Stable Value Funds in Portfolio

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Portfolio7
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Stable Value Funds in Portfolio

Post by Portfolio7 » Sat Dec 17, 2016 5:07 pm

I'm sorry to revisit this topic, but I'm more conflicted than ever on the proper use of Stable Value funds within a portfolio, that last bit being the key. I think I just have to put my thoughts down, and I appreciate any comments.
My Asset Allocation is 72/28. 48% US Eq, 24% Int'l, 28% Bonds/Cash
12% Large Cap Value
12% Mid Cap Value
12% Sm Cap Value
12% REIT
12% Emerging Market Equities
12% International Small Vap
12% Intermediate Treasuries 5.25 yrs duration avg
9% Tips Fund Duration 8.1 yrs
7% Stable Value
Funds are Vanguard for US & Bonds, DFA for overseas, and the Stable Value has an unrecognized symbol, not yet sure.

Stable Value funds are typically bonds with an insurance wrapper, and act like cash with a near 3% return (in my plan). This is awesome if I'm trying to preserve my wealth. I stick my 'required' cash for withdrawal in Stable Value, put the rest in equities or a combination of equities & bonds, wonderful.

However, what if you are in the growth phase of your portfolio? I've been doubling my portfolio about every 7 years (9.8% CAGR over 22 years), and I do want to stay on pace or close to it. The two key values of bonds in this case (and I am in Intermediate Treasuries and Tips) is reduced volatility of your portfolio (a form of 'safety', in my mind)... but bonds themselves are volatile as well, which is what I think I need in my growth portfolio to protect it... so when my equities zig, bonds zag, and I rebalance once a year, which tends to create a buy low sell high situation which should help maximize total portfolio performance while minimizing total portfolio volatility and keeping my total risk profile intact. I was 28% in Intermediate Treasuries before recently splitting out to Tips and Stable Value, but I think I may have been premature... the more I think about Stable Value, the less sure I am of any of the conclusions I had reached before.

So, considering a growth portfolio, when is a stable value fund appropriate? I think the answer most people would give is when the returns exceed bond yields (esp the SEC yield). However, if I have a significant allocation to stable value, I will lack some of the upside of bonds in the next downturn: my 12% + 9% Treasuries of various flavors will benefit from the flight to safety (usually), but my 7% stable value fund will do nothing for my portfolio (except to continue earning a modest but consistent return.) I appreciate any wisdom you all can bring to this discussion.
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Re: Stable Value Funds in Portfolio

Post by BHUser27 » Sat Dec 17, 2016 5:26 pm

FWIW - I use my 401(k) Stable Value fund as part of the "bond" portion of my portfolio. In fact, it is a about half of my "bond" allocation.

The first thing you should do is establish your desired Equity/Bond allocation using the guidelines in the Wiki.
Then feel free to use Stable Value as part of your "bond" allocation -- as long as you are comfortable with the risk and expected returns versus other options.

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Re: Stable Value Funds in Portfolio

Post by retiredjg » Sat Dec 17, 2016 5:39 pm

Portfolio7 wrote:So, considering a growth portfolio, when is a stable value fund appropriate?
In my opinion, a stable value fund is a good substitute for bonds if you have no good bond choices in your work plan. Or if it consistently pays near as much as or more than bonds.
I think the answer most people would give is when the returns exceed bond yields (esp the SEC yield). However, if I have a significant allocation to stable value, I will lack some of the upside of bonds in the next downturn: my 12% + 9% Treasuries of various flavors will benefit from the flight to safety (usually), but my 7% stable value fund will do nothing for my portfolio (except to continue earning a modest but consistent return.) I appreciate any wisdom you all can bring to this discussion.
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Re: Stable Value Funds in Portfolio

Post by FIREchief » Sat Dec 17, 2016 5:46 pm

I haven't seen much about stable value funds on the forum, but I'm a relative newbie. I have been planning to use a stable value fund in the near future to hold some significant assets on the non-equity side of my portfolio. As I (think I) understand it:

a) Worst case scenario for stable value: I'll get zero interest, zero inflation protection but 100% term protection

b) Worst case scenario for bonds: I'll get low interest, zero inflation protection and zero term protection

I realize that there is some variety of default risk on both sides of the equation. Am I missing something?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Stable Value Funds in Portfolio

Post by GreatOdinsRaven » Sat Dec 17, 2016 6:25 pm

Portfolio7 wrote: Stable Value funds are typically bonds with an insurance wrapper, and act like cash with a near 3% return (in my plan).
I'm actually blown away that you're getting "near 3% returns" with your stable value fund. We recently solicited offers for stable value funds for our DC plan and they best we could find was 2.25% with Voya. May I ask whom your company uses for your stable value fund?
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Re: Stable Value Funds in Portfolio

Post by Peter Foley » Sat Dec 17, 2016 8:37 pm

I too am of the opinion that stable value is a good proxy for a bond fund allocation. We have most of our non equities in stable value paying between about 3% and 4.25%. Remember that part of the purpose of holding non equities is to preserve capital during a downturn.

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Re: Stable Value Funds in Portfolio

Post by snowshoes » Sat Dec 17, 2016 9:27 pm

Kiplingers suggests Vanguards TBM + BND (Vanguards Total Bond Market Index products) would be a good substitute for a stable value fund here. http://www.kiplinger.com/article/invest ... funds.html Does anyone agree, I do not. I see too much risk, interest rate normalizations being the main risk. Where might one find an attractive SVF offering ? Most are offered by big insurance.

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Re: Stable Value Funds in Portfolio

Post by Peter Foley » Sat Dec 17, 2016 10:40 pm

snowshoes wrote:
Where might one find an attractive SVF offering ? Most are offered by big insurance.
Most are only offered through 401k, 403b, or 457 accounts. One limitation of stable value funds is that they typically limit withdrawals and transfers from the funds to a certain percentage per year and/or upon obtaining a certain age (60 or 62 for example). This allows the stable value fund to extend maturities a bit for better yields.

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Re: Stable Value Funds in Portfolio

Post by Elysium » Sat Dec 17, 2016 11:23 pm

I use them. About 10% of overall portfolio is in stable value fund (Vanguard Retirement Savings Trust) with yield around 2%. They won't grow any more than that, I know this, they just preserve the value. However with low inflation, there is no issue with losing value of principal. Rest of the portfolio should make up for it. What it does give is an absolute certainity that the money is there, and it is one component that does not change in value with market movements.

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Re: Stable Value Funds in Portfolio

Post by iceport » Sun Dec 18, 2016 1:00 pm

Portfolio7 wrote:Stable Value funds are typically bonds with an insurance wrapper, and act like cash with a near 3% return (in my plan). This is awesome if I'm trying to preserve my wealth.
With a yield that high, I'd consider the stable value fund a legitimate part of your fixed income allocation. When I held a similar equity allocation to yours, with a minimum 3% yield on our stable value fund, I evenly split my 30% fixed income allocation between total bond market, LT TIPS, and the stable value fund.

Now on the doorstep of retirement, I keep about 24% of the 56/44 portfolio in a 2.7% stable value fund, with 20% of the portfolio equal to 5 years' worth of withdrawals, and the stable value fund constituting a (practically) risk-free holding.
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Re: Stable Value Funds in Portfolio

Post by Retired1809 » Sun Dec 18, 2016 1:33 pm

Risk associated with stable value fund??

I seldom hear any discussion of the risks of stable value fund, namely the ability of the issue to pay. There's no FDIC coverage or even implicit promise by any government agency to protect investors in stable value funds. I would do a lot of due diligence on the insurance company standing behind these plans. Black swan events aren't expected but do happen.

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Re: Stable Value Funds in Portfolio

Post by jocdoc » Sun Dec 18, 2016 3:15 pm

I currently invest 50% to stable value and 50% to DODIX to reduce the risk and duration of my bond fund. I also use it to rebalance if my stocks drop. I used it exclusively when the SEC bond yields in the bond fund drops below 2%. I recently reduced my stable value and switched back into DODIX (Dodge and Cox bond fund) MY SV only pays out 1.75%. That said it is currently less than 5% of my bond allocation. Most of my bonds are in my IRA in Vanguard; 30% TIPs and 70% total bond fund.
I would not use it if I had the vanguard total Bond fund in my retirement plan.
Many states have some sort of guarantee of the funds in SV for retirement plans if the insurance company fails; up to a certain Anount $. You may eventually get some or all your money back if the state has the funds for their guarantee.

I would not put more than the state guarantee limit and certainly not more than 20% in SV.

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Re: Stable Value Funds in Portfolio

Post by Portfolio7 » Sun Dec 18, 2016 4:19 pm

Thanks everyone for the comments! Had a family commitment last night and this morning.

re: Stable Value fund. Returns YTD (Daily)* +2.94% 1 Yr +3.07% 3 Yrs +2.93% 5 Yrs +3.02% 10 Yrs +3.63% There are 10 managers of the fund, ranging from Pimco with the biggest slice, to Blackrock to Dodge and Cox. There are 6 primary insurers, including Prudential, Metlife, NY Life, etc. The fund may be unique to my employer.

Hiker/Diehard, I think Stable Value funds are very secure and the security they provide certainly has value - they endured 2008 just fine, but by how slim a margin is anyone's guess. Even Money Markets were showing strain. In a worse crisis, however, I think I'd prefer Cash, short term treasuries, or gold, as I'd expect some of the insurance companies to struggle or go under.

Iceport, I think my bond allocation is fairly close to what you had, with some skew - I don't think I have access to a TIPS fund with more than 8 yr duration, and ttl bond acts a lot like Int Trsy within a portfolio. Your usage in retirement sounds like what I was thinking when I mentioned preserving wealth.

Snowshoes/Foley, I agree with the comments on interest rate risk - I expect that from a returns perspective there is more downside than upside on that front, but rates could be flat for a long time too. I hold the TIPS for protection; but with liquidity issues, TIPS true value seems tough to ascertain (i.e. it offers interest rate protection. It offers safety for your portfolio during equity slumps. It's tough to gauge the relative value of that safety vs other alternatives). Btw, my Stable Value fund limits buying and selling to once per month, but other than that I am free to do what I want.

Retiredjg, I am in synch with your analogy - managing a portfolio is a lot like managing a baseball team. A balance of various skills is critical, since nobody can do it all, with the defensive aspect of the game bearing a resemblance to risk management. Rather than expecting more from the players, I'm trying to understand the potential mix of players and which brings the greatest value to the team, so I can better balance the return/risk (offensive/defensive) capabilities of my portfolio. A defensive player like stable value is often a positional player in baseball... maybe this takes the analogy too far, but I'm really just not sure how to figure the value of this player relative to the rest of the team. Unlike a baseball team, I can have percentages of each player, and the relative trade-offs are muddled for me regarding Stable Value funds - so should I be 1/3 each Int Trsy, Tips, and Stable Value? 100% Stable Value? or 50/35/15? I just don't know how to even think about the problem in a productive way. Right now, most of my bonds are in Int Trsy because I trust the asset class to balance losses in a market crash. A healthy chunk is in Tips to offset Interest rate risk which I think has a high chance of causing moderate losses, and also still provide some protection in market declines (2008 not withstanding). The smallest chunk in Stable Value, because I'm not entirely sure what that brings to the table, but solid returns seem valuable, and there is indication that some cash component can help long term portfolio returns. I am unsatisfied with that reasoning, but maybe its just the best I can do.

BHUser, that seems like a very sensible approach - that's pretty much what I've done thus far. It's the 'feel free' part that gets to me. In some things I am a perfectionist (I know, enemy of the good and all that), and I like to feel I understand the trade-offs with respect to risk and return when I trade out bonds for stable value. As much as I think and feel like the overall portfolio is reasonable, I can't say I'm comfortable with it yet.
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Re: Stable Value Funds in Portfolio

Post by VTXVX » Sun Dec 18, 2016 6:46 pm

GreatOdinsRaven wrote:
Portfolio7 wrote: Stable Value funds are typically bonds with an insurance wrapper, and act like cash with a near 3% return (in my plan).
I'm actually blown away that you're getting "near 3% returns" with your stable value fund. We recently solicited offers for stable value funds for our DC plan and they best we could find was 2.25% with Voya. May I ask whom your company uses for your stable value fund?

See 3.5% Fixed account at Nationwide on the bottom of page 3: https://www.myfloridadeferredcomp.com/S ... Report.pdf

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Re: Stable Value Funds in Portfolio

Post by Retired1809 » Sun Dec 18, 2016 8:49 pm

Regarding risk of stable value funds - especially from TIAA:

I know of medical school professors who have 2 or 3 million bucks in TIAA Traditional. Even former Fed Chair Benecke said that the TIAA Traditional was his largest retirement asset.

Must be a "sleep-well" investment!

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Re: Stable Value Funds in Portfolio

Post by dbr » Sun Dec 18, 2016 9:27 pm

Here is more info about the Nationwide account including the following:

"The Nationwide Fixed Account is backed by the General Account of Nationwide Life Insurance Company. Information about the securities held in the General Account does not imply ownership by plan participants investing in the Fixed Account or by plan sponsor as the owners of the group annuity contract. The Nationwide Fixed Account is backed solely by the claims paying ability of Nationwide Life Insurance Company. This investment portfolio is not a mutual fund."

https://www.nrsforu.com/iApp/rsc/profil ... d=10000002

I have no idea what risk applies to this in reality, but the highlight above and the description of the fund might be worth some second thoughts.

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Re: Stable Value Funds in Portfolio

Post by Portfolio7 » Mon Dec 19, 2016 11:06 pm

dbr wrote:I have no idea what risk applies to this in reality, but the highlight above and the description of the fund might be worth some second thoughts.
I agree with you from a general viewpoint. In my case, there are 6 major insurers. They each cover roughly 16% of the portfolio... so that seems reasonably diversified from a risk standpoint.
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Re: Stable Value Funds in Portfolio

Post by whodidntante » Mon Dec 19, 2016 11:42 pm

dbr wrote: The Nationwide Fixed Account is backed solely by the claims paying ability of Nationwide Life Insurance Company. This investment portfolio is not a mutual fund."
Just when I was starting to like fixed income. :happy

My TRP stable value fund sounds more stable. Maybe.

The Trust will invest primarily in Guaranteed
Investment Contracts (GICs), Bank Investment Contracts
(BICs), Synthetic Investment Contracts (SICs), and Separate
Account Contracts (SACs). GICs, BICs, SICs, and SACs are
types of investment contracts that are designed to provide
principal stability and a competitive yield.

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Re: Stable Value Funds in Portfolio

Post by Riverstwo » Tue Dec 20, 2016 12:18 pm

I invest 50% in Stable Value, nice conservative way to keep your money intact while the other 50% grows.

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Re: Stable Value Funds in Portfolio

Post by dabblingeconomist » Tue Dec 20, 2016 12:55 pm

For now, my mother uses them very aggressively (effectively 40% of the portfolio), as I recommended - through some kind of grandfathering, she has access to a stable value fund that pays an after-expenses rate of 3.4%, and in a separate account to a different stable value fund that pays 2.9%.

These are far better than the short rate available on riskfree bonds or bank accounts, which is closer to 0.5%-1%. For now, that's an arbitrage opportunity that is very hard to pass up.

I think many people fail to recognize just how good a deal this is because they're comparing to medium or long-term bond rates, and misinterpreting those as the returns that will be obtained in the short term. In reality, the short-term expected return on a 10-year Treasury is closer to the yield on a 1-year Treasury - that higher yield will, on average, only manifest itself in mark-to-market returns farther in the future. There are therefore substantial gains from holding higher-yielding short assets now, and then reinvesting several years from now if yields indeed rise as expected. (At the very least, one can conduct a near-arbitrage, relative to a typical bond portfolio, by investing some of it in artificially above-market stable value funds and then lengthening the maturity of the remaining bond portfolio, keeping duration constant while improving yield.)

The only limiting principle here, as others have mentioned, is black swan risk. These funds are not, at least beyond inconsistent state-by-state limits, government-backed in the same way that treasuries are - or agencies or agency MBS or munis or high-yield bank accounts. They fail very rarely, but presumably they would be more likely to fail in exactly the same kind of black swan disaster where the rest of the portfolio would perform badly as well. This limits the extent to which those juicy above-market short-term yields, at least from any one provider, should be used in a portfolio. (Where exactly the limit should be... I don't know.)

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Re: Stable Value Funds in Portfolio

Post by Day9 » Tue Dec 20, 2016 12:55 pm

Sometimes a Stable Value fund is the only good fixed income option in a 401k or similar plan. The other options might just be high expense ratio actively managed funds.

The ones I've come across are not transparent so I could not analyze credit, duration, and other kinds of risks. Even if they were more transparent I probably would not have been able to do this anyway! I'll stick to investing in what I know.
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Re: Stable Value Funds in Portfolio

Post by donaldfair71 » Tue Dec 20, 2016 1:10 pm

VTXVX wrote:
GreatOdinsRaven wrote:
Portfolio7 wrote: Stable Value funds are typically bonds with an insurance wrapper, and act like cash with a near 3% return (in my plan).
I'm actually blown away that you're getting "near 3% returns" with your stable value fund. We recently solicited offers for stable value funds for our DC plan and they best we could find was 2.25% with Voya. May I ask whom your company uses for your stable value fund?

See 3.5% Fixed account at Nationwide on the bottom of page 3: https://www.myfloridadeferredcomp.com/S ... Report.pdf
My SV through LIncoln Financial returns 2.87% right now, net of all fees. Has been as high as 4.8% in the past decade (contractually, it cannot go below 2.87%).

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Re: Stable Value Funds in Portfolio

Post by dziuniek » Tue Dec 20, 2016 3:14 pm

My Stable Value fund in the 457b currently pays 2.75%. I'll take it.

It is composed of approx. 65% Voya Stabilizer and 35% Prudential Guaranteed Long Term Fund (whatever these are.

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Re: Stable Value Funds in Portfolio

Post by powermega » Tue Dec 20, 2016 3:17 pm

3% is an outstanding yield for this kind of fund. The one in my 401k is currently yielding 1.1%. If mine had a 3% yield, I would definitely use it.
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Re: Stable Value Funds in Portfolio

Post by dbr » Tue Dec 20, 2016 4:45 pm

dziuniek wrote:My Stable Value fund in the 457b currently pays 2.75%. I'll take it.

It is composed of approx. 65% Voya Stabilizer and 35% Prudential Guaranteed Long Term Fund (whatever these are.
I'm all in favor of SV funds generally, but I am not in favor of putting a lot of money in something where you don't know what it is.

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Re: Stable Value Funds in Portfolio

Post by Portfolio7 » Wed Dec 21, 2016 2:58 am

dabblingeconomist wrote: I think many people fail to recognize just how good a deal this is because they're comparing to medium or long-term bond rates, and misinterpreting those as the returns that will be obtained in the short term. In reality, the short-term expected return on a 10-year Treasury is closer to the yield on a 1-year Treasury - that higher yield will, on average, only manifest itself in mark-to-market returns farther in the future. There are therefore substantial gains from holding higher-yielding short assets now, and then reinvesting several years from now if yields indeed rise as expected. (At the very least, one can conduct a near-arbitrage, relative to a typical bond portfolio, by investing some of it in artificially above-market stable value funds and then lengthening the maturity of the remaining bond portfolio, keeping duration constant while improving yield. :!: :thumbsup )
Great addition to the discussion, thanks! I realized I had a tool to look at Stable Value funds, and modified the Simba spreadsheet (that thing is so cool!!). Before discussing that, let's just note that cash returns are low, and the safety it brings to a growth portfolio seems to come at greater cost than Treasuries and other bonds, at least in the long term growth portfolio. The calculus may change a bit for a retirement portfolio, where stability has real value in increasing the SWR.

However, if you crank up the returns on cash to mimic some of the higher-return Stable Value funds, Portfolio backtests seem to yield a reasonable role for Stable Value funds, along with tips and treasuries. I don't like using backtests for specific asset allocation analysis, but I do like what they can tell me about the viability of a stable value fund when paired with equities and treasuries. I am beginning to reassure myself that it was a reasonable action to diversify my bond portfolio as I did, and that Stable Value may even deserve a higher allocation than I gave it. If we really are in a rising interest rate environment (i could instead see it stay flat a long time) it would be fine to turn over most of my bond portfolio to stable value, except for the potential risk in a big downturn. I'll have to think on the balance of risks a while, since I really don't want the majority of my bond funds in stable value, and I really like the 'flight to safety' response of Treasuries & inflation protection from TIPS. Worst case, 1/3 each to stable value, Int Trsy, and TIPS seems like a very balanced approach on the surface (though it's balanced in quantity when what i really need to balance is the potential impact on the portfolio.)

However, your comment above is suggestive that a healthy chunk of Stable Value might pair really nicely with a small but significant amount of LT Trsy and extended duration TIPS (which I like for other reasons as well.) I have to back out the '35 year bond bull' market so that I don't overstate the general value of the Gov't bonds, but it seems like a fun project to look into. My Stable Value fund seems diverse and solid enough that the risk to principal is very small.
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Re: Stable Value Funds in Portfolio

Post by dziuniek » Wed Dec 21, 2016 2:54 pm

dbr wrote:
dziuniek wrote:My Stable Value fund in the 457b currently pays 2.75%. I'll take it.

It is composed of approx. 65% Voya Stabilizer and 35% Prudential Guaranteed Long Term Fund (whatever these are.
I'm all in favor of SV funds generally, but I am not in favor of putting a lot of money in something where you don't know what it is.
Generally - neither am I. :twisted:

But 15% of almost nada won't break the bank. :)

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Re: Stable Value Funds in Portfolio

Post by hirlaw » Wed Dec 21, 2016 3:02 pm

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Brock Osweiler too?

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Re: Stable Value Funds in Portfolio

Post by Kevin M » Wed Dec 21, 2016 4:52 pm

Portfolio7 wrote:I just don't know how to even think about the problem in a productive way.
How about going back to the fundamentals of portfolio theory combined with the fundamentals of fixed-income risk and return components?

Portfolio theory says that you form a portfolio of risky assets and combine it with the appropriate amount of a riskless asset to get the desired combination of expected return and risk (uncertainty of return as measured by standard deviation of expected return over the appropriate holding period).

Stocks are the riskiest assets with the highest expected returns. An intermediate-term Treasury or Treasury fund os a moderately risky asset with much lower expected returns. A short-term Tbill (cash) is the traditional riskless asset, but this is in nominal terms.

The beauty of a good stable value (SV) fund (or good direct CDs, the TSP G fund, etc.) is that it provides a higher expected return than short-term Treasuries but with not a huge amount more risk. The risk is absorbed by the insurance company in return for liquidity constraints on the fund, so essentially you are receiving a rich liquidity premium. It has almost no term risk, compared with significant term risk for an intermediate-term Treasury fund, and although it has some credit risk, historically this credit risk has been minimal. The only SV fund loss I know if is a small loss in 2008 in the SV fund used by Lehman, and even that fund had a positive return for the year.

If you visualize this on a standard expected return vs. risk chart, the SV fund (or good direct CD or TSP G fund) is higher on the vertical axis than say a 5-year or 7-year Treasury, but to the left on the horizontal axis. I think thus justifies using much more SV fund (or good direct CD or TSP G fund) and much less Treasuries or any other bonds or bond fund for the fixed-income portion of a portfolio.
Right now, most of my bonds are in Int Trsy because I trust the asset class to balance losses in a market crash.

First, historically this has not always been the case, although it has been the case in recent years. Second, you're basically talking about a relatively small rebalancing bonus, which I think pales in comparison to the almost-guaranteed higher return you'll earn year in and year out with the SV fund when there is no financial crisis. Yield on the 5-year Treasury is about 2.1% and on the 7-year Treasury about 2.4% (and this is after the term risk has shown up in the last few months--a 5-year Treasury bought on July 5 has lost more than 5%). So you're earning 60-90 basis points more on your SV fund, which after a few years of non-crisis will be impossible to recover with a small rebalancing bonus from Treasuries going up when stocks tank.
A healthy chunk is in Tips to offset Interest rate risk which I think has a high chance of causing moderate losses, and also still provide some protection in market declines (2008 not withstanding).
Your SV fund does a much better job of this than TIPS while earning a healthy yield premium. TIPS are subject to real interest rate risk, and as noted, did a lousy job of downside protection in 2008.

What TIPS bring to the table is a hedge against unexpected inflation, but the price you pay for this in terms of lower yield is quite steep. You're getting paid a lot by the SV fund for taking some unexpected inflation risk, and since nominal yields tend to rise with inflation, the lack of term risk in the SV fund gives you a decent inflation hedge as well. Finally, having only 10% of the portfolio in TIPS provides such a small hedge against unexpected inflation that it's hardly worth the bother.
The smallest chunk in Stable Value, because I'm not entirely sure what that brings to the table, but solid returns seem valuable, and there is indication that some cash component can help long term portfolio returns. I am unsatisfied with that reasoning, but maybe its just the best I can do.
See my explanation above.

Kevin
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Re: Stable Value Funds in Portfolio

Post by Aptenodytes » Wed Dec 21, 2016 5:03 pm

What I did was put a new column in the Simba backtesting spreadsheet with historical data on my stable value fund (TIAA-TRAD), and then used the spreadsheet's tool for exploring alternative portfolios.

It didn't really change the overall picture very much. But it makes sense to use more accurate data for your stable value fund instead of using a proxy.

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Re: Stable Value Funds in Portfolio

Post by Portfolio7 » Wed Dec 21, 2016 5:38 pm

Kevin, thank you, nicely summarized. In the past day or so I've been heading in the direction that your reply would suggest, but hoping I wasn't overlooking significant risks. Your summary really fills in the gaps for me, everything is starting to click into place. I'm not experienced at analyzing bonds, and I know I'll need to work through some of the things you and other members all said, but I'm confident I'll get there now.

Aptenodytes, good call, I did something like that... I don't have the data, but I have 1/3/5/10 year returns, so I estimated the return benefit vs T-Bills, plugged that into the T-Bill column, and used that to get a rough idea of how the stable value fund might impact my portfolio.. in another week I think I might be able to get the actual data and have it plugged in and analyzed. With the assets in my fund, it did definitely have a modest positive impact on the trade-offs for fixed income classes at estimated returns, and that was actually a huge revelation. If I can use Stable Value to moderate risk and maintain the reward profile at the same time, it's kind of a no-brainer. That's becoming clearer and clearer to me.

Thanks again everyone for your help!
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Re: Stable Value Funds in Portfolio

Post by flatfoot » Wed Dec 21, 2016 7:26 pm

anybody have a ticker for a sv fund?

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Re: Stable Value Funds in Portfolio

Post by Kevin M » Wed Dec 21, 2016 8:32 pm

Be careful with backtesting. The data for some asset classes has been extended further back in the backtesting spreadsheet, but if you use only data since 1972, whatever you see for bonds cannot be representative of the future starting from current low yields. You have to go back to the 1940s-1950s to get comparable starting yields.

Also be cognizant of inflation--i.e., focus on real returns. There have been 20-, 30-, 40- and even 50-year negative real returns for intermediate-term Treasuries staring in the early 1940s and/or ending in the early 1980s. Conversely, the best 20-, 30-, 40- and 50-year real returns for intermediate-term Treasuries ended in the 2000s, so also beware of recency bias.

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Re: Stable Value Funds in Portfolio

Post by Kevin M » Wed Dec 21, 2016 8:43 pm

flatfoot wrote:anybody have a ticker for a sv fund?
SV funds typically are offered only inside of 401k or similar plans (also 529), so I don't think you'll be able to get quotes for them based on a ticker symbol, even if you can find one. I just looked at a couple I know of, and could not find ticker symbols for them.

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Re: Stable Value Funds in Portfolio

Post by flatfoot » Wed Dec 21, 2016 8:48 pm

thanks... thats what I thought. Ive always wanted to see how big of difference between a 2.9% SV vs DODIX

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Re: Stable Value Funds in Portfolio

Post by Kevin M » Wed Dec 21, 2016 9:27 pm

flatfoot wrote:thanks... thats what I thought. Ive always wanted to see how big of difference between a 2.9% SV vs DODIX
That's comparing apples and oranges, as DODIX is a bond fund, and bond funds do not have a stable value. DODIX is an investment-grade bond fund, so maybe better to compare to other investment-grade bond funds.

Their benchmark is the Barclays US Aggregate index, although currently the duration is shorter (4.0 vs. 5.5), and they have a lot more corporate bonds (43% vs. 26%) and less Treasuries (11% vs. 36%). Historical performance looks quite good compared to say Vanguard Total Bond or Intermediate-Term Investment-Grade bond funds, but still significant variance and max drawdown of about -8%. Backtest Portfolio Asset Allocation.

SEC yield for DODIX currently is 2.60%, so an SV fund at 3% is a much better deal. Better to look forward than backward, so SEC yield is more relevant than historical performance.

Dodge & Cox Funds : Income Fund Characteristics

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Re: Stable Value Funds in Portfolio

Post by avenger » Thu Dec 22, 2016 5:14 am

I use the stable value fund in my 457 yielding 2.9%. I put about half of my fixed income allocation into it. In my mind, it also serves as a cash allocation - my cash needs are inside my 457. I can sell taxable equities, then buy equities in my 457 with the stable value fund without changing my asset allocation. As a result, I don't have a traditional emergency fund. I have a cash allocation earning 2.9%.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

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Re: Stable Value Funds in Portfolio

Post by Earl Lemongrab » Thu Dec 22, 2016 1:20 pm

The stable-value fund at MegaCorp is currently paying about 2.3%. Here is some performance data versus the bond index fund:

Code: Select all

Fund Name      YTD   1 Month   3 Month   12 Month   3 Year   5 Year
Bond Index     1.70%  -0.80%   -3.48%      1.42%     2.61%    2.09%
Stable Value   2.15%   0.20%    0.56%      2.23%     2.12%    2.26%
They used to have ten-year data, but not anymore.

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Re: Stable Value Funds in Portfolio

Post by retire2beach13 » Fri Dec 30, 2016 4:30 pm

Long time follower of Bogleheads, first time poster! Very interesting and personally pertinent topic. I'm a "bucket" guy who maintains a 2-year Stable Value Fund balance (and a couple of intermediate term bond fund holdings, wish I had better short term bond funds avaliable there) in my former employer 457b plan...my Bucket #1. Use monthly withdrawal from the SVF to supplment my pension as a bridge to what I hope will be an age 70 delayed SS filing. The SVF is expensive, 81 basis points for 2% return, but the 457b is the only qualified funds bucket from which I can currently draw assets without IRS penalty. Track other VANG & FIDO brokerage holdings for a holistic portfolio view monthly using Pers Cap, Sig Fig and Future Advisor (label SVF as Cash, since I don't have a ticker or proxy); and rebalance entire portoflio biannually by asset class allocations using Larry Swedroe's 5/25 rule. Three years into early retirement and so-far so good, but I'm really going to miss that Stable Value Fund if the 457b bucket is emptied before I decide I need to turn on the SS tap!

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Re: Stable Value Funds in Portfolio

Post by Portfolio7 » Wed Jan 04, 2017 1:20 am

Kevin M wrote:Be careful with backtesting. The data for some asset classes has been extended further back in the backtesting spreadsheet, but if you use only data since 1972, whatever you see for bonds cannot be representative of the future starting from current low yields. You have to go back to the 1940s-1950s to get comparable starting yields.

Also be cognizant of inflation--i.e., focus on real returns. There have been 20-, 30-, 40- and even 50-year negative real returns for intermediate-term Treasuries staring in the early 1940s and/or ending in the early 1980s. Conversely, the best 20-, 30-, 40- and 50-year real returns for intermediate-term Treasuries ended in the 2000s, so also beware of recency bias.

Kevin
Kevin, great stuff, thanks! Sorry was away on vacation and screenless. The bond situation has been scratching at my brain stem for several months, and I knew some of what you mentioned, but the perspective on real returns was new to me, much appreciated. There is also the Tips liquidity issue and gold in the first two years it was legal to own again - I've been trying to collect anomalies in the Simba return data (i.e. where certain period results are not likely to repeat for one reason or another.) I'm coming to the conclusion that Stable Value should represent at least half my bond portfolio, and am still playing with data normalizations a bit. Then I'll probably re-read Swenson a bit and ponder. In any case, I'm a lot more comfortable with the Stable Value allocation now. :sharebeer
"An investment in knowledge pays the best interest" - Benjamin Franklin

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Re: Stable Value Funds in Portfolio

Post by Dandy » Wed Jan 04, 2017 11:18 am

What is the purpose of you fixed income allocation. For most it is for stability or safety to take the risk on the equity side. Stable Value is pretty safe with an excellent yield in today's market. I don't see the problem -- I would allocate a lot of your fixed income to your Stable Value Fund, especially in a likely rising rate environment since the potential bond fund appreciation that might be a benefit is less likely to occur.

You might want to make sure you know what restrictions there are e.g. how often can you move $ in and out. But, absent something very restrictive I would be happy with Stable Value whether in the accumulation or growth mode at these rates vs the market. It is a decision that can be changed if the advantage goes away e.g. better rates elsewhere or higher inflation..

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Re: Stable Value Funds in Portfolio

Post by dionysus » Sun Mar 26, 2017 9:02 pm

Excellent discussion -- thanks to all for very informative and interesting posts! Finding this thread was awesome since I just started rethinking my bond allocation (40% of portfolio) and was struggling with what % should be allocated to stable value.

Portfolio7 - any new thoughts?

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Re: Stable Value Funds in Portfolio

Post by NiceUnparticularMan » Sun Mar 26, 2017 10:52 pm

I don't have any conventional bonds, only a small allocation of TIPS, and otherwise for my "fixed" allocation I exclusively use a stable value fund and other things like it (mostly the G Fund and a cash-balance pension--note currently the cash-balance pension has the highest return, the stable value fund the lowest, but that could reverse in a different rate environment). I hold a bit more in riskier assets than I otherwise would if I had to use conventional bonds and TIPS instead. This is not generating mind-blowing results at the moment because intermediate-bond yields are currently low, but if that ever changes this allocation should improve its yield without losing any value, which could be handy.

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Re: Stable Value Funds in Portfolio

Post by Portfolio7 » Mon May 08, 2017 6:16 pm

dionysus wrote:Excellent discussion -- thanks to all for very informative and interesting posts! Finding this thread was awesome since I just started rethinking my bond allocation (40% of portfolio) and was struggling with what % should be allocated to stable value.

Portfolio7 - any new thoughts?
Dionysius, missed your post. I ended up going 100% stable value for the fixed income portion of my portfolio (30% of portfolio, a slight shift from the 28% noted in the original post, a concession to turning 50). I was very influenced by Kevin M's comments above. The odds of missing out on great returns from IT or LT Treasuries in the near future, given current yields, seems remote. My small TIPS allocation wasn't really doing much for me, with low yields & modest portfolio protection vs inflation. SV seems like the safest approach right now, given the apparent risks in the current environment. My company seems to have a very robust 401k Stable Value Fund, so I feel pretty good even with that big chunk of my savings in it.

The real question is would I have done the same 40 years ago when rates were much higher... and I think it would have been ok to do so, but maybe not optimal. The question of what's optimal is something I need to address - I am not likely to have time to think much more about it until summer, but I want a rule of thumb that helps me avoid dumb mistakes. In investing, optimal is unknowable, and we typically default to a good mix and letting it ride, classic Bogle. FI is a little bit of a different beast vs equities, but I suspect not different enough to warrant a tactical FI solution (though there is evidence in favor of active strategies in FI). I was also very influenced by Swenson's writings (so for me fixed income s/b mostly Treasuries, SV, & cash/MM... not interested in other bond instruments). I am slowly making my way through Swedroe's everything bonds book. Afterwords I hope to have a better foundation for thinking about it. I believe when SV yields equal or exceed other FI instruments you'd want 100% SV, but otherwise I suspect it's a trade-off of sorts between yield and duration (I think Swedroe has some thoughts on this), but also requires consideration of which risks you are individually most vulnerable to.
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Re: Stable Value Funds in Portfolio

Post by Dottie57 » Mon May 08, 2017 6:27 pm

Kevin M wrote:
flatfoot wrote:thanks... thats what I thought. Ive always wanted to see how big of difference between a 2.9% SV vs DODIX
That's comparing apples and oranges, as DODIX is a bond fund, and bond funds do not have a stable value. DODIX is an investment-grade bond fund, so maybe better to compare to other investment-grade bond funds.

Their benchmark is the Barclays US Aggregate index, although currently the duration is shorter (4.0 vs. 5.5), and they have a lot more corporate bonds (43% vs. 26%) and less Treasuries (11% vs. 36%). Historical performance looks quite good compared to say Vanguard Total Bond or Intermediate-Term Investment-Grade bond funds, but still significant variance and max drawdown of about -8%. Backtest Portfolio Asset Allocation.

SEC yield for DODIX currently is 2.60%, so an SV fund at 3% is a much better deal. Better to look forward than backward, so SEC yield is more relevant than historical performance.

Dodge & Cox Funds : Income Fund Characteristics

Kevin
I have Dodge and Cox Income Fund in my 401k. I was very happy to have it in 2008. It definitely went down, but so much less than the stock funds. It gave me hope I wo@dn't have tomstart all over at 50,

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Re: Stable Value Funds in Portfolio

Post by Northern Flicker » Mon May 08, 2017 6:51 pm

12% Intermediate Treasuries 5.25 yrs duration avg
9% Tips Fund Duration 8.1 yrs
7% Stable Value
This looks very reasonable. I think it is a good idea to diversify a stable value fund with bonds having no credit risk rather than with a bond index fund. It would be a good idea to try to learn what assets are held in the SVF and what the credit ratings are of the orgs who do the wrap contracts, and also to understand triggering events for processing withdrawals at market value to be sure risks are understood.
Index fund investor since 1987.

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