401K's are a reality for many W2 income earners and although they are quite restrictive there is usually free money from the company making it too good to ignore. So I have been on a journey to teach myself how to make the best of this asset structure. I might have loved to put it all into crypto but it is not a choice that anyone has so this becomes my safer investment hedge.
For many years I largely avoided all bonds because everywhere you turned people were expecting interest rates to rise soon and that bond values must fall. Bonds in general looked very unattractive paying very little interest and had substantial downside risk if interest rates rose. I don’t think that this long term picture has changed, but Momentum trading showed me that despite what everyone was saying, long term treasury funds like VUSTX were still doing well and continued to do so through until the middle of 2015. I grudgingly invested in them and I am glad I did, there was still one more puff on the cigar butt. In 2015 I sold all my long term treasury bonds because of the 200 Day Moving Average cross at the end of Apr 2015. I exchanged them for Junk bonds TRHYX. This is now ~15% of my 401K and it is my entire bond allocation currently. There are goods and bad's to this decision and time will tell whether I should have given them the full bond allocation.
Pros
• I wanted to maintain the income that I was getting from bonds and junk bonds pay quite well compared to any other.
• The junk bonds were sitting in the low end of their trading range and have been gently rising ever since. I bought in the bottom quartile of the 52 week price history, so income plus potential upside here.
• They don’t generally move very suddenly so I don’t have to lie awake at night wondering if I should have sold that day.
Cons
• There is really only one major downside. That is, that Junk bonds are positively correlated with equities and recessions. So when the stock market tanks, they do too which is counter to the general intent of holding Bonds. They lost more than 30% of their value in the 2008 crash.
So you have to have a strong stomach when they drop. The good news is that they still carry on throwing off income which is my primary reason for holding them. I actually only acquire them when they are cheap. The way I like to think of this is: If you have a nice rental property throwing of a couple of hundred bucks a month in income and the property market suddenly tanks, do you quickly dump the property and lose the income stream or do you hunt around for another now much cheaper property to add to your portfolio.
Finally another psychological benefit of this kind of investment is that you can continue to watch your passive income grow from quarter to quarter. Sometimes the market goes down and that is generally personally depressing but I can warm my hands around the small but growing fire of passive income while I wait for the market to come back. I like it when the market puts these kinds of assets on sale.