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Hello Fools! I'm looking to re-balance my Fidelity IRA after a nice run up in my equity portion and need to get back to a 70/30 as I'm 87/13. I'm a big fan of low cost index funds, invest long term (~20yrs to retirement) and want a simple portfolio of 70 equity and 30 bonds/something!

As much as I don't want to do bonds given high probability of interest rate rise/risk, I'm considering Dodge & Cox Income Fund or Fidelity® Total Bond Fund.

Given I'm in for the long term, does it still make sense to take this bond portion? I'm just looking to fill this 30% bucket with something more conservative to balance out my portfolio.

Would love to hear some feedback!

Thanks in advance - really appreciate some feedback!
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As much as I don't want to do bonds given high probability of interest rate rise/risk, I'm considering Dodge & Cox Income Fund or Fidelity® Total Bond Fund.

Given I'm in for the long term, does it still make sense to take this bond portion? I'm just looking to fill this 30% bucket with something more conservative to balance out my portfolio.


Your concern about interest rate risk, and its effect on bond prices (and therefore, the share price of bond funds) is certainly well-based. But keep in mind that interest rate risk isn't that much worse than the risk of buying stock index funds when the indexes are at an all-time high.

You say you're in for the long term. To me, times like this are when it makes sense to buy individual bonds and plan to hold them to maturity. Yes, if rates rise the market value will fall, but that's only temporary, as they'll pay off at par value at maturity. (Or the call date, if applicable.)

Bill
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Given I'm in for the long term, does it still make sense to take this bond portion? I'm just looking to fill this 30% bucket with something more conservative to balance out my portfolio.

Given that you are 20 years to retirement, I would argue that the optimum asset allocation is 100% equities and 0% bonds.

Bonds give you income but no appreciation. But if you are in the accumulation phase, you don't need income. You need growth (capital appreciation). A primary thing you need is protection against 20 year's worth of inflation. And bonds give you NO inflation protection[*].

The purpose of the bond allocation is to dampen the volatility. But what do you care about short-term volatility when your first withdrawal won't be for a couple of decades? You won't be doing the dreaded "have to sell stocks when they are down" thing--because you won't be selling stocks at all. Not for another 20+ years.

“It makes little sense that we should care about a bad day or a bad year in the stock market if it provides us with good long-term returns.” -– William Bernstein

“You need long-term strategies to reach long-term goals, and paying attention to short-term fluctuations in the stock market is one of the most destructive things you can do for your long-term financial health.” -- Jim O’Shaughnessy

"Over the full market cycle, investing to achieve short-term comfort costs a fortune." -- John Hussman

[*] I've read a few articles & papers recently that are saying that after considering inflation, bonds actually have a NEGATIVE total return right now. That's a pretty high price to pay for dampening something (volatility) that you don't care about.
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RedSox2004 you are doing the most important thing with regard to your retirement - thinking.

In my view, you may be looking at things in correctly. You do not provide enough information.

The fixed income holding world should be very different for somebody within 4 or 5 years of depending on their portfolio for money vs. somebody with 10 or more years. Between 5 and 10 years that depends.

Based on the comment your are considering D&C Income fund I suspect you are view bonds as an income/growth source. The experts generally say the purpose of bonds is risk reduction -- i.e. if the S&P drops 40%, bonds will not. So you can live off the bonds instead of having to sell the stocks you bought at a price much higher than the market.

Take a serious look at a graph of the S&P 500 from 2000 through 2018. Sure everybody wants growth, but as bad as 2008 was, it was not years to recover from that price drop.

Take a look at any interest sensitive investment return over any period since 1980 through 2018. Bond rates have been falling generally. That has given bonds a big boost in returns/income for the last 35 or so years. That is not likely to happen again. Rates may begin a climb or just work up and down in a range. They are not going to have a general downward trend.

If you opt for bonds as risk protection, you can put your bond money into short (or ultra short) term bond funds. Another option is puts 5% of your portfolio in a money market. Returns are crap, but those funds will cover market downturns so you are not forced to "Sell Low". We use this approach.

If you really want income from your fixed income, look at some Junk Bond Funds -- a few funds have "high quality" Junk bonds. They give returns that have more than paid for their taxes. They do provide some risk reduction, but not as much as government bonds. I am 76 and choose to have 35% in fixed income. In addition to my 5% in a money market, most of the rest of my fixed income is in VWEAX. This on is very different than funds that invest in shale oil or Porto Rican bonds. If you decide to try this - you need to do your homework.

For homework generally on mutual funds, my Go To place is Morningstar.
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Well, you go 100% in stocks, and you might actually lose over time. We've been in a 9 year bull market and too many folks are blinded by the fact that the market usually doesn't have 9 year runs.

- ----

The downside of being 100% in stocks is that in years where the stock market plunged, if you were all stocks, you had no way of rebalancing

Look at 2008 - OCT 12 07 SP500 1560

MAR 6 09 683

Wow.....you went down more than half. And stayed down for March 28 or so 2013!

If you had, say, 30% in bonds or REITS or TIPS........and rebalanced once a year.....

On Dec 31, 2007, you would have moved money from the bonds to the stock funds

On Dec 331, 2008....same thing

When the market recovered , you'd own a LOT MORE SHARES of stock.

- - ---

All of the 30 year SWR studies are done upon rebalancing

--------
-------

Another example

You are all stock on March 4, 2000..........SP5000 around 1527

and on October 4......it's 800....or half of what it was. OMG.......

Come Dec 31, you rebalance - take bond money and move to stock.

You come out ahead of the game. Own many more shares of SP500

- - -- -

I doubt there are many financial advisors out there who advocate 100% stock portfolios for too many people. Well, if you have enough assets so your SWR is 1% or 1.5%,you can ride the market. Heck, you get that in dividends....... likely - but they too can be cut -

---

If you were all stock in 2009 and retired that year, well, good luck. You got creamed. And it took five years to get the SP500 back to where it was.

- - ----

I was probably 80% stock before I retired - but that was 18 years ago...and CDs were paying 6%......and I just loved that......had a bunch......

Now....for my IRA, I'm 50/50 with the other half in TIPS, REITS, GNMA and foreign bonds. 3% cash to pay the RMD monthly - and the dividends/interest from the funds are used to pay the RMD for the most part. Half to sell a bit every 18 months to fund the rest of the RMD.

5% of non-IRA in CDs and MMF and checking account.

10% of non-IRA in tax free bonds, GNMA, REITS.

I aim for 70/30 overall..but naturally the stock market rise has changed that a bit. Riding it out.

Haven't had to sell anything for income - just do fine off SS, RMD, teeny pension, and the interest on bonds, REITS, GNMA, and dividends on the stocks.

- - - ---

Accumulation phase...I'd still advise having bonds. When the market tanks, it gives you the ability to buy stocks cheap......

If you look at Bernsteins SWR curves..... the SWR for 'all stock' is less than 2%. Peaks at mid point at 4%.

Accumulation phase - well, methinks you play with fire assuming that stocks are going up and up and up and up and up and up forever with no events like 2000 and 2008 ever happening again.


t
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The downside of being 100% in stocks is that in years where the stock market plunged, if you were all stocks, you had no way of rebalancing

If you are 100% in stocks, what's there to rebalance?

PSU
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PSUEngineer asks,

If you are 100% in stocks, what's there to rebalance?

</snip>


You might still rebalance to maintain your desired allocation between large cap, small cap, and international stocks.

intercst
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You might still rebalance to maintain your desired allocation between large cap, small cap, and international stocks.

Sure but the discussion was between stocks and bonds, not different classes of stocks. I was just sticking with the discussion.

PSU
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As much as I don't want to do bonds given high probability of interest rate rise/risk, I'm considering ...Fidelity® Total Bond Fund.

Well, that statement doesn't make sense to me.

Here's the thing about rebalancing and asset allocation: You don't do it to maximize potential income r growth, you do it to minimize the potential loss. So, on the bond side, interest rate risk is something to be aware of, but if you have individual bonds, you'll get the interest payments and then get your money back when the term ends. If you have bond funds, you'll take a hit to the fund's NAV when interest rates rise, but over time the bonds will be replaced with ones earning a higher rate.

I had this concern five or six years ago: interest rates had nowhere to go but up, so I didn't want to diversify into bond funds but also didn't want to be stuck in a 92% stock allocation if the market crashed. So, I put money into the Merger Fund, MWCRX, FLOT and other bonds + bond-like things (that maybe have "levers" to adjust to buy only types of bonds that wouldn't be hit as much...floating rate, etc.). All that stuff has underperformed my "regular" bond funds. I believe I was 100% right--bonds will lose value as interest rates rise--but I was either too early, or tried to avoid bond losses in an ineffective/inefficient way. Point here: Learn from my mistake.

A quote I heard: If you don't have anything that's going down, you're not diversified. You don't have to believe that 100% to see the truth in the concept. That, plus understanding that:
1. The portfolio with the best longevity (historically) during the withdrawal stage is somewhere between 60/40 and 80/20.
2. An advisor that came to talk to my company's employees about saving/investing/retirement said that over the very long term, an portfolio with some asset allocation outperformed 100% of any one thing. I don't recall the mix, and would sure like to see the exact numbers in a spreadsheet, but with a couple hundred people there I didn't feel like calling him on this assertion.

I wish I could have back all the life insurance and car/home insurance premiums that I "wasted," but obviously we can't take the risk of massive loss by being on the wrong side of that low probability / high consequence event. The bonds are sort of insurance against a higher probability event of stocks losing >20% (say) at some time...it's gonna happen.
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That 2nd part is true, my goal is to reduce risk by limiting my stock allocation. As you said, if market drops, ala 2008, I want to have part of my portfolio, i.e bonds/other not drop as much.
Thanks much for feedback!

"Based on the comment your are considering D&C Income fund I suspect you are view bonds as an income/growth source. The experts generally say the purpose of bonds is risk reduction -- i.e. if the S&P drops 40%, bonds will not."
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GWPotter - this is some great info, thanks. Correct, I'm looking for risk protection as you mentioned not income at this point. As you mentioned, I was looking at shorter duration funds or a mix of short/intermediate and D&C Income seemed to have good long term track record but know this isn't everything. I have also thought about a small amount in MM account. Thanks for tip on Morningstar and use it often.
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An advisor that came to talk to my company's employees about saving/investing/retirement said that over the very long term, an portfolio with some asset allocation outperformed 100% of any one thing. I don't recall the mix, and would sure like to see the exact numbers in a spreadsheet,

What does he mean by "long term" and "outperforms"?
Usually when these people say that, they tend to mean long term as ~20 years. And pretty much ignore the overall performance but pay a LOT of attention to short term (1 year) volatility & drawdowns. They are trying to sell you something, so they like to scare you with big bad things (volatility and drawdowns) that happen in the short term but are mere blips in the long term.

like to see the exact numbers in a spreadsheet

Ask and ye shall receive.

All rolling 20 year periods (actually all rolling 240 month periods), 1950 to 2017
S&P500 and 10-yr T-bills, all interest & dividends reinvested (monthly rebalance)
("10'th percentile" means 10% are below this and 90% are above this.)

100/0
Median CAGR: 10.6% Min CAGR: 6.3% 10'th percentile CAGR: 7.4% annualized stdev: 0.6%

95/5
Median CAGR: 10.5% Min CAGR: 6.3% 10'th percentile CAGR: 7.4% annualized stdev: 0.6%

90/10
Median CAGR: 10.4% Min CAGR: 6.4% 10'th percentile CAGR: 7.4% annualized stdev: 0.6%


0/100
Median CAGR: 7.0% Min CAGR: 4.0% 10'th percentile CAGR: 4.6% annualized stdev: 0.4%

5/95
Median CAGR: 7.3% Min CAGR: 4.5% 10'th percentile CAGR: 4.9% annualized stdev: 0.4%



60/40
Median CAGR: 9.1% Min CAGR: 6.3% 10'th percentile CAGR: 7.0% annualized stdev: 0.5%


I don't see that his claim bears out. What I do see is that higher stock allocation has better return, with no difference in the volatility.

The spreadsheet that I used is here: https://www.dropbox.com/s/cbzvg74iyeyfwt6/SPX-monthly-1950-2...
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