sdvan wrote:Yes, in theory, I could hold for 5 years after each interest rate increase and I'd earn the interest rate prevailing at the time of the interest rate increase. But, at what cost? If instead, I purchase individual bonds and hold them to maturity, I never suffer any NAV loss regardless of what interest rates do. That seems like a much better buffer against equity risk.
LH wrote:I would stay the course.
Yeah, you can try CDs, just not in cyprus please, and i bonds, and series E, but really beyond those which are limited, there is no substitute for treasuries and TIPS.
sdvan wrote:The reason to consider individual bonds is the guarantee that they will not lose NAV if held to maturity. In theory the fund also could function similarly if held for the duration after an interest rate increase. But, the NAV hit from multiple interest rate increases and the tiny returns have me considering individual bonds. An individual bond would function more like a CD.
sdvan wrote:Diversification with state GO bonds is not necessary. All carry the same risk. Plus, state bonds are likely less risky than city, county, school district, etc. bonds held by the bond fund. In other words, I think the individual bonds are no more risky (and potentially less risky) than the bond fund and the return is the same with no risk of NAV loss.
Archie Sinclair wrote:sdvan wrote:Yes, in theory, I could hold for 5 years after each interest rate increase and I'd earn the interest rate prevailing at the time of the interest rate increase. But, at what cost? If instead, I purchase individual bonds and hold them to maturity, I never suffer any NAV loss regardless of what interest rates do. That seems like a much better buffer against equity risk.
That's an illusion. The market value of individual bonds will go down temporarily too. It seems like what you're really saying is that you don't want to know the true value of your investments.
sdvan wrote:I think there is a difference. With the bond fund, I don't have any control over the NAV drop. The NAV will go down and the most I can hope to do is to recover that loss with increased payments by holding for the duration of the fund after the interest rate increase. This is compounded if there are multiple interest rate increases.
ogd wrote: Here's a simplified scenario that I played with when I was making my own version of your decision: suppose today, three of our fellow citizens hold the following assets:
Citizen A, afraid of interest rates but desiring yield, holds muni bonds maturing in 5 years.
Citizen B, being lazy, holds VCADX, with roughly 5 years duration.
Citizen C, being even more afraid of rate increases, holds cash.
Now suppose interest rates rise tomorrow. Just once, decisively and brutally, by like 5%. It hurts like hell, but it's enough to satisfy citizen A's gut instinct that there are no more rate hikes coming. What happens to the three portfolios?
Citizen A has suffered no apparent loss, but will have to wait 5 years to take advantage of the higher rates.
Citizen B has suffered about 25% NAV loss, but his depreciated fund shares are yielding more (on the depreciated basis). The effects of the rate hike will be gone after about 5 years.
Citizen C has suffered no loss and he can buy new bonds and start making the higher yield immediately.
From this it's clear to me that citizen A, although he'd like to think he's in the same boat as citizen C, is actually in the same boat as citizen B. They both suffered a loss, realized or not, whereas citizen C hasn't. To put it another way, citizen A and citizen B's assets are still interchangeable after the rate event, e.g. citizen B can sell his fund at a loss and *buy* the same depreciated bonds that A holds, on the market. By contrast, A and C's portfolios are clearly not interchangeable, there's no way that A can go back to the same amount of cash *now*.
What if the rate event takes place 1 year into the maturity period, you ask? In that case, A indeed loses less than B, but the same as B's cousin, Bprime, who was holding a bond fund with duration four years. And you can push the date further, to the point where if the rate hike happens the day before bond maturity, citizen A's holdings are indeed the same as cash, i.e. no loss.
Scooter57 wrote:The one problem with the limited term muni funds, besides the low yield is that the last year as the bonds mature they move to money market for the proceeds, so you will have a whole year with poorer yield before you get your principal back.
Users browsing this forum: Yahoo [Bot] and 21 guests