Is It Finally Time For A Bond Ladder?

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Is It Finally Time For A Bond Ladder?

Postby BHChinook » Thu Jun 27, 2013 11:47 am

When I first retired (13 years ago), I put most of my bonds in a bond ladder. About seven years ago, I decided to simplify, simplify, simplify and I switched nearly all my assists into three funds that gave me very close to the asset allocation I was (and am) comfortable with. That was VTINX (Target Retirement), Wellesley and Wellington. I've been sleeping very well ever since... but lately, one eye is tending to open about 3AM...

I understand the principle that holding a bond fund long term (through ups and downs) is sound because, over the long term, rising interest rates reduce capital value but eventually the greater interest income compensates; similarly falling interest rates increase capital value but reduce interest income. But I'm wondering whether the unique time we live in (where the Fed has artificially kept interest rates so low that a rapid rise is pretty much assured at some point in the near future) puts this principle in jeopardy.

It would be very easy for me to change my holdings to Total Stock Market, Total International Stock Market, TIPS, and then put the bonds back into a 5-year bond or CD ladder. The advantage for the bonds or CDs would be that I could hold each until maturity and thereby not be concerned about intermediate paper losses in capital value. The only thing I would not be able to match would be the foreign bonds that VTINX is moving partially into. And of course, I would need to either use FDIC insured CDs or pick my bonds carefully as diversity would be reduced.

Is anyone else thinking this way? Is the idea flawed?

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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Jun 27, 2013 12:27 pm

BHChinook wrote:I understand the principle that holding a bond fund long term (through ups and downs) is sound because, over the long term, rising interest rates reduce capital value but eventually the greater interest income compensates; similarly falling interest rates increase capital value but reduce interest income. But I'm wondering whether the unique time we live in (where the Fed has artificially kept interest rates so low that a rapid rise is pretty much assured at some point in the near future) puts this principle in jeopardy.

Hi BHChinook,

This comes up astonishingly often these days. Since you are concerned about principles -- rather than going into rate vs NAV calculations which may or may not be convincing to you, here's one principle that holds no matter what the trajectory of rates: bond funds are made of bonds, their return is the same as the aggregate of those bonds and their NAVs simply reflect the market value of the portfolio. The fund trades more, but it does so at fair market prices and it does it to enhance returns, because bonds close to maturity produce very little income relative to their market value and are "dead money" so to speak.

If holding a bond ladder and rolling over only at maturity was a good idea, you can bet there would be many funds doing this. But this is not the case. Like I said, the final leg of maturity is a drag on returns; yet such funds would still face the psychological disadvantage of a traded fund -- showing you the declining values of your holdings and keeping you up at 3am, as opposed to out of sight out of mind like with individual bonds. To be fair, ETFs holding bonds to a defined maturity date have appeared, like "Guggenheim BulletShares 2018 Corp Bond BSCI", but they are not gaining much traction and are more expensive as a result. They would be a reasonable vehicle if you had a clear liability to be met in 2018; not so much as an ongoing investment.

Meanwhile, what the fund gives you is much much easier management -- instead of hunting and worrying about individual bonds (you've been there), you pay a manager a very small fee to do it for you, which is probably more than made up for in their superior efficiency of trades (i.e. spreads). So your decision years ago that this is the simplest easiest thing to do is still very much right.

As for CDs, there are obviously no CD funds out there, so a ladder might be a reasonable decision. I do think there are good deals in the CD space. However, remember that that money will be very hard to access if you need to rebalance, for example.

If you need help tuning out noise about the iminent colapse in bonds, check out this article from 2010 for a chuckle: http://www.marketwatch.com/story/pop-go ... 2010-06-04 . Rates were 1% higher back then, I believe. You can find similar headlines in 2011, with rates still higher than today. Paraphrasing South Park, this is the Ultimate Bond Apocalypse That Can't Possibly Fail To Happen ... Again. Version 3.0.

Hope this helps! [NB: edited to fix a couple of typos]
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Re: Is It Finally Time For A Bond Ladder?

Postby Call_Me_Op » Thu Jun 27, 2013 12:33 pm

ogd wrote:This comes up astonishingly often these days. Since you are concerned about principles -- rather than going into rate vs NAV calculations which may or may not be convincing to you, here's one principle that holds no matter what the trajectory of rates: bond funds are made of bonds, their return is the same as the aggregate of those bonds and their NAVs simply reflect the market value of the portfolio.


Not quite. The NAV is affected by market impact costs, which can be severe during liquidity events. We say this in 2008 and have seen it very recently as as well.
Best regards, -Op

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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Jun 27, 2013 12:43 pm

Call_Me_Op wrote:
ogd wrote:This comes up astonishingly often these days. Since you are concerned about principles -- rather than going into rate vs NAV calculations which may or may not be convincing to you, here's one principle that holds no matter what the trajectory of rates: bond funds are made of bonds, their return is the same as the aggregate of those bonds and their NAVs simply reflect the market value of the portfolio.


Not quite. The NAV is affected by market impact costs, which can be severe during liquidity events. We say this in 2008 and have seen it very recently as as well.

Hi Op,

It's definitely the case, particularly in less liquid market like munis, that the NAV is temporarily depressed to reflect the liquidity conditions. You would face the same problems trying to sell individual bonds in this market. It will not affect the long-term value of your holdings. The depressed NAV is what people selling out of the fund right now were able to get for their shares, and this is fair to the remaining shareholders. It would be worse for them if the NAV stayed up while bonds were being constantly sold for less.
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Re: Is It Finally Time For A Bond Ladder?

Postby jdb » Thu Jun 27, 2013 12:47 pm

I maintain muni bond ladder in taxable account. Will not get into arguments of bond fund vs bond ladder, since each have benefits and drawbacks and I also own funds. But there are increasing amounts of small lot individual muni bonds appearing on screens which are being offered at what appears to be substantially below historical prices. I am in market for non callable A rated or better muni bonds of 4-7 years duration and am buying some every week, and seems that more being offered at good prices.
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Re: Is It Finally Time For A Bond Ladder?

Postby Call_Me_Op » Thu Jun 27, 2013 1:13 pm

ogd wrote:
Call_Me_Op wrote:
ogd wrote:This comes up astonishingly often these days. Since you are concerned about principles -- rather than going into rate vs NAV calculations which may or may not be convincing to you, here's one principle that holds no matter what the trajectory of rates: bond funds are made of bonds, their return is the same as the aggregate of those bonds and their NAVs simply reflect the market value of the portfolio.


Not quite. The NAV is affected by market impact costs, which can be severe during liquidity events. We say this in 2008 and have seen it very recently as as well.

Hi Op,

It's definitely the case, particularly in less liquid market like munis, that the NAV is temporarily depressed to reflect the liquidity conditions. You would face the same problems trying to sell individual bonds in this market. It will not affect the long-term value of your holdings. The depressed NAV is what people selling out of the fund right now were able to get for their shares, and this is fair to the remaining shareholders. It would be worse for them if the NAV stayed up while bonds were being constantly sold for less.


But you do not have to sell if you hold individual bonds. If you are in a fund, you are forced to sell (in effect) during the liquidity crisis. This locks-in some steep losses that are not recoverable for the securities that have been sold.
Best regards, -Op

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Re: Is It Finally Time For A Bond Ladder?

Postby Simplegift » Thu Jun 27, 2013 1:17 pm

BHChinook wrote:I understand the principle that holding a bond fund long term (through ups and downs) is sound because, over the long term, rising interest rates reduce capital value but eventually the greater interest income compensates; similarly falling interest rates increase capital value but reduce interest income. But I'm wondering whether the unique time we live in (where the Fed has artificially kept interest rates so low that a rapid rise is pretty much assured at some point in the near future) puts this principle in jeopardy.

One way to look at it, if you've held your bond funds for more than 5 years, is that you've certainly accumulated significant unrealized gains. Were you really expecting your bond funds to provide capital growth — or is this the role of equities in your portfolio? If bond fund prices continue to fall, you're essentially losing "found money," since you weren't expecting these unrealized gains in the first place.

Bond prices will fall back to 2006-2007 levels at some future point, and bond fund holders should expect this. Stay diversified, rebalance and keep enjoying the higher monthly income in your retirement. My two cents.

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Last edited by Simplegift on Thu Jun 27, 2013 1:20 pm, edited 1 time in total.
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Jun 27, 2013 1:19 pm

Call_Me_Op wrote:But you do not have to sell if you hold individual bonds. If you are in a fund, you are forced to sell (in effect) during the liquidity crisis. This locks-in some losses. I don't understand why you refer to the NAV as "temporarily depressed." Market impact costs are not recovered - they are costs associated with selling securities.

The reason the fund is forced to sell is fund redemptions. The outgoing investors are "rewarded" with a lower NAV than normal, reflecting the liquidity conditions into which their bonds were sold. As a continuing shareholder, my bonds are not affected by these sales. The NAV will recover when liquidity returns to normal.
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Re: Is It Finally Time For A Bond Ladder?

Postby BHChinook » Thu Jun 27, 2013 1:31 pm

When I started this thread, I was very much hoping the majority of advice would be to stay with my funds. On paper, the concept of bond/CD ladders is pretty simple but in practice, there are enormous complexities if the execution is to be effective. So herein lies the dilemma:

Meanwhile, what the fund gives you is much much easier management -- instead of hunting and worrying about individual bonds (you've been there), you pay a manager a very small fee to do it for you, which is probably more than made up for in their superior efficiency of trades (i.e. spreads). So your decision years ago that this is the simplest easiest thing to do is still very much right.


But you do not have to sell if you hold individual bonds. If you are in a fund, you are forced to sell (in effect) during the liquidity crisis. This locks-in some steep losses that are not recoverable for the securities that have been sold.


Staying with the bond funds brings diversity, expert management (hopefully), simplicity. Moving to ladders can protect from capital losses associated with selling before bond maturities.

I am almost certainly going to stay with my funds because their advantages are more important to me than the potential gain associated with ladders. Of course, if the Fed unexpectedly announces they are not going to buy another bond and interest rates rise to 6-8% overnight, I will likely regret my decision... :happy
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Jun 27, 2013 1:46 pm

BHChinook wrote:Staying with the bond funds brings diversity, expert management (hopefully), simplicity. Moving to ladders can protect from capital losses associated with selling before bond maturities.

I strongly disagree. It only protects you from seeing the prospective capital losses before they are recovered, but it doesn't really make a difference in returns.

Here's a good reason not to do the ladder: check out the current treasury quotes from WSJ:

http://online.wsj.com/mdc/public/page/2 ... asury.html

, in particular, this row:
Code: Select all
Maturity   Coupon   Bid   Asked   Chg   Asked yield
6/30/2014   2.625   102.4375   102.4453   unch.   0.196


The last column is what you'd be getting for your money for the next year, whether by buying or by not selling at the current prices. A ladder has about 20% of your money stuck in this rung earning 0.2%. As an individual, I can get 0.65% in a checking account -- it makes no sense for me to hold short-term Treasuries. When I do buy Treasuries, I get an intermediate fund that rolls over the Treasuries before they get to this point; I specifically would not want 20% of my investment to earn less than cash. Again, this is why the funds don't hold to maturity and this is why you shouldn't either.

(I should add that in more normal times 1 year T's would give yields comparable to checking / savings. But not today).
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Re: Is It Finally Time For A Bond Ladder?

Postby Sidney » Thu Jun 27, 2013 2:32 pm

ogd wrote:I strongly disagree. It only protects you from seeing the prospective capital losses before they are recovered, but it doesn't really make a difference in returns.
You mean I can't avoid valuation losses by not looking? I'm shocked.
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Re: Is It Finally Time For A Bond Ladder?

Postby jdb » Thu Jun 27, 2013 3:00 pm

Sidney wrote:
ogd wrote:I strongly disagree. It only protects you from seeing the prospective capital losses before they are recovered, but it doesn't really make a difference in returns.
You mean I can't avoid valuation losses by not looking? I'm shocked.

An individual bond held to maturity or redemption is equivalent to a certificate of deposit held to maturity (credit issues aside). Both can be marked to market on a daily basis. But it becomes semantics, how many holders of certificates of deposit look at daily fluctuation in value? In a bond fund on other hand it is possibe to lose capital if sell when NAV is below purchase price NAV.
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Re: Is It Finally Time For A Bond Ladder?

Postby Sidney » Thu Jun 27, 2013 3:03 pm

jdb wrote:In a bond fund on other hand it is possibe to lose capital if sell when NAV is below purchase price NAV.
True about individual bonds as well.

CDs with reasonable exit clauses (not brokered CDs) offer some alternative but CDs don't scale well.
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Re: Is It Finally Time For A Bond Ladder?

Postby linuxizer » Thu Jun 27, 2013 3:09 pm

Sidney wrote:
jdb wrote:In a bond fund on other hand it is possibe to lose capital if sell when NAV is below purchase price NAV.
True about individual bonds as well.


Yup.

Of note:
http://www.bogleheads.org/wiki/Individu ... _Bond_Fund

jdb: I thought you were making the argument that since the most bond funds have to maintain a constant maturity, they have to constantly sell and re-buy. But of course the depressed NAV is generally about equally depressed between the bonds you sell and the ones you buy--maybe even more so since in this sort of crisis long bonds (the ones they'd be buying) are affected more than short ones (the ones they'd be selling).
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Re: Is It Finally Time For A Bond Ladder?

Postby jdb » Thu Jun 27, 2013 3:11 pm

Sidney wrote:
jdb wrote:In a bond fund on other hand it is possibe to lose capital if sell when NAV is below purchase price NAV.
True about individual bonds as well.

CDs with reasonable exit clauses (not brokered CDs) offer some alternative but CDs don't scale well.


Agree, never want to have to sell individual bond before maturity or redemption. Spread on sale alone is guaranteed loser. But with indiviual bond (credit issues aside) or certificate of deposit can be assured of return of principal on date certain. With longer term bond fund no assurance that NAV back to purchase NAV within any ascertainable time period.
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Re: Is It Finally Time For A Bond Ladder?

Postby Sidney » Thu Jun 27, 2013 3:26 pm

Everyone's situation is different. As I said, CDs don't scale well so not an advantage for me. Individual bonds (except treasuries) are a lot of work and you need to buy a lot of issues to get diversification. Some people don't mind doing the work. I buy individual treasury bonds but the funds work for me everywhere else.
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Jun 27, 2013 3:37 pm

jdb: look at this Treasury:

Maturity Coupon Bid Asked Chg Asked yield
12/31/2014 0.125 99.7695 99.7930 0.0508 0.263

It will give me 0.263% from now till maturity, based on the price I can buy or sell it today. Can you come up with any scenario, not involving taxes, where it would be beneficial for me as an individual investor to hold money in this security, when I can get 0.65% in a checking account? It's trading at a discount; I might have bought it at 100 or 105 or 50, who knows -- feel free to use any buying price you want in your scenario. Yes it will give me $100 on 12/31/2014, as opposed to maybe a principal loss now, but who cares: the right thing to do is sell it and take my money elsewhere. That $100 in 1.5 years is not worth $99.77 now.

This is the kind of decision the fund manager is facing. He's not yearning to hold to maturity but prevented from doing it by those pesky shareholders. He looks at that 0.263%, hates it, and sells the treasury.

I know it's going to be hard to convince you that knowing you'll receive "face value" (proably not what you paid; certainly not what the bond was worth 6 months ago) at various points in time over 5 years is not worth much except in the most unlikely future obligations scenario. But just tell me why anyone would want to hold a Treasury in the last year or two of maturity. For munis, it's a little more complicated, but let's say you find a point in time where the spreads are low -- why would you not sell? The fund manager is much more adept at fighting those spreads, btw.
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Re: Is It Finally Time For A Bond Ladder?

Postby jdb » Thu Jun 27, 2013 4:09 pm

ogd wrote:jdb: look at this Treasury:

Maturity Coupon Bid Asked Chg Asked yield
12/31/2014 0.125 99.7695 99.7930 0.0508 0.263

It will give me 0.263% from now till maturity, based on the price I can buy or sell it today. Can you come up with any scenario, not involving taxes, where it would be beneficial for me as an individual investor to hold money in this security, when I can get 0.65% in a checking account? It's trading at a discount; I might have bought it at 100 or 105 or 50, who knows -- feel free to use any buying price you want in your scenario. Yes it will give me $100 on 12/31/2014, as opposed to maybe a principal loss now, but who cares: the right thing to do is sell it and take my money elsewhere. That $100 in 1.5 years is not worth $99.77 now.

This is the kind of decision the fund manager is facing. He's not yearning to hold to maturity but prevented from doing it by those pesky shareholders. He looks at that 0.263%, hates it, and sells the treasury.

I know it's going to be hard to convince you that knowing you'll receive "face value" (proably not what you paid; certainly not what the bond was worth 6 months ago) at various points in time over 5 years is not worth much except in the most unlikely future obligations scenario. But just tell me why anyone would want to hold a Treasury in the last year or two of maturity. For munis, it's a little more complicated, but let's say you find a point in time where the spreads are low -- why would you not sell? The fund manager is much more adept at fighting those spreads, btw.


I only dabble in muni bond ladder in taxable account, with terms of at least 4 years. Tried a corporate bond ladder some years ago but buy-sell spreads got too high. Did have a treasury bond ladder for awhile in Treasury Direct but got out of that. But in answer to your question, quite a few of the muni bonds which I bought six or more years ago at tax free yields of over 5% show significant capital gains if wanted to sell. But devils bargain when set up ladder is that would hold to maturity or redemption. So as to those bonds am reaping benefit of annual interest income above market. As to individual bonds (shorter duration) being purchased today with proceeds from maturities of earlier bonds, probably with rising rates would show capital loss in future if sold, but again if held to maturity or redemption get principal back. Important thing about any bond ladder is psychological, knowing principal (credit issues aside) will be returned at time certain with interest payments in interim. But I like bond funds too, each has their place.
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Jun 27, 2013 4:22 pm

jdb wrote:But in answer to your question, quite a few of the muni bonds which I bought six or more years ago at tax free yields of over 5% show significant capital gains if wanted to sell. But devils bargain when set up ladder is that would hold to maturity or redemption. So as to those bonds am reaping benefit of annual interest income above market.

My point is, you're not getting 5% based on what you could sell them for today (or rather, when the fog clears completely after the recent unpleasantness and spreads are lower). You're getting 0.5%-ish at best at the short end of the ladder. And it's the same with the bond at a loss: yes, you'd lose principal, but there might be better uses for the money nonetheless.

I should also add that I like muni yields a lot currently. The comparison with FDIC-insured accounts is not nearly as dire.

jdb wrote:Important thing about any bond ladder is psychological, knowing principal (credit issues aside) will be returned at time certain with interest payments in interim.

I can't dispute the psychological aspect. The question is, is it worth the hassle, the larger spreads you pay and the low yields at the short end of the ladder.

The reason I'm pretty passionate about this one is that whenever somebody shows up with a complicated 20 fund portfolio, everyone here tells them, rightly, to "simplify, simplify, simplify". Yet maintaining a muni ladder is at least 10 times the work. Treasuries not quite as bad, but still. If you must do it, at least be sure of the reasons.
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Re: Is It Finally Time For A Bond Ladder?

Postby Call_Me_Op » Thu Jun 27, 2013 4:23 pm

ogd wrote:
Call_Me_Op wrote:But you do not have to sell if you hold individual bonds. If you are in a fund, you are forced to sell (in effect) during the liquidity crisis. This locks-in some losses. I don't understand why you refer to the NAV as "temporarily depressed." Market impact costs are not recovered - they are costs associated with selling securities.

The reason the fund is forced to sell is fund redemptions. The outgoing investors are "rewarded" with a lower NAV than normal, reflecting the liquidity conditions into which their bonds were sold. As a continuing shareholder, my bonds are not affected by these sales. The NAV will recover when liquidity returns to normal.


I think you are missing the fact that market impact costs are due to increases in bid-ask spread - in other words, trading fees. If trading becomes more expensive, those fees are irrecoverable.
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Jun 27, 2013 4:33 pm

Call_Me_Op wrote:I think you are missing the fact that market impact costs are due to increases in bid-ask spread - in other words, trading fees. If trading becomes more expensive, those fees are irrecoverable.

Calling spreads "fees" is a simplification that you really shouldn't make here. They are prices.

With an ETF it's clearly the outgoing investors that pay the spread, right when they sell. A mutual fund will set the NAV somewhere within the spread, but on the other hand it can manage much lower spreads than you and me and I've seen no evidence that it's costing them significantly more than the usual fees. Certainly they don't seem to be underperforming equivalent ETFs.
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Re: Is It Finally Time For A Bond Ladder?

Postby jdb » Thu Jun 27, 2013 4:36 pm

ogd wrote:The reason I'm pretty passionate about this one is that whenever somebody shows up with a complicated 20 fund portfolio, everyone here tells them, rightly, to "simplify, simplify, simplify". Yet maintaining a muni ladder is at least 10 times the work. Treasuries not quite as bad, but still. If you must do it, at least be sure of the reasons.
[/quote]

Agreed. Lots of work, need to know EMMA and spend time reading prospectuses and reviewing spreads etc. Also need to avoid issues with large derivative debt. But to me a bit of an investment hobby. Also helps if have lived and travelled in different parts of country, especially the fly over portions, since so many of most interesting bonds are from smaller municipalities and agricultural counties. But one does need to know when to hold and when to fold and what to avoid at all costs.
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Re: Is It Finally Time For A Bond Ladder?

Postby BHChinook » Thu Jun 27, 2013 4:51 pm

But to me a bit of an investment hobby.


Most hobbies have a cost but I like a hobby for which the cost can be known and/or controlled :happy I consider my self-management of my families portfolio as a hobby too but I've kept it very simple and basically let Vanguard managers do the heavy lifting.

This has been an enormously useful thread to me and I'm once again happy to stay with my current funds.

I'm a little less comfortable with my mother's bond funds (similar to mine) as she's 97 and, on paper, her time horizon is considerably less than mine. I keep wondering if maybe putting all her mutual funds (she still has some very nice individual bonds from years ago that we're keeping) into money market...
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Re: Is It Finally Time For A Bond Ladder?

Postby linuxizer » Thu Jun 27, 2013 4:58 pm

BHChinook wrote:
I'm a little less comfortable with my mother's bond funds (similar to mine) as she's 97 and, on paper, her time horizon is considerably less than mine. I keep wondering if maybe putting all her mutual funds (she still has some very nice individual bonds from years ago that we're keeping) into money market...


Or an SPIA to cover living expenses and keep the rest in bond funds....

I have no idea how close to actuarial cost you could get for an SPIA for a 97-year-old woman, though. Could be very expensive or pretty cheap.
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Re: Is It Finally Time For A Bond Ladder?

Postby Simplegift » Thu Jun 27, 2013 5:06 pm

BHChinook wrote:I keep wondering if maybe putting all her mutual funds (she still has some very nice individual bonds from years ago that we're keeping) into money market...

Or a rolling CD strategy perhaps, with part of her assets, if managing them would not be too much of a hassle.
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Re: Is It Finally Time For A Bond Ladder?

Postby Chris M » Fri Jun 28, 2013 4:17 pm

Sidney wrote:
ogd wrote:I strongly disagree. It only protects you from seeing the prospective capital losses before they are recovered, but it doesn't really make a difference in returns.
You mean I can't avoid valuation losses by not looking? I'm shocked.


You can't avoid the losses, but you can avoid the sense of distress that comes with looking. The advantages of a bond ladder over a bond fund may be purely psychological, but don't minimize the importance of psychology in investing. It is extremely important. Loss aversion causes many (most?) investors to sell at precisely the wrong time. I strongly suspect the average holder of a bond ladder is much less likely to sell in response to declining bond prices than the average holder of a bond fund. A reasonable piece of advice for skittish investors is don't look at your 401(k) statement during a bear market; a bond ladder can be seen as a useful variant of this "don't peek" advice.

Also, I think some of the replies touting the value of fund managers need to factor in the costs of active management. If these managers are really improving your net returns by actively buying and selling bonds for you, then why do most of them get beaten by low-cost index funds? Let's not forget that "costs matter," as the namesake of this forum often says.
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Re: Is It Finally Time For A Bond Ladder?

Postby BHChinook » Fri Jun 28, 2013 5:00 pm

Also, I think some of the replies touting the value of fund managers need to factor in the costs of active management. If these managers are really improving your net returns by actively buying and selling bonds for you


Are you referring to the management costs of the bond funds we are comparing here, namely Vanguard Total Bond and Vanguard TIPS? I also have Wellesley and Wellington but the ERs of these are also quite low...
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Fri Jun 28, 2013 5:21 pm

BHChinook wrote:
Also, I think some of the replies touting the value of fund managers need to factor in the costs of active management. If these managers are really improving your net returns by actively buying and selling bonds for you


Are you referring to the management costs of the bond funds we are comparing here, namely Vanguard Total Bond and Vanguard TIPS? I also have Wellesley and Wellington but the ERs of these are also quite low...

One of those replies was mine and I was referring to Vanguard munis, which are active but very cheap (well within typical muni spreads). Even for index funds, there is a "manager" planning and executing the trades so you don't have to. I certainly wouldn't advocate paying too much for active bond management. I do own an institutional fund that I pay 0.4% for in my 401k, mostly because it was the simplest option.
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Re: Is It Finally Time For A Bond Ladder?

Postby Chris M » Fri Jun 28, 2013 5:35 pm

BHChinook wrote:
Also, I think some of the replies touting the value of fund managers need to factor in the costs of active management. If these managers are really improving your net returns by actively buying and selling bonds for you


Are you referring to the management costs of the bond funds we are comparing here, namely Vanguard Total Bond and Vanguard TIPS? I also have Wellesley and Wellington but the ERs of these are also quite low...


Oh, sorry, I misread--what I said wouldn't apply to Vanguard Total Bond and TIPS, as they are index funds. And you're right, Wellington and Wellesely have ERs comparable to index funds.
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Re: Is It Finally Time For A Bond Ladder?

Postby Sidney » Fri Jun 28, 2013 5:41 pm

ogd wrote:One of those replies was mine and I was referring to Vanguard munis, which are active but very cheap (well within typical muni spreads).

Yes, my VG funds are 12bp which is a pretty good deal for high level of diversification and not having to spend my own time managing a lot of bonds. I also wonder if I get some of this back in better spreads via the fund.
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Re: Is It Finally Time For A Bond Ladder?

Postby longview » Wed Oct 09, 2013 7:02 am

jdb:
I only dabble in muni bond ladder in taxable account, with terms of at least 4 years. Tried a corporate bond ladder some years ago but buy-sell spreads got too high. Did have a treasury bond ladder for awhile in Treasury Direct but got out of that. But in answer to your question, quite a few of the muni bonds which I bought six or more years ago at tax free yields of over 5% show significant capital gains if wanted to sell. But devils bargain when set up ladder is that would hold to maturity or redemption. So as to those bonds am reaping benefit of annual interest income above market. As to individual bonds (shorter duration) being purchased today with proceeds from maturities of earlier bonds, probably with rising rates would show capital loss in future if sold, but again if held to maturity or redemption get principal back. Important thing about any bond ladder is psychological, knowing principal (credit issues aside) will be returned at time certain with interest payments in interim. But I like bond funds too, each has their place.


Why did you ditch the Treasury ladder?

Also, do you build your muni ladder in Vanguard? Or one of the more muni-specific brokers?
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Is It Finally Time For A Bond Ladder?

Postby jdb » Wed Oct 09, 2013 11:17 am

longview wrote:jdb:
I only dabble in muni bond ladder in taxable account, with terms of at least 4 years. Tried a corporate bond ladder some years ago but buy-sell spreads got too high. Did have a treasury bond ladder for awhile in Treasury Direct but got out of that. But in answer to your question, quite a few of the muni bonds which I bought six or more years ago at tax free yields of over 5% show significant capital gains if wanted to sell. But devils bargain when set up ladder is that would hold to maturity or redemption. So as to those bonds am reaping benefit of annual interest income above market. As to individual bonds (shorter duration) being purchased today with proceeds from maturities of earlier bonds, probably with rising rates would show capital loss in future if sold, but again if held to maturity or redemption get principal back. Important thing about any bond ladder is psychological, knowing principal (credit issues aside) will be returned at time certain with interest payments in interim. But I like bond funds too, each has their place.


Why did you ditch the Treasury ladder?

Also, do you build your muni ladder in Vanguard? Or one of the more muni-specific brokers?

Hi Longview. My tax deferred accounts were filled and wanted fixed income for taxable accounts. Yes, I use Vanguard bond platform but only because simpler for me as have my stock index fund investments with them and like their consumer friendly philosophy. But sure there are other equally good bond platforms. Just bought a few more small lot bonds within past week, A rated investment grade without insurance non callable for 6 to 7 year terms with yield to maturity of between 2.7 and 2.9 percent which to me is equivalent to taxable yields around 4.2 percent. If going with fixed income ladder and in higher tax brackets in taxable accounts makes more sense than CD ladder as long as intend to hold to maturity and willing to do homework as to what you are buying.
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Re: Is It Finally Time For A Bond Ladder?

Postby longview » Thu Oct 10, 2013 12:37 am

jdb wrote:Hi Longview. My tax deferred accounts were filled and wanted fixed income for taxable accounts. Yes, I use Vanguard bond platform but only because simpler for me as have my stock index fund investments with them and like their consumer friendly philosophy. But sure there are other equally good bond platforms. Just bought a few more small lot bonds within past week, A rated investment grade without insurance non callable for 6 to 7 year terms with yield to maturity of between 2.7 and 2.9 percent which to me is equivalent to taxable yields around 4.2 percent. If going with fixed income ladder and in higher tax brackets in taxable accounts makes more sense than CD ladder as long as intend to hold to maturity and willing to do homework as to what you are buying.


Thanks for the info -- I'm with Vanguard also. Last question... do you get those rates just from searches and Emma checking -- or did you have to call and ask for a lower price? You see people mentioning calling to haggle with brokers a lot (which doesn't sound too fun to me).
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Is It Finally Time For A Bond Ladder?

Postby jdb » Thu Oct 10, 2013 9:50 am

longview wrote:
jdb wrote:Hi longview. My tax deferred accounts were filled and wanted fixed income for taxable accounts. Yes, I use Vanguard bond platform but only because simpler for me as have my stock index fund investments with them and like their consumer friendly philosophy. But sure there are other equally good bond platforms. Just bought a few more small lot bonds within past week, A rated investment grade without insurance non callable for 6 to 7 year terms with yield to maturity of between 2.7 and 2.9 percent which to me is equivalent to taxable yields around 4.2 percent. If going with fixed income ladder and in higher tax brackets in taxable accounts makes more sense than CD ladder as long as intend to hold to maturity and willing to do homework as to what you are buying.


Thanks for the info -- I'm with Vanguard also. Last question... do you get those rates just from searches and Emma checking -- or did you have to call and ask for a lower price? You see people mentioning calling to haggle with brokers a lot (which doesn't sound too fun to me).

Hi Longview. Before answering your good questions need to do disclaimer. I would be considered a rank amateur investor in muni bond market, many thousands of professionals have probably fogotten more than I will ever know about muni bonds, including several eminent participants on this site. Having unburdened myself, quick answer is that I get all info from bond screen and EMMA (and additional Google search on issuer sometimes), and do purchases online. Do miss a little bit the interactions with brokers since up to a couple years ago had to transact muni bond purchases over the phone. But as to negotiating price, do not think small lot investor has much leverage. One of best things about EMMA is transparency of prices, can usually see the price received by the seller and the dealer markup. Hard to negotiate discount when can see as in most recent small lot purchases that the seller received a price apparently below prevailing price point and that even with small markup of less than 10 basis points the offering price is at or below prevailing price point. Hope this helps.
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Re: Is It Finally Time For A Bond Ladder?

Postby 3504PIR » Thu Oct 10, 2013 6:18 pm

ogd wrote:
BHChinook wrote:Staying with the bond funds brings diversity, expert management (hopefully), simplicity. Moving to ladders can protect from capital losses associated with selling before bond maturities.

I strongly disagree. It only protects you from seeing the prospective capital losses before they are recovered, but it doesn't really make a difference in returns.

Here's a good reason not to do the ladder: check out the current treasury quotes from WSJ:

http://online.wsj.com/mdc/public/page/2 ... asury.html

, in particular, this row:
Code: Select all
Maturity   Coupon   Bid   Asked   Chg   Asked yield
6/30/2014   2.625   102.4375   102.4453   unch.   0.196


The last column is what you'd be getting for your money for the next year, whether by buying or by not selling at the current prices. A ladder has about 20% of your money stuck in this rung earning 0.2%. As an individual, I can get 0.65% in a checking account -- it makes no sense for me to hold short-term Treasuries. When I do buy Treasuries, I get an intermediate fund that rolls over the Treasuries before they get to this point; I specifically would not want 20% of my investment to earn less than cash. Again, this is why the funds don't hold to maturity and this is why you shouldn't either.

(I should add that in more normal times 1 year T's would give yields comparable to checking / savings. But not today).


There is no "rule" in building a ladder which would force you to fill this rung in the manner you suggest. Buy a one year cd, keep the money in cash, etc. But in no way is one restricted into what you are suggesting.

Building a bond ladder is a lot of work compared to owning a fund for sure.

As to risk, an investor can limit purchases to treasuries, agency bonds with AAA ratings, and similar high rated munis and have virtually no risk, unless choosing to do so in lower rated bonds.

Buying bonds at auction significantly reduces the spread/cost in government bonds of most types, often guaranteeing purchase at par for individual investors. Bonds can be bought at auction in almost any duration one can imagine.

I'm somewhat surprised more bogleheads don't ladder bonds to maturity, if people really believed that bonds are for safety and stability. My instinct is that more here are enamored with the extended bull market returns in bond funds that have impacted their total return, but that's only a guess and it is more work obviously. But I would think simplicity is overrated when it comes to greater financial security.
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Re: Is It Finally Time For A Bond Ladder?

Postby john94549 » Thu Oct 10, 2013 6:58 pm

In my humble opinion, OP and others are overly-complicating a relatively simple investment decision. Fixed-income is an "anchor-to-windward", not a source of yield. Aside from the giddy days of 2006, when CD yields were driven by ridiculous loans to iffy borrowers seeking a quick buck, the market in fixed-income has mellowed. More rational rates are now the norm, and 5-year CD rates roughly approximate equity dividend yields.

That said, I still have a 5.75% 10-year CD from KeyDirect (aka Key Bank) clicking right along, just as if nothing ever happened.
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Thu Oct 10, 2013 7:19 pm

3504PIR wrote:There is no "rule" in building a ladder which would force you to fill this rung in the manner you suggest. Buy a one year cd, keep the money in cash, etc. But in no way is one restricted into what you are suggesting.

This is precisely what an intermediate fund does for me. It sells the lower rungs of a ladder so I can skip short term bonds (or add a separate short term fund if I so choose). I can do it as an individual, but why bother?

The larger point is: some advocates of individual bond investing (you may or may not be in that camp) would have you believe that holding to maturity is holy and allows you to ignore price fluctuations. But it also masks bad deals, like the above; it may happen that it's advantageous to sell bonds even at a loss to par so as to take advantage of better opportunities elsewhere. A bond is a living, breathing thing with a moving price and yield. Both of those happen to agree very closely with the movements of a bond fund of similar composition.

3504PIR wrote:Building a bond ladder is a lot of work compared to owning a fund for sure.
...snip...
I'm somewhat surprised more bogleheads don't ladder bonds to maturity

Are you? As you say, simplicity is a big theme on this website. Over and over people with complex portfolios (advisor- or self-inflicted) of 10-20 funds are advised (rightly) to simplify. Yet individual bonds are literally an order of magnitude more time-consuming than those portfolios, and you don't gain anything, except the illusion of not having been hurt by a decline in bonds. Ask yourself: if you have a ladder, I have a fund of the same duration, john94549 here has cash, and the rates go up 3% tomorrow, which of us in the best position? And aren't the portfolios of the other two still interchangeable? What "greater financial security" has your laborious ladder bought you?
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Re: Is It Finally Time For A Bond Ladder?

Postby dbr » Fri Oct 11, 2013 9:22 am

3504PIR wrote:I'm somewhat surprised more bogleheads don't ladder bonds to maturity . . .


I don't think it is a surprise because there is not enough to be gained to justify the bother.
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Re: Is It Finally Time For A Bond Ladder?

Postby 3504PIR » Fri Oct 11, 2013 11:21 am

ogd wrote:
3504PIR wrote:There is no "rule" in building a ladder which would force you to fill this rung in the manner you suggest. Buy a one year cd, keep the money in cash, etc. But in no way is one restricted into what you are suggesting.

This is precisely what an intermediate fund does for me. It sells the lower rungs of a ladder so I can skip short term bonds (or add a separate short term fund if I so choose). I can do it as an individual, but why bother?

The larger point is: some advocates of individual bond investing (you may or may not be in that camp) would have you believe that holding to maturity is holy and allows you to ignore price fluctuations. But it also masks bad deals, like the above; it may happen that it's advantageous to sell bonds even at a loss to par so as to take advantage of better opportunities elsewhere. A bond is a living, breathing thing with a moving price and yield. Both of those happen to agree very closely with the movements of a bond fund of similar composition.

3504PIR wrote:Building a bond ladder is a lot of work compared to owning a fund for sure.
...snip...
I'm somewhat surprised more bogleheads don't ladder bonds to maturity

Are you? As you say, simplicity is a big theme on this website. Over and over people with complex portfolios (advisor- or self-inflicted) of 10-20 funds are advised (rightly) to simplify. Yet individual bonds are literally an order of magnitude more time-consuming than those portfolios, and you don't gain anything, except the illusion of not having been hurt by a decline in bonds. Ask yourself: if you have a ladder, I have a fund of the same duration, john94549 here has cash, and the rates go up 3% tomorrow, which of us in the best position? And aren't the portfolios of the other two still interchangeable? What "greater financial security" has your laborious ladder bought you?


I am surprised because of the stability and safety aspect. BND is down 4% ytd and bond yields haven't even gone up 1%. To me, that isn't crazy volatility, but it isn't safe or stable either.
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Re: Is It Finally Time For A Bond Ladder?

Postby dbr » Fri Oct 11, 2013 11:58 am

3504PIR wrote:

I am surprised because of the stability and safety aspect. BND is down 4% ytd and bond yields haven't even gone up 1%. To me, that isn't crazy volatility, but it isn't safe or stable either.


Why isn't it safe and what is the criterion for stability?
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Re: Is It Finally Time For A Bond Ladder?

Postby linuxizer » Fri Oct 11, 2013 12:02 pm

ogd wrote:The larger point is: some advocates of individual bond investing (you may or may not be in that camp) would have you believe that holding to maturity is holy and allows you to ignore price fluctuations. But it also masks bad deals, like the above; it may happen that it's advantageous to sell bonds even at a loss to par so as to take advantage of better opportunities elsewhere. A bond is a living, breathing thing with a moving price and yield. Both of those happen to agree very closely with the movements of a bond fund of similar composition.

Over and over people with complex portfolios (advisor- or self-inflicted) of 10-20 funds are advised (rightly) to simplify. Yet individual bonds are literally an order of magnitude more time-consuming than those portfolios, and you don't gain anything, except the illusion of not having been hurt by a decline in bonds. Ask yourself: if you have a ladder, I have a fund of the same duration, john94549 here has cash, and the rates go up 3% tomorrow, which of us in the best position? And aren't the portfolios of the other two still interchangeable? What "greater financial security" has your laborious ladder bought you?


This should be engraved on a plaque and posted on the side of the Bogleheads server.
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Re: Is It Finally Time For A Bond Ladder?

Postby ogd » Fri Oct 11, 2013 3:39 pm

3504PIR wrote:I am surprised because of the stability and safety aspect. BND is down 4% ytd and bond yields haven't even gone up 1%. To me, that isn't crazy volatility, but it isn't safe or stable either.

Total return is -2%, during what's generally agreed to be a bad bond year. Stocks can do that in a day or two (last Friday + Monday, for example), let alone a month or a year. Moreover, the rate-driven bond decline isn't the same flavor as a stock decline, i.e. it isn't because of worsening prospects and you do get repaid going forward via higher yields. The price simply reflects that last year's shareholders bought in worse conditions, with lower return expectations, than somebody investing today (the cash holder in my example). The prices of bonds held individually have been going down just the same, if you bother to look.

If you need 0% price volatility and the knowledge that today's drops will be made good by tomorrow's yields is not enough, then you're limited to cash. Bonds won't cut it regardless of the way you hold them.
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Re: Is It Finally Time For A Bond Ladder?

Postby 3504PIR » Sat Oct 12, 2013 7:44 am

ogd wrote:
3504PIR wrote:I am surprised because of the stability and safety aspect. BND is down 4% ytd and bond yields haven't even gone up 1%. To me, that isn't crazy volatility, but it isn't safe or stable either.

Total return is -2%, during what's generally agreed to be a bad bond year. Stocks can do that in a day or two (last Friday + Monday, for example), let alone a month or a year. Moreover, the rate-driven bond decline isn't the same flavor as a stock decline, i.e. it isn't because of worsening prospects and you do get repaid going forward via higher yields. The price simply reflects that last year's shareholders bought in worse conditions, with lower return expectations, than somebody investing today (the cash holder in my example). The prices of bonds held individually have been going down just the same, if you bother to look.

If you need 0% price volatility and the knowledge that today's drops will be made good by tomorrow's yields is not enough, then you're limited to cash. Bonds won't cut it regardless of the way you hold them.


I don't thing one needs to be in cash. Regarding what "camp" I am in, I am largely indifferent. I do see a value in laddering for retiree's per the OP's question. I agree with you, in that someone with a longer horizon can buy and hold through the good times and bad.
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Re: Is It Finally Time For A Bond Ladder?

Postby 3504PIR » Sat Oct 12, 2013 7:45 am

dbr wrote:
3504PIR wrote:

I am surprised because of the stability and safety aspect. BND is down 4% ytd and bond yields haven't even gone up 1%. To me, that isn't crazy volatility, but it isn't safe or stable either.


Why isn't it safe and what is the criterion for stability?


I think its in the eye of the beholder.
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