Bond allocaton strategy?

Any thoughts about bond allocation strategy in light of recent events? Hold steady, or change the percentage or type of bond holdings?

Commentators are saying the Treasuries are terrible values now, due to flight to quality raising costs and falling interest rates. I guess so if you want to hold to maturity, but if you are holding a mutual fund or etf for a limited time, things are looking pretty good as your old inventory increases in value.

Bank loan funds have been a great disapointment, continually losing value due to the crises. Commentators say the next good bond area will be corporates, after the bottoming has happened and defaults start to look less likely. Tempted to go the bond ETF route in the future because can maintain stop loss orders over them...

Reply to
dumbstruck
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I don't see bonds as a good bet for the small investor. You cannot possibly own enough bonds to get over the risk of default, and even high rated bonds are going into default. Bond funds would seem to increase diversity, but they end up being mostly bets on interest rates, and those look like they will be falling until a new government is formed and gets the economy back on track.

-john-

Reply to
John A. Weeks III

What overall allocation strategy are you using?

Your query puzzled me, because AFAIC, there are only two bond categories: Good and garbage. Good includes CDs, treasuries, and what's called high quality "investment grade" corporate bonds. The garbage includes junk bonds, the issues of certain undeveloped countries, etc.

The typical online asset allocator is referring only to the good ones when it spews out a percentage for bonds.

If you're asking about mortgage backed securities, they have been an anomaly this past year. They once were what I would call a bond fund with more risk than the "good" bond funds, and less risk than junk bond funds. What happened to them makes me not trust the bond rating agencies anymore.

It also sounds like you are trying to chase bond returns. That's a mistake. The good ones are not very volatile. They just hum along, earning the "prevailing interest rate," and reduce your portfolio's overall volatility. Letting a person sleep at night.

Reply to
Elle

Now that we can no longer trust the bond rating agencies, how do we go about deciding what bond/bond fund will be good? I had planned to buy into a bond index fund when interest rates stabilized, but with all the subprime mess, I've just stayed with a stable value/money market fund.

Anoop

Reply to
anoop

Yeah, I'm puzzled because a lot of commentators from the bond trading pits seem to say to flee treasuries and other stuff... for reasons I don't understand. What I want is about 20-30% of my portfolio stablized or at least relatively decoupled from stock returns. Used to keep that about half and half bonds and money market, but over several stock crashes the bonds sagged as well, and the MM can be low return anyway.

So more recently (for non-stocks) I have used a collage of hedge-like things including intnl reits, bank loan funds, emerging market bond funds, commodities, and long-short funds. These mostly swooned together recently (in a delayed fashion, giving false reassurance) so I moved more to the traditional bond funds. These are doing pretty good, but I can't make sense of the risks that are being repeated on the news. Might be most reassuring if there was a zero-coupon bond ETF which I could protect with a stop-loss sell order, but I don't know of any. Well, I find the emerging debt funds give huge returns over time if you just wait out the storms, but that doesn't satisfy my hedging desire.

Reply to
dumbstruck

"anoop" wrote

mortgages (and only subprime ones at that) took a meaningful hit. Seems to me the media would have reported on bonds besides MBS that took a hit. I suppose corporate bond ratings are still about as valid as they formerly were. Money markets have stayed in fine shape. But funds like GE's "Enhanced cash fund" (which I think was known to invest in MBS) did not, due to its exposure to MBS. You can find a discussion on the GE fund here in November.

Of course the recent correction to yields on money market and "good" bond funds is due to the Fed's lowering of the benchmark yada rate the other day.

Interest rates have been on the low side since about 2001. But the Fed's job is to control the money supply to minimize inflation and recession. Interest rates have always varied as a result. Have they been unusually volatile? I don't think so, but someone else might want to google and post here.

Of note perhaps is that bank (U.S. and overseas) preferred stocks took a huge hit recently but seem to be recovering. Non-bank preferreds, not so much. This reflects investors' doubtfulness about the banking system. Remember, banks have long been priced on the low side when it comes to P/Es. Arguably this crisis is one reason why. It's perfectly reasonable for investors to doubt all issues of a bank, preferred, common stock, whatever, in this situation.

I personally was glad the European Central Bank left interest rates unchanged, following the cut here. This gives me more confidence in the integrity of the world economy in the coming months. Not that the U.S. Fed's rate cut was wrong. That still remains to be seen, IMO.

1.5 cents
Reply to
Elle

"dumbstruck" wrote

I think their message is for people either (1) with short timeframes; (2) who buy all the palaver of media "analysts" (whose expertise is very doubtful, succumbing as the media has in recent decades to reporting such that they can sell commercial time to advertisers, and so often lacking the wisdom that only comes from long experience with the markets); (3) currently a response to the lowering of the Fed's benchmark rate; or (4) a combination.

Maybe cite a specific article, and we could discuss it, in brief, here.

What I want is about 20-30% of my portfolio

I think you need to look to the long term with your bonds. They are, after all, not entirely immune to volatility. I presume your bonds (if all in the aforementioned "good" category) took a much smaller hit than stocks. That's the point of holding them.

Especially when you are talking about stop-loss orders, I think you need to take a breath and go hunt down commentators with long experience. Do not chase returns. Much as you want to "beat the market" by adjusting your allocations, slow and easy wins the race.

Reply to
Elle

But it's not very useful to divide bonds into "good" and "garbage", if we can't trust the folks doing the division. :-)

I think the best strategy is to diversify your bond holdings, don't make big bets on overly-specialized funds, etc. And, stay in it for the long term. If you need money for the short term and cannot tolerate any loss of principal, you'd better keep it in cash instead.

FWIW, I've had the majority of my bond allocation in a state-specific muni bond fund (VMATX) for the last year or more, and smaller chunks in LSBDX (available through a past employer's 401K plan) and FBNDX (about the only choice for a core bond fund in my current employer's plan). And I used my last chunk of bond money to buy a small stake in PRFHX for further diversification on the tax-free side; high-yield munis are supposed to be very low risk compared to high-yield corporate bonds, so I'll wait and see.

-Sandra the cynic

Reply to
Sandra Loosemore

"Sandra Loosemore" wrote

Sure. People go with their best information. Mine is the proverbial hunch, based hopefully in the reading of thoughtful, fact-filled reports. Practically speaking, how trusting are you right now of the bond rating agencies? Does the allocation you posted reflect changes due to what's happened recently? From what you wrote, I am not quite sure you made changes.

snip; please look back

I would think the ratings reflect this difference between high yield munis and high yield corporates.

Reply to
Elle

How will we know "when interest rates have stablilized"? Historically, there little evidence to suggest they do.

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How is this any different than trying to time the market?

Reply to
kastnna

True, but the rating agencies sold their souls to the devil in the process. How can we trust them? I guess we could believe that they understand more conventional debt instruments better. I guess we could believe that, couldn't we? Couldn't we?

-- Doug

Reply to
Douglas Johnson

I have not adjusted strategy except to be more suspicious of Fidelity bond funds. All bond funds, including index funds and ETFs, select specific issues to invest in. Fidelity has tended to try to boost performance by overweighting MBSs. (In the past, Vanguard has attempted to boost performance in its total bond index fund by overweighting corporates.)

Generally I do not use Treasuries, because the extra safety offered is not of particular value, and in times when it would appear to have real value (like now), they are still overpriced. On the rare occasions when I do use Treasuries, I purchase short terms (bills), and don't incur the overhead of a fund (which adds no value in issue selection).

For domestic "investment grade" bond investing, I prefer using funds that are managed by houses that specialize in them, and do their own ratings (and may invest significantly in unrated bonds). If they have adequate in-house expertise, they can add value through knowledge of the individual securities as well as of the market. Especially in this environment, this lessens the risks/conflicts of interest associated with the NRSROs (Nationally Recognized Statistical Rating Organizations).

Some examples of funds/families: Baird Core Plus Bond (BCOIX), Met West Total Bond (MWTRX), Westcore Plus Bond (WTIBX). I would rather delegate the allocation strategy to funds like these, that have fairly wide ranging mandates.

Finally, munis may offer a good opportunity as insurers get downgraded. Munis tend to be quite secure, and insurance more of a marketing tool than something offering real value, so as insured munis get "downgraded" because of their insurer's downgrades, the market may overreact (especially institutions with strict requirements).

Mark Freeland snipped-for-privacy@sbcglobal.net

Reply to
Mark Freeland

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I agree that this is timing the market, but, IMHO, it is foolish to buy into bonds when you know for sure (by minutes from Fed meetings) that interest rates are going up.

Like wise, it would seem that it would be obvious that buying into a bond fund is a good idea once rate cuts begin. Except that I now have no idea what the debt rating of a bond fund really is and I don't have the patience to read the fine print in the funds' prospectus, and hence I've been sticking with stable value/MM funds.

Anoop

Reply to
anoop

Lots of comments re: bond stratety. Are you looking to hold bonds that are long term, medium term, or short term? Each will have a different volatility. Personally, I own Vanguard's short term bond fund, which has less volatility, and I am holding as a portion of my cash position. I also have an allocation in a long term index fund, because long term is the only option for our 401k. Long term funds have much more volatility; perhaps you will want to see if short or medium funds are more suitable for your cirumstances/risk tolerance.

Elizabeth Richardson

Reply to
Elizabeth Richardson

No, I haven't made any changes due to concerns over bond rating agencies. Just pointing out that I've already tried to diversify my bond holdings within the limits of my constraints (muni bonds in taxable account, what's available in my 401(k) plans), and that since I'm taking a long-term view of my investments it's not critical for me to preserve principal at all costs in the short term.

-Sandra the cynic

Reply to
Sandra Loosemore

Thanks everyone for all the food for thought. Oddly, I feel reinforced in my strategy of temporarily surfing gov't bonds because their imploding interest rates lead to capital gains. This trend should backfire as soon as rates stabilize or reverse, so by then I hope the end of debt crises will stop the capital erosion of higher yielding instruments like corporate bonds and bank loan funds. I hate to have to watch for the inflection point, so was hoping to set up auto ETF trade triggers.

The goal of holding bond funds for me is certainly not a hold-forever profit center, it is just ballast for a ship predominantly holding stocks. It's purpose is to offer emergency liquidity during stock setbacks, but at not too high of a cost (like the ridiculous money market rates now). If you need emergency money during a stock setback you should not liquidate that stock because of the high opportunity cost (ie. it is expected to cyclically rebound a high percentage).

I'm sort of a bond-retard, but I gather the current situation can be summarized by clicking on the 3month sort of

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andscrolling down to bond type total returns. Only gov't is showing life,but according to
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can see this is not due to the pathetic interest rates but aflight to quality giving some temporary cap gains. This can only go sofar and can reverse badly to capital erosion (must be what the punditsare yelling about).

BTW if you peek at the 5yr return on morningstar you see outsize returns typical for emerging market bond funds. I don't consider this part of the low-volatility ballast for my ship, but more like part of the stock. I was hoping for various decoupled high return things to reduce the need for low-return ballast, but it didn't work too well. Bonds are no magic bullet though; as a youngster I inherited some 3% ones during the insane inflation of the Carter admin. Sold them for a tiny fraction of their face value - essentially worthless.

Reply to
dumbstruck

I'm trying to retain what I have, and therefore the bond funds - Vanguard VBMFX and VFIIX -

Reply to
P.Schuman

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