What percentage should be in High Yield AKA "Junk" bonds
What percentage should be in High Yield AKA "Junk" bonds
Hi Fellow Bogleheads,
I am looking for some guidance as to what percentage of my bond holdings should be in a riskier High Yield(HY) aka "Junk' bond fund?
Right now my HY bond fund is at about 5% (the other 95% is in 75% Intermediate Term and 25% Short Term funds) of my bond portfolio and 2% of my total portfolio including cash.
Although i am personally comfortable with these percentages I was looking for some feedback. Is there a standard % of a bond portfolio that is recommended to be invested in a HY bond fund?
Thank you for your feedback in advance!
~Moshe
I am looking for some guidance as to what percentage of my bond holdings should be in a riskier High Yield(HY) aka "Junk' bond fund?
Right now my HY bond fund is at about 5% (the other 95% is in 75% Intermediate Term and 25% Short Term funds) of my bond portfolio and 2% of my total portfolio including cash.
Although i am personally comfortable with these percentages I was looking for some feedback. Is there a standard % of a bond portfolio that is recommended to be invested in a HY bond fund?
Thank you for your feedback in advance!
~Moshe
My money has no emotions. ~Moshe |
|
I'm the world's greatest expert on my own opinion. ~Bruce Williams
Re: What percentage should be in High Yield AKA "Junk" bonds
Zero percent... my opinion anyway.
At such a small percentage of your fixed income side and even smaller part of your overall portfolio, I don't see your holding that junk bond fund making much of a difference one way or the other.
Take risk and go for return on the equity side, is probably going to be the general advice you get about this.
At such a small percentage of your fixed income side and even smaller part of your overall portfolio, I don't see your holding that junk bond fund making much of a difference one way or the other.
Take risk and go for return on the equity side, is probably going to be the general advice you get about this.
Re: What percentage should be in High Yield AKA "Junk" bonds
Rick Ferri recommends holding perhaps 20% of your fixed income allocation in high yield bonds, while many Bogleheads recommend none at all. Others say hold some but consider them as 1/2 equities and 1/2 fixed income. Search the forum for Ferri vs Swedroe on high yield bonds to see some epic, and educational, arguments for both sides.
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Re: What percentage should be in High Yield AKA "Junk" bonds
My AA targets to hold 20% of my non-inflationary-protected fixed income in VWEHX (Vanguard High Yield Corporate Fund 0.23%). This equates out to a little over 15% of my fixed income bucket, and about 3.5%% of my total portfolio. It's not a lot, but I like having that small slice there just for a little diversification. As I age, my inflation-protected portions will increase (IPS calls for it to be AGE-20% of my fixed income bucket), so my overall allocation to Total Bond and HY Bonds will decrease.
I'm not sure how "junky" people might consider that fund since most of the holdings are rated in the "B" category, but it's the most-risky element of my fixed income bucket.
I'm not sure how "junky" people might consider that fund since most of the holdings are rated in the "B" category, but it's the most-risky element of my fixed income bucket.
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Re: What percentage should be in High Yield AKA "Junk" bonds
I have held Vg HY Corp for many years and it has done very well for me. HY is about 13% of my FI and 8% of my portfolio. HY funds come in varying degrees of risk and Vanguard's is more conservative than most.
Re: What percentage should be in High Yield AKA "Junk" bonds
5% - 10% of my whole portfolio. I think it is a good bucket to own. But you may get haters who say none at all, since one of the prevailing boglehead themes is simplicity and many here are against adding complexity to a portfolio. I think in the end it will be such a de minimus part of your overall holdings that it won't matter for you.
40% Extended Market | 40% S&P 500 | 10% REIT | 5% State Muni Bond | 5% Cash
Re: What percentage should be in High Yield AKA "Junk" bonds
Apologies, I should have mentioned that my HY bond fund is the Vanguard VWEHX (Vanguard High Yield Corporate Fund).
Thank you for all your thoughtful posts!
~Moshe
Thank you for all your thoughtful posts!
~Moshe
My money has no emotions. ~Moshe |
|
I'm the world's greatest expert on my own opinion. ~Bruce Williams
Re: What percentage should be in High Yield AKA "Junk" bonds
I used to carry about 5% of my total allocation for more than a decade, until a year or so ago, but I considered it as stock because it reacted more with stock gyrations , it appeared.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
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Re: What percentage should be in High Yield AKA "Junk" bonds
Zero works for me.
Zero works for Vanguard's LifeStrategy funds.
Zero works for Vanguard's Target Retirement funds.
Zero works for the Coffeehouse Portfolio.
Fidelity has a 5.03% in their Fidelity Freedom increasing up to 6.57% for Fidelity Freedom 2055 fund
T. Rowe Price has 4.6% in their T. Rowe Price Retirement 2005, decreasing down to 0.92% for 2055.
Biggest objection I have to it is that people have a tendency to count is as "bonds" which means they are hiding some risk in the portfolio, hopefully not from themselves.
Zero works for Vanguard's LifeStrategy funds.
Zero works for Vanguard's Target Retirement funds.
Zero works for the Coffeehouse Portfolio.
Fidelity has a 5.03% in their Fidelity Freedom increasing up to 6.57% for Fidelity Freedom 2055 fund
T. Rowe Price has 4.6% in their T. Rowe Price Retirement 2005, decreasing down to 0.92% for 2055.
Biggest objection I have to it is that people have a tendency to count is as "bonds" which means they are hiding some risk in the portfolio, hopefully not from themselves.
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.
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Junk Bonds ?
Moshe:
In my view, bonds are primarily for safety in a portfolio.
In 1998 when the stock market plunged nearly 50%, Vanguard's Hi-Yield/junk bond fund (VWIEX) fell -21%. We were very happy that we had Total Bond Market in our portfolio with its +5% gain.
Junk bonds perform somewhere between stocks and traditional bonds. In my opinion, stocks are more efficient than junk bonds for obtaining higher returns per unit of risk.
There is more than one road to Dublin.
Best wishes
Taylor
In my view, bonds are primarily for safety in a portfolio.
In 1998 when the stock market plunged nearly 50%, Vanguard's Hi-Yield/junk bond fund (VWIEX) fell -21%. We were very happy that we had Total Bond Market in our portfolio with its +5% gain.
Junk bonds perform somewhere between stocks and traditional bonds. In my opinion, stocks are more efficient than junk bonds for obtaining higher returns per unit of risk.
There is more than one road to Dublin.
Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: What percentage should be in High Yield AKA "Junk" bonds
moshe wrote:... what percentage of my bond holdings should be in a riskier High Yield(HY) aka "Junk' bond fund?
I'd agree 0% in bonds. If you have them, I'd argue that they could be included in equities side of the allocation. Still with 2% of your portfolio, it's pretty much negligible if that's the only issue.
Re: Junk Bonds ?
To you as well Taylor. Food for thought for sure.Taylor Larimore wrote:
There is more than one road to Dublin.
Best wishes
Taylor
My money has no emotions. ~Moshe |
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Re: What percentage should be in High Yield AKA "Junk" bonds
David Swensen says 0%.
In Unconventional Success, he lists junk bonds in the chapter "Non-Core Asset Classes" aka "stuff not to own". Summarizing on pg. 110, he says:
In Unconventional Success, he lists junk bonds in the chapter "Non-Core Asset Classes" aka "stuff not to own". Summarizing on pg. 110, he says:
Swensen stresses that the interest of the issuer is not allgned with the interest of the bondholder. The issuer wants to increase equity value and reduce debt of the distressed company. Thus, junk bonds get called when the distressed company's prospects improve. The junk-bond investor gets the risk but not the return.Magnified credit risk, greater illiquidity, and more valuable call options pose a triple threat to bondholders [which] work against junk-bond owners in times of crisis, undermining the ability of junk bonds to provide portfolio protection... For the ten years ending December 31, 2003, Lehman Brothers High-Yield Index produced annualized returns of 5.9 percent relative to 7.5 percent for US Treasuries ... junk bond investors took greater risk for less return.
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Re: What percentage should be in High Yield AKA "Junk" bonds
Zero percent. Take your risk on the equities side - Emerging Markets, Small Value International or Domestic come to mind, off the bat. Don't chase yield or you might find the PIKs not to be worth the paper their written on.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: What percentage should be in High Yield AKA "Junk" bonds
This same interesting situation exists with lending credit card debt to high risk, highly indebted borrowers. In times of stress, more borrowers go bankrupt leading to losses, but the high interest rates the rest of the time provide higher returns. Averaged out, it's quite profitable, and I believe if you compare long term high yield bond results to bonds, the high yield will outperform, but with much higher risk. Just like there's a group of people perpetually dependent on credit card debt that don't immediately go bankrupt, there is a group of companies that are desperate enough to pay higher interest rates, and can pay it back for some time.Whiggish Boffin wrote:Swensen stresses that the interest of the issuer is not allgned with the interest of the bondholder. The issuer wants to increase equity value and reduce debt of the distressed company. Thus, junk bonds get called when the distressed company's prospects improve. The junk-bond investor gets the risk but not the return.
Re: What percentage should be in High Yield AKA "Junk" bonds
Is your portfolio almost all tax-deferred?
If it isn't mostly tax-deferred, then it's easy to say that you should hold 0% high-yield bonds, because they waste tax-deferred space. High-yield bonds behave like a mixture of bonds and stocks, but you have to hold them in tax-deferred accounts; if you hold a mixture of bonds and stocks in separate funds, you can hold the stocks in taxable as an index fund, and with current rates, you can also hold the bonds in taxable as a muni fund without losing much to taxes.
If you don't have limited tax-deferred room, and you don't have a better-than-market bond option (the TSP G fund or TIAA Traditional Annuity), then high-yield bonds in your IRA would be reasonable for anything from 0% to about 25% of your bond allocation. Count them as half bonds and half stocks; if you have 60% stock and 10% high-yield bonds, your portfolio has the risk of 65% stock.
If it isn't mostly tax-deferred, then it's easy to say that you should hold 0% high-yield bonds, because they waste tax-deferred space. High-yield bonds behave like a mixture of bonds and stocks, but you have to hold them in tax-deferred accounts; if you hold a mixture of bonds and stocks in separate funds, you can hold the stocks in taxable as an index fund, and with current rates, you can also hold the bonds in taxable as a muni fund without losing much to taxes.
If you don't have limited tax-deferred room, and you don't have a better-than-market bond option (the TSP G fund or TIAA Traditional Annuity), then high-yield bonds in your IRA would be reasonable for anything from 0% to about 25% of your bond allocation. Count them as half bonds and half stocks; if you have 60% stock and 10% high-yield bonds, your portfolio has the risk of 65% stock.
Re: What percentage should be in High Yield AKA "Junk" bonds
Yes. Almost all my bond holdings are in tax advantaged accounts. The only place i do not have bonds is in my Roth account so that i can try and maximize the performance of that account without having to worry about the tax implications.grabiner wrote:Is your portfolio almost all tax-deferred?
Thank you all for your time and expertise. I know it has been said before but i appreciate the forum and all the insights.
~Moshe
My money has no emotions. ~Moshe |
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I'm the world's greatest expert on my own opinion. ~Bruce Williams
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Re: What percentage should be in High Yield AKA "Junk" bonds
You are asking the wrong question.moshe wrote:Hi Fellow Bogleheads,
I am looking for some guidance as to what percentage of my bond holdings should be in a riskier High Yield(HY) aka "Junk' bond fund?
Right now my HY bond fund is at about 5% (the other 95% is in 75% Intermediate Term and 25% Short Term funds) of my bond portfolio and 2% of my total portfolio including cash.
Although i am personally comfortable with these percentages I was looking for some feedback. Is there a standard % of a bond portfolio that is recommended to be invested in a HY bond fund?
Thank you for your feedback in advance!
~Moshe
What you should be asking yourself is what % of my investment holdings should be in high yield bonds instead of another equally risky investment class such as emerging markets or commodities. High yield bonds are volatile and behave like stocks, not bonds. I don't invest in HY bonds because I can get better returns with less risk in other investment classess. Too much work to analyze HY bonds for only 5-10%% of a portfolio. Too much risk to have more than 10% invested in HY bonds. No brainer.
Last edited by manwithnoname on Wed Feb 12, 2014 10:02 am, edited 1 time in total.
Re: What percentage should be in High Yield AKA "Junk" bonds
If high yield bonds are equally risky as equities (or even emerging market equities) but pay no risk premium, who buys high yield bonds and why? Their extended unpopularity suggests they should be cheaper for risk to own than more popular asset classes.
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Re: What percentage should be in High Yield AKA "Junk" bonds
High Yield bonds are not as risky as equities, at least most are not. For example, the following illustrates key data points for 10 year return of Vg HY Corp (VWEHX), Vg Total Bond (VBMFX) and Vg Total Stock Market Index (VTSMX):hiddensee wrote:If high yield bonds are equally risky as equities (or even emerging market equities) but pay no risk premium, who buys high yield bonds and why? Their extended unpopularity suggests they should be cheaper for risk to own than more popular asset classes.
Fund 10 yr return Std Deviation Vanguard Risk Rating
VWEHX 6.83% 5.86 3
VTSMX 7.99% 15.24 4
VBMFX 4.42% 3.45 2
There is a lot of variation in the riskiness of HY bond funds. Vanguard's is more conversative than most but Fidelity and others also have good HY bond funds that lean to the conservative side. HY bond funds are really a hybrid fund. I consider VWEHX as roughly equivalent of 50% equity.
Re: What percentage should be in High Yield AKA "Junk" bonds
That looks like a substantial improvement in return (especially in real terms) over total bond market without a dramatic increase in std dev.
Re: What percentage should be in High Yield AKA "Junk" bonds
0%. Get your risk in equities. If you feel that you need more risk, weight more to equities. Once you find that weight, I think that you are playing with fire to put something called "junk" in the area where you are looking for the highest quality and stability.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Re: What percentage should be in High Yield AKA "Junk" bonds
Unfortunately, you need to consider when that risk shows up. Again, look at 2008-2009 - that fund dropped exactly when you needed it to be steady. High-quality bonds did not.hiddensee wrote:That looks like a substantial improvement in return (especially in real terms) over total bond market without a dramatic increase in std dev.
Retirement investing is a marathon.
Re: What percentage should be in High Yield AKA "Junk" bonds
+1kenyan wrote:Unfortunately, you need to consider when that risk shows up. Again, look at 2008-2009 - that fund dropped exactly when you needed it to be steady. High-quality bonds did not.hiddensee wrote:That looks like a substantial improvement in return (especially in real terms) over total bond market without a dramatic increase in std dev.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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Re: What percentage should be in High Yield AKA "Junk" bonds
In "The Only Guide to Alternative Investments You'll Ever Need", Larry describes High Yield bonds as having both equity and bond-like characteristics. He gives a conversion chart based on the credit quality to percent equity to ascribe to High Yield bonds. If you would like to add them, the chart is very useful.
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Re: What percentage should be in High Yield AKA "Junk" bonds
We need to have "high yield/junk" as a temporary sticky once a week
But it always comes down to the same thing: People who own junk (and bought it with their eyes at least semi-open) seem perfectly happy. Those who don't own it, and probably never have, think it is worse than a social disease.
Yep, junk is correlated to both bonds and equities, but sometimes it marches to its own drummer.
I have owned junk for the better part of my more than 30 years of investing with Vanguard. Presently junk amounts to about 15% of my bond component - and I rebalance into and out of junk bonds occasionally as required by my IPS. I am a happy camper.
I accept the fact that risk and return should go hand in hand. And frankly I am happy that many investors and institutions do not invest in junk - it makes my return incrementally greater.
I certainly don't recommend that folks "close to the line" invest in junk, and I wouldn't ever put 100% of my bonds in junk, but the junk market is 10-15% of the bond market - and anyone who doesn't own any is departing from market weight - and therefor giving up at least a theoretical diversification benefit..
Please note my signature, "volatility is my friend". Bonds are for income, not some presumed and undefined safety.
I prefer to take my risks both on the bond and equity side, nowhere is it writ that risk is to be taken on the equity side except on the Bogleheads.
Dale
But it always comes down to the same thing: People who own junk (and bought it with their eyes at least semi-open) seem perfectly happy. Those who don't own it, and probably never have, think it is worse than a social disease.
Yep, junk is correlated to both bonds and equities, but sometimes it marches to its own drummer.
I have owned junk for the better part of my more than 30 years of investing with Vanguard. Presently junk amounts to about 15% of my bond component - and I rebalance into and out of junk bonds occasionally as required by my IPS. I am a happy camper.
I accept the fact that risk and return should go hand in hand. And frankly I am happy that many investors and institutions do not invest in junk - it makes my return incrementally greater.
I certainly don't recommend that folks "close to the line" invest in junk, and I wouldn't ever put 100% of my bonds in junk, but the junk market is 10-15% of the bond market - and anyone who doesn't own any is departing from market weight - and therefor giving up at least a theoretical diversification benefit..
Please note my signature, "volatility is my friend". Bonds are for income, not some presumed and undefined safety.
I prefer to take my risks both on the bond and equity side, nowhere is it writ that risk is to be taken on the equity side except on the Bogleheads.
Dale
Last edited by Dale_G on Thu Feb 13, 2014 8:59 pm, edited 2 times in total.
Volatility is my friend
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Re: What percentage should be in High Yield AKA "Junk" bonds
People on this forum like to say that the market is efficient, but then when it comes to junk bonds like to say that you get better risk adjusted returns in stocks over high yields bonds. Does this mean that the market is not efficiently pricing the high yield risk correctly? Which is it?
These are rhetorical questions, because I find it silly that people think there is some hard line between corp bonds rated at Baa and those rated at Baa2. If you want to take your equity risk on the equity side, that's great, but that should imply you hold 0% corporate bonds.
About 10-15% of my bond allocation is in High yield.
Your decision of somewhere between 0-20% HY is not that important compared to the other decisions you need to make to be successful at investing.
These are rhetorical questions, because I find it silly that people think there is some hard line between corp bonds rated at Baa and those rated at Baa2. If you want to take your equity risk on the equity side, that's great, but that should imply you hold 0% corporate bonds.
About 10-15% of my bond allocation is in High yield.
Your decision of somewhere between 0-20% HY is not that important compared to the other decisions you need to make to be successful at investing.
Re: What percentage should be in High Yield AKA "Junk" bonds
I'm not sure.kenyan wrote:Unfortunately, you need to consider when that risk shows up. Again, look at 2008-2009 - that fund dropped exactly when you needed it to be steady. High-quality bonds did not.hiddensee wrote:That looks like a substantial improvement in return (especially in real terms) over total bond market without a dramatic increase in std dev.
Suppose you invest with a 7 year run up, HY returning 6.8% and treasuries returning 4.4%. Your investment of $1 is worth, at the crash, $1.58 in HY and $1.35 in treasuries. So you can afford to lose 15% with no real loss compared to treasuries, just the loss of your additional gains (and yields will remain higher than for treasuries).
Of course you can say the same for equities but the problem with equities is that they have volatile run-ups too. HY doesn't seem to.
Just playing Devil's Advocate.
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Re: What percentage should be in High Yield AKA "Junk" bonds
At 2% of portfolio, I would not bothermoshe wrote:2% of my total portfolio including cash.
John
Re: What percentage should be in High Yield AKA "Junk" bonds
Hi John,Johm221122 wrote:At 2% of portfolio, I would not bothermoshe wrote:2% of my total portfolio including cash.
John
Thank you for your reply.
Can you elaborate? Would you "not bother" to hold any at all or would you take a larger position as a % of your total portfolio? Also, the "why"s would be educational also.
All the best,
~Moshe
My money has no emotions. ~Moshe |
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I'm the world's greatest expert on my own opinion. ~Bruce Williams
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Re: What percentage should be in High Yield AKA "Junk" bonds
I would recommend 0%.I do hold some I an income fund but it is on chopping block next time my plan says to change AA
John
John
Re: What percentage should be in High Yield AKA "Junk" bonds
There isn't a should be on this. IF you want to hold some HY Bonds it is a personal decision as is the allocation mix. As I recall Ric Ferri was proposing 10% of portfolio while Larry Swedroe was against them totally. I hold about 10% of portfolio but use ST IG in a 1:2 ratio as a counterbalance.moshe wrote:Hi Fellow Bogleheads,
I am looking for some guidance as to what percentage of my bond holdings should be in a riskier High Yield(HY) aka "Junk' bond fund?
~Moshe