When to rebalance out of a stable value fund

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funkysi
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When to rebalance out of a stable value fund

Post by funkysi »

What kind of total return would a Total Bond Fund have to achieve and for how long until you rebalanced out of a stable value fund paying 3% with a zero expense ratio, total tax deferred liquidity, and a chance to rebalance into an expensive sp500 fund? There is a small chance that the stable value fund could go up as well I suppose. I could also move the funds to vanguard and then buy total bond there. I know there is a bit of crystal ball gazing going on here and I am not looking to make any sudden moves. 10 to 15 year timeline I would say.

Stable value at AXA but no expenses.

Thanks again
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vineviz
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Re: When to rebalance out of a stable value fund

Post by vineviz »

funkysi wrote: Tue Sep 20, 2022 7:09 am What kind of total return would a Total Bond Fund have to achieve and for how long until you rebalanced out of a stable value fund paying 3% with a zero expense ratio, total tax deferred liquidity, and a chance to rebalance into an expensive sp500 fund? There is a small chance that the stable value fund could go up as well I suppose. I could also move the funds to vanguard and then buy total bond there. I know there is a bit of crystal ball gazing going on here and I am not looking to make any sudden moves. 10 to 15 year timeline I would say.
The best use, IMHO, for a stable value fund is for money that will be spent in the very short-run (say, 3 years or less).

In general, your fixed income allocation should have an average duration in line with your investment horizon.

With "10-15 year timeline" I'd say that a long-term bond funds such as Vanguard Long-Term Bond ETF (BLV) or iShares Core 10+ Year USD Bond ETF (ILTB) would be more attuned to that investment horizon, and they both have yields around 4.5%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
chw
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Re: When to rebalance out of a stable value fund

Post by chw »

I’ve been slowly winding down my SV position this year, and shifting into one and two year treasuries as yields have risen above the SV return available to me (about 2.5%). The SV fund option has worked as expected over the past 2 years providing a modest return while avoiding losses on total bond index funds in what appeared to be a likely rising interest rate environment.

I plan to cycle out of these short term treasuries as yields rise above 3% for core bond funds (such as BND) for several quarters, and simply use BND for my FI allocation (per my IPS). I know this sounds like timing, but is simply assessing assessing the yields on fixed income instruments available to me, and utilizing them based on triggers rates in my IPS.
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vineviz
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Re: When to rebalance out of a stable value fund

Post by vineviz »

chw wrote: Tue Sep 20, 2022 9:11 am I plan to cycle out of these short term treasuries as yields rise above 3% for core bond funds (such as BND) for several quarters, and simply use BND for my FI allocation (per my IPS). I know this sounds like timing, but is simply assessing assessing the yields on fixed income instruments available to me, and utilizing them based on triggers rates in my IPS.
It "sounds like timing" because it IS timing.

Writing down the triggers doesn't change that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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TxFrog
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Re: When to rebalance out of a stable value fund

Post by TxFrog »

I'm in a similar situation as the OP. Last year around August, when the 10 year Treasury was yielding 1.2%, I sold my bond funds and put the proceeds into my 401(k) Stable Value Fund (SVF) yielding 2%. I know, I know...I committed the sin of market timing. But at the time it didn't make sense to put money into a bond fond yielding <2% when I had access to my SVF yielding 2%.

For now I'm staying put, but will reassess at the beginning of next year when it's time to re-balance my portfolio and when my SVF crediting rates are reset.

I am wondering though, if those of us with access to a solid SVF have an arbitrage opportunity. That is sell bond funds and purchase SVF when bond rates fall below the SVF crediting rate, and vice versa sell SVF and purchase bond funds when bond rates rise above the SVF crediting rate.
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grabiner
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Re: When to rebalance out of a stable value fund

Post by grabiner »

vineviz wrote: Tue Sep 20, 2022 9:16 am
chw wrote: Tue Sep 20, 2022 9:11 am I plan to cycle out of these short term treasuries as yields rise above 3% for core bond funds (such as BND) for several quarters, and simply use BND for my FI allocation (per my IPS). I know this sounds like timing, but is simply assessing assessing the yields on fixed income instruments available to me, and utilizing them based on triggers rates in my IPS.
It "sounds like timing" because it IS timing.

Writing down the triggers doesn't change that.
However, it is not necessarily market timing when one half of the transaction is non-marketable, which occurs with a stable value fund. Market timing is an investment strategy whose success depends on your ability to predict the market movements better than other investors. But when you exchange a marketable asset for a non-marketable asset, or vice versa, you may come out ahead even if you cannot predict the market.

For example, if your stable value fund has a guaranteed yield of 3%, and your bond fund is currently yielding 3%, then there is no point in using the bond fund. If your stable value fund has a current yield of 3%, and your bond fund is currently yielding 4%, then you might use the bond fund after comparing the risks.

Another example of a similar situation is the decision whether to pay down a loan. If you have a 3% mortgage, you might buy bonds yielding 4% in preference to paying it down, and then sell those bonds to pay down the loan when the bond yields have dropped to 3% (and you will have a capital gain on the bonds, so you didn't waste the higher yield).
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cfaboy
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Re: When to rebalance out of a stable value fund

Post by cfaboy »

"For example, if your stable value fund has a guaranteed yield of 3%, and your bond fund is currently yielding 3%, then there is no point in using the bond fund. If your stable value fund has a current yield of 3%, and your bond fund is currently yielding 4%, then you might use the bond fund after comparing the risks."

The above is not true, because it ignores another source of risk, which is reinvestment risk. One has no idea what rate will prevail when the funds produce dividends. Thus if the rates are the same, one might one to consider still maintaining a position in the the bond fund. If rates fall, of course, the bond fund will be a better investment and could be viewed as providing better protection for poor economic times/recessions. The problem with stable value funds is that rates can go low and stay low and there is no offsetting gain in the price of the underlying. For example, the TSP G fund is a very good stable value fund, but it had lower returns than the F fund for years for this reason.
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grabiner
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Re: When to rebalance out of a stable value fund

Post by grabiner »

cfaboy wrote: Tue Sep 20, 2022 9:48 pm "For example, if your stable value fund has a guaranteed yield of 3%, and your bond fund is currently yielding 3%, then there is no point in using the bond fund. If your stable value fund has a current yield of 3%, and your bond fund is currently yielding 4%, then you might use the bond fund after comparing the risks."

The above is not true, because it ignores another source of risk, which is reinvestment risk. One has no idea what rate will prevail when the funds produce dividends.
This is why I included "guaranteed" in the comment above. Some forms of TIAA Traditional Annuity guarantee a yield of 3%, which has to be better than 3% with some risk if that is the yield on a bond fund. If the stable value fund and the bond fund have the same yield, but neither yield is guaranteed, then the only advantage of the stable value fund is risk reduction; they will break even if rates stay the same, but the conventional bond fund will outperform if rates fall and underperform if rates rise.
The problem with stable value funds is that rates can go low and stay low and there is no offsetting gain in the price of the underlying. For example, the TSP G fund is a very good stable value fund, but it had lower returns than the F fund for years for this reason.
And that is the trade-off between risk and return. Even though the G fund may have a lower yield than the F fund, it can be better in the context of a portfolio; 80% stock and 20% G fund may have the same risk and higher expected returns than 75% stock and 25% F fund.
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vineviz
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Re: When to rebalance out of a stable value fund

Post by vineviz »

grabiner wrote: Tue Sep 20, 2022 10:19 pm This is why I included "guaranteed" in the comment above. Some forms of TIAA Traditional Annuity guarantee a yield of 3%, which has to be better than 3% with some risk if that is the yield on a bond fund. If the stable value fund and the bond fund have the same yield, but neither yield is guaranteed, then the only advantage of the stable value fund is risk reduction; they will break even if rates stay the same, but the conventional bond fund will outperform if rates fall and underperform if rates rise.
The TIAA Traditional Annuity differs from stable value funds precisely because of the long-term rate guarantee.

I know of no stable value funds whose rates have a long-term guaranteed rate .

A stable value fund may be MORE risky than a long-term bond fund, not less, for an investor with a long investment horizon. We should be clear with people on this topic.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
retiredflyboy
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Re: When to rebalance out of a stable value fund

Post by retiredflyboy »

I would start now.
Facts are stubborn things. Everything works until it doesn’t.
FCM
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Re: When to rebalance out of a stable value fund

Post by FCM »

I finally transferred about half of my 401k stable value balance into my existing traditional IRA. My stable value fund is paying about 2%, but I can now get close to 4% in a one year T bill. Thus, I'm going to replace some of my stable value holdings with a one year T bill. Since I still have a considerable amount in my 401k, I could always move my money from my IRA back into the 401k stable value fund in the future if the stable value fund becomes more rewarding.
jvini
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Re: When to rebalance out of a stable value fund

Post by jvini »

chw wrote: Tue Sep 20, 2022 9:11 am I’ve been slowly winding down my SV position this year, and shifting into one and two year treasuries as yields have risen above the SV return available to me (about 2.5%). The SV fund option has worked as expected over the past 2 years providing a modest return while avoiding losses on total bond index funds in what appeared to be a likely rising interest rate environment.

I plan to cycle out of these short term treasuries as yields rise above 3% for core bond funds (such as BND) for several quarters, and simply use BND for my FI allocation (per my IPS). I know this sounds like timing, but is simply assessing assessing the yields on fixed income instruments available to me, and utilizing them based on triggers rates in my IPS.
Good for you. I did the same. Rules are fine but sometimes a situation changes enough that there has to be some flexibility and common sense. If a Stable Value fund has no risk and is paying as much as a bond fund with risk, why not? If treasuries then pay more than the stable value fund, make a ladder.

I saved over 100k by getting out of my bond funds in January when inflation was here and the Fed told us they were raising rates (I didn't touch my equity side other than to rebalance per my plan). The funds were paying less than Stable Value with no real risk other than missing out on rates going down. I've been buying 1 and 2 yr treasuries slowly and 3 yr. CDs to make a ladder. It's not hard to do and I'd rather be up a couple hundred grand than down. The fixed asset part of my portfolio is to keep things stable and maybe earn a little. The move made sense with little down side.
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