zero rates

Post by livesoft »

If inflation is -4% (i.e. deflation), then would that produce a positive real return?
Wiki This signature message sponsored by sscritic: Learn to fish.
jayoco
Posts: 21
Joined: Tue Jan 05, 2016 6:01 pm

Re: Bond Alternatives in the time of Zero rates

Post by jayoco »

livesoft wrote: Sun Jul 05, 2020 11:39 am If inflation is -4% (i.e. deflation), then would that produce a positive real return?
Yes. We may very well have deflation this year.
dcw213
Posts: 193
Joined: Sun Dec 16, 2012 3:04 pm

Re: Bond Alternatives in the time of Zero rates

Post by dcw213 »

I have changed my fixed income strategy significantly in light of the current rate environment. In my opinion there is very little upside buying something like total bond fund in this environment and a whole lot of downside (obviously I do not know this but am assuming rates will not go substantially negative).

I have been maxing out annual savings bonds (Series I and EE) for years with some feelings of regret and now am happy I have been. I will continue to. I have taken advantage of retail CDs and have a decent amount of these from 2018 and 2019 yielding 3.5%.

My big change is that I sold all bond funds (except small amounts in some target date funds in 529s) and started using options. For a chunk of what would normally be my bond allocation I moved to a brokerage and am selling cash secured puts on the S&P 500 with rolling expiration dates. I sold them at strike prices that are deep out of the money (on average about -25% from current valuation) and received about 8%-9% annualized premium. My thought process is that I am ignoring the next to nothing yield available in bond funds and instead am being paid for my commitment to rebalance to stocks in the event there is a large drawdown. I feel like this works for me with the portion that I was struggling with. Of course I acknowledge the risks of this and they seem appropriate to me in the current environment with a chunk of savings bonds and 3.5% CDs in hand.
DanFrancis
Posts: 61
Joined: Wed Jun 21, 2017 12:38 am

Re: Bond Alternatives in the time of Zero rates

Post by DanFrancis »

Horton wrote: Sun Jul 05, 2020 10:54 am For Vanguard Total Bond, the chart below shows the yield, six year forward looking return, and rolldown return (return - yield) for the past 25 years. The rolldown return averages about 0.20%. Take Total Bond's current yield (1.37%) plus an estimate of the rolldown return (0.20%) and you have an estimate of the 6-year return (1.57%).

Image
I have no idea what Horton is saying with the "rolldown" and "forward looking" returns etc. Are these guesses for the future? How do they help? The Vanguard Total Bond has averaged 3.66% a year over the past 10 years and averaged 5.93% a year since its inception in 1986. We do not know the future. Horton, are you saying that you predict 1.57% total? per year? over the next 6 years. Please clarify. Of course we don't know the future, at least I don't. But Chairman Powell of the Fed said he will do everything within his power not to allow negative rates.
anoop
Posts: 1783
Joined: Tue Mar 04, 2014 1:33 am

Re: Bond Alternatives in the time of Zero rates

Post by anoop »

Fed is committed to holding at least ZIRP for 2 years. After that, I think the probability is higher we remain ZIRP or go NIRP. Short of some kind of system reset, rates cannot go up because there is too much debt in the system.

The fed is buying bonds now so it will keep rates artificially low and if things still get problematic they will do yield curve control.
User avatar
midareff
Posts: 7142
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Bond Alternatives in the time of Zero rates

Post by midareff »

I have not found alternatives to the bond universe but have done some changes within that sector. I have moved out of high yield completely, was in the 7% area of total portfolio in VWEAX, Vanguard's High Yield. All bonds are investment grade in either the Short or Intermediate Term Corporate Indices or in taxable in Intermediate Term or Long Term Munis. The sledding is tough and getting tougher. Current weighted effective duration is 5.21 years, SEC 1.66% , distribution yield 2.41%. With the SEC of the S&P500 Admiral (VFIAX) higher than that of many bonds funds it makes you think more equities may be helpful as long as sufficient safe money is held.

Currently a 2:1 mix of IT to LT Munis in taxable is distributing 2.53% monthly for an after tax equivalent of 3.24%. Unfortunately all yields are drifting lower... 5.21 years duration and 1.51% SEC on that muni portfolio sector.

Current goal for aggregate of all portfolio bonds is to be shorter in duration than Total Bond Market with a higher after tax equivalent yield (both taxable & IRA) and higher SEC while maintaining full investment grade quality. Of course the further you move from government agency or treasury the greater the daily fluctuation in NAV (risk management issue) and so forth. Over the last two years the bond portion of the portfolio has lost about 10% of its distribution yield which makes me look to a little longer duration within the investment grade spectrum to try an recapture some of that while keeping effective duration under that of Total Bond just in case the pundits who think interest rates will stay near zero long term also know nothing.
Last edited by midareff on Mon Jul 06, 2020 7:36 am, edited 1 time in total.
Explorer
Posts: 481
Joined: Thu Oct 13, 2016 7:54 pm

Re: Bond Alternatives in the time of Zero rates

Post by Explorer »

midareff wrote: Mon Jul 06, 2020 6:30 am I have not found alternatives to the bond universe but have done some changes within that sector. I have moved out of high yield completely, was in the 7% area of total portfolio in VWEAX, Vanguard's High Yield. All bonds are investment grade in either the Short or Intermediate Term Corporate Indices or in taxable in Intermediate Term or Long Term Munis. The sledding is tough and getting tougher. Current weighted effective duration is 5.21 years, SEC 1.66% , distribution yield 2.41%. With the SEC of the S&P500 Admiral (VFIAX) higher than that of many bonds funds it makes you think more equities may be helpful as long as sufficient safe money is held.
Sounds like a very prudent plan.
bluewater23t
Posts: 18
Joined: Tue Jan 07, 2020 9:31 am

Re: Bond Alternatives in the time of Zero rates

Post by bluewater23t »

jayoco wrote: Sun Jul 05, 2020 11:20 am
livesoft wrote: Sun Jul 05, 2020 10:29 am
bluewater23t wrote: Sun Jul 05, 2020 10:26 amI am confused.
I don't think you are confused, but some others may be.
The starting yield on the 10Y treasury was 3%. Today it's 70bps. That's a very large difference and likely to produce negative real returns.
I get that, but doesnt this only affect bonds that are currently expiring in the next 2-3 years that need to be replaced (or for however long ZIRP lasts)? IT and LT bonds already in a bond fund are still going to be paying out....so maybe bond fund distributions decrease over time, but they dont automatically go to near zero.
hudson
Posts: 3269
Joined: Fri Apr 06, 2007 9:15 am

Re: Brighthouse Shield Annuities.

Post by hudson »

Compass wrote: Sat Jul 04, 2020 6:19 pm I'm considering using these products in my traditional IRA to replace a portion, not all, of my bond mutual funds. These got a bad rap on our forum when comparing them to no load index stock mutual funds mostly because they don't pay dividends. But the commenters did not discuss them as an alternative to bond mutual funds. With interest rates near zero, any bond mutual funds probably will loose within 6 years as rates can only go up. This seems like it could solve that problem by transferring all of the bonds in a my traditional IRA to a combination of CDs and this annuity. With Bond Mutual funds posed to loose over the next 6 years, the strategy is to reallocate the to these locked up term Shield annuities for some stability and some returns and keep some CDs/cash to re-balance with when stocks crash.

There are 2 Shield products in particular. 1st is the 6 year term Sheild 25 with a 125% Cap based on the S&P index this is recommended for stability. The 2nd is the 1 year term Shield 10 with over a 9% Step return. This one is more of a gamble but with decent odds.

I'd appreciate your opinion on this strategy on using these Brighthouse Shield Annuity contracts, not as an alternative to Stock mutual funds, but as as an alternative to Bonds with a mix of cash.
Compass,
Before buying those annuities consider reading Larry Swedroe's Alternative Investment Book: https://www.amazon.com/Only-Guide-Alter ... B003NE61GC

Here it is on Google... https://books.google.com/books?id=9Bd-R ... st&f=false

My quick opinion with no research: I wouldn't touch those annuities with a ten foot pole.
User avatar
Watty
Posts: 20709
Joined: Wed Oct 10, 2007 3:55 pm

Re: Bond Alternatives in the time of Zero rates

Post by Watty »

Bond Alternatives in the time of Zero rates

I am still not sure that it was the best choice but a few months ago I had similar concerns, especially about international bonds, and I moved all my bond asset allocation into short term TIPS.

Here is the thread where that was discussed.

viewtopic.php?f=1&t=306096
statefan03
Posts: 62
Joined: Wed Mar 25, 2020 12:31 pm
Location: NC

Re: Bond Alternatives in the time of Zero rates

Post by statefan03 »

I'm looking at equity bond substitutes. Stable dividend paying stocks like Utilities, Banks, and Telecommunications are favorably priced right now.
hudson
Posts: 3269
Joined: Fri Apr 06, 2007 9:15 am

Bond Alternatives: More Payout....More Risk

Post by hudson »

grok87 wrote: Sun Jul 05, 2020 4:41 am as far as bond replacements, i am currently using savings bonds: Ibonds and traditional EE bonds.
cheers,
grok
grok's choices are excellent; his principal is protected!

If I had money to invest in 2020, I would invest as follows...not necessarily in this order.

Treasuries, US Backed bond funds like Vanguard's GNMA, or CDs
Inflation Protected Treasuries...Intermediate term...like VIPSX
Intermediate Term Munis rated AAA/AA/A...like VWIUX or BMBIX
High Yield Savings like Ally, Marcus, or Amex Bank

I haven't seen a single alternative that I can warm up to. Some say guaranteed; but I don't buy that.

My plan has always been to take the best available. It's nice to beat or tie inflation....after taxes....if possible.

The current inflation rate is .1% https://www.usinflationcalculator.com/i ... ion-rates/

Bottom Line: The payout of alternatives is attractive, but I can't get excited about any of them.
Last edited by hudson on Mon Jul 06, 2020 8:47 am, edited 3 times in total.
User avatar
vineviz
Posts: 7845
Joined: Tue May 15, 2018 1:55 pm

Re: Bond Alternatives in the time of Zero rates

Post by vineviz »

DanFrancis wrote: Mon Jul 06, 2020 2:06 am
Horton wrote: Sun Jul 05, 2020 10:54 am For Vanguard Total Bond, the chart below shows the yield, six year forward looking return, and rolldown return (return - yield) for the past 25 years. The rolldown return averages about 0.20%. Take Total Bond's current yield (1.37%) plus an estimate of the rolldown return (0.20%) and you have an estimate of the 6-year return (1.57%).

Image
I have no idea what Horton is saying with the "rolldown" and "forward looking" returns etc. Are these guesses for the future? How do they help? The Vanguard Total Bond has averaged 3.66% a year over the past 10 years and averaged 5.93% a year since its inception in 1986. We do not know the future. Horton, are you saying that you predict 1.57% total? per year? over the next 6 years. Please clarify. Of course we don't know the future, at least I don't. But Chairman Powell of the Fed said he will do everything within his power not to allow negative rates.
Horton was estimating the annualized total return of the bond fund over the next six years.

Given the term structure of rates I'd say the expectation of a positive roll down yield for Vanguard Total Bond is possibly optimistic, but overall I think the estimate of 1.4% to 1.6% annual returns for Vanguard Total Bond over the next 5-6 years is entirely reasonable.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
tibbitts
Posts: 11967
Joined: Tue Feb 27, 2007 6:50 pm

Re: Bond Alternatives in the time of Zero rates

Post by tibbitts »

statefan03 wrote: Mon Jul 06, 2020 8:23 am I'm looking at equity bond substitutes. Stable dividend paying stocks like Utilities, Banks, and Telecommunications are favorably priced right now.
When I first got wind of Covid-19, I thought well, this will probably just blow over like 99% of all the similar problems have, but just in case, I was directing what little new funds I had at the time to "stable dividend paying stock" funds, with a modest percentage of those being international in case the U.S. was affected worse than some other countries. I was mostly just trying to avoid recent high-flying categories. And we know how that ended. Yes, now that they're down 20-ish% (still) while many other categories have had much better (if possibly temporary) recoveries, maybe these categories finally are "favorably priced." But it wasn't like they'd been coming off a huge decade relative to the rest of the market at the time I invested. Maybe they'll just go nowhere for another decade or two while some other equities will have at least some modest gains. I'm not abandoning ship now the way so many others are with value and international, but if I had it to do over I would invest more broadly and most definitely not try to determine what is and isn't "favorably priced."

Also at this point if I was tempted to move bond money anywhere it might be to other bond funds but not to equities. You could maybe tweak bonds for a little more equity-like risk with more corporates etc. but I wouldn't go beyond that into actual equities.
hulburt1
Posts: 431
Joined: Tue Jul 15, 2014 9:17 pm

Re: Bond Alternatives in the time of Zero rates

Post by hulburt1 »

I'm 67. Right now my best bond is weighting to take SS at 70. I have 400000 in MM This will last for 10 years. I have 750000 in S&P
Which will be used after my MM money run out. Bonds make no sense to me. All is in Roth and Ira. I look at moving money from Ira to Roth as a good Annuity. For every `120000 I put in Roth I have $1000 every month for 10 years tax free. I just do not understand Bonds would be better then taking SS at 70.
tealeaves
Posts: 215
Joined: Sun Apr 29, 2018 1:21 pm

Re: Bond Alternatives in the time of Zero rates

Post by tealeaves »

Only alternative in my mind for better returns with an equivalent (perhaps lower) risk profile would be paying off debt as others mentioned. Aside from that, you can lower you own personal inflation rate (and thus increase your personal "real" return) by spending less or picking up a small side gig.
ColoRetiredGirl
Posts: 228
Joined: Mon Nov 13, 2017 11:40 pm
Location: Colorado

Re: Bond Alternatives in the time of Zero rates

Post by ColoRetiredGirl »

Following
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Bond Alternatives in the time of Zero rates

Post by dbr »

hulburt1 wrote: Mon Jul 06, 2020 9:19 am I'm 67. Right now my best bond is weighting to take SS at 70. I have 400000 in MM This will last for 10 years. I have 750000 in S&P
Which will be used after my MM money run out. Bonds make no sense to me. All is in Roth and Ira. I look at moving money from Ira to Roth as a good Annuity. For every `120000 I put in Roth I have $1000 every month for 10 years tax free. I just do not understand Bonds would be better then taking SS at 70.
An annuity is not a bond, but that does not change the fact that delaying SS may be a very good decision for many people. Note that purchasing an annuity from an insurance company is subject to the same lowered prospects as investing in bonds when interest rates are low. The SS benefit schedule is not affected by that though when inflation is low the COLA is also low.
Nowizard
Posts: 3021
Joined: Tue Oct 23, 2007 5:33 pm

Re: Bond Alternatives in the time of Zero rates

Post by Nowizard »

When there are so many different opinions about a particular investment approach that lead to many different responses, we simply state that there is confusion which is a sign to not be overly certain about any changes, particularly if they involve moving away from funds toward other investments (We just don't want the added complexity of CD ladders, etc.) Since we are not concerned about inflation in the immediate future and look at bonds as part of a more conservative investment pattern rather than trying to squeeze more return, we are sticking with Total Bond Index with about an additional 1/3 of the amount held there in Short Term Corporate Index (VFSUX).

Tim
tibbitts
Posts: 11967
Joined: Tue Feb 27, 2007 6:50 pm

Re: Bond Alternatives in the time of Zero rates

Post by tibbitts »

hulburt1 wrote: Mon Jul 06, 2020 9:19 am I'm 67. Right now my best bond is weighting to take SS at 70. I have 400000 in MM This will last for 10 years. I have 750000 in S&P
Which will be used after my MM money run out. Bonds make no sense to me. All is in Roth and Ira. I look at moving money from Ira to Roth as a good Annuity. For every `120000 I put in Roth I have $1000 every month for 10 years tax free. I just do not understand Bonds would be better then taking SS at 70.
If you die before 70, waiting to take SS until 70 wouldn't be the optimal plan, at least not for the value of your estate. If you have a spouse that's a slightly more complicated question, but regardless, you have to do the math including the 20-whatever percent social security haircut provided in current law. I don't see how doing Roth conversions, which I'm doing too, are annuity alternatives.
User avatar
Horton
Posts: 749
Joined: Mon Jan 21, 2008 3:53 pm

Re: Bond Alternatives in the time of Zero rates

Post by Horton »

DanFrancis wrote: Mon Jul 06, 2020 2:06 amI have no idea what Horton is saying with the "rolldown" and "forward looking" returns etc. Are these guesses for the future? How do they help? The Vanguard Total Bond has averaged 3.66% a year over the past 10 years and averaged 5.93% a year since its inception in 1986. We do not know the future. Horton, are you saying that you predict 1.57% total? per year? over the next 6 years. Please clarify. Of course we don't know the future, at least I don't. But Chairman Powell of the Fed said he will do everything within his power not to allow negative rates.
The chart shows actual data, not guesses or predictions. The chart shows the relationship between the fund’s current yield and its future return over the proceeding 6 year period. There is a close relationship with the yield and future returns. The difference - the roll down return - occurs due to interest rate changes during the period along with the fund’s turnover to maintain the necessary duration of the portfolio.

With the current yield Around 1.4%, the roll down return would need to be above 2.6% to achieve a total return of 3% over the next 6 years. That would require rates to fall From today’s level or rates would need to rise and then fall back to today’s level. I wouldn’t count on a return north of 3% for the next 6 years.
capjak
Posts: 115
Joined: Fri Sep 22, 2017 8:58 am

Re: Bond Alternatives in the time of Zero rates

Post by capjak »

I have MYGAs, principle guaranteed by claims paying ability of the insurance company which is AMBest A+ rated and pays 3.5% annual interest tax deferred 7 year term and a 5 year term at 2.65%. Access to interest on a monthly basis if I want.
User avatar
abuss368
Posts: 21628
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Bond Alternatives in the time of Zero rates

Post by abuss368 »

I am continuing to simply invest in Total Bond Index. It has done the job every year.

In my opinion any short or intermediate investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
midareff
Posts: 7142
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Bond Alternatives in the time of Zero rates

Post by midareff »

abuss368 wrote: Mon Jul 06, 2020 6:48 pm I am continuing to simply invest in Total Bond Index. It has done the job every year.

In my opinion any short or intermediate investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.
Safety yes, some NAV fluctuation depending on credit makeup and duration... income, that's getting harder to find.
User avatar
abuss368
Posts: 21628
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Bond Alternatives in the time of Zero rates

Post by abuss368 »

midareff wrote: Mon Jul 06, 2020 6:52 pm
abuss368 wrote: Mon Jul 06, 2020 6:48 pm I am continuing to simply invest in Total Bond Index. It has done the job every year.

In my opinion any short or intermediate investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.
Safety yes, some NAV fluctuation depending on credit makeup and duration... income, that's getting harder to find.
No doubt and frustrating. I would like to avoid going further out on the tree branch towards corporates (or a higher equity allocation)!
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
midareff
Posts: 7142
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Bond Alternatives in the time of Zero rates

Post by midareff »

abuss368 wrote: Mon Jul 06, 2020 6:53 pm
midareff wrote: Mon Jul 06, 2020 6:52 pm
abuss368 wrote: Mon Jul 06, 2020 6:48 pm I am continuing to simply invest in Total Bond Index. It has done the job every year.

In my opinion any short or intermediate investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.
Safety yes, some NAV fluctuation depending on credit makeup and duration... income, that's getting harder to find.
No doubt and frustrating. I would like to avoid going further out on the tree branch towards corporates (or a higher equity allocation)!
I understand..... keep in mind those corporates are are one of those "any" intermediate bond funds you cited. Remember, corporate bonds are superior to equities (paid first) in a bankruptcy and are we really ready to sign off on the disappearance of corporate America? Ten year Treasury at .674% of a 6 year duration corporate fund distributing > 2.5% .. then deduct inflation and pay tax on them. Pick your poisons carefully.
Post Reply