Bond portfolio review

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Topic Author
FlamePoint
Posts: 223
Joined: Wed Nov 11, 2020 9:45 pm

Bond portfolio review

Post by FlamePoint »

I’ve been a member of this forum for a couple years now and am finally getting around to seeking some advice on our current portfolio. Like a lot of folks with large bond portfolios I’m concerned about the current environment, the potential for higher than average inflation, and capital preservation of our fixed income.

Emergency funds: None. Fixed income will be used as emergency fund.

Debt: None

Tax Filing Status: MFJ

Tax Rate: 24% Federal, 3% State

Age:58/59, both retired

Desired Asset allocation: 55% stocks / 45% bonds
Desired International allocation: 20% of stocks

Portfolio: $4.3M

Taxable - Joint
$383K, Money Market FDZXX
$15K, a few individual stocks

Her Rollover IRA at Fidelity:
$653K Total US Stock FZROX, O% ER
$312K Total International Stock FZILX, 0% ER
$754K Total US Bond FXNAX, .025% ER

Her Roth IRA at Fidelity:
$151K Total US Stock FZROX, O% ER
$70k Total International Stock FZILX, 0% ER

Her HSA: $12K

His Rollover IRA at Fidelity:
$670K Total US Stock FZROX, O% ER
320K Total International Stock FZILX, 0% ER
$751K Total US Bond FXNAX, .025% ER

His Roth IRA at Fidelity:
$135K Total US Stock FZROX, O% ER
$65K Total International Stock FZILX, 0% ER

His HSA: $12K


Comments:
1. Annual Expense: $96K, includes healthcare (company provided). HC costs will increase by $20k between ages 61-64, then drop back down to existing level at age 65.
2. We plan to collect SS at age 70. His SS $44K, her SS $42K (doesn’t include COLA between now and age 70).
3. We will be receiving an additional lump sum annuity payout at age 65 of $244K. It will be rolled over to our IRA’s
4. 2 kids in college. Both have fully funded 529’s.
5. I’ll be doing Roth conversions up to the top of the 24% tax bracket thru age 63, then will continue conversions to age 72 paying close attention to IRMAA tiers. Hope to convert at least 60% of tax deferred to Roth by age 72.
6. HC plan qualifies for HSA contributions. Will continue to add yearly max to both accounts up to age 65.
7. Met with Private Client Fidelity rep last week and she is recommending we consider a different approach to our fixed income bucket. She suggested we either consider utilizing the Fidelity Managed Total Bond Fund (FTBFX, .45% ER) or move our bonds to Separately Managed Account with a .40% ER. She feels that with the challenging bond market right now, following an index fund may not allow us to optimize our return in the current environment.

Questions:
1. Looking for recommendations regarding our bond bucket and thoughts on our Fidelity rep’s recommendations. Not excited about the expense fees associated with either.
2. Anything else we should be thinking about?
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ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Bond portfolio review

Post by ruralavalon »

FlamePoint wrote: Sun May 16, 2021 12:06 pm I’ve been a member of this forum for a couple years now and am finally getting around to seeking some advice on our current portfolio. Like a lot of folks with large bond portfolios I’m concerned about the current environment, the potential for higher than average inflation, and capital preservation of our fixed income.

Emergency funds: None. Fixed income will be used as emergency fund.

Debt: None

Tax Filing Status: MFJ

Tax Rate: 24% Federal, 3% State

Age:58/59, both retired

Desired Asset allocation: 55% stocks / 45% bonds
Desired International allocation: 20% of stocks

Portfolio: $4.3M

Taxable - Joint
$383K, Money Market FDZXX
$15K, a few individual stocks

Her Rollover IRA at Fidelity:
$653K Total US Stock FZROX, O% ER
$312K Total International Stock FZILX, 0% ER
$754K Total US Bond FXNAX, .025% ER

Her Roth IRA at Fidelity:
$151K Total US Stock FZROX, O% ER
$70k Total International Stock FZILX, 0% ER

Her HSA: $12K

His Rollover IRA at Fidelity:
$670K Total US Stock FZROX, O% ER
320K Total International Stock FZILX, 0% ER
$751K Total US Bond FXNAX, .025% ER

His Roth IRA at Fidelity:
$135K Total US Stock FZROX, O% ER
$65K Total International Stock FZILX, 0% ER

His HSA: $12K


Comments:
1. Annual Expense: $96K, includes healthcare (company provided). HC costs will increase by $20k between ages 61-64, then drop back down to existing level at age 65.
2. We plan to collect SS at age 70. His SS $44K, her SS $42K (doesn’t include COLA between now and age 70).
3. We will be receiving an additional lump sum annuity payout at age 65 of $244K. It will be rolled over to our IRA’s
4. 2 kids in college. Both have fully funded 529’s.
5. I’ll be doing Roth conversions up to the top of the 24% tax bracket thru age 63, then will continue conversions to age 72 paying close attention to IRMAA tiers. Hope to convert at least 60% of tax deferred to Roth by age 72.
6. HC plan qualifies for HSA contributions. Will continue to add yearly max to both accounts up to age 65.
7. Met with Private Client Fidelity rep last week and she is recommending we consider a different approach to our fixed income bucket. She suggested we either consider utilizing the Fidelity Managed Total Bond Fund (FTBFX, .45% ER) or move our bonds to Separately Managed Account with a .40% ER. She feels that with the challenging bond market right now, following an index fund may not allow us to optimize our return in the current environment.

Questions:
1. Looking for recommendations regarding our bond bucket and thoughts on our Fidelity rep’s recommendations. Not excited about the expense fees associated with either.
2. Anything else we should be thinking about?
Fidelity® US Bond Index (FXNAX) has a similar effective duration (6.15 years versus 5.90 years), and a better credit quality (AA versus BBB) as compared to Fidelity® Total Bond Fund (FTBFX). Those figures are from Morningstar. So I don't see the benefit to her recommendation "with the challenging bond market right now."

According to Yahoo, the yield is 1.92% versus 2.33%, so not much different there either.

The "challenging bond market right now" presents challenges for any type of fixed income investment.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
Jon Luskin
Posts: 920
Joined: Sat May 18, 2013 1:56 am
Location: San Diego, CA

Re: Bond portfolio review

Post by Jon Luskin »

FlamePoint wrote: Sun May 16, 2021 12:06 pm
7. Met with Private Client Fidelity rep last week and she is recommending we consider a different approach to our fixed income bucket. She suggested we either consider utilizing the Fidelity Managed Total Bond Fund (FTBFX, .45% ER) or move our bonds to Separately Managed Account with a .40% ER. She feels that with the challenging bond market right now, following an index fund may not allow us to optimize our return in the current environment.

Questions:
1. Looking for recommendations regarding our bond bucket and thoughts on our Fidelity rep’s recommendations. Not excited about the expense fees associated with either.
2. Anything else we should be thinking about?
Notice the Fidelity rep recommended Fidelity's non-trivial-fee bond fund, NOT a fund from another company, or a less expensive Fidelity product. This suggests that the Fidelity rep may have a strong personal financial incentive to recommend that product. They may be compensated for moving client money into their Fidelity products.

Of course, that's not to say that particular fund couldn't be the right match for your goals. Not knowing enough about your personal financial situation, I'm unable to comment on that.

Yet, on average, higher-fee funds underperform lower costs funds. Bond funds are no exception to this. This applies even active bond funds are combined with low-cost stock funds. This study shows just that: https://www.betterment.com/resources/al ... ite-paper/.

In short, you may be getting "advice" that is little more than a thinly disguised sales pitch. That's why it's important to work with a financial planner that's not just fee-only, but advice-only. Working with an advice-only planner removes more of the conflicts of interest embedded in the financial advisory space.

(Of course, as an advice-only planner, I'm biased towards advice-only financial planning. But then again, I choose this billing model because I feel it's the best way to help people.)

Good luck with your allocation!
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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abuss368
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Re: Bond portfolio review

Post by abuss368 »

Is their an incentive to recommend a Fidelity managed fund? Perhaps.

I have often thought about bond funds. Thinking I could always “do better”. I soon realized I was dancing on the head of a pin.

In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

In my opinion, Total Bond Index does just that. I have invested in this one fund for many years, with different interest rate cycles, and it simply does the job. For good reason, it is the largest bond fund on the PLANET!

Tony
John C. Bogle: “Simplicity is the master key to financial success."
bhough
Posts: 259
Joined: Wed Feb 15, 2017 5:53 pm

Re: Bond portfolio review

Post by bhough »

Did the rep say how paying someone 0.45% was going to overcome those challenges? Those words are meaningless, meant to make you feel stupid and blindly trust the smarter financial advisor people. The challenges are rising inflation which will likely mean rising interest rates and low current yields. Every asset manager is challenged by these times. The one thing you shouldn't do is to reduce your miniscule return by giving them 0.45% of it.

I'd leave it in your bond index fund and make sure you have maxed out your I bonds each year. Looks like you are doing great.
b
Topic Author
FlamePoint
Posts: 223
Joined: Wed Nov 11, 2020 9:45 pm

Re: Bond portfolio review

Post by FlamePoint »

JonL -

Thanks for the feedback. I agree the higher fee products do cause me pause. While they may ultimately perform slightly better than an index fund, I am skeptical. I prefer the Boglehead approach of a 3 fund portfolio made up of low cost index funds. I value simplicity and something I can maintain over the long-haul.

Ultimately our Roth account will be our legacy money and we’ll look to utilize the tax-deferred funds to get us to age 70, then as a supplement to SS from that point forward.

Very low likelihood we’ll ever runout of money, however I do want to make sure our bond portfolio is diversified enough to weather the storms.
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ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Bond portfolio review

Post by ruralavalon »

FlamePoint wrote: Sun May 16, 2021 2:08 pm JonL -

Thanks for the feedback. I agree the higher fee products do cause me pause. While they may ultimately perform slightly better than an index fund, I am skeptical. I prefer the Boglehead approach of a 3 fund portfolio made up of low cost index funds. I value simplicity and something I can maintain over the long-haul.

Ultimately our Roth account will be our legacy money and we’ll look to utilize the tax-deferred funds to get us to age 70, then as a supplement to SS from that point forward.

Very low likelihood we’ll ever runout of money, however I do want to make sure our bond portfolio is diversified enough to weather the storms.
I think it's wise to stick with very diversified, low expense index funds, including for the bond allocation.

In general it is better to hold your bond allocation in traditional tax-deferred accounts like a traditional 401k or traditional IRA if good bond funds are available there.

In general it would be better to use the Roth IRA to hold stock funds with their higher expected returns, rather than bond funds.

Wiki article, "Tax-efficient Fund Placement", link.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
FlamePoint
Posts: 223
Joined: Wed Nov 11, 2020 9:45 pm

Re: Bond portfolio review

Post by FlamePoint »

ruralavalon wrote: Sun May 16, 2021 2:35 pm
FlamePoint wrote: Sun May 16, 2021 2:08 pm JonL -

Thanks for the feedback. I agree the higher fee products do cause me pause. While they may ultimately perform slightly better than an index fund, I am skeptical. I prefer the Boglehead approach of a 3 fund portfolio made up of low cost index funds. I value simplicity and something I can maintain over the long-haul.

Ultimately our Roth account will be our legacy money and we’ll look to utilize the tax-deferred funds to get us to age 70, then as a supplement to SS from that point forward.

Very low likelihood we’ll ever runout of money, however I do want to make sure our bond portfolio is diversified enough to weather the storms.
I think it's wise to stick with very diversified, low expense index funds, including for the bond allocation.

In general it is better to hold your bond allocation in traditional tax-deferred accounts like a traditional 401k or traditional IRA if good bond funds are available there.

In general it would be better to use the Roth IRA to hold stock funds with their higher expected returns, rather than bond funds.

Wiki article, "Tax-efficient Fund Placement", link.
Agreed. And this is exactly how I’m approaching it. Our Roth’s only hold equity funds and will continue in that vein as I convert. Ultimately if I can convert enough I can see a day where our tax-deferred IRA’s hold all our bond income, and our Roth’s our equity. As much as possible I’m trying to avoid a tax bomb when RMD’s hit or when one of us passes away.
Topic Author
FlamePoint
Posts: 223
Joined: Wed Nov 11, 2020 9:45 pm

Re: Bond portfolio review

Post by FlamePoint »

abuss368 wrote: Sun May 16, 2021 2:00 pm Is their an incentive to recommend a Fidelity managed fund? Perhaps.

I have often thought about bond funds. Thinking I could always “do better”. I soon realized I was dancing on the head of a pin.

In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

In my opinion, Total Bond Index does just that. I have invested in this one fund for many years, with different interest rate cycles, and it simply does the job. For good reason, it is the largest bond fund on the PLANET!

Tony
Great insights. Thank you.
Topic Author
FlamePoint
Posts: 223
Joined: Wed Nov 11, 2020 9:45 pm

Re: Bond portfolio review

Post by FlamePoint »

bhough wrote: Sun May 16, 2021 2:03 pm Did the rep say how paying someone 0.45% was going to overcome those challenges? Those words are meaningless, meant to make you feel stupid and blindly trust the smarter financial advisor people. The challenges are rising inflation which will likely mean rising interest rates and low current yields. Every asset manager is challenged by these times. The one thing you shouldn't do is to reduce your miniscule return by giving them 0.45% of it.

I'd leave it in your bond index fund and make sure you have maxed out your I bonds each year. Looks like you are doing great.
b
Thanks for the feedback. I’ll look into Ibonds. Believe there’s a max of $10K per year PP. so $20K per year for a couple…not a huge amount, but falls into the camp of “can’t hurt, might help”.
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