When is it TOO safe? [Holding other than bonds in fixed income]

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HeelaMonster
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When is it TOO safe? [Holding other than bonds in fixed income]

Post by HeelaMonster »

I'm placing this under "Theory, News & General" because I'm really looking more for theoretical, generic feedback than for personalized analysis (... though I'm happy to provide more personal details if those below are not sufficient to get the question across).

DW and I are both 65, both retired as of this year, and have our expenses covered by pensions and rental income. They will be doubly covered when we start taking SS, so we don't anticipate having to tap our portfolio for much of anything. This is currently invested at 50:50 AA... IF we take the 50% fixed income portion to include cash instruments (which is where my question is leading).

Our fixed income allocation includes things like TSP G Fund (currently paying 4%), I Bonds (6-10%), T Bills or Notes (4.8%), CDs (4.85%), VMFXX money market (3.6%)... plus a fair amount of Total Bond Index as 40% of VBIAX (primarily in IRAs, but some in taxable). We also have a bolus of cash from sale of rental property and maturing CDs that we now need to deploy.

QUESTION(s):

1. Assuming we are happy enough with the returns, what are the arguments against holding the large majority of our fixed income allocation in things OTHER than bond funds, like those listed above? This might eventually result in AA of 50% stocks: 10% bond market: 40% cash (or cash equivalents).

2. Am I correct that the primary risk of holding this much in "completely safe" (i.e., can't lose principal) investments is that over-reliance on interest-bearing instruments will eventually lose out to inflation? And that bonds have historically returned more than cash?

3. To be clear, we are not scared off by this year's losses in the bond market (e.g., VBTLX), are not running for the exits, and are not planning to divest. But we wouldn't be adding anything new to that pot, instead shunting new funds toward CDs, treasuries, and the like. I want to make sure I fully appreciate the potential downsides, over the next 25-30 years. Per the subject line, when is this approach going to be playing it TOO safe?
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Richard1580
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Re: When is it TOO safe?

Post by Richard1580 »

You might want to consider building a TIPS ladder. That would protect you from inflation and give you a liquid source of cash should the need arise. If you don't want to deal with individual TIPS bonds, a mixture of short and intermediate TIPS funds/ETFs would probably accomplish the same thing. Good luck!
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hudson
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Re: When is it TOO safe?

Post by hudson »

HeelaMonster wrote: Wed Nov 23, 2022 5:47 pm I'm placing this under "Theory, News & General" because I'm really looking more for theoretical, generic feedback than for personalized analysis (... though I'm happy to provide more personal details if those below are not sufficient to get the question across).

DW and I are both 65, both retired as of this year, and have our expenses covered by pensions and rental income. They will be doubly covered when we start taking SS, so we don't anticipate having to tap our portfolio for much of anything. This is currently invested at 50:50 AA... IF we take the 50% fixed income portion to include cash instruments (which is where my question is leading).

Our fixed income allocation includes things like TSP G Fund (currently paying 4%), I Bonds (6-10%), T Bills or Notes (4.8%), CDs (4.85%), VMFXX money market (3.6%)... plus a fair amount of Total Bond Index as 40% of VBIAX (primarily in IRAs, but some in taxable). We also have a bolus of cash from sale of rental property and maturing CDs that we now need to deploy.

QUESTION(s):

1. Assuming we are happy enough with the returns, what are the arguments against holding the large majority of our fixed income allocation in things OTHER than bond funds, like those listed above? This might eventually result in AA of 50% stocks: 10% bond market: 40% cash (or cash equivalents).

2. Am I correct that the primary risk of holding this much in "completely safe" (i.e., can't lose principal) investments is that over-reliance on interest-bearing instruments will eventually lose out to inflation? And that bonds have historically returned more than cash?

3. To be clear, we are not scared off by this year's losses in the bond market (e.g., VBTLX), are not running for the exits, and are not planning to divest. But we wouldn't be adding anything new to that pot, instead shunting new funds toward CDs, treasuries, and the like. I want to make sure I fully appreciate the potential downsides, over the next 25-30 years. Per the subject line, when is this approach going to be playing it TOO safe?
1. Duration matched individual treasuries and CDs are all good. I like having part TIPS and part nominals/CDs.
2. Nominal treasuries or CDs may or may not lose out to inflation. Nobody knows.
3. Nominal treasuries, TIPS, and CDs are all good. I'm 100% there today. When my holding mature, I'm going to make sure that my holdings are duration matched.... 50:50 nominals-CDs: TIPS (or maybe 30:70?)

Bottom line: I don't see an issue.
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whodidntante
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Re: When is it TOO safe?

Post by whodidntante »

It's amazing how much attention TIPS have gotten lately, but I have to point out that they seem like a really good deal right now. The real yield is pretty strongly positive across the yield curve. Real yields were formerly negative. I think the long-term average is for yields to be slightly positive, but right now the real yields are above average. I suppose that is mainly due to the hyper-aggressive Fed actions lately.

Managing a "fixed-income portfolio" yourself can be a bit of a chore. It doesn't pay much, and arguably doesn't pay at all since you aren't likely to do better than a bond fund that offers similar exposure to what you are trying to accomplish. One situation where it makes great sense is when you have known expenses at a known date. For example, I've been taking huge loans recently at 0% and buying Treasury bills with it that mature just before the 0% APR expires. It can also be worthwhile when you find above market rates somewhere, like if you find a bank paying 1% above anything else available on a CD with a term that is acceptable to you.

But in your situation where your expense are a lock, I would take way, way, more risk. I'd put that whole puppy in a global stock portfolio. If that works out, you can have fun deciding who to give your money to, or whether you want your Ferrari in race red or canary yellow. My personal opinion is that you shouldn't spoil children with money, however. It leaves everyone worse off.
friar1610
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Re: When is it TOO safe?

Post by friar1610 »

One potential downside to the varied fixed income vehicles you list is the complexity (or, more accurately, the lack of simplicity.) I have mentioned several times in this forum that I think that diversification on the fixed income side is a good idea.* You certainly have that, as I do. But, as I’ve been learning, one price you pay for that diversification is that your FI becomes a little more difficult to keep track of and manage than, say, one or two bond funds. Only you can decide whether or not this is a big deal for you and your spouse. It hasn’t been for me thus far (age77). But I’ve been trying to simplify things for the benefit of my wife should I predecease her. (To say she has shown any interest in “high finance” would be a gross exaggeration.) And even if she is the first to go, I have to admit that I’m losing interest (no pun intended!) in keeping too many financial balls in the air. I may reach a point when I won’t want the CDs, I-Bonds, Treasurys, etc. if I can get more-or-less the same results with an intermediate and short-term bond fund. On the other hand, this may not be an issue for you yet or ever.

* what I like about FI diversification is that each vehicle has different characteristics - both advantages and disadvantages - and can meet a slightly different FI need.
Friar1610 | 50-ish/50-ish
delamer
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Re: When is it TOO safe?

Post by delamer »

Have you considered eliminating bonds (except maybe short-term) and increasing your stock allocation?

Maybe 75% stocks and 25% cash equivalents (which would include short-term bonds)?

Ot take whodidntante’s suggestions and go 100% stocks, since you don’t need your portfolio to cover your expenses.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
secondopinion
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Re: When is it TOO safe?

Post by secondopinion »

HeelaMonster wrote: Wed Nov 23, 2022 5:47 pm I'm placing this under "Theory, News & General" because I'm really looking more for theoretical, generic feedback than for personalized analysis (... though I'm happy to provide more personal details if those below are not sufficient to get the question across).

DW and I are both 65, both retired as of this year, and have our expenses covered by pensions and rental income. They will be doubly covered when we start taking SS, so we don't anticipate having to tap our portfolio for much of anything. This is currently invested at 50:50 AA... IF we take the 50% fixed income portion to include cash instruments (which is where my question is leading).

Our fixed income allocation includes things like TSP G Fund (currently paying 4%), I Bonds (6-10%), T Bills or Notes (4.8%), CDs (4.85%), VMFXX money market (3.6%)... plus a fair amount of Total Bond Index as 40% of VBIAX (primarily in IRAs, but some in taxable). We also have a bolus of cash from sale of rental property and maturing CDs that we now need to deploy.

QUESTION(s):

1. Assuming we are happy enough with the returns, what are the arguments against holding the large majority of our fixed income allocation in things OTHER than bond funds, like those listed above? This might eventually result in AA of 50% stocks: 10% bond market: 40% cash (or cash equivalents).

2. Am I correct that the primary risk of holding this much in "completely safe" (i.e., can't lose principal) investments is that over-reliance on interest-bearing instruments will eventually lose out to inflation? And that bonds have historically returned more than cash?

3. To be clear, we are not scared off by this year's losses in the bond market (e.g., VBTLX), are not running for the exits, and are not planning to divest. But we wouldn't be adding anything new to that pot, instead shunting new funds toward CDs, treasuries, and the like. I want to make sure I fully appreciate the potential downsides, over the next 25-30 years. Per the subject line, when is this approach going to be playing it TOO safe?
1. Bond funds are an option to hold bonds; they are not the only way to do so. I count CDs and treasury notes as bonds unless they are no more than 1 year, so are I-bonds. I do think 40% in cash equivalents is too much; you will be at the mercy of ever-changing rates (good or bad). The longer out, the more it is a position on the future of the dollar.

2. Some say that inflation is the biggest risk, but that is a general problem with fixed income not indexed on inflation. The primary risk of cash is that distant nominal expenses (fixed dollar amounts) will not be met effectively (effectively meaning that less present dollars were needed to meet them in the future). I think bonds return better in general than cashlike investments, but that is anyone's guess.

3. I think you are slightly misinterpreting what is cash-like and what is bond-like since a good amount of what is mentioned are bonds. But I see no problem with having treasuries and CDs more inline with future spending rather than a general bond fund; since these are insured investments, that would be one less worry.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Topic Author
HeelaMonster
Posts: 663
Joined: Sat Aug 10, 2019 11:46 am

Re: When is it TOO safe?

Post by HeelaMonster »

Thanks to all of you for thoughtful replies. :beer

I do see the issue of managing multiple, diverse vehicles for FI with "a little here, a little there"... my first questions on BH were about unwinding a 30 year tangle on the equity side that grew out of that approach, and have no desire to repeat that here, now that we have finally achieved some simplification.

And yes, I also see the opportunity to shift more toward stock allocation. I suspect that will happen once we settle into retirement and see how this all works in practice.
Last edited by HeelaMonster on Wed Nov 23, 2022 7:52 pm, edited 3 times in total.
Topic Author
HeelaMonster
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Joined: Sat Aug 10, 2019 11:46 am

Re: When is it TOO safe?

Post by HeelaMonster »

secondopinion wrote: Wed Nov 23, 2022 6:59 pm 3. I think you are slightly misinterpreting what is cash-like and what is bond-like since a good amount of what is mentioned are bonds. But I see no problem with having treasuries and CDs more inline with future spending rather than a general bond fund; since these are insured investments, that would be one less worry.
Agreed; I sensed that even as I was typing (...but wrote it anyway, ha!). I think what I was trying to describe was that the majority of our FI holdings have a "safety net" underneath, guaranteed to never lose principal or NAV. Which, as so many have learned this year, is not necessarily the case with bond funds, depending on when you might want/need to withdraw. But point well taken.
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