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It seems all conventional wisdom says, as we get closer to retirement, gradually shift the allocation (mix) of your portfolio from equity funds to bond funds. I subscribe to the Boglehead investing methodology and agree with much of what Mr. Clements, and many others, have written on this site. My wife and I have been investing much of our savings in Index funds over the past 15 years. We are truly blessed and should be financially independent, able to retire, within the next 5 years (age 60). However, as I shift our portfolio from Equity index to Bonds index funds, I am struck by the low performance of bonds. I know 2022 was a horrible year for bonds but even the 5 and 10-year returns don’t keep up with inflation.
I use Fidelity as my brokerage company. Their Total US Bond Index fund, FXNAX returns are 1YR = +1.34%, 3YR = -2.4%, 10YR = +1.35%. Similar to Vanguard’s VBTLX.
Fidelity’s Inflation Protected Bond Index, FIPDX returns are better but not great. 1Yr =+2.0%, 3YR = -2.4%, 5YR = +1.8, 10YR =+2.5%
As a 55-year-old with retirement on the horizon, I know I need to reallocate to safer investments. My current allocation mix is 70% Stocks, 30% Bonds. I would like to be closer to a 55%, 45% mix but am struggling with the shift to poor bond returns. I am not an aggressive investor but with 1-2% annual returns I feel I am losing money (e.g. Fidelity cash reserve SPAXX is currently paying 4%)
Does anyone have alternatives or some insight to ease this transition. Or maybe a lesson on bond return that will calm my concerns. Thanks.
Rob Berger of YouTube fame has noted that you can expect the current yield from a bond fund to be its performance over the next X years, where X is twice the duration of the fund minus a year.
Here’s an announcement from Vanguard for two new shortest term Treasury index funds: https://corporate.vanguard.com/content/corporatesite/us/en/corp/who-we-are/pressroom/press-release-vanguard-to-offer-new-options-for-meeting-investors-short-term-liquidity-needs-112224.html
Doesn’t the research indicate that the best bang on bond funds is a managed fund with low expense that models a total bond market but doesn’t attempt to replicate it.
This makes a lot of sense because of the breadth of a true bond index, the inability to over buy inefficiencies (which happen more in bonds) and the generally higher expenses involved in bond trading.
Vanguard’s Core Bond Fund has beaten Vanguard Total Bond Fund over 10 years, that tends to mean it wasn’t a fluke.
John, I think most commenters are recommending a move from bond funds to short-term treasury notes that you hold to maturity. That way, you get your principle back along with interest, and bear little, if any, credit risk.
If the amount of interest you receive exceeds the inflation rate, i.e., you receive a positive real return, then the spending power of your portfolio should increase—a favorable result as you approach retirement.
It’s important to acknowledge that we have had a buoyant economy for the last few years where bonds have done poorly compared to stocks. But we can expect bonds to outshine stocks when, not if, we experience the next recession. Then you will be glad you had some allocation to bonds in your portfolio.
Re the first para on individual bonds over bond funds, here’s another perspective.
https://humbledollar.com/money-guide/great-debates-bonds-or-bond-funds/