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I have a 50% stock, 50% cash allocation. I'm 54, and would like to invest most of my cash into a bond portfolio. I am also thinking that this might not be the right time. Better to wait for the long awaited correction, dollar cost average, or just pile in?
1. Logically and fundamentally, I'm concerned about what returns for fixed income are going to look like going forward.
2. When you have funds starting to short bonds and everyone is talking about NOW you're getting to the point where fixed income is done, I am becoming more skeptical. That's not to say that fixed income won't eventually really turn, but I think all the talk and action makes me wonder.
3. I would definitely not invest heavily in bonds at this point, and I think one has to be choosy at this point about what fixed income sub asset classes you invest in. I think most people shouldn't be 100% anything (unless you can accept the risks with being 100% anything), so you should have some bond exposure, but I think how much depends on your situation, desired risk tolerance, etc etc.
Edited to add: David makes good points below, and if the volatility is acceptable, MLPs and real estate may be other income ideas to consider.
"Long awaited" might be the key. It's possible that bonds face not a correction but an extended bear market. When that might occur remains speculative.
I suppose if it were me, I'd start by thinking about my asset allocation: why 50/50? T. Rowe Price's Retirement 2025 fund is 50% domestic equity, 25% international equity, 25% other. Or is this a comingled sort of average: 75% equity in your long-term portfolio but 25% in your short-term one, so ... In any case, I'd start there.
If you think about the division your asset allocation between growth and income, rather than stocks and bonds, you might then broader how you think about reallocating some or all of the your. If you ultimately decide that, say, 60/40 works for you, perhaps the 40 might be split among conventional fixed income, real estate, preferred stock, MLPs and so on? The 40 might end up at 20% bonds, 5% each real estate, preferred, gold and other real assets.
Highlights of the Price portfolio include: 13% intermediate-term bonds, 4% e.m. stocks, 3% real assets, 3% e.m. bonds, 1% tips.
I think I’d look for a hybrid type income fund rather than straight fixed income funds. You will find a lot of them listed under conservative allocation funds. I have provided a link to them. Simply click on the time period to see the leaders and you can click on the fund itself to view its Morningstar report.
A recent job changed prompted a rollover to Fidelity so in effect " I started over" with allocation and funds. When I was done the mix turned out to be 40% foreign, 20% US and 40% cash /bonds. Some of the funds I used are bond funds and some were allocation funds with bonds or flexibility. Keeping cash is something I do also. Some of the funds might work for you.Funds are:
Matthews Asia Strategic Income(MAINX) Fidelity Strategic Income(FSICX) 4 distinct areas of the bond world Templeton Global Total Return(TGTRX) Riverpark Short Term HY(RPHYX) Northern Global Tactical(BBALX) 30%+ bonds at this time w/flexibilty. Payden Value Leaders(PYVLX) A stock fund with a yield over 4%.
Why have any bonds at all? Leave the cash as is and orient your equity sleeve to dividend income. TRP Equity Income, VG Equity Income. VIG, VDGIX for growth of income. Or add a hybrid as mentioned above to let someone else worry about interest-rate risk. FPA Cresecent ,Greenspring and James balanced are hybrids with a small cap/multicap orientation for added spice. REITs, MLPS are to correlated to equity to be considered diversifiers. I am only 47 and do not have this type of porfolio...I just wonder how it might work in the coming environment. Just my two cents.
Thanks everybody for your suggestions. I do have 6 allocation funds that I didn't mention: FPACX, GLRBX, OAKBX, VWINX, PASDX and PRPFX. Was also planning to add to these.
Well, thanks for clarifying. Actually, the OP seems quite clear in retrospect. Sounds like you want to keep the 50% stock allocation but move the 50% cash into bond funds? Hmm. Don't know about that. I wouldn't at this point. I do like your choice of OAKBX. I wont try to defend it against its current detractors, but I'd rather ride that fund long-term than a 50% stock & 50% fixed-income mix of my own making. I think OAKBX (or any good hybrid for that matter) will give you a smoother ride and still help you maintain the purchasing power of your $$. FWIW
If I had a lot of cash, I would consider RPHYX for some of it to earn some return on it. David has a good analysis of this fund and there was a good discussion held with the managers. Read the fund profile and listen to the interview.
BTW, it is not that you do not have bonds. You do have significant amount of bonds in your balanced funds. If you want to put the cash to use, consider adding some more to your balanced funds and let the managers manage the duration/credit quality of bonds. For the rest you can keep it in RPHYX.
If you still want some other bond funds consider the following:
MAINX - An Asia Region focused Income fund. David has conducted Interview with manager as well. Read the profile and listen to the interview. SUBYX - Unconstrained Bond fund. The managers has build a bond fund with 'negative duration'. Read David's profile as well - SUBFX is the instl. class. FRIFX - This is actually not a pure bond fund. Consider it as a Real-Estate balanced fund. It has stocks, bonds, preferred and convertibles.
Reply to @David_Snowball: I think those still have significant stock risk. Real estate is itself a sector. I would not pick a sector within a sector (actually we have increasing number of ETFs just for that). That is why I like FRIFX. It has stocks, bonds, preferred and convertible and manager can choose the best for the time.
Check out SDGIX (Dreyfus/Standish Global Fixed Income I). Its a world bond fund with low volatility, and thus very steady returns. The total assets are low, allowing it to be nimble. Available via Vanguard (TF), among others.
Reply to @MikeM2:Certainly agree with you MM2 concerning letting the hybrid fund managers make the bond portion decisions.Isn't this the reason we invest in funds like FPACX,VDGIX,VWELX,Greenspring, and James. Here is a bit of a primer on MLP's and risk. http://www.etftrends.com/2013/03/master-limited-partnership-etf-attractive-yields-with-risks/ Here is another idea that takes the guess work out of a 60/40 portfolio, only with an income focus on the equity side that yields 5-5.8% paid monthly.In addition it is about 45% non dollar across it's portfolio and is balanced quarterly as to it's 150 positions.Just bought some in the last month and feel the idea is a solid premise for those of us "chasing yield" and concerned about the $$.Sells at a slight premium to NAV, though that has narrowed a bit recently. http://www.arrowshares.com/files/DDF/GYLDQ42012FactSheet.pdf
As an older investor, I've never commented on this excellent board, but offer just one humble comment regarding bond exposure. MikeM had an excellent / very astute, comment . "Why any bonds?". The following comes from a very personal experience and mirrors what all my great mentors offered as life lessons to me along the way.
My father was a police office who proudly purchased a $5000 Walmart bond in 1958 or 59. This was all the money Mom and Pop had to invest. Mom, myself and my sister marveled at Pop's gutsy move. Instead of passbook savings Pop plowed into Wall Street and was an Investor. He redeemed the coupon seven years later and Pop collected $579 + $5000. Brilliant.
My uncle John in Dallas coincidentally purchased $3000 in Walmart stock and in total collected $13,000,240, some 25 years later. That was my first lesson on bonds, and one I never forgot. Uncle John quietly bought me my first car in college and Pop struggled to send me $5.00 a week spending money. I appreciated all they did immensely.
When in a bond buying conundrum as many are these days. One consideration might be to simply purchase the underlying engine (stock) vs. the engines exhaust fumes (i.e. bonds).
Over time your rewards will be incredible. Bonds are certainly OK, but consider this option.
Consider these world class names & you'll never, ever wish to churn, sell, wonder about, or fret over. Just buy them, sit on them, and do NOTHING EVER! Then receive checks and checks and checks.
If you wish to buy a group of stocks of the worlds greatest companies, you'll have enormous satisfaction as well as rich gains. Not all will be winners, that can't happen, but most will win for you year after year. Just remember Do Nothing! You don't have to do anything, because hundreds of thousands of people go to work each day at these enterprises and do the work for you.
Consider:
Pfizer, ATT, Unilever, Proctor and Gamble, Union Pacific Rail, Travelers Insurance, Kimberly Clark, Kraft Foods, Kinder Morgan, Reynolds America, ABB, JP Morgan, Wells Fargo, Vodafone, Phillip Morris, Altria, Lyondellbasell Industries, ABB, and pick a few you like as Walmart, Home Depot. And be done.
Throw in a few MLP's like MMP and VNR, a foreign Fund Stock and Bond if you must, from Mathews and a VYM from Vanguard. And you're 90% on the road to wealth.
It isn't that hard.
Try for a 3% yield and 3% growth. You'll receive far more than that. However be modest in your goals. And remember... Do Nothing Else.
I would look at multi sector bond funds ala PONDX. Albeit I am now rotating out of a third to a half of my position in such into bank loan/floating rate funds ala PSFIX and NFRIX as a precaution to rising rates as well as getting some exposure to that insanely overvalued junk bond market via WHIYX.
Reply to @SteveS: "Pfizer, ATT, Unilever, Proctor and Gamble, Union Pacific Rail, Travelers Insurance, Kimberly Clark, Kraft Foods, Kinder Morgan, Reynolds America, ABB, JP Morgan, Wells Fargo, Vodafone, Phillip Morris, Altria, Lyondellbasell Industries, ABB, and pick a few you like as Walmart, Home Depot. And be done.
Throw in a few MLP's like MMP and VNR, a foreign Fund Stock and Bond if you must, from Mathews and a VYM from Vanguard. And you're 90% on the road to wealth. "
That's kind of the route that I'm going. I'm definitely in agreement with the general idea.
Your Dad and your uncle must have been very early investors in Walmart. In fact, before Walmart even had the first store in 1962. As far as I know, Walmart offered first common stock to public in 1970 (ref).
Anyway, the days might be off a little bit. But it is clear that this was a very early stage investment. Both your dad and your uncle took risks in such early stage investments. $3000, $5000 must have been a very significant investment by that time's standards.
While Walmart, Microsoft etc. are a good example of success, many such investments might not turn out to be that successful. The market history is littered with those. We often do not hear much about those failures. Successful few dominate the air. In other words, there is survivorship bias.
Today, Walmart is not a bad company but it is far from its early growth days. It is also much less risky to invest. It will probably yield a good enough growth via dividends and some price appreciation, just not a spectacular one (see below calculation of returns).
So, it is prudent to have a portion of your money in stocks. At least the money that you will need in shorter term. It really depends on your liabilities, needs.
By the way, I calculated the returns for your dad and your uncle:
Bond return: 1.58% annualized over 7 years (kind of low, was it a low interest environment at the time?) Stock return: 39.79% annualized over 25 years (spectacular)
Well, congratulations to your uncle. He could have invested in many other not so spectacular stocks as well.
Reply to @Investor: Won't let you overlook KMart. Actually started as a simple 5 & dime store called SS Kresge in downtown Detroit in 1909. Spread nationally. Than in 1962 they opened the first KMart department store in Garden City, Mi. By 1970 KMart had become one of the most adored business enterprises in the country. Stock price soared. Everybody and his brother were wishing they'd bought Kresge stock ten years earlier. Same old "Shoulda, Woulda, Coulda"
(The youngsters here probably find it hard to remember when the current low-life run by Eddie Lampert was actually King of the Hill among U.S. retailers.)
If you go to Morningstar you can get info on funds that hold a particular stock. Let's use Procter & Gamble or PG. Put PG in the quote box and the click the "shareholders tab. From there you can see which funds hold the stock in various forms.
Reply to @Daves: if you have your rollover at a discount brokerage you can buy individual stocks.
Good luck with stock picking. Hopefully you can find some long term holds as you will be competing with mutual funds, hedge funds, pensions and other professional investors. So, you should have a long term view and a lot of patience.
Comments
2. When you have funds starting to short bonds and everyone is talking about NOW you're getting to the point where fixed income is done, I am becoming more skeptical. That's not to say that fixed income won't eventually really turn, but I think all the talk and action makes me wonder.
3. I would definitely not invest heavily in bonds at this point, and I think one has to be choosy at this point about what fixed income sub asset classes you invest in. I think most people shouldn't be 100% anything (unless you can accept the risks with being 100% anything), so you should have some bond exposure, but I think how much depends on your situation, desired risk tolerance, etc etc.
Edited to add: David makes good points below, and if the volatility is acceptable, MLPs and real estate may be other income ideas to consider.
I suppose if it were me, I'd start by thinking about my asset allocation: why 50/50? T. Rowe Price's Retirement 2025 fund is 50% domestic equity, 25% international equity, 25% other. Or is this a comingled sort of average: 75% equity in your long-term portfolio but 25% in your short-term one, so ... In any case, I'd start there.
If you think about the division your asset allocation between growth and income, rather than stocks and bonds, you might then broader how you think about reallocating some or all of the your. If you ultimately decide that, say, 60/40 works for you, perhaps the 40 might be split among conventional fixed income, real estate, preferred stock, MLPs and so on? The 40 might end up at 20% bonds, 5% each real estate, preferred, gold and other real assets.
Highlights of the Price portfolio include: 13% intermediate-term bonds, 4% e.m. stocks, 3% real assets, 3% e.m. bonds, 1% tips.
Just stuff to talk about.
David
I think I’d look for a hybrid type income fund rather than straight fixed income funds. You will find a lot of them listed under conservative allocation funds. I have provided a link to them. Simply click on the time period to see the leaders and you can click on the fund itself to view its Morningstar report.
http://news.morningstar.com/fund-category-returns/conservative-allocation/$FOCA$CA.aspx
Hope this helps.
Skeeter
A recent job changed prompted a rollover to Fidelity so in effect " I started over" with allocation and funds. When I was done the mix turned out to be 40% foreign, 20% US and 40% cash /bonds. Some of the funds I used are bond funds and some were allocation funds with bonds or flexibility. Keeping cash is something I do also. Some of the funds might work for you.Funds are:
Matthews Asia Strategic Income(MAINX)
Fidelity Strategic Income(FSICX) 4 distinct areas of the bond world
Templeton Global Total Return(TGTRX)
Riverpark Short Term HY(RPHYX)
Northern Global Tactical(BBALX) 30%+ bonds at this time w/flexibilty.
Payden Value Leaders(PYVLX) A stock fund with a yield over 4%.
Art
REITs, MLPS are to correlated to equity to be considered diversifiers. I am only 47 and do not have this type of porfolio...I just wonder how it might work in the coming environment.
Just my two cents.
BTW, it is not that you do not have bonds. You do have significant amount of bonds in your balanced funds. If you want to put the cash to use, consider adding some more to your balanced funds and let the managers manage the duration/credit quality of bonds. For the rest you can keep it in RPHYX.
If you still want some other bond funds consider the following:
MAINX - An Asia Region focused Income fund. David has conducted Interview with manager as well. Read the profile and listen to the interview.
SUBYX - Unconstrained Bond fund. The managers has build a bond fund with 'negative duration'. Read David's profile as well - SUBFX is the instl. class.
FRIFX - This is actually not a pure bond fund. Consider it as a Real-Estate balanced fund. It has stocks, bonds, preferred and convertibles.
Note: +7.5% return in 2008.
Here is a bit of a primer on MLP's and risk.
http://www.etftrends.com/2013/03/master-limited-partnership-etf-attractive-yields-with-risks/
Here is another idea that takes the guess work out of a 60/40 portfolio, only with an income focus on the equity side that yields 5-5.8% paid monthly.In addition it is about 45% non dollar across it's portfolio and is balanced quarterly as to it's 150 positions.Just bought some in the last month and feel the idea is a solid premise for those of us "chasing yield" and concerned about the $$.Sells at a slight premium to NAV, though that has narrowed a bit recently.
http://www.arrowshares.com/files/DDF/GYLDQ42012FactSheet.pdf
My father was a police office who proudly purchased a $5000 Walmart bond in 1958 or 59.
This was all the money Mom and Pop had to invest. Mom, myself and my sister marveled at Pop's gutsy move. Instead of passbook savings Pop plowed into Wall Street and was an Investor.
He redeemed the coupon seven years later and Pop collected $579 + $5000. Brilliant.
My uncle John in Dallas coincidentally purchased $3000 in Walmart stock and in total collected $13,000,240, some 25 years later. That was my first lesson on bonds, and one I never forgot.
Uncle John quietly bought me my first car in college and Pop struggled to send me $5.00 a week spending money. I appreciated all they did immensely.
When in a bond buying conundrum as many are these days. One consideration might be to simply purchase the underlying engine (stock) vs. the engines exhaust fumes (i.e. bonds).
Over time your rewards will be incredible. Bonds are certainly OK, but consider this option.
Consider these world class names & you'll never, ever wish to churn, sell, wonder about, or fret over. Just buy them, sit on them, and do NOTHING EVER! Then receive checks and checks and checks.
If you wish to buy a group of stocks of the worlds greatest companies, you'll have enormous satisfaction as well as rich gains. Not all will be winners, that can't happen, but most will win for you year after year. Just remember Do Nothing! You don't have to do anything, because hundreds of thousands of people go to work each day at these enterprises and do the work for you.
Consider:
Pfizer, ATT, Unilever, Proctor and Gamble, Union Pacific Rail, Travelers Insurance, Kimberly
Clark, Kraft Foods, Kinder Morgan, Reynolds America, ABB, JP Morgan, Wells Fargo, Vodafone,
Phillip Morris, Altria, Lyondellbasell Industries, ABB, and pick a few you like as Walmart, Home Depot. And be done.
Throw in a few MLP's like MMP and VNR, a foreign Fund Stock and Bond if you must, from Mathews and a VYM from Vanguard. And you're 90% on the road to wealth.
It isn't that hard.
Try for a 3% yield and 3% growth. You'll receive far more than that. However be modest in
your goals. And remember... Do Nothing Else.
Here is a somewhat dated M* article with some other ideas in the same space.The above link to arrowshares should take you to the fact sheet.It's not in the Gov't TSP,which i am tranferring/withdrawing from over the next 8 years as I transition into retirement.
http://news.morningstar.com/articlenet/article.aspx?id=556106
GYLD web site;http://www.arrowshares.com/default.aspx?act=fund.aspx&productID=1
Quality dividend stocks, VYM, Matthews etc...Income and appreciation potential. Kudos to Steve S' suggestions.
Do read "Barrons" consistently, so many great ideas come from that publication and it takes a great deal of anxiety out of investing.
Clark, Kraft Foods, Kinder Morgan, Reynolds America, ABB, JP Morgan, Wells Fargo, Vodafone,
Phillip Morris, Altria, Lyondellbasell Industries, ABB, and pick a few you like as Walmart, Home Depot. And be done.
Throw in a few MLP's like MMP and VNR, a foreign Fund Stock and Bond if you must, from Mathews and a VYM from Vanguard. And you're 90% on the road to wealth. "
That's kind of the route that I'm going. I'm definitely in agreement with the general idea.
Your Dad and your uncle must have been very early investors in Walmart. In fact, before Walmart even had the first store in 1962. As far as I know, Walmart offered first common stock to public in 1970 (ref).
Anyway, the days might be off a little bit. But it is clear that this was a very early stage investment. Both your dad and your uncle took risks in such early stage investments. $3000, $5000 must have been a very significant investment by that time's standards.
While Walmart, Microsoft etc. are a good example of success, many such investments might not turn out to be that successful. The market history is littered with those. We often do not hear much about those failures. Successful few dominate the air. In other words, there is survivorship bias.
Today, Walmart is not a bad company but it is far from its early growth days. It is also much less risky to invest. It will probably yield a good enough growth via dividends and some price appreciation, just not a spectacular one (see below calculation of returns).
So, it is prudent to have a portion of your money in stocks. At least the money that you will need in shorter term. It really depends on your liabilities, needs.
By the way, I calculated the returns for your dad and your uncle:
Bond return: 1.58% annualized over 7 years (kind of low, was it a low interest environment at the time?)
Stock return: 39.79% annualized over 25 years (spectacular)
Well, congratulations to your uncle. He could have invested in many other not so spectacular stocks as well.
(The youngsters here probably find it hard to remember when the current low-life run by Eddie Lampert was actually King of the Hill among U.S. retailers.)
This sounds great but.... since I am invested in rollover IRA's (all mutual funds), how can I invest in individual companies as you suggest?
Can you suggest any MFs that invest heavily in some of the companies you mention?
Daves
If you go to Morningstar you can get info on funds that hold a particular stock. Let's use Procter & Gamble or PG. Put PG in the quote box and the click the "shareholders tab. From there you can see which funds hold the stock in various forms.
Art
http://investors.morningstar.com/ownership/shareholders-overview.html?t=PG®ion=USA&culture=en-us
Good luck with stock picking. Hopefully you can find some long term holds as you will be competing with mutual funds, hedge funds, pensions and other professional investors. So, you should have a long term view and a lot of patience.