Hi! Glad to have found you all by way of the M* boards where I've been a forums poster/reader for
a number of years. I work with an hourly advisor a few times a year to help me with allocation and
am always interested in other opinions about my total portfolio - especially with regard to my current
bond fund holdings and concentration, quantity of positions (i think it's too many and would like to
consolidate where possible). Is there a simple way to show my PF here - or can it be viewed by non M*
users (as it is a Shared Portfolio there)? I am very interested in an alternative to longer-duration bond
funds such as VFIDX and a few ETFs - which i have some concerns about in the rising interest rate
environment. The RSIVX reviews here caught my attention as i was looking also at OSTIX - but my
FA friend when we last spoke in December - said he felt my total PF was already more or less mirroring
the same approach (with the funds i am already in) and that it would be redundant. I am not feeling
the love for anything with the Long-Term component in it for the near term....
Sorry for dumb questions or anything out-of-line in this initial post.. just getting acquainted and
would love to get some feedback on any possible changes i could make on my own to improve upon
my chances for better returns and avoiding the prospect of NAV losses in bond funds
Thanks!
Mike
Comments
Folks do sometimes share portfolio weights (bonds 38%), individual holdings (VFIDX 12%) or sleeve composition (40% long bonds, most Treasuries; 40% intermediates, mostly corporate...). We don't have any site-based way of peering at shared portfolios (the prospect of which might make me a little anxious).
So, you might share the composition of the bond sleeve of your portfolio, assuming that your bond exposure comes mostly in dedicated fixed-income funds rather than blended asset/hybrid funds.
Your questions, and your underlying concerns, strike me as sensible. My general impulse would be to encourage you to look at the choices and arguments made by really good fixed-income investors who have the freedom to go anywhere and the temperament to use that freedom. The Reams Asset Management folks who run Scout Unconstrained, the Osterweis team that runs Osterweis Strategic Income, and Mr. Romick at FPA Crescent all seem like voices worth hearing. If you look at our January 2013 issue, you'll get a sense of what some of those folks were saying a year ago.
In general, my own approach moves - as you might have noticed - more in the direction of "strategic income" and independent blended-asset funds rather than conventional, duration-linked bond funds. At base, that just reflects the fact that the bond market strikes me as in flux and I simply lack the competence to make a confident judgment about where, within it, to go.
As ever,
David
Besides, January is terrible for making any changes based on current views. There are large distortions in the beginning of the year in views and markets. Everyone in the media is making predictions because they have to, mutual funds managers are getting out of their window dressing trades, etc. Now, we also have the added complexity of retail investors doing knee jerk reactions to last year's statements. There is no law that says you have to adjust your portfolio in the beginning of the year although most do by habit and convention!
Until then, low duration mix of Treasuries and Investment Grade corporates would be best with a little more in cash than your target allocation. In the worst case, they will likely be flat in total return.
If you want to be an active investor, then there may be near term opportunities to exploit while the dust is settling. Floating rates and high yield still look good at the moment to be in and have been for a while. But not if you want to be passive because that can change.
I have gotten much more interested in strategic income type funds for some of the reasons you suggest - and while the conventional funds i've held have served their purpose well over the duration of several years, i also question the validity of continuing to hold certain ones that seem far too sensitive to interest rate and now, volatility - than they have been during the overall bond market run-up.
I appreciate your perspective and will be glad to follow-up with a post of the general portfolio weights, composition percentages, and some of the specific funds that i am concerned about.
Thanks!
Mike
There are many strategies in bond funds - duration strategies, asset allocation strategies, hedged strategies, etc. Some will do well at the end of the year, some won't but we have no way of knowing who will or won't. If you diversify across them, the combined returns may not be any different than a conservative and conventional short duration allocation at much lower ER.
Past performance is particularly bad in this inflection period as the choice of PIMCO/Gross at the beginning of 2013 showed. After all, they were one of the brilliant strategic movers, right?
Reality seems to be that none of these huge funds are able to make much of a correction in the relatively illiquid bond markets to support an active/tactical allocation strategy or to manage risk if the core investment thesis doesn't hold. So you are pretty much betting on the static investment philosophy. But we have only one year of inflection point to judge from a long bull run in bonds that made most everybody look like a genius, some more than others. By the time managers establish credentials in the new environment, their funds will get bloated enough to not be very "strategic".
I don't mean to just provide a non-constructive criticism, but I am not sure there is any obvious solution to deciding what to do in the bond market in this climate except perhaps for finding a small boutique fund that you trust with a risk management strategy if their investment thesis doesn't hold, staying very conservative in duration or doing your own active management if you can because you can be much more nimble than any of these funds.
maintaining a portfolio of funds/ETFs/CEFs with an occasional FA's input for about five years after being in and out of managed advisory relationships. I'm 55, self-employed without debt, with an aim to at least move into a semi-retirement mode in maybe 5-7 years -- and
my income fluctuates anywhere from mid 5-figures to low 6-figures as a freelance performer.
My asset allocation is roughly as follows:
US Stock: 20%
Foreign Stock: 10%
Bond/Fixed Income 56%
Cash 12%
Other Stuff: 2%
Growth has been somewhat flatline in recent years with the heavy bond weighting
and I'm interested in how i might improve returns with some possible alternatives
in the Fixed Income sector(s).
The Bond/FI breakdown is as follows - in order of percentage size of total portfolio:
14% Vanguard Short Term/VFSUX
8.9% Vanguard Interm-Term /VFIDX
(7.7% Cash)
3.9% SPDR Nuveen Barclays Build America Bond ETF(BABS)
3.5% Vanguard Short Term Bond VCSH (ETF)
3.3% Vanguard High-Yield Bond VWEHX
3.3% Blackrock Credit Allocation Income BTZ (ETF)
2.7% Vanguard TIPS VIPSX
3.2% Alliance Bernstein Income ETF (ACG)
2.8% RidgeWorth Seix Floating RT Hi Inc. SAMBX
2.2% Eaton Vance Short Duration DIversified EVF
1.9% Fidelity Floating Rate Hi Income FFRHX
1.8% Schwab TIPS ETF(SCHP)
1.7% PowerShares Preferred Stock PGX (ETF)
1.7% MS Emerging Mkts Debt MSD (ETF)
1.5% Nuveen Div.Advantage -(Muni Nat'l Long) NZF (ETF)
0.9% SPDR Barclays Cap Convertible Secs CWB
I'm excluding the equity side of the Portfolio. Obviously a lot of small positions
and these are spread across a taxable account, an I-401k, SEP-IRA and Roth -
largest positions are in Taxable.
I realize this is alot of holdings but overall, expense ratio average is low.
Aside from looking at ways I might do some consolidation to reduce the
quntity, I'm looking to get a sense of any 'red flags' that might jump out as
being problematic - or vulnerable to principal erosion in a rising interest rate
environment. Many of these funds have served their purpose well as a hedge
against equity volatility in past years but i question whether some of them are
still valid if bonds are likely to do little or nothing performance-wise for one or
more years to come.
If so, my thought is, why not explore a strategic income fund as a substitution
for one or more of these positions to at least have a shot at better than flat or negative returns.
I know this is a little messy without being able to simply provide a neat pie-chart graph
per se. In any event, would welcome any perspectives and thanks for taking time to
read through all of this.
Best Regards,
Mike
Mike, you need to roughly figure out your financial needs for retirement and how much it needs to appreciate or not from what you have now and where you need to be factoring in your savings, income needs, etc. Use one of the free online retirement calculators to get an idea without having to specify a portfolio. That will give you a goal for roughly how much performance you need from the portfolio. The portfolio needs to be constructed with respect to those goals. Otherwise suggestions might not be very relevant to you. Unless you want to be an active tactical allocation investor, you don't need this many funds or most of those funds. Your beta exposure to equities may not be sufficient to meet your needs which we do not know.
But in Mike's defense, he is not alone here in being a fundaholic.
I'm not surprised at your reactions though in my defense i can't 'take credit' for
the composition of this PF as it stands. Actually it is for the most part the work of my
hourly advisor friend who has pretty much overseen this - and expanded upon it since
i began working with him in early '09. He is a former fund manager and derives no
compensation from any of the fund recommendations - strictly an hourly arrangement where we revisit things a few times a year. I guess his overall viewpoint is that quantity of funds is not a major deal if the expense ratio is reasonably low across the board and each piece of the puzzle fulfills a specific role or purpose in serving the total diversification of the portfolio...
(yes i have raised the quantity of positions issue with him a few times and that's pretty much his take on that subject).
That said, we haven't seen stellar returns - but I haven't exactly green-lighted a moderate-to moderate-aggressive approach either. Rather, I've been more risk-averse than many at my age since the banking collapse period and was never able to fully recommit to a more ambitious/aggressive policy - so, to some extent, his hands were tied and he was inclined to make choices with my risk-aversion in mind. Where I could really use some help is in specific changes/consolidation ideas for the bond sleeve - and as i mention - look more at strategic income vehicles such as OSTIX or RSIVX type of funds - perhaps to replace multiple smaller bond fund/ETFs - and hopefully serve to achieve more efficient performance and some positive returns versus flat to under-performance for the next few years (?)
Thanks!
Lower quality bonds tend to track equities (along with the economy's prospects) - so their recent performance is in a sense a bit deceptive. Higher grade bonds - especially Treasuries - behave in an opposite manner, normally rising in value as the economy sags. The point is: some exposure to high quality bonds can still (I think) help provide portfolio stability in times of economic distress (when equities are likely to fall).
I'd second a lot of the advice above. Those (high quality) bonds are best left in the hands of a skilled manager with a broad mandate. These guys make a living balancing various risk assets, including bonds, in ways you and I cannot. A few I own which I think do a pretty decent job here are: OAKBX, TRRIX, and RPSIX. (Some will argue the last two are "static" allocations. Yes, but I still find they behave in fairly stable fashion for whatever reason.) These three are mentioned only by way of example and not intended as recommendations.
Age and circumstance dictate our investment choices, including whether and how much fixed income to hold. I'd still argue that someone under 40 or 50 would be a lot better off staying 100% equity funds at that stage in life and than perhaps slowly adding some alternatives, including bonds, as they grow older. Regards
At least from my perspective, maybe the best advice I've read here in many a moon. Thanks Hank.
Now on a day like today, my performance was quite impressive with this mix but..there i go again paying attention to the daily gyrations of the market; ) - Anyway, thanks once again for everyone's help - you've given me some good ideas to consider.
Regards,
Ted
http://bonds.about.com/od/bondinvestingstrategies/a/Stocks-And-Bonds-Year-By-Year-Total-Return-Performance.htm
I am looking at 'possible' scaling back on freelance income and more reliance on investment income.
So that being said, it seems a little extreme to suggest a 70/30 ratio of equity to bond fund holdings at this stage. Let's say hypothetically that I have a million in assets at age 55, as a self-employed sole proprietor. Would you be inclined to put 70% of assets in stock at risk and adopt a growth-oriented approach? Not being contentious - just want to be clear on what you're getting at.
Also just to reiterate - the advisor has nothing to gain in recommending the funds in this mix - in other words, nothing to be gained by suggesting i have 30 funds versus 10 funds - his work is hourly - and he's entirely independent. I'm gathering from the replies here that he may be irresponsible as far as the quantity of funds we are using ?
Thanks again,
Mike
Everybody's different. So, don't take anybody's advice as necessarily right for you. From age 25 until around 50 my fund-appointed "adviser" had me in just one fund, a growth fund, TEMWX. In retrospect, his choice served me very well. My life was much busier than and I was comfortable with that one very good fund. Rarely even checked the value. After 50, I grew increasingly cautious, dropped the advisor, began studying-up on investing, and started diversifying widely. This new approach suited my age and conservative nature - though I've made more than a few mistakes along the way.
I respect Ted and the others who hold very equity-intense allocations, even at their advanced ages. On the other hand, I am still haunted by the faces and voices of long-acquainted friends and neighbors relating to me their heart-wrenching stories of 50% or greater losses of retirement savings over a very short (18 month) period back in '08 & '09. One particular recollection is of a fellow who had come to think of high yield bonds as a lot safer than equities and had piled most of his net worth into a high yield fund. The good ones dropped 40-50%. Their less conservative peers fell 60-70% over that period.
Regards, hank
Unless your friend went into a closed end high yield bond fund, and only an idiot's idiot would pile most of their net worth into a closed end junk fund, the above is a patently absurd statement. First of all, on a risk adjusted return basis, junk bonds are safer than stocks. And the actual facts are, in the open end junk bond fund category in 2008 they lost on average 26% after being down 34% at their nadir in early December 2008. That was a once in a lifetime bottom followed by the greatest bull ever in junkland and by late summer of 2009 they were hitting all time historical highs which they have continued doing to this very day.
I spoke with the fellow mentioned in December '08, and your figures show an average high yield drop of 34% at around that point. Quite possibly his losses were near 50% by then. I couldn't tell you what fund he was in or if it was open or closed end (though you are correct that the average closed end HY fund did drop 50% in 2008.) ..... Just for context, remember that the losses (at least in the equities markets) continued well into 2009 until the sharp rebound began during the second week of March. It's likely the low point - for most markets anyway - was reached around March 9. If you have the average losses for junk bond funds by that date, I'd appreciate it.
As I think you suggest, those who stayed the course were rewarded. Those who threw in the towel at the worst possible moment suffered serious and lasting damage. It's hard now to sense the panic many felt at the time and to understand their decision to sell - even at the worst possible time.
Thanks again for the correction. Regards
Thanks Hank, as you can guess I am a tad sensitive about the junk bond market as I believe it is one of the most underappreciated classes out there (albeit now believe junk is overpriced and don't own any pure corporate junk funds)
I don't even have to look that one up as the bottom in junk was as I mentioned in my post, December 2008. Being a momentum trader it was one of the rare times I actually got in as close to a bottom as possible and that was all because of what happened on December 16, 2008. Thanks Ben Bernanke! Junk had a huge rally off its December lows into early February then stopped me out and declined into the March equity lows before it took off again on the Zweig buy signal on March 9 (there were actually a cluster of Zweig buy signals that March, a rarity) But junk never approached its December 2008 lows in March 2009 so the average loss for that vicious bear in junk (began in May 2008) was the aforementioned 34%.
all the little (5% or less) diversifier positions shown - and accomplish the same thing with fewer funds and better performance. I wasn't automatically assuming or suggesting the FA was not doing a good job - but i'm getting the impression from you and other posters that i could be doing much better - and if so i'd like to make changes sooner than later - be it DIY or
working with a different FA. Thanks for your help once again,
Mike