Comments on next 5 yrs re fixed income part of portfolio?


J

junkystuff

People like Bill Gross are cautious about investing in domestic bonds
over the next five years. Some say that ladders of high quality
individual bonds with short durations, or C.D.'s, or 3 month
treasuries, or even money market funds are safer assuming a minimum of
$50,000 to 100,000 for this part of a portfolio. The function of this
part of the portfolio is to lower beta, raise total portfolio yield,
perserve capitol, and in the current economic situation, protect from
interest rate risk. I'm reasonably experienced in mutual funds but have
only bought bond funds (currently VFSTX, HABDX, and some soon to mature
zeros, plus VMMXX) and am a novice in individual bonds. My portfolio's
beta is 1. It is tax sheltered. Any suggestions or recommended readings
in financial journals or articles about the fixed income part of my
portfolio over the next five years would be appreciated.
 
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E

Elle Navorski

I think your question boils down to, "What is going to happen to interest
rates in the next five years?" The only guesstimate I'd care to hazard,
based on a lot of anecdotal reading, is that in the next five years,
interest rates might creep up, but then they might hover and decline a bit
after rising; they are not going to skyrocket.

So what's the best hedge?

I suggest you construct a five-year bond ladder. Probably not more than
that. After a long discussion last year with a couple of guys here on this,
I was persuaded that a five-year maturity is likely going to be optimal. (I
had been contemplating a ten-year maturity. Now I think that's a bad idea
given the record lows of today's interest rates.)

As for getting some experience with individual corporate bonds (and
treasuries, and government agency issues), I suggest the bond search engine
at www.fidelity.com , fixed income, "Find individual bonds" on the right.
It lets you set the grade of bond, maturity, desired yield, etc.

As for CDs, try
http://www.bankrate.com/brm/rate/high_home.asp?web=brm&prodtype=high ,
click on a maturity, and compare what comes up there to the high grade
bonds of the same maturity at Fidelity.

Maybe do these comparisons weekly for the next few months or so.

Recently I was comparing CDs to corporate bonds, and CDs were yielding
consistently a bit higher than high grade corporate bonds. Also, my bank
happens to offer one-time adjustable (but not callable) CDs: A five-year
one-time adjustable CD may be stepped up once in the course of its life to
whatever the current rate is for new five-year CDs. I thought that was a
pretty good deal, for someone who thinks interest rates are likely to rise
in the next few years.
 
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J

jt

Is there some reason why you are staying domestic? Euro and UK central
bankers are expected to keep rates steady or even decrease, and you can
participate via pimco funds with or without currency changes hedged
out. I don't get the bond ladder approach, which really just loses
money in a stealthy way (due to inflation) rather than an explicit way
as in a bond fund (which makes up with higher interest rates).
Domestically, the expanding class of bank loan funds have a really
sweet tradeoff of low volatility and quick pickup of rate rises.
 

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