Wading Through The Fixed Income Maze
Wading Through The Fixed Income Maze
Good Morning,
Currently retired and my wife and I are invested in the 3 fund portfolio. I have a comfort level with and understand the equity side of the equation
and the simplicity and efficiency of broad market equity indexing.
However, I seem to be having a lot of angst on the fixed income side, already taking a 3% loss in NAV in BND ytd. I understand that over time the
high yields of new bonds bought will compensate for the loss in NAV and don't have any real need to draw out of BND over the next 6 - 7 years,
unless I need to in a beneficiary IRA that I need to take RMD's out of sees a big drawdown on the equity side. ( I have been fortunate the last couple
of years that I could take the withdrawals out of equities in that IRA, due to the robust stock market.)
Fixed income will be around 25% of our holdings after I purchase a 3 yr. MYGA in our taxable holdings in a few weeks from the sale of a larger home
and add that to a pretty strong cash position in a money market fund at TD Ameritrade that is now paying 0% interest.
The cash and MYGA will represent roughly 12% of our overall portfolio and BND will represent roughly 13% in our tax deferred traditional IRA's, with
the 2 Roth accounts being 100 % equities. This fixed income in addition to our SS would be approximately 25X expenses.
Do I continue on with 100 % BND for simplicity and hope that as I need RMD's that equities will be the place to pull them from over the next several
years, or do I take approximately 50K out of BND in the beneficiary IRA that would be 2 years of withdrawals and park it in short term TIPS ( VTIP),
short term treasuries ( VGSH) or short bond BSV, with approximately 75% treasuries and 25% corporates? How about just plain old cash for 2 pulls at
all times, given most bear markets last between 14 and 27 months?
While I'm at it , is BND really the prudent intermediate holding or is BIV , which roughly 60/40 treasuries/corporate with no GNMA's and a higher
historical yield than BND ( albeit slightly bigger drawdowns ) the route to go if I'm in no real need for most of this bond allocation. ( I just read an
article yesterday claiming that an intermediate 100% GNMA fund may be the way to go for the core bonding holding ? More confusion.)
Any assistance in muddling through this with a a prudent and simple plan would be greatly appreciated!
Currently retired and my wife and I are invested in the 3 fund portfolio. I have a comfort level with and understand the equity side of the equation
and the simplicity and efficiency of broad market equity indexing.
However, I seem to be having a lot of angst on the fixed income side, already taking a 3% loss in NAV in BND ytd. I understand that over time the
high yields of new bonds bought will compensate for the loss in NAV and don't have any real need to draw out of BND over the next 6 - 7 years,
unless I need to in a beneficiary IRA that I need to take RMD's out of sees a big drawdown on the equity side. ( I have been fortunate the last couple
of years that I could take the withdrawals out of equities in that IRA, due to the robust stock market.)
Fixed income will be around 25% of our holdings after I purchase a 3 yr. MYGA in our taxable holdings in a few weeks from the sale of a larger home
and add that to a pretty strong cash position in a money market fund at TD Ameritrade that is now paying 0% interest.
The cash and MYGA will represent roughly 12% of our overall portfolio and BND will represent roughly 13% in our tax deferred traditional IRA's, with
the 2 Roth accounts being 100 % equities. This fixed income in addition to our SS would be approximately 25X expenses.
Do I continue on with 100 % BND for simplicity and hope that as I need RMD's that equities will be the place to pull them from over the next several
years, or do I take approximately 50K out of BND in the beneficiary IRA that would be 2 years of withdrawals and park it in short term TIPS ( VTIP),
short term treasuries ( VGSH) or short bond BSV, with approximately 75% treasuries and 25% corporates? How about just plain old cash for 2 pulls at
all times, given most bear markets last between 14 and 27 months?
While I'm at it , is BND really the prudent intermediate holding or is BIV , which roughly 60/40 treasuries/corporate with no GNMA's and a higher
historical yield than BND ( albeit slightly bigger drawdowns ) the route to go if I'm in no real need for most of this bond allocation. ( I just read an
article yesterday claiming that an intermediate 100% GNMA fund may be the way to go for the core bonding holding ? More confusion.)
Any assistance in muddling through this with a a prudent and simple plan would be greatly appreciated!
Re: Wading Through The Fixed Income Maze
You can remove a lot of the angst from bond holdings if you recognize that there are far more choices in bond offerings than there are reasons to select among them. There is a reason total bond funds are recommended for the three fund portfolio, the reason being that it does the job and suggests that a person stop worrying about it.
People seem to have a hard time accepting the fact that bonds do have volatility. Yes, the value of a bond investment fluctuates. It fluctuates much less than a stock investment, at least as long as one is not at extremes of duration with very long bonds. The whole idea is to set the risk and return of the whole portfolio by mixing stocks and bonds appropriately. There is no particular purpose to holding some asset that has no variability while holding lots of other assets that do.
The mix of the assets is kept at a level by rebalancing. One can rebalance as one contributes or withdraws by adding to what is below target or taking from what is above target. If that is not enough and one exceeds some range from target then one can step in and sell what is high to rebalance to what is low.
That is it. You don't need anything else.
Also, and you will have to forgive my bluntness, but to be 75/25 stocks to bonds and worrying about what you hold in bonds is unnecessary.* It is very possible that 75/25 is an appropriate allocation for you and that you are fine with total bond or equally fine with lots of other choices.
*If there is a portfolio theory concept for what bonds should be paired with a higher stock allocation, it would be long bonds, but I am certainly not recommending that.
As to Social Security, I am not sure what you mean by "This fixed income in addition to our SS would be approximately 25X expenses." A better assessment of how your portfolio and its allocation matches what you want to spend would come from stating your expected rate of annual withdrawals from the portfolio amount you have now.
People seem to have a hard time accepting the fact that bonds do have volatility. Yes, the value of a bond investment fluctuates. It fluctuates much less than a stock investment, at least as long as one is not at extremes of duration with very long bonds. The whole idea is to set the risk and return of the whole portfolio by mixing stocks and bonds appropriately. There is no particular purpose to holding some asset that has no variability while holding lots of other assets that do.
The mix of the assets is kept at a level by rebalancing. One can rebalance as one contributes or withdraws by adding to what is below target or taking from what is above target. If that is not enough and one exceeds some range from target then one can step in and sell what is high to rebalance to what is low.
That is it. You don't need anything else.
Also, and you will have to forgive my bluntness, but to be 75/25 stocks to bonds and worrying about what you hold in bonds is unnecessary.* It is very possible that 75/25 is an appropriate allocation for you and that you are fine with total bond or equally fine with lots of other choices.
*If there is a portfolio theory concept for what bonds should be paired with a higher stock allocation, it would be long bonds, but I am certainly not recommending that.
As to Social Security, I am not sure what you mean by "This fixed income in addition to our SS would be approximately 25X expenses." A better assessment of how your portfolio and its allocation matches what you want to spend would come from stating your expected rate of annual withdrawals from the portfolio amount you have now.
Re: Wading Through The Fixed Income Maze
1. I think it is reasonable to hold a couple years of expenses in cash or cash equivalents, especially after the run-up that stocks have had over the last dozen years. Go ahead and move some of your expense money out of equities.
2. Stop looking at your accounts so closely, it drives recency bias. Why do you even know that the NAV of BND is down 3% in the last 4 months? Do you remember that BND was up 7.7% last year? Probably not.
I don’t even know the percentage gain in my total portfolio YTD, I see an upwards trend so far this year (nice!) but that is as close as I track it. Continuously checking individual fund NAV values can drive a person crazy.
2. Stop looking at your accounts so closely, it drives recency bias. Why do you even know that the NAV of BND is down 3% in the last 4 months? Do you remember that BND was up 7.7% last year? Probably not.
I don’t even know the percentage gain in my total portfolio YTD, I see an upwards trend so far this year (nice!) but that is as close as I track it. Continuously checking individual fund NAV values can drive a person crazy.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Wading Through The Fixed Income Maze
You could consider purchasing MYGAs in your IRA account. You likely have some familiarity with the product, since you’re currently planning to purchase one in your taxable account.
MYGAs can be useful since they guarantee a fixed return for a finite period of time. That fixed return is currently attractive compared to most bond funds. A MYGA also won’t have market value fluctuations, and will pay out in full at the end of the term.
MYGAs can be useful since they guarantee a fixed return for a finite period of time. That fixed return is currently attractive compared to most bond funds. A MYGA also won’t have market value fluctuations, and will pay out in full at the end of the term.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Re: Wading Through The Fixed Income Maze
Amen to the above by David Jay.
As far as cash management, my view is that this does not come from investment concerns but comes from practical concerns of cash flow. These are details specific to the magnitude and timing of what one spends and how cash income appears for that investor. Most people are going to end up with cash sloshing around in accounts as money comes in and goes out. We typically have about 1% of asset value in cash that way and to ensure that we can pay what we need to pay when things come due. That can go up, for example, if a large expense is on the horizon or when an asset transfer such as an RMD comes in the form of cash. A large part of the slosh is that a lot of spending is on credit cards so there is a monthly reckoning for that.
Our routine cash deposits come from SS, pensions, and keeping dividend distributions in taxable accounts in cash for spending. Some people might prefer to arrange that their brokerage sell and issue a monthly cash stipend automatically for convenience. I don't doubt that a person with less pension and Social Security cash flow would carry a larger cash holding for cash flow management purposes.
As far as asset allocation is concerned the asset allocation is about about 50% stocks, about 50% intermediate bonds, and niggled in there somewhere about 1% cash in checking and savings accounts. I don't see any investment role for cash.*
*CDs have traditionally been a reasonable option for fixed income holdings. While CDs meet a definition of cash I would not count them that way in the context of this discussion. In the same way I would not count I bonds, stable value funds, MYGAs etc. as cash for this discussion. Note that by the financial definition of risk as variability of return, no cash holdings are risk free because the return they pay is not constant in time. It is only a question of when the risk is paid. Ask someone trying today to replace a CD that was paying 5%.
As far as cash management, my view is that this does not come from investment concerns but comes from practical concerns of cash flow. These are details specific to the magnitude and timing of what one spends and how cash income appears for that investor. Most people are going to end up with cash sloshing around in accounts as money comes in and goes out. We typically have about 1% of asset value in cash that way and to ensure that we can pay what we need to pay when things come due. That can go up, for example, if a large expense is on the horizon or when an asset transfer such as an RMD comes in the form of cash. A large part of the slosh is that a lot of spending is on credit cards so there is a monthly reckoning for that.
Our routine cash deposits come from SS, pensions, and keeping dividend distributions in taxable accounts in cash for spending. Some people might prefer to arrange that their brokerage sell and issue a monthly cash stipend automatically for convenience. I don't doubt that a person with less pension and Social Security cash flow would carry a larger cash holding for cash flow management purposes.
As far as asset allocation is concerned the asset allocation is about about 50% stocks, about 50% intermediate bonds, and niggled in there somewhere about 1% cash in checking and savings accounts. I don't see any investment role for cash.*
*CDs have traditionally been a reasonable option for fixed income holdings. While CDs meet a definition of cash I would not count them that way in the context of this discussion. In the same way I would not count I bonds, stable value funds, MYGAs etc. as cash for this discussion. Note that by the financial definition of risk as variability of return, no cash holdings are risk free because the return they pay is not constant in time. It is only a question of when the risk is paid. Ask someone trying today to replace a CD that was paying 5%.
Re: Wading Through The Fixed Income Maze
My interpretation was that the 25% FI allocation = 25x expenses (net of SS) - ie the overall portfolio is 100x - and the expenses represent a 1% withdrawal rate - clearly well in excess of any reasonable SWR expectation.dbr wrote: ↑Tue Apr 20, 2021 8:28 am As to Social Security, I am not sure what you mean by "This fixed income in addition to our SS would be approximately 25X expenses." A better assessment of how your portfolio and its allocation matches what you want to spend would come from stating your expected rate of annual withdrawals from the portfolio amount you have now.
Re: Wading Through The Fixed Income Maze
That was my conclusion also, with the implication that worrying about those bonds is not necessary.ivk5 wrote: ↑Tue Apr 20, 2021 8:53 amMy interpretation was that the 25% FI allocation = 25x expenses (net of SS) - ie the overall portfolio is 100x - and the expenses represent a 1% withdrawal rate - clearly well in excess of any reasonable SWR expectation.dbr wrote: ↑Tue Apr 20, 2021 8:28 am As to Social Security, I am not sure what you mean by "This fixed income in addition to our SS would be approximately 25X expenses." A better assessment of how your portfolio and its allocation matches what you want to spend would come from stating your expected rate of annual withdrawals from the portfolio amount you have now.
Re: Wading Through The Fixed Income Maze
A portion of my FI is in a savings account. It is more of a fixed loss than a fixed income. The Fed as of last week was still buying bonds (QE), the pandemic is not over but the end is in sight, economic growth is picking up, the Fed is vowing to keep their rate low for a long time and seems to want inflation anchoring to move up a bit and there is a lot of fiscal stimulus. I am just going to wait a bit and see what happens. This may be a mistake but it is not a big mistake. I hope by the end of the summer we can return to a post pandemic life. The data may change. No one really knows. It doesn't seem to me you are proposing anything terribly risky.
Re: Wading Through The Fixed Income Maze
That is correct. Thank youivk5 wrote: ↑Tue Apr 20, 2021 8:53 amMy interpretation was that the 25% FI allocation = 25x expenses (net of SS) - ie the overall portfolio is 100x - and the expenses represent a 1% withdrawal rate - clearly well in excess of any reasonable SWR expectation.dbr wrote: ↑Tue Apr 20, 2021 8:28 am As to Social Security, I am not sure what you mean by "This fixed income in addition to our SS would be approximately 25X expenses." A better assessment of how your portfolio and its allocation matches what you want to spend would come from stating your expected rate of annual withdrawals from the portfolio amount you have now.
Re: Wading Through The Fixed Income Maze
Thank You for adding to the discussion Stinky. I started looking at MYGA's because you brought them to my attention previously and am looking to purchase in my taxable space. The only issue is in my tax deferred accounts where I don't think TD Ameritrade has anything competitive to the direct providers out there in their arsenal , since they are a broker.Stinky wrote: ↑Tue Apr 20, 2021 8:40 am You could consider purchasing MYGAs in your IRA account. You likely have some familiarity with the product, since you’re currently planning to purchase one in your taxable account.
MYGAs can be useful since they guarantee a fixed return for a finite period of time. That fixed return is currently attractive compared to most bond funds. A MYGA also won’t have market value fluctuations, and will pay out in full at the end of the term.
Re: Wading Through The Fixed Income Maze
I'm am guilty of that ! Constant checking needs to end...David Jay wrote: ↑Tue Apr 20, 2021 8:31 am 1. I think it is reasonable to hold a couple years of expenses in cash or cash equivalents, especially after the run-up that stocks have had over the last dozen years. Go ahead and move some of your expense money out of equities.
2. Stop looking at your accounts so closely, it drives recency bias. Why do you even know that the NAV of BND is down 3% in the last 4 months? Do you remember that BND was up 7.7% last year? Probably not.
I don’t even know the percentage gain in my total portfolio YTD, I see an upwards trend so far this year (nice!) but that is as close as I track it. Continuously checking individual fund NAV values can drive a person crazy.
Re: Wading Through The Fixed Income Maze
Please take this as humor, but humor with a point, from the old Bob Newhart show: https://www.youtube.com/watch?v=4BjKS1-vjPsBigDGB wrote: ↑Tue Apr 20, 2021 9:46 amI'm am guilty of that ! Constant checking needs to end...David Jay wrote: ↑Tue Apr 20, 2021 8:31 am 1. I think it is reasonable to hold a couple years of expenses in cash or cash equivalents, especially after the run-up that stocks have had over the last dozen years. Go ahead and move some of your expense money out of equities.
2. Stop looking at your accounts so closely, it drives recency bias. Why do you even know that the NAV of BND is down 3% in the last 4 months? Do you remember that BND was up 7.7% last year? Probably not.
I don’t even know the percentage gain in my total portfolio YTD, I see an upwards trend so far this year (nice!) but that is as close as I track it. Continuously checking individual fund NAV values can drive a person crazy.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Wading Through The Fixed Income Maze
That seems incredibly apt to this forum.David Jay wrote: ↑Tue Apr 20, 2021 9:52 am
Please take this as humor, but humor with a point, from the old Bob Newhart show: https://www.youtube.com/watch?v=4BjKS1-vjPs
Re: Wading Through The Fixed Income Maze
Now THAT’S a good one.dbr wrote: ↑Tue Apr 20, 2021 10:28 amThat seems incredibly apt to this forum.David Jay wrote: ↑Tue Apr 20, 2021 9:52 am
Please take this as humor, but humor with a point, from the old Bob Newhart show: https://www.youtube.com/watch?v=4BjKS1-vjPs
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
- retired@50
- Posts: 12821
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Re: Wading Through The Fixed Income Maze
It sure does. Maybe we can get it added as a sticky, or put in the wiki...dbr wrote: ↑Tue Apr 20, 2021 10:28 amThat seems incredibly apt to this forum.David Jay wrote: ↑Tue Apr 20, 2021 9:52 am
Please take this as humor, but humor with a point, from the old Bob Newhart show: https://www.youtube.com/watch?v=4BjKS1-vjPs
Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Re: Wading Through The Fixed Income Maze
Yes, thanks to David Jay, and the other one I would add if there were a Wiki of YouTube quips would be one of these: https://www.bing.com/videos/search?q=jo ... M%3DHDRSC3retired@50 wrote: ↑Tue Apr 20, 2021 10:45 amIt sure does. Maybe we can get it added as a sticky, or put in the wiki...dbr wrote: ↑Tue Apr 20, 2021 10:28 amThat seems incredibly apt to this forum.David Jay wrote: ↑Tue Apr 20, 2021 9:52 am
Please take this as humor, but humor with a point, from the old Bob Newhart show: https://www.youtube.com/watch?v=4BjKS1-vjPs
Regards,
One does have to have a good sense for irony.
Re: Wading Through The Fixed Income Maze
You are in great shape. There is no reason to hold anything except BND for your fixed income, but if you want money in shorter funds, in MYGAs, or in cash there is no harm done other than spending more time to keep everything moved around.BigDGB wrote: ↑Tue Apr 20, 2021 9:39 amThat is correct. Thank youivk5 wrote: ↑Tue Apr 20, 2021 8:53 amMy interpretation was that the 25% FI allocation = 25x expenses (net of SS) - ie the overall portfolio is 100x - and the expenses represent a 1% withdrawal rate - clearly well in excess of any reasonable SWR expectation.dbr wrote: ↑Tue Apr 20, 2021 8:28 am As to Social Security, I am not sure what you mean by "This fixed income in addition to our SS would be approximately 25X expenses." A better assessment of how your portfolio and its allocation matches what you want to spend would come from stating your expected rate of annual withdrawals from the portfolio amount you have now.
I suppose one question is how comfortable you are with 75% in stocks. Those holding could easily lose 10%, 20%, 30% in the course of a year and it would be a mistake to have that happen and then sell at the bottom. Of course you could afford such a loss. Your stock holding could permanently evaporate and the 25% in bonds would leave you with a large enough portfolio to withdraw your same income provided you did rebalance back to some holding in stocks.
Re: Wading Through The Fixed Income Maze
That was good ! Now I don't even have to go in for therapy and meds !David Jay wrote: ↑Tue Apr 20, 2021 9:52 amPlease take this as humor, but humor with a point, from the old Bob Newhart show: https://www.youtube.com/watch?v=4BjKS1-vjPsBigDGB wrote: ↑Tue Apr 20, 2021 9:46 amI'm am guilty of that ! Constant checking needs to end...David Jay wrote: ↑Tue Apr 20, 2021 8:31 am 1. I think it is reasonable to hold a couple years of expenses in cash or cash equivalents, especially after the run-up that stocks have had over the last dozen years. Go ahead and move some of your expense money out of equities.
2. Stop looking at your accounts so closely, it drives recency bias. Why do you even know that the NAV of BND is down 3% in the last 4 months? Do you remember that BND was up 7.7% last year? Probably not.
I don’t even know the percentage gain in my total portfolio YTD, I see an upwards trend so far this year (nice!) but that is as close as I track it. Continuously checking individual fund NAV values can drive a person crazy.
Re: Wading Through The Fixed Income Maze
Feeling pretty comfortable at 75/25. My friends who either use a " professional" for their investing or are do it your selfers are anywhere from 70/30 to one of them who follows the Dave Ramsey 100 % equities philosophy!dbr wrote: ↑Tue Apr 20, 2021 11:01 amYou are in great shape. There is no reason to hold anything except BND for your fixed income, but if you want money in shorter funds, in MYGAs, or in cash there is no harm done other than spending more time to keep everything moved around.BigDGB wrote: ↑Tue Apr 20, 2021 9:39 amThat is correct. Thank youivk5 wrote: ↑Tue Apr 20, 2021 8:53 amMy interpretation was that the 25% FI allocation = 25x expenses (net of SS) - ie the overall portfolio is 100x - and the expenses represent a 1% withdrawal rate - clearly well in excess of any reasonable SWR expectation.dbr wrote: ↑Tue Apr 20, 2021 8:28 am As to Social Security, I am not sure what you mean by "This fixed income in addition to our SS would be approximately 25X expenses." A better assessment of how your portfolio and its allocation matches what you want to spend would come from stating your expected rate of annual withdrawals from the portfolio amount you have now.
I suppose one question is how comfortable you are with 75% in stocks. Those holding could easily lose 10%, 20%, 30% in the course of a year and it would be a mistake to have that happen and then sell at the bottom. Of course you could afford such a loss. Your stock holding could permanently evaporate and the 25% in bonds would leave you with a large enough portfolio to withdraw your same income provided you did rebalance back to some holding in stocks.