Should I really be using a stable value fund as my fixed income allocation?

My current target asset allocation is:

  • 87% Stocks / 13% Fixed Income
  • 50% US Stocks / 50% International Stocks

I am currently targeting the following funds to implement this:

  • 34% Vanguard S&P 500 Index Fund
  • 8% Vanguard Extended Market Index Fund
  • 43% Vanguard Total International Stock Market Index Fund
  • 13% Vanguard Retirement Savings Trust

I’m starting to wonder if I should really be allocating the entire fixed income portfolio to a stable value fund, especially as my portfolio and that allocation % grows.

Why did I originally pick the stable value fund? During the 2008 downturn, it did not lose ANY value. It looks like it has zero years/quarters/months with a loss. It has a better return than a money market fund – it has been returning about 3-5% historically. I also liked that it gave distributions monthly. (Yes, I know that sounds silly.)

The other two fixed income funds in my 401(k) plan are:

  1. PIMCO Total Return Institutional, which is an active intermediate-term bond fund with an expense ratio of 0.46% and a random quarterly expense of 0.25%. The average duration of its bonds is 7.1 years and its average maturity is 9.0 years. Its 1 year return of 4.16% is severely lagging the Barcap 5-10 Yr Govt/Credit Benchmark 1 year return of 10.79%.  All of its other returns are pretty close to the benchmark. 86% of its bonds are rated A, AA, or AAA.
  2. Vanguard Total Bond Market Index Fund Investor Shares, which is an index intermediate-term bond fund with an expense ratio of 0.22%. It had a small dip in 2008 and its returns slightly lag the Spliced Barclays USAgg Floag Adj Ix* benchmark. 69.7% of its bonds are U.S. Government and the rest are rated Baa, A, Aa, or Aaa. Its average duration is 5.1 years, which is a bit shorter than the PIMCO fund’s average duration of 7.1 years. Its average maturity is 7.1 years, which is shorter than the PIMO fund’s average maturity of 9.0 years.

If I was going to choose between the two bond funds available in my 401(k), I would go with the Vanguard Total Bond Market Index Fund over the PIMCO one. The slightly shorter maturity and duration make the fund somewhat less volatile. I think that I will leave the current funds in the stable value fund since my policy is to re-balance with new funds and not to change investment strategies too frequently. I also like the idea of having a small (5-10%) allocation to cash and then the rest of the fixed income allocation being bonds.

Given that, the target breakdown could look like this:

  • 87% Stocks / 13% Fixed Income
  • 50% US Stocks / 50% International Stocks (within stocks)
  • 5-10% Cash / 3-8% Bonds
This would mean the following implementation:
  • 34% Vanguard S&P 500 Index Fund
  • 8% Vanguard Extended Market Index Fund
  • 43% Vanguard Total International Stock Market Index Fund
  • 5-10% Vanguard Retirement Savings Trust
  • 3-8% Vanguard Total Bond Market Index Fund

I have some time to think on this, but I’m definitely leaning towards adding some bonds to my portfolio.

Readers, how have you implemented the fixed income part of your investment portfolio?


14 thoughts on “Should I really be using a stable value fund as my fixed income allocation?

  1. I’m too young to be thinking too much about fixed income!

    But we do have some amount of our portfolios in bonds, somewhere between 10-20%.

    Here’s the 403(b) Fidelity allocations:
    Our IRAs are more heavily weighted towards stocks with only the Vanguard portion being in a target date fund (which has some amount of bonds).

    And of course there’s the house and the cash primary emergency fund.

    • If you’re too young, what am I doing thinking about it?!

      I think that I’m going to move away from all of my non-stocks being in cash, but I just don’t know what % to do and I’m only going to do it with new funds, not selling anything. (That automatically builds in a waiting period!)

      I pulled in some other stuff that I was counting in the Investments category, but not in the asset allocation which through my asset allocation to 29% cash / 71% stocks, so it’ll take a few years of putting all new funds into stocks before I get that back to where I want it to be. I think that’s okay though because stocks still scare me a bit, so maybe having such a low cash allocation is bad. We’ll see.

      The other day, a friend said “Today is going to be a bloody day for the markets”, I responded with “Who cares? It’ll be just fine when we want to retire.” I really like how index funds mean that I don’t need to watch the markets!

      • Don’t feel bad for having some fixed income. In years like 2008, you’ll outperform. In boom years, you won’t make *quite* as much but, again, your diversification will result in less risk and, possibly, higher returns. Most importantly, if it helps you sleep better at night then it’s the right allocation for you. A mix of global index funds + some fixed income seems to be an extremely prudent allocation.

        • Oh, I don’t feel bad for having some fixed income. I think I worded that weirdly. Perhaps what I feel weird about is letting my asset allocation stay so far off from my “target” asset allocation. I definitely think I should have some – I’ve just had a hard time deciding among the three available funds in that category in my 401(k). My decision almost always has been to just leave the money in whatever it’s already in.

  2. You should describe your investing strategy, in terms of your feelings about taking on “risk.” I am agressive, so I have 90% of my money in stocks and 10% in bonds.

    • I am somewhat aggressive in terms of age (i.e. time until I need the money) and “low” asset level (in regards to how much I actually need to retire). So as I get older and as my assets increase in size, I’ll adjust my target allocation to stocks down.

      I actually am pretty conservative personally, but I realize that I have quite a bit of time until retirement, so I just ignore the markets and that seems to help in not paying attention to what my portfolio is doing.

    • I liked Mike Piper’s reasoning for switching to the Lifecycle funds: himself.

      I’m starting to realize that the most important part is to not fiddle with stuff, so I’m quite careful now to 1) ponder for awhile (say a month) before implementing any changes and 2) only make changes with new funds, so as to reduce the effects of any fiddling.

  3. I don’t think you’d be wrong to go with either fund. The stable value fund seems fine or what is is. When we are taking the difference between 8% and 13% of your portfolio, It seems like that decision is not going to have THAT much of an effect on your overall return.

    • Yup, that’s a very good point. I’ll most likely just end up leaving it the way it is. It’s hard when there are two or three good decisions to choose from, when there’s really no “best” decision – there are just two or three options and any are really fine. If one was a clear winner, I would probably spend far less time thinking about it!

  4. Really I think either is fine. When I feel stressed by these kind of decisions I always try to keep the big picture in mind- How much you save is so much more important then where it is saved. You are already doing the hard part and saving a lot. You’ll do fine with any of these bond funds!

    • I wouldn’t call my emotions in relation to this “stressed”, but I certainly think about it too much when one option isn’t clearly the winner. I love watching the balance go up each month, which is pretty much entirely from contributions at this point.

  5. Vanguard stable value is solid. The underlying bonds in the stable value fund are probably similar to the bond fund you are looking at.
    Stable value justs smoothes the ride. At your levels, you probably will not notice the difference.

    • I like your comment that the stable value fund just smooths out the ride. Thanks! I don’t know very much about the underlying funds in the stable value, but it seems to be doing just fine.

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