Bond strategy moving forward

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flyninjasquirrel
Posts: 58
Joined: Fri May 05, 2017 9:00 am

Bond strategy moving forward

Post by flyninjasquirrel »

I am admittedly less educated on the ins and outs of bonds than I am on other aspects of investing. I am currently reading more on the topic, but also wanted to get the sage advice of this community on what my strategy should be for this portion of my portfolio moving forward.

Age: 38/39
State of Residence: NC
Tax Status: MFJ
Tax Rate: 37%, 4.5%
Assets: $1.7 mil
Debt: $500k on mortgage, will be paid off in 3 years
Current AA: 80/20, international 20% of equities
Desired AA after age 40: 70/30

EF in HYSA - $100k

Taxable - $276k
No bond fund currently

His 401k - $686k
SWAGX, $116k, 6.7%

Her 401k - $356k
VBTIX, $49k, 2.8%

His IRA - $56k
VBTLX, $10k, 0.6%

Her IRA - $113k
VBTLX, $14.5k, 0.8%

HSA - $62k
FXNAX, $37k, 2.15%

His I Bonds - $43k, 2.5%
Her I Bonds - $43k, 2.5%

Current bond % of portfolio = 18%

Max out all tax advantaged space and contribute $50-100k to taxable annually. Buy $10k per year each of I bonds. Started this in 2021. Goal retirement age is 50-55.

Questions:
1) We currently hold standard intermediate term total bond market index funds in our portfolio. Should there be any effort made to add in bond funds of different durations?

2) With our investment in I Bonds, is there still a role for a TIPS fund here? How much? Is there a point we should stop buying I Bonds considering our goal retirement age?

3) We may have to hold some bonds in taxable in the future. What are the best VG muni bond funds? Is there any downside to holding a large percentage of muni bonds?

As always, thanks for the help.

EDIT: added bond fund amounts and change % to represent % of total portfolio
Last edited by flyninjasquirrel on Wed May 15, 2024 8:13 am, edited 3 times in total.
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retiredjg
Posts: 54612
Joined: Thu Jan 10, 2008 11:56 am

Re: Bond strategy moving forward

Post by retiredjg »

It appears you have a couple of total bond index funds for your bond allocation. There is certainly nothing wrong with that choice.

It is unclear if you have 31% of your portfolio in these funds (in which case you have a little extra for now) or if the percentage refers to the account (in which case you do not have enough bonds for now.)

Even if you wanted to change, if these are your only accounts there may not be any better choices available.
crisp3er
Posts: 43
Joined: Sun Dec 27, 2020 11:08 am

Re: Bond strategy moving forward

Post by crisp3er »

It seems you've explored various options to diversify your investment portfolio. It's admirable that you dedicate time to educate yourself and make informed decisions regarding investments.

However, understanding the exact allocation of your assets can be confusing. Without precise details, it may be challenging to identify beneficial changes.

Even in this situation, it's important to continue educating yourself and improving your investment strategy to achieve your long-term financial goals.
bonesly
Posts: 1423
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Bond strategy moving forward

Post by bonesly »

flyninjasquirrel wrote: Wed May 15, 2024 7:41 am 1) We currently hold standard intermediate term total bond market index funds in our portfolio. Should there be any effort made to add in bond funds of different durations?
Total bond has an average duration that's intermediate (about 6-7 years), but it's composed of maturities as long as 30 years and as short as 2 years (thus the "total" moniker). There's no diversification advantage for adding funds of different duration in general. If you are using the strategy of duration-matching to a need date, then a ladder of individual T-Notes with duration matched to your spending date is likely appropriate.
flyninjasquirrel wrote: Wed May 15, 2024 7:41 am 2) With our investment in I Bonds, is there still a role for a TIPS fund here? How much? Is there a point we should stop buying I Bonds considering our goal retirement age?
I-Bonds and TIPS are both inflation-adjusted, but I-Bonds can be ideal for a Taxable holding since the interest can be deferred until you cash out, while TIPS are best held in a tax-deferred account (like most bonds). If your total bond allocation is on target there's no need to buy more. If you total bond allocation is below target (perhaps because the allocation to bonds is increasing with time), then you could buy more bonds wherever it's convenient (I-Bonds in Taxable, TIPS/Nominals in Tax-Deferred, or some mix of both).
flyninjasquirrel wrote: Wed May 15, 2024 7:41 am 3) We may have to hold some bonds in taxable in the future. What are the best VG muni bond funds? Is there any downside to holding a large percentage of muni bonds?
Presuming your actual vs desired allocation will call for more bonds in the future, it would be better to purchase additional bonds in tax-deferred first (purchase stocks in taxable to maintain the AA if it's a swap), then in Taxable via I-Bonds. If you're "out of space" for tax-deferred (it's 100% bonds already) and I-Bonds in taxable (hit the annual purchase limit already), then munis in Taxable make sense as long as you remain in the top tax bracket. Regarding the "best" muni bond funds, you'll want ones that are exempt from both Fed and NC tax at the lowest cost.

I don't think you'll find anything that's higher quality or lower cost than Vanguard Tax-Exempt Bond Index (VTEB, ER=0.06%), but it's taxable in NC.

Unfortunately, NC munis seem to only be offered by high-cost firms that typically are sold through an advisor with a front-end load on top of ERs well in excess of 0.5%. I would not recommend anything that costly (and would just buy VTEB and suck up the NC tax), but if you're out of options and have to avoid NC tax on bond income, then these three seem viable (they're costly, but at least if you buy them direct, there's no front-end load).

MFS NC Municipal Bond Fund (MNCLX I-Class, ER=0.59%)
Nuveen NC Municipal Bond Fund (FCNRX I-Class, ER=0.61%)
Dupree NC Tax-Free Fund (NTFIX I-Class, ER=0.70%)

All three of these may be available at your current brokerage (perhaps for an out-of-house transaction fee of something like $25). Just be sure that transaction fee is not applied for automatic reinvestment purchases. Those three companies all have A-class shares they'd probably rather have you buy so don't get up-sold on A-class (MFS for example charges a 4.25% front-end load and the ER jumps to 0.81% if an "advisor" sells you the product instead of you buying it direct as investor-class shares).
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