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Portfolio for possible early retirement

Hello,

Due to some medical issues I may be forced to find ways to generate income. I have read this forum for some time and think the members here are top notch. I've managed my own investments for about 15 years and consider myself pretty knowledgeable. However, truth be told, I'm no expert with bonds or bond funds.

I have sought out the advise of a financial advisor and one consultant from a major discount brokerage. Both had very different opinions. The financial advisor recommended a basket of American Funds. The consultant recommended several ETF's, like BAB and high yield mutual funds. ( The actual recommended portfolio only had 18% dividend paying stocks)

Most of the assets are in a taxable account. But, I guess, I can't allow the possible tax ramifications to dictate every investment decision.

I'm thinking of funds like:

VWINX
PONDX
SCHD
DLTNX
High yield bond ?
Short term ?

Trying to generate around 4% yield with around 30% in high quality stocks, if possible. I know that interest will likely keep going higher and this could cause serious issues with the bond portion.

I would absolutely love to hear the thoughts and opinions from forum members. Thanks in advance



Comments

  • SCHD is a good choice. Super low ER.

    Another option are income funds. In particular, multi Asset Income funds. They give the manager a wider scope to find income sources wherever they may be. I know TRowe Price has a few in their stable as well as Fidelity and Vanguard. Since I use American Century, I use AMJVX. It could be prudent to not depend on one single fund for this purpose but to have two or three.

  • I would suggest you check out the following forum.
    http://www.early-retirement.org/forums/

    There are lot more posters there and you will get more feedback.
  • SCHD is a good choice. Super low ER.

    Another option are income funds. In particular, multi Asset Income funds. They give the manager a wider scope to find income sources wherever they may be. I know TRowe Price has a few in their stable as well as Fidelity and Vanguard. Since I use American Century, I use AMJVX. It could be prudent to not depend on one single fund for this purpose but to have two or three.

    Thanks! I was just playing around with numbers and came up with this. Morningstar's X-ray claims that expense ratio is just .51% and the portfolio yields over 4%. Going to research these funds a bit further. Thanks again.


     
    Vanguard Wellesley®
    Allocation--30% to 50% Equity - 31.25%

     
    Principal Global Div
    Allocation--30% to 50% Equity - 18.75%

     
    Invesco Income Alloc
    Allocation--30% to 50% Equity - 18.75%

     
    DoubleLine Total Ret
    Intermediate-Term Bond - 12.50 %

     
    PIMCO Income D - 12.50%
    Multisector Bond

     
    Schwab US Dividend E - 6.25%
    Large Value

  • Wellesley is the gold standard of these funds.

    I came up with 0.07% for the SCHD expense ratio. It wouldn't be the first time M* was wrong.

    http://www.schwab.com/public/schwab/investing/investment_help/investment_research/etf_research/etfs.html?path=/Prospect/Research/etfs/summary.asp?symbol=SCHD
  • The overall expense ratio for the entire portfolio was .51%. Thanks again for your help
  • I think you are on a very good track. I might look at DVY (also NOBL, OUSA, SPHD) in lieu of SCHD, though it is awfully good. I prefer DVY myself, small beer. The rest are solid choices and thinking.
  • to protect against interest rate rises might look at floating rate funds at fidelity and t.rowe price and also check out tip funds. agree with equity should be 30-40 % of portfolio
  • Hi ZoneBlitz!
    You have some great picks. I own VWINX, PONDX, DLTNX. I sold DLTNX a while back but will buy again when this rate thing is over. I will add VWELX.....higher in stocks. But 30% stocks might not be enough in the long run. Also, I will say PTIAX is also very good. Maybe drop small amount in the S&P 500.
    God bless
    the Pudd
  • edited December 2016
    ZB, I think your initial choices (VWINX, etc) are all fine/good candidates.

    You may also wish to consider, for some, limited portion of your portfolio, closed-end funds. CEFs are focused on delivering what you stated was your goal: income. Right now -- year-end -- may be a good time to identify/take positions in CEFs. Generally, any current CEF holders who are "underwater", sell out late in the year. That surfeit of selling generally abates come the new year -- sometimes leading to price appreciation or at least stabilization.

    Specifically, muni-CEFs and preferred CEFs have declined and 'may' offer value. Muni income is of course tax-free. Most preferreds -- generally those NOT issued by REITs -- offer favorable (lower) tax treatment than bond income.

    Purchasing individual preferreds might also be an option, especially in light of their recent sell-offs. 6% yields are now available at/near/below par, in many cases from VERY credit-worthy issuers. The downside is their prices are subject to interest-rate risk -- which generally will NOT impact the issuer's ability to pay their preferred coupon.

    dividendyieldhunter.com and quantumonline are both good resources for identifying income vehicles.

    I generally limit CEFs and pfds to an overall 20% of my portfolio -- and I do trade (rather than hold them) --- so that for some periods of time, I will hold none. The price swings generally make them conducive to pruning positions when prices get too rich. Presently, I've approximately 15% in CEFs, all from recent (post-election) purchases.

    Good luck.

  • IMHO, there's no way to get a 4% yield without a good amount of risk. Not that that isn't okay, just that one should be aware of the risks assumed. There are the most obvious ones - interest rate risk (loss of value due to increasing rates) and credit risk (delayed payments, defaults, loss of principal).

    But there are some others as well embedded in several of the suggestions. One is declining value of your portfolio, not due to interest rate risk or even inflation (though that one's omnipresent). Rather it is using principal to get higher current yield.

    If you buy a bond with above market interest (current yield, coupon), you'll be paying above face value (premium bond). For instance, you might pay $110 for a bond with a $100 face (par) value, you'll get that higher stream of payments, but you're gradually losing value, beyond inflation. Same thing with bond funds. This is why I prefer to look at SEC yield, which incorporates this loss (or gain) in bond value in calculating an effective yield.

    PONDX's trailing yield is 7%+, but its SEC yield is 3.35%. Conversely, DVY's trailing yield is 3.09%, but its SEC yield is 3.46%.

    Another risk is leverage. Funds, especially but not exclusively CEFs (e.g. PONDX also leverages), borrow money at short term rates to buy long term securities yielding more. This works so long as the long term securities continue to yield more. A risk is that rising interest rates will make replenishing cash more expensive (as the short term debt matures), and perhaps even cost more than the fund is receiving on its older long term securities.

    Here's a M* video from 2013 (a few years before short term rates started rising), that explains how these funds may work:
    http://beta.morningstar.com/videos/610062/What-Will-Higher-Rates-Mean-for-Levered-Closed-End-Funds.html

    Then there's the use of derivatives. This can be anything as "simple" as mortgage backed securities (with call risk that can behave poorly with rising interest rates - negative convexity) to a slew of more esoteric stuff. In its analysis of DLTNX, M* lists some of these (while acknowledging that DLTNX has matured a bit): "These securities, which included inverse floater, interest-only, and inverse interest-only mortgage tranches, throw off lots of income but can also be highly volatile and suffer from bouts of illiquidity."

    For the most part, you're seeing lots of fine suggestions here, and there's only a little I can add to them. I would not use BAB - Build America Bonds haven't been issued for years. As a result, all the other funds (e.g. BABS [Nuveen], BABZ [PIMCO]) have closed down or broadened the types of bonds they can invest in.

    If you're looking at SCHD and DVY, you might want also want to look at VYM. It invests a bit more broadly (~400 securities vs. ~100 for the others), with half the turnover (11% vs. 21-22%). Not significant differences, just another alternative to throw into the mix.

    Finally, I'm still working on figuring out how PGBAX seems to walk on water - trailing and SEC yields of 5%+, no leverage. It does dive deeply into junk (averaging B rating), but the closest world bond I found so far, RBTRX, has a significantly longer duration and an SEC yield of "just" 4.5%. So credit rating alone isn't the full story.

    If this type of portfolio appeals to you, you might also look at TTRZX or GIM. GIM has been trading at large discounts for the past three years (perhaps reflecting its poor performance over that period, or perhaps its move to almost all EM bonds that typically trade at similar discounts).
  • Puddnhead said:

    Hi ZoneBlitz!
    You have some great picks. I own VWINX, PONDX, DLTNX. I sold DLTNX a while back but will buy again when this rate thing is over. I will add VWELX.....higher in stocks. But 30% stocks might not be enough in the long run. Also, I will say PTIAX is also very good. Maybe drop small amount in the S&P 500.
    God bless
    the Pudd


    PTIAX looks very promising. Thanks!
  • edited December 2016
    Hi @msf
    Excellent points, too often outside of considerations; and needs to be studied/analyzed properly relative to bonds. For many investments, the past chart confirms history, the current chart confirms only the day and a future chart may be as good as blind faith.
    NOTE: trends do exist, and trends come and go when we aren't paying attention.

    msf noted:
    "IMHO, there's no way to get a 4% yield without a good amount of risk. Not that that isn't okay, just that one should be aware of the risks assumed. There are the most obvious ones - interest rate risk (loss of value due to increasing rates) and credit risk (delayed payments, defaults, loss of principal).

    But there are some others as well embedded in several of the suggestions. One is declining value of your portfolio, not due to interest rate risk or even inflation (though that one's omnipresent). Rather it is using principal to get higher current yield.

    If you buy a bond with above market interest (current yield, coupon), you'll be paying above face value (premium bond). For instance, you might pay $110 for a bond with a $100 face (par) value, you'll get that higher stream of payments, but you're gradually losing value, beyond inflation. Same thing with bond funds. This is why I prefer to look at SEC yield, which incorporates this loss (or gain) in bond value in calculating an effective yield. "PONDX's trailing yield is 7%+, but its SEC yield is 3.35%. Conversely, DVY's trailing yield is 3.09%, but its SEC yield is 3.46%.


    Regards,
    Catch
  • Hi Zoneblitz,

    Early retirement is most always a challenging decision given its many moving parts and the uncertainties of future portfolio returns. It's wise to seek advice from numerous informed sources. MFOers can be helpful with respect to specific components to fill a portfolio. The suggestions already offered by MFO members provide some excellent specifics and general guidelines.

    Allow me to take a step backward in terms of making the retirement decision itself. Is it prudent at this time? What are the odds for a successful retirement as measured by portfolio survival?

    I am a strong advocate for Monte Carlo application to address this serious question. Monte Carlo techniques were designed to explore uncertainties. Many versions of the Monte Carlo tool,are now accessible on the Internet. Here is a Link to one such superior tool that can be used to aid in making a retirement decision:

    https://www.portfoliovisualizer.com/monte-carlo-simulation#analysisResults

    Many folks have deployed such a tool when making their retirement decision. I did, and suggest you might benefit by running a few what-if simulations. You get to choose the scenarios that you want to explore. Each case is completed in seconds. Please give it a look/see.

    Try different portfolio constructions. Try different future return likelihoods. The options are almost endless. And each separate run will yield a portfolio survival probability.

    A Monte Carlo analysis will contribute to the retirement date decision itself as well,as providing some insights to a portfolio construction that has the best odds for its long term survivability.

    I hope this helps. Monte Carlo analyses sure helped me in making my retirement decision.

    Best Wishes for a successful retirement decision and a long,successful retirement.
  • edited December 2016
    Zoneblitz...as an early retiree also, your desire to have money in multiple positions is sound, IMHO...and many really good options are listed in this thread.

    I would also not overlook a handful of individual securities. There's a reason stocks like AT&T or Verizon as an example, find their way into an income seeker's portfolio.

    Best of luck.
  • edited December 2016
    MJB,

    Thanks for your comments and concerns. I do share many of the same concerns and that's the reason for me reaching out. Much of the advise (from professionals) just seemed to confuse the already complicated situation.


  • Generating 4% yield will take some risk, although if interest rates rise as treasuries will yield 3+% and it will be easier.. but that will be due to inflation so your target may move.

    You need to consider the loss of principle risk you run reaching for yield as there is no such thing as a free lunch.

    there are multiple advisory services available for stocks and mutual funds but few for income investors. Most of the equity advisors have an "income portfolio" that is loaded with equities and if you look carefully, lost 20% (vs 45% for SP500) in 2008. This would destroy anyone needing current income.

    VWINX is everybody's suggestion here, but M* discusses the impact of their bond portfolio ( which has a duration of over 5 years) on their recent returns. In funds like this you have to take what they give you.

    I think traditional open end mutual funds are a bit limited here, but there are some good choices in other posts like ZEOIX and RPSIX

    Look at Kiplinger's Income newsletter. He has a lot of ideas, doesn't trade much at all ( too little in my opinion), but points to ideas most of us haven't thought of . Most of these are individual stocks, REITS, MLPs, BDCs etc. However, he seems to believe that riding a position down 50 to 75% is Ok if it is still paying a good dividend.

    You can also set up your own dividend stock portfolio if you like to do the background work. There are a lot of ideas in Barron's for example, or M* dividend investor.

    Doing it on your own will save you 0.8 to 1.25% in an actively manged fund, but you have to be knowledgeable, spend a fair amount of time reading and run some risks

    The other thing that has not been mentioned is to assemble your own bond ladder with increasing maturities. you can roll over the shorter maturies as they mature and re-invest at higher interest rates. There are several ETFs that mature at specific dates that would work for this. Look at Guggenheim Bullet shares

    You can do alright if you assemble a collection of dividend growth stocks, high yield bonds with short maturities and watch them carefully, but 4% will be difficult
  • You also can get a free initial consult w Ric Edelman group, who are real informed and prudent. Some hire-us pressure after that, I imagine.
  • Now the Fed has raised rate by 25 basis points. There are more to come next year. So bond fund would face more headwind going into 2017. As msf pointed out, it would be challenging to generate 4% yield without incurring additional risk in terms of credit quality (junk bonds) and currency (EM debts). EM bond funds had a sizable decline recently as USD strengths. Investment grade and intermediate term bond funds saw a meaningful decline since October. Surprisingly, several junk bonds did okay. For example,

    OSITX - invested in short term junk bonds. Skillful managers.
    VWEHX - invested in the "less junkier" end of junk bonds. Vanguard low expense ratio.
  • edited December 2016
    Edmond said:

    ZB, I think your initial choices (VWINX, etc) are all fine/good candidates.

    You may also wish to consider, for some, limited portion of your portfolio, closed-end funds. CEFs are focused on delivering what you stated was your goal: income. Right now -- year-end -- may be a good time to identify/take positions in CEFs. Generally, any current CEF holders who are "underwater", sell out late in the year. That surfeit of selling generally abates come the new year -- sometimes leading to price appreciation or at least stabilization.

    Specifically, muni-CEFs and preferred CEFs have declined and 'may' offer value. Muni income is of course tax-free. Most preferreds -- generally those NOT issued by REITs -- offer favorable (lower) tax treatment than bond income.

    Purchasing individual preferreds might also be an option, especially in light of their recent sell-offs. 6% yields are now available at/near/below par, in many cases from VERY credit-worthy issuers. The downside is their prices are subject to interest-rate risk -- which generally will NOT impact the issuer's ability to pay their preferred coupon.

    dividendyieldhunter.com and quantumonline are both good resources for identifying income vehicles.

    I generally limit CEFs and pfds to an overall 20% of my portfolio -- and I do trade (rather than hold them) --- so that for some periods of time, I will hold none. The price swings generally make them conducive to pruning positions when prices get too rich. Presently, I've approximately 15% in CEFs, all from recent (post-election) purchases.

    Good luck.

    Thank you for this. I researched many cefs/pfds last night and think your approach makes a lot of sense.

  • @Edmond, do you have wisdom on PDI?
  • edited December 2016
    I really appreciate all the comments. This current market really makes this challenging. I'm very happy that I asked the question on this forum. Many thought out ideas and well grounded concerns. I think I'm going to gradually invest in the following portfolio and keep 20% on the sidelines for other opportunities. ( We are due for a pullback in equities any day now....waiting...waiting ) A few adjustments were made because of my wish to control the stock exposure.

    Edmond's approach really makes a lot of sense to me. It also cures my need to tinker and research ideas.

    VWINX
    PONDX
    GIBLX
    PTIAX
    OSTIX
    DGRO/HDV
  • edited December 2016
    If goal really is 4%, what about individual investment grade corporate bonds ?

    WELLS FARGO CO MTN BE 4.10000% 06/03/2026 FR ... yield to worst 4.047%

    ARES CAP CORP NOTE CALL MAKE WHOLE3.62500% 01/19/2022 ... yield to worst 4.391%

    Are couple examples ... c
  • A good suggestion. Since I've been pointing out risks, some of the risks in individual bonds include:

    - issue selection - lack of diversification. The most aggressive rules of thumb I've read are that one should have at least $50K (muni) or $100K (corporate), so that one can own bonds from at least 10 different issuers. Here's Fidelity's page recommending a $100K-$200K min, depending on type of bonds.

    - inflation risk - locking in a fixed rate of return for many years, even if inflation rises. (WF - CUSIP 94974BFY1 - is 10 year, noncallable)

    Nominal interest rate is not a risk, because by hypothesis one is accepting a 4% total return (holding to maturity), regardless of how high market rates go.

    Note that the ARES bond (CUSIP 04010LAR4) is a discount bond, so while its total return is about 4.4%, its current yield is about 3.75%, based on a coupon of 3.625 and a current price of about 96.5. The rest of the yield come from the price rising to par (similar to a zero coupon bond, with similar tax treatment).

    Nice sampling of bonds with different attributes.

    I like the idea of a build-your-own portfolio. It does take a substantial commitment to make it work.
  • @Zoneblitz More Options and Homework Nice table in SA article
    BDC Buzz, from Seeking Alpha
    Dividend investing, high income, BDCs, portfolio strategy

    Baby Bonds for business development companies are finally starting to deliver attractive yields to investors.

    Most of these bonds have maturities of 2-7 years and offer stable yields of around 7%.

    I am expecting higher yields in the coming weeks and will likely be making purchases.
    http://seekingalpha.com/article/4025080-rising-yields-bdc-baby-bonds

    As mentioned by @Edmond. Good source for research and tax status of interest/dividends
    http://www.quantumonline.com/search.cfm
  • edited December 2016
    I am sorry to hear about your health. There are lots of good suggestions already. My 2 cents. I think it is possible to put together a 4% yielding portfolio without stretching. An early retiree usually needs to have more equities to get a little growth to make sure you don't outlive your money and to provide inflation protection. Think definitely more than 50%. If you can offer up how many years we should plan for it will be easier to offer an allocation suggestion as some early retirees will want 75% stocks. If you have an interest in managing it yourself, I'd recommend some individual issues to complement some funds. Here's an example that is 50/50 stock bonds that will yield about 4.2%:

    Individual stocks (with 4% in each):
    SO
    WEC
    JNJ
    PG
    MMM
    UL

    REIT's (with 4% in each)::
    WPC
    O
    HCN

    Utility ETF (with 4% allocation):
    XLU

    Baby Bonds (held to maturity; with 4% in each):
    CCV
    GEH

    Preferred Stocks (with 4% in each):
    PSA.T
    NNN-E

    Open Ended Mutual Funds:
    TILDX (with a 4% allocation)
    AVEDX (with a 4% allocation)
    FFRHX (with a 14% allocation)

    Vanguard intermediate term bond ETF BIV with a 14% allocation

    CEF's (with a 4% allocation to each):
    ETB
    NSL

    (Note, I am long many of these.)

  • David: "(Edmond), do you have wisdom on PDI?

    REPLY: Wisdom? No. I've traded in/out of it over the years. It seems to often generate a special year-end divd. It goes ex-divd on 12/22 (if I recall) a rather substantial special divd. So NAV and price will likely drop then accordingly. Its trading at a premium currently. Buy/sell points are not UN-important when trading CEFs -- just as they are not UNimportant in buying ANY security. The OP's initial inquiry indicated his objective was income. Several of the PIMCO CEFs especially seem extraordinarily good at maintaining their disty --- and (just as importantly) EARNING that disty.

    As a general rule, with bond CEFs, besides evaluating current/historical premiums/discounts, I always like to review the most recent AR/SAR, and determine if the disty/share is covered by NII/share. If there is a substantial UNDER-earning of the disty, that is a big red-flag for me -- as it may portend a future disty cut (which is not fun for current shareholders. PIMCO publishes a monthy UNII/NII earnigs update on their website. PDI, PCI, PKO and a couple others look 'OK' to me -- but as always, choose buy points CAREFULLY, and consider easing into any position, rather than going 'all in' on one date.

    =====================================

    ZB: "..keep 20% on the sidelines for other opportunities"

    REPLY: As a general comment, I think NOT being fully invested (holding cash) works well for a lot of people (this writer included!). Though I believe that position is a minority one. Most of the financial industry has a financial interest in keeping all retail investors fully invested all the time. And of course with the stock market at all time highs (as presently) those folks can point to the opportunity cost of holding cash. Of course we won't always be trading at all-time highs. Cash IS -- as it has been since 2009-- the most unloved of asset classes. But cash provides reliable "ballast" to a portfolio (bonds do too, but not always). Perhaps most importantly, as you note, cash provides optionality -- one cannot "buy low" if one is always 100% invested. And there is a "sleep easy" factor (speaking for myself) in holding cash. These are not quantitave benefits, they are qualitative. But that doesn't make them unimportant.

    Good luck.


  • edited December 2016
    In the current environment, 4% will require taking risk. You will have to decide which risk is worth it: credit risk, interest rate risk, currency risk, call risk, etc.

    If taking risk is not appealing, what about reducing living expenses?

    Nick de Peyster
    http://undervaluedstocks.info/
  • Hi Zoneblitz!
    Your lineup looks really good. Now, what are the percentages going to be, I wonder? Just like football, it's all in the odds regarding what it is you do and why you do it. In other words, the game plan (Blitz or Play Zone or maybe Man). It's what your strengths are and what areas of the field you own.
    God bless
    the Pudd
    p.s. What are you going to do? Just curious.....
  • edited December 2016
    Zoneblitz said "This current market really makes this challenging."

    Yes. I agree. And that's the difficulty of investing later in life. Were you 20 something or even in your 30s current valuations wouldn't pose much of an issue. Markets are very forgiving over very long time-spans (lasting several decades). Unfortunately, it's much easier to get caught leaning the wrong way when you've got a limited time span. And, if you're already taking distributions for subsistence, it makes it even harder.

    I haven't responded earlier because I try not to give financial advice. But, couldn't resist diving in here. I'm sure the others have been helpful.

    Wishing you success.
  • edited December 2016
    Puddnhead said:

    Hi Zoneblitz!
    Your lineup looks really good. Now, what are the percentages going to be, I wonder? Just like football, it's all in the odds regarding what it is you do and why you do it. In other words, the game plan (Blitz or Play Zone or maybe Man). It's what your strengths are and what areas of the field you own.
    God bless
    the Pudd
    p.s. What are you going to do? Just curious.....

    I actually help coach youth football :) We run all types of blitz and coverage packages. It's a lot of fun.

    Anyhow, I'm content with the portfolio for now. May include a floating rate fund and change allocations.

    VWINX - 30%
    PONDX - 10%
    GIBLX - 10%
    PTIAX - 10%
    OSTIX - 10%
    DGRO/HDV - 10%
    Cash - 20%

    I'm going to use the cash position to dial up/down my equity exposure - buy preferred stocks, etc. I do believe that we will have a pullback in equites after the new year. Everyone I know is buying stocks and that scares me.
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