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Our portfolio leans somewhat towards the conservative side. Our overall target allocation is 45% equities, 45% bonds, and 10% cash.
When it comes to the allocation within bonds I have not seen much in the way of literature that recommends an allocation regarding types of bonds/durations.
Our current allocation in specific funds as a percentage of our entire portfolio is: 15% short term, 8.5% short term tips, and 16.5% intermediate (the rest of the bonds are in a target date fund).
I’m sort of aiming towards one third of bond portion of our portfolio being 1/3 each short term, short term tips, and intermediate.
My allocation is not based on any research, It just seems good to have more than 1/2 in short term to shorten my overall bond duration and thus exposure to rising interest rates. Having a portion in tips also decreases my risk to rising inflation, while the intermediate portion allows for some excess gains when interest rates decrease.
Is my thought process well thought out? Crazy?
Any insight would be appreciated.
Bonds make up 30% of my portfolio, and I simply invest in the Total US Bond Market Index Fund, along with the G-fund in my Thrift Savings Plan.
I’m not too excited by bond funds/indexes. When bond returns became very low I shifted from bond funds to individual bonds, although I do own a TIPS fund. I felt we weren’t being properly compensated for the slight risk we were taking. I was rewarded when bond funds dropped in 2022. Individual bond funds represent about 4% of our portfolio. However, G owns additional in two target date funds. While overall those have done well the bond components faltered in 2022 and have not yet fully recovered.
I continue to favor owning individual bonds over indexes, although because of interest rates we have added CDs to the mix.
That is similar to how I play it. I initially had just the plain old vanilla CD ladder back when Powell raised the rates. Then after hearing the podcasts from Doubleline, Oaktree and Pimco. I started to add more CLOs and Senior Loan ETFs when my CD ladders expires and I got my money back. I am just trying to learn more about MBS ETFs and Mortgage REITs as I consider them to be fixed income with building attached as collaterals.
Bond funds/indexes aren’t meant to be exciting 😉
Your allocations are perfectly reasonable, not far off from things I’ve seen proposed by “the experts”. You tend to deviate in your ratio of short term to intermediate, most tend to favor the intermediate and hold fewer tips as well.
Do you think this is superior to owning something like Vanguard Core Bond ETF? It’s far closer to an index of the bond market than just govt issues, you get management which in bonds tends to be justifed by slightly higher returns, and it’s one fund, so simplicity, esp for rebalancing.
I’m always curious what people think as in my head the Core Bond fund is closest to giving you that total market approach of say a Vanguard Total Market (VTI) which is always very popular.
David, this is an important topic for all of us to consider. I like Michael’s last comment, and lean toward Jonathan’s thinking, which is always a good policy. He’s posted a number of articles on HD about bonds. And Adam Grossman as well.
A comment caught my eye, about not basing a decision on research. Here are a couple of links to Wade Pfau articles, which have links within the articles. These articles are light reading about serious topics.
One
Two
I use a bucket approach for my bonds. I try to match the duration of the bonds to the time when I will likely need the money. The money I’ll need over the next year is kept in money market funds. The money I will need within the next two years is kept in bond funds with a two-year duration period. The money I will need five years from now I hold in bond funds with a five-year or so duration and the rest in bond funds with a seven or eight-year duration. Hopefully, this will earn a higher return overall for my bond investments than keeping everything in short-term bond funds. (Most of the time you receive higher interest rates on longer-term bonds.)
In addition to my earlier comment, I’ll note both Jonathan Clements and Bill Bernstein recommend sticking with short term bonds, and sticking with Treasuries at that, the idea being to take risk in the stock side of the portfolio and stay safe in the bond side. I believe both also like a 50/50 split between regular short treasuries and TIPS. So there’s two good literature sources for you. Otherwise many recommend the US Aggregate Bond Index, which may be what’s already in your target date fund.
It’s an interesting question. I probably think more about my bond holdings than any other, though I very rarely do anything different as a result.
Hi Michael,
Thanks for the tip. My reasoning in utilizing the intermediate bond fund was it was for longer term investment. This was inherited money to be used for two car purchases over 10 years (we have two and replace at 10 years if becoming unreliable), and to build a porch on our house once we were 70 (12 years later) and begin receiving Social Security. I knew that intermediate term bonds were more risky due to exposure to increasing interest rates, but was willing to do that for the increased interest rates, but didn’t anticipate the worst bond market in history. 🤷♂️
I would also consider I-Bonds for funds outside of IRAs. Annual limits are $10,000 per person. Currently at 3.11%.
The bond allocation you listed seems to be 40% via indexes and the remaining 60% in the Target Date Fund. Your overall allocation is 45% equities, 55% bonds/cash.
I’d look under the hood of the target date funds you hold. This may suit you or not. Vanguard’s Target Date Funds include several bond funds. The allocations vary. For example, the 2025 fund is about 30% total stock market (VSMPX), 20% International stock market (VGTSX), 29% Total bond market index (VTBIX), 13% International bond index (VTILX) and 7% short term inflation protected securities (VTAPX).
My spouse does holds two different Vanguard target date funds. Using two adjusts the stock/bond ratio and holdings slightly.
For anyone who might wonder how Vanguard’s target date funds work, these funds adjust the underlying asset mix over time. Vanguard states that the 2025 fund VTTVX is for someone who “…..may wish to consider this fund if you’re planning to retire between 2023 and 2027“.
These funds generally begin furthest from retirement with 90% in stocks and 10% in bonds. As we approach retirement at 25 years from retirement the stock portion begins to decline. At five years from retirement the allocation is about 60% stock and 40% bonds. At retirement it is 50% and the stock allocation continues to decrease until it arrives at 30% at age 72. At that time the allocation matches that of the Target Retirement Income Fund VTINX.
VTINX is comprised of the same five indexes listed for VTTVX.
Hi Norm, Thanks for commenting.
We only have <100K in non retirement money. When this fund was larger (last year spent a significant amount on a new vehicle) we took hit in 2022 when the bond market collapsed. We were in an intermediate term bond fund as the money was scheduled to be used over a decade or so for car purchases and a porch addition.
Last year I bit the bullet and took a 21K long term loss when I converted the fund to short term bonds as we hope to utilize the money to build the porch in three years.“Luckily” overall with interest payments since 2022 we have a slight (<1K) gain. Now I just need to live another six years to recoup the capital loss on my taxes, as unfortunately all the brokerage money is newly invested in bonds so no long term capital gains to offset.
Your allocation seems reasonable.
Have you thought through the impact from a fresh sustained surge of inflation? Or from a recession that drives yields down for a decade again?
Makes sense to me. Of course, the greatest portion of your bonds is in the target date fund (my guess is in a total bond fund, not sure). So, your discretionary allocation while sound likely has the smallest impact on your bond portfolio.
Hi Ben, Thanks for commenting. Actually the target date bonds are only about 5% of the portfolio total, as the ones listed amount to 40 of the 45% of our overall portfolio.
Sorry for the confusion. I had a little difficulty trying to figure out how to word my post.
I was thinking the same thing. Because of that, since the target date fund bond holding is likely intermediate duration, I might split the bonds outside that between short and short TIPS.
Nothing like my own bond holdings, but I’m working with the ideas of the original post which are already reasonable imo.
My bonds are in a brokerage account. They equal 36.5% of that account. 20% long term, 12% Limited term and 4.5% Intermediate term. Don’t take much from that, it was a fandom selection, no grand plan and they are all munis.
Does that mean you have no room in tax deferred accounts for bonds? Also is your tax rate high enough to require Muni Bonds in your taxable account? You might be able to use taxable bonds and still realize more profits after paying taxes, which seems to be important to you based on prior articles.
Actually I do, I forgot that. A bond fund is 18% of the rollover IRA. I don’t know about require tax-free, but I come out ahead a bit. I just like the idea of some being tax free😀
Hey Dick, by limited term do you mean short term?
Yes