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Tuesday, April 27, 2010

Bond allocation

Looking for a specific recommendation for allocating the bond portion of your portfolio? Reasoning at bond allocation.

I think this is a reasonable allocation. I would argue for 5% in TLT for some long Treasury rate exposure and a reduction in "Money Market" of 5% to a 15% exposure.

He is playing it pretty tight with the attempt to catch a bit more from the high yield sector. He sees another possible 100 basis points tightening. If it gets another 50 basis points, I would take it and run. High yield has had a spectacular run.

ALLOCATION
Vanguard Inflation-Protected Securities Fund (VIPSX): 30%

Vanguard Total Bond Market Index Fund (VBMFX) (holds government and corporate investment grade bonds): 20% *

Vanguard High-Yield Corporate ((VWEHX)): 20%

Vanguard Intermediate-Term Investment-Grade (corporate) (VFICX): 10% * Vanguard Money Market (really really short term bonds): 20%



* more sensitive to interest rates.

3 comments:

  1. A Vanguard Prime Money Market yield of .02% doesn't exactly have me turning cartwheels when you can get somewhere between 1.3-1.2% FDIC insured money market or savings account at Discover, Amex, or Ally. I've been in Prime Money Market for many years and have recently switched.

    Also, I expect interest rates to rise sometime after the elections this fall so I'm keeping my maturities short. I like the Vanguard Intermediate and Short-term Investment Grade Bond Funds. I'd also recommend buying the Treasury allocation through TreasuryDirect.gov and avoid paying the mutual fund fees.

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  2. Good point on the Discover money market as long as you stay within FDIC limit. It is a little bit of a hassel if you are moving your money around. For example, if you want to reduce cash position by 5% and increase corporate bond exposure by 5%. But the yield pickup is substantive.
    Same point on Treasury Direct - not easy to sell and put into alternative asset. Still, you do get a nice saving from transactions costs.
    I expect interest rates to rise as well but we should recognize that we are market timing here. That's why I like to have a big toe at least in the long part of the curve. If the deflation scenario plays out it would be a shocker I think to just about everybody and as we know "Mr. Market" likes to fool everybody!
    Final point - I see many people with numerous statements from a number of brokers so I tend to preach simplification. For most people having less statements by combining accounts and reducing the number of brokers allows them to get their investment positioning cleared up.

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  3. I agree with you on simplification. It makes it much easier to stick with the investment plan. And who hasn't been fooled by "Mr. Market?"

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