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Tiki Bar Capital profile picture
Target date funds are a neat concept, but I wonder if their bond-heavy allocations for investors nearing retirement are going to bite them in the butt.

The outlook for bonds from here just isn't good. Personally, I'm at an all time low in my bond allocation -- a little under 20%. And I'm far from young.

I have peers who think I'm taking crazy risk. But really? You think a negative real rates environment is promising for bond returns going forward?

I keep an eye on actively managed "all in one" mutual funds for a gut check on where risk/reward lies. One of my favorites, the Dodge & Cox Balanced Fund ($DODBX) generally invests "no less than 25% and no more than 75% of its total assets in equity securities." As of June 30th, it was allocated ~74% to equities -- very close to its lowest possible bond allocation. www.dodgeandcox.com/... It is far from alone in that respect among actively managed funds.

Inflation and rising rates will not be kind to bonds. I'd rather own high quality global equities than almost any bond these days, notwithstanding the higher volatility.
I like your general point and reasoning. I would further refine the approach to redefine the "bond" portion as an "income bucket" which could contain many different types of income securities other than bonds per se. For the last many years the interest rates on bonds has been too low to bother with, not even covering ordinary 2% inflation and with virtually no prospect of capital appreciation and a high risk of depreciation. In particular I would have a large portion of the "income bucket" in preferred stock funds such as PFFA or RSP or individual preferred stocks for more active investors, a good portion in intermediate duration closed end bond funds such as PTY, PKO or EVV, and the remainder in a mix of high yield securities or funds of BDCs, mREITs, CmREITS, MLPs and REITS, which admittedly may have greater volatility than bonds and for which timing purchases is a little more critical. The yield on such an allocation would have a much better income and real return than plain bonds or bond funds and offer some prospect for capital growth particularly if some of the income can be reinvested instead of withdrawn.
Jerbear profile picture
The large bond ETFs such as AGG, BND and SCHZ pay about 2% and are down about 3% for the past year. The outlook for bonds is almost certainly to be increasing yield so the capital gains will be negative. Why hold bonds at all? And what alternative is there?
@Jerbear I generally agree with you about bonds. Some additional alternative options include preferred stocks (particularly fixed-to-float varieties if you are concerned about rising rates), equity REITs, MLPs, BDCs, and CEFs. They all pay much higher rates than bonds. If you select very high quality players in those spaces you can get relatively low risk, with steadily increasing distributions in the cases of some eREITs, MLPs, and BDCs. There are also dividend growth stocks that also pay an increasing dividend, and in some cases have paid increasing dividends for 25+ years. I like the ETF SCHD for a nice diversified, high quality, growing stream of income from stocks. I don't necessarily think of these options noted above as bond replacements, strictly speaking, but I do think of the idea of a high quality, growing stream of income as a fairly low risk way to solve the same problem noted by the author. There is price volatility risk, but with the high quality players, fairly low income volatility risk, which is what most retired people care about. Many of the better names had stable or growing dividends through 2020, even though their prices temporarily dropped by 30-50% in March/April 2020. And the growing stream of income can at least partially offset inflation risk.
@5992321 I should have read your comment, which is spot on, and I wouldn't have needed to make mine above.
@AllStreets :-). Looks like we think very much alike.
I read everyone of your articles and enjoy very much. I am 76 year old and been retired for 15 years. I feel the greatest known market risk facing me is inflation.
The Fed can not control it any more with 28 Trillion Federal debt and we are adding an additional 1-3 trillion each year it is shocking.Plus if you add another 60 trillion of state debts 2 point increase in interest rates would eat up 2/3 individual tax receipts
Plus with interest rates at this level they can only go up.
Making bonds a losers game. The only option is stocks……knowing there will be some down drafts.
Dave Nafziger
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