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OCD:

I was re-reading this thread and realized I wrote, - Two total stock market positions - one as part of a target date fund in a taxable account and another as part of a balanced fund held in my HSA. …

I meant that those are total bond market positions contained in funds of funds...

The HSA has pretty expensive bond fund choices, thus the balanced fund which I augment with other equity funds to make the HSA more aggressive. The Target Date fund was purchased some time ago and it just doesn't seem worth the tax hit to change it, so I just work with its allocations.

- Joel
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Not bonds in the traditional view, but it works for me.

VWEAX
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GWP -- I checked out VWEAX and it's got my attention. Thanks for mentioning it!

Lisa
in MA
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Junk bond fund. I wouldn't call junk bonds "bond alternatives", would just call them what they are: A way to get extra yield by reaching for junk. Nothing wrong with that, I own a couple of such funds myself.

They are an alterate investment. As Vanguard says about it: "high-yield bonds tend to have volatility similar to that of the stock market."

See? Just an alternative to stocks, like commodities, REITs, etc.


"This fund may be considered complementary to an already diversified portfolio."

"Diversified portfolio" means you have a significant allocation to investment grade bonds.


The bonds alternative I use is investment-grade preferred stocks.
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LisaMA,

You wrote, I have a bunch of annuities, and after the fees, they have a guarantee of 3.5 - 4% growth/year.

Are you certain? Are you certain this is guaranteed growth? Or is it a guaranteed return?

Annuities - especially variable annuities - are often sold on the basis of their annuitized "returns". Unfortunately the insurance industry's definition of "returns" tends to include a return of principal. So often the "guarantee of 4% returns" means they guarantee they will give you back 4%/year regardless of how well the underlying investments actually perform - but the fine print often doesn't actually guarantee you will achieve any particular rate of growth in your principal. This is actually a horrible guarantee because by making such a guarantee they are not guaranteeing the annuity will survive you - only that you will get paid something if the money lasts.

Note: This is not the case for fixed deferred or single premium annuities that when you convert, you select the life-certain option. Life-certain means the annuity is guaranteed to pay some minimum amount until you pass, so it won't stop paying just because the insurance company's investments did poorly.

Also, What do you have as alternatives to bonds?

I hold:

- Individual bonds (one near maturity, investment grade issue and two long-dated junk issues).
- A stable value fund (in my 401k) that is currently paying ~2.6% APY.
- A few floating rate preferred stocks tied to LIBOR, currently paying ~4% to 7.4% with most in the ~4% (investment grade) range. (I'm hedging against Fed rate increases here. Early this year I held the ETF FLOT, but decided I could do better with preferreds even though they are a bit less liquid.)
- A few fixed rate preferreds of varying quality paying between 5.98%(investment grade) to 9.45%(junk) APY - but mostly junk-rated issues.
- Two total stock market positions - one as part of a target date fund in a taxable account and another as part of a balanced fund held in my HSA. (This was the cheapest way to add fixed income exposure to my HSA that wasn't just part of the mandatory cash balance that received next to nothing in interest.)

And of course I have an e-fund, mostly at Ally, earning 1.9%.

Hope that wasn't information overload. I think bond funds for the most part suck and long ago I decided I could do better on my own. So far I'm pretty certain I have - though I admit you have to be careful and investing in individual issues presents unique dangers.

I also hold a few individual stock picks as well, but the vast majority of my equity position is in index funds.

- Joel
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Rayvt says:

Junk bond fund. I wouldn't call junk bonds "bond alternatives", would just call them what they are: A way to get extra yield by reaching for junk. Nothing wrong with that, I own a couple of such funds myself.

They are an alternate investment. As Vanguard says about it: "high-yield bonds tend to have volatility similar to that of the stock market."

=== === ===

Over the last five years, a well-run junk-bond ETF [for example, ticker = JNK] has had a Compounded Annual Growth Rate[CAGR] of only 2.5%, an Ulcer Index of 4.6, and a maximum drawdown of approximately 18% during Feb-March/2016.

In comparison, over the same time period, the S&P ETF [ticker = SPY] has had a CAGR of 11.3%, an Ulcer Index of 2.7, and a maximum drawdown of approximately 11%, also during Feb-March/2016.

Currently, short-term, FDIC-insured bank CDs are yielding in the vicinity of 2.5%, with absolutely no risk of capital loss.

So, in the current interest-rate environment, where is the attraction of buying a junk-bond fund ===> Personally, I do not see the attraction.

--BigBunk
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Currently, short-term, FDIC-insured bank CDs are yielding in the vicinity of 2.5%, with absolutely no risk of capital loss.


Indeed.

Ally bank is paying exactly 2.5% on 12 month CDs and 1.90% on savings accounts.

Capital One is paying 2.5% also.
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Lisa
in MA
going soon from a 40hr/week income to a 10/hr week income, aka mostly retired

#####

When my Gramps retired several years ago, they gave him a "golden handshake" -- and then rehired him as a part-time employee at the same hourly rate of pay, for 18 hours per week.

"NOT bad," he told me.

*bill
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BigBunk wrote So, in the current interest-rate environment, where is the attraction of buying a junk-bond fund ===> Personally, I do not see the attraction.

First off I do not have the skills of inclination to invest in individual bonds or stocks. So my investments are all in mutual funds.

My attraction is not to Junk Bonds but rather specificaly to VWEAX.

We have cash equivalents in quantities such that when coupled with Social Security insulate us from selling any of my mutual funds for at least 24 months. While VWEAX does indeed track equities somewhat, it also pays between 5% and 6%.

In terms of behaving like an equity, if you had investing $10K in VWEAX and VFIAX (S&P Index fund) on January 1, 2007 the lowest value for each of those investments during the great recession would be $6.1K for VWEAX and $4.8K for VFIAX. At roughly mid February 2014, VFIAX recovered enough to have caught up with VWEAX.

Don't know what the future holds, but in the last 25 years Vanguard has done a pretty good job of finding high yield bonds did not fail in the Dot Com Bust or the Great Recession.

VFIAX is our largest single investment.
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You also might want to look for a mutual fund that holds Preferred Stocks. In principle such a fund should offer an alternative that pays more than investment grade bonds. My bias against bonds is rather simple -- I believe over 5 to 10 year time periods they loose purchasing when one takes into account taxes and inflation over 5 to 10 year periods of time. (Obviously that did not happen over the 25 year period from 1980 on ward.

Personally, I hope we don't ever go through what preceded that 25 year period again.
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Preferreds...

GWPotter Beat me to it.


Submitted for your consideration:

https://www.barrons.com/articles/how-to-play-preferred-stock...
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OCD:

I was re-reading this thread and realized I wrote, - Two total stock market positions - one as part of a target date fund in a taxable account and another as part of a balanced fund held in my HSA. …

I meant that those are total bond market positions contained in funds of funds...

The HSA has pretty expensive bond fund choices, thus the balanced fund which I augment with other equity funds to make the HSA more aggressive. The Target Date fund was purchased some time ago and it just doesn't seem worth the tax hit to change it, so I just work with its allocations.

- Joel
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As Vanguard says about it: "high-yield bonds tend to have volatility similar to that of the stock market."

I had a high yield bond fund at one time, and found that to be true--higher yield with lots more volatility. I ended up getting out of high yield bonds because I decided not to have non-stocks try to take the place of stocks.
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What do you have as alternatives to bonds?

I have a smidge of money in MERFX, which profits by buying individual stocks which are going to merge. The gain is supposed to come from the fact that stocks in a merger or acquisition don't hit their calculated fair value right at the M/A announcement because there's the possibility it won't go through. MERFX returns more than bonds with a lot less volatility than stocks. The fee is 1.5% per year, so I've been looking at another M&A fund that charges 0.75% (don't have the name handy).

The rationale for buying that fund five or six years ago was that I wanted to get some assets out of stocks, but bond interest had nowhere to go but up (so, bond funds lose value as interest rates increase)...as it turns out, bond interest *can* stay low for a long time. Because this is a fund that has historically returned more than bonds but at much less volatility than stocks, it might have a place in a portfolio that's being drawn down or if you're making a "bond tent" in anticipation of drawing from rather than adding to your portfolio. That 1.5%, though...

Another attractive factor of M&A funds is that they're supposed to "float" above the current interest rate. That is, as interest rates go up, the M&A return should go up as well.

Other things I own that are in the bond category but aren't traditional types are BNDX international bonds and FLOT floating rate bond fund. They're still bonds, but not the same as government or corporate bonds.

I thought about using PFF preferred stocks, but decided not to have stocks try to substitute for bonds. It might pay to own preferred stocks themselves, but funds get hammered by rising interest rates along with bonds.
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Very good question for all to see what alternative investments people are using instead of bonds. After reading tons of info about fixed income investing, I came to the conclusion that I want nothing to do with bonds, bond funds/ETFs, or CDs. Even a 3% return is just not good enough for me.
So, my alternatives are high quality dividend stocks paying 4-7% annual dividends, and selling put & call options. About 50% of my IRAs are now in cash, and I use the cash to sell cash covered PUTs, covered CALLs, and other option strategies like straddles, strangles, collars, and iron condors. I've only been doing this for about 6 months now (just retired in Jan'2018), and have been earning about 15% annual return on the cash portion of my accounts. That has helped a lot to pad the losses I've seen on my equity positions this year. It does require a substantial amount of my time daily to keep up with it all, but hopefully, the time commitment will decrease as my options trading skills improve over time.
Everything I know about options trading was learned from all the free training available from optionalpha.com, which I would highly recommend to anybody who is interested and has the time. The training videos and podcasts are excellent. It's hard to believe in this day and age that you can get something this valuable for free. I would advise to get it while you can.
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I've only been doing this for about 6 months now...and have been earning about 15% annual return on the cash portion of my accounts.

1. It's not really "cash" if you're buying/selling options with it.
2. Extrapolating six months of something to a longer term can be *very* misleading.
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Even a 3% return is just not good enough for me.

I'm curious as to why not, and why it took you until 5 months into your retirement to determine this, since you retired 11 months ago, but have only been trading options for 6 months?

AJ
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Even a 3% return is just not good enough for me.
"Wanting or needing x% return doesn’t cause it to be available in the market." -- Financial Architects, LLC.


So, my alternatives are high quality dividend stocks paying 4-7% annual dividends

Dividends are not bond substitutes. A dividend-paying stock is nothing like a bond, it's just a stock...which pays a dividend.

I use the cash to sell cash covered PUTs, covered CALLs, and other option strategies like straddles, strangles, collars, and iron condors.

There is no free money available in the market. I won't step onto my standard soapbox about covered calls and their equivalent (cash-secured puts). Consider it stood upon, though. You can google "problem with covered calls" to see what I go on (and on and on and on) about.

the time commitment will decrease as my options trading skills improve over time.
...
Everything I know about options trading was learned from all the free training available from ...
...
It's hard to believe in this day and age that you can get something this valuable for free. I would advise to get it while you can.


"While you can"?? I have books that talked about all this stuff that were published long before the internet was invented. They say the same stuff that all the options sites on the internet say. No new information has come out in 30+ years.

"something this valuable for free."?? Maybe consider that perhaps free+valuable is an oxymoron. Perhaps even though it is free it isn't actually valuable.
Perhaps it is free _because_ it isn't actually valuable.

"as my options trading skills improve over time."
Think of this as a blackjack player in a casino. Being unskilled means you will lose a lot of money. Being highly skilled means you will only lose a little money, since you won't pull boneheaded moves. There is no level of skill that will beat the house. (Absent cheating like card counting--which the casinos have forbidden anyway.)


Here's a key thing to keep in mind:
Options are a zero sum game. The ONLY source for the winners' cash is from the losers' hides. In options, no money is created or destroyed; it simply is shifted from the writers to the buyers, and back again. ( http://www.financialarchitectsllc.com/ruminations.html )

I've only been doing this for about 6 months now
Your counterparty is a computer trading for an investment house like Goldman Sachs, etc. who have been trading options for many decades. What is the probability that a beginner will beat them consistently, especially considering it's zero-sum?
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Options are a zero sum game. The ONLY source for the winners' cash is from the losers' hides.

Sub-zero, actually, since brokerage commissions shave off a bit as the money moves back and forth between winners and losers.
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I retired in 2011, and I've been trading options since then. I keep my tax bracket below that which allows all of my LT gains to be taxed at 0%; I try to keep my ST gains as small as possible, holding my long options until I've held them long enough for them to be treated as LT instead of ST. 1256 type options get both ST and LT treatment no matter the holding period.

It's true that options is zero-sum, one just has to be on the positive side rather than the negative side more often. So don't automatically dismiss options trading - just know what you're doing.

Here are my results since 2012:

-- year -- -- ST -- -- LT -- -- 1256 --
2012 -2307 +3107 0
2013 +3795 +13931 0
2014 +928 +9722 0
2015 -401 +34131 +962
2016 +2562 +5915 +3470
2017 -1401 +12008 +1066


Bob
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It's true that options is zero-sum, one just has to be on the positive side rather than the negative side more often. So don't automatically dismiss options trading - just know what you're doing.

Now show a period which isn't a never-ending bull market.

The internet is chock full of articles and strategies by people whose investment career began after Feb 2009. Don't confuse genius with a bull market. Just about any strategy works well in a bull market.
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Now show a period which isn't a never-ending bull market.
... Don't confuse genius with a bull market, Just about any strategy works well in a bull market


1. As I said, I started using options after I retired in 2011.
2. My point is that options can be used successfully.

You appear to think that I am trying to see you something. I am not. What I am saying is that one should not automatically dismiss using options; their use can be effective.

As to how effective in a flat or down market, I will soon know. Already I find I am selling fewer puts and using covered calls on dividend-paying equities more often than before.

Bob
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2. My point is that options can be used successfully.

I guess my main point was about options being zero sum. The money the buyer makes comes out of the pockets of the seller. It's like in a friendly poker game. The amount of money that the winner takes home is exactly equal to the amount of money that the losers's wallets are lighter by.

In such a contest the party with the greater skill and experience is most likely to be the overall winner. "Old age and experience beats youth and enthusiasm."

You appear to think that I am trying to see (sic) [sell?] you something. I am not.

No, I respond that way to everybody who talks enthusiastically about covered calls.


What I am saying is that one should not automatically dismiss using options; their use can be effective.

My "dismissal" of options isn't automatic, it is from (expensive!) experience of the seldom-mentioned downside & risk of the common popular options strategies--basically any strategy that is discussed on sites like SeekingAlpha.

Look, if you are going to play the options game, you want to be in some area other than the single most popular options strategy of amateur investors. Don't be one of the herd of wildebeest crossing the river--that's where the crocodiles wait for the prey.
Google gives over 393 million hits for "covered calls". Did you try googling "problems with..." like I mentioned?

options use can be effective.

Arguably true.
But how about something where you aren't part of the herd...something that gets only 4000 google hits instead of 400 million? https://www.google.com/search?&q=deep+itm+calls&oq=%... (long dated).
That strategy isn't about getting "almost free" money. It's about non-callable, non-margin leverage. Not a lot of competition there; the "herd" is usually just yourself and one or two other guys.

::sigh:: Now I've gone on too long---but at least it's not on the same soapbox. ;-)
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