Rethinking my AA at 42
Rethinking my AA at 42
I might get chastised for market timing but here goes! I have a PIMCO bond fund in my 401K (PTTRX) that has high fees and is underperforming my Vanguard bond fund (VBTIX) by almost 1%. I bought both funds before I became a Boglehead and understood the benefits of a simple portfolio.
I want to get rid of the high fee PTTRX fund and am debating where to move the money, which makes up about 7% of my total 401K portfolio. I could buy more VBTIX to keep my bond allocation the same, or use the opportunity to reduce my bond allocation (currently 10%) by plowing it all into equities. Then I would have 3% bonds left which also seems a bit pointless. I do have 5% of my 401K in short-term fixed income which is up a little this year. So total AA is 85/15.
With almost 25 years to retirement should I even have short-term fixed income in my 401K? Do I really need bonds at all? I can’t afford I-bonds as I need more short-term cash/EF (actively building this up). I think I’m being swayed by the abysmal current bond returns and questioning why I’d bother to buy more of a “weak” asset, which has provided zero hedge against inflation and is performing just as poorly as the S&P 500. I am 100% equities in my HSA and 90/10 in 529s. No Roth (yet) so 401K is our biggest investment vehicle right now.
Maybe this is just a personal decision but I’d love to hear thoughts on why buying bonds now is a good/bad idea or perhaps that 7% is so small I should just stop agonizing over it. Now that the market is up (but bonds still way down) I feel even more confused.
I want to get rid of the high fee PTTRX fund and am debating where to move the money, which makes up about 7% of my total 401K portfolio. I could buy more VBTIX to keep my bond allocation the same, or use the opportunity to reduce my bond allocation (currently 10%) by plowing it all into equities. Then I would have 3% bonds left which also seems a bit pointless. I do have 5% of my 401K in short-term fixed income which is up a little this year. So total AA is 85/15.
With almost 25 years to retirement should I even have short-term fixed income in my 401K? Do I really need bonds at all? I can’t afford I-bonds as I need more short-term cash/EF (actively building this up). I think I’m being swayed by the abysmal current bond returns and questioning why I’d bother to buy more of a “weak” asset, which has provided zero hedge against inflation and is performing just as poorly as the S&P 500. I am 100% equities in my HSA and 90/10 in 529s. No Roth (yet) so 401K is our biggest investment vehicle right now.
Maybe this is just a personal decision but I’d love to hear thoughts on why buying bonds now is a good/bad idea or perhaps that 7% is so small I should just stop agonizing over it. Now that the market is up (but bonds still way down) I feel even more confused.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Re: Rethinking my AA at 42
my 2c. If I understand correctly, there are three questions.
1. What your AA should be considering you have 25 more years to retirement?
During accumulation, one will need access to quick cash mostly in extra-ordinary circumstances. e.g. job loss, illness, etc. which may interrupt your income. During this interruption you can use the cash portion of you AA to tide you over. Some people call this emergency fund and use it to calculate their overall AA. I do consider emergency fund in my overall AA calculation. If you have a separate emergency fund or an emergency plan (way to raise cash quickly without selling equities in a tax efficient manner), then i contend that you can have a much higher stock allocation. Personally i have been having a healthy bond allocation in my 401k/IRA but i am trending this down now. I will be increasing my stock allocation in tax deferred and simultaneously increasing bond allocation in taxable.
Once you have an AA decided then you can decide on the ideal placement for the investments.The standard recommendation is that the investments with highest expected returns should be in the tax deferred accounts.
2. Should you switch out your high ER bond fund in your 401k?
from what I have read on Bogleheads, Bond funds typically have higher expense ratios. So i dont' know if just the ER should drive this decision to switch out.
3. Should you even invest in bonds given that they are still down even though equities have recovered?
I think everyone is still confused about investing in bonds. So cant really say what is best.
1. What your AA should be considering you have 25 more years to retirement?
During accumulation, one will need access to quick cash mostly in extra-ordinary circumstances. e.g. job loss, illness, etc. which may interrupt your income. During this interruption you can use the cash portion of you AA to tide you over. Some people call this emergency fund and use it to calculate their overall AA. I do consider emergency fund in my overall AA calculation. If you have a separate emergency fund or an emergency plan (way to raise cash quickly without selling equities in a tax efficient manner), then i contend that you can have a much higher stock allocation. Personally i have been having a healthy bond allocation in my 401k/IRA but i am trending this down now. I will be increasing my stock allocation in tax deferred and simultaneously increasing bond allocation in taxable.
Once you have an AA decided then you can decide on the ideal placement for the investments.The standard recommendation is that the investments with highest expected returns should be in the tax deferred accounts.
2. Should you switch out your high ER bond fund in your 401k?
from what I have read on Bogleheads, Bond funds typically have higher expense ratios. So i dont' know if just the ER should drive this decision to switch out.
3. Should you even invest in bonds given that they are still down even though equities have recovered?
I think everyone is still confused about investing in bonds. So cant really say what is best.
superstition: belief that market will one day come around to your concept of fair value
Re: Rethinking my AA at 42
1. It might be better to go back and think through your need, ability, and willingness to take risk in setting your asset allocation.
2. Moving assets from a less effective bond fund to one that is a better choice is fine. This does not imply all by itself that you should rethink your assets allocation.
3. Bonds are not "weak." They are a lower returning, lower risk asset that is paired with stocks to create a portfolio that is in the right place for you on a spectrum of risk and return. That has not changed. Recently interest rates have risen with unusual rapidity and bond prices have dropped with unusual rapidity while stocks have not even remotely "crashed" to the degree they can. Higher interest rates mean long term investors will get better returns from bonds over time than if rates had stayed low.
3. Short bonds generate less return at less risk. For the long term investor the handle on risk and return is not what bonds one has but the asset allocation given what bonds you use. Even asset allocation is important only because it can be selected over a very wide range. Naturally if you need an emergency fund or have a specific short term need to fund you do what you have to do. 85/15 is low enough in bonds that what bonds you have makes little difference. 85/15 is just starting to get different from 100/0 but not by enough to ask which to choose. I think the basic asset allocations are probably 100/0, 75/25, 50/50, 25/75, and 0/100. It is an argument that 100/0 and 0/100 are allocations no one should have, but that is a discussion.
4. You might take a look at this graphic and test what different selections of asset allocation do to the outcome: https://engaging-data.com/visualizing-4-rule/ It works to put negative numbers in for spending if you are saving.
2. Moving assets from a less effective bond fund to one that is a better choice is fine. This does not imply all by itself that you should rethink your assets allocation.
3. Bonds are not "weak." They are a lower returning, lower risk asset that is paired with stocks to create a portfolio that is in the right place for you on a spectrum of risk and return. That has not changed. Recently interest rates have risen with unusual rapidity and bond prices have dropped with unusual rapidity while stocks have not even remotely "crashed" to the degree they can. Higher interest rates mean long term investors will get better returns from bonds over time than if rates had stayed low.
3. Short bonds generate less return at less risk. For the long term investor the handle on risk and return is not what bonds one has but the asset allocation given what bonds you use. Even asset allocation is important only because it can be selected over a very wide range. Naturally if you need an emergency fund or have a specific short term need to fund you do what you have to do. 85/15 is low enough in bonds that what bonds you have makes little difference. 85/15 is just starting to get different from 100/0 but not by enough to ask which to choose. I think the basic asset allocations are probably 100/0, 75/25, 50/50, 25/75, and 0/100. It is an argument that 100/0 and 0/100 are allocations no one should have, but that is a discussion.
4. You might take a look at this graphic and test what different selections of asset allocation do to the outcome: https://engaging-data.com/visualizing-4-rule/ It works to put negative numbers in for spending if you are saving.
Re: Rethinking my AA at 42
Personally with 25 years to retirement, I wouldn't have a bonds in my portfolio. As long as you have an emergency fund, I don't see the point of something that generally only tracks inflation (roughly). For a few decades bonds did exceedingly well due to almost never ending interest rate cuts.
And with that much time to go, just have money go directly into your investments and don't bother checking except at year end for taxes.
And with that much time to go, just have money go directly into your investments and don't bother checking except at year end for taxes.
----------------------------- |
If you think something is important and it doesn't involve the health of someone, think again. Life goes too fast, enjoy it and be nice.
- nisiprius
- Advisory Board
- Posts: 52215
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Rethinking my AA at 42
I think you should be very cautious about changing the overall stock/bond allocation. Take this for what it's worth--these are the glide paths Morningstar uses to benchmark target date funds--
According to Morningstar's collective judgement, 85% stocks at age 42 is smack on the "moderate" curve. It's not extremely conservative, it's not extremely aggressive.
Now, let me say that if I had a chance to invest in PTTRX, I wouldn't; I'd stick with Total Bond. It's a high-fee actively managed fund, and I am committed to low-fee index funds. Nevertheless, I'm very surprised when you say PTTRX has underperformed VBTIX by 1%, to the point of seriously wondering if you got the numbers right. Please tell us the time period and where you got those numbers.
Source
PTTRX has pretty consistently outperformed Total Bond, and the usual knock on it is whether it is doing it by taking additional risk. On the numbers (particularly the Sharpe ratio, which is a measure of risk-adjusted return) it hasn't, so the question is whether there is some hidden risk that hasn't shown up yet.
In any case, if your issue is that you are dissatisfied with PTTRX, then two obvious ideas are to exchange it for Total Bond, or to exchange it for a TIPS fund.
The fact that you're also wondering about changing your asset allocation sounds like general restlessness, which is probably not a good reason for changing anything.
According to Morningstar's collective judgement, 85% stocks at age 42 is smack on the "moderate" curve. It's not extremely conservative, it's not extremely aggressive.
Now, let me say that if I had a chance to invest in PTTRX, I wouldn't; I'd stick with Total Bond. It's a high-fee actively managed fund, and I am committed to low-fee index funds. Nevertheless, I'm very surprised when you say PTTRX has underperformed VBTIX by 1%, to the point of seriously wondering if you got the numbers right. Please tell us the time period and where you got those numbers.
Source
PTTRX has pretty consistently outperformed Total Bond, and the usual knock on it is whether it is doing it by taking additional risk. On the numbers (particularly the Sharpe ratio, which is a measure of risk-adjusted return) it hasn't, so the question is whether there is some hidden risk that hasn't shown up yet.
In any case, if your issue is that you are dissatisfied with PTTRX, then two obvious ideas are to exchange it for Total Bond, or to exchange it for a TIPS fund.
The fact that you're also wondering about changing your asset allocation sounds like general restlessness, which is probably not a good reason for changing anything.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Rethinking my AA at 42
If you are self-aware enough to know that you will not be susceptible to behavioral errors in a deep and prolonged market decline I would keep bonds to a minimum if you are 25 years from retirement and you have a sufficient EF.
The fool, with all his other faults, has this also - he is always getting ready to live. - Seneca Epistles < c. 65AD
Re: Rethinking my AA at 42
Based on your statements I've boldfaced, I think what is confusing you is focusing on what bonds may do in the future, which of course nobody knows. Forget the future, focus on the now and decide on an AA based on how much risk you want and can take on your way to retirement. The poster dbr mentioned the importance of determining need, willingness, and ability to take risk and it is in the wiki's "Asset allocation" page:meadowrue wrote: ↑Sat Aug 13, 2022 11:20 am ...
With almost 25 years to retirement should I even have short-term fixed income in my 401K? Do I really need bonds at all? I can’t afford I-bonds as I need more short-term cash/EF (actively building this up). I think I’m being swayed by the abysmal current bond returns and questioning why I’d bother to buy more of a “weak” asset, which has provided zero hedge against inflation and is performing just as poorly as the S&P 500. ...
Maybe this is just a personal decision but I’d love to hear thoughts on why buying bonds now is a good/bad idea or perhaps that 7% is so small I should just stop agonizing over it. Now that the market is up (but bonds still way down) I feel even more confused.
https://www.bogleheads.org/wiki/Asset_a ... C_and_need
https://www.bogleheads.org/wiki/Asset_allocation
Last edited by Fallible on Sat Aug 13, 2022 1:46 pm, edited 1 time in total.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
Re: Rethinking my AA at 42
I based it purely on the fact my PTTRX fund is down 9.94% YTD and my VBTIX fund is down 9.11%. So not quite 1% but it seems like Vanguard is doing marginally better.nisiprius wrote: ↑Sat Aug 13, 2022 1:09 pm Now, let me say that if I had a chance to invest in PTTRX, I wouldn't; I'd stick with Total Bond. It's a high-fee actively managed fund, and I am committed to low-fee index funds. Nevertheless, I'm very surprised when you say PTTRX has underperformed VBTIX by 1%, to the point of seriously wondering if you got the numbers right. Please tell us the time period and where you got those numbers.
I agree about the restlessness. I feel behind in terms of saving/investing for my age so that makes me want to chase bigger returns I suppose. I believe I can handle the risk (didn’t really blink in March 2020 and never sold but rather increased investments during that time). But when you say I’m smack in the “moderate” band, that isn’t really my goal. I want/need to be more aggressive. Or maybe the difference in return for moderate/aggressive isn’t that big? To be honest, I bought the bond funds because it felt like the “responsible” thing to do after 40 (reduce risk) but I never really understood bonds. And I still don’t!
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Re: Rethinking my AA at 42
Actively working to build our EF after DH’s business took a major hit during Covid and is only just recovering. We used almost our whole EF. Bonds are only in my 401K, not individual bonds or TIPs so I can’t access them as a backup EF. Right now, all my new 401K contributions are 100% stock so eventually my AA will tip (which I am OK with) But the desire to get out of the actively managed, high fee fund is making me want to make a more active move, rather just letting my AA drift with new contributions. For what it’s worth, I have tested my risk tolerance and feel good that I can avoid behavioral pitfalls like selling into a declining market.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Re: Rethinking my AA at 42
AS difference like that between two funds that are as different as those two means nothing. Since 1996 the CAGR of PTTRX has been 5.25% at a standard deviation of annual returns of 4% and a Sharpe ratio of 0.79. The same numbers for VBTIX have been 4.38%, 3.7%, and .65. On that history PTTRX has outperformed VBTIX. Naturally that past history does not predict a clear conclusion regarding the next 25 years.
-
- Posts: 694
- Joined: Tue Aug 24, 2021 8:32 am
Re: Rethinking my AA at 42
You asked for opinions, here's mine!meadowrue wrote: ↑Sat Aug 13, 2022 1:52 pm Actively working to build our EF after DH’s business took a major hit during Covid and is only just recovering. We used almost our whole EF. Bonds are only in my 401K, not individual bonds or TIPs so I can’t access them as a backup EF. Right now, all my new 401K contributions are 100% stock so eventually my AA will tip (which I am OK with) But the desire to get out of the actively managed, high fee fund is making me want to make a more active move, rather just letting my AA drift with new contributions. For what it’s worth, I have tested my risk tolerance and feel good that I can avoid behavioral pitfalls like selling into a declining market.
For what its worth we are the same age and I agree with Nisi's assessment above. I wouldn't be making any major adjustments to asset allocation without a lot more assessment and time. However, this is my general rule anytime I have that feeling to make adjustments. Sure, no big deal to swap the actively managed bond fund for the index fund, but it has been a pretty good fund in the past. Who knows what the future brings.
My personal opinion is that 2020 was traumatic in so many ways but from a portfolio standpoint it wasn't a big test. Did you have what you would consider significant portfolio assets in 2008? How did you feel during that timeframe and the "lost decade"? If you feel like your portfolio value isn't where it needs to be or that you won't be able to meet your goals without taking on more stock risk that could be:
1) True.
2) A result of reading too much bogleheads.org where anyone who isn't Elon Musk might feel behind.
3) Saving too little and hoping for higher returns to bail you out.
Anyway, the gurus here can give you a lot better opinion with more info.
Re: Rethinking my AA at 42
PersonalFinanceJam wrote: ↑Sat Aug 13, 2022 3:17 pmI really appreciate your opinion. Thank you! It actually helped me immensely to read this. I have been a diligent investor but neither I nor DH are doctors, software engineers, FIRE, 40x income, etc. This forum has taught me so much but also made me feel quite a bit behind. We are doing our very best with two kids, a mortgage, and an “average” HH income but “winning the game” sometimes feels like it’ll be impossible. We invest 15% of our income. We don’t live beyond our means. But life can just get expensive sometimes (this year alone, we needed a new roof and new AC!) I think #2 is the most accurate. I think my desire for more risk stems from my fear of #1 though. I worry that we just won’t meet our goals no matter how hard we try.meadowrue wrote: ↑Sat Aug 13, 2022 1:52 pm
You asked for opinions, here's mine!
For what its worth we are the same age and I agree with Nisi's assessment above. I wouldn't be making any major adjustments to asset allocation without a lot more assessment and time. However, this is my general rule anytime I have that feeling to make adjustments. Sure, no big deal to swap the actively managed bond fund for the index fund, but it has been a pretty good fund in the past. Who knows what the future brings.
My personal opinion is that 2020 was traumatic in so many ways but from a portfolio standpoint it wasn't a big test. Did you have what you would consider significant portfolio assets in 2008? How did you feel during that timeframe and the "lost decade"? If you feel like your portfolio value isn't where it needs to be or that you won't be able to meet your goals without taking on more stock risk that could be:
1) True.
2) A result of reading too much bogleheads.org where anyone who isn't Elon Musk might feel behind.
3) Saving too little and hoping for higher returns to bail you out.
Anyway, the gurus here can give you a lot better opinion with more info.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Re: Rethinking my AA at 42
If it helps, I had an 80/20 mix in my 401K going into the 2007 recession. I re-balanced the portfolio 3 times on it's way to the bottom. The third time was just after the market hit bottom and started its upward trajectory. When the market fully recovered I had more than tripled my pre-recession balance. The bonds helped me ride out the crash and gave me funds that I could use to buy the stocks when they went on sale.
The bonds in my portfolio were considered "safe", a 50/50 split between short and intermediate term treasuries. The short was split 40% Short Term High Quality Corporate Bonds, 40% Short Term High Quality US Treasuries, and 20% to Short Term US TIPS. The Intermediate Term was the Vanguard Total Bond Market which was 70% Treasures and 30% Corporate.
The Bonds are there for a reason especially in a market crash. Older now, I am at a 60/40 ratio but don't plan on using my IRA until I have to make the requisite 4% RMD's. In 2007 my portfolio was balanced across 2 IRA's and my 401K and all used mutual funds.
The bonds in my portfolio were considered "safe", a 50/50 split between short and intermediate term treasuries. The short was split 40% Short Term High Quality Corporate Bonds, 40% Short Term High Quality US Treasuries, and 20% to Short Term US TIPS. The Intermediate Term was the Vanguard Total Bond Market which was 70% Treasures and 30% Corporate.
The Bonds are there for a reason especially in a market crash. Older now, I am at a 60/40 ratio but don't plan on using my IRA until I have to make the requisite 4% RMD's. In 2007 my portfolio was balanced across 2 IRA's and my 401K and all used mutual funds.
What Goes Up Must come down -- David Clayton-Thomas (1968), BST
Re: Rethinking my AA at 42
This is kind of where my head is at … sell the bonds (from the active fund) and buy equities while the market is down (though maybe I’m too late!) Like what you did in ‘07/‘08. Would that be a bad idea now? Am I just chasing returns? I like thinking of the bonds as providing a rebalancing opportunity. If I rebalance now though, I’ll essentially be changing my AA. May I ask, how far did you take your GFC rebalancing? All the way to 100/0 or somewhere in between? What made you decide to start buying bonds again?enad wrote: ↑Sat Aug 13, 2022 7:58 pm If it helps, I had an 80/20 mix in my 401K going into the 2007 recession. I re-balanced the portfolio 3 times on it's way to the bottom. The third time was just after the market hit bottom and started its upward trajectory. When the market fully recovered I had more than tripled my pre-recession balance. The bonds helped me ride out the crash and gave me funds that I could use to buy the stocks when they went on sale.
The bonds in my portfolio were considered "safe", a 50/50 split between short and intermediate term treasuries. The short was split 40% Short Term High Quality Corporate Bonds, 40% Short Term High Quality US Treasuries, and 20% to Short Term US TIPS. The Intermediate Term was the Vanguard Total Bond Market which was 70% Treasures and 30% Corporate.
The Bonds are there for a reason especially in a market crash. Older now, I am at a 60/40 ratio but don't plan on using my IRA until I have to make the requisite 4% RMD's. In 2007 my portfolio was balanced across 2 IRA's and my 401K and all used mutual funds.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Re: Rethinking my AA at 42
. If you look at annual returns for 2021 and 2020, PTTRX did quite a bit better. If you look at past 12 months, it does better. If you look at 3,5,and 10 year returns it does better.meadowrue wrote: ↑Sat Aug 13, 2022 1:44 pmI based it purely on the fact my PTTRX fund is down 9.94% YTD and my VBTIX fund is down 9.11%. So not quite 1% but it seems like Vanguard is doing marginally better.nisiprius wrote: ↑Sat Aug 13, 2022 1:09 pm Now, let me say that if I had a chance to invest in PTTRX, I wouldn't; I'd stick with Total Bond. It's a high-fee actively managed fund, and I am committed to low-fee index funds. Nevertheless, I'm very surprised when you say PTTRX has underperformed VBTIX by 1%, to the point of seriously wondering if you got the numbers right. Please tell us the time period and where you got those numbers.
A recent drop doesn’t make a fund bad just like a little quick run up doesn’t make better. And PTTRX isn’t guaranteed to continue to do better either. But just saying fund A Is down right now so I’m switching to fund B is not a great investing strategy.
- nisiprius
- Advisory Board
- Posts: 52215
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Rethinking my AA at 42
Unfortunately, 2020 has probably taught too many investors the wrong lesson. I didn't really blink in March 2020 and I am definitely risk-averse.
According to Morningstar, 2020 was the shortest crash in history. They created a "pain index" for measuring severity, and the pain of the 2000-2013 "lost decade" measured 85.51, while the pain of the Covid crash was only 1.00.
Nothing like the consecutive collapses or near-collapses of Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, AIG, the Reserve Primary Fund, and Washington Mutual happened in 2020. In fact I don't remember any major financial institution collapsing.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Rethinking my AA at 42
I totally get that, nisiprius. I was in the early stages of investing in ‘08 so I have no idea, really, how I might react to market conditions like that, now that I have a bigger nest egg. Perhaps I’m not as risk tolerant as I like to think.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Re: Rethinking my AA at 42
Bonds don't make sense in my view for anyone seeking to grow capital, for example as you seem to be. I prefer equities, specifically stocks. If you don't like to own stocks, try an index etf like SPY.meadowrue wrote: ↑Sat Aug 13, 2022 11:20 am I might get chastised for market timing but here goes! I have a PIMCO bond fund in my 401K (PTTRX) that has high fees and is underperforming my Vanguard bond fund (VBTIX) by almost 1%. I bought both funds before I became a Boglehead and understood the benefits of a simple portfolio.
I want to get rid of the high fee PTTRX fund and am debating where to move the money, which makes up about 7% of my total 401K portfolio. I could buy more VBTIX to keep my bond allocation the same, or use the opportunity to reduce my bond allocation (currently 10%) by plowing it all into equities. Then I would have 3% bonds left which also seems a bit pointless. I do have 5% of my 401K in short-term fixed income which is up a little this year. So total AA is 85/15.
With almost 25 years to retirement should I even have short-term fixed income in my 401K? Do I really need bonds at all? I can’t afford I-bonds as I need more short-term cash/EF (actively building this up). I think I’m being swayed by the abysmal current bond returns and questioning why I’d bother to buy more of a “weak” asset, which has provided zero hedge against inflation and is performing just as poorly as the S&P 500. I am 100% equities in my HSA and 90/10 in 529s. No Roth (yet) so 401K is our biggest investment vehicle right now.
Maybe this is just a personal decision but I’d love to hear thoughts on why buying bonds now is a good/bad idea or perhaps that 7% is so small I should just stop agonizing over it. Now that the market is up (but bonds still way down) I feel even more confused.
ibonds are redeemable after one year, so are near-cash in my view.
-
- Posts: 694
- Joined: Tue Aug 24, 2021 8:32 am
Re: Rethinking my AA at 42
Yes, life is expensive. My DW is 5 years younger than myself and we have our first child on the way! Expenses incoming!meadowrue wrote: ↑Sat Aug 13, 2022 7:42 pm ...
I really appreciate your opinion. Thank you! It actually helped me immensely to read this. I have been a diligent investor but neither I nor DH are doctors, software engineers, FIRE, 40x income, etc. This forum has taught me so much but also made me feel quite a bit behind. We are doing our very best with two kids, a mortgage, and an “average” HH income but “winning the game” sometimes feels like it’ll be impossible. We invest 15% of our income. We don’t live beyond our means. But life can just get expensive sometimes (this year alone, we needed a new roof and new AC!) I think #2 is the most accurate. I think my desire for more risk stems from my fear of #1 though. I worry that we just won’t meet our goals no matter how hard we try.
If you haven't done so, I suggest it's probably time to seek out a basic retirement calculator so you can put some theoretical numbers behind your thinking. The spending side of the equation might be difficult at this stage but at least you could see some hypothetical scenarios of how your portfolio might grow with different AA and savings rates. I'd also suggest you vary the retirement start date. Hopefully you will be able to work all the way to 67 but you may come to a point where you don't want to or can't.
The wiki has a listing of calculators. I suggest you use one based on either historical returns or Montecarlo simulation instead of one which asks you to pick some portfolio return assumptions. I like firecalc/cFIREsim and Fidelity's calculator but you have several options.
https://www.bogleheads.org/wiki/Retirem ... d_spending
Some additional perspective on your AA. In addition to what Nisiprius said above, if we were to look at some of the target retirement funds built by the "experts" as a guide here's what you would find:
The Vanguard 2045 fund is currently roughly 13% bonds and in the next 5 years will get to about 20% bonds. This includes the holdings in international bonds. Fidelity's freedom index 2045 is about 10% bonds and in the next 5 years will get to about 12%. So Fidelity is a bit more aggressive. but you see not too far off. You could do way worse than just picking a TD fund or mimic what one of the above does if not available in your account.
Good luck!
Re: Rethinking my AA at 42
Investing is mostly behavioral. It sounds like you'll stay the course better with more equities. Go ahead and do it.
Re: Rethinking my AA at 42
Can we start with you clarifying what you think "rebalancing" means, meadowrue? The point of rebalancing is to return to your original AA after differential rises or losses that throw it out of equilibrium. So if enad was 80/20 prior to the declines, they would have rebalanced back to 80/20. When stocks were declining this would have entailed trading bonds for stocks, but when stocks rose again, rebalancing would have entailed trading stocks for bonds.meadowrue wrote: ↑Sat Aug 13, 2022 8:10 pmThis is kind of where my head is at … sell the bonds (from the active fund) and buy equities while the market is down (though maybe I’m too late!) Like what you did in ‘07/‘08. Would that be a bad idea now? Am I just chasing returns? I like thinking of the bonds as providing a rebalancing opportunity. If I rebalance now though, I’ll essentially be changing my AA. May I ask, how far did you take your GFC rebalancing? All the way to 100/0 or somewhere in between? What made you decide to start buying bonds again?
So rebalancing is returning your actual AA to your chosen target (ideal) AA. It is not considered changing your AA (a term normally used for when one changes one's target AA).
Re: Rethinking my AA at 42
Stop. Don't change anything.
You want to dump the bond fund that has done slightly worse YTD than the other bond fund (ignoring the fact that it's done better over a longer time frame). And you want to dump bonds because they haven't recovered from recent lows as fast as stocks have (ignoring the possibility that the recovery might not be a recovery).
Don't change anything. At most, switch PTTRX for VBTIX, citing the higher expense ratio. But what if the bond fund you left recovers faster than the one you switched into (it might, or it might not)? Or just don't change anything.
90/10 is an aggressive asset allocation. It may be too aggressive for you.
Some posters have said that it seems like you have the risk tolerance needed for a 100/0 AA. I disagree. You have shown that you are uncomfortable when one investment does worse (or not as good as) another investment and that discomfort leads to you wanting to do something (i.e. move into the "better" investment). That's not the risk tolerance needed for a 100/0 AA.
You want to dump the bond fund that has done slightly worse YTD than the other bond fund (ignoring the fact that it's done better over a longer time frame). And you want to dump bonds because they haven't recovered from recent lows as fast as stocks have (ignoring the possibility that the recovery might not be a recovery).
Don't change anything. At most, switch PTTRX for VBTIX, citing the higher expense ratio. But what if the bond fund you left recovers faster than the one you switched into (it might, or it might not)? Or just don't change anything.
90/10 is an aggressive asset allocation. It may be too aggressive for you.
Some posters have said that it seems like you have the risk tolerance needed for a 100/0 AA. I disagree. You have shown that you are uncomfortable when one investment does worse (or not as good as) another investment and that discomfort leads to you wanting to do something (i.e. move into the "better" investment). That's not the risk tolerance needed for a 100/0 AA.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Re: Rethinking my AA at 42
Thanks so much for the responses. Lots of food for thought. I do understand rebalancing vs changing my target AA. Honestly, I have been happy with my 85/15 AA for the last couple years. The reason I’ve been questioning it is because I thought I was wasting $$ on an active bond fund, and when I considered switching all bonds to the passive bond fund, I questioned whether more bonds is really what I need/want to reach my goals. Even with the market this year, I’m still at almost 85/15 so pure rebalancing is not on the table. In response to beensabu, I think you’ve analyzed me very well! I like to think I could do 100/0. I feel like I need the risk because I can’t yet max my retirement investments every year (working hard to get there) but the fact I can’t just sit still now tells me I probably won’t sit still at 100/0. I am going to do nothing for a few more months and reassess then. A big thank you for the voices of reason on this forum.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Re: Rethinking my AA at 42
Great reference point.nisiprius wrote: ↑Sat Aug 13, 2022 8:21 pmUnfortunately, 2020 has probably taught too many investors the wrong lesson. I didn't really blink in March 2020 and I am definitely risk-averse.
According to Morningstar, 2020 was the shortest crash in history. They created a "pain index" for measuring severity, and the pain of the 2000-2013 "lost decade" measured 85.51, while the pain of the Covid crash was only 1.00.
Nothing like the consecutive collapses or near-collapses of Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, AIG, the Reserve Primary Fund, and Washington Mutual happened in 2020. In fact I don't remember any major financial institution collapsing.