Hi all
I am sharing a "thinking outloud moment" about my bonds allocation. I have not reduced my AA to reduce bonds but I do constantly think about different ways I might do that and why or why not. I expect to start drawing on my portfolio at around 50 (5 years from now) so I need to expect to let it grow and ride over a period greater than 30 years. So my AA will stay somewhat high on the stock side. Now the question is this: Would it make sense to look at moving half my bonds to dividend producing etfs, or perhaps preferreds that have a high yield. My thinking is that if I pick something with modest potential growth, like PFXF, even if we had a crash and they dropped 50%, the yield would still be equal to bonds that did not lose value during the same period, l based on today's bond yields. Of course it is possible bonds will yield more later, so I am not sure if that deflates my thought process. I could shift to bonds more if that happened, but it may be they are yielding more at a time when those stocks are now down 50% so selling them would mean I am losing to get those bonds back. But if I am ok keeping those dividend or preferred etfs forever, then I guess it would not matter?
Reducing bonds
Re: Reducing bonds
Topic moved to Personal Investments.
Re: Reducing bonds
Dividends are irrelevant in the long term. There's no guarantee that a company will always issue them or not cut them. (Q.v. AT&T) If your dividend fund has dropped 50%, you've still got a 50% paper loss. If you need the money because you've also lost your job, you're locking in those losses.ZachFinch76 wrote: ↑Fri Sep 24, 2021 4:03 pm Hi all
I am sharing a "thinking outloud moment" about my bonds allocation. I have not reduced my AA to reduce bonds but I do constantly think about different ways I might do that and why or why not. I expect to start drawing on my portfolio at around 50 (5 years from now) so I need to expect to let it grow and ride over a period greater than 30 years. So my AA will stay somewhat high on the stock side. Now the question is this: Would it make sense to look at moving half my bonds to dividend producing etfs, or perhaps preferreds that have a high yield. My thinking is that if I pick something with modest potential growth, like PFXF, even if we had a crash and they dropped 50%, the yield would still be equal to bonds that did not lose value during the same period, l based on today's bond yields. Of course it is possible bonds will yield more later, so I am not sure if that deflates my thought process. I could shift to bonds more if that happened, but it may be they are yielding more at a time when those stocks are now down 50% so selling them would mean I am losing to get those bonds back. But if I am ok keeping those dividend or preferred etfs forever, then I guess it would not matter?
Re: Reducing bonds
No, it would not.
If you have modeled your prospects in FireCalc and/or several of the other models used for retirement planning and it seems that a higher stock allocation is truly needed, then you can do that. Trying for more yield is not the same as getting more return, and return is the parameter that determines the outcome. In any case unless you are overconservative now, it is likely there is nothing to change.
If you have modeled your prospects in FireCalc and/or several of the other models used for retirement planning and it seems that a higher stock allocation is truly needed, then you can do that. Trying for more yield is not the same as getting more return, and return is the parameter that determines the outcome. In any case unless you are overconservative now, it is likely there is nothing to change.
- drumboy256
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Re: Reducing bonds
Dividends =/= Bonds
Without knowing your AA, I'm guessing you're probably at a 80/20 or perhaps a 75/25 of which the only advice I have is to have at least 20% of those bonds in LTT's since you're still expecting to live past when you retire. For example, if I had $2M saved up across your accounts, $1.5M in stocks, $400,000 in LTT's and $100k in Total Bonds or Total World Bond or--- if you're spicy enough for it, TIPS. Point being, if you went dividend ETFs, you're overweight in stocks and would tilt your risk in an unneeded way.
Without knowing your AA, I'm guessing you're probably at a 80/20 or perhaps a 75/25 of which the only advice I have is to have at least 20% of those bonds in LTT's since you're still expecting to live past when you retire. For example, if I had $2M saved up across your accounts, $1.5M in stocks, $400,000 in LTT's and $100k in Total Bonds or Total World Bond or--- if you're spicy enough for it, TIPS. Point being, if you went dividend ETFs, you're overweight in stocks and would tilt your risk in an unneeded way.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson |
20% IVV / 40% IBIT / 20% IXUS / 20% VGLT + chill
Re: Reducing bonds
I see this recommendation becoming more popular but I wonder, most people hold bonds in their 401k which do not offer LLT. Rather an intermediate term or stable value. Given that, are we stuck with duration risk? 6-8 yr maturity vs 30?drumboy256 wrote: ↑Fri Sep 24, 2021 6:21 pm Dividends =/= Bonds
Without knowing your AA, I'm guessing you're probably at a 80/20 or perhaps a 75/25 of which the only advice I have is to have at least 20% of those bonds in LTT's since you're still expecting to live past when you retire. For example, if I had $2M saved up across your accounts, $1.5M in stocks, $400,000 in LTT's and $100k in Total Bonds or Total World Bond or--- if you're spicy enough for it, TIPS. Point being, if you went dividend ETFs, you're overweight in stocks and would tilt your risk in an unneeded way.
Re OP, agree that HQ dividend funds aren’t an equal substitute.
Last edited by Makaveli on Fri Sep 24, 2021 7:02 pm, edited 1 time in total.
- drumboy256
- Posts: 673
- Joined: Sat Jun 06, 2020 2:21 pm
Re: Reducing bonds
ITT's could work although you're not going to gain the same game of function exercise by holding them. Most of the VGLT/EDV/FNBGX Long Term Treasuries have a duration of around 24.8 years. Holding them as part of your long term portfolio makes sense even if you're retired since your living horizon is most likely 85-90+ years of age. To the point tho, the risk of shorter term would be more worrisome to myself rather than longer term in relation to Bonds vs. Dividend funds.Makaveli wrote: ↑Fri Sep 24, 2021 6:27 pmI see this recommendation becoming more popular but I wonder, most people hold their bonds in their 401k which do not offer LLT. Rather an intermediate term or stable value. Given that, are we stuck with duration risk? 6-8 yr maturity vs 30?drumboy256 wrote: ↑Fri Sep 24, 2021 6:21 pm Dividends =/= Bonds
Without knowing your AA, I'm guessing you're probably at a 80/20 or perhaps a 75/25 of which the only advice I have is to have at least 20% of those bonds in LTT's since you're still expecting to live past when you retire. For example, if I had $2M saved up across your accounts, $1.5M in stocks, $400,000 in LTT's and $100k in Total Bonds or Total World Bond or--- if you're spicy enough for it, TIPS. Point being, if you went dividend ETFs, you're overweight in stocks and would tilt your risk in an unneeded way.
Re OP, agree that HQ dividend funds aren’t an equal substitute.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson |
20% IVV / 40% IBIT / 20% IXUS / 20% VGLT + chill
Re: Reducing bonds
I'd consider an income annuity for some of your bond allocation. An immediate single life annuity for a 50-year-old male pays around 4.2%. If you put the money in at age 45 and defer payments for 5 years, the payout rate goes up to almost 5%. That's guaranteed income for life with zero correlation to the stock market, which should enable you to take more risk with the rest of your portfolio.