Crisis of Confidence - Choosing Bond allocations in portfolio

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djdube525
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Crisis of Confidence - Choosing Bond allocations in portfolio

Post by djdube525 » Wed Oct 04, 2017 7:00 am

About a year ago, I massaged retirement funds into what I would call a "modified" 3 fund portfolio in Fidelity (401k) and Vanguard (IRA) admiral equivalent index funds....

My wife and I are about 20 years from retirement (would take us to 65)

Initial allocation:
Domestic Stocks: 40% (25% Total Stock Market, 15% Small Cap Value)
International Stocks: 40% (25% Global Ex-US, 15% Emerging Markets)
Bonds: 20% (10% TIPS, 10% Total Bond Market)

Given the run up this year in international and domestic stocks, I need to rebalance a bit, and while I'm at it, I'm at least re-thinking my bond selections. Where I'm a bit conflicted. In general, stock market seems a bit "frothy"... so would like to have some bonds in there to temper the "falls". On the flip side, given where treasuries are at, there's no where but "up" which means bonds will take a hit.

Any advice on the bond side of the house? Shift the total bond allocation towards an intermediate or short term? Stay the course? Any other advice?

pptiger
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by pptiger » Wed Oct 04, 2017 7:14 am

Stay the course my friend.

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midareff
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by midareff » Wed Oct 04, 2017 7:19 am

The decision is really about AA, not about bond choices. You are 45 years old and 20% bonds. If you are no longer comfortable with that risk profile (80% equities/20% bonds) it might be time to adjust that to something you are more comfortable with. As an example age -15 would put you at 30% bonds, and so forth. What does your written IP say?

TheHouse7
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by TheHouse7 » Wed Oct 04, 2017 7:27 am

Stay the course. I have had the same thoughts and the best thing to do is stop worrying about AA and try to find more to contribute.

:sharebeer
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

pptiger
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by pptiger » Wed Oct 04, 2017 7:51 am

pptiger wrote:
Wed Oct 04, 2017 7:14 am
Stay the course my friend.
Let me expand my point a little bit. If you are close to retirement, then I think it makes sense to think about your AA, but not because the possibility of a bear coming (they always come). You would be transitioning from the accumulation phase to the withdrawal phase. Changes in your personal financial situation warrants a hard look of your AA. Of course ideally you would have already thought about it.

Now, since you have 20 years ahead before retirement, if you worry about the next bear, you are speculating, not investing. In fact, I've never understood the reason behind bond-in-age or similar rules. Adding bond of course lowers the volatility of your portfolio, but the risk is mostly determined by your investment horizon and your personal need. If you know you won't touch your retirement money for a long time, what's the point of having bond? I can see the psychological benefit of helping someone going through a market downturn, but if you look at the long picture, why?

I think 20% bond is a good choice. Just think it as an insurance. If something catastrophic happens and you have to take money out of your retirement account, then bonds are there for you.

rkhusky
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by rkhusky » Wed Oct 04, 2017 12:25 pm

Perhaps you should think about a glide path to retirement. What is your desired AA at retirement? Suppose it is 50/50. Choosing a linear glide path would result in reducing your stock allocation by 1.5% per year, if you are currently at 80/20 with 20 years until retirement. Some people find that small adjustments are easier to swallow. If 70/30 is where you really want to be now, with 50/50 at retirement, then make the move to 70/30 now and then reduce stocks by 1% per year thereafter.

garlandwhizzer
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by garlandwhizzer » Wed Oct 04, 2017 12:47 pm

I think you've got a good portfolio as it stands and wouldn't agonize over changes.

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livesoft
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by livesoft » Wed Oct 04, 2017 12:52 pm

I bought bond funds today and was quite confident doing so. After all, bond funds have dropped about 1% in the past month. They are practically on sale. How often do bond funds drop 1% in less than a month? I can tell you they might do that after they go up 1% in a week. :twisted:

Here's a chart showing what I mean:
Image
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onthecusp
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by onthecusp » Wed Oct 04, 2017 12:56 pm

I have the same concerns, but am constantly rebalancing into bonds with additional savings and an occasional sale to get back to my target allocation. If it goes the other way I'll buy stock and occasionally rebalance the other way.

Beardog
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by Beardog » Wed Oct 04, 2017 1:43 pm

The current amount that you have already invested, and how much you are currently investing are likely your most important concerns at 45 years of age. We are 55, and are now at 60/40. I don't worry about what stocks or bonds are going to do. Every month I buy more bond fund shares. I often go for weeks or even months without looking at the markets. At your age, I was more comfortable at 65/35, but everyone is different. Stay the course.
Beardog

djdube525
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by djdube525 » Thu Oct 05, 2017 6:38 am

midareff wrote:
Wed Oct 04, 2017 7:19 am
The decision is really about AA, not about bond choices. You are 45 years old and 20% bonds. If you are no longer comfortable with that risk profile (80% equities/20% bonds) it might be time to adjust that to something you are more comfortable with. As an example age -15 would put you at 30% bonds, and so forth. What does your written IP say?
I'm sorry... "written IP"? I'm not "grokking" that.

djdube525
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by djdube525 » Thu Oct 05, 2017 6:48 am

Beardog wrote:
Wed Oct 04, 2017 1:43 pm
The current amount that you have already invested, and how much you are currently investing are likely your most important concerns at 45 years of age. We are 55, and are now at 60/40. I don't worry about what stocks or bonds are going to do. Every month I buy more bond fund shares. I often go for weeks or even months without looking at the markets. At your age, I was more comfortable at 65/35, but everyone is different. Stay the course.
We're actually in a pretty reasonable shape in terms of how much has already been accumulated. Been maxing out 401k and HSA contributions... excess is attacking debt (Student loans... the gift that keeps on giving).

Assuming 6% returns and 3.5% drawdowns... retiring at 60 is certainly a possibility, but am assuming 65 due to unknowns with SS, Medicare, etc etc. 15-20 years is a long time horizon.

retiredjg
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by retiredjg » Thu Oct 05, 2017 6:53 am

djdube525 wrote:
Thu Oct 05, 2017 6:38 am
I'm sorry... "written IP"? I'm not "grokking" that.
Your written Investment Plan. It can be anything from a few sentences (like mine) to very long, covering every detail. Having a written plan makes it easy to make decisions later because you don't have to reinvent the wheel and reevaluate constantly. The decisions are already made - when you were cool headed.

https://www.bogleheads.org/wiki/Investm ... _statement

djdube525
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by djdube525 » Thu Oct 05, 2017 7:06 am

retiredjg wrote:
Thu Oct 05, 2017 6:53 am
djdube525 wrote:
Thu Oct 05, 2017 6:38 am
I'm sorry... "written IP"? I'm not "grokking" that.
Your written Investment Plan. It can be anything from a few sentences (like mine) to very long, covering every detail. Having a written plan makes it easy to make decisions later because you don't have to reinvent the wheel and reevaluate constantly. The decisions are already made - when you were cool headed.

https://www.bogleheads.org/wiki/Investm ... _statement
Ahhhhh... I couldn't get "Internet Protocol" out of my head (too early & not enough coffee this morning) :wink:

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DaleMaley
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by DaleMaley » Thu Oct 05, 2017 7:54 am

I would suggest focusing on your age versus AA glide path from now until retirement.

In my case it was.......

Age 22 to 40 100:0 Stocks to bonds
Age 40 to 50 90:10
Age 50 to death 60:40

Everyone takes a little bit different glide path, but generally speaking, we all seem to end up with a retirement AA of between 40:60 and 60:40 stocks to bonds.

In my case, it took a lot of intestinal fortitude to "stay the course" from age 22 to 40 at an AA of 100% stocks, and I would not recommend 100:0 for those faint of heart :)
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midareff
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by midareff » Thu Oct 05, 2017 7:57 am

djdube525 wrote:
Thu Oct 05, 2017 6:38 am
midareff wrote:
Wed Oct 04, 2017 7:19 am
The decision is really about AA, not about bond choices. You are 45 years old and 20% bonds. If you are no longer comfortable with that risk profile (80% equities/20% bonds) it might be time to adjust that to something you are more comfortable with. As an example age -15 would put you at 30% bonds, and so forth. What does your written IP say?
I'm sorry... "written IP"? I'm not "grokking" that.
Your written investment plan outlining how you intend to manage your investments. You can read about it in the wiki but in general terms it is our written plan which helps us avoid spur of the moment decisions that take us away from our plan into the emotional response world and cost us.

dbr
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by dbr » Thu Oct 05, 2017 8:16 am

As some other posts have suggested, it is entirely possible you want to change your bond allocation but not for the reasons you mention. The key question is how did you arrive at your current choice and what has changed in your circumstances (not in the market) that might cause you to make a different choice?

Txsman
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by Txsman » Thu Oct 05, 2017 8:27 am

Maybe off the subject a bit but what are thoughts on using a pension as part of the bond allocation? I am not doing this but I have considered it.

livesoft
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by livesoft » Thu Oct 05, 2017 8:29 am

Txsman wrote:
Thu Oct 05, 2017 8:27 am
Maybe off the subject a bit but what are thoughts on using a pension as part of the bond allocation? I am not doing this but I have considered it.
One can do anything they want to do. If one's pension or social security or annuity payout covers one's required expenses or more, then I can see why one wouldn't even want to have bonds. It's all about your personality and the need, ability, willingness risk thing.
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dbr
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by dbr » Thu Oct 05, 2017 8:32 am

Txsman wrote:
Thu Oct 05, 2017 8:27 am
Maybe off the subject a bit but what are thoughts on using a pension as part of the bond allocation? I am not doing this but I have considered it.
Pensions aren't bonds. It is perfectly possible the existence of your pension would affect how much or how little risk you want to take with your investments, but that is not because a pension is a bond or should logically be "called" a bond. Note that having to "call" something what it is not is not good thinking ever.

This all comes back to the question of how you are arriving at your choice for asset allocation. The best method I know is the aforementioned need/ability/risk, a discussion of which can be found in some of Larry Swedroe's books.

Raabe34
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by Raabe34 » Thu Oct 05, 2017 8:36 am

You also may want to trim some from your emerging market allocation if you're going to change your IPS. 15% is a lot in an 80/20 split.

xxd091
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by xxd091 » Thu Oct 05, 2017 12:58 pm

Hi
Some practical info
Now 70+ and living on Pension and Savings
Estimating the income you need at retirement is a guide-probably will need about the same income that you are living on now!
Mortgage and kids gone but travel expenses rise
Once you have made your pile you don’t want to lose it especially as your human capital (ability to earn more money)runs out ie nearing retirement
I am now on 30/70 Eq/Bonds -my pile is big enough. John Bogle thought you age in bonds is another rough rule you could use.
xxd09

djdube525
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by djdube525 » Sat Oct 07, 2017 8:01 am

I need to come clean a little bit, part of which is remembering why I did what I did...

For by retirement portions, I have a 401k with my current employer, and an IRA from a past employer. The IRA is about 13% of the size of my 401k. As a result, In my IRA, I tried to maximize as many admiral class funds as possible which is where I came up with:

US Stocks 40%: (25% TSM, 15% Small Cap Value)
Intl Stocks 40%: (25% All world-ex us, Emerging Markets 15%)
Bonds 20%: (10% TIPS, 10% Total Bond) Not enough for Admiral Class

My original 401k targets are more in line with desired AA at our age:

US Stocks 35%: (25% TSM, 10% Small Cap Value)
Intl Stocks 35%: (25% All world-ex us, Emerging Markets 10%)
Bonds 20%: (10% TIPS, 10% Total Bond)
REIT: 10%

I did re-balance my 401k a bit (still in the process), moved some of my emerging market and small cap into the bonds, so they are closer to being back in line at 10%.

As for a written investment plan... I have to admit, I don't have one written on paper, but have loosely thought about it in my head. Again, upon reflection, it makes sense to put it on paper, not only to crystallize ones thoughts, but will god forbid something happens to me, there's a guide for my wife to follow (yes - everything is being shared/run by her).

As for "glide path"... I hadn't actually spent too much time considering that other than thinking (I do need to factor that in) - so this thread has been very useful. My wife's family genes are pretty good - grandparents have lived well into the late 90s. We also tend to be a bit more aggressive, and given long life spans, so as a starting point, I'm targeting a rule of thumb of stock % = 125-age, with the REIT being represented in the stock portion. I'm going to build out a spreadsheet forecasts target % in each class, factoring the glide path.

Which is all to say, staying the course, and putting longer term goals down on paper. They may need to be tweaked a bit, but need a starting point from which to analyze.
Last edited by djdube525 on Sat Oct 07, 2017 9:13 am, edited 1 time in total.

Lastrun
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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by Lastrun » Sat Oct 07, 2017 8:36 am

djdube525 wrote:
Sat Oct 07, 2017 8:01 am
I'm going to build out a spreadsheet forecasts target % in each class, factoring the glide path.
This might help.

https://corporate.morningstar.com/us/do ... 062017.pdf

Not saying it is gospel, just gives you Morningstar's approach to glide paths.

FYI, IMHO as Vanguard has a bias to international in their TDF's, Morningstar's is TIPS.

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Re: Crisis of Confidence - Choosing Bond allocations in portfolio

Post by unclescrooge » Sat Oct 07, 2017 10:35 pm

Raabe34 wrote:
Thu Oct 05, 2017 8:36 am
You also may want to trim some from your emerging market allocation if you're going to change your IPS. 15% is a lot in an 80/20 split.
It's also one of the cheaper asset classes. Selling cheap assets to buy expensive assets isn't how you make money in investing.

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