FREE NEWSLETTER
Go to main Forum page »
I’ve mentioned my dumb luck at having most of our money in cash, earning about 4% as of 4/1. My strategy is to dollar cost average back into the market between now and the end of the year. If you ask my reasoning on this, I’d just say that I don’t want to be late to the party that follows the end of trade war. I have begun the process with my IRA, and will soon start on Chris’s.
My quandary has to do with our bond allocation. Thinking that the Federal Reserve would soon lower rates to stave off a possible recession I was considering fully investing the bond allocation at this time. It now seems that a wrench has been thrown into my plan. With other countries now demanding higher interest rates on U.S. debt due to the trade war, I’m not so sure of myself any longer.
Anyone want to jump in and help me think this through?
Update. Thanks everyone. HumbleDollar is kind of like a foodbank to me. It’s where I come when I need food for thought. And thanks for staying on topic. My thinking is influenced by a general weariness of today’s uncertainty. For our IRAs and brokerage account I believe my best course of action is to dollar cost average back into the market using a total bond ETF. I also have a small side bet on high yield bonds; I just can’t resist.
I’m happy to settle for 4% high yield savings in our emergency fund, but will put a portion of that into short a term bond ETF.
Dan, it sounds like you might find the fund I alluded to below interesting. Fidelity Total Bond FTBFX, and ETF version FBND. Using this lets pros manage the side bet on high yield bonds without me doing it.
FBND is indeed my pick
I think your concerns about investing during highly volatile times are quite accurate. I don’t have any special insights into it because it’s during these times that our old canards become useless.
That said, dollar cost averaging is the tested method for avoiding the fear of lump sum action during these periods of uncertainty.
Right now the bond market seems to be addressing currency risk. There’s a definite worry that a next step in the trade wars is currency devaluation, we’re already seeing currency trades reflect that. I don’t know if that helps.
Can you specify more precisely what your concerns are (like are you worried about yield? Are you worried about capital losses because you regularly sell bonds? If it’s just a general weariness I use dollar cost averaging and accept that I won’t maximize returns.
I posted the following a few days ago in another thread but worth posting in this discussion.
I’m not at all inclined to ditch bonds. This is largely because I don’t see much of an alternative other than cash, which we already have a highish allocation to, and I wouldn’t want to overdo this either.
However, I am considering two things re bonds:
(1) Embracing a larger opportunity set. Our largest bond holding is the “core plus” fund Fidelity Total Bond FTBFX which has a limited ability to invest up to 20% in high yield and foreign bonds including EM. I like this in the base case, but I think especially now when the bond market is in flux and better opportunities may lie outside the usual index.
I realize this is a bit contrary to the more conventional wisdom of seeking safe haven in short Treasuries, but am wondering if the latter will stay as safe as they always have been.
(2) Hedging against neighbor risk. With the new scariness, bond funds may be more volatile and may be subject to shareholders selling out of their funds forcing redemptions. I have no interest in dealing with individual bonds, but – Fidelity offers a separately managed account in which they build a portfolio of individual bonds. I may consider this for a portion of our bond holdings.
For the most part…I have never understood investing in shiny yellow rocks for most of my 41 years of life. I have come to look at it like a tool for currency hedging though.
However, I understand gold can be a decent hedge against a falling US dollar/inflation. It is also not heavily correlated to stocks (not negatively correlated either).
I am NOT saying anyone should go HEAVY into gold…but it may be worth doing some research and looking into a small position in gold.
I don’t look at portfolios as 3 funds exclusively (equity/bonds/cash). I look at it like equity and non equity.
Equity is stocks, real estate, and private equity. With stocks (low-cost passive ETFs) being the VAST majority of this bucket me for personally. Haven’t touched private equity yet but learning about it.
Non-equity – bonds, cash, gold, other precious metals, currency/bitcoin. Again, the VAST majority is in long term, US government bonds. But gold has its place too, as does short-term cash. Bitcoin is minimal but I have just a touch. I do not own any other precious metals or currencies or nongovernment bonds at the moment (just diclosing). Currently learning more about foreign bonds. Wont be making big moves hastily though.
Buffet says concentrated risk make sense IF YOU KNOW what your doing. Its rubbish to buy everything. EXCEPT for those of us (most of us) who don’t know things on a truly professional level….those people should buy low cost ETF’s which we do.
That said….maybe research or consider a little more diversification.
I find the 28% capital gains rate on gold annoying. I know it just comes with the territory, cost of doing business, etc… still annoying when my other capital gains are at 15%
I believe one way to lower the tax rate on gold gains is to invest in the gold ETF GLD within traditional IRA’s. IRA withdrawals will eventually be taxed at ordinary income tax rates which for most folks are lower than the 28% special capital gains rate on gold.
I’ve invested in Sprott Physical Gold Trust (PHYS). I’m assuming that long term capital gains will be taxed at 0%, 15%, or 20% in taxable accounts.
Thanks John. Yes, for funds that invest in physical bullion, one could always keep those in an IRA. Another option is to hold funds that invest in futures rather than the actual metal.
I think there’s even a way one could hold physical bullion in an IRA. I know nothing about this but suspect it’s complicated.
Dan, a few ideas: consider deploying your money into short and intermediate term high quality corporate bonds. reason.. corporate bonds may pay higher total returns than savings accounts or comparable treasury bonds without much added risk.
A suggestion… Vanguard intermediate term corporate bond ETF. (VCIT) 30 day sec yield 5.31% as of 4/11/25.
Depending on market conditions a conservative strategy would be to stick with cash as long as interest rates stay above 4%. After that you could deploy your money into funds. Prevailing opinion—cash is king.
As with all investment decisions please do your own research.as well. Hope this helps.
Added: Dan, I’m no expert on the bond market, but reasonable to expect money to flow into bonds as investors reduce stock heavy allocations to stabilize their portfolio against up and down market swings.
As you think about your strategy, I’d encourage you to consider 2 things.
First, the Federal Reserve only controls the short end of the yield curve, while the bond market controls the long end of the curve. And as we saw last week, the bond market wields a great deal of power.
Second, while the United States’ position as the world’s reserve currency has provided our bond market with a risk-free premium, the events of the last week and the last 3 months, have given global investors reason to question whether the U.S will continue to be a “safe” place to invest.
A decline in trade will result in a decline in demand for USD’s and a decline in demand for USD’s will lead to a decline in demand for US Treasuries, which leads to higher bond yields. I’d expect continued volatility as the globe and the bond market sort out this new world order. While that might be good for traders on Wall Street, it’s not good for investors making long term investment decisions, including of course, the U.S. housing industry.
Russ, I agree. I know, “Stay The Course”, but I am seriously thinking about moving my Total Bond Fund holdings to 1/2 Short Term Treasury Fund, 1/2 Short Term Tips. (I’m generally diversified with domestic, international stock funds and cash.) Can someone talk me off the ledge?
I use FBND (fidelity bond fund), which does include both short term and TIPS. For me, it’s just not possible to know if additional bond diversification is necessary. I do think I will use Vanguard short term fund VCIT for a portion of our disaster fund.