GNMA Funds

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GNMA Funds

Postby PismoBeachTom » Wed Jun 26, 2013 8:48 pm

I would like some basic advice about what to do with my BlackRock GNMA (PGPAX) fund. I have over $100,000 in this fund. Drops of just a few cents a day make a big difference. I am underwater at this point. I am in my 60s so I am questioning whether I should wait for this to come back. Long term, the dividends might make up for the losses, but in the current environment, that time frame is too long. The big question is, should I bail out now and try to make up the difference elsewhere. I've read about what happens with these funds when interest rates rise and fall. Here are just a few things I am wondering:

Will the Fed tapering and the increase in interest rates mean that fewer GNMA loans will be made and thus make these types of funds even less desirable in the future?
I read that the Japanese are less interested in these funds with the changes in their economy and it may be affecting the price. Is this significant enough to worry about?
PGPAX has some Fannie Mae holdings. I read in the LA Times today that a bypartisan group of senators want to shut Fannie and Freddie down. Will this affect the fund going forward.

I cannot find much information. On the good side, I see this fund recovering from market shocks, but that has been in a low-interest rate environment. What now?
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Re: GNMA Funds

Postby dm200 » Wed Jun 26, 2013 9:32 pm

PismoBeachTom wrote:I would like some basic advice about what to do with my BlackRock GNMA (PGPAX) fund. I have over $100,000 in this fund. Drops of just a few cents a day make a big difference. I am underwater at this point. I am in my 60s so I am questioning whether I should wait for this to come back. Long term, the dividends might make up for the losses, but in the current environment, that time frame is too long. The big question is, should I bail out now and try to make up the difference elsewhere. I've read about what happens with these funds when interest rates rise and fall. Here are just a few things I am wondering:

Will the Fed tapering and the increase in interest rates mean that fewer GNMA loans will be made and thus make these types of funds even less desirable in the future?
I read that the Japanese are less interested in these funds with the changes in their economy and it may be affecting the price. Is this significant enough to worry about?
PGPAX has some Fannie Mae holdings. I read in the LA Times today that a bypartisan group of senators want to shut Fannie and Freddie down. Will this affect the fund going forward.

I cannot find much information. On the good side, I see this fund recovering from market shocks, but that has been in a low-interest rate environment. What now?


I suppose there are several ways to look at this. Right now, any losses you have are a fact. You have them, and the fund is worth what it is worth now. The yield is increasing and should increase since the NAV dropped. How long it takes to recover those recent losses. IMO, is not the issue. The relevant issue is your risk tolerance and what you hold going forward.

Before this recent drops in GNMA (and other bond) prices/values, presumably you judged the GNMA fund to be in your risk tolerance. Did your risk tolerance change in this very short period of time?
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Re: GNMA Funds

Postby livesoft » Wed Jun 26, 2013 9:40 pm

OK, I have more in a GNMA fund than you do. My fund has gone down in value I think, but I haven't looked. I just don't care because I am more interested in my stock fund.

So my basic advice: Don't worry about it. Worry about something else.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: GNMA Funds

Postby joe8d » Wed Jun 26, 2013 9:41 pm

Interesting, Bob Brinker for years would recommend GNMA as the ultimate bond fund.Now he never mentions it.
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Re: GNMA Funds

Postby z3r0c00l » Wed Jun 26, 2013 9:56 pm

PismoBeachTom wrote:I would like some basic advice about what to do with my BlackRock GNMA (PGPAX) fund. I have over $100,000 in this fund. Drops of just a few cents a day make a big difference. I am underwater at this point. I am in my 60s so I am questioning whether I should wait for this to come back.


First, the general bond news: you will do okay in the long run if you are willing to hold on to the investment. These funds will recover, and they are also not down by all that much, just a few percent. Do you have any stock investments? Did you panic the last time these stocks fell by a comparable amount in a day or two? It took bonds a month+ to fall the same amount. If the fund was good a year ago with record low rates and record high navs, it is BETTER today. Remember that your stocks can fall 10% or even 20% in a day... these bond funds are unlikely to lose that much in a year, even a bad year.

Double check to see what fund you actually own. PGPAX is one of the worst bond funds I have ever seen with a 5.5% front end, 1.48% er, and a terrifyingly small 14 million under management. Maybe you own BGPSX instead? That fund is not so bad.

I would consider selling and then buying VBTLX, selling because the fund is not the cheapest or best diversified, and buying back into bonds which are still suitable for a person who is near retirement. If you own PGPAX, it has to go asap. If BGPSX, you would be fine to hold on to it I think. Yes NAV will suffer at times, but income will increase and you can reinvest dividends at lower NAVs if you want.
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Re: GNMA Funds

Postby john94549 » Wed Jun 26, 2013 10:40 pm

My Mom has a rather major position in a fund which specializes in this somewhat arcane corner of the market. Roughly 15% of investable assets, not huge, but substantial. The duration is something in the neighborhood of 3 (admittedly, a moving target), and she's 98. Her reaction to the recent market gyrations: a big yawn. She just re-invests her dividends.
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Re: GNMA Funds

Postby z3r0c00l » Wed Jun 26, 2013 10:45 pm

What fund?
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Re: GNMA Funds

Postby john94549 » Wed Jun 26, 2013 10:53 pm

z3r0c00l wrote:What fund?


FUSGX. Mind you, this is a person totally un-flummoxed when her Stanley stock lost half its value. She gives "long-term investor" a whole new meaning.
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Re: GNMA Funds

Postby Jim180 » Wed Jun 26, 2013 11:03 pm

joe8d wrote:Interesting, Bob Brinker for years would recommend GNMA as the ultimate bond fund.Now he never mentions it.


Brinker still has them in his Balanced portfolio, and also his Income portfolio. Brinker talks about GNMA's when they are doing well but never mentions them when they are going down.
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Re: GNMA Funds

Postby PismoBeachTom » Wed Jun 26, 2013 11:05 pm

Thanks everyone for responding. My first time at this site.

dm200, this fund met my risk tolerance at the time, but with recent news I began to wonder whether this type of fund will only go down from here on based on news of Fed tapering and actual tapering in the future. I have to say I know more about this fund now than when I bought it, but I don't understand changes in the economy that affect it (like most people I presume). That is why I am here.

z3r0c00l, yes this is PGPAX, but it is in a company IRA, so the fees are minimal. I am limited to switching among the funds in the mix. Still I appreciate your observations about the other funds.

So I suppose I will do what livesoft recommends and worry about something else.

My strategy was to stay in this fund until I saw positive changes in the economy and then move into something with hopefully a little more upside. Now I am kinda stuck with it. Do any of you think it is a good idea to buy more of this fund at the lower price while I wait it out?
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Re: GNMA Funds

Postby john94549 » Wed Jun 26, 2013 11:15 pm

Pismo, by "investing more", if you mean new contributions, well, that's a hard call. Re-investing dividends has a certain elegance about it, but loading up more shares with new money, not so. Explore your options.
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Re: GNMA Funds

Postby Jim180 » Wed Jun 26, 2013 11:19 pm

I will say this. When rates are rising there are fewer mortgage prepayments so the duration of GNMA funds has a tendency to increase. For example last year the Vanguard GNMA fund had a duration in the 3-4 range. Right now that fund has a duration of 5. Your decision comes down to risk tolerance and what kind of income you are looking to generate. Do you need something that has at least a 2% yield? If so then right now you need some kind of intermediate-term bond fund. If you go to an intermediate-term index fund you would probably get about the same yield but with a higher duration. That would make you more uncomfortable than you are now.
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Re: GNMA Funds

Postby z3r0c00l » Thu Jun 27, 2013 7:12 am

PGPAX:
https://www.google.com/finance?q=MUTF%3 ... LG90QGf6wE
"ESG Managers Growth and Income Portfolio Class A"

BGPSX
https://www.google.com/finance?q=MUTF%3 ... FYTC0AGPAw
"BlackRock GNMA Portfolio Service Shares"

Just to triple check - I would hope that you have the latter fund, it matches the name you gave above. I would insist that they pay me a few percent per year to own PGPAX as described above, even with reduced fees and no load. The $14 million under management really scares me... some apartments sell for less than that.

"My strategy was to stay in this fund until I saw positive changes in the economy and then move into something with hopefully a little more upside. Now I am kinda stuck with it."

I think your investing strategy is fundamentally flawed. You do not buy and sell mutual funds like flipping a house. Buy the right investment for you, and hold it. You should have a balanced bond portfolio, so do you have a good mix of bonds in the 401K or elsewhere? GNMA should only be a modest portion of your bond holdings.
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Re: GNMA Funds

Postby Call_Me_Op » Thu Jun 27, 2013 7:36 am

joe8d wrote:Interesting, Bob Brinker for years would recommend GNMA as the ultimate bond fund.Now he never mentions it.


It's easy to like bonds (all types, not just GNMA's) in the midst of a great bond bull market. Not so easy on the other side.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: GNMA Funds

Postby jdb » Thu Jun 27, 2013 9:13 am

livesoft wrote:OK, I have more in a GNMA fund than you do. My fund has gone down in value I think, but I haven't looked. I just don't care because I am more interested in my stock fund.

So my basic advice: Don't worry about it. Worry about something else.

Livesoft is right on again. IMHO there seems to be a disconnect regarding bond funds. Unless you are a bond fund day trader an investor needs to plan to hold each dollar invested in a bond fund for at least average duration of fund. Otherwise better off not investing in that fund. Interest rates not primary problem with bond funds despite recent public hysteria. As interest rates increase the NAV will go down but fund will be stocking up on higher interest coupon bonds over time. Bogeyman for bonds is inflation. With low inflation bonds are good conservative long term investment regardless of rates as long as sufficient holding period. If inflation rears its ugly head for extended period then bonds are not good investment regardless of interest rates. My money is on continuation of low inflation but do have TIPS ladder and TIPS fund as backup just in rare case I cannot foresee future.
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Re: GNMA Funds

Postby Scooter57 » Thu Jun 27, 2013 11:31 am

Vanguard's GNMA funds have also dropped much more than would be predicted by duration or by the level of risk Vanguard assigns to them which was 2 on a scale of 1-5.

I have some money in the Vanguard GNMA which I figured would be okay to hold because of the relatively short duration and that low risk level. Turns out not only has the NAV dropped dramatically--much more than predicted by the duration, but the monthly payments are dropping, too.

My investment is a very small percent of my fixed income allocation, so I'm holding and hoping that either the payments start to increase as more mortgages are issued at rates now 1 full percentage point higher than they were month ago, or that the NAV recovers in response to plunging interest rates caused by an economic downturn.

But if in December I am still looking at the kind of NAV losses I have now in that fund, I'll be selling it to get a tax loss that will cancel out the capital gains I got from selling a bunch of what I believed were riskier high expense, non-Vanguard bond funds I'd inherited, which I did in January.

To the original poster. Be very careful to determine who is giving you advice on this board. Some people are very knowledgeable about investing. Some people are just repeating what they have heard, often things that aren't quite true. (For example: Yield doesn't go up on your existing holding as the NAV drops, it only rises when you buy in at the lower price. And it will take months and maybe years for the yield on an existing holding to rise as new bonds and mortgages replace old ones.)

I would suggest the original poster poster talk to an accountant about whether there would be any advantage in selling at a loss now and investing the money in something else like a 5 year jumbo credit union CD paying near 2%. (There are a few around if you hunt for them.) A capital loss can be helpful if you need to sell other investments that have large capital gains. And it may be time to study up and rethink what the OP's money is invested in. Moving to low expense funds for stocks could earn a lot more money in the future, for example.
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Re: GNMA Funds

Postby dm200 » Thu Jun 27, 2013 11:54 am

(For example: Yield doesn't go up on your existing holding as the NAV drops, it only rises when you buy in at the lower price. And it will take months and maybe years for the yield on an existing holding to rise as new bonds and mortgages replace old ones.)


By my "logic", the yield does go up when the NAV drops (other factors being equal). If the NAV is 11.00 and the monthly distribution is $0.03 per share, that is a yield of about 3.27% annually. [(0.03*12)/11.00). If the NAV drops to 10.00 and the monthly distribution stays the same, I calculate the yield to be about 3.60% annually]

You are correct, though, that this increased yield will take time to actually make up for a drop in the NAV.
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Re: GNMA Funds

Postby Phineas J. Whoopee » Thu Jun 27, 2013 12:05 pm

Scooter57 wrote:...
To the original poster. Be very careful to determine who is giving you advice on this board. Some people are very knowledgeable about investing. Some people are just repeating what they have heard, often things that aren't quite true. (For example: Yield doesn't go up on your existing holding as the NAV drops, it only rises when you buy in at the lower price. And it will take months and maybe years for the yield on an existing holding to rise as new bonds and mortgages replace old ones.)
...

[Emphasis added.]

Sage counsel in general.

With all due respect, Scooter, that's not what the word yield means.

There's a perfectly good term that means what I think you intended to say, but it isn't yield.

I think you intended to say cash flow, and no boglehead to my knowledge has claimed cash flow increases as NAV drops.

Indeed, PismoBeachTom, be very careful whose advice you listen to.

PJW
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Re: GNMA Funds

Postby Scooter57 » Thu Jun 27, 2013 2:07 pm

If you read the messages posted on the innumerable bond threads, you will see people saying over and over again that it doesn't matter that NAVs are dropping because yield is rising as NAV drops so investors who hold will be getting more in dividends.

So yes, I do know what yield is. And I understand it is different from the monthly cash you get from a bond fund. But apparently a lot of people posting here don't get it, and their posts are misleading to those who are worrying when, if ever they will recover the capital they have invested in their bond funds. They are being told that they will be getting more money each month because the yield has risen. They won't. They will get more money each month when bonds with higher monthly payments are bought by the fund.
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Re: GNMA Funds

Postby PismoBeachTom » Thu Jun 27, 2013 2:20 pm

z3r0c00l, thanks for pushing to clarify the fund name. I meant BGPAX, not PGPAX. Fortunately, I have not been mistakenly invested in something. I just typed it wrong in my message. The other part of this portfolio is in FDAFX, which is a target date 2016-2020 fund. I do have some other portfolios largely in cash waiting for the right time.

Based on the advice I have read here, I have decided to stick it out with BGPAX for a while. I know it may not be the best fund, but I am not going to sell and commit my losses. Been there, done that. I am tired of chalking things up as life lessons.
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Re: GNMA Funds

Postby Phineas J. Whoopee » Thu Jun 27, 2013 2:35 pm

Scooter57 wrote:If you read the messages posted on the innumerable bond threads, you will see people saying over and over again that it doesn't matter that NAVs are dropping because yield is rising as NAV drops so investors who hold will be getting more in dividends.

So yes, I do know what yield is. And I understand it is different from the monthly cash you get from a bond fund. But apparently a lot of people posting here don't get it, and their posts are misleading to those who are worrying when, if ever they will recover the capital they have invested in their bond funds. They are being told that they will be getting more money each month because the yield has risen. They won't. They will get more money each month when bonds with higher monthly payments are bought by the fund.

[Emphasis added.]

No, they aren't being told that.

They are being told that if they reinvest dividends beyond the average duration they will end up better off than they would have been had interest rates not risen. That's the definition of duration. The word yield has a definition, which I've linked to for you. So does the term cash flow as shown above.

Do you not see how your own words contradict each other?

Attempt to return to topic: The average duration of a GNMA fund cannot be known because of negative convexity.

PJW
Last edited by Phineas J. Whoopee on Thu Jun 27, 2013 2:57 pm, edited 1 time in total.
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Re: GNMA Funds

Postby dm200 » Thu Jun 27, 2013 2:54 pm

Phineas J. Whoopee wrote:
Scooter57 wrote:If you read the messages posted on the innumerable bond threads, you will see people saying over and over again that it doesn't matter that NAVs are dropping because yield is rising as NAV drops so investors who hold will be getting more in dividends.

So yes, I do know what yield is. And I understand it is different from the monthly cash you get from a bond fund. But apparently a lot of people posting here don't get it, and their posts are misleading to those who are worrying when, if ever they will recover the capital they have invested in their bond funds. They are being told that they will be getting more money each month because the yield has risen. They won't. They will get more money each month when bonds with higher monthly payments are bought by the fund.

[Emphasis added.]

No, they aren't being told that.

They are being told that if they reinvest dividends beyond the average duration they will end up better off than they would have been had interest rates not risen. That's the definition of duration. The word yield has a definition, which I've linked to for you. So does the term cash flow as shown above.

Do you not see how your own words contradict each other?

PJW


While past performance is no guarantee of future results, nonetheless a review of the performance of the various Vanguard Bond funds demonstrates, when there is a drop in NAV, what has happened if the fund is held (dividends and distributions reinvested) for a period of time.
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Re: GNMA Funds

Postby z3r0c00l » Thu Jun 27, 2013 5:21 pm

Scooter57 wrote:Vanguard's GNMA funds have also dropped much more than would be predicted by duration or by the level of risk Vanguard assigns to them which was 2 on a scale of 1-5.


Lots of people are not reading the very plain, very simple, not small print on these investments:

"Conservative to moderate funds—Risk level 2 Risk level two
Vanguard funds classified as conservative to moderate are subject to low-to-moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years)."

A one month drop of 4% is hardly more risk than a risk level 2 fund should show from time to time. You should expect to hold these from 4 to 10 years minimum, closer to 10 years in this kind of environment.

Glad that you own the better fund! I think you will be fine with it - the fund is a better investment now than it was last month. That is a good thing, though you will feel some discomfort in the short term. Remember these are CA 10 year investments (per the above expert rating system.)
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Re: GNMA Funds

Postby Scooter57 » Thu Jun 27, 2013 6:01 pm

Phineas J. Whoopee wrote:
Scooter57 wrote:If you read the messages posted on the innumerable bond threads, you will see people saying over and over again that it doesn't matter that NAVs are dropping because yield is rising as NAV drops so investors who hold will be getting more in dividends.

So yes, I do know what yield is. And I understand it is different from the monthly cash you get from a bond fund. But apparently a lot of people posting here don't get it, and their posts are misleading to those who are worrying when, if ever they will recover the capital they have invested in their bond funds. They are being told that they will be getting more money each month because the yield has risen. They won't. They will get more money each month when bonds with higher monthly payments are bought by the fund.

[Emphasis added.]

No, they aren't being told that.

They are being told that if they reinvest dividends beyond the average duration they will end up better off than they would have been had interest rates not risen. That's the definition of duration. The word yield has a definition, which I've linked to for you. So does the term cash flow as shown above.

Do you not see how your own words contradict each other?

Attempt to return to topic: The average duration of a GNMA fund cannot be known because of negative convexity.

PJW


There is NO need to be so condescending. Your tone comes across very rude. Perhaps you aren't reading the same threads I am. I'm not going to get into a debate with you and post links to other discussions, because that doesn't help the OP.

Over the past few months I have pointed out several things about bond funds that have all played out over the past weeks, starting with the fact that they could drop more than the duration would suggest and finishing with the fact that because so much bond money is in funds, when everyone heads for the exits ugly things could happen to these funds, which is what is happening.

The response from quite a few people on this forum has been very dismissive. I've been told several times that rates could only rise by .25% a year thanks to how the Fed does things. Well,that didn't turn out to be exactly true. And people claimed that duration was a meaningful concept for bond funds as opposed to bonds, which was contradicted by an intelligent discussion and Morningstar and borne out by what is happening with bond fund prices (not just GNMA).

The argument about negative convexity, which is repeated endlessly on this board is not the deal killerfactor that some seem to think it is. Yes, people do refinance when rates drop, and they hold onto low rate mortgages when they rise, but Muni Bonds get called and held in the same manner in response to low and rising rates, and no one harps on that here or suggests they are a poor investment.

More importantly, people have to terminate mortgages when they move, which happens very frequently in the U.S. due to the highly mobile nature of our job force. Only slightly over 50% of people stay in a home more than 10 years after purchasing it.(see data: http://www.nahb.org/generic.aspx?sectio ... nnelID=311.

And of course, the Vanguard GNMA fund is a managed fund, so the managers have discretion over what mortgages they purchase and how much longer they have to run.
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Re: GNMA Funds

Postby dm200 » Thu Jun 27, 2013 6:52 pm

z3r0c00l wrote:
Scooter57 wrote:Vanguard's GNMA funds have also dropped much more than would be predicted by duration or by the level of risk Vanguard assigns to them which was 2 on a scale of 1-5.


Lots of people are not reading the very plain, very simple, not small print on these investments:

"Conservative to moderate funds—Risk level 2 Risk level two
Vanguard funds classified as conservative to moderate are subject to low-to-moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years)."

A one month drop of 4% is hardly more risk than a risk level 2 fund should show from time to time. You should expect to hold these from 4 to 10 years minimum, closer to 10 years in this kind of environment.

Glad that you own the better fund! I think you will be fine with it - the fund is a better investment now than it was last month. That is a good thing, though you will feel some discomfort in the short term. Remember these are CA 10 year investments (per the above expert rating system.)


I agree. I am completely baffled by a drop of 4% in one month being characterized as more (or even much more) "risky" than the '2' (low to moderate fluctuations in share price), when the Vanguard descriptions seem (to me) to accurately describe the risk. I am also baffled by folks who seem to pay no attention to the 4-10 year projected holding period.
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Re: GNMA Funds

Postby livesoft » Thu Jun 27, 2013 9:52 pm

GNMA fund up more than 1% since the recent low. This baby really rocks!
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: GNMA Funds

Postby livesoft » Thu Jun 27, 2013 9:56 pm

Scooter57 wrote:...
I would suggest the original poster poster talk to an accountant about whether there would be any advantage in selling at a loss now and investing the money in something else like a 5 year jumbo credit union CD paying near 2%. (There are a few around if you hunt for them.) A capital loss can be helpful if you need to sell other investments that have large capital gains. And it may be time to study up and rethink what the OP's money is invested in. Moving to low expense funds for stocks could earn a lot more money in the future, for example.

These thoughts do no quite apply do they, since the OP has this fund in a "company IRA"?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: GNMA Funds

Postby dm200 » Fri Jun 28, 2013 11:10 am

livesoft wrote:GNMA fund up more than 1% since the recent low. This baby really rocks!


I find it interesting that when a Bond fund drops 4% in a short period, lots of folks conclude that the fund is too risky and volatile, but nobody seems to complain if the NAV goes up 4% in a short period. :confused
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Re: GNMA Funds

Postby livesoft » Fri Jun 28, 2013 11:52 am

dm200 wrote:I find it interesting that when a Bond fund drops 4% in a short period, lots of folks conclude that the fund is too risky and volatile, but nobody seems to complain if the NAV goes up 4% in a short period. :confused

Yes. I still remember the day that VIPSX (TIPS fund) went up 3% in one day. It was so unusual, I sold it the next day.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: GNMA Funds

Postby Scooter57 » Fri Jun 28, 2013 12:40 pm

Same here. I knew just about nothing about investment last year when I inherited a significant sum, all invested in high expense, poor quality funds. (I knew enough to know that was a bad idea even then!)

The Vanguard CFP suggested I sell the stocks I'd inherited and put the money into the Intermediate Term Tax-Exempt fund. I did so--only to see the fund start shooting up at a rate that appalled me. I had held bond funds before but they just kind of sat there and went up and down a penny or two a share. But this fund was, in bond fund terms, galloping.

I thought to myself, anything that can go up that fast can go down that fast, and that got me studying the whole subject of bonds, and I got my head around the part about how bond funds go up when rates drop and down when they rise. I also learned that the rates today were abnormally low. I closed out the whole position with a very small gain and have been warning people about dangers of bond funds ever since.

I've gotten a lot of flack from quite a few people here for posting on this subject so consistently, but so far my concerns about the dangers lurking in these funds in the current interest rate environment have been more than borne out by events, and my only regret is that I didn't get out of bonds 100%. I still have 5% of my money in bond funds that are all in the red. They are high quality, low expense funds, unlike the garbage I sold, but the losses are just as real.
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Re: GNMA Funds

Postby ogd » Fri Jun 28, 2013 1:25 pm

Scooter57,

Unlike you, I've held bond funds, and muni funds in particular, across drops much steeper than today, so I've had my share of value fluctuating. As long as you know what you expect and you have the right horizon, I still find them a good value. I also remember times when that chunk of my portfolio was the only thing keeping me from selling everything, buying some grassland and becoming a shepherd.

I've been hearing predictions about interest rate this and muni defaults that for as long as I can remember paying attention. It's become apparent to me that nobody knows nothing about the future. Your prediction has panned out for now, and that's great for you, but sometimes the most damaging thing for an investor is to be proven right for a while. At least in your case it seems that it's made you more conservative (cash instead of bonds), which is not all that bad. At least you're not out there shorting bond funds with leverage, or going 100% dividend stocks or some such, based on your confidence in your predictive skills. Instead you are here demanding reverence for said skills but willing to listen to arguments to the contrary. I can only hope that you will find some of them convincing.
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Re: GNMA Funds

Postby Scooter57 » Fri Jun 28, 2013 4:07 pm

Ogd,

My "prediction" is not a prediction nor is it timing. I did not and do not know when bond rates would rise. All I learned was that IF they rose certain things were going to happen which could have long term impact no one had warned me about.

A 20% drop in the value of what I'd been advised to put into intermediate term tax exempt would have been a major hit, and given my age, waiting 15 years--the time Vanguard's FI guy later mentioned in a web seminar it could take for it to shake out, would have been a huge problem for me.

I had made it clear to the CFP that I was looking for very low risk in fixed income. I was not aware at the time, as are many posting here, that I could extend the FDIC coverage on CDs with POD accounts. I learned that from contributors here. When I realized I could get a safe return barely different from one putting capital at a significant risk, I found it strange none if the investment professionals I'd consulted bothered to mention the fact. Or that the odds are that rates will rise at some point. The CFP even went so far as to suggest we would have decades of very low rates like Japan. We might, but to base investment decisions on the idea that was probable strikes me as deeply flawed.

I am at a loss as to why my posts generate such hostile responses here. I am posting what I hope will be helpful to people who may not be aware of the things I was not aware of. If people are fine with locking in current rates for up to 15 years and facing major capital losses if they spend dividends rather than reinvest, fine. But they should know that is what they are signing up for.

And they really need to understand that we have never had a prolonged bear market in bonds where so many bonds were held by funds and ETFs. No one really knows how the bond funds will hold up under prolonged stress. This past month underlines that there may be nasty surprises.
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Re: GNMA Funds

Postby ogd » Fri Jun 28, 2013 5:07 pm

Hi Scooter57,

If you're miffed about the hostility, you only need to take another look at your last post. It's because of stuff like this:

Scooter57 wrote:we have never had a prolonged bear market in bonds where so many bonds were held by funds and ETFs. No one really knows how the bond funds will hold up under prolonged stress.

, which is a) not true and b) based on a fundamental lack of understanding about how the funds work. And because of numbers like this:
Scooter57 wrote:A 20% drop in the value of what I'd been advised to put into intermediate term tax exempt would have been a major hit

, which is almost 3x the peak-to trough drop in VWIUX (-7.3% price, -5.3% returns). What in the world is that 20% number? If it's potential why do you fail to point out that it's a worst case scenario that unlike stocks or inflated cash starts repairing itself immediately?

This alarmist tone has consequences, Scooter57. People listen to it and want to do dumb/unjustified things, like reduce their bond allocation (how many times have you heard that recently?) or dive into the shark-infested waters of direct muni investing, and that's just wrong. I'm not saying that they listened to you specifically or that it was your recommendation to do those things -- but you are contributing to the problem and when you push emotional buttons, you get responses that you might not like.
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Re: GNMA Funds

Postby Scooter57 » Fri Jun 28, 2013 7:02 pm

A 4% rise in rates is not worst case. It's barely reversion to the mean. Worst case is a 13% rise in rates, which I have experienced. With a 5 to 6 year duration, a 4% rise in rates, taking us only back to levels common before 2008 would cause a drop of 20% or more.

It doesn't start to come back immediately, either, as the is the same problem in munis as in GNMAs as many are callable. When rates rise low yielding munis don't get called. So they persist in the fund at lower yields unless sold at a loss.

The only emotion I see on display here is YOURS. Thinking about the issues I raise seems to make you anxious.

I'm hardly alone in addressing these issues, and the only professionals telling us to ignore them are, coincidentally, working for companies that become less profitable if we sell out of bond funds. They present highly questionable studies to back up their claims that ignore issues like the impact of sequential rate increases, or they cite as reassuring examples what happened during brief periods of rising rates during which rates were 3 times higher than they are now so that recovery of NAV was far swifter. Compounding at 7% is very different from compounding 1.6%.

And everyone is ignoring the impact of NAV decline on retirees who must spend their fixed income dividends and can't reinvest. The words "if dividends are reinvested are buried in every reassuring article provided by fund vendors.

Regular folks do need to know that reasonable people with no stake in strangers buying any asset class are aware of possible major issues here. They also need to go beyond trusting any anonymous poster's opinion when the "safe" part of their portfolio is at stake. Read books, study how bonds work, and be aware that bond funds work differently from bonds and that concepts like "duration" apply to individual Treadury bonds and may break down for bond funds. And be aware that there are lower risk ways of investing.
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Re: GNMA Funds

Postby dm200 » Fri Jun 28, 2013 7:51 pm

In regards to the Vanguard Intermediate Tax exempt fund, the summary prospectus https://personal.vanguard.com/pub/Pdf/s ... 2210077327 has lots of warnings and every new investment requires acknowledgement of reading the prospectus. There are several pages of such warnings of risk. Just two small excerpts:

An investment in the Fund could lose money over short or even long periods. You should expect the Fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market.
and

During the periods shown in the bar chart [2003-2012], the highest return for a calendar quarter was 6.14% (quarter ended September 30, 2009), and the lowest return for a quarter was –3.60% (quarter ended December 31, 2010).

The behavior of this fund during recent weeks should come as no surprise.

As far as FDIC/NCUA federal insurance being able to be multiplied, the FDIC and NCUA web sites have calculators and detailed explanations. I believe, also, that federally insured banks and credit unions must have detailed explanations available that explain all of this.
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Re: GNMA Funds

Postby jdb » Fri Jun 28, 2013 8:22 pm

http://www.youtube.com/watch?v=NO04VXBIS0M

I think Scooter57 should change his user name to Chicken Little. See attached video.
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Re: GNMA Funds

Postby ogd » Fri Jun 28, 2013 8:43 pm

Scooter57, I don't want to get into a shouting match with you, so let's skip over the emotional stuff and the fund company / boglehead conspiracies -- I will no longer respond to such points. Let's talk data. When I talked about a fundamental misunderstanding about funds work, I meant this:

Scooter57 wrote:So they persist in the fund at lower yields unless sold at a loss.
...
And everyone is ignoring the impact of NAV decline on retirees who must spend their fixed income dividends and can't reinvest. The words "if dividends are reinvested are buried in every reassuring article provided by fund vendors.

Today if I'm an intermediate fund I can roll over a 1 year UST into a 5 year UST -- selling at a loss or a gain, it's irrelevant here -- and make 1.25% more yield on the same money. This bonus is much bigger than 6 months ago (it was 0.45%), and it's simply because the yield curve has steepened. Furthermore, because the 5 year UST has declined in value more than my loss in the 1 year, I can buy more of it than back in December (I'm too lazy to run the bond calculator right now, feel free to disprove this with numbers if you can). So I can make more money in absolute terms without waiting for anything to mature. Funds roll over bonds all the time -- this is why the recovery begins instantly and automatically. Fundamentally, higher interest rates make the passage of time more rewarding for bonds.

If your hypothetical retiree gets more interest in absolute terms and proceeds to spend it all -- then yes, they won't ever recover. For fairness, some amount of reinvested dividend from the increase in returns must be factored into the recovery and it's not just misinformation from fund advocates.

As for the "fundamental difference between bonds and funds" -- if bond ladders were the way to go there would be bond funds out there doing it, I guarantee it. Nothing prevents a bond manager from holding a ladder and adding to it / trimming uniformly. Not even fund outflows -- that's your misunderstanding #2, from another thread. They don't do it because the short end of the ladder produces really bad returns, as I'm sure you know, worse than savings accounts currently. If an investor wants to hold bonds in that space, they can always do it with a short fund -- but they shouldn't be forced to by a uniform ladder.

So yes, there are differences between bond ladders and funds, by design, but at the core the fund is a holding vehicle for the same bonds you would have held individually. It just saves you a whole lot of headache. Yes, you have to choose your fund wisely and be prepared to deal with interest rate risk among other things.
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Re: GNMA Funds

Postby Scooter57 » Fri Jun 28, 2013 9:30 pm

So you expect the GNMA fund to begin recovering immediately, though the NAV has been dropping for months and the dividends not rising either? This post was about the GNMA fund,

And what is a UST? The term is not one I've seen before.
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Re: GNMA Funds

Postby ogd » Fri Jun 28, 2013 9:42 pm

Within months, yes, as total return. Turnover is 10%ish / month.

UST is a U.S. Treasury.
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Re: GNMA Funds

Postby Scooter57 » Sat Jun 29, 2013 7:52 am

Well, I'll check on GNMA in a few months and see how it plays out. For the sake of everyone holding it, I hope you're right.
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Re: GNMA Funds

Postby z3r0c00l » Sat Jun 29, 2013 8:21 am

Scooter57 wrote:Well, I'll check on GNMA in a few months and see how it plays out. For the sake of everyone holding it, I hope you're right.


Scooter, this is a 10+ year investment. Checking it every few months is meaningless. Recovery in rising rate environments often takes a few years. It would be easy for this fund to go negative for the next year or two. Not sure why this is a problem, though. Stocks could be negative for a decade or more and people still seem to buy them.
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Re: GNMA Funds

Postby Scooter57 » Sat Jun 29, 2013 9:42 am

Stocks are where I prefer to take risk. Fixed income is the stuff I will need to live on as I get older and the family businesses no longer provide a reliable cash flow. Since I am already the age where most people retire, ten year horizons have a different meaning to me now. I'm hoping to live that long. Several friends have not.

Almost every investing book I've consulted suggests that a highly conservative portfolio for an older person should be invested with a heavy tilt towards bonds. But if even the safest bonds can take 10 years to recover the value of the original investment, we have a major problem here that retirees need to be much, much more aware of.

Especially since the whole point of investment risk, as I learned at my pappy's knee, is to be rewarded for taking it on. What kind of risk premium are these bond funds offering us in exchange for the possibility looking at the NAV might trigger a heart attack for the next 5-10 years? A 1.6% return?, 2%?, a princely 3% but with correspondingly more default risk?

When I owned bond funds in the past I was getting around 7% (and often more) for risking my capital, an amount that would double my investment in 10 years and allow me to ignore fluctuations in the NAV. But when the fund is paying 2% it will take over 35 years to double the investment, and meanwhile those NAV fluctuations can eat up a whole year's worth of dividend in a few days.

And that doesn't even get into the issue of inflation. The official figures tell me inflation is 1% a year. Perhaps that would turn out to be true when I go out shopping for a Boeing Jetliner or a new industrial plant. But oddly, though, when I go out to buy a hamburger down the street, the plate that was $5 ten years ago is now $9. And when I go to the super market the steak that was $5 is now $12, and the gas I have to buy to get me there instead of being $1.30 is $3.50. And that doesn't even get into the costs of health care/insurance/vehicles/property tax etc. All of which a retiree will need and which show little sign of having any relationship to the official inflation numbers.

So I have to assume that, best case, in another 10 years when I get the principal back that was sunk in the GNMA fund along with the compounded 2.3% interest it is paying (which in 10 years will have increased the principal by barely 1/3) it will buy half as much as it does now. Which leads me question the whole idea that bond funds belong in my portfolio. (And with the way the governments has changed the way the CPI is calculated, that applies to TIPS too. Does anyone here really believe that inflation is running at 1%?)

I'm from a generation that was raised to believe that if you went to college, got a job and worked hard you'd have a life-long job and a pension. Round about our 40s they changed the rules. No more pensions. Then no more job. We read breathless descriptions about how wonderful it was that we could keep "reinventing our careers." But if we kept saving, we'd have a wonderful retirment. And there was all that equity in our homes we could rely on after a lifetime of paying off the mortgage. Whoops. Cancel the last. And there would be Social Security to rely on. (Well, maybe, but probably less. And for many it will start at a later age, even though the ability to get meaningful work through your 60s has become vanishingly slim.) But at least the money invested in the market would yield on average 10% a year. It always had, hadn't it. Except that suddenly it doesn't. Count on 7%--no make that 4%. Or even 2%.

So by now, I'm getting hip to the tricks. And one trick I'm not going to be taken by is the one that tells me to put my nest egg (or suggest that friends put their nest eggs) in a "safe, conservative" investment that might end up being yet another thing that worked great for the Geezers who preceded us, but will leave us holding an empty bag. And in many cases, eating dog food.
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Re: GNMA Funds

Postby tibbitts » Sat Jun 29, 2013 10:18 am

Scooter57 wrote:Stocks are where I prefer to take risk. Fixed income is the stuff I will need to live on as I get older and the family businesses no longer provide a reliable cash flow. Since I am already the age where most people retire, ten year horizons have a different meaning to me now. I'm hoping to live that long. Several friends have not.

Almost every investing book I've consulted suggests that a highly conservative portfolio for an older person should be invested with a heavy tilt towards bonds. But if even the safest bonds can take 10 years to recover the value of the original investment, we have a major problem here that retirees need to be much, much more aware of.

Especially since the whole point of investment risk, as I learned at my pappy's knee, is to be rewarded for taking it on. What kind of risk premium are these bond funds offering us in exchange for the possibility looking at the NAV might trigger a heart attack for the next 5-10 years? A 1.6% return?, 2%?, a princely 3% but with correspondingly more default risk?

When I owned bond funds in the past I was getting around 7% (and often more) for risking my capital, an amount that would double my investment in 10 years and allow me to ignore fluctuations in the NAV. But when the fund is paying 2% it will take over 35 years to double the investment, and meanwhile those NAV fluctuations can eat up a whole year's worth of dividend in a few days.

And that doesn't even get into the issue of inflation. The official figures tell me inflation is 1% a year. Perhaps that would turn out to be true when I go out shopping for a Boeing Jetliner or a new industrial plant. But oddly, though, when I go out to buy a hamburger down the street, the plate that was $5 ten years ago is now $9. And when I go to the super market the steak that was $5 is now $12, and the gas I have to buy to get me there instead of being $1.30 is $3.50. And that doesn't even get into the costs of health care/insurance/vehicles/property tax etc. All of which a retiree will need and which show little sign of having any relationship to the official inflation numbers.

So I have to assume that, best case, in another 10 years when I get the principal back that was sunk in the GNMA fund along with the compounded 2.3% interest it is paying (which in 10 years will have increased the principal by barely 1/3) it will buy half as much as it does now. Which leads me question the whole idea that bond funds belong in my portfolio. (And with the way the governments has changed the way the CPI is calculated, that applies to TIPS too. Does anyone here really believe that inflation is running at 1%?)

I'm from a generation that was raised to believe that if you went to college, got a job and worked hard you'd have a life-long job and a pension. Round about our 40s they changed the rules. No more pensions. Then no more job. We read breathless descriptions about how wonderful it was that we could keep "reinventing our careers." But if we kept saving, we'd have a wonderful retirment. And there was all that equity in our homes we could rely on after a lifetime of paying off the mortgage. Whoops. Cancel the last. And there would be Social Security to rely on. (Well, maybe, but probably less. And for many it will start at a later age, even though the ability to get meaningful work through your 60s has become vanishingly slim.) But at least the money invested in the market would yield on average 10% a year. It always had, hadn't it. Except that suddenly it doesn't. Count on 7%--no make that 4%. Or even 2%.

So by now, I'm getting hip to the tricks. And one trick I'm not going to be taken by is the one that tells me to put my nest egg (or suggest that friends put their nest eggs) in a "safe, conservative" investment that might end up being yet another thing that worked great for the Geezers who preceded us, but will leave us holding an empty bag. And in many cases, eating dog food.

I'm in agreement with much of what you're saying, except that there I'm not sure there's a great alternative.

I'm assuming you're advocating CDs as the only practical alternative, since even a ladder of treasuries pays nothing, and even if it did you'd be wasting the state tax exemption in a deferred account. Corporates - and GNMAs for that matter - are more difficult to buy individually. I used to have taxable CDs, when I was younger (30s') and had a much higher income (vs. now in my 50's) and more available cash than now. It wasn't that big a deal to shift between institutions every time one of my many CDs came due, although with a lot of them you had to be careful because they'd auto-renew, and you couldn't cancel that until just before that due date. And usually the auto-renew rate wasn't competitive, of course, so you almost always had to move the money to another institution. But I find that doing the same thing in a deferred account is considerably more of a hassle - you have your Roth and your Traditional and your SEP and your solo 401k, not to mention employer programs where you can't change the plan or move the money at all. You have to make sure that your new account is opened correctly, and if there's a mistake, sometimes you can't just correct it with the bank, you've got to correct it with the IRS. Having gone through that, it can be incredibly difficult. So while I share many of your frustrations, I'm more inclined to think that there just isn't a good solution available today. I own modest amount of the GNMA fund, only because it's part of the bond market, and I'm not confident that there's a more practical solution.

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Re: GNMA Funds

Postby barefootjan » Sat Jun 29, 2013 10:51 am

So I have to assume that, best case, in another 10 years when I get the principal back that was sunk in the GNMA fund along with the compounded 2.3% interest it is paying (which in 10 years will have increased the principal by barely 1/3) it will buy half as much as it does now.

Well, at least that's something...???? :confused --- What is the likely scenario (or possible scenarios) for using CDs instead?
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Re: GNMA Funds

Postby tibbitts » Sat Jun 29, 2013 11:00 am

barefootjan wrote:So I have to assume that, best case, in another 10 years when I get the principal back that was sunk in the GNMA fund along with the compounded 2.3% interest it is paying (which in 10 years will have increased the principal by barely 1/3) it will buy half as much as it does now.

Well, at least that's something...???? :confused --- What is the likely scenario (or possible scenarios) for using CDs instead?

That's part of the problem - it's not like you can buy a bunch of 6-7% CDs as an alternative, even if you could buy them easily in your all your deferred accounts. And of course you could still experience GNMA NAV appreciation if the economy tanks even worse than it already has, which is certainly a reasonable possibility.

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Re: GNMA Funds

Postby ogd » Sat Jun 29, 2013 11:16 am

Like I said, I expect the recovery to begin visibly in a matter of months.

The nice thing about rate-driven capital losses is that they come with a built-in trampoline. Further rate increases will set back the recovery but accelerate it at the same time; it's the same forces at work that make individual bonds or CDs return to par at maturity, to be reinvested at higher yields, but recast into a different shape in a fund.

That's why a number like -30% (entirely possible with LT Treasuries) is not as scary if it's rate-driven. I mean it's not nice to have your horizon enforced all of a sudden, but at least the interest is still there and help is on the way. When we plan against a 30% drop in stocks, there's always the possibility (even likelihood) that the market's fears pan out and stocks stay in the dumpster for a decade or two, soon taking the dividend stream down with them. There's no guarantee of recovery. So it's not the same thing and the risk rating of 1 or 2 for bond funds has a justification.

What hurts permanently in the bond world is defaults -- capital is gone, interest is gone, have a nice life. And inflation outpacing interest rates, like it happens right now with short maturities. I too wish the rates were higher on safe money, if nothing else because it would signal a healthy economy that can use capital productively. But such is the world we live in.
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Re: GNMA Funds

Postby YDNAL » Sat Jun 29, 2013 12:16 pm

PismoBeachTom wrote:I would like some basic advice about what to do with my BlackRock GNMA (PGPAX) fund. I have over $100,000 in this fund. Drops of just a few cents a day make a big difference. I am underwater at this point.

Tom,

Welcome to the Forum!

One question when choosing an investment should be... how does it fit with my overall plan and other investments. Another question...what do I know (don't know) about this investment. Since you invested recently and "underwater at this point," sell it unless the drops are significant (because you are basically buying high/selling low), and put the money in a Money Market account until you understand the next purchase.

PismoBeachTom wrote:I am in my 60s so I am questioning whether I should wait for this to come back. Long term, the dividends might make up for the losses, but in the current environment, that time frame is too long.

You are in your 60s - so no spring chicken like many of us. We should have an investment plan as roadmap (can modify when necessary); or develop a plan if one does not exist.

Links:
viewtopic.php?f=1&t=6211
http://www.bogleheads.org/wiki/Investme ... _Statement
http://www.bogleheads.org/wiki/Getting_Started
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Re: GNMA Funds

Postby Scooter57 » Sat Jun 29, 2013 4:14 pm

barefootjan wrote:So I have to assume that, best case, in another 10 years when I get the principal back that was sunk in the GNMA fund along with the compounded 2.3% interest it is paying (which in 10 years will have increased the principal by barely 1/3) it will buy half as much as it does now.

Well, at least that's something...???? :confused --- What is the likely scenario (or possible scenarios) for using CDs instead?


Rates go way up, I break the CD (having invested in local CUs that do not have limiting wording in their contracts.) Buy short CDs at higher rates. If rates are really moving up, money market funds, as they move up fastest. Rates stabilize, buy 2 - 5 year CDs as I have for decades. Money market funds if they ever get back to being what they were. Muni funds eventually, when rates are in their usual range.

I missed a rollover date with a local CU some years ago. They were nice enough to move the money into their highest paying CD a week later, when I noticed it, though legally they didn't have to. That's why I stay local as much as possible and avoid internet banks. I don't have the IRA/401k problem as my IRA is a very small percent of my holdings. My income has fluctuated so much all my life, I couldn't put much in. In any event, my taxes are higher in retirement than in most of my accumulation phase. So that's fine.
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Re: GNMA Funds

Postby usarmycwo » Sat Jan 18, 2014 1:14 pm

All the previous [excellent] posts were made in June of last year. I'm hoping for an update of opinion on GNMA.

It's now mid-January 2014. VFIIX is at 10.53. It had gotten as low as 10.40 a short time ago and is now creeping up. (Why is that, by the way? It seems important to understand what's causing the rise.)

You know that VFIIX served us well during the 2000 and 2008 crashes, so I kept putting my and my wife's IRAs there over the years. I'm not interested in making money, just preserving what little I've accumulated in a lifetime (a great lifetime) of serving in the Army.

At the same time, I'm scared sh!tless at high inflation (to pay off the national debt) and accept that bonds aren't protection against it. (Somebody tell me again why inflation is so low when we've been printing money the past five years? And am I wrong to think it must catch up to us?)

GNMA, I read, is basically an intermediate term bond. When interest rates rise, as they must from zero, we should run from bonds.

Yes, I should have bailed when VFIIX was at 11.00. But I didn't, and here I am now, with over a THIRD of my retirement money in VFIIX.

The question I've been unable to answer is: keep or sell?

Your opinions most welcomed.
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Re: GNMA Funds

Postby livesoft » Sat Jan 18, 2014 1:26 pm

If you sold some of your GNMA, what would you do with the money? Buy Gold? Under the mattress? Another GNMA bond fund? TIPS? What would you do with the money? What's the plan?

Oh, since this thread started, VFIJX (Vanguard GNMA) has a total return of 2.7%. Not too bad for an intermediate bond fund in the past 6 months. :) Especially since total US bond index only has about 1.9% total return for the same time period.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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