RetireJapan

That’s what the talking heads on CNBC and Bloomberg are saying. But I need to rebalance my portfolio allocation of 60% stocks, 10% REITS and 30% bonds (all ETFs). I retire in 5 years. Obviously the first two are currently way overweight and bonds way underweight.

The problem is the inflation predictions. Everyone is predicting higher inflation in the next few years, making bonds a money-losing proposition well into the future. I have a fair bit of cash in the account waiting to be invested.

So, do I stick to the allocation target and lose money? Or do I just keep putting more $$$ into stocks and REITs and probably make money but rendering my target useless and reducing diversification?

Comments appreciated. Thanks.

My default response would be stick to the plan and ignore the noise.

If you are specifically worried about bonds, you might consider holding (some) cash instead.

Alternatively, if you are due to retire in 5 years, you are probably looking at several decades post retirement. Depending on what kind of pensions etc you have you may want to be more or less aggressive with your investment portfolio.

Personally I don't hold any bonds and am at an age where I could retire at any time. That said, I can understand that some people will want to maintain a bond or other fixed income allocation. Here are some options to consider:

1. You can mitigate the effect of rising interest rates a little bit by using shorter duration bond funds. These will have low interest rates but at least will fall in value less than longer duration bonds funds if/when interest rates rise.

2. If you have a loan such as a mortgage you could think of it as a "negative bond" so paying it off in some ways resembles allocating funds to bonds at a tax-free fixed interest rate equivalent to the rate on your mortgage. I don't think it makes much sense to hold bonds if you also are carrying a mortgage.

3. Some people use a CD ladder as an equivalent to holding bonds which doesn't lose face value even as interest rates rise. Again, this would not have a great interest rate but at least doesn't fall in face value.

4. Depending on upon the amount of assets you're working with and your access to overseas financial products, there are funds of real estate hard money loans which have high rates, very short duration (meaning the money is lent out for only 1 or 2 years at most) and because they are backed by the real estate of the borrower are relatively "safe". Those are often marketed to accredited investors but the returns even now can reach double digits. There is more borrower risk to these than the options mentioned above but they are high yield and if anything rising rates are helping these funds right now.

5. Finally, and at least for me a little beyond my expertise, there is now a growing industry of lending related to crypto currency. The loans are backed by the crypto asset and usually only amount to a fraction of the face value so they are supposed to be "safe." (https://tokentax.co/blog/10-best-crypto-loans/)

To further confuse your decision-making, a thread from some months back:

viewtopic.php?f=11&t=1080

I'm still not sure about many things, including the ideas and POVs included in that thread (including my own). Tho I still don't have any bonds (and very likely never will), I do have a largish chunk of cash--call it a 5-10 year emergency fund. It also makes a difference that my wife is also just retired with her own pension and savings, so I'm really only supporting half of a couple, rather than both of us on my own (differing investment requirements, risk profile, and so on).

Good luck!

Thanks very much for your responses. Yeah, I'll stick with the allocation target.

Tokyowart, I like your option #1 best of all. It fits with my "Couch Potato" investment plan and so I'll be adding a certain ETF whose bonds are 1-5 years to my portfolio and hope for the best.

So far, my bond ETFs have done good job of limiting my portfolio's downside while their regular dividends are always nice to see.

Zoomtokyo wrote: ↑Sun Mar 21, 2021 9:36 pm
So far, my bond ETFs have done good job of limiting my portfolio's downside while their regular dividends are always nice to see.

If you are worried about inflation and your bonds, you may want to explore TIPS Bonds. https://www.investopedia.com/terms/t/tips.asp TIPS and TIPZ and SCHP are some specific tickers you can look at once you understand how TIPS are structured.

I have a similar concerns about inflation. However I have a greater concern that we may have stealthily moved to a new play book, Modern Monetary Theory (MMT). Something like 50% of the money spent in the US this last year is unfunded. I’m pretty sure the US cannot raise taxes enough to remotely cover what they’re spending (and more spending to come). And I don’t understand what this means for inflation, stock markets, etc. so I’m holding my course and not making big changes until I better understand what’s going on.

If you have time, Stephanie Kelton’s book on MMT is an interesting THEORY. I just wish I didn’t have my money participating in some people’s theories.

I have developed and developing markets bonds in my portfolio because that's what my text books told me, and I'm happy to keep that even though bonds are supposed to be killed now.

If something does trigger a bear in the stock market, that's when I want to have those bond funds so that I can reallocate more into stocks at that time to rebalance. Buy low.

That said, I am recently interested in bonds getting killed This in itself is an interesting thing, to have a play with on the side...
Although his predictions haven't come to fruition yet, I'm a fan of Takeshi Fujimaki, and putting his gloomy predictions aside, he brought my attention to US traded tickers like TMV (Direxion Daily 20+ Year Treasury Bear 3X Shares ETF). It's been a disaster to hold that over the long term, but it does look like it's perking up a bit in recent times thanks to the run up in bond yields.
(I was surprised to see my balance had decreased over night, despite another spike in yields, so I am assuming this is some tracking error or other feature of TMV that I didn't read about properly before just buying some).

Edit: another similar ticker I saw mentioned was TBT (ProShares UltraShort 20+ Year Treasury)

OkLah! wrote: ↑Wed Mar 31, 2021 1:02 am As I hold my bonds to maturity I don’t mind the ups and down. So far when a bond expired I could not reinvest at a similar coupon (keeping risk unchanged). As yield do increase i will be able to pick up higher coupons.

For the funds type it is more complicated since there is no maturity.

I think nationality matters here. As Americans have access to Series E and Series II bills, which non-Americans do not.

...

For Non-Americans such as myself, there are not a lot of attractive products.

You can buy notes and strips from brokers such as Monex and Rakuten, but you need to deal with exchange rates on top of already thin yields.

This leaves products such as

(1) 楽天・全世界債券インデックス（為替ヘッジ）ファンド

Rakuten->　https://www.rakuten-sec.co.jp/web/fund/ ... 90C000HBG4
Vanguard ->　https://investor.vanguard.com/etf/profi ... folio/bndw

Rakuten fees -> 0.282%　（Vanguard .15 + Rakuten .13)

and

(2) ｅＭＡＸＩＳ Ｓｌｉｍ 先進国債券インデックス

Link-> https://www.rakuten-sec.co.jp/web/fund/ ... 90C000END3

Real cost -> 0.170%


as the only viable alternatives really in my opinion.