From cash to bonds. Which fund/ETF?

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Always passive
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From cash to bonds. Which fund/ETF?

Post by Always passive »

My wife has a small equity portfolio, all in VT and about the same amount in cash. All this in an IRA.
She read a Barron’s article that discusses the virtues of investing for yield at this time and she has asked me what to do? She does not want to add to her equity portfolio.
The article in question is
“Yields Are Above 8%. It’s Time to Get Excited About Income Investing.”
Given that the Fed is most likely not done, I suggest that she builds a 2-5 year ladder of corporate bond ETFs with defined maturity that she can roll over annually. Invesco and iShares offers them.
BTW, we are pensioners in the early 70s and she does not need the money apart from the required IRA withdrawals that she will begin next year.

Are there any ideas ? Am I wrong?
Thank you for your help.
shess
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Re: From cash to bonds. Which fund/ETF?

Post by shess »

Always passive wrote: Mon Jul 04, 2022 12:13 am She read a Barron’s article that discusses the virtues of investing for yield at this time and she has asked me what to do? She does not want to add to her equity portfolio.
My best advice would be "Cancel your subscription to Barron's". Cancelling my Forbes subscription 25 years ago was one of the best financial decisions I ever made. They're going to fill those column inches regardless of whether they have any new information to communicate, and you're going to pay for it.

Personally, I would not invest in corporate bonds for yield at any time, but especially not now. If the Fed really isn't done, rates are going to keep going up, and it is also fairly likely that default rates will go up. Double whammy. And that feels likely even if they manage a "soft" landing.

My general rule of thumb (based on reading Bernstein over the years) is to take risk in equities so I put my fixed income in government-backed securities. Reaching for yield by buying corporate bonds adds most of the risk of equities with only marginal improvements to yield. I'd rather shift from 75/25 to 80/20 over placing part of the 25% into corporate bonds in search of yield.
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FoundingFather
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Re: From cash to bonds. Which fund/ETF?

Post by FoundingFather »

Always passive wrote: Mon Jul 04, 2022 12:13 am My wife has a small equity portfolio, all in VT and about the same amount in cash. All this in an IRA.
She read a Barron’s article that discusses the virtues of investing for yield at this time and she has asked me what to do? She does not want to add to her equity portfolio.
I generally think it wise to make small moves when changing a portfolio, especially when it is not my own. I think that this reduces the risk for behavioral mistakes that can occur by pushing someone out of their comfort zone.

In line with that, your wife has a portfolio that is 50/50 total world stock market/cash. A reasonable change, therefore, would be to move your wife's cash into a short term treasury bond fund, with VGSH as a possible example. It is currently paying 3%, and it would not be expected to drop more than 3-5% at worst with interest rate changes (I think that a 3.5% drop is the worst it has ever experienced). With a duration of 2 years, if the value of this holding dropped, it would only take 1-3 years to recover.

This fund will not pay as much as a total bond market fund like BND, but BND is much less like cash (has fallen ~12.5% in recent days), with a duration of ~7 years, meaning that it's price swings and time to recovery will be bigger and longer with interest rate changes. For all of this, you only get about 0.5% higher yield with BND than VGSH currently.

I use mostly series I savings bonds, and I also like a total market bond fund, but these two options would be a pretty big departure from your wife's current situation. A short term treasury bond fund isn't too different from cash, but should give a better return in the long run.

Let me know if I have misunderstood your goals.

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Apathizer
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Re: From cash to bonds. Which fund/ETF?

Post by Apathizer »

I like BNDW. It's composed of all investable world bonds. If you prefer US only, then BND.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
livesoft
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Re: From cash to bonds. Which fund/ETF?

Post by livesoft »

Who wouldn't like to have risk-free 8% yields nowadays!!?? Not gonna happen. There will be risk for that kind of yield. The yields of BND and BNDW mentioned by others are no where near 8%.
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Re: From cash to bonds. Which fund/ETF?

Post by nisiprius »

It is never time to get excited.

I actually follow a rule: whenever I am considering any change in my portfolio, I wait thirty days before I make it. I should wait longer, but at least 30 days is something.

I agree with those who say your wife should quit reading Barron's, since she is not ready to "tune out the noise."
Given that the Fed is most likely not done, I suggest that she builds a 2-5 year ladder of corporate bond ETFs with defined maturity that she can roll over annually. Invesco and iShares offers them.
That is one of any number of perfectly reasonable things she could do.

The big problem is that if she does it on the basis of relying on advice--from Barron's, from you, or from anyone--she is apt to be unhappy if the suggested investment goes down and stays down for long. But I get it that with defined maturity she can see a limit on how long it can stay down.

She needs to take responsibility, do it for herself, and have her own personal conviction in what she buys. It doesn't have to be a conviction that it will do well, just a conviction that it can't be too bad and that she will be able to stick to it through bad patches.
Last edited by nisiprius on Mon Jul 04, 2022 10:18 am, edited 1 time in total.
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nisiprius
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Re: From cash to bonds. Which fund/ETF?

Post by nisiprius »

P.S. Most investors like investments that go up. Whenever they crash, it's absolutely standard: people write articles making the contrarian and counterintuitive idea that the crash is a good thing, and that now is the time to buy.

Sometimes it is, sometimes it isn't.

The mere fact that the price has moved down does not automatically mean that it must be a good investment now.
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.
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Re: From cash to bonds. Which fund/ETF?

Post by dbr »

Always passive wrote: Mon Jul 04, 2022 12:13 am My wife has a small equity portfolio, all in VT and about the same amount in cash. All this in an IRA.
Most likely the two of you together should have an investment plan for all your accounts taken together according to the following process:

1. Define your objectives
2. Arrive at an asset allocation for the whole.
3. Locate assets across accounts for best tax efficiency (This means taxable, 401k, IRA, Roth IRA, special investments such as munis and I bonds).
4. Select investments.

As far as cash, that is a subset of fixed income which is held for lower risk at lower return to offset higher risk, higher return stocks. The parameters of risk in fixed income are credit risk (chance of default) and term risk (sensitivity on the market to interest rates). Cash is at zero on both of those and also offers less return. Another dimension is inflation, which can be offset by holding TIPS or I bonds. The investor has to select along that range and when selecting fixed income for risk and return also adjust stock/bond allocation to set overall risk and return. I bonds are the cash of inflation offset holdings and TIPS are the bonds in that category.

Also, reading financial periodicals and blogs is one of the most dangerous things you can do.
atlguy
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Re: From cash to bonds. Which fund/ETF?

Post by atlguy »

Assuming she wants to do this, I think using the Bond ETFs you mentioned are reasonable. I would recommend she stay in the 2 -4 year maturation.
A lot of sub investment grade companies that were small with high debt ratios refinanced in 2020 and 2021. That risky debt starts to mature after 2026 and some of it is very likely in these funds. These funds IMHO get riskier than normal beyond that point.
I play in that space but I don't think your wife should.
hudson
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Re: From cash to bonds. Which fund/ETF?

Post by hudson »

Always passive wrote: Mon Jul 04, 2022 12:13 am My wife has a small equity portfolio, all in VT and about the same amount in cash. All this in an IRA.
She read a Barron’s article that discusses the virtues of investing for yield at this time and she has asked me what to do? She does not want to add to her equity portfolio.
The article in question is
“Yields Are Above 8%. It’s Time to Get Excited About Income Investing.”
Given that the Fed is most likely not done, I suggest that she builds a 2-5 year ladder of corporate bond ETFs with defined maturity that she can roll over annually. Invesco and iShares offers them.
BTW, we are pensioners in the early 70s and she does not need the money apart from the required IRA withdrawals that she will begin next year.

Are there any ideas ? Am I wrong?
Thank you for your help.
Corporate bonds give me heartburn. With fixed income, I like very safe products; think 3% plus or minus. Fidelity Fixed Income, Bonds & CDs: https://fixedincome.fidelity.com/ftgw/fi/FILanding

I'll take the best available CDs or treasuries. (High quality and low expense muni funds/ETFs are almost as good, but it depends on your situation.)
If treasuries, maybe split half nominal and half inflation protected...that also depends.
Last edited by hudson on Wed Jul 06, 2022 4:58 am, edited 2 times in total.
rgs92
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Re: From cash to bonds. Which fund/ETF?

Post by rgs92 »

Corporate bonds carry credit risk. The value of a corporate bond can go up or down significantly based on the market's opinion of the bond issuer's ability to pay the bond's interest or even to return the principal amount at maturity. So a corporate bond is sort-of like a stock.
A fund of these instruments will have some percentage of bonds that have these problems.

It is no substitute for cash or even a total-bond-market fund. Do not simply look at the yield, which can mask a poor or volatile total return.
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Re: From cash to bonds. Which fund/ETF?

Post by Valuethinker »

rgs92 wrote: Tue Jul 05, 2022 9:49 pm Corporate bonds carry credit risk. The value of a corporate bond can go up or down significantly based on the market's opinion of the bond issuer's ability to pay the bond's interest or even to return the principal amount at maturity. So a corporate bond is sort-of like a stock.
A fund of these instruments will have some percentage of bonds that have these problems.

It is no substitute for cash or even a total-bond-market fund. Do not simply look at the yield, which can mask a poor or volatile total return.
To amplify this, one should run the graph of any corporate bond fund in the 2008-9 period.

The term "equity risk" does not capture how painful that was. We had GM bondholders here who got 10 cents on the dollar in the restructuring. High Yield bond funds in particular trade like stock funds during a crash.

(Probably the Covid crash was too short to really see - only a few short weeks. But credit risk shows up just when you don't want it, and the correlation between risky corporate bonds & stocks goes up just when the stock market is falling out of bed).

It is better to hold US Treasury bonds and US Agency bonds (GNMA, FNMA etc). There are technical reasons (read Larry Swedroe's book on bonds) why the latter are not preferred but funds like Total Bond Market hold a lot of them (because it is such a huge market - US mortgages backed by de jure or de facto US govt guarantee).

In terms of Vanguard funds either Total Bond Market or Intermediate Term US Treasury is probably the best bet.

TBM is a classic case of a "good enough" solution. It does hold corporate bonds (Investment Grade - about 20% I think). But it will roughly track the performance of bond markets, and will give a yield in the long run 1-2% pa higher than say a Money Market Fund.
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