re: Recommended asset allocation for those entering retirement

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For me it was:
Bucket 1 | 3 years expenses in cash/CDs etc, 10-15% of portfolio
Bucket 2 | 80/20 split asset to bonds, 50-60% of portfolio
Bucket 3 | 25/30% growth funds like Russell 2k

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Good thread with reasonable plans.

I was a financial information junkie for years, especially after my balances became significant. I was 100% stocks for many years, with a focus on low cost indexes, and my play account of individual stocks. Traditional advice led to a bond ladder and a CD ladder around age 50 with a plan to retire early. Upon reflection, and after a few years of following that advice, I decided that I had enough money to move most of the bond and CD money back into stocks. I also use real estate as my diversification from stocks. Real estate in a growth area is lucrative compared to real estate in a non growth area, so that may not be a good choice for everyone.

I landed on the opinion that for those that have been fortunate financially, the traditional advice on the mix of bonds and CDs is too conservative. Timing matters, but my move away from safety has been the right choice for me.

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Rates are higher meaning prices are lower for bonds now. I’d argue it’s a much better time for bonds now than in the past few years. You can get close to 6% yields for investment grade (Baa3/BBB- to Aaa/AAA) bonds right now with about a 6yr duration.

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The problem is many people don't understand the difference between bond funds and individual bonds. If you buy individual bonds AND hold to maturity, the changes in interest rates mean nothing. You will get the agreed interest and par value of what you bought. Only a default would cause you to lose money.

You are correct. If you are a bond fund holder for the long term then you want higher rates. Yes the bond fund value dropped now due to higher interest rates. However you will eventually come out ahead and have higher overall return than if rates had stayed flat or fell. The catch is you have to hold the bond fund for long enough for the higher interest payments to make up the difference.

This is directly related to a bond fund's duration which many people don't understand either. If you need the money in a year; you shouldn't be buying a bond fund that has a duration of 5+ years.

That is why many people who held a general bond fund like BND were crying when interest rates went up. BND has a duration of 6 years but if you were looking to retire in a couple years then you are SOL. You would need to hold the fund for ~11 years (2xduration-1) to come out ahead. That assumes the interest rate stayed flat which it wouldn't.

Obviously if you could market time when to buy and sell based on rate changes that would be great but almost impossible without luck.

As someone who owns mid 6 figures in a ladder of individual bonds, I made sure I understood what I was getting myself into. Those individual bonds will guarantee my basic yearly income when I retire in a few years.

So I will never have to sell stocks in a down year to fund my basic expenses. This is my solution to SORR and to help ensure that I can retire early and not have to work again.

I still remember the crash of 2008 that derailed the plans (for years) of so many who were close to retirement or just started retirement and then fell victim to SORR.

A lot of what you said is correct and I agree with it. However, bonds and/or bond funds are not always just for the interest income. Bonds are used as a ballast to a portfolio to rally when stocks fall. Obviously, that’s not always the case (2022) but most of the time it is.

You referenced 2008/2009, look at what Treasury bonds or funds did during that time. No one cared about the income received, but the total return was huge.

The same happened during 2020 when COVID wrecked the market.

So I think our differences lie in I don’t think bonds should always be viewed as far as the interest earned but the total return.

But yes, if you have enough capital and can just build a bond portfolio (doesn’t always have to be a ladder) and use the income for living purposes then that’s great.

So what you’re saying is my statements are correct.

Treasurys rallied during COVID. There was no need for me to go into details of how, why etc…they rallied.

Unless you were day trading Treasurys your end result was they were a ballast to your equity portfolio, which is the point of this thread.

I’ve been involved deeply in bond market trading since 2000 and fully understand the trading that occurred across bond markets in 2020.