Shorten duration of Bond allocation

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stocknoob4111
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Shorten duration of Bond allocation

Post by stocknoob4111 »

I have 10% of my portfolio in VBILX which has been hit hard just like other Intermediate Bond Funds.... now that rates have come up a bit and the fund has gained a little is it a good time to swap the entire allocation to a reduced duration Bond fund or is this a bad idea? Of course shorter duration means near zero yield but the upside is protection from interest rate increases. Or would you just stay the course at this point and ride it out?

I realize I don't have much of my portfolio in Bonds so what are others with substantial bond allocations doing? Or perhaps have already done?
Johm221122
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Re: Shorten duration of Bond allocation

Post by Johm221122 »

We don't know the future of rates or your future transactions, to tell you if this is a good move.
I can tell you that I'm sticking to my plan and will buy, hold and rebalance as my plan says. Trying to time the bond market is as difficult as trying to time the stock market
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midareff
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Re: Shorten duration of Bond allocation

Post by midareff »

While the Boglehead mantra is stay the course and don't ever try to time the market things can change IMHO. If rebalancing in this run-up has provided your needs in bonds/fixed income/bank cash it may be reasonable to shorten the duration of your overall bond holdings in anticipation of interest rate increases that may or may not come. Last month's CPI-U was 94 bps higher than the same month prior year. If you think nothing will happen when the candy runs out that's AOK.

Used to be you could make a few bps in bonds over CPI-U + tax rate costs on dividends. Now IT and ST are net net negative REAL adjusted for CPI-U and taxation and long treasuries are down > 14% for the last 12 months ....... all before tax and CPI-U adjustment. I think you have to ask yourself how much in bonds is enough for my portfolio? ....and carry an ample emergency fund.
Last edited by midareff on Fri Apr 16, 2021 8:16 am, edited 1 time in total.
Patzer
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Re: Shorten duration of Bond allocation

Post by Patzer »

Basically, you are asking us to predict whether the loss you will get if/when rates rise will off-set the higher interest rate the intermediate bonds give versus short term bonds.

Let's compare VBIRX to VBILX to my checking account.

Intermediate: VBILX 6.6 Duration, 1.68% SEC Yield.
Short: VBIRX 2.8 Duration, .47% SEC Yield.
T-Mobile Checking: 0 Duration, 1% Yield.
Obviously, if rates stay the same, Intermediate bonds win, because 1.68% is the biggest number.

If rates fall, Intermediate bonds win, because they have the highest duration and the highest starting yield.

What about if rates rise?
If rates rise .25% in the next 1 year, what would that look like?
VBILX 1.68% - 6.6 *.25= 0.03% Return
VBIRX .47% - 2.8 * .25=-0.23% Return
T-Mobile Checking: 1% - 0 * .25 = 1% Return

So, if you think rates won't rise, stick with intermediate bonds, if you think they will rise, you would be better off in a high yield checking or savings account then intermediate or short-term bonds.
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Re: Shorten duration of Bond allocation

Post by BolderBoy »

stocknoob4111 wrote: Fri Apr 16, 2021 7:55 amOr would you just stay the course at this point and ride it out?

I realize I don't have much of my portfolio in Bonds so what are others with substantial bond allocations doing? Or perhaps have already done?
I'm not an expert on bonds.

In early January, VG reps were suggesting folks consider shortening the duration of their bond holdings. So in my retirement accounts I moved half my VBTLX -> VBIRX. Now I think it was a ho-hum thing to do. Yesterday I did some rebalancing and bought more VBTLX.

If you are in this for the long haul I doubt it makes much difference.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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Re: Shorten duration of Bond allocation

Post by Johm221122 »

Patzer wrote: Fri Apr 16, 2021 8:15 am Basically, you are asking us to predict whether the loss you will get if/when rates rise will off-set the higher interest rate the intermediate bonds give versus short term bonds.

Let's compare VBIRX to VBILX to my checking account.

Intermediate: VBILX 6.6 Duration, 1.68% SEC Yield.
Short: VBIRX 2.8 Duration, .47% SEC Yield.
T-Mobile Checking: 0 Duration, 1% Yield.
Obviously, if rates stay the same, Intermediate bonds win, because 1.68% is the biggest number.

If rates fall, Intermediate bonds win, because they have the highest duration and the highest starting yield.

What about if rates rise?
If rates rise .25% in the next 1 year, what would that look like?
VBILX 1.68% - 6.6 *.25= 0.03% Return
VBIRX .47% - 2.8 * .25=-0.23% Return
T-Mobile Checking: 1% - 0 * .25 = 1% Return

So, if you think rates won't rise, stick with intermediate bonds, if you think they will rise, you would be better off in a high yield checking or savings account then intermediate or short-term bonds.
Assuming the OP has a 50 year investing timeline ahead of him. How often does he have to make this decision
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midareff
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Re: Shorten duration of Bond allocation

Post by midareff »

Patzer wrote: Fri Apr 16, 2021 8:15 am Basically, you are asking us to predict whether the loss you will get if/when rates rise will off-set the higher interest rate the intermediate bonds give versus short term bonds.

Let's compare VBIRX to VBILX to my checking account.

Intermediate: VBILX 6.6 Duration, 1.68% SEC Yield.
Short: VBIRX 2.8 Duration, .47% SEC Yield.
T-Mobile Checking: 0 Duration, 1% Yield.
Obviously, if rates stay the same, Intermediate bonds win, because 1.68% is the biggest number.

If rates fall, Intermediate bonds win, because they have the highest duration and the highest starting yield.

What about if rates rise?
If rates rise .25% in the next 1 year, what would that look like?
VBILX 1.68% - 6.6 *.25= 0.03% Return
VBIRX .47% - 2.8 * .25=-0.23% Return
T-Mobile Checking: 1% - 0 * .25 = 1% Return

So, if you think rates won't rise, stick with intermediate bonds, if you think they will rise, you would be better off in a high yield checking or savings account then intermediate or short-term bonds.
T-Mobile Checking might be less of a deal than you think it is. From an online opinion; "f you are thinking of using a T-Mobile bank account just be aware that they make it VERY hard to get your money out once it is deposited. There is a $3,000 limit to ACH transfers, going into or out of their bank. When I saw this account offer I thought "this is great, I can fund the account with the FDIC insurance limit and earn 1% on it, safely. One percent is nearly twice what the "real" online banks are now offering. But then I find that online transfers are limited to $3,000 per day, and you can only do a small number of transfers in each month. And unlike most banks, the limits are in force even if you initiate a transfer from one of your linked banks instead of through T-Mobile. And they accept ONLY incoming wire transfers, not outgoing. So if you put your money in, forget about transferring it out. Imagine putting in $250,000 and then only being able to get it back out by transferring $3,000 a day, and being limited to just a handful of monthly transactions. They get your money deposited, then make it too darn hard to get it out. I soooooo regret starting the account. I just made the assumption that like most online banks, T-Mobile would NOT limit the dollar amount of transfers that were initiated through the websites of linked banks. Do yourself a favor and don't get lured in by the 1% rate."

Frankly, those limitations should they be accurate make using this as an alternative to bonds or regular bank savings account inconceivable for me.
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Re: Shorten duration of Bond allocation

Post by Patzer »

Johm221122 wrote: Fri Apr 16, 2021 8:22 am
Assuming the OP has a 50 year investing timeline ahead of him. How often does he have to make this decision
Yea, I am not recommending they flip back and forth all the time. I am just trying to outline what they are really asking as a math problem, instead of as an emotional decision.
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Re: Shorten duration of Bond allocation

Post by Johm221122 »

Patzer wrote: Fri Apr 16, 2021 8:26 am
Johm221122 wrote: Fri Apr 16, 2021 8:22 am
Assuming the OP has a 50 year investing timeline ahead of him. How often does he have to make this decision
Yea, I am not recommending they flip back and forth all the time. I am just trying to outline what they are really asking as a math problem, instead of as an emotional decision.
+1 the problem with trying to time market is you have to be right twice and be right more than your wrong long term
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Re: Shorten duration of Bond allocation

Post by Patzer »

midareff wrote: Fri Apr 16, 2021 8:23 am T-Mobile Checking might be less of a deal than you think it is. From an online opinion; "f you are thinking of using a T-Mobile bank account just be aware that they make it VERY hard to get your money out once it is deposited. There is a $3,000 limit to ACH transfers, going into or out of their bank. When I saw this account offer I thought "this is great, I can fund the account with the FDIC insurance limit and earn 1% on it, safely. One percent is nearly twice what the "real" online banks are now offering. But then I find that online transfers are limited to $3,000 per day, and you can only do a small number of transfers in each month. And unlike most banks, the limits are in force even if you initiate a transfer from one of your linked banks instead of through T-Mobile. And they accept ONLY incoming wire transfers, not outgoing. So if you put your money in, forget about transferring it out. Imagine putting in $250,000 and then only being able to get it back out by transferring $3,000 a day, and being limited to just a handful of monthly transactions. They get your money deposited, then make it too darn hard to get it out. I soooooo regret starting the account. I just made the assumption that like most online banks, T-Mobile would NOT limit the dollar amount of transfers that were initiated through the websites of linked banks. Do yourself a favor and don't get lured in by the 1% rate."

Frankly, those limitations should they be accurate make using this as an alternative to bonds or regular bank savings account inconceivable for me.
That's just not true, not going to list all my transactions, but here are just my ACH transactions that were 5k+ in the last 3 months.
In January, I transferred 6K into my account and 10K out, each in 1 transaction.
In February, I transferred 8K out in 1 transaction.
In March, I transferred 11K in with 1 transaction and I transferred 21.5K out in 3 transactions.
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Re: Shorten duration of Bond allocation

Post by midareff »

Patzer wrote: Fri Apr 16, 2021 8:32 am
midareff wrote: Fri Apr 16, 2021 8:23 am T-Mobile Checking might be less of a deal than you think it is. From an online opinion; "f you are thinking of using a T-Mobile bank account just be aware that they make it VERY hard to get your money out once it is deposited. There is a $3,000 limit to ACH transfers, going into or out of their bank. When I saw this account offer I thought "this is great, I can fund the account with the FDIC insurance limit and earn 1% on it, safely. One percent is nearly twice what the "real" online banks are now offering. But then I find that online transfers are limited to $3,000 per day, and you can only do a small number of transfers in each month. And unlike most banks, the limits are in force even if you initiate a transfer from one of your linked banks instead of through T-Mobile. And they accept ONLY incoming wire transfers, not outgoing. So if you put your money in, forget about transferring it out. Imagine putting in $250,000 and then only being able to get it back out by transferring $3,000 a day, and being limited to just a handful of monthly transactions. They get your money deposited, then make it too darn hard to get it out. I soooooo regret starting the account. I just made the assumption that like most online banks, T-Mobile would NOT limit the dollar amount of transfers that were initiated through the websites of linked banks. Do yourself a favor and don't get lured in by the 1% rate."

Frankly, those limitations should they be accurate make using this as an alternative to bonds or regular bank savings account inconceivable for me.
That's just not true, not going to list all my transactions, but here are just my ACH transactions that were 5k+ in the last 3 months.
In January, I transferred 6K into my account and 10K out, each in 1 transaction.
In February, I transferred 8K out in 1 transaction.
In March, I transferred 11K in with 1 transaction and I transferred 21.5K out in 3 transactions.
That's great because those original reviews were a bit scary. Wonder why your results are so different?
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Re: Shorten duration of Bond allocation

Post by Patzer »

midareff wrote: Fri Apr 16, 2021 8:36 am
Patzer wrote: Fri Apr 16, 2021 8:32 am
midareff wrote: Fri Apr 16, 2021 8:23 am T-Mobile Checking might be less of a deal than you think it is. From an online opinion; "f you are thinking of using a T-Mobile bank account just be aware that they make it VERY hard to get your money out once it is deposited. There is a $3,000 limit to ACH transfers, going into or out of their bank. When I saw this account offer I thought "this is great, I can fund the account with the FDIC insurance limit and earn 1% on it, safely. One percent is nearly twice what the "real" online banks are now offering. But then I find that online transfers are limited to $3,000 per day, and you can only do a small number of transfers in each month. And unlike most banks, the limits are in force even if you initiate a transfer from one of your linked banks instead of through T-Mobile. And they accept ONLY incoming wire transfers, not outgoing. So if you put your money in, forget about transferring it out. Imagine putting in $250,000 and then only being able to get it back out by transferring $3,000 a day, and being limited to just a handful of monthly transactions. They get your money deposited, then make it too darn hard to get it out. I soooooo regret starting the account. I just made the assumption that like most online banks, T-Mobile would NOT limit the dollar amount of transfers that were initiated through the websites of linked banks. Do yourself a favor and don't get lured in by the 1% rate."

Frankly, those limitations should they be accurate make using this as an alternative to bonds or regular bank savings account inconceivable for me.
That's just not true, not going to list all my transactions, but here are just my ACH transactions that were 5k+ in the last 3 months.
In January, I transferred 6K into my account and 10K out, each in 1 transaction.
In February, I transferred 8K out in 1 transaction.
In March, I transferred 11K in with 1 transaction and I transferred 21.5K out in 3 transactions.
That's great because those original reviews were a bit scary. Wonder why your results are so different?
I have no idea, maybe they were trolls. The review you quoted says "Imagine if you did X", doesn't sound like they actually had a problem, just imagined one.
I have had my account since April of 2019 and have had absolutely zero problems.
Even has no fee ATM withdrawals at my local CVS for the rare instances where I need cash.
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midareff
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Re: Shorten duration of Bond allocation

Post by midareff »

Patzer wrote: Fri Apr 16, 2021 8:43 am
midareff wrote: Fri Apr 16, 2021 8:36 am
Patzer wrote: Fri Apr 16, 2021 8:32 am
midareff wrote: Fri Apr 16, 2021 8:23 am T-Mobile Checking might be less of a deal than you think it is. From an online opinion; "f you are thinking of using a T-Mobile bank account just be aware that they make it VERY hard to get your money out once it is deposited. There is a $3,000 limit to ACH transfers, going into or out of their bank. When I saw this account offer I thought "this is great, I can fund the account with the FDIC insurance limit and earn 1% on it, safely. One percent is nearly twice what the "real" online banks are now offering. But then I find that online transfers are limited to $3,000 per day, and you can only do a small number of transfers in each month. And unlike most banks, the limits are in force even if you initiate a transfer from one of your linked banks instead of through T-Mobile. And they accept ONLY incoming wire transfers, not outgoing. So if you put your money in, forget about transferring it out. Imagine putting in $250,000 and then only being able to get it back out by transferring $3,000 a day, and being limited to just a handful of monthly transactions. They get your money deposited, then make it too darn hard to get it out. I soooooo regret starting the account. I just made the assumption that like most online banks, T-Mobile would NOT limit the dollar amount of transfers that were initiated through the websites of linked banks. Do yourself a favor and don't get lured in by the 1% rate."

Frankly, those limitations should they be accurate make using this as an alternative to bonds or regular bank savings account inconceivable for me.
That's just not true, not going to list all my transactions, but here are just my ACH transactions that were 5k+ in the last 3 months.
In January, I transferred 6K into my account and 10K out, each in 1 transaction.
In February, I transferred 8K out in 1 transaction.
In March, I transferred 11K in with 1 transaction and I transferred 21.5K out in 3 transactions.
That's great because those original reviews were a bit scary. Wonder why your results are so different?
I have no idea, maybe they were trolls. The review you quoted says "Imagine if you did X", doesn't sound like they actually had a problem, just imagined one.
I have had my account since April of 2019 and have had absolutely zero problems.
Even has no fee ATM withdrawals at my local CVS for the rare instances where I need cash.
I was curious and went back and looked at the T-Mobile published requirements. It seems like the "Account Disclosures and FAQs" pages of their web site is down so I could not look further about additional requirements but just the part about ten required monthly qualifying purchases would be enough for me not to consider them. I don't do the jump through hoops months thing for the lure of a few basis points.

"2) you have registered for perks with your T-Mobile ID; and 3) at least 10 qualifying purchases using your T-Mobile MONEY card have posted to your Checking Account before the last business day of the month. Qualifying purchases posting on or after the last business day of the month count toward the next month’s qualifying purchases. If you meet this purchase requirement in a given month, we will pay you this benefit in the subsequent month as an added value provided all other requirements are met. As an additional added value for customers that haven’t yet deposited money into their T-Mobile MONEY account, you will receive 4.00% APY in the cycle in which you make your first deposit of greater than $1, as well as in the cycle that follows that deposit provided all other requirements are met. These added value benefits are subject to change. Balances above $3,000 in the Checking Account earn 1.00% APY. "

FWIW, the distribution yield on the VG ST Corp Index is still over 1.55% Not remotely interested in moving from Ally...... YMMV.
Last edited by midareff on Fri Apr 16, 2021 8:56 am, edited 1 time in total.
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nisiprius
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Re: Shorten duration of Bond allocation

Post by nisiprius »

Go to Vanguard's web page for VBILX.

Image

1) Notice that the duration is 6.6 years.

2) Notice that Vanguard suggests this fund may be appropriate for investors planning to hold it for 4 to 10 years.

3) Notice that through its lifetime, superimposed on a general upward growth, you see fluctuations up and down. How large were they and how long did they last? If we go to Morningstar and choose Investor shares, we can see twenty-seven years of history:

Image

PortfolioVisualizer measures the maximum drawdown as -8.92%, and as starting in April 2008, with recovery by December 2008, so, less than a year.

For comparison, Total Stock had a drawdown of -50.89% lasting more than four years.

You can't state any absolutes for a bond fund because the bonds in it don't mature at the same time, and if you are imagining hypotheticals there's no limit to how fast or how interest rates could go. But bonds behave differently from stocks, and the fact that they are legal contracts, (often) to pay out specific numbers of dollars on specific days, is a powerful restraining force on how much they can fluctuate.

The duration of the bond fund is a period of time over which you can reasonably expect the fluctuations to average out. This is a much more reliable rule of thumb than anything you can say about stock market returns. If you are willing to hold stocks on the idea that they probably will not lose money if you hold for 20 years, then you should be willing to hold VBILX on the idea that you probably will not lose money if you hold for 6 years.

4) So far, 1994 to present, VBIIX (different share class, same fund, longer history) would never yet have lost money if held for 36 months or more. This is the worst 36-month period in its history: 11/2005 to 10/2008, inclusive, which of course is also the worst period for VBILX:

Source

Image

5) Of course a short-term speculator who really can outpsych the rest of the market and anticipate short-term price movements in a bond fund could beat buy-and-hold by taking money away from other short-term speculators who are trying to take money away from him.

What you should do depends on your personal goals and risk tolerance. Here are my observations:

a) An investor who doesn't ever see losses over periods of time like weeks, months, or single years, should not be in an intermediate-term bond fund, period.

b) Investors in intermediate-term bond funds should not pay much attention to performance fluctuations over periods of time that are much shorter than the duration of the fund. They should expect such fluctuations.

c) As things stand in 2021, I really don't see the point in anything shorter than intermediate-term bond funds. If you find the risk characteristics of intermediate-term bond funds to be troubling, you really might as well shrug and go to something like bank accounts (competitive CDS, highest-available "high yield" savings).

d) If you skim over this forum, you will see both people saying to shorten duration "because interest rates can only go up"--the first posting of that kind I've found was in 2009--and others saying to lengthen duration to take better advantage of a supposed robust and permanent negative correlation with stocks. The presence of such contradictory advice helps me personally, to shrug and say, "OK, I'll just keep steering straight down the middle."
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Re: Shorten duration of Bond allocation

Post by sycamore »

stocknoob4111 wrote: Fri Apr 16, 2021 7:55 am I have 10% of my portfolio in VBILX which has been hit hard just like other Intermediate Bond Funds.... now that rates have come up a bit and the fund has gained a little is it a good time to swap the entire allocation to a reduced duration Bond fund or is this a bad idea? Of course shorter duration means near zero yield but the upside is protection from interest rate increases. Or would you just stay the course at this point and ride it out?

I realize I don't have much of my portfolio in Bonds so what are others with substantial bond allocations doing? Or perhaps have already done?
Don't swap; stick with your IPS. If you don't have one, write one up and stick to it! Otherwise you'll be asking yourself "is now the time to switch" every couple of months for the rest of your life...

I'm sticking with bonds of average intermediate-term duration for the bulk of my fixed income exposure. A smaller portion (that's earmarked for short-term living expenses) goes into the best short-term location I can find, like HYSA, sometimes I even chase signup/transfer bonuses.
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Re: Shorten duration of Bond allocation

Post by Cyclesafe »

Wait until your fund shows a loss of $3000, then TLH. In the meanwhile, enjoy your higher return.
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stocknoob4111
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Re: Shorten duration of Bond allocation

Post by stocknoob4111 »

Cyclesafe wrote: Fri Apr 16, 2021 9:03 am Wait until your fund shows a loss of $3000, then TLH. In the meanwhile, enjoy your higher return.
thanks, there isn't anything to harvest since I acquired the fund a while ago - my cost basis is 10.95 and the current NAV is 12.10
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Re: Shorten duration of Bond allocation

Post by retired@50 »

stocknoob4111 wrote: Fri Apr 16, 2021 9:23 am
Cyclesafe wrote: Fri Apr 16, 2021 9:03 am Wait until your fund shows a loss of $3000, then TLH. In the meanwhile, enjoy your higher return.
thanks, there isn't anything to harvest since I acquired the fund a while ago - my cost basis is 10.95 and the current NAV is 12.10
Keep in mind that the vast majority of money made from a bond fund is the monthly interest payments, NOT from share price movement.
VBILX has traded between $9.49 and $12.78 per share since inception in 2001.
Focus on the monthly interest payments and ignore the share price.

Regards,
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Re: Shorten duration of Bond allocation

Post by stocknoob4111 »

retired@50 wrote: Fri Apr 16, 2021 9:29 am Focus on the monthly interest payments and ignore the share price.
Interest isn't much and I have to pay taxes on it since all my fixed income is in my Taxable... I don't have any decent Bond Fund choices in my tax advantaged unfortunately so I had to make the decision to put it in Taxable.
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Re: Shorten duration of Bond allocation

Post by retired@50 »

stocknoob4111 wrote: Fri Apr 16, 2021 9:34 am
retired@50 wrote: Fri Apr 16, 2021 9:29 am Focus on the monthly interest payments and ignore the share price.
Interest isn't much and I have to pay taxes on it since all my fixed income is in my Taxable... I don't have any decent Bond Fund choices in my tax advantaged unfortunately so I had to make the decision to put it in Taxable.
What's your tax bracket? If high, you could consider a municipal bond fund instead of a taxable bond fund.

Regards,
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Re: Shorten duration of Bond allocation

Post by stocknoob4111 »

retired@50 wrote: Fri Apr 16, 2021 9:39 am What's your tax bracket? If high, you could consider a municipal bond fund instead of a taxable bond fund.
Tax bracket is 24%, no state tax... but I have not bothered with Municipal bonds since even though they are tax free the yield is substantially lower than something like VBILX so it's pointless when you do the math. In addition, I think I prefer the mix on something like VBILX which has 50% USG debt and 50% high quality Corporates vs just Municipal debt.
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