Move to bond index fund or leave in stable value fund

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BBurki
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Move to bond index fund or leave in stable value fund

Post by BBurki »

Hello!

RE: a recently inherited account with a fairly large balance.

The account has a bit more than half in a stable value fund. I want to move toward a 60/40 3-fund portfolio.

With the possibility of rising interest rates (which, as I understand it, causes bond values to fall) I'm wondering if I should wait to move 40% of the money out of the stable value fund into a bond index fund. Or should I leave it where it is until the interest rate climate calms down.

Thoughts?
dbr
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Re: Move to bond index fund or leave in stable value fund

Post by dbr »

Interest rates are always unstable.

However, I would comment that a stable value fund is perfectly acceptable for the bond allocation in the 3 fund idea. The 3 fund idea should not be a listing of exactly what funds you have to have, at least not with respect to bonds. Keep in mind total bond market is not even remotely a "total market" of bonds fund anyway.

As to whether someone "should" or shouldn't change an SV fund for an intermediate term bond fund there is no firm advice nor is there any obvious advice that bonds are or aren't going to experience something bad because interest rates might change.

In the case one expects bond returns to be limited in future and that won't meet objectives, one can add more risk for better return and shift the asset allocation more to stocks -- or not.
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BBurki
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Re: Move to bond index fund or leave in stable value fund

Post by BBurki »

dbr wrote: Fri Jan 14, 2022 10:26 am Interest rates are always unstable.

However, I would comment that a stable value fund is perfectly acceptable for the bond allocation in the 3 fund idea. The 3 fund idea should not be a listing of exactly what funds you have to have, at least not with respect to bonds. Keep in mind total bond market is not even remotely a "total market" of bonds fund anyway.

As to whether someone "should" or shouldn't change an SV fund for an intermediate term bond fund there is no firm advice nor is there any obvious advice that bonds are or aren't going to experience something bad because interest rates might change.

In the case one expects bond returns to be limited in future and that won't meet objectives, one can add more risk for better return and shift the asset allocation more to stocks -- or not.
Thanks for the input.

So, in your opinion, a stable value fund has equal merit to a total bond market index fund?

I should add that the expense ratio of the SV fund is 0.27% while the expense ratio of the bond fund I'm considering is 0.03%
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Stinky
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Re: Move to bond index fund or leave in stable value fund

Post by Stinky »

What is the credited rate for the stable value fund?

By the way, the expense ratio for the SV fund is irrelevant. All that counts is the credited rate.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
dbr
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Re: Move to bond index fund or leave in stable value fund

Post by dbr »

BBurki wrote: Fri Jan 14, 2022 11:09 am
dbr wrote: Fri Jan 14, 2022 10:26 am Interest rates are always unstable.

However, I would comment that a stable value fund is perfectly acceptable for the bond allocation in the 3 fund idea. The 3 fund idea should not be a listing of exactly what funds you have to have, at least not with respect to bonds. Keep in mind total bond market is not even remotely a "total market" of bonds fund anyway.

As to whether someone "should" or shouldn't change an SV fund for an intermediate term bond fund there is no firm advice nor is there any obvious advice that bonds are or aren't going to experience something bad because interest rates might change.

In the case one expects bond returns to be limited in future and that won't meet objectives, one can add more risk for better return and shift the asset allocation more to stocks -- or not.
Thanks for the input.

So, in your opinion, a stable value fund has equal merit to a total bond market index fund?

I should add that the expense ratio of the SV fund is 0.27% while the expense ratio of the bond fund I'm considering is 0.03%
Yes, though I would not use the language "merit" which is a term that does not apply to investing. It is just a question of whether or not the investment choice aligns with your objectives. In the event one chooses a long term lower returning investment one can also adjust the stock/bond allocation to come out where you want. The ER of a stable value fund is not a consideration rather than just looking at the yield offered. Like CDs, SV funds tend to offer reasonable yields relative to prevailing interest rates at perhaps a little less risk.

Defining risk as the variability of return, a stable value fund will have risk in how variable the yield is, running in recent decades from perhaps 5% to 1%, or a +/- variability of 2%. The standard deviation of annual return for an intermediate duration bond fund is probably about 6% over time.
sizzlefuzz
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Re: Move to bond index fund or leave in stable value fund

Post by sizzlefuzz »

BBurki wrote: Fri Jan 14, 2022 10:20 am Hello!

RE: a recently inherited account with a fairly large balance.

The account has a bit more than half in a stable value fund. I want to move toward a 60/40 3-fund portfolio.

With the possibility of rising interest rates (which, as I understand it, causes bond values to fall) I'm wondering if I should wait to move 40% of the money out of the stable value fund into a bond index fund. Or should I leave it where it is until the interest rate climate calms down.

Thoughts?
If it is an inherited IRA, you might want to look at something like a LifeStrategy fund to just manage the AA for you.
Mid 30s | AA: 91/9 | Investing early & often
Topic Author
BBurki
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Re: Move to bond index fund or leave in stable value fund

Post by BBurki »

Stinky wrote: Fri Jan 14, 2022 11:12 am What is the credited rate for the stable value fund?

By the way, the expense ratio for the SV fund is irrelevant. All that counts is the credited rate.
Thanks for the input!

I think it is (or was anyway) 1.71% for Q4 2021. That's assuming I'm looking in the right place, which is on this doc:

https://my.voya.com/static//epweb/pdf/ffs/QE53.PDF
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Stinky
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Re: Move to bond index fund or leave in stable value fund

Post by Stinky »

BBurki wrote: Fri Jan 14, 2022 11:35 am
Stinky wrote: Fri Jan 14, 2022 11:12 am What is the credited rate for the stable value fund?

By the way, the expense ratio for the SV fund is irrelevant. All that counts is the credited rate.
Thanks for the input!

I think it is (or was anyway) 1.71% for Q4 2021. That's assuming I'm looking in the right place, which is on this doc:

https://my.voya.com/static//epweb/pdf/ffs/QE53.PDF
I agree that the credited rate was 1.71% for last quarter. That credited rate is likely to be pretty “stable” for the upcoming quarters.

I view your stable value fund as being very attractive for your fixed income allocation, given what I expect to happen to interest rates over the next year or so. The SV fund will allow you to avoid the decline in bond fund prices that I expect will happen as interest rates (finally) rise.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
BBurki
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Re: Move to bond index fund or leave in stable value fund

Post by BBurki »

sizzlefuzz wrote: Fri Jan 14, 2022 11:26 am
BBurki wrote: Fri Jan 14, 2022 10:20 am Hello!

RE: a recently inherited account with a fairly large balance.

The account has a bit more than half in a stable value fund. I want to move toward a 60/40 3-fund portfolio.

With the possibility of rising interest rates (which, as I understand it, causes bond values to fall) I'm wondering if I should wait to move 40% of the money out of the stable value fund into a bond index fund. Or should I leave it where it is until the interest rate climate calms down.

Thoughts?
If it is an inherited IRA, you might want to look at something like a LifeStrategy fund to just manage the AA for you.
Yep, that's not a bad option. LifeStrategy isn't an option for me, but I do have the option of a target date fund. But I've probably watched too many Jack Bogle YouTube videos where he talks about paying the lowest fees possible :D And those target date funds have expense ratios of 0.40%, while index funds are much lower.
dbr
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Re: Move to bond index fund or leave in stable value fund

Post by dbr »

I believe it is usually the case that SV fund payout rates tend to lag changes in interest rates by a year or so. That rate might or might not fall a little.

I had an SV fund in the 401k that started out at about 5% and then at one point they terminated it claiming that the cost was excessive relative to the payout rate as interest rates fell. The default for transferring the assets was an intermediate total bond fund. I personally moved the assets to an intermediate TIPS fund.
ivgrivchuck
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Re: Move to bond index fund or leave in stable value fund

Post by ivgrivchuck »

BBurki wrote: Fri Jan 14, 2022 10:20 am Hello!

RE: a recently inherited account with a fairly large balance.

The account has a bit more than half in a stable value fund. I want to move toward a 60/40 3-fund portfolio.

With the possibility of rising interest rates (which, as I understand it, causes bond values to fall) I'm wondering if I should wait to move 40% of the money out of the stable value fund into a bond index fund. Or should I leave it where it is until the interest rate climate calms down.

Thoughts?
I'd keep it.

The 3-fund portfolio VTI/VXUS/BND is a good choice, but it's perfectly acceptable to replace the BND component with other fixed income asssets, stable value fund being one of them.

And if the time comes when BND pays significantly more (>1%) than the stable value fund, you can always switch at that point.
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
Topic Author
BBurki
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Re: Move to bond index fund or leave in stable value fund

Post by BBurki »

ivgrivchuck wrote: Fri Jan 14, 2022 12:09 pm
I'd keep it.

The 3-fund portfolio VTI/VXUS/BND is a good choice, but it's perfectly acceptable to replace the BND component with other fixed income asssets, stable value fund being one of them.

And if the time comes when BND pays significantly more (>1%) than the stable value fund, you can always switch at that point.
Got it. Thank you, sir!
Topic Author
BBurki
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Re: Move to bond index fund or leave in stable value fund

Post by BBurki »

dbr wrote: Fri Jan 14, 2022 11:58 am I believe it is usually the case that SV fund payout rates tend to lag changes in interest rates by a year or so. That rate might or might not fall a little.

I had an SV fund in the 401k that started out at about 5% and then at one point they terminated it claiming that the cost was excessive relative to the payout rate as interest rates fell. The default for transferring the assets was an intermediate total bond fund. I personally moved the assets to an intermediate TIPS fund.
Thank you!
sizzlefuzz
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Re: Move to bond index fund or leave in stable value fund

Post by sizzlefuzz »

BBurki wrote: Fri Jan 14, 2022 11:55 am

Yep, that's not a bad option. LifeStrategy isn't an option for me, but I do have the option of a target date fund. But I've probably watched too many Jack Bogle YouTube videos where he talks about paying the lowest fees possible :D And those target date funds have expense ratios of 0.40%, while index funds are much lower.
What are your fund options/ERs? That might help people reply in a more informed manner.
Mid 30s | AA: 91/9 | Investing early & often
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ruralavalon
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Re: Move to bond index fund or leave in stable value fund

Post by ruralavalon »

BBurki wrote: Fri Jan 14, 2022 11:35 am
Stinky wrote: Fri Jan 14, 2022 11:12 am What is the credited rate for the stable value fund?

By the way, the expense ratio for the SV fund is irrelevant. All that counts is the credited rate.
Thanks for the input!

I think it is (or was anyway) 1.71% for Q4 2021. That's assuming I'm looking in the right place, which is on this doc:

https://my.voya.com/static//epweb/pdf/ffs/QE53.PDF
To make your decision, I suggest that you compare that 1.71% rate to the SEC Yield and distribution yield of the bond fund offered in the plan.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
jvini
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Re: Move to bond index fund or leave in stable value fund

Post by jvini »

I moved about 70% of my bond funds to my stable value fund. The rest are in VGIT and a little in BND. That includes rolling over my IRA bond allocation into my 401k so I could take advantage of the stable value fund. I figure I'll let the 60% equity side of my portfolio take the risk and let the fixed side be very stable. If rates keep rising and are considerably higher than the stable value fund I'll consider going back into VGIT treasury bond fund.
Topic Author
BBurki
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Re: Move to bond index fund or leave in stable value fund

Post by BBurki »

Stinky wrote: Fri Jan 14, 2022 11:12 am What is the credited rate for the stable value fund?

By the way, the expense ratio for the SV fund is irrelevant. All that counts is the credited rate.
May I ask why the expense ratio is irrelevant?
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Stinky
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Re: Move to bond index fund or leave in stable value fund

Post by Stinky »

BBurki wrote: Sun Jan 16, 2022 9:28 am
Stinky wrote: Fri Jan 14, 2022 11:12 am What is the credited rate for the stable value fund?

By the way, the expense ratio for the SV fund is irrelevant. All that counts is the credited rate.
May I ask why the expense ratio is irrelevant?
In my mind, the expense ratio is useful is comparing two similar funds - like two broad market index funds. In that case, it is likely that the lower expense ratio fund will provide more value over time.

In your case, there aren’t two stable value funds. Just one. And I’d argue that the “principal guarantee” makes the stable value fund a different animal than a bond fund.

So I’d just look at the credited rate on the SV fund. And compare it, if you’d like, to the SEC yield on the bond fund.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
dbr
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Re: Move to bond index fund or leave in stable value fund

Post by dbr »

Stinky wrote: Sun Jan 16, 2022 11:11 am
BBurki wrote: Sun Jan 16, 2022 9:28 am
Stinky wrote: Fri Jan 14, 2022 11:12 am What is the credited rate for the stable value fund?

By the way, the expense ratio for the SV fund is irrelevant. All that counts is the credited rate.
May I ask why the expense ratio is irrelevant?
In my mind, the expense ratio is useful is comparing two similar funds - like two broad market index funds. In that case, it is likely that the lower expense ratio fund will provide more value over time.

In your case, there aren’t two stable value funds. Just one. And I’d argue that the “principal guarantee” makes the stable value fund a different animal than a bond fund.

So I’d just look at the credited rate on the SV fund. And compare it, if you’d like, to the SEC yield on the bond fund.
Right. Perhaps another point of view is that a regular bond fund holds the same bonds as any other similar fund but one fund costs you more to own. You could get the same bonds cheaper elsewhere. The SV fund is really a specific contract between your plan and the providers of the insurance contracts and is a unique arrangement between them and the plan. You get what your plan can negotiate. There isn't a choice of a different SV plan where those providers were forced to negotiate a higher payout.
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