Using long bonds vs. intermediate in 401K?

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jjunk
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Using long bonds vs. intermediate in 401K?

Post by jjunk »

I'm considering a switch from my current intermediate bond holding to one of long duration. The main reason being the ability to earn more interest over the next 25yrs while I wait for that money to come available. I'm planning to retire early next year at the age of 44. My allocation is 70/30 and my 30% is held entirely within my 401K. While I know I can use SEPP and a couple other strategies to get to this money earlier, I don't plan to do so until 59.5 or later. Given that my timeline is greater than the duration, what are the other downsides to this idea?
retiredjg
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Re: Using long bonds vs. intermediate in 401K?

Post by retiredjg »

Long bonds lose more value when interest rates go up. So be prepared for that. They do eventually start paying more though.

If your "intermediate" bond fund contains bonds of all terms (short, mid, long) you already are getting the benefits of some long bonds.
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jjunk
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Re: Using long bonds vs. intermediate in 401K?

Post by jjunk »

Thanks. My thought process here was since I'll only be making 401K contributions for another year, I wanted to maximize the longer term growth of this side of my portfolio without essentially changing it's "job". So, I while I could take more risk on the equity side and increase it there, I want to stay 70/30 forever. So, how to maximize the value of that 30%? Go longer on the duration and bring in more dividends. I realize I'm trading equity risk for interest rate risk so the value will fluctuate a lot more than it is today, but over the next 20yrs or so, I would imagine I'd be ok. Then at retirement, I'd roll back into an intermediate term fund and get back some of that risk premium while sacrificing interest.

The other thing I could do is add a corporate bond to my portfolio, giving it a different composition without increasing duration as much as a longer term bond.

Not sure that it makes sense, but that's my thinking.
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Re: Using long bonds vs. intermediate in 401K?

Post by rmelvey »

At 70/30 I think going long duration can make sense. Your portfolio is still dominated by equity risk. But just try to stay the course when interest rates get choppy. Holding long bonds is harder emotionally than holding stocks because the consensus is usually that rates will go higher (even though they are usually wrong).
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Re: Using long bonds vs. intermediate in 401K?

Post by retiredjg »

My thought is that long bonds tend to act more "stock like" in times of financial distress. If you intend to maintain a 70% stock allocation, you already have enough stock like stuff in my opinion. :happy However, you know your needs and you know your response to financial stress and none of us know any of that.

You either have enough money to retire at 44 or you don't. Squeezing out an extra bit with long bonds is not going to make a good plan bad. Nor will it make a bad plan turn good.
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Re: Using long bonds vs. intermediate in 401K?

Post by dcabler »

retiredjg wrote:My thought is that long bonds tend to act more "stock like" in times of financial distress. If you intend to maintain a 70% stock allocation, you already have enough stock like stuff in my opinion. :happy However, you know your needs and you know your response to financial stress and none of us know any of that.

You either have enough money to retire at 44 or you don't. Squeezing out an extra bit with long bonds is not going to make a good plan bad. Nor will it make a bad plan turn good.
There of course are long bonds and long bond funds. What I've seen is that long treasury bond funds tend to do very well in times of financial distress. Corporate bond funds seem to act more stock-like. At least what's what appeared to happen in 2008....
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Re: Using long bonds vs. intermediate in 401K?

Post by saltycaper »

Sounds like taking on a lot more risk in order to reach for a small amount of extra return
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Re: Using long bonds vs. intermediate in 401K?

Post by retiredjg »

dcabler wrote:There of course are long bonds and long bond funds. What I've seen is that long treasury bond funds tend to do very well in times of financial distress. Corporate bond funds seem to act more stock-like. At least what's what appeared to happen in 2008....
This is a good point. Of course long treasuries may not pay what this poster is looking for. :twisted: But adding long treasuries might be a good idea.
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Re: Using long bonds vs. intermediate in 401K?

Post by jjunk »

Sorry, I really should have been more specific. I am actually talking about long bond index funds, not holding individual bonds. For example, I currently hold FSITX (Spartan US Bond Index). I'm thinking about moving those positions to FLBIX (Long Term Treasury) or something similarly long duration with more than treasuries.
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Re: Using long bonds vs. intermediate in 401K?

Post by betablocker »

Bonds are for safety not maxing returns. If you want more return you need to up your equity allocation or invest in asset classes with higher expected returns (small value, emerging markets, etc.). Larry Swedroe has written a lot about intermediate treasuries being the right trade off between yield and safety. If you make your bonds riskier history shows you don't get much for it. So you get a worse trade off between addition risk and additional yield. Stocks are for return. Many people make this mistake with corporates, junk bonds, and dividend stocks.
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Re: Using long bonds vs. intermediate in 401K?

Post by retiredjg »

jjunk wrote:Sorry, I really should have been more specific. I am actually talking about long bond index funds, not holding individual bonds. For example, I currently hold FSITX (Spartan US Bond Index). I'm thinking about moving those positions to FLBIX (Long Term Treasury) or something similarly long duration with more than treasuries.
Yes, we (I :happy ) should be more specific. I was talking about bond funds as well, not individual bonds. Others likely were too.
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Re: Using long bonds vs. intermediate in 401K?

Post by jjunk »

betablocker wrote:Bonds are for safety not maxing returns. If you want more return you need to up your equity allocation or invest in asset classes with higher expected returns (small value, emerging markets, etc.). Larry Swedroe has written a lot about intermediate treasuries being the right trade off between yield and safety. If you make your bonds riskier history shows you don't get much for it. So you get a worse trade off between addition risk and additional yield. Stocks are for return. Many people make this mistake with corporates, junk bonds, and dividend stocks.
Thanks for this. I'll do a search for some of Larry's articles on the matter and read up on the trade-offs and how he came to that conclusion. I'm happy to be wrong here and leave things the way they are. Just something I thought of as I was walking through some retirement planning stuff over the weekend.
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Re: Using long bonds vs. intermediate in 401K?

Post by BigJohn »

I personally agree with comments on not taking the extra risk since bonds are there for safety. The other issue that a long bond fund will bring is that while you have a 25 year horizon now in 10 years you'll have a 15 year horizon. However, the bond fund will still be at the longer duration and not nearly as well matched to your needs.
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alec
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Re: Using long bonds vs. intermediate in 401K?

Post by alec »

jjunk wrote:I'm considering a switch from my current intermediate bond holding to one of long duration. The main reason being the ability to earn more interest over the next 25yrs while I wait for that money to come available. I'm planning to retire early next year at the age of 44. My allocation is 70/30 and my 30% is held entirely within my 401K. While I know I can use SEPP and a couple other strategies to get to this money earlier, I don't plan to do so until 59.5 or later. Given that my timeline is greater than the duration, what are the other downsides to this idea?
Seems like a scenario for individual long term TIPS inside the IRA.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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jjunk
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Re: Using long bonds vs. intermediate in 401K?

Post by jjunk »

Thats an interesting idea. I hadnt thought much about TIPs but I should look into that. Thanks for the suggestion
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alec
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Re: Using long bonds vs. intermediate in 401K?

Post by alec »

jjunk wrote:Thats an interesting idea. I hadnt thought much about TIPs but I should look into that. Thanks for the suggestion
I'd look at grok's posts on TIPs for suggestions.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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