Optimal Bond Portfolio for the Recently Retired?

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RooseveltG
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Optimal Bond Portfolio for the Recently Retired?

Post by RooseveltG »

Stock portfolio recommendations are fairly uniform (US, Internationals, REITS. small cap/value tilts) but the gurus recommend different bond portfolios.

The average investor needs to choose duration, credit risk and whether to own a total bond market fund because of the inclusion of mortgage backed securities.

As a recent retiree, I am much more perplexed about the bond side of my portfolio. Any perspectives would be appreciated.

Roosevelt.
Call_Me_Op
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Call_Me_Op »

Although you are correct that equity recommendations are somewhat more uniform, there is really no consensus on either equities or fixed-income. There is certainly no "optimal bond portfolio", as that would depend upon having the ability to clearly prognosticate. There seem to be 2 main camps on here - those who advocate total bond fund and another group unwilling to even take 5 years of duration risk. The latter group recommends things like bank CD's and I-Bonds. There is a third group that advocates the Permanent Portfolio or variants thereof.

It seems to me that the banks have "caught onto" people who want to get a good rate on a long-term CD but have the option to break it early. The banks seem to be offering pathetically-low rates on CD's of all maturities, including long. And of course we are limited to 10K in I-Bonds each year. So the "zero duration" option is pretty lousy right now.
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rixer
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by rixer »

RooseveltG wrote:Stock portfolio recommendations are fairly uniform (US, Internationals, REITS. small cap/value tilts) but the gurus recommend different bond portfolios.

The average investor needs to choose duration, credit risk and whether to own a total bond market fund because of the inclusion of mortgage backed securities.

As a recent retiree, I am much more perplexed about the bond side of my portfolio. Any perspectives would be appreciated.

Roosevelt.

I have the same questions as you, RoseveltG. I'm comfortable with the equity side but I'm all over the place on fixed income. I have two managed interm funds, a cd ladder and mm funds. I also wish I had a better handle on the fixed income part of my portfolio.
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SimpleGift
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by SimpleGift »

RooseveltG wrote:As a recent retiree, I am much more perplexed about the bond side of my portfolio. Any perspectives would be appreciated.
My suggestion would be to just go with the bond guru that you like best and pick one of their retirement bond allocations that makes the most sense to you. If we're talking about a choice between Ferri, Swedroe, Bernstein, etc., you can't go too far wrong with any of their recommendations.

In my case, years ago when I was first setting up my nearly all taxable retirement portfolio (after selling a business), I happened to run across William Bernstein's recommended bond allocations in his book, The Four Pillars of Investing. He had one sample bond portfolio there for an entirely taxable investor ("Taxable Ted") and this allocation just clicked with me and made very good sense — the right duration, credit risk, percentage of muni bonds, etc. I've stuck with it now for more than a decade and can't imagine changing it, come what may.
dbr
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by dbr »

Keep in mind that part of the range of choices in bonds involves features that stocks do not have. Courtesy of Washington DC we have inflation indexed bonds as a choice. There are no inflation indexed stocks. Also courtesy of the same folks, we have tax exempt bonds. There are no tax exempt stocks. Due to the nature of money we have options of holding cash deposits, such as CD's, savings accounts, savings bonds, etc. There are even creative investment products based on bonds that contract for cash preservation such as money market funds and stable value funds. There are no cash stocks; stocks are not money. I think the only range of choices in stocks are between common and preferred stocks and perhaps one might separate out certain stock-like investments such as REITs and MLPs.

Another dimension is that common stocks are strictly the issues of private corporations. The part of bonds that overlays this is corporate bonds. There are no mortgage backed stocks, no local government and tax district stocks, no US Treasury stocks, and so on.

It is no wonder the area is perplexing.
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SnapShots
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by SnapShots »

rixer wrote:
RooseveltG wrote:Stock portfolio recommendations are fairly uniform (US, Internationals, REITS. small cap/value tilts) but the gurus recommend different bond portfolios.

The average investor needs to choose duration, credit risk and whether to own a total bond market fund because of the inclusion of mortgage backed securities.

As a recent retiree, I am much more perplexed about the bond side of my portfolio. Any perspectives would be appreciated.

Roosevelt.

I have the same questions as you, RoseveltG. I'm comfortable with the equity side but I'm all over the place on fixed income. I have two managed interm funds, a cd ladder and mm funds. I also wish I had a better handle on the fixed income part of my portfolio.
Me 2.. :confused
the best decision many times is the hardest to do
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SimpleGift
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by SimpleGift »

The choices for a bond allocation may be more perplexing than for a stock allocation, but the consequences of the decision seem to be much less momentous to one's financial well being:
  • • Bernstein recommends taking all the risk on the equity side and keeping durations short.
    • Swedroe advises that retirees may extend maturities a bit, but only if they're compensated for the risk.
    • Ferri recommends adding a small allocation to high-yield or emerging market bonds.
    • Bogle recommends a total bond market approach, but tilted to more corporates these days.
    • Swenson advises high-quality bonds only, with half nominals and half TIPS.
All of this advice can be confounding, but the point is that one's financial well being is not going to be drastically affected by the choice one makes here. Yes, do your research, consider all the various alternatives and recommendations — but then just choose an allocation that makes the most sense for your situation and enjoy the rest of your retirement.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Greenie »

This articles suggests possibly being on the bond sidelines for awhile in cash and coming back to bonds when rates are higher:
http://online.wsj.com/article/SB1000142 ... =rss_Money
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Munir
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Munir »

Simplegift wrote:The choices for a bond allocation may be more perplexing than for a stock allocation, but the consequences of the decision seem to be much less momentous to one's financial well being:
  • • Bernstein recommends taking all the risk on the equity side and keeping durations short.
    • Swedroe advises that retirees may extend maturities a bit, but only if they're compensated for the risk.
    • Ferri recommends adding a small allocation to high-yield or emerging market bonds.
    • Bogle recommends a total bond market approach, but tilted to more corporates these days.
    • Swenson advises high-quality bonds only, with half nominals and half TIPS.
All of this advice can be confounding, but the point is that one's financial well being is not going to be drastically affected by the choice one makes here. Yes, do your research, consider all the various alternatives and recommendations — but then just choose an allocation that makes the most sense for your situation and enjoy the rest of your retirement.
One more option proposed by a vocal group on this forum is CDs (non-brokered). An article in todays WSJ, http://online.wsj.com/article/SB1000142 ... sNewsThird, suggests that currently cash may be the optimum fixed income vehicle for retirees. Many retirees like me do not have access to stable value funds. My issue is that since nearly all my fixed income funds are in a traditional IRA, I do not want the hassle of opening various IRAs with credit unions and banks just to have CDs with them. How can I access, or more accurately, can I access, non-brokered CDs via my IRA in any other fashion?
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Taylor Larimore
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Taylor Larimore »

RooseveltG wrote:Stock portfolio recommendations are fairly uniform (US, Internationals, REITS. small cap/value tilts) but the gurus recommend different bond portfolios.

The average investor needs to choose duration, credit risk and whether to own a total bond market fund because of the inclusion of mortgage backed securities.

As a recent retiree, I am much more perplexed about the bond side of my portfolio. Any perspectives would be appreciated.

Roosevelt.
Roosevelt:

In my opinion, any low-cost, good quality, short- or intermediate-term bond fund should provide safety and income in a portfolio.

I like Total Bond Market Index Fund for the same reason I like Total Stock Market Index Fund--diversification.

When experts disagree it is often because it does not make much difference.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Greenie
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Greenie »

I think many of us near retirement are questioning having 60% of our portfolio in bonds and waiting to be clobbered as interest rates rise. It is tempting to move to the cash sidelines until their are more favorable yields for the risks we are taking.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by stevewolfe »

Greenie wrote:I think many of us near retirement are questioning having 60% of our portfolio in bonds and waiting to be clobbered as interest rates rise. It is tempting to move to the cash sidelines until their are more favorable yields for the risks we are taking.
Being in my early 40's with 60% in fixed income, maybe you should consider alternatives to bonds? For example, we have a large allocation to I-Series savings bonds and CD's as well as a stable value fund in a 401(k). Yes, there are limits on I-Bonds annual purchase, but you can accumulate a goodly amount of them over years at $10k per SSN + trust. If you are uncomfortable with bond funds, there may be alternatives that pay better than cash out there for you... :beer
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Munir »

stevewolfe wrote:
Greenie wrote:I think many of us near retirement are questioning having 60% of our portfolio in bonds and waiting to be clobbered as interest rates rise. It is tempting to move to the cash sidelines until their are more favorable yields for the risks we are taking.
Being in my early 40's with 60% in fixed income, maybe you should consider alternatives to bonds? For example, we have a large allocation to I-Series savings bonds and CD's as well as a stable value fund in a 401(k). Yes, there are limits on I-Bonds annual purchase, but you can accumulate a goodly amount of them over years at $10k per SSN + trust. If you are uncomfortable with bond funds, there may be alternatives that pay better than cash out there for you... :beer
If one's funds are in a traditional IRA which has no access to stable value funds, I-bonds, or non-brokered CDs, what other avenues are there to use as "cash" other than MM funds and brokered CDs ?
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by SnowSkier »

I've been thinking through the same questions as the OP, for my 69-yr-old mom's portfolio. Wanted to share where we ended up so far, since we believe it's one potential answer of many "good-enough" answers, to hopefully get any improvement suggestions or comments.

Assuming Vanguard funds, and no TIPS just yet, we've ended up deciding on half short-term bond fund and half intermediate-term bond funds.

The short-term one we're using is Vanguard Intermediate-Term Investment Grade (VFSUX) with 2.4 yrs duration, and 1.52% SEC yield now.

For the intermediate-term ones, we considered 3 (TBM, Intermediate Term Treasury, and Intermediate-Term Investment Grade), and decided to put 25% of fixed income allocation into each of these two:
- Vanguard TBM (VBTLX) with 5.5 yrs duration, and 2.01% SEC yield now
- Vanguard Intermediate Term Treasury (VFIUX) with 5.3 yrs duration, and 1.41% SEC yield.

Overall thinking, after lots of reading, was we wanted half short-term (~2.5 yrs duration) and half intermediate-term (~5.5 yrs duration), wanted the short-term to be the investment grade one, and wanted the intermediates to include at least some specific treasuries (not blended as in TBM) to serve as primary source of rebalance funds for the next time stocks fall.

In the event of interest rate increases, VFSUX should fall the least of these, and TBM & VFIUX would fall less than something like VFIDX/IntTerm Inv Grade or VCIT.
In the event of significant stock market drops, VFIUX should do the best of these, followed by TBM.

Thoughts? Suggestions? Does this fall into the realm of "good enough" fixed income portfolios in this challenging fixed-income environment?
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by dbr »

A thought that just struck me this morning is that these bond threads seem to have an amazing resemblance to discussion forums like this one:

http://ths.gardenweb.com/forums/appl/

This, by the way, is not a negative comment targeted at anyone or at either forum.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by BlueEars »

Let's say your AA calls for 60% fixed income. A few approaches:
1) Do what Wellesley does and select a bond fund or a few bond funds with nearly the Wellesley duration. They've been a decent all weather fund. Their current duration = 6.4 years as shown here: https://personal.vanguard.com/us/funds/ ... =INT#tab=2 Note Wellesley does not have a large cash position because over the long run cash is not king.

2) Have maybe 1 to 2 years in a short term investment grade fund like VFSUX (FWIW, I have about 1 year in VFSUX and only a few months of cash).

3) Consider taking that 60% fixed income and putting a small piece of that in equities. Yes, I know you may already have 40% equities. But IMO the equities have a better risk/reward profile right now. So maybe make that 55/5 (55% bonds, 5% additional equities). Promise yourself as rates climb that 5% extra equities will move back to FI. Well you asked for opinions and as we know there is no optimal bond portfolio until we are looking back in history. :happy
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Munir »

dbr wrote:A thought that just struck me this morning is that these bond threads seem to have an amazing resemblance to discussion forums like this one:

http://ths.gardenweb.com/forums/appl/

This, by the way, is not a negative comment targeted at anyone or at either forum.
If this "is not a negative comment targeted at anyone or at either forum", then what is it? It sounds purely negative and sarcastic to me unless I am missing something. Please elaborate.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by ogd »

SnowSkier wrote:Thoughts? Suggestions? Does this fall into the realm of "good enough" fixed income portfolios in this challenging fixed-income environment?
It's probably too complicated. The bond market is very, very good at pricing the different durations (it does this for a living) and in addition you are mixing in credit risk (ST IG) without sounding like you meant it.

Consider just picking a duration and a credit risk target separately, the latter from e.g. behaviour during the financial crisis. Then see if a single fund satisfies it, if not mix in a couple. Then stay there. Do not try to second guess after interest rate risk shows up, the market is always one step ahead of you.
Munir wrote:If one's funds are in a traditional IRA which has no access to stable value funds, I-bonds, or non-brokered CDs, what other avenues are there to use as "cash" other than MM funds and brokered CDs ?
You can get IRA CDs from almost all banks and credit unions, although it does involve transferring money. It's only in a 401k without stable value funds that you truly have no alternative to bonds. That said, see above.
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nedsaid
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by nedsaid »

You are among many who are perplexed about bonds, including me.

I am 54 and have kept my bonds in the intermediate term range. I have a good helping of TIPs in there for inflation protection and international bonds as a currency hedge. This strategy is based in part in being able to reinvest the dividends for years to come.

The experts like Ferri, Swedroe, Bernstein, and others will have a lot in common in their approach to fixed income. But as you have found out, there are differences in opinion. A previous posted nicely summarized these differences.

For a retiree or a near retiree, things are different because presumably you are drawing interest and dividends to live on and not reinvesting them. With no dividends to reinvest into your bond funds, you may not see a full recovery in the drop in principal.

One thing to consider is a CD ladder. Buy one, two, three, four, and five year CDs in equal amounts. As a CD matures, buy a new 5 year CD. This gets you around the problem of rising interest rates causing the Net Asset Value in your bond funds to drop. The CDs are used as a substitute or a partial substitute for bonds.

Another option is to buy an immediate annuity to get monthly checks from the insurance company. It alleviates the worry about running out of money. The drawback is that most of these have no inflation protection. Those that do have a much lower monthly payment starting out.

Another approach is to stay with your previous plan and harvest your withdrawals from the portfolio as a whole. You are investing for total return. Hopefully you are harvesting the gains in your portfolio. This approach is favored by most Bogleheads. One would use a 3 or 4 percent withdrawal rate. Most folks can't take a purely "income" approach and harvest just the dividends and interest. They will have to also harvest capital gains or even principal to have enough to live on.

Or you could go with a variation of the "buckets" strategy. Calculate the amount of annual withdrawals you need from the portfolio. Take three years worth of needed withdrawals out of the portfolio and buy a one, two, and three year CD with them. Each year, cash in one CD and that is your withdrawal. In good market years, replenish your CD portfolio by transferring a year's withdrawals from the stock and bond portfolio and buying another CD. If the markets are bad, three years is long enough for things to recover enough so that you don't have to sell at the bottom. You could use a
short term bond fund for this strategy instead of the CDs.

Unfortunately, there is no one correct answer for investing the bond portion of your portfolio or a withdrawal strategy. I addressed both because both are intertwined.

The previous posters have offered good suggestions.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by dbr »

Munir wrote:
dbr wrote:A thought that just struck me this morning is that these bond threads seem to have an amazing resemblance to discussion forums like this one:

http://ths.gardenweb.com/forums/appl/

This, by the way, is not a negative comment targeted at anyone or at either forum.
If this "is not a negative comment targeted at anyone or at either forum", then what is it? It sounds purely negative and sarcastic to me unless I am missing something. Please elaborate.
Well, on that other forum people are perplexed that when they want to buy appliances there are a jillion choices, some of which are significant in general, some of which are significant to the specific wants of an individual, and many of which are just choices of the six of one, half a dozen of another variety. There are so many choices people don't know what to do and don't want to choose wrong having made some horrible mistake. Also on that forum there is lots of angst about quality and customer service and so on that is similar to all the fear that some approach to bonds will or won't be good or bad. In both cases the more choices there are and the less they matter, the more discussion is generated because any actual answer is very difficult to ferret out.

I think this is a general phenomenon that applies to many decision making situations and I was just observing that. I don't think saying so is negative about anybody as we all want to do the right thing and are powerfully impelled to optimize situations. It might be a backhanded way of suggesting that relaxing and not worrying so much about it could be a good thing. If people would prefer that, than I apologize for my comments.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by RK »

Greenie wrote:This articles suggests possibly being on the bond sidelines for awhile in cash and coming back to bonds when rates are higher:
http://online.wsj.com/article/SB1000142 ... =rss_Money
I read this article by Brett Arends today as it was reprinted in the Denver Post. My concern about what it is suggesting is that it sounds a lot like market timing. Yet, in the article, a couple of academics said in a paper "There are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously". They go on to say that by their calculations a conservative portfolio of 40/60% stocks/bonds at a 4% withdrawal rate stands a 50% chance of running out of money within 30 years. As a conservative, and retired, investor,I would be very reluctant to cash in stocks and bonds with the expectation bond rates will increase and stock equity valuations will moderate in the future. But I would welcome more experienced investor's opinions of the article.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by pastafarian »

dbr wrote:
Well, on that other forum people are perplexed that when they want to buy appliances there are a jillion choices, some of which are significant in general, some of which are significant to the specific wants of an individual, and many of which are just choices of the six of one, half a dozen of another variety. There are so many choices people don't know what to do and don't want to choose wrong having made some horrible mistake...

I think this is a general phenomenon that applies to many decision making situations and I was just observing that. I don't think saying so is negative about anybody as we all want to do the right thing and are powerfully impelled to optimize situations.
Here's evidence to back you up.
Too much choice makes choosing tough. Although we have been conditioned to view unlimited options as something to be desired, in reality a surfeit of options can leave us anxious and unable to decide. In fact, “choice conflict” and “decision paralysis” are major contributors to financial mistakes— say, the inability some people have to move money out of a conservative retirement fund; or the difficulty others have in refinancing their mortgage. But this challenge pervades almost every aspect of life, from deciding on a mate to choosing a wine to picking out shirts. That’s why it’s often a good idea to limit your own choices, which is easier than it seems. One smart way is to find “trusted screeners” whose judgment you like— and whose honesty you can rely upon— to pare down or even make your choices for you. Independent rating services or media entities like Consumer Reports often do the research for you, then identify the top three selections among a jumble of products or services. That will leave you in control of your final choice while also limiting your options to a number that won’t inspire paralysis. An alternative strategy is to ask a colleague, friend, or relative with expertise in the subject to pare your options to a manageable few.

Belsky, Gary; Gilovich, Thomas (2009-12-26). Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics (pp. 240-241). Simon & Schuster. Kindle Edition.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by BlueEars »

RK wrote:
Greenie wrote:This articles suggests possibly being on the bond sidelines for awhile in cash and coming back to bonds when rates are higher:
http://online.wsj.com/article/SB1000142 ... =rss_Money
I read this article by Brett Arends today as it was reprinted in the Denver Post. My concern about what it is suggesting is that it sounds a lot like market timing. Yet, in the article, a couple of academics said in a paper "There are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously". They go on to say that by their calculations a conservative portfolio of 40/60% stocks/bonds at a 4% withdrawal rate stands a 50% chance of running out of money within 30 years. As a conservative, and retired, investor,I would be very reluctant to cash in stocks and bonds with the expectation bond rates will increase and stock equity valuations will moderate in the future. But I would welcome more experienced investor's opinions of the article.
Intermediate bonds did not do that badly in the irregular rate rise from 2003 to 2007. If you subtract off a few percent because we are starting at an even lower rate now I think one could make a case for maybe some 3 to 5 years of zero real rates. But then we are closer to normal after that. What will happen to stocks in those years? Who knows, emerging history is fun (and scary) that way.

I for one will not be going into cash and waiting for normality as that article hints at. Such a strategy could be very successful ... or not. It is market timing, but seems to be a not very smart way to market time.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Peter Foley »

Roosevelt G:

I would frame the issue a little differently, that is being perplexed about the non equity side of one's proposal. As others have pointed out, there a recommendations by knowledgeable individuals that support a number of different bond fund approaches (balancing risk and reward). I'm equally perplexed and my non equities are 55-60% of my AA.

TIPs are also an option as are CDs, Stable Value Funds, and cash.

I personally have a mix of older EE and I bonds, Total bond market, TIPs, stable value, and cash. Stable value is currently my largest holding by far and by chance/luck total bond is my smallest. (I was in the middle of transferring my total bond allocation from my deferred account to an IRA when Mr. Bernanke gave his speech in late May about lessening up on QE and the bond market tumbled. I'm holding that transfer in a money market for now.)

I don't see much sense in holding CDs unless you create a CD ladder.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by patrick »

Many of these things don't matter much, as long as you can refrain from churning the portfolio by switching back and forth repeatedly. But in some cases they can make a difference.

Moving 10% of your bonds into high yield and/or emerging markets won't make much difference. However, moving 90% of your bonds into high yield and/or emerging markets is likely to make a difference. The trouble with risk is that you can't tell in advance if the difference will be for the better or for the worse.

Sitting in cash for one year while waiting for an interest rate increase also isn't likely to make much of a difference. However, if the expected interest rate doesn't come and you keep on waiting for a decade or two, the interest rate difference compounded over the whole period could get rather large.

And TIPS won't make much difference if inflation is moderate, but if inflation gets high they will make a difference.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Hexdump »

pastafarian wrote:
Here's evidence to back you up.
One smart way is to find “trusted screeners” whose judgment you like— and whose honesty you can rely upon— to pare down or even make your choices for you.

Belsky, Gary; Gilovich, Thomas (2009-12-26). Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics (pp. 240-241). Simon & Schuster. Kindle Edition.
Hence my reliance on the Wellesley managers as my "trusted screeners". Their track record has been pretty good.
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by stratton »

Vanguard Retirement Income (VTINX) has bonds broken up this way:

56% TBM
24% Short term TIPS
20% Total Intl Bond Index

Paul
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Re: Optimal Bond Portfolio for the Recently Retired?

Post by Johm221122 »

As mentioned
You could always substitute a SPIA for some fixed income.Depending on your age they can provide a lot more payment than bonds
John
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