Totally confused about fixed-income.

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Topic Author
crazychris
Posts: 11
Joined: Thu May 17, 2018 2:41 pm

Totally confused about fixed-income.

Post by crazychris » Fri Mar 27, 2020 1:19 am

One of my learnings from this COVID-crash is that we need a bigger emergency fund. We have, currently, 8-9 months of expenses in cash in FDIC-insured accounts, but I feel that is insufficient for us to sleep completely comfortably.

My plan is:
1. To increase that over some time to 12 months of expenses in FDIC-insured savings accounts. (Expect this to take 11-12 months).
2. Slowly invest in fixed-income to cover an additional 24 months of expenses, bringing it up to a total of 3 years of EF in cash/fixed-income. (Expect this to take a 4-5 years).

This plan is inspired by people like KlangFool, whose arguments resonate with me (what will I do to feed my family if stocks crash by 80% for 3 years, for example).

I'm totally confused about what fixed-income assets to buy though, or even about how to think about it. I've seen good arguments for Treasuries (intermediate and long-term), and good arguments for VBTLX. I'm really confused at the end of it though.

Any help would be greatly appreciated.

Me and my spouse are 34/32, and have at least a 30-year investing horizon.

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dunkmachine
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Joined: Sat Jan 06, 2018 12:48 pm

Re: Totally confused about fixed-income.

Post by dunkmachine » Fri Mar 27, 2020 7:58 am

I'm a nobody on this forum, but the recent events made me realize I'm a fan of treasuries for 100% of my fixed income allocation. Whether intermediate vs. long-term, I'm still researching. I like David Swenson's suggestion of 50/50 US Treasuries and TIPS. He also suggested a bond duration that matches the treasury market, so I'm leaning towards intermediate-term. I'll trade the lower yield for a more zero or negative correlation with TSM during downturns. It's easier to stomach rebalancing out of a fund that is up vs. a fund that has only decreased slightly relative to other assets.

MikeG62
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Location: New Jersey

Re: Totally confused about fixed-income.

Post by MikeG62 » Fri Mar 27, 2020 8:38 am

You can get essentially the same safety in FDIC or NCUA insured CD’s with much better yield than Treasuries. Just stay within the insurance limits.

Purchasing a 10-year Treasury with a sub 1.0% yield will likely result in your losing money to inflation over the next decade.

I’ve invested in CD’s this month with yields ranging from 2.25% to 3.0%. They are out there if you look around.
Real Knowledge Comes Only From Experience

jimkinny
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Re: Totally confused about fixed-income.

Post by jimkinny » Fri Mar 27, 2020 8:50 am

CDs and/or treasuries are likely the best options. There are many threads on this forum discussing them.

If you don't know about term/interest and credit rate risk then read about about them on the boglehead wiki and read about bond fund duration on the wiki. There is a link at the top of this page.

Pikel
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Joined: Sat Jan 04, 2020 9:55 am

Re: Totally confused about fixed-income.

Post by Pikel » Fri Mar 27, 2020 8:52 am

CDs, I and EE Bonds is the trifecta until your net worth becomes so high that a married couple contributing 40k a year to I & EE bonds is noise and FDIC/NCUA insurance of 500k means having to find many banks/credit unions.

I have said this before but a flaw in boglehead mantra is "equity/bond" should really be "risky/riskfree." Corporate bonds are subject to systematic risk. They crash with the market. Corporate bonds belong on the "risky" side of the equation, and I think there is a fair amount of evidence that if you want to take risk it's better to just be in equity.

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Sandtrap
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Re: Totally confused about fixed-income.

Post by Sandtrap » Fri Mar 27, 2020 9:38 am

crazychris wrote:
Fri Mar 27, 2020 1:19 am
One of my learnings from this COVID-crash is that we need a bigger emergency fund. We have, currently, 8-9 months of expenses in cash in FDIC-insured accounts, but I feel that is insufficient for us to sleep completely comfortably.

My plan is:
1. To increase that over some time to 12 months of expenses in FDIC-insured savings accounts. (Expect this to take 11-12 months).
2. Slowly invest in fixed-income to cover an additional 24 months of expenses, bringing it up to a total of 3 years of EF in cash/fixed-income. (Expect this to take a 4-5 years).

This plan is inspired by people like KlangFool, whose arguments resonate with me (what will I do to feed my family if stocks crash by 80% for 3 years, for example). I'm totally confused about what fixed-income assets to buy though, or even about how to think about it. I've seen good arguments for Treasuries (intermediate and long-term), and good arguments for VBTLX. I'm really confused at the end of it though.

Any help would be greatly appreciated.

Me and my spouse are 34/32, and have at least a 30-year investing horizon.
In some ways, "fixed income investing" is more complex than equities.
It would be good to put things on "paws" and learn a bit more.
Suggestions:
1
Search past threads on "Liability Matching Portfolio" by W. Bernstein.
Also, read his small book, "Rational Expectations".
https://www.amazon.com/Rational-Expecta ... oks&sr=1-2
2
Read: "The Bond Book" by Thau.
https://www.amazon.com/Bond-Book-Third- ... 8&me=&qid=
3
Search past threads on "Tiers" by "dratkinson" (excellently presented)
viewtopic.php?t=235699
4
Post a "Portfolio Review Request" for a long term comprehensive financial strategy with the considerations you have presented and additional questions. (please follow the format).
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

Topic Author
crazychris
Posts: 11
Joined: Thu May 17, 2018 2:41 pm

Re: Totally confused about fixed-income.

Post by crazychris » Fri Mar 27, 2020 10:27 am

Thank you dunkmachine, MikeG62, jimkinny, Pikel, and Sandtrap for your thoughts! This sounds like a great start for me.

hudson
Posts: 2338
Joined: Fri Apr 06, 2007 9:15 am

Re: Totally confused about fixed-income.

Post by hudson » Fri Mar 27, 2020 11:28 am

crazychris,
To expand on Sandtrap's response...

Maybe read William Bernstein's Ages of the Investor; it's only 50 pages and is available as a Kindle Book for a few dollars. Bernstein says near the beginning...

"After you’ve put enough TIPS, plain vanilla Treasuries, and CDs into your mental LMP, you’re free to start adding again to your RP [risk portfolio].”

Or read Larry Swedroe's bond book...
Swedroe would likely recommend AAA/AA bonds or CDs. He says that intermediate bonds are the sweet spot.
He doesn't like total bond funds.

beernutz
Posts: 110
Joined: Sun May 31, 2015 12:50 pm

Re: Totally confused about fixed-income.

Post by beernutz » Fri Mar 27, 2020 11:37 am

Do you have to spread your CDs out to multiple institutions if you want more than $250k of FDIC coverage?

BV3273
Posts: 432
Joined: Mon Oct 19, 2015 7:20 pm

Re: Totally confused about fixed-income.

Post by BV3273 » Fri Mar 27, 2020 11:42 am

I’ve definitely re-evaluated my fixed income holdings after this mess.

CDs/MMs, Treasuries, TIPS, and munis will all play a role in my portfolio. Just in differing amounts.

Risk free vs. Risk definitely resonates. I knew there was some risk with munis, but I wasn’t prepared to see one of them -9+% on a day of trading. That was insane.

I need a certain percentage of my portfolio to be Risk Free. You can call it an EF or whatever, but this portion of my portfolio should have no downside at all.

hudson
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Joined: Fri Apr 06, 2007 9:15 am

Re: Totally confused about fixed-income.

Post by hudson » Fri Mar 27, 2020 11:49 am

beernutz wrote:
Fri Mar 27, 2020 11:37 am
Do you have to spread your CDs out to multiple institutions if you want more than $250k of FDIC coverage?
Yes and No...read what the FDIC says...https://www.fdic.gov/deposit/deposits/faq.html
Many credit unions use NCUA insurance...same rules....just as safe.

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Phineas J. Whoopee
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Re: Totally confused about fixed-income.

Post by Phineas J. Whoopee » Fri Mar 27, 2020 10:39 pm

Hi crazychris.

It's completely rational to want a store of funds enough to carry you and your family through a bad economic crisis. Recent surveys have shown a plurality of US families unprepared for even what one might call a minor financial emergency. That's bad.

We should show compassion.

Taking a general view, any intermediate-term investment-grade low-cost bond fund should fill the role of fixed income in a mixed stock / bond portfolio, but that wasn't your question.

With respect to one to three years of living expenses, probably it would be better to use less volatile assets. Bank savings accounts or money market accounts, both of which are FDIC-insured, come to mind. US Treasury Bills, all of which mature within one year (the longest are 364 days, therefore less than a full calendar year) come to mind. US Savings Bonds do too, but unless one lives in a federally-declared disaster area they can't be redeemed for a year.

I'm not getting all prepper here, but imperishable food supplies can also count.

I think it depends on your family's vulnerabilities, and what there is to do about them.

Today's pandemic situation certainly justifies a larger emergency reserve. How much larger is an individual question.

Maybe I've said nothing. Maybe I've said everything. Probably it's closer to nothing than the other. Sorry about that.

PJW

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