Asset Allocation w/ Bond Yields at Zero%

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Bogle7
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Asset Allocation w/ Bond Yields at Zero%

Post by Bogle7 » Fri Aug 02, 2019 11:44 am

With bond rates approaching zero (or even negative), where do I put my money?

A few points:
1. We are 71/62 with planned death ages of 95.
2. I know the traditional rule used to be: “your age in bonds”. But, Michael Kitces has convinced me otherwise. I am comfortable with a high percentage of assets in stocks.
3. I like Taylor Larimore’s three-fund portfolio idea, however, we are in 9 funds now.
4. All our money is at Fidelity in 73% stocks (FNCMX, FXAIX, FSMAX, FSSNX, FSGGX) and 23% bonds (FXNAX, FTBFX, FUMBX, THOPX). I like having my money at one place from a management perspective.
5. My original goal with cash/bonds was to have enough to cover 6 years of severe stock market downturn. That is the paranoid part of my brain. We are slightly over that at 7 years. I have been taking monthly withdrawals from cash to reduce this amount and percentage.

My conundrum is: if bonds yield zero or negative, then what should I do with our money that is currently in bonds?

Gold?
Real estate (REITs)?
Something else?

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Socrates
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by Socrates » Fri Aug 02, 2019 12:31 pm

I think FTBFX is a good bond fund as is VBILX....mix of corporate and treasury for higher return

Also a good portion of my bonds are with PIMIX......Pimco is a good bond fund(s) IMHO
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vineviz
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by vineviz » Fri Aug 02, 2019 12:58 pm

Bogle7 wrote:
Fri Aug 02, 2019 11:44 am
My conundrum is: if bonds yield zero or negative, then what should I do with our money that is currently in bonds?
I suppose this is a theoretical question, since the four bond funds you currently own have an average yield to maturity of 2.75%.

Probably the easiest way to boost your bond yield would be to get rid of FTBFX and THOPX, which have insanely high expense ratios, and just reallocate that money across the remaining two funds.

But the long-run answer is to stay invested in bonds: in the unlikely case that bond yields fall or even turn negative, it will be because bonds still offer an attractive risk/reward tradeoff at that time.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Quaestner
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by Quaestner » Fri Aug 02, 2019 1:08 pm

We don't know what bonds will do, but let's say that US yields go lower. That will surely mean that inflation is low - a good thing when retired! I wouldn't break your plan and load up on riskier things. You can weather a low yield storm.

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Dargo
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by Dargo » Fri Aug 02, 2019 6:02 pm

Will try to ride it out and resist the urge to bail out :oops:
Life is what happens to you when you are busy making other plans..John Lennon

stan1
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by stan1 » Fri Aug 02, 2019 6:07 pm

Navy Federal has a 3.5% 5 year CD right now if you are eligible to join.

I bought 3% CDs for my mom in 2014 and 3.5% CDs when those came due in 2019.

Those were the right decisions for her (and I know we got "lucky").

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Sandtrap
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by Sandtrap » Fri Aug 02, 2019 6:12 pm

Bogle7 wrote:
Fri Aug 02, 2019 11:44 am
With bond rates approaching zero (or even negative), where do I put my money?

A few points:
1. We are 71/62 with planned death ages of 95.
2. I know the traditional rule used to be: “your age in bonds”. But, Michael Kitces has convinced me otherwise. I am comfortable with a high percentage of assets in stocks.
3. I like Taylor Larimore’s three-fund portfolio idea, however, we are in 9 funds now.
4. All our money is at Fidelity in 73% stocks (FNCMX, FXAIX, FSMAX, FSSNX, FSGGX) and 23% bonds (FXNAX, FTBFX, FUMBX, THOPX). I like having my money at one place from a management perspective.
5. My original goal with cash/bonds was to have enough to cover 6 years of severe stock market downturn. That is the paranoid part of my brain. We are slightly over that at 7 years. I have been taking monthly withdrawals from cash to reduce this amount and percentage.

My conundrum is: if bonds yield zero or negative, then what should I do with our money that is currently in bonds?

Gold?
Real estate (REITs)?
Something else?
Consider diversification of the fixed portion of your portfolio.
IE: Total Bond, Treasury Funds, REIT's.
In addition to a percentage in CD's, Money Market, Muni's, High Yield Accounts, etc.

Note: you say you are comfortable with a high percentage equity allocation. At present, 73/27 at age 71 and 62.

How would you feel in a deep market downturn if that 73% equity loss 50-70 percent of its value?
What if the recovery period is extended?

j
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nisiprius
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by nisiprius » Fri Aug 02, 2019 6:13 pm

Bogle7 wrote:
Fri Aug 02, 2019 11:44 am
...With bond rates approaching zero (or even negative)...
What are you talking about? Just because some European bonds have negative interest rates doesn't mean that every kind of "bond" has "zero or even negative" rates.

Treasuries are running around 2% depending on term:

Image

Vanguard Total Bond Market Index Fund, VBTLX, is showing an SEC yield of 2.50%.

Vanguard Prime Money Market Fund, VMMXX, is showing an SEC yield of 2.25%.

These are not "zero or even negative."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

MoneyMarathon
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by MoneyMarathon » Fri Aug 02, 2019 6:26 pm

Bogle7 wrote:
Fri Aug 02, 2019 11:44 am
With bond rates approaching zero
It's helpful to think of things not just in nominal terms.

If inflation is at 5% and bonds paid 5.5%, or if inflation is at 2% and bonds paid 2.5% ... no biggie, either way it's just barely keeping pace. To get the really big yields, the Fed would need to see really big inflation first. The prices of everything would be going up faster every year than they are now. Your investments would have to work harder in nominal terms just to keep up.

we1
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by we1 » Fri Aug 02, 2019 6:57 pm

With real yields essentially at 0%, the purpose of bonds nowadays is primarily for liquidity so that you aren’t a forced seller in a steep equity correction.

Your AA approach is similar to mine. Keep X years in safe bonds for liquidity and the rest in equities.

Some will say you need long term bonds to hedge your equities and there is some validity to that but I prefer either intermediate duration or pairing LTT with short-term TIPS.

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Re: Asset Allocation w/ Bond Yields at Zero%

Post by dbr » Fri Aug 02, 2019 7:01 pm

Investing in negative real yields (you need to talk real yields here) may or may not work to meet your objectives, depending on what your objectives are. If they don't work then you have to invest in something else. It may be there is nothing that works. In that case you have to change your objectives or fail.

But what are are you objectives, and is it true that a portfolio of stocks and bonds, the bonds having negative real yields fails to meet you objectives? I still meet my objectives with negative real yields for bonds. The effect is just on how much can be spent without running out of money after awhile and I can still spend enough.

skeptic42
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by skeptic42 » Sat Aug 03, 2019 3:48 am

I am from Europe and I hold a bond ETF including negative yields, because I don't want to hold 100% stocks. Funny thing, the return of the bond ETF was not so bad despite negative yields. Nevertheless, if you look at the stocks/bonds portfolio as a whole, the negative yield of some bonds is not that special, because lots of stocks in a total market fund don't return more than 0 as well.

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welderwannabe
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Re: Asset Allocation w/ Bond Yields at Zero%

Post by welderwannabe » Sat Aug 03, 2019 8:20 am

Permanent portfolio maybe?
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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