Bond fund investing- need advice

[martlou]

I was advised by an investment planner that to allocate 50% of my portfolio into bonds, I should move a substantial amount from the money market into VBTLX.

I bought this at a NAV of $11.20 and didn't dollar cost average, so I am down. Forgive my lack of knowledge here. I just haven't had much money in bonds over the years and have concern that the price dropped in the last few days but interest rates didn't go up.

I am trying to decide if I should sell some of this and put it back into the money market.
I have 6 years to go before I will start accessing the money.

[hollowcave2]

First of all, you're watching the fund over a few days, which is too short a time frame to make meaning out of these fluctuations. A bond fund will fluctuate and that is different from a money market fund. The time frame to look at is a few years, not a few days. Your angst may mean that you've exceeded your risk tolerance, but I would not move money back into a money market unless you need the money now. You haven't even received your first dividend yet!

An alternative could be to reduce your exposure to volatility by putting half of the money into a short term fund. That would be the short term index, or I personally like the short term investment grade fund. Your advisor was probably trying to maximize the amount of interest paid for a given volatility, and the total bond fund is a good choice for that.

I would only have money in a money market if you need immediate liquidity. Another choice might be certificates of deposit (CD's) that are FDIC insured, but you would need to ladder them in order to have some liquidity if you need money.

Steve

[martlou]

Thank you for your post! I think my discomfort comes from having so much money in one fund plus my lack of experience with bond funds fluctuating over time. I don't need to move it for liquidity so I will hang in there. It looks like I bought the fund at the high though!

[NYBoglehead]

Thank you for your post! I think my discomfort comes from having so much money in one fund plus my lack of experience with bond funds fluctuating over time. I don't need to move it for liquidity so I will hang in there. It looks like I bought the fund at the high though!

Don't look at it too frequently. It'll go up and down over time, but in the end you should be good. Even if interest rates rise the NAV will go down but you'll be receiving more interest and re-investing it at a lower NAV, thus buying more shares. It is much better there than in the money market fund. I know having that much in one fund sounds like a lot, but the fund invests in thousands of bonds and will be adding new ones as they are issued. 6 years is still a lot of time, don't worry about the day to day flucuations.

[martlou]

Thank you! I appreciate your input!

[reggiesimpson]

Thank you for your post! I think my discomfort comes from having so much money in one fund plus my lack of experience with bond funds fluctuating over time. I don't need to move it for liquidity so I will hang in there. It looks like I bought the fund at the high though!

Don't look at it too frequently. It'll go up and down over time, but in the end you should be good. Even if interest rates rise the NAV will go down but you'll be receiving more interest and re-investing it at a lower NAV, thus buying more shares. It is much better there than in the money market fund. I know having that much in one fund sounds like a lot, but the fund invests in thousands of bonds and will be adding new ones as they are issued. 6 years is still a lot of time, don't worry about the day to day flucuations.

+1

[Bustoff]

TBM has an average duration of 5.2 years.

duration
A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point.

In 1994, when the U.S. Federal Reserve raised its target interest rate six times, bond funds on average lost 4.6 percent, according to Morningstar.

Today’s bond fund investors may be hit with declines steeper than those at other points in history when interest rates rose, says Ken Volpert, head of taxable bonds for Vanguard Group. In previous periods, yields were higher, about 6 percent or 7 percent, he says. That meant investors received bigger interest payments to offset price declines. Yields in bond funds are so low today that rates don’t have to increase much before investors would see negative returns. A 10-year Treasury is yielding about 1.7 percent. If yields rise to 2.7 percent, investors would have losses of about 7.5 percent even with interest payments, Volpert says. The Fed has supported the bond market by keeping its target rate for overnight loans among banks between zero and 0.25 percent since December 2008. While the Fed said on Sept. 13 it will probably keep the federal funds target rate near zero until mid-2015, long-term rates could rise before then.
http://www.businessweek.com/articles/20 ... ors-beware

[martlou]

Thank you for clarifying! So if I understand correctly, on a 5.2 duration, the price would fall 5% approximately with 1% yield increase, and it could take about 1.5 years to be even again if the yield increased from 1.7 to 2.7% ? With this explanation, how is the bond fund going to be better than leaving the money in a money market?

[livesoft]

I bought this at a NAV of $11.20 and didn't dollar cost average, so I am down.

So it appears that VBTLX is down 0.5% in value since the NAV was last at 11.20. Bond funds fluctuate much more than that. In another 2 weeks, it may be up 0.5% in value or down another 0.5% in value. And VBTLX has the same value it had 3 months ago: It's return has been 0% since early October.

If one cannot sleep well with a bond fund that fluctuates by 0.5% in a day or week, then one should probably consider going back to CDs.

[martlou]

I am ok with the fluctuation as long as the fund eventually has better results than the money market. I don't need the money for another 6 years. Thanks for the post!

[livesoft]

Well, one cannot predict the future, so it would be better to write:

I'm OK with a good chance the fund eventually has better results than the money market, but I'm also OK if it doesn't have better results than the money market.

[Bustoff]

how is the bond fund going to be better than leaving the money in a money market?

While the NAV of the TBM is essentially flat after one year, each share paid 12 months of dividends totaling $0.36 cents.
The Prime money market paid 12 months of dividends totaling $0.00036. I don't even know how to say that figure.

There are a lot of savvy investors around here. Rather than asking if TBM is a good investment going forward, perhaps we can ask Bogleheads which bond funds they are investing in going forward.

Vanguards Ken Volpert claims, “The best place to be is very defensive and very short-term,” he pointed to Vanguard Short-Term Corporate Bond ETF (VCSH) or Vanguard Short-Term Investment-Grade Fund (VFSTX) .

Perhaps adjusting your fixed income allocation to three equal parts such as 1/3 Short-Term Corporate Bond, 1/3 Total Bond Fund, 1/3 CD's might help you sleep better.

[livesoft]

Thirty-six millicents.

But "$0.36 cents"? What's the dollar sign doing in there?

[sscritic]

Thirty-six millicents.

But "$0.36 cents"? What's the dollar sign doing in there?

0.36 mills.

Confusing us. Or is it the word cents that is confusing us?

[Bustoff]

Thirty-six millicents.

But "$0.36 cents"? What's the dollar sign doing in there?

0.36 mills.

Confusing us. Or is it the word cents that is confusing us?

livesoft and sscritic - what is your opinion as to Volperts advice ?

[martlou]

how is the bond fund going to be better than leaving the money in a money market?

While the NAV of the TBM is essentially flat after one year, each share paid 12 months of dividends totaling $0.36 cents.
The Prime money market paid 12 months of dividends totaling $0.00036. I don't even know how to say that figure.

There are a lot of savvy investors around here. Rather than asking if TBM is a good investment going forward, perhaps we can ask Bogleheads which bond funds they are investing in going forward.

Vanguards Ken Volpert claims, “The best place to be is very defensive and very short-term,” he pointed to Vanguard Short-Term Corporate Bond ETF (VCSH) or Vanguard Short-Term Investment-Grade Fund (VFSTX) .

Perhaps adjusting your fixed income allocation to three equal parts such as 1/3 Short-Term Corporate Bond, 1/3 Total Bond Fund, 1/3 CD's might help you sleep better.

Thank you again, maybe some other savvy investors will respond, and I will look into your allocation suggestions.

[sscritic]

I don't buy bond funds to make money (although I did sell some this year and was forced to take a profit), but to have something that won't drop by 50%. I could use CDs for that and I have some (a small amount), but I am not changing anything. I have the equivalent of total bond, inflation-protected, and a muni fund and am sitting tight. I am more concerned with what will happen on the equity side, but there is nothing I can do about that (my crystal ball is not helping at all; can I get a refund?), so I am sitting tight there as well.

I am retired and not putting a lot into either stocks or bonds, so sitting tight is about all I can do. And watch Chinese soap operas.

P.S. I am not an investing guru, not by a long shot. I don't tell other people what AA they should have. Now if you want someone to read a federal regulation for you, give me a call.

[martlou]

Apparently, I bought this fund at a bad time at as advised. $11.20 nav price.

[martlou]

Apparently, I bought this fund (VBTLX) at a bad time. I was advised to put all the bond money into this one fund at $11.20 nav price.
I realize it has only been a month but I don't see how the dividends are going to compensate for the loss with the interest rates so low. I am not a savvy bond investor and the fluctuation isn't comfortable to me. I have primarily been in stocks and cash. I am advised to hang in there but at this point I am not seeing how I am going to break even because my nav (on $175,000) was $11.20. I am 6 years from drawing the money so maybe that will sort it out.

[Call_Me_Op]

This is no means a catastrophe - so don't panic. One lesson to learn from it is to fully understand something before you invest in it - regardless of what investment that is. There is nothing wrong with sitting in cash for a long time while you understand your options. I am not saying the intermediate bond funds are a bad investment, just that things tend to go a whole lot smoother when you understand how they work, and competing investments, before taking the plunge. Also, dollar-cost averaging is a good idea if you have concerns about investing a large sum all at once.

[JW Nearly Retired]

Thank you for clarifying! So if I understand correctly, on a 5.2 duration, the price would fall 5% approximately with 1% yield increase, and it could take about 1.5 years to be even again if the yield increased from 1.7 to 2.7% ? With this explanation, how is the bond fund going to be better than leaving the money in a money market?

Good question. Burton Malkiel said a year ago that bonds are "sure losers", or words to that effect. Nothing is sure and people have been saying such things for a while now and nothing much has happened. Still, if and when the economy picks up, interest rates will rise. If they rise very quickly and/or high you would have been better off leaving it in a money market.

I really know nothing much about bonds, but I feel better having a mix of money market/bonds/tips as my fixed income allocation.
JW

[martlou]

This is no means a catastrophe - so don't panic. One lesson to learn from it is to fully understand something before you invest in it - regardless of what investment that is. There is nothing wrong with sitting in cash for a long time while you understand your options. I am not saying the intermediate bond funds are a bad investment, just that things tend to go a whole lot smoother when you understand how they work, and competing investments, before taking the plunge. Also, dollar-cost averaging is a good idea if you have concerns about investing a large sum all at once.

Thanks, unfortunately, I had been sitting on cash and at the advise of an advisor put that money (all of it) in the one bond fund. The idea was that the NAV wasn't as important as the allocation ratio for bonds and stocks. In my investing, I have never put that much into one fund at one time. I have done my own research but in this case I relied on expertise, and I didn't understand that the bond prices would drop even if interest rates didn't rise. At least, that seems to be what has happened in the last month or so. If I had left it in the money market, inflation might erode it but I wouldn't be down $3000.

[livesoft]

I am surprised you are fixated on the $11.20 price you paid. Since you purchased this fund it has paid out $0.07824 in distributions and will pay today another ~$0.022 dividend, for about a $0.10 total. That really means you bought for $11.10. It will probably have a NAV today of $11.00 even, so you will be down less than $1800 since you purchased. (I don't see how you say you have lost $3,000.) To me that seems quite a small fluctuation for an intermediate-term bond fund and no big deal.

So as I wrote before, if this really bothers you, first get the math right, then use CDs instead of bond funds.

[martlou]

I am surprised you are fixated on the $11.20 price you paid. Since you purchased this fund it has paid out $0.07824 in distributions and will pay today another ~$0.022 dividend, for about a $0.10 total. That really means you bought for $11.10. It will probably have a NAV today of $11.00 even, so you will be down less than $1800 since you purchased. (I don't see how you say you have lost $3,000.) To me that seems quite a small fluctuation for an intermediate-term bond fund and no big deal.

You are right, with the distribution today, it should be around $1800. It isn't a large fluctation, true. I am just trying to get insight and appreciate the input.