Nearly all fixed income in cash: Wrong decision?

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LeftCoastIV
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Nearly all fixed income in cash: Wrong decision?

Post by LeftCoastIV »

We are mid-40s with (I think) sufficient assets to fund an early retirement at around ~50x annual expenses (before taxes). We are settling into a 60/40 portfolio, which feels “right” for us (enough market exposure for long-term growth, but no need for excessive risk). However, nearly all of our fixed income is in cash, with very little in bonds. Something like 2% of our portfolio is in bonds. The rest of our fixed income is in cash.

Of course I don’t love the 0.5% being offered for FDIC accounts right now, but in my view bonds are not sufficiently compensating me for the additional risk exposure (both credit and duration). I realize that backtesting of a 60/40/0 portfolio outperforms a 60/0/40 portfolio, but of course past performance is no indication of future performance.

It doesn’t seem logical to invest in bond funds right now. Am I missing something? This is a significant part of our portfolio, and I want to be thorough in our analysis, hear all perspectives, etc.

We recently started buying i-bonds, but it will take many years before that’s a meaningful part of our portfolio.

If helpful, we are in the top marginal income tax bracket and most of our assets are in taxable accounts. This would lean us towards munis, but the market appears to be efficient in pricing out the advantage for munis.

Thank you.
CoherentIntegration
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Re: Nearly all fixed income in cash: Wrong decision?

Post by CoherentIntegration »

I think it depends on what your goal is for this portion of your portfolio. Are you looking for a stream of fixed income? To dampen the volatility of an equity portfolio? To hedge against inflation? I think cash is a fine way to do reduce volatility. It obviously stinks at generating income. You could argue that it’s a decent inflation hedge (there was an episode of the Rational Reminder podcast on inflation hedges a few weeks ago that I found interesting).
dbr
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Re: Nearly all fixed income in cash: Wrong decision?

Post by dbr »

I don't think your question is whether or not cash might or should be the choice for your fixed income allocation. It would seem that the question is whether or not it is possible to determine that at a certain time (now) the choice should be cash while at another time it should be bonds with some degree of duration and default risk that cash does not have.

I would say that ex ante the owner of a long term investment in stocks and bonds should make the same choice today that they would make at any other time. I would say that a short term investor should also make the same choice today that they would make at any other time.

I think a long term investor in stocks and bonds would likely prefer intermediate term bonds of very good or excellent credit quality, but there is no reason a portfolio using only cash for fixed income is inferior at the lower orders once stock/bond asset allocation is adjusted to same return or same risk. A short term investor would have an all fixed income asset allocation and the duration would be short and the credit quality high, aka cash.
reln
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Re: Nearly all fixed income in cash: Wrong decision?

Post by reln »

LeftCoastIV wrote: Sat Jul 31, 2021 3:49 pm We are mid-40s with (I think) sufficient assets to fund an early retirement at around ~50x annual expenses (before taxes). We are settling into a 60/40 portfolio, which feels “right” for us (enough market exposure for long-term growth, but no need for excessive risk). However, nearly all of our fixed income is in cash, with very little in bonds. Something like 2% of our portfolio is in bonds. The rest of our fixed income is in cash.

Of course I don’t love the 0.5% being offered for FDIC accounts right now, but in my view bonds are not sufficiently compensating me for the additional risk exposure (both credit and duration). I realize that backtesting of a 60/40/0 portfolio outperforms a 60/0/40 portfolio, but of course past performance is no indication of future performance.

It doesn’t seem logical to invest in bond funds right now. Am I missing something? This is a significant part of our portfolio, and I want to be thorough in our analysis, hear all perspectives, etc.

We recently started buying i-bonds, but it will take many years before that’s a meaningful part of our portfolio.

If helpful, we are in the top marginal income tax bracket and most of our assets are in taxable accounts. This would lean us towards munis, but the market appears to be efficient in pricing out the advantage for munis.

Thank you.
Your intuition is right. Investing in bonds now is silly.
Explorer
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Explorer »

For me, cash is not a substitute for bonds. I do hold varying levels of cash depending on my perception of the market. I call this "margin of safety." Currently I have a high cash level.

The rest of the portfolio, I expose to market risks in both stocks and bonds. In an AA that I am comfortable with. I am blending ST bonds along with IT bonds in my bond portion in order to reduce duration risk.

So, to me stocks, bonds and cash play different roles in my portfolio.
livesoft
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Re: Nearly all fixed income in cash: Wrong decision?

Post by livesoft »

Vanguard Total US Bond Market Index fund VBTLX is actually UP UP UP +3.2% since March 18, 2021.

I think one can time the bond market somewhat in that when a bond fund like VBTLX drops around 4%, one should rebalance into it. There are of course no guarantees, but I think all fixed income in cash is a poor decision for long-term assets.
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Marseille07
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Marseille07 »

LeftCoastIV wrote: Sat Jul 31, 2021 3:49 pm We are mid-40s with (I think) sufficient assets to fund an early retirement at around ~50x annual expenses (before taxes). We are settling into a 60/40 portfolio, which feels “right” for us (enough market exposure for long-term growth, but no need for excessive risk). However, nearly all of our fixed income is in cash, with very little in bonds. Something like 2% of our portfolio is in bonds. The rest of our fixed income is in cash.

Of course I don’t love the 0.5% being offered for FDIC accounts right now, but in my view bonds are not sufficiently compensating me for the additional risk exposure (both credit and duration). I realize that backtesting of a 60/40/0 portfolio outperforms a 60/0/40 portfolio, but of course past performance is no indication of future performance.

It doesn’t seem logical to invest in bond funds right now. Am I missing something? This is a significant part of our portfolio, and I want to be thorough in our analysis, hear all perspectives, etc.

We recently started buying i-bonds, but it will take many years before that’s a meaningful part of our portfolio.

If helpful, we are in the top marginal income tax bracket and most of our assets are in taxable accounts. This would lean us towards munis, but the market appears to be efficient in pricing out the advantage for munis.

Thank you.
I don't think you're missing anything, but I don't understand that you seem to dislike cash and bonds, yet insist on 40% in Fixed Income.

I don't like bonds so I just hold cash, but I ain't complaining about 0.5%.
jebmke
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Re: Nearly all fixed income in cash: Wrong decision?

Post by jebmke »

reln wrote: Sat Jul 31, 2021 5:10 pm Investing in bonds now is silly.
I've been hearing that since I retired in December, 2007
When you discover that you are riding a dead horse, the best strategy is to dismount.
Mike Scott
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Mike Scott »

That's a lot of cash to be losing to inflation for the rest of your life. I would try to break even with inflation long term at a minimum.
carminered2019
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Re: Nearly all fixed income in cash: Wrong decision?

Post by carminered2019 »

pay off your mortgage with the cash if you still have a mortgage. 3% guarantee return.
hudson
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Re: Nearly all fixed income in cash: Wrong decision?

Post by hudson »

LeftCoastIV wrote: Sat Jul 31, 2021 3:49 pm We are mid-40s with (I think) sufficient assets to fund an early retirement at around ~50x annual expenses (before taxes). We are settling into a 60/40 portfolio, which feels “right” for us (enough market exposure for long-term growth, but no need for excessive risk). However, nearly all of our fixed income is in cash, with very little in bonds. Something like 2% of our portfolio is in bonds. The rest of our fixed income is in cash.

Of course I don’t love the 0.5% being offered for FDIC accounts right now, but in my view bonds are not sufficiently compensating me for the additional risk exposure (both credit and duration). I realize that backtesting of a 60/40/0 portfolio outperforms a 60/0/40 portfolio, but of course past performance is no indication of future performance.

It doesn’t seem logical to invest in bond funds right now. Am I missing something? This is a significant part of our portfolio, and I want to be thorough in our analysis, hear all perspectives, etc.

We recently started buying i-bonds, but it will take many years before that’s a meaningful part of our portfolio.

If helpful, we are in the top marginal income tax bracket and most of our assets are in taxable accounts. This would lean us towards munis, but the market appears to be efficient in pricing out the advantage for munis.

Thank you.
At 50 times expenses, you can do whatever you want with fixed income as long as it's mostly high quality stuff.
Broken Man 1999
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Broken Man 1999 »

livesoft wrote: Sat Jul 31, 2021 5:35 pm Vanguard Total US Bond Market Index fund VBTLX is actually UP UP UP +3.2% since March 18, 2021.

I think one can time the bond market somewhat in that when a bond fund like VBTLX drops around 4%, one should rebalance into it. There are of course no guarantees, but I think all fixed income in cash is a poor decision for long-term assets.
If one wanted to play a bit of market timing of bond funds, I would use EDV (Vanguard Extended Duration Treasury Index ETF) or VGLT (Vanguard Long-term Treasury Index ETF) because they have interest rate volatility, and also investors pile in and exit their positions on bad/good news.

Now if I were ever to start market timing I would start with my purchase of $200,000 in VGLT (originally exchanged from Short-term Treasury Index MF to Long-term Treasury Index MF on June 28. Then I converted to the ETF class (VGLT).

As of COB Friday, I have capital gains of $8,268.68, not a bad return for about a month of holding the investment. No worries about taxes, we only have TIRAs and Roths.

So, maybe I sell the amount of capital gains, stash the gains in my Short-term Treasury Index MF, ready to exchange again if the opportunity presents itself.

But, that would be market timing..... :D

Broken Man 1999
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rerod
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Re: Nearly all fixed income in cash: Wrong decision?

Post by rerod »

Your not alone.

I chickened out when I saw VBTLX skyrocket and sold at $11.62 March 6th 2020 and bought VUSXX Vanguard Treasury Money Market Fund. I thought I made a good decision until the fed bond market stimulus bail out shot bonds back up. Who knew?

Now dividends are 3 bucks instead of $600, but I sleep better. I'm not getting back into the bond market because to much risk and not enough reward, and only one direction rates can go imo. But I figured the fed would jack rates to prevent the bubble were in.
Last edited by rerod on Sat Jul 31, 2021 8:34 pm, edited 1 time in total.
loggerboots
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Re: Nearly all fixed income in cash: Wrong decision?

Post by loggerboots »

What is the credit risk of something like BND?

With 20 years of fixed income, couldn't the duration risk be mitigated by using bonds or bond funds of various durations? If so (and correct me if I'm wrong), that leaves only the credit risk as cited by the OP.

Is credit risk on something like an intermediate core bond fund significant enough to warrant giving up that much yield (granted, 1.3% isn't great but it's better the .5%)?

Thanks
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BolderBoy
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Re: Nearly all fixed income in cash: Wrong decision?

Post by BolderBoy »

reln wrote: Sat Jul 31, 2021 5:10 pm Your intuition is right. Investing in bonds now is silly.
Fixed income options in lieu?
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KlangFool
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Re: Nearly all fixed income in cash: Wrong decision?

Post by KlangFool »

LeftCoastIV wrote: Sat Jul 31, 2021 3:49 pm
in my view bonds are not sufficiently compensating me for the additional risk exposure (both credit and duration).
LeftCoastIV,

Why do you think that your view is correct? This is an honest question. I know that I know nothing. Hence, I do not avoid bond. I have CASH, Bond, and Stock. I am protected from my own ignorance. I prefer to spread my eggs across multiple baskets.

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reln
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Re: Nearly all fixed income in cash: Wrong decision?

Post by reln »

jebmke wrote: Sat Jul 31, 2021 5:47 pm
reln wrote: Sat Jul 31, 2021 5:10 pm Investing in bonds now is silly.
I've been hearing that since I retired in December, 2007
Was then and still is now.
reln
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Re: Nearly all fixed income in cash: Wrong decision?

Post by reln »

BolderBoy wrote: Sat Jul 31, 2021 8:30 pm
reln wrote: Sat Jul 31, 2021 5:10 pm Your intuition is right. Investing in bonds now is silly.
Fixed income options in lieu?
Bonds are inefficient investments for a human lifecycle. Better off with SPIAs, DIAs, and stocks.
venkman
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Re: Nearly all fixed income in cash: Wrong decision?

Post by venkman »

Currently, you can get a 5-year MYGA from an A-rated company that yields 2.8%. Taxes on earnings are deferred until you take them out, and you can continue to roll over the money and defer the taxes. It should only be used for a portion of your fixed income that you're sure you won't need to be liquid (either for withdrawal or rebalancing), because surrender charges are pretty steep (and there's a 10% penalty on earnings if you withdraw before age 59.5). The state annuity guarantees aren't as robust as FDIC insurance or Treasury bonds, but the odds of actually losing money are very low.
babystep
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Re: Nearly all fixed income in cash: Wrong decision?

Post by babystep »

dbr wrote: Sat Jul 31, 2021 5:06 pm I don't think your question is whether or not cash might or should be the choice for your fixed income allocation. It would seem that the question is whether or not it is possible to determine that at a certain time (now) the choice should be cash while at another time it should be bonds with some degree of duration and default risk that cash does not have.

I would say that ex ante the owner of a long term investment in stocks and bonds should make the same choice today that they would make at any other time. I would say that a short term investor should also make the same choice today that they would make at any other time.

I think a long term investor in stocks and bonds would likely prefer intermediate term bonds of very good or excellent credit quality, but there is no reason a portfolio using only cash for fixed income is inferior at the lower orders once stock/bond asset allocation is adjusted to same return or same risk. A short term investor would have an all fixed income asset allocation and the duration would be short and the credit quality high, aka cash.
This.

I would assume that OP is not a short-term investor since they are in 40s. The above also implies that OP is really trying to time the market for cash vs bonds. They may or may not be successful in that.
babystep
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Re: Nearly all fixed income in cash: Wrong decision?

Post by babystep »

reln wrote: Sat Jul 31, 2021 8:52 pm
BolderBoy wrote: Sat Jul 31, 2021 8:30 pm
reln wrote: Sat Jul 31, 2021 5:10 pm Your intuition is right. Investing in bonds now is silly.
Fixed income options in lieu?
Bonds are inefficient investments for a human lifecycle. Better off with SPIAs, DIAs, and stocks.
Sure, stocks over bonds for the long-term. But OP is deciding between cash and bonds. They already have 60% in stocks.
Dandy
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Dandy »

I think you are comfortable with cash and understand its limitations and benefits. You might consider some short term bond funds down the line e.g. in Treasuries and/or Inflation protected funds.

My fixed income allocation is about 25% FDIC products and money markets, 25% short term bond funds and 50% in intermediate bond funds (mostly due to being part of a couple of balanced funds). I keep enough to fund draw down needs in the first 2 categories to fund current yearly draw down needs for at least 15 years.

I also think your withdrawal strategy is important. I try to preserve cash like assets a bit by withdrawing some from equities and intermediate bonds unless equities have a bad year. This treats "safe" assets a bit more like insurance than an ATM.
UpperNwGuy
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Re: Nearly all fixed income in cash: Wrong decision?

Post by UpperNwGuy »

reln wrote: Sat Jul 31, 2021 5:10 pm Investing in bonds now is silly.
I am proud to be silly.... and happy to be making money from my silliness.
reln
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Re: Nearly all fixed income in cash: Wrong decision?

Post by reln »

babystep wrote: Sun Aug 01, 2021 12:21 am
reln wrote: Sat Jul 31, 2021 8:52 pm
BolderBoy wrote: Sat Jul 31, 2021 8:30 pm
reln wrote: Sat Jul 31, 2021 5:10 pm Your intuition is right. Investing in bonds now is silly.
Fixed income options in lieu?
Bonds are inefficient investments for a human lifecycle. Better off with SPIAs, DIAs, and stocks.
Sure, stocks over bonds for the long-term. But OP is deciding between cash and bonds. They already have 60% in stocks.
It's an unnecessary restriction.
DarkHelmetII
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Re: Nearly all fixed income in cash: Wrong decision?

Post by DarkHelmetII »

Keep in mind bonds / fixed income can actually increase / decrease in principal. Point is its role is more than the interest.
Nowizard
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Nowizard »

Time frames and when one might need money invested in bond funds are one key. If you plan to keep investments in bond funds for at least the duration of the fund, you should be fine placing money in bond funds now so long as you reinvest distributions.

Tim
reln
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Re: Nearly all fixed income in cash: Wrong decision?

Post by reln »

UpperNwGuy wrote: Sun Aug 01, 2021 7:01 am
reln wrote: Sat Jul 31, 2021 5:10 pm Investing in bonds now is silly.
I am proud to be silly.... and happy to be making money from my silliness.
Haha😆👍. What are bonds earning? 1% YTD instead of 15%?

I joke about caring about YTD but on a serious note forward looking estimates from vanguard still has the equity premium of a diversifed stock portfolio over a diversifed bond portfolio at around 300bp to 500bp per year.

Agreed that some people can't yet take the short term volatility and so they say use bonds to smooth it. I say you can be trained to take the short term volatility and avoid bonds to earn more money in the long run.
WyomingFIRE
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Re: Nearly all fixed income in cash: Wrong decision?

Post by WyomingFIRE »

We are long-term investors. 47X. Buy-and-hold, LBYM types. 65/30/5. Still working, but if we retired tomorrow our WR would be around 2.5% (that number moves up and down a bit, and won't be narrowed down until retirement gets closer). We were effectively 100/0/0 until about age 50 or so. Now, at age 57, I'm in the SORR window, so we have been de-risking our AA a bit over the past decade.

In our joint after tax brokerage account at Vanguard, we hold (among other things) about 1X of BND which, since inception (2007), has "average annual returns" of 4.16%.

In my rollover IRA account Vanguard, we hold (among other things) about 7X of VBTLX which, since inception (2001), has "average annual returns" of 4.18%.

It may be that I don't understand what "average annual returns" are. But we like our bond holdings. They provide ballast. They de-risk our equity holdings. And they provide returns. We also hold a decent amount of cash. I know nothing about the future. YMMV.
Last edited by WyomingFIRE on Sun Aug 01, 2021 8:32 am, edited 1 time in total.
babystep
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Re: Nearly all fixed income in cash: Wrong decision?

Post by babystep »

reln wrote: Sun Aug 01, 2021 7:43 am
babystep wrote: Sun Aug 01, 2021 12:21 am
reln wrote: Sat Jul 31, 2021 8:52 pm
BolderBoy wrote: Sat Jul 31, 2021 8:30 pm
reln wrote: Sat Jul 31, 2021 5:10 pm Your intuition is right. Investing in bonds now is silly.
Fixed income options in lieu?
Bonds are inefficient investments for a human lifecycle. Better off with SPIAs, DIAs, and stocks.
Sure, stocks over bonds for the long-term. But OP is deciding between cash and bonds. They already have 60% in stocks.
It's an unnecessary restriction.
Care to elaborate?
UpperNwGuy
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Re: Nearly all fixed income in cash: Wrong decision?

Post by UpperNwGuy »

reln wrote: Sun Aug 01, 2021 8:19 am
UpperNwGuy wrote: Sun Aug 01, 2021 7:01 am
reln wrote: Sat Jul 31, 2021 5:10 pm Investing in bonds now is silly.
I am proud to be silly.... and happy to be making money from my silliness.
Haha😆👍. What are bonds earning? 1% YTD instead of 15%?

I joke about caring about YTD but on a serious note forward looking estimates from vanguard still has the equity premium of a diversifed stock portfolio over a diversifed bond portfolio at around 300bp to 500bp per year.

Agreed that some people can't yet take the short term volatility and so they say use bonds to smooth it. I say you can be trained to take the short term volatility and avoid bonds to earn more money in the long run.
You must be young. You're talking to an old guy who is well into retirement. Not enough time left to ride the volatility roller coaster.
rerod
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Re: Nearly all fixed income in cash: Wrong decision?

Post by rerod »

DarkHelmetII wrote: Sun Aug 01, 2021 7:59 am Keep in mind bonds / fixed income can actually increase / decrease in principal. Point is its role is more than the interest.
Rising interest rates drops the principal and rates need to be increased to prevent the bubble were in. The feds asleep at the wheel.
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LeftCoastIV
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Re: Nearly all fixed income in cash: Wrong decision?

Post by LeftCoastIV »

Thanks for all the responses so far. A few replies:
CoherentIntegration wrote: Sat Jul 31, 2021 4:42 pm I think it depends on what your goal is for this portion of your portfolio. Are you looking for a stream of fixed income? To dampen the volatility of an equity portfolio? To hedge against inflation? I think cash is a fine way to do reduce volatility. It obviously stinks at generating income. You could argue that it’s a decent inflation hedge (there was an episode of the Rational Reminder podcast on inflation hedges a few weeks ago that I found interesting).
Not looking for an income stream. Would prefer to avoid it actually, due to taxes. Looking for (a) risk diversification and ballast, (b) hopefully a return that at least matches inflation, preferably modestly beating it. Cash accomplishes (a) but fails at (b).
Marseille07 wrote: Sat Jul 31, 2021 5:40 pm I don't understand that you seem to dislike cash and bonds, yet insist on 40% in Fixed Income.
I don't like bonds so I just hold cash, but I ain't complaining about 0.5%.
I hold 40% fixed income to limit my exposure to equities.
Mike Scott wrote: Sat Jul 31, 2021 5:54 pm That's a lot of cash to be losing to inflation for the rest of your life. I would try to break even with inflation long term at a minimum.
Sure, but how?
loggerboots wrote: Sat Jul 31, 2021 8:18 pm Is credit risk on something like an intermediate core bond fund significant enough to warrant giving up that much yield (granted, 1.3% isn't great but it's better the .5%)?
Credit risk can be managed by buying gov't bond funds, or AAA rated corporates, but duration risk remains. I don't expect bonds to be risk free, but I do expect to be compensated for the risk.
DarkHelmetII wrote: Sun Aug 01, 2021 7:59 am Keep in mind bonds / fixed income can actually increase / decrease in principal. Point is its role is more than the interest.
Yes, agree. I view this as duration risk. A bond (fund) with 2% yield could see that return wiped out by NAV decline if rates rise above expectations.
KlangFool wrote: Sat Jul 31, 2021 3:49 pm Why do you think that your view is correct? This is an honest question. I know that I know nothing. Hence, I do not avoid bond. I have CASH, Bond, and Stock. I am protected from my own ignorance. I prefer to spread my eggs across multiple baskets.
KlangFool
So, this is an interesting question. I think your argument is that bonds (and bond funds) are priced efficiently based on all available information, and to think otherwise is market timing. The head scratcher is why a professional/institutional investor would be accepting current bond returns and not requiring higher rates. Perhaps they understand the risk profile better, and view it as a fair premium over cash.
Dandy wrote: Sun Aug 01, 2021 6:51 am I think you are comfortable with cash and understand its limitations and benefits. You might consider some short term bond funds down the line e.g. in Treasuries and/or Inflation protected funds.

My fixed income allocation is about 25% FDIC products and money markets, 25% short term bond funds and 50% in intermediate bond funds (mostly due to being part of a couple of balanced funds). I keep enough to fund draw down needs in the first 2 categories to fund current yearly draw down needs for at least 15 years.

I also think your withdrawal strategy is important. I try to preserve cash like assets a bit by withdrawing some from equities and intermediate bonds unless equities have a bad year. This treats "safe" assets a bit more like insurance than an ATM.
Thanks for sharing this.
Nowizard wrote: Sun Aug 01, 2021 8:04 am Time frames and when one might need money invested in bond funds are one key. If you plan to keep investments in bond funds for at least the duration of the fund, you should be fine placing money in bond funds now so long as you reinvest distributions.
If I understand your argument correctly, it is that rising rates will be captured by the bond fund as it invests in new bond issues over time, somewhat de-risking duration risk in the process. You would still suffer a NAV decline if rates rise above expectations, but newer issues over time would capture those higher rates.
Last edited by LeftCoastIV on Sun Aug 01, 2021 10:56 am, edited 1 time in total.
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JoMoney
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Re: Nearly all fixed income in cash: Wrong decision?

Post by JoMoney »

I feel the same way about bonds, and have a similar mostly cash/stable value/savings bonds for the (small) allocation I have in fixed income. I've had this opinion about bonds and their poor yields for several years now. From a return perspective, it's been the wrong choice, but I haven't had any risk in that portfolio either (nor do I want it). I sleep quite well with a nice size "emergency fund" and try to ignore the temptations that I should be doing something fancy, or reaching too far for yield with it.
FWIW, if I had a larger fixed income allocation (I'm not even at 10%, though aiming to get there) I would probably incorporate some bonds at least to the point where the duration of the FI portfolio was matched to something close to my potential need of the money. With more than 2 years of expenses in near-cash, any additional money would probably get laddered out in longer maturity cd's/bond fund(s).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
dbr
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Re: Nearly all fixed income in cash: Wrong decision?

Post by dbr »

It is probably better to discuss these questions by defining one's objectives and then finding what asset allocations best serve those objectives.

For example there is no question that as long as the system of capital enterprise is not destroyed by catastrophic events such as war, disintegration of government, pandemic, etc. then owning stocks is the best allocation to maximize chances of accumulating wealth albeit at huge uncertainty in both short term variation and long term outcome. Warren Buffett is a champion of owning capital enterprise and recommends a 90/10 allocation, and then only for people who can't manage stocks and still spend money. He himself only hold cash when he can't find proper business opportunities.

Many people are totally unable to stand the ups and downs of investing in risky assets and ruin their wealth making bad decisions in panic. Some people think that won't happen to them and it does anyway.

If the objective is to minimize chances of running out of money too soon while spending modestly for an extended time from a portfolio then the best allocation to bonds might be around 40%. It isn't clear that it matters a lot what kind of bonds or cash that is.

If the objective is to provide certainty of lifetime income while retaining wealth is of no importance, then the portfolio should be used to buy an annuity, or if a pension is offered, it should be taken rather than a lump sum, and money should be spent to delay Social Security.

If a person really wants to get wealthy it is necessary to participate in high risk ventures such as one's own business, and so on, exposing oneself in the process to losing more than one owns. A moderate venture in that direction might be investing in a few rental properties, which many people do successfully and some people lose their shirts on.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by aristotelian »

Mike Scott wrote: Sat Jul 31, 2021 5:54 pm That's a lot of cash to be losing to inflation for the rest of your life. I would try to break even with inflation long term at a minimum.
+1. You are in a no win situation. Cash protects you from principal loss if/when rates going up but guarantees you negative real return as long as rates stay low. I guess OP is so averse to principal loss they are willing to accept guaranteed lower return now? Doesn't make much sense to me. I would at least do I Bonds, EE Bonds, HM Bradley 3% yield, etc, to try and get to zero real return without too much risk.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by JoMoney »

dbr wrote: Sun Aug 01, 2021 9:35 am...
If the objective is to provide certainty of lifetime income while retaining wealth is of no importance, then the portfolio should be used to buy an annuity, or if a pension is offered, it should be taken rather than a lump sum, and money should be spent to delay Social Security...
:thumbsup
Even with an objective to "retain wealth", you don't need to put the entire portfolio into a SPIA annuity.
To the extent someone might need to be drawing the current income, and would otherwise be drawing down the principal and interest from a bond portfolio, they would likely get a higher return in a SPIA then the same amount of money in a bond ladder at current yields amortized over life expectancy. The SPIA would also insure that amount was guaranteed to last their lifetime even if they live longer than actuarial expectations.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by 2commaBH »

I personally wouldn't sleep well losing all that value to inflation but it's up to you. I think we are in a similar situation to you and prefer state munis for tax reasons on the theory that something is better than nothing. But you could at least "punch up" your cash yield with CD ladders.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by dbr »

LeftCoastIV wrote: Sun Aug 01, 2021 9:25 am Thanks for all the responses so far. A few replies:
CoherentIntegration wrote: Sat Jul 31, 2021 4:42 pm I think it depends on what your goal is for this portion of your portfolio. Are you looking for a stream of fixed income? To dampen the volatility of an equity portfolio? To hedge against inflation? I think cash is a fine way to do reduce volatility. It obviously stinks at generating income. You could argue that it’s a decent inflation hedge (there was an episode of the Rational Reminder podcast on inflation hedges a few weeks ago that I found interesting).
Not looking for an income stream. Would prefer to avoid it actually, due to taxes. Looking for (a) risk diversification and ballast, (b) hopefully a return that at least matches inflation, preferably modestly beating it. Cash accomplishes (a) but fails at (b).

A single piece of the portfolio does not have to meet the objectives of the portfolio as a whole. That is especially true when it is unrealistic to expect that positive real return necessarily is available in any given asset. Even stocks outrun inflation in the long run, seemingly, but can have long periods of negative real returns.
Marseille07 wrote: Sat Jul 31, 2021 5:40 pm I don't understand that you seem to dislike cash and bonds, yet insist on 40% in Fixed Income.
I don't like bonds so I just hold cash, but I ain't complaining about 0.5%.
I hold 40% fixed income to limit my exposure to equities.

Sure, that is sensible and pretty much what other people do.
Mike Scott wrote: Sat Jul 31, 2021 5:54 pm That's a lot of cash to be losing to inflation for the rest of your life. I would try to break even with inflation long term at a minimum.
Sure, but how?

In the long run intermediate term bonds will probably average positive real returns and cash probably around zero real return. That does not mean there are not periods of negative real returns. It comes with the territory and isn't worth complaining about. Nobody said we get what we want.


loggerboots wrote: Sat Jul 31, 2021 8:18 pm Is credit risk on something like an intermediate core bond fund significant enough to warrant giving up that much yield (granted, 1.3% isn't great but it's better the .5%)?
Credit risk can be managed by buying gov't bond funds, or AAA rated corporates, but duration risk remains. I don't expect bonds to be risk free, but I do expect to be compensated for the risk.

Right now the yield curve is flat meaning we are not getting compensated for duration risk at this time. Larry Swedroe once mooted that extending duration was worthwhile if one could get 20bps per year additional duration. That doesn't work right now,.
DarkHelmetII wrote: Sun Aug 01, 2021 7:59 am Keep in mind bonds / fixed income can actually increase / decrease in principal. Point is its role is more than the interest.
Yes, agree. I view this as duration risk. A bond (fund) with 2% yield could see that return wiped out by NAV decline if rates rise above expectations.
LeftCoastIV wrote: Sat Jul 31, 2021 3:49 pm Why do you think that your view is correct? This is an honest question. I know that I know nothing. Hence, I do not avoid bond. I have CASH, Bond, and Stock. I am protected from my own ignorance. I prefer to spread my eggs across multiple baskets.
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So, this is an interesting question. I think your argument is that bonds (and bond funds) are priced efficiently based on all available information, and to think otherwise is market timing. The head scratcher is why a professional/institutional investor would be accepting current bond returns and not requiring higher rates. Perhaps they understand the risk profile better, and view it as a fair premium over cash.

I am not an expert in bond markets, but I would think the answer to your question is that the professional investor doesn't have any choice if he wants to place debt. He has competitors at auction who will accept those returns. Alternatively he can take the money and buy something else, such as stocks or real estate. Otherwise, just like you and me, he can't always have what he wants.
Dandy wrote: Sun Aug 01, 2021 6:51 am I think you are comfortable with cash and understand its limitations and benefits. You might consider some short term bond funds down the line e.g. in Treasuries and/or Inflation protected funds.

My fixed income allocation is about 25% FDIC products and money markets, 25% short term bond funds and 50% in intermediate bond funds (mostly due to being part of a couple of balanced funds). I keep enough to fund draw down needs in the first 2 categories to fund current yearly draw down needs for at least 15 years.

I also think your withdrawal strategy is important. I try to preserve cash like assets a bit by withdrawing some from equities and intermediate bonds unless equities have a bad year. This treats "safe" assets a bit more like insurance than an ATM.
Thanks for sharing this.
Nowizard wrote: Sun Aug 01, 2021 8:04 am Time frames and when one might need money invested in bond funds are one key. If you plan to keep investments in bond funds for at least the duration of the fund, you should be fine placing money in bond funds now so long as you reinvest distributions.
If I understand your argument correctly, it is that rising rates will be captured by the bond fund as it invests in new bond issues over time, somewhat de-risking duration risk in the process. You would still suffer a NAV decline if rates rise above expectations, but newer issues over time would
capture those higher rates.

Duration tells you the time to indifference of the bond after a step rise in rates. This if for people that can't stand the idea that bond values change and would be better off in zero duration holdings. Note that over time bond investors gain more wealth if interest rates increase than if they don't.
Or, duration is effectively the derivative or return with respect to changes in rates. I interpret the second as duration telling you how volatile the investment is by translating volatility in rates into volatility in return. Rates are viewed as constantly undergoing random change.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by babystep »

LeftCoastIV wrote: Sun Aug 01, 2021 9:25 am Thanks for all the responses so far. A few replies:

Not looking for an income stream. Would prefer to avoid it actually, due to taxes. Looking for (a) risk diversification and ballast, (b) hopefully a return that at least matches inflation, preferably modestly beating it. Cash accomplishes (a) but fails at (b).
Should one look at each component of the portfolio is achieving those two goals or your overall portfolio should be looked at against those two goals?
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Re: Nearly all fixed income in cash: Wrong decision?

Post by KlangFool »

LeftCoastIV wrote: Sun Aug 01, 2021 9:25 am
So, this is an interesting question. I think your argument is that bonds (and bond funds) are priced efficiently based on all available information, and to think otherwise is market timing. The head scratcher is why a professional/institutional investor would be accepting current bond returns and not requiring higher rates. Perhaps they understand the risk profile better, and view it as a fair premium over cash.
LeftCoastIV,

Those folks are paid millions every year to issue, buy, and sell billions of bonds regularly. This is a more efficient market than the stock market. So, why would someone else in the forum think that they are smarter or know more than those folks.

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Re: Nearly all fixed income in cash: Wrong decision?

Post by Robot Monster »

If you're afraid of rising rates, there's an excellent post by nisiprius that examines what happens to bonds when interest rates rise that you should check out. link
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Wiggums »

Duplicate post
Last edited by Wiggums on Sun Aug 01, 2021 10:14 am, edited 1 time in total.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Wiggums »

We are holding munis, I-bonds and some ultrashort bonds. I feel like we were compensated on the way down. Also, the bond fund's duration is the approximate breakeven point. So all is good.
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Outer Marker »

What type of accounts do you have, and what investment options are available to you?

If you have access to a 401K stable value fund, I think that is a great place to park fixed income. G Fund if you have access to TSP.

If you're limited to retail funds, I'd use Vanguard's Short Term Bond Index fund.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Marseille07 »

LeftCoastIV wrote: Sun Aug 01, 2021 9:25 am I hold 40% fixed income to limit my exposure to equities.
This is all good and fine. Now, 38% in cash and 2% in bonds are probably not that great in terms of losing vs inflation. You want to figure out how to construct the 40% in Fixed Income. It'll be a mixture of I-bonds (which you are already doing) and other options.

I'd probably suggest 10% in cash (including I-bonds) and 30% in total bond market and call it a day.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by ruralavalon »

LeftCoastIV wrote: Sat Jul 31, 2021 3:49 pm We are mid-40s with (I think) sufficient assets to fund an early retirement at around ~50x annual expenses (before taxes). We are settling into a 60/40 portfolio, which feels “right” for us (enough market exposure for long-term growth, but no need for excessive risk). However, nearly all of our fixed income is in cash, with very little in bonds. Something like 2% of our portfolio is in bonds. The rest of our fixed income is in cash.
. . . . .
LeftCoastIV wrote: Sun Aug 01, 2021 9:25 amNot looking for an income stream. Would prefer to avoid it actually, due to taxes. Looking for (a) risk diversification and ballast, (b) hopefully a return that at least matches inflation, preferably modestly beating it. Cash accomplishes (a) but fails at (b).
In my opinion an asset allocation of 60 stocks, 40% fixed income is within the range of what is reasonable.

In my opinion most of the fixed income in cash is not reasonable. You will certainly have a negative real return on your cash, net of inflation and taxes.

In addition to continuing purchases of
I-bonds, consider a Single Premium Immediate Annuity (SPIA) or deferred income annuity. Also consider a Treasury bond fund, total bond market fund, or an intermediate-term bond fund, they all provide good diversification.
Last edited by ruralavalon on Sun Aug 01, 2021 10:46 am, edited 2 times in total.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Berner »

I share your concern regarding the bond bubble, but 40% is a lot to put in cash given the inflation rates we are seeing. My suggestion is to consider allocating some or all of the fixed income portion of your portfolio to an inflation-protected ETF or mutual fund, such as VTIP. Personally, 25% of ny portfolio is invested in inflation-protected securities which is sufficient to fund our portfolio draws until we reach full retirement age of 67 (we are currently 56 and retired).
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Re: Nearly all fixed income in cash: Wrong decision?

Post by Escapevelocity »

Nominal high credit quality bonds are all yielding negative real returns. I’m more concerned with whether this is a permanent condition we’re facing as investors or a temporary one. It would be reassuring as someone entering retirement that I could count on long term average returns in my bond allocation of at least 0% real.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by illumination »

I don't blame someone for not wanting to get in bond funds, I now largely stay clear as well. The rate of return for risk involved just doesn't seem to me to be "worth it". I happen to think the Fed is kicking a can down the road and it's getting to the end game where they are going to have to start raising rates and can only look the other way at inflation for so long. I guess that's a form of market timing, but I'm at peace with that. I only look to bonds for their promised rate of return, something like BND currently yields around 1.29%, VGSH (Short Term Treasuries) is .29%. Those are probably the only bond funds I'd be interested in, I'll gladly take that "hit" in less return to protect my principal. I have my fixed income in money market accounts that essentially yield nothing. Missing out on the extra yield for the insurance to my principal seems cheap to me.


Laddering CDs or SPIA's look like a much better way to park fixed income if you're okay with the liquidity. I also like the strategy of paying down a home mortgage instead.
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Re: Nearly all fixed income in cash: Wrong decision?

Post by indexfundfan »

An earlier post suggested MYGAs. Have you looked into this?

A MYGA does not produce an income stream (tax-deferred compounding in taxable account) and may almost keep up with inflation. In response to low CD and bond fund yields, I have now around 20% of my fixed income assets in MYGAs.

Here's a post discussing where you can purchase MYGAs

viewtopic.php?t=334589
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