FREE NEWSLETTER
OVER THE PAST FEW weeks, my wife and I did something we hadn’t done in four years: We bought bonds.
Specifically, we parked some money in one- to two-year Treasurys paying 4.3% to 4.6%—the highest rates in 15 years. Our portfolio now approaches 5% bonds, and we plan to buy more. We’re waiting to capture higher rates following the expected Federal Reserve rate increases.
Bonds represent a seismic shift for us. In early 2020, I even wrote that the 60% stock-40% bond portfolio seemed dead, thanks to near-zero interest rates. But today, bonds are back, and it’s TINA (there is no alternative to stocks) that now appears dead.
We recognize that our bonds are losing to inflation in the short term. Still, as retirees, we may be hurt less by inflation because many of our costs are either fixed or in decline, including housing, transportation and education. Also, inflation should eventually come down.
In 2021, I also wrote about our use of covered calls on high-dividend stocks as a sort of bond proxy. In today’s bear market, this approach has held up well because the stocks involved haven’t been crushed like technology stocks. In fact, some of these “value” stocks remain near all-time highs, despite the market downturn.
Our bond-proxy approach resulted in our portfolio regularly having a stock allocation of more than 90% through much of the 2021 TINA era. This year, we thought it prudent to reduce our stock exposure due to a mix of personal and market changes.
We bought a second home in January. This required some stock sales, plus we now need to maintain a larger stash of operating and emergency cash. We have also ramped up our vacation spending after a two-year pandemic hiatus. On top of that, inflation provides another reason for a larger cash cushion, as we strive to make sure we have enough money on hand to cover our expenditures.
Concurrent with our house purchase, interest rates started to rise after 21 months of being near zero—ever since the March 2020 pandemic start. In early 2022, the Federal Reserve began ramping up interest rates, Russia invaded Ukraine and inflation was rampant. These developments have all boosted the odds of a recession.
As a result, we lowered our portfolio’s stock exposure by some 13 percentage points, so it’s now closer to 80%. Unlike HumbleDollar’s editor, we got there by selling long-term stock holdings on the way down rather than buying in hopes of a rebound. I rationalize this “investment sin” as a lock-in-less gains, limit losses, rebalance and risk-reduction measure. Maybe we should have done more.
In the big picture, our small allocation shift from stocks to bonds and cash doesn’t change much, other than to make my wife and me feel slightly more comfortable about our risk exposure. Each 10% move away from stocks probably only impacts near-term wealth by a couple of percent in either direction—depending on good news or bad on issues such as inflation, Ukraine, corporate earnings and interest rates.
Total neophyte when it comes to bonds. If I buy a 2 year treasury note today, is the interest rate locked in until maturity? Signed me, 100% stocks
If you buy a two-year Treasury at par value and hold to maturity, you will indeed get the stated interest rate.
Much as I enjoy your writing Mr. Yeigh I sure hope few who read it think that a retiree with 95% (or even 80%) of their portfolio in equities is a role model to emulate – unless, of course, they have a multimillion dollar portfolio, paid-for house and modest income needs.
A far saner approach, it seems to me, is to heed the advice of William Bernstein and innumerable other investing experts to fund essential needs using the appropriate mixture of pensions, (delayed) Social Security and TIPS, with equities for growth and/or legacy.
Nominal bonds are still pretty unexciting, but you’re about to miss the opportunity to guarantee yourself 4.3% real income for 30 years. The well-known financial advisor Allan Roth wrote about this recently and his article attracted a wealth of insightful comments on the Bogleheads forum. Here’s the article:
https://www.advisorperspectives.com/articles/2022/10/24/the-4-rule-just-became-a-whole-lot-easier?utm_source=boomtrain&utm_medium=email&utm_campaign=AP+Newsletter+2022-10-25+6479&bt_ee=AR0I2C1ZfO7f%2BU9JLMlgBYKTFD8NSLXRGNfwk98nMUkcNIy10%2BvCXp1dsDezd08W&bt_ts=1666692148692
We’ve nearly left the bond club, not for stocks. Our target stock allocation has stayed steady, but for the past year or so most of our fixed income allocation has been in cash, and most of that in a 401k stable value fund. Expect the small amount we’ve continued to hold in bonds will now also see some light.
Thank you for your article Mr. Yeigh. For this reader the whole TINA thing is nonsense. I have a number of friends who abandoned bonds altogether and significantly increased their stock allocation the past few years because they believed in TINA and thought they’d have a great ride. I simply rolled my eyes as I expected they’d pay the price for significantly overweighting equities. There was never a need to abandon bonds in favor of stocks due to TINA, simply reduce duration of bond holdings while just dealing with the lower rates. But now they’ve paid a pretty dear price for their TINA philosophy.
Bonds also haven’t been that great this year. It seems like it depends on your time horizon.
Before you can conclude that your friends have paid dearly for their philosophy, you need to consider the fact that they made considerably more until this year by having a higher stock allocation.
From my perspective, just because it worked out for a time doesn’t mean it was the appropriate investment strategy. If I think Apple will report excellent quarterly earnings and I sell other stock holdings to use the proceeds to load up on Apple shares, and then the stock price soars on positive earnings news, it doesn’t mean it was the right strategic move. Tactically sure it was right but I believe in strategic investing, not tactical.
I have always been conservative and allocated a significant portion of my 403(b) contributions to TIAA’s annuity when I was working. My comment was simply meant to point out that a very high stock allocation over the past decade has worked out very well even after taking 2022 into account.