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Participant ○○○

Is 60/40 Dead?

With the interest rates at 0%, is there value in allocating 40% to total bond index funds? Is cash or short-term bond funds better as the 40%?

I am curious what bogleheads are doing.

 

Thanks.

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Re: Is 60/40 Dead?

I'm not a bogglehead but I do not think 60/40 is dead.  Bengen, the Trinity Study authors, and others have all confirmed that when looking at a 30-year retirement period an allocation of 50% stock to 75% stock performed best. (Note: this supports the 4% distribution rule.)  60/40 is pretty much dead center and there are a lot of excellent moderate-allocation funds with that ratio.  Two that I prefer is American Funds Balanced Fund and Vanguard Wellington.  Of course the conservative-allocation fund (40/60), Vanguard Wellesley Income, preforms better during crashes like in 2008 and now.  I have invested in Wellesley also just so I don't have to make a withdrawal from the others when the market is down.

Of course I'm a long-term investor who does not want to do the balancing himself.  Others prefer different allocations.

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Re: Is 60/40 Dead?

I seldom invest in bonds or bond funds since I do not understand them fully.  the allocation besides equity can be in bond funds, stable-value fund, or any fixed-income options.  I am mostly in stable value funds with better yield than money market funds. 

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Re: Is 60/40 Dead?

 

Great question, Steady Eddie.

But to me the more important question for everyone, is not the asset allocation percentages, but rather, regardless of your bond percentage, here is the question that matters:

IS THERE ANY INTEREST RATE, AT WHICH YOU WOULD CONCLUDE BONDS ARE HIGH RISK INVESTMENTS, MOST LIKELY TO HAVE NEGATIVE REAL RETURNS GOING FORWARD, AND ARE WORTHLESS TO HOLD IN PORTFOLIOS??

For example, how about 1% rates or less?  Or zero percent rates? 

Or negative interest rates?  Would you continue to hold fixed income bond funds if a loss was built in, such as with negative rates?

IMO, How you answer this determines the long term wealth of your portfolio.

For me, I have concluded we are there now on interest rates that are not worth it, and have been exiting my bond funds since late last year, and to a much greater degree, during the first quarter.  Posted same.  So far, so good.

First time exiting FI in 53 years!

R48

 

 

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Re: Is 60/40 Dead?

 

This is a difficult question. Maybe the 40% could be 1/2 long BND + 1/2 short BND?

It's a thought.

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Re: Is 60/40 Dead?


R48,

Are you exiting moderate allocation funds (e.g., Vanguard Wellington) because they clearly have significant bond exposure?

@retiredat48 wrote:

 

Great question, Steady Eddie.

But to me the more important question for everyone, is not the asset allocation percentages, but rather, regardless of your bond percentage, here is the question that matters:

IS THERE ANY INTEREST RATE, AT WHICH YOU WOULD CONCLUDE BONDS ARE HIGH RISK INVESTMENTS, MOST LIKELY TO HAVE NEGATIVE REAL RETURNS GOING FORWARD, AND ARE WORTHLESS TO HOLD IN PORTFOLIOS??

For example, how about 1% rates or less?  Or zero percent rates? 

Or negative interest rates?  Would you continue to hold fixed income bond funds if a loss was built in, such as with negative rates?

IMO, How you answer this determines the long term wealth of your portfolio.

For me, I have concluded we are there now on interest rates that are not worth it, and have been exiting my bond funds since late last year, and to a much greater degree, during the first quarter.  Posted same.  So far, so good.

First time exiting FI in 53 years!

R48

 

 


 

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Re: Is 60/40 Dead?

Thanks for the responses so far.

I do not see much upside with the TBM funds, all I see is down side when the inevitable rise of interest rates occurs. And as bonds in the portfolio are replaced with lower coupon bonds upon maturity, the yield continues to shrink.

R48 - I am inclined to exit these positions and stay in cash for now.

galeno - half and half of long and short will probably get us the intermediate duration anyway, so not sure that is a good solution. I think you are holding treasuries and TIPs?

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Re: Is 60/40 Dead?

Interesting question SteadyEddy, and I’ve been wondering the same thing. My “core” fund in my retirement accounts is Wellington (VWELX), and for my wife it’s Balanced (VBIAX). With bonds yielding so little, I’ve been wondering about going to an even higher equity allocation and holding “just enough” cash/ short term bonds to cover us for several years. Question is what is that “just enough” amount? In other words going closer to 90% equity. Currently at ~83% equity, so still pretty high, but also working for two more years before retirement. 

Bonds just look like “return free risk” now. I’m still holding positions in Vang. High Yld. Tax Exempt (VWALX) and Vang. Int. Term Tax exempt (VWIUX), but the yields are pretty puny.

Win
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Re: Is 60/40 Dead?

 

Right now we hold 45% stocks + 20% Corp bonds + 15% TIPS + 15% US Treas + 5% CASH.

When we go to 50/50 next year we'll look like 50% stocks + 15% Corp bonds + 15% TIPS + 15% US Treas + 5% CASH.

I too am very concerned about our bonds. Low yields and high duration = guaranteed losses. Cash = guaranteed losses. Long/short idea is silly.

Net (of ER) YTM on our bonds: Corps = 3.52%. TIPS = 0.42%. US Treas = 0.59%. 

What to do? Boost equities to much higher levels? 

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Re: Is 60/40 Dead?

Another here with Wellington as a core fund.  I agree with R48's assessment of the bond component but I have to trust that management is a heckava lot smarter than I am and will "manage" accordingly. I don't like to tinker.  My overall portfolio is 81/19 at the moment with the equities in an index mid-cap, an index small cap, and a larger chunk in growth (VIGIX).

I'm looking at retirement in the next few months and am leaning toward leaving my funds as they are but re-working it a bit to give about two years worth of expenses in cash (and for me that won't take too much)..

Regards.

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Re: Is 60/40 Dead?

Thanks for the additional responses on this thread. Corp bonds are a bit different since they carry the risk of the underlying corporations - so investors expect slightly higher yield than treasuries. But neither appears to be a good investment due to, as win puts it, "return free risk" widgets.

Cash/MM isn't paying much - nonetheless holding cash appears to be a safer bet for now.

One CEF that I have a toe-hold in is BTZ which has more than 60% in investment grade bonds but uses leverage to juice up distribution yield. It will be more equity like, in my view, similar to dividend aristocrats like T. 

I do not want to go full-bore into CEFs and inherit even more risk than TBMs but that is an alternative for a small portion of cash so I can generate yield and fight inflation.

Let us keep brainstorming ideas here as alternative to TBMs.

Thanks.

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Re: Is 60/40 Dead?

Once again, the tortoise has caught up to the hare.   Since 2008 through March 2020 (12 years) Wellington has beaten Wellesley by $162 on the growth of 10K.  Wellesley actually beat VBINX over that period.  Sometimes sitting in the middle may not be the best place to be.

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Re: Is 60/40 Dead?

Personally, I am sticking with my bond OEFs in DoubleLine and Pimco.  Jeffrey Sherman, DoubleLine CIO, in a webcast review of one of his funds on Tuesday, stated that, aside from Treasuries, there are plentiful yield opportunities out there.  We have gone from famine to feast.  But active management and experienced team is important.  I want and need yield from my bond OEFs.  I can live with downside single digits as my overall portfolio yields 4%+ and provides me ongoing liquidity.

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Re: Is 60/40 Dead?

In this crash, allocation/balanced funds did what they were supposed to do - moderate the declines and participate in the rebound. They were less volatile. IMO, the doubters may be getting out of them too early. In this falling rate environment to ZIRP, allocation/balanced funds have exploited the capital appreciation of bonds -a new role for them. Allocation/balanced funds remain a significant part of my core. If one goes to a RIA, it will never suggest an all-equity portfolio, and allocation/balanced funds offer that in a simple way - just like a difference between gourmet vs canned food.    https://stockcharts.com/h-perf/ui?s=VWELX&compare=JABAX,BALFX,FBALX,$SPX&id=p55111222208

YBB
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Re: Is 60/40 Dead?

When do you see rates rising? With the coronavirus putting the US into recession or possibly depression one would think rising rates are a long way off. Maybe 1-2 years.


@SteadyEddy wrote:

Thanks for the responses so far.

I do not see much upside with the TBM funds, all I see is down side when the inevitable rise of interest rates occurs. And as bonds in the portfolio are replaced with lower coupon bonds upon maturity, the yield continues to shrink.

R48 - I am inclined to exit these positions and stay in cash for now.

galeno - half and half of long and short will probably get us the intermediate duration anyway, so not sure that is a good solution. I think you are holding treasuries and TIPs?


 

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Re: Is 60/40 Dead?

Same place as you, Yogi.

I have no intention of changing. 

Funds are performing as expected.

Rumors of the death of [fill in the blank] tend to be greatly exaggerated. 

However, my own death is a certainty.

Bob

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Re: Is 60/40 Dead?

FED BUYS HI YIELD

VWEAX = SEC Yield 7.39% Is that enough yield for you?


 

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Re: Is 60/40 Dead?

No one sees the value of GNMA funds as part of the 40%?

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Re: Is 60/40 Dead?


@rhythmmethod wrote:

FED BUYS HI YIELD

VWEAX = SEC Yield 7.39% Is that enough yield for you?


 


No.  I'm waiting for 2008's 10-11% yield (NAV below $4) and then I'' back up the truck.

But that is because I believe we are a long way from the bottom on this thing and we may get their by summer or fall.

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Re: Is 60/40 Dead?


@GLI2019 wrote:

Same place as you, Yogi.

I have no intention of changing. 

Funds are performing as expected.

Rumors of the death of [fill in the blank] tend to be greatly exaggerated. 

However, my own death is a certainty.

Bob


Likewise, Bob.  40/60 portfolio with balanced funds as core.  Everything working to plan.

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