Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

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linenoise
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Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by linenoise » Wed Oct 10, 2018 2:20 pm

Hello,

I am currently using some free time to take care of my personal finances and my desired asset allocation looks like this:

Taxable accounts:
  • 60% SCHB (Schwab US Broad Market ETF, Expense Ratio 0.03%);
  • 30% SCHF (Schwab International Equity ETF, ER 0.06%);
401(k) and backdoored RIRA:
  • 10% BLV (Vanguard Long-Term Bond ETF, ER 0.07%).
Unfortunately my 401(k), which has 10x more money than my RIRA, doesn't give me access to BLV (nor its equivalent mutual fund) and is currently invested in VFFVX (Vanguard Target Retirement 2055 Fund, ER 0.15%). My 401(k) has limited bond funds options and the most interesting seems to be MWTIX (Metropolitan West Total Return Bd I, ER 0.45%).

The question I am trying to answer is whether I should switch to MWTIX or keep VFFVX in my 401(k)?

If I keep VFFVX that means I need to rebalance accordingly and I will end up with bonds in my taxable accounts which is not desirable if I understand correctly. Another option would be to get access to more investment options in my 401(k). Which might be possible as I am becoming self employed, but I have not documented myself yet. Or get an opportunity to roll it over to an IRA. Which might difficult since I am doing the backdoor Roth every year.

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vineviz
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by vineviz » Wed Oct 10, 2018 4:27 pm

From what you’ve posted, your desired allocation would be 90% bonds, and that seems crazy.

I think your taxable looks fine, and I’d use a target date fund
in the 401k and call it done.

Given the difference in account sizes and the glide path of the TDF you’d probably not need to rebalance for years, and could do it by choosing a new target date fund with a different allocation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Wed Oct 10, 2018 4:38 pm

A portfolio is usually easier to work with if you have a US stock fund and a bond in the account that gets the most contributions. If your 401k fits that description (and it usually should) consider that.

Or you could use the target fund in the 401k and put a slice of bonds into taxable (unknown type at this point). I prefer bonds in the tax-deferred accounts, but having some in taxable is not a fatal flaw.

You have not presented enough information to help you much. Your tax bracket? Will the taxable account be getting very large contributions as well or will the 401k and Roth IRA become a larger part of the portfolio?

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Wed Oct 10, 2018 4:41 pm

vineviz wrote:
Wed Oct 10, 2018 4:27 pm
From what you’ve posted, your desired allocation would be 90% bonds, and that seems crazy.
I didn't read it that way at all. Did I miss something?
I think your taxable looks fine, and I’d use a target date fund
in the 401k and call it done.
I think this poster wants 90% stocks and 10% bonds. The set up you describe would be 99/1 to start with. Unless you meant a very different target date fund?

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vineviz
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by vineviz » Wed Oct 10, 2018 4:49 pm

retiredjg wrote:
Wed Oct 10, 2018 4:41 pm
vineviz wrote:
Wed Oct 10, 2018 4:27 pm
From what you’ve posted, your desired allocation would be 90% bonds, and that seems crazy.
I didn't read it that way at all. Did I miss something?
I think your taxable looks fine, and I’d use a target date fund
in the 401k and call it done.
I think this poster wants 90% stocks and 10% bonds. The set up you describe would be 99/1 to start with. Unless you meant a very different target date fund?
I saw the 401k as having 10x the assets as the taxable account and holding only bonds. But my allocation would be 91% stocks if I’m reading things right.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Wed Oct 10, 2018 5:15 pm

I think the taxable account is much much larger - 90% of the portfolio. And the 401k is 10x the size of the Roth IRA.

linenoise
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by linenoise » Wed Oct 10, 2018 5:24 pm

Hi, thanks for the comments! Just to clarify and answer some questions:
  • We are looking at a 90% stock / 10% bonds situation;
  • The 10x I was talking about is between my 401(k) and my Roth IRA: that is my 401(k) can hold 10x more money than my Roth IRA, altogether my 401(k) and my Roth IRA can hold about 10% of the money that I have to invest;
  • I am trying to setup a SCHB/SCHF/BLV kind of asset allocation;
  • I am single, no debt, CA resident, in the highest tax brackets, unemployed at the moment and for the next 11months or so;
  • I do not expect my 401(k) and my RIRA to become a larger part of my port-folio .

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Wed Oct 10, 2018 6:18 pm

The way to say this is 90% taxable, 9% 401k, and 1% Roth IRA. :happy

linenoise
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by linenoise » Thu Oct 11, 2018 5:26 pm

That's indeed another way to say it.

After sleeping over this, I'm leaning towards MWTIX (Metropolitan West Total Return Bd I, ER 0.45%) in my 401(k) and BLV (Vanguard Long-Term Bond ETF, ER 0.07%) in my Roth IRA to keep things simple. If I get the chance to get more control on my 401(k) I'll try to exchange MWTIX for BLV.

The alternative I'm thinking of would be looking into VFFVX (Vanguard Target Retirement 2055 Fund, ER 0.15%) and account it correctly with SCHB (Schwab US Broad Market ETF, ER 0.03%) and SCHF (Schwab International Equity ETF, ER 0.06%) and then buy some Muni bonds (probably a mix of Vanguard California Long-Term Tax-Exempt Fund and another national muni fund) in my taxable account.

Thoughts? Thank you!
Last edited by linenoise on Thu Oct 11, 2018 9:33 pm, edited 2 times in total.

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Thu Oct 11, 2018 5:36 pm

I don't speak ticker so I have no idea what you said. :happy

Kevin8696
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by Kevin8696 » Thu Oct 11, 2018 6:27 pm

OP.... why the long-term bond preference ? You like riding roller coasters ?

linenoise
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by linenoise » Thu Oct 11, 2018 9:31 pm

retiredjg wrote:
Thu Oct 11, 2018 5:36 pm
I don't speak ticker so I have no idea what you said. :happy
I edited the post to include descriptions and links.
Kevin8696 wrote:
Thu Oct 11, 2018 6:27 pm
OP.... why the long-term bond preference ? You like riding roller coasters ?
The reasons that I keep seeing are:
  • Long term bonds seem to have a negative correlation with the stock market;
  • You should invest with regards to your investment horizon and I'm lucky to be young enough to plan for the long term.
More info in a recent discussion: viewtopic.php?f=1&t=260386.

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Fri Oct 12, 2018 6:48 am

It is a very long thread and I only read some of it and don't know what those people think, but I don't think that long term bonds are where most investors should be. For most purposes, I'd suggest using an intermediate term bond.

Keep in mind that things like total bond market and the actively managed "core plus" funds like your Met. West Total Return contain bonds of all terms - short - intermediate - and long. They "average" out to intermediate and that is why mixed funds like that are called intermediate.

We don't know what bond funds are available in your 401k, but the Met West fund is a reasonable choice.

If you end up putting bonds in taxable, consider a mix of CA long term tax exempt (which really are not that "long") and a short term national fund. This will give you an overall intermediate term but most of the income will be exempt from your high state taxes. Holding a large portion of your bond allocation in any one state's funds is probably not advisable - mixing it with a national fund takes away some of that one-state risk.

S_Track
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by S_Track » Fri Oct 12, 2018 7:17 am

retiredjg wrote:
Fri Oct 12, 2018 6:48 am
Keep in mind that things like total bond market and the actively managed "core plus" funds like your Met. West Total Return contain bonds of all terms - short - intermediate - and long. They "average" out to intermediate and that is why mixed funds like that are called intermediate.

Glad you said that and saved me a question to the forum. Many times I read how folks are spliting being Short and Intermediate which seems exactly what total bond is already doing. I do understand if you don;t agree with the propoportions in total bond you would need to roll your own.

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vineviz
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by vineviz » Fri Oct 12, 2018 7:24 am

retiredjg wrote:
Fri Oct 12, 2018 6:48 am
It is a very long thread and I only read some of it and don't know what those people think, but I don't think that long term bonds are where most investors should be. For most purposes, I'd suggest using an intermediate term bond.
I don't presume to know where most investors should be investing: the investment horizon drives the investment decision.

As a rule, people with a long-term investment horizon (i.e. 15 or more years) should have all or most of their bond allocation in long-term bonds.

People with an intermediate-term investment horizon (5 to 15 years) should have all or most of their bond allocation in intermediate-term bonds.

People with a short-term investment horizon (2 to 5 years) should have all or most of their bond allocation in short-term bonds.

People with an immediate-term investment horizon (0 to 2 years) should have all or most of their money in cash or cash-equivalents (ultrashort bonds, CDs, savings accounts, money market funds, etc.).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Fri Oct 12, 2018 8:18 am

I understand that is how you think and we'll just have to not agree on the subject. But in some ways, our thoughts are not so different.

A mixed term bond fund like a total bond index is not that much different from holding all three terms for different horizons. It is a good suggestion for people who want or need a simple and easy portfolio because it contains some of everything.

It also works well because work plans like 401ks (where I think most bonds should be when possible) are more likely to have a total bond fund or a "core plus" bond fund than a good quality long term bond fund. When helping people construct their own portfolios, I find it helpful to work with the building blocks they have available rather than wishing for something that is not available.

This thread is an example of that. Linenoise has read that other thread and come away with a viewpoint similar to yours - likely because you were the most vocal poster in that other thread. The problem is that linenoise does not have a long term bond fund available in his/her 401k and so is wishfully hoping for one even though there is at least one perfectly decent (if slightly costly) bond fund in the plan already. A perfectly good portfolio can be built with what linenoise has available even if a long term bond fund might be a tiny bit better.

One thing I was curious about in the other thread....you have a preference for long term bond funds, but it is not clear to me if you were mostly talking about treasuries or just long term bond funds in general. And do you like only the high quality choices or are you comfortable with a medium quality long term fund?

Kevin8696
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by Kevin8696 » Fri Oct 12, 2018 8:20 am

linenoise wrote:
Thu Oct 11, 2018 9:31 pm
retiredjg wrote:
Thu Oct 11, 2018 5:36 pm
I don't speak ticker so I have no idea what you said. :happy
I edited the post to include descriptions and links.
Kevin8696 wrote:
Thu Oct 11, 2018 6:27 pm
OP.... why the long-term bond preference ? You like riding roller coasters ?
The reasons that I keep seeing are:
  • Long term bonds seem to have a negative correlation with the stock market;
  • You should invest with regards to your investment horizon and I'm lucky to be young enough to plan for the long term.
More info in a recent discussion: viewtopic.php?f=1&t=260386.
Regarding negative correlation of long-term bonds with the stock market, see the attached Portfolio Visualizer link.

Over the 20-period from 1998-2017, the VG long-term bond fund (BLV, VBLTX) and the VG total bond fund (BND, VBMFX) showed nearly the exact same slightly negative correlation to the US stock market... (0.09) for the long-term fund, and (0.10) for total bond market fund.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
Last edited by Kevin8696 on Fri Oct 12, 2018 9:16 am, edited 1 time in total.

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vineviz
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by vineviz » Fri Oct 12, 2018 8:45 am

retiredjg wrote:
Fri Oct 12, 2018 8:18 am
A mixed term bond fund like a total bond index is not that much different from holding all three terms for different horizons. It is a good suggestion for people who want or need a simple and easy portfolio because it contains some of everything.
I agree that a total bond fund is simple and usually easy to implement, it is not functionally equivalent to choosing a bond fund with an appropriate duration. A 35 year old investor, who wants an age-appropriate bond allocation of maybe 15% for their retirement portfolio, has a 50 year investment horizon. There is no rational reason for such an investor to own ANY short- or intermediate-term bonds in such a portfolio, because there are no short- or intermediate term investment needs.

I'm sympathetic to the argument that many investors don't have access to a decent bond funds with specific maturity targets, but I'm not sure that the lack of availability should alter their preferences even though it might alter their ability to execute their preference.
retiredjg wrote:
Fri Oct 12, 2018 8:18 am
One thing I was curious about in the other thread....you have a preference for long term bond funds, but it is not clear to me if you were mostly talking about treasuries or just long term bond funds in general. And do you like only the high quality choices or are you comfortable with a medium quality long term fund?
I tend to treat the question of bond duration as being distinct from the other decisions (sovereign versus corporate, nominal versus inflation-adjusted, investment-grade versus high-yield).

My personal view is that most investors should probably use US treasury bonds most of the time because they offer relatively "pure" exposure to term risk, which can be balanced against the market risk (i.e. 'beta') in the equity portion of the portfolio. Corporate bonds are exposed to both term risk and market risk, so for a given bond allocation the corporate bond investor has more equity exposure (often without being aware) than a treasury bond investor. A 60/40 investor using corporate bonds has the same equity exposure as a 70/30 investor using treasuries, for instance.

My view is that investors in their accumulation phase should probably own nominal treasuries, whereas investors in retirement should probably own a good amount of TIPS to protect them from inflation risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Sat Oct 13, 2018 9:52 am

vineviz wrote:
Fri Oct 12, 2018 8:45 am
I'm sympathetic to the argument that many investors don't have access to a decent bond funds with specific maturity targets, but I'm not sure that the lack of availability should alter their preferences even though it might alter their ability to execute their preference.
Herein lies the rub for me. You are talking investing theory and that is fine when people understand that is what you are talking about. I have no problem with your theory of matching duration to horizon. But the average investor here who is looking for portfolio help will only hear "I should be using long term bonds, preferably treasuries" and they will try to set up a portfolio to achieve that even though it is not the best portfolio they can build.

For example, some will avoid filling their tax-deferred work accounts even though that is probably more important than having a certain kind of bond fund. Some will contribute to IRA - even though their contributions are not deductible - just to have a place to put their long term bonds. Some might put their long term bonds into a taxable account ( :shock: ) because that's the only place they have to put them.

It is important for average investors to realize the decision tree does not start with "what kind of bonds should I have"? It should start with "what are the best choices available in my work account that can be used to build my best possible portfolio?"

Then there are other decisions to make on the decision tree before you ever get to "what to put into this space I have left? When you get to that point of the decision tree, the bonds are usually already placed and the only space left is space that should not hold long term bonds anyway (taxable and maybe Roth IRA although I'm not one to absolutely avoid bonds in Roth IRA).

The one really good place for long term bonds, traditional IRA such as a large rollover from a 401k, is something many people are not even using any more because they want to be able to use the "back door" maneuver for Roth IRA. They have made the one good place for long term bonds disappear. :happy

There is a place here for talking theory here and many do talk theory to the nth degree. But I think we all have to be careful about encouraging theory to people who either can't implement it or will not build their best portfolio because they mistakenly think that something is more important that it really is.

Again, linenoise and this thread are a good example. Linenoise took your discussion in the other thread to heart and decided it was pretty important to get those long term bonds into his/her portfolio. Unfortunately, it can't happen in this portfolio.

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vineviz
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by vineviz » Sat Oct 13, 2018 10:15 am

retiredjg wrote:
Sat Oct 13, 2018 9:52 am
vineviz wrote:
Fri Oct 12, 2018 8:45 am
I'm sympathetic to the argument that many investors don't have access to a decent bond funds with specific maturity targets, but I'm not sure that the lack of availability should alter their preferences even though it might alter their ability to execute their preference.
Herein lies the rub for me. You are talking investing theory and that is fine when people understand that is what you are talking about. I have no problem with your theory of matching duration to horizon. But the average investor here who is looking for portfolio help will only hear "I should be using long term bonds, preferably treasuries" and they will try to set up a portfolio to achieve that even though it is not the best portfolio they can build.
I don't think I'm guilty of suggesting that investors ignore best practice in other areas of portfolio construction in order to achieve it with their bond allocation.

My presumption is always that when people ask for advice they deserve advice that is both accurate and informative, without being encyclopedic.

For many investors, the general advice that long-term investment goals are best met with low cost and passively managed long-duration investments (like stock and long-term bond index funds) is entirely actionable.

Some investors might find themselves stymied by lack of availability but, again, that doesn't change the validity of the general advice. Every investor, to some degree or another, finds themselves having to take the theory and apply it the real-world circumstances (including constraints) they face.

It's akin in some ways to a doctor telling their patient with high blood pressure to avoid foods that are high in salt, sugar, and alcohol. The fact that the patient can't or won't COMPLETELY avoid foods with those ingredients doesn't obviate the general principle.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by KlangFool » Sat Oct 13, 2018 10:24 am

linenoise wrote:
Thu Oct 11, 2018 9:31 pm
retiredjg wrote:
Thu Oct 11, 2018 5:36 pm
I don't speak ticker so I have no idea what you said. :happy
I edited the post to include descriptions and links.
Kevin8696 wrote:
Thu Oct 11, 2018 6:27 pm
OP.... why the long-term bond preference ? You like riding roller coasters ?
The reasons that I keep seeing are:
  • Long term bonds seem to have a negative correlation with the stock market;
  • You should invest with regards to your investment horizon and I'm lucky to be young enough to plan for the long term.
More info in a recent discussion: viewtopic.php?f=1&t=260386.
linenoise,

Long-term bond is a lousy deal. It has a higher risk than a short-term bond but a lower return than stock. In general, we either use a total bond market index fund or a short-term bond fund for the fixed income portion.

Others can give you a better and more complete explanation and book to read about this.

KlangFool

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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by HEDGEFUNDIE » Sat Oct 13, 2018 10:37 am

KlangFool wrote:
Sat Oct 13, 2018 10:24 am
linenoise wrote:
Thu Oct 11, 2018 9:31 pm
retiredjg wrote:
Thu Oct 11, 2018 5:36 pm
I don't speak ticker so I have no idea what you said. :happy
I edited the post to include descriptions and links.
Kevin8696 wrote:
Thu Oct 11, 2018 6:27 pm
OP.... why the long-term bond preference ? You like riding roller coasters ?
The reasons that I keep seeing are:
  • Long term bonds seem to have a negative correlation with the stock market;
  • You should invest with regards to your investment horizon and I'm lucky to be young enough to plan for the long term.
More info in a recent discussion: viewtopic.php?f=1&t=260386.
Long-term bond is a lousy deal. It has a higher risk than a short-term bond but a lower return than stock.
This is true for most bonds, not just LT bonds. It is not a good reason to avoid LT bonds.

Here is a comparison of short/medium/long bonds with S&P 500 over past ~27 years...

https://www.portfoliovisualizer.com/bac ... ion3_3=100

The differences in risk and return are exactly what you would expect.

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ruralavalon
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by ruralavalon » Sat Oct 13, 2018 10:52 am

In my opinion Metropolitan West Total Return Institutional (MWTIX) ER 0.45% offered in your 401k is a good, actively managed, intermediate-term (average effective duration = 6.13 years) bond fund, using investment grade bonds (average credit quality = BBB), with a moderate expense ratio.

That would be a good bond fund to use in your 401k. I can't say if it's the best bond fund to use in your 401k, because you haven't listed the other fund choices offered in your 401k.

I agree with retiredjg and KlangFool that intermediate-term bond funds are preferable to long-term bond funds, and so suggest you consider Vanguard Total Bond Market (BND) or another intermediate-term bond fund in your Roth IRA.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: Intermediate-term Bond Fund or Target Retirement Fund in 401(k)

Post by retiredjg » Sat Oct 13, 2018 12:14 pm

vineviz wrote:
Sat Oct 13, 2018 10:15 am
I don't think I'm guilty of suggesting that investors ignore best practice in other areas of portfolio construction in order to achieve it with their bond allocation.
I'm sorry if you thought I meant that. I didn't.

What I meant is that many people with less knowledge than you will not know the difference. :happy

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