What to add in bond holdings?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
nesdog
Posts: 221
Joined: Thu Dec 07, 2017 7:20 pm

What to add in bond holdings?

Post by nesdog »

As the year ends, I'm reviewing our allocations, specifically the bond area. Generally, our AA breaks down like this for all investment accounts:

33/52/12

Munis are roughly 22% of the full invested total.
Corporates about 16%
Gov't issues at 12%

The breakdown within just the bonds:

Munis=45%
Corp=31%
Gov't=24%

I have some cash to invest. Are we better off not adding to the muni total, as that already represents the largest portion of our bond holdings? These are generally some individual bonds and the rest in funds. Trying to be diversified.

Thanks...
Insert clever comment here...
User avatar
Sandtrap
Posts: 19591
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: What to add in bond holdings?

Post by Sandtrap »

nesdog wrote: Tue Dec 07, 2021 12:02 pm As the year ends, I'm reviewing our allocations, specifically the bond area. Generally, our AA breaks down like this for all investment accounts:

33/52/12

Munis are roughly 22% of the full invested total.
Corporates about 16%
Gov't issues at 12%

The breakdown within just the bonds:

Munis=45%
Corp=31%
Gov't=24%

I have some cash to invest. Are we better off not adding to the muni total, as that already represents the largest portion of our bond holdings? These are generally some individual bonds and the rest in funds. Trying to be diversified.

Thanks...
For more comprehensive contextual responses:
(you can edit your post using the "pencil icon")

Notes:
1. It would help to list the funds (names and tickers) and also the ER. (expense ratios).(edit your post) :D
2. Also, split the lists whether the funds are in "taxable" or "tax advantaged" (401k, IRA, etc) space.

Question:
Why have you gone this path instead of simplifying and diversifying with low cost bond/muni/corp index funds so that only 1 or 2 are needed?

For example: Vanguard Total Bond Index Fund: VBTLX (ER=.05) (fully diversified low cost index fund).
https://investor.vanguard.com/mutual-fu ... file/VBTLX

j :D
Wiki Bogleheads Wiki: Everything You Need to Know
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: What to add in bond holdings?

Post by dbr »

The choice to own munis is driven by tax considerations if you do or have to hold bonds in taxable. If munis are the indicated choice then for tax reasons probably all the bonds in that taxable account would be munis. Most people would not hold any munis unless forced to by tax reasons.
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: What to add in bond holdings?

Post by sycamore »

Agree that tax consideration is the main factor to consider unless your Investment policy statement says you should only own so much in munis versus corps versus govt bonds. In general about half to munis doesn't concern me. At least it didn't bother me back when I owned munis.

Another factor is how much of your munis is in a single state versus national? You may want to limit your exposure to the risk of a single state's bad finances impacting the bond prices.
User avatar
mrpotatoheadsays
Posts: 546
Joined: Fri Mar 16, 2012 2:36 pm

Re: What to add in bond holdings?

Post by mrpotatoheadsays »

nesdog wrote: Tue Dec 07, 2021 12:02 pm Are we better off not adding to the muni total, as that already represents the largest portion of our bond holdings?
Bonds can (or should) be viewed as the stable portion of your portfolio; growth (through risk) can (or should) be achieved through equities.

The tiny benefit of municipals (for highly taxed individuals only) versus Treasuries is not worth the risk. The tiny benefit of corporate bonds (yield) versus Treasuries is not worth the risk; in a down market even short-term corporate bonds have quickly lost 20%.

Therefore, risk can (or should) be taken through equity holdings. Your equity-to-bond allocation correlates to the amount of risk you take. Assume a maximum drawdown of 50% for equities. Diversity can (or should) be achieved through equities. Diversity across equity factors has historically proven to limit drawdown.

Consider the following allocation for your bond partition only:
Intermediate-term Treasury bonds (30%)
Intermediate-term TIPS (20%)
Short-term Treasury bonds (30%)
Short-term TIPS (20%)

Compare the above to the diverse Vanguard Total Bond Market Index in down and/or inflationary markets.
ZWorkLess
Posts: 425
Joined: Thu May 04, 2017 8:13 pm

Re: What to add in bond holdings?

Post by ZWorkLess »

If you haven't already maxed out your I bond purchases for 2021, that's what I'd do with the first 10k (single) or 20k (married).
MrCheapo
Posts: 1469
Joined: Tue Dec 22, 2020 2:43 pm

Re: What to add in bond holdings?

Post by MrCheapo »

ZWorkLess wrote: Wed Dec 08, 2021 1:07 pm If you haven't already maxed out your I bond purchases for 2021, that's what I'd do with the first 10k (single) or 20k (married).
+1 It's a no brainer. Even if the I-Bond rate resets to 0% in April (it won't) but even if it did, you'll earn a guaranteed 3.5%+ for the year. Hard to beat that now.

Also, with interest rates likely to increase the price of bond funds may go down.
Topic Author
nesdog
Posts: 221
Joined: Thu Dec 07, 2017 7:20 pm

Re: What to add in bond holdings?

Post by nesdog »

Thanks for the responses.

My initial idea was just to touch on the diversity of the bond totals only. After reading over the posts, I realize I have to really attack a much bigger picture, encompassing my entire portfolio. I need to lay out everything in our usual BH manner and then post for comments. That will be much more useful. Will do so when I get a chance to sort it out.
Insert clever comment here...
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: What to add in bond holdings?

Post by hudson »

nesdog wrote: Tue Dec 07, 2021 12:02 pm The breakdown within just the bonds:

Munis=45%
Corp=31%
Gov't=24%


I have some cash to invest. Are we better off not adding to the muni total, as that already represents the largest portion of our bond holdings? These are generally some individual bonds and the rest in funds. Trying to be diversified.

Thanks...
W. Bernstein says that it's ok to own corporates and munis as long as you have plenty of CDs and treasuries.
My personal rule is to not go over 30% of my total holdings in munis. Why, because they aren't a safe as treasuries/CDs. I'm more interested in the return of my money rather than the return on my money.
I don't own any corporate/investment grade because I speculate that munis are safer.
Right now, if I was going to put new money in fixed income, I would look hard at duration matched inflation protected treasuries (DMTIPS :)).
UpperNwGuy
Posts: 9479
Joined: Sun Oct 08, 2017 7:16 pm

Re: What to add in bond holdings?

Post by UpperNwGuy »

nesdog wrote: Tue Dec 07, 2021 12:02 pm Trying to be diversified.
Diversification is not nearly as important in bonds as it is in stocks. More important issues are yield, safety, and tax situation.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: What to add in bond holdings?

Post by hudson »

UpperNwGuy wrote: Thu Dec 09, 2021 7:57 am
nesdog wrote: Tue Dec 07, 2021 12:02 pm Trying to be diversified.
Diversification is not nearly as important in bonds as it is in stocks. More important issues are yield, safety, and tax situation.
agree
Taxes are important.
It's all about the quality of the holdings.
Didn't Larry Swedroe recommend AAA or better?
Post Reply