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I am in my late 50's and my only income is dividend income placing me in the 10-15% tax bracket. My present allocation is 55% stock, 31% bond and 14% cash. My understanding is that bond funds are best in a tax deferred account, but since I have no earned income, I can't contribute to an IRA. I was thinking of muni's, but my understanding is that they wouldn't make sense in my tax bracket. I want to limit taxes as much as possible and am looking to invest about $40k, but not sure what my options are.
I am in my late 50's and my only income is dividend income placing me in the 10-15% tax bracket. My present allocation is 55% stock, 31% bond and 14% cash. My understanding is that bond funds are best in a tax deferred account, but since I have no earned income, I can't contribute to an IRA. I was thinking of muni's, but my understanding is that they wouldn't make sense in my tax bracket. I want to limit taxes as much as possible and am looking to invest about $40k, but not sure what my options are.
Any feedback would be greatly appreciated.
Thank you
Stating the obvious, munis don't make sense in a tax-deferred account. Their yields are predicated on them being tax free. So if you buy munis of your own state (munis which give you a tax shield), you should always keep them in a taxable account. If you buy munis of OTHER states (not sure why you would), you are buying lower-yielding bonds for no good reason.
Why don't munis make sense in your tax bracket? 0% tax is still better than 10-15%.
Second, in your late 50s, 55% stock, 31% bond and 14% cash is a reasonable allocation, not sure why you want to change that.
Taxes are no big deal on $40K (say you get 3% taxable income from dividends, 15% tax, it's still only $180.) Anyway, your options are probably buy munis and/or stocks like Berkshire Hathaway (BRK-B) that do not pay dividends; if you want to pay zero taxes. Markel (MKL) is another good one. Somewhat of a baby Berkshire.
I am in my late 50's and my only income is dividend income placing me in the 10-15% tax bracket. My present allocation is 55% stock, 31% bond and 14% cash. My understanding is that bond funds are best in a tax deferred account, but since I have no earned income, I can't contribute to an IRA. I was thinking of muni's, but my understanding is that they wouldn't make sense in my tax bracket. I want to limit taxes as much as possible and am looking to invest about $40k, but not sure what my options are.
Any feedback would be greatly appreciated.
Thank you
Munis might still make sense, although I doubt it. Muni funds were paying better interest/dividends a year ago than they are now, because the prices of muni bonds have gone up (which means the interest they pay goes down).
There really aren't a lot of great places for income without taking on significant risk. But I'll give you a list of bond funds I like from least risky to most risky:
Baird Core Plus: This low key Milwaukee based fund shop does a great job and has low expenses, charging just .30% if you invest $25,000 and .55 for less than that. This is your basic "core" bond fund that invests mostly in investment grade bonds, but it does nibble on some lower quality junk bonds without gorging on them.
Although that 10 year trailing return looks appealing, especially given the modest risks the fund takes, it may be tough to get similarly solid returns over the next 10 years, given the very low current interest rates in US investment grade bonds. Its lower risk profile means it only has limited ability to scoop up bargains outside investment grade US bonds.
Current Yield: 2.52%
Trailing 12 Month Yield: 2.90%
10 Year Trailing Total Return: 5.90%
Dodge & Cox Global Bond: This is a new fund, but it has been launched by a very reputable firm. All of Dodge & Cox's funds are notable for good long term performance and low costs, although their stock fund have had some major hiccups along the way. Their other US based bond fund, Dodge & Cox Income, has been a steady performer, though, without any real blowups since its 1989 inception. I expect the Global Bond fund to be somewhat more aggressive than its domestic sibling, but not crazily so. This fund charges .60%, which is pretty much the cheapest in the "global bond" category outside a global bond index fund (and those are lousy because they are weighted too heavily in Japan, Germany, & other countries that are paying even less interest than the US). It doesn't have much of a track record yet. It had a small gain of 1.67% last year, which put it slightly above average for the category. It can invest anywhere in the world and will typically invest at least 40% outside the US.
Current Yield: Not Available
Trailing 12 Month Yield: 1.40%
Fidelity Strategic Income: This multi-sector fund ventures farther outside the core bond universe into lower quality junk bonds and into foreign bonds as well. It is relatively tame for this fairly aggressive fund category. The expense ratio is sort of annoying at .69%, but that is actually low for this more expensive fund category.
Current Yield: 3.56%
Trailing 12 Month Yield: 3.35%
10 Year Trailing Total Return: 6.30%
Loomis Sayles Bond: I admit I love this fund. It's definitely not for everyone, but I'd feel remiss for not mentioning it because it's a strong performer. This is also a multisector fund and it's price tag, at .91%, is enough to make me gag. But it does have very solid returns if you are willing and able to hang on in tough times. In addition to being able to buy up to 35% in junk bonds and around 35% outside the US (and additional bonds from Canada), it can buy bonds in emerging markets, as well as up to around 25% in dividend paying and preferred stocks, although it typically holds much less than that. It's pretty aggressive so you have to stay with it. It lost 22% in 2008, but came roaring back in 2009 with a 36% gain. But 2008 and 2009 are atypical of how this fund performs in most years. For 2014, it beat the multisector bond category average with a pedestrian 4.49% return.
Current Yield: 2.93%
Trailing 12 Month Yield: 3.97%
10 Year Trailing Total Return: 7.03%
Last edited by mysticaltyger; 02-28-2015 at 02:20 AM..
something to keep in mind when considering bond funds and thinking about using a bond etf.
while they are popular , bond etf's are not the best way to buy your bonds. you may be better off buying the mutual fund equivelant or better yet , actively managed bond funds.
Bond funds can and do add value through active management.
while the saying is equity indexing beats 80% of funds ,that is not true of bond indexing.
there are many managers who have beaten their benchmark consistently for many years.
active fixed income managers make risk management a priority by employing teams of credit analysts. which h helps reduce default rates and improve recovery results.
Actively managed funds can also consider investing in less widely traded bonds that index-based bond ETFs may not have access to.
Bond funds have proven track records. bond etf's are pretty new . equity etf's have been around for more than 20 years. there are many issues about bond etf's that are untested in a real bear market.
so far bond etf's that track bond indexes have never been top performers.
Bond funds can’t be sold short. Bond ETFs can be sold short, which means that bond ETFs can be sold, even by people who don’t own shares of the actual ETFs.
This can lead to increased volatility in ETFs- especially for those that trade high-yield bonds. I have found that bond ETFs are generally more volatile than bond funds.
most folks want bonds for low volatility which is best gotten through fund equivelants and not the etf versions.
depending on the types of bonds a bond etf trades they sell at a premuim or discount to the bonds it holds. with equities the spreads are so small it isn't worth mentioning.
but bond etf's , especially if they hold high yield can have big spreads.
buying at a premium in an up market for bonds and selling at a discount if you decide to sell in a bear market for bonds can increase losses.
etf versions tend to do better in bull markets for bonds while when things slide the mutual fund version does better. you can see that with vanguard.
i see zero reason to buy high yield etf's like hyg or jnk when great funds like fidelity capitaland income, janis jahyx or fidelity high yeld constantly beat them and we have not even really hit a bond bear market yet.
there are far better bond fund choices in my opinion than agg , even though it is popular.
Last edited by mathjak107; 02-28-2015 at 03:27 AM..
fidelity total bond beat agg over the 3 year, 5 year, and 10 year time frames. i am not a lover of the vanguard one as it has been to index like for my taste .
a good managed fund like fidelity strategic income beat agg over the 3,5, and 10 year by huge margins.
while equity etf's can be quite good i am becoming less and less thrilled with bond etf's .
for those who remember , i was tracking a potential etf model with lower costs that i was thinking of using but have since abandoned that idea which is why i stopped posting the monthly update comparisons , mostly because the active bond funds have been so much better.
fidelity total bond beat agg over the 3 year, 5 year, and 10 year time frames. i am not a lover of the vanguard one as it has been to index like for my taste .
a good managed fund like fidelity strategic income beat agg over the 3,5, and 10 year by huge margins.
while equity etf's can be quite good i am becoming less and less thrilled with bond etf's .
for those who remember , i was tracking a potential etf model with lower costs that i was thinking of using but have since abandoned that idea which is why i stopped posting the monthly update comparisons , mostly because the active bond funds have been so much better.
I like Fidelity Total Bond, but I actually like Baird Core Bond Plus better. It has better returns, a lower expense ratio, and a similar investment mandate.
I agree with you on the Vanguard Bond indexes/etfs. Too much in very low yielding government bonds for my taste.
fidelity total bond beat agg over the 3 year, 5 year, and 10 year time frames
They simply took on more risk, which anybody can do with index funds with lower fees. That's all. Want more risk? Just invest in IEF (7 - 10 year treasury bond index fund) instead. IEF: Summary for iShares 7-10 Year Treasury Bond- Yahoo! Finance
Of course taking on more risk can backfire. Past performance is no guarantee of future results. With interest rates at all time lows I'd want to take on LESS risk when it comes to bonds. AGG has less volatility than IEF.
it is a balance of risk vs reward that counts and even on the downside managed bond funds have done better many giving more downside protection since they can do whatever it takes..
while there is nothing wrong with agg , etf's in general are not the best way to invest in bond funds , especially because they trade at premiums or discounts to assets. why introduce another level of risk if that is you concern?
to many excellent bond fund choices in my opinion to bother with trying to index in something like agg. especially now where it may take a bond fund manager to stem losses if bond rates reverse.
seems if you are that concerned about risk in bonds you wouldn't want the negatives of a bond etf.
i would sooner take my chances with any fund run by Jeffrey Gundlach, and Daniel Fuss at Loomis Sayles to name two if i really wanted the odds in my favor..,
we have never had a full blown bear market in bonds in any of our lifetimes yet as bonds have only been in a long term bull market for more than 35 years.
i know when we turn the corner i want someone in the drivers seat.
Last edited by mathjak107; 03-01-2015 at 05:17 AM..
One good reason to add (high quality) bond funds is to provide higher risk-adjusted return. There has been study done that shows that adding long duration treasury and high investment grade bond, reduces the volatility of a portfolio composed of stocks and such bonds. This is because investors tend to shift from equity to such high-quality long duration bonds (almost risk free ones) in times of crisis, i.e. flight to quality. This is akin to having a natural hedge in your portfolio.
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