Deja vu: Bond funds lose money every year

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Deja vu: Bond funds lose money every year

Postby livesoft » Sat Jul 06, 2013 3:29 pm

With all the news about bond funds, I thought I would feed the flames with the chart below that I created at Morningstar.com. You are looking at the 3 month rolling returns of Total US Bond Index, Interm-Term Bond Index and Inflation-protected securities for the past 10 years. It seems like over 3-month periods there something like 9 out of 10 years where bond funds lose money. It's routine.

So we should all be used to losing money over the short term in bond funds by now. What's so different about losing money this time? :)

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Re: Deja vu: Bond funds lose money every year

Postby dm200 » Sat Jul 06, 2013 3:35 pm

livesoft wrote:With all the news about bond funds, I thought I would feed the flames with the chart below that I created at Morningstar.com. You are looking at the 3 month rolling returns of Total US Bond Index, Interm-Term Bond Index and Inflation-protected securities for the past 10 years. It seems like over 3-month periods there something like 9 out of 10 years where bond funds lose money. It's routine.

So we should all be used to losing money over the short term in bond funds by now. What's so different about losing money this time? :)

Image


I must not be reading/interpreting the chart the same way as you are, or we disagree about your statement " It seems like over 3-month periods there something like 9 out of 10 years where bond funds lose money."

I do not think bond funds lose money 9 of 10 years, but rather during a 3 month period in 9 of 10 years, bond funds lose money. BIG difference.
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Re: Deja vu: Bond funds lose money every year

Postby billyt » Sat Jul 06, 2013 3:39 pm

If look at 3 year rolling returns, you will see that many bond funds never lose money if you hold them for at least 3 years. That is because bond funds are funds made up of bonds that are guaranteed to return your principal.
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Re: Deja vu: Bond funds lose money every year

Postby Goodman60 » Sat Jul 06, 2013 3:42 pm

What's different this time is the magnitude of the potential losses compared to prior periods. Bond yields are starting from close to zero this time.
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Re: Deja vu: Bond funds lose money every year

Postby billyt » Sat Jul 06, 2013 3:46 pm

You are stuck in the past. The 10 year treasury is yielding 2.74% according to Bloomberg and 10 year TIPS yields are positive again.
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Re: Deja vu: Bond funds lose money every year

Postby billyt » Sat Jul 06, 2013 3:47 pm

What losses?
If you hold for the duration you won't have any losses.
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Re: Deja vu: Bond funds lose money every year

Postby SpringMan » Sat Jul 06, 2013 4:03 pm

billyt wrote:What losses?
If you hold for the duration you won't have any losses.

This assumes one rate increase. What about multiple rate increases occurring each year for several years? Each rate increase will have the same effect as the first, no?
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Re: Deja vu: Bond funds lose money every year

Postby Grandpaboys » Sat Jul 06, 2013 4:15 pm

quote
I do not think bond funds lose money 9 of 10 years, but rather during a 3 month period in 9 of 10 years, bond funds lose money. BIG difference. unquote

I agree and that's the way I see the chart.

I have been in long, intermediate and short corporate bonds since 1992 and they have been one of the best investments I have ever had in producing income from dividends and capital gains that I use for living expenses. In the 2008/2009 period I lowered my average duration to intermediate and backed of my truck to buy the lowest NAV I had ever seen. I considered selling a few weeks ago but could not match the income in CD. Also the capital gains from selling would have produced a very large capital gains tax. My income remains the same, my life style has not changed, so I have Stayed the Course with a sound investment made in 2008/2009. I see local banks and credit unions reducing CD rates which surprises me with the 10 year treasury increases. With the 10 year Treasury increases I was expecting CD rates to be on the rise.
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Re: Deja vu: Bond funds lose money every year

Postby billyt » Sat Jul 06, 2013 4:17 pm

Sure, rates may increase every year for the next 30 years, but how high can rates get, and how fast? Odds are that if you hold for the duration you won't have any losses in any but the most extreme circumstances. Look at the rolling return charts. Look at the history of bond fund returns during past periods of rising rates. I doubt very much that its different this time. Rates look like they are finally beginning to normalize. This is good news for anyone with an allocation to bonds in their portfolio.
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Re: Deja vu: Bond funds lose money every year

Postby G-Money » Sat Jul 06, 2013 4:26 pm

livesoft wrote:What's so different about losing money this time? :)

What's different is that the stock market has gone almost straight up over the last 4 years, so people think the hiccup we're seeing in the bond market is a big deal. :oops:
Don't assume I know what I'm talking about.
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Re: Deja vu: Bond funds lose money every year

Postby SpringMan » Sat Jul 06, 2013 4:33 pm

I guess it depends on one's time horizon and when one needs to start withdrawing the bond funds down. I am 66 so have to start RMDs in 4 years. Younger investors can wait out the duration for each rate increase. For now for much of my fixed income I am hiding out in VG Prime MM. At least MM is not losing money other than inflation. I still hold bonds in balanced funds like Wellesley and Wellington. Unwinding the QE is unprecedented IMO. I may move from MM to CDs. We have reached our number and don't need to swing for the fence on the fixed income side and we still have a 35% equity portfolio.
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Re: Deja vu: Bond funds lose money every year

Postby Toons » Sat Jul 06, 2013 4:46 pm

Are bond funds losing money?Sounds great for dividend reinvestment,the glass is always,always half full. :happy .Press on Regardless . :happy
Equity markets well up over 100% since March 2009. Whats to complain about. :happy :happy
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Re: Deja vu: Bond funds lose money every year

Postby Tom_T » Sat Jul 06, 2013 4:54 pm

SpringMan wrote:
billyt wrote:What losses?
If you hold for the duration you won't have any losses.

This assumes one rate increase. What about multiple rate increases occurring each year for several years? Each rate increase will have the same effect as the first, no?

Let's say that you have a bond fund with an average duration of five years. If rates go up one percent, the NAV will drop by five percent. However... if this happens every year, at some point the higher interest more than compensates for the loss in NAV due to rate hikes. Earn six percent interest, lose five percent on the rate hike, and you are still ahead. Higher rates are ultimately better for bond fund holders.
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Re: Deja vu: Bond funds lose money every year

Postby Leesbro63 » Sat Jul 06, 2013 4:57 pm

billyt wrote:You are stuck in the past. The 10 year treasury is yielding 2.74% according to Bloomberg and 10 year TIPS yields are positive again.


Reread my post: I said "STARTING FROM".
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Re: Deja vu: Bond funds lose money every year

Postby Kevin M » Sat Jul 06, 2013 4:59 pm

Looking at bond history over most periods since the 1980s could be a mistake. Might be better to start in the mid 1940s when rates were similarly low as they have been recently.

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Re: Deja vu: Bond funds lose money every year

Postby FinancialDave » Sat Jul 06, 2013 6:04 pm

G-Money wrote:
livesoft wrote:What's so different about losing money this time? :)

What's different is that the stock market has gone almost straight up over the last 4 years, so people think the hiccup we're seeing in the bond market is a big deal. :oops:


So, If you want a comparison to what is going to happen over the next 25 years why not look at a comparable time frame such as 1958-1982.

What you are looking at is the last bull market in bonds which is essentially over now.

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Re: Deja vu: Bond funds lose money every year

Postby FinancialDave » Sat Jul 06, 2013 6:19 pm

Tom_T wrote:
SpringMan wrote:
billyt wrote:What losses?
If you hold for the duration you won't have any losses.

This assumes one rate increase. What about multiple rate increases occurring each year for several years? Each rate increase will have the same effect as the first, no?

Let's say that you have a bond fund with an average duration of five years. If rates go up one percent, the NAV will drop by five percent. However... if this happens every year, at some point the higher interest more than compensates for the loss in NAV due to rate hikes. Earn six percent interest, lose five percent on the rate hike, and you are still ahead. Higher rates are ultimately better for bond fund holders.


I wonder if anyone pays attention to the fact that the income has not changed all that much -- if you were getting $100 a month from your bond funds 2 months ago, I suspect you may be getting the same or even less now. I know I have a very small position in a cross section of 5 different TROWE bond funds, from TIPS, to Long bonds to intermediate, etc, and all 5 of those bonds funds paid out less the first of July, than they did the first of June, and all the prices are down.

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Re: Deja vu: Bond funds lose money every year

Postby nedsaid » Sat Jul 06, 2013 6:25 pm

Yes, I have noticed that the income from my bond funds is still the same or a bit less. My suspicion is that the bonds in these portfolios are mostly the same as they were a few months ago and with mostly the same payouts. As bond portfolios turn over and the managers buy new bonds, we should start to see higher income. Any thoughts how long this will take?
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Re: Deja vu: Bond funds lose money every year

Postby ogd » Sat Jul 06, 2013 6:32 pm

nedsaid wrote:Yes, I have noticed that the income from my bond funds is still the same or a bit less. My suspicion is that the bonds in these portfolios are mostly the same as they were a few months ago and with mostly the same payouts. As bond portfolios turn over and the managers buy new bonds, we should start to see higher income. Any thoughts how long this will take?

Pay attention to the shorter month (28 days for Vanguard, for some reason).

Higher dividends will appear as the fund turns over bonds. Check the turnover / year ratio on Morningstar.
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Re: Deja vu: Bond funds lose money every year

Postby ogd » Sat Jul 06, 2013 6:34 pm

I think livesoft's point was that almost every year there is a 3 month period of loss. The particular choice of words for the title is rather inflammatory, which seems to be partially the intention :)

Reading comprehension test, livesoft?
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Re: Deja vu: Bond funds lose money every year

Postby FinancialDave » Sat Jul 06, 2013 6:37 pm

nedsaid wrote:Yes, I have noticed that the income from my bond funds is still the same or a bit less. My suspicion is that the bonds in these portfolios are mostly the same as they were a few months ago and with mostly the same payouts. As bond portfolios turn over and the managers buy new bonds, we should start to see higher income. Any thoughts how long this will take?


IMO, it's not at all predictable as the biggest variable is the amount of cash on hand in the funds and if the net cash flow is out of the fund or into the fund.

I was just reading on Morningstar that the PIMCO Total Return Bond Fund had something like $9.9 billion outflow in June. That's about 3.5% of the fund total, but since their cash position is listed as 16% long and 66% short, it's pretty hard to tell what they might have had to sell.

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Re: Deja vu: Bond funds lose money every year

Postby avalpert » Sat Jul 06, 2013 6:52 pm

I'm pretty sure what Livesoft is saying is that the Bond market is easy to time with very predictable cycles so anyone who loses money in it is a sucker...
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Re: Deja vu: Bond funds lose money every year

Postby Alan S. » Sat Jul 06, 2013 7:49 pm

Would be nice to see the May and June results added to the chart for comparison with past periods of declining prices. That is when the current down draft began.
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Re: Deja vu: Bond funds lose money every year

Postby livesoft » Sat Jul 06, 2013 7:52 pm

^I think recent declines of May-June-July are included in the chart. Otherwise the TIPS funded would not be labeled -7.34
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: Deja vu: Bond funds lose money every year

Postby FinancialDave » Sun Jul 07, 2013 12:42 pm

avalpert wrote:I'm pretty sure what Livesoft is saying is that the Bond market is easy to time with very predictable cycles so anyone who loses money in it is a sucker...


Let's rephrase that a bit and see who else may be the sucker.........


The person who parks (or invests) their money in the bond market because they have a short term need and have been told the bond market is more stable. Their need comes due some 6 months, 1 yr, or 2 yr later (it was not a predictable need date) and they notice their bond fund is some 10% down from where they bought in. In this environment they cannot wait another 6 months for it to be down another 10%, so they sell at a loss!

:oops:
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Re: Deja vu: Bond funds lose money every year

Postby avalpert » Sun Jul 07, 2013 12:47 pm

FinancialDave wrote:
avalpert wrote:I'm pretty sure what Livesoft is saying is that the Bond market is easy to time with very predictable cycles so anyone who loses money in it is a sucker...


Let's rephrase that a bit and see who else may be the sucker.........


The person who parks (or invests) their money in the bond market because they have a short term need and have been told the bond market is more stable. Their need comes due some 6 months, 1 yr, or 2 yr later (it was not a predictable need date) and they notice their bond fund is some 10% down from where they bought in. In this environment they cannot wait another 6 months for it to be down another 10%, so they sell at a loss!

:oops:

Wow, they really were silly for not buying a short-term fund for their short-term needs. That's what they guess for taking he extra risk reaching for yield...
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Re: Deja vu: Bond funds lose money every year

Postby exoilman » Sun Jul 07, 2013 1:09 pm

At what point will the stock market correct? For many I think when the ten year treasury > 3%. Then the bond funds will attract the money that flowed out into stocks/stock funds. I am staying the course with IP in spite of seeing my fixed income (all deferred) taking the "hit". Next year is my first RMD.

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Re: Deja vu: Bond funds lose money every year

Postby FinancialDave » Sun Jul 07, 2013 1:27 pm

exoilman wrote:At what point will the stock market correct? For many I think when the ten year treasury > 3%. Then the bond funds will attract the money that flowed out into stocks/stock funds. I am staying the course with IP in spite of seeing my fixed income (all deferred) taking the "hit". Next year is my first RMD.

Sam


Sam,
As long as you already have 3.65% of your IRA assets, at least by the end of next year (the size of your first RMD) in a money market, which is no more complex than just not investing the dividends and interest, in most cases over a year or two, then you will be fine. If you are expecting to sell something in 2014, there is just no way to predict whether it will be good news or bad news for you.

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Re: Deja vu: Bond funds lose money every year

Postby Red Rover » Sun Jul 07, 2013 4:49 pm

How should an individual who will retire in 6 months and begin taking distributions from their portfolio approach investing in bond funds in the current market with the potential pending dowturn if QE is "tapered" starting soon and ends next year? Does Warren Buffet's comment that bonds are a bad investment right now apply to buying and holding a bond fund for the long haul?

My objective is to buy and hold a 70/30 AA, taking 4-5% annual distributions to supplement my pension. All my assets are tax deferred.

My understanding of bond funds is that money can be lost because bonds in a fund are/may be sold before reaching maturity, i.e. the feature of individual treasuries with a guaranty at maturity does not apply to a fund. I don't have a 20 year window anymore so waiting even 10 years to draw interest is not an option; I will be drawing out a portion of my assets annualy.

Let's say that bond funds continue to underperform for several years. Based on my plan to buy and hold and take 4-5% annually, can the money lost in the short term be made up by holding the fund for 20+ years?
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Re: Deja vu: Bond funds lose money every year

Postby FinancialDave » Sun Jul 07, 2013 5:12 pm

Red Rover wrote:How should an individual who will retire in 6 months and begin taking distributions from their portfolio approach investing in bond funds in the current market with the potential pending dowturn if QE is "tapered" starting soon and ends next year? Does Warren Buffet's comment that bonds are a bad investment right now apply to buying and holding a bond fund for the long haul?

My objective is to buy and hold a 70/30 AA, taking 4-5% annual distributions to supplement my pension. All my assets are tax deferred.

My understanding of bond funds is that money can be lost because bonds in a fund are/may be sold before reaching maturity, i.e. the feature of individual treasuries with a guaranty at maturity does not apply to a fund. I don't have a 20 year window anymore so waiting even 10 years to draw interest is not an option; I will be drawing out a portion of my assets annualy.

Let's say that bond funds continue to underperform for several years. Based on my plan to buy and hold and take 4-5% annually, can the money lost in the short term be made up by holding the fund for 20+ years?


The problem is in your distribution phase once the asset is sold that lost money is never going to be gotten back. The good news is that depending on the income of your bond funds you could get half or more from the income -- so the deal is that in retirement you do NOT want to re-invest the dividends, especially in a falling bond market as this is a good way to lose more money over the long period of most bear market (or bull market) bond cycle.

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Re: Deja vu: Bond funds lose money every year

Postby billyt » Sun Jul 07, 2013 5:13 pm

The bonds held in the fund are guaranteed to return their principal at maturity. The fund is equivalent to a rolling bond ladder. Even though the NAV will take a hit as interest rates rise, the total return of the fund will improve over time. Rising rates are good for bond funds.
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Re: Deja vu: Bond funds lose money every year

Postby FinancialDave » Sun Jul 07, 2013 5:59 pm

Rising rates are good for bond funds


Let's maybe re-phrase this in the proper context - Rising rates are eventually good for the income derived from bond funds and I say eventually because income in bond funds is still going down. So if you are only withdrawing 4-5% you will most likely be fine, because you are getting probably half your income from dividends and interest.

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Re: Deja vu: Bond funds lose money every year

Postby dm200 » Sun Jul 07, 2013 6:08 pm

billyt wrote:The bonds held in the fund are guaranteed to return their principal at maturity. The fund is equivalent to a rolling bond ladder. Even though the NAV will take a hit as interest rates rise, the total return of the fund will improve over time. Rising rates are good for bond funds.


As best I understand, not exactly. The guarantee at maturity would only apply to some bond funds, such as Treasury and GNMA. The bonds in a fund may also have been purchased at a premium, in which case the premium is not guaranteed at all. In addition, I believe most bond funds do not hold the bonds to maturity, but rather keep the average maturity/duration within the goals of the fund.
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Re: Deja vu: Bond funds lose money every year

Postby Twins Fan » Sun Jul 07, 2013 6:45 pm

dm200 wrote:
billyt wrote:The bonds held in the fund are guaranteed to return their principal at maturity. The fund is equivalent to a rolling bond ladder. Even though the NAV will take a hit as interest rates rise, the total return of the fund will improve over time. Rising rates are good for bond funds.


As best I understand, not exactly. The guarantee at maturity would only apply to some bond funds, such as Treasury and GNMA. The bonds in a fund may also have been purchased at a premium, in which case the premium is not guaranteed at all. In addition, I believe most bond funds do not hold the bonds to maturity, but rather keep the average maturity/duration within the goals of the fund.


I have been wondering about this situation myself lately, as all the bond talk got me studying up more on bonds. Go figure... :D

But, here is the breakdown for Vanguard Intermediate Term Bond Index...

Under 1 Year 0.2%
1 - 3 Years 0.1%
3 - 5 Years 3.4%
5 - 10 Years 96.1%
10 - 20 Years 0.2%
20 - 30 Years 0.0%
Over 30 Years 0.0%
Total 100.0%

As you can see, pretty much everything is in 5 - 10 years... the intermediate range. But, if bond funds are basically bond ladders, shouldn't there be about 33% in each group... 1 - 3, 3 - 5, and 5 - 10 years??

Is it a bond ladder from 5 - 10 years, as in they buy 10 year bonds and then when they get to 5 years from maturity Vanguard sells them to keep it a true, or constant intermetiate term fund?

Any help would be appreciated. I really don't know, but have been curious since I've been looking into it.
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Re: Deja vu: Bond funds lose money every year

Postby tetractys » Sun Jul 07, 2013 6:45 pm

Thanks Livesoft, nice chart. So far this is a down year for bonds, sigh. I guess it's a little late for most of us to sell all our bonds screaming in panic--ha ha. It will be interesting to see just how long it takes for the higher rates to show up as dividends. -- Tet
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Re: Deja vu: Bond funds lose money every year

Postby ogd » Sun Jul 07, 2013 6:51 pm

Twins Fan wrote:As you can see, pretty much everything is in 5 - 10 years... the intermediate range. But, if bond funds are basically bond ladders, shouldn't there be about 33% in each group... 1 - 3, 3 - 5, and 5 - 10 years??

They are not really bond ladders. They could if they wanted, but instead they choose to focus on certain points of the maturity curve that are either more rewarding or allow the investor to express their risk tolerance.

One reason is that the short end of a bond ladder is really bad in terms of yields (see short and ultrashort bond funds); worse than a decent savings account. If an investor wishes to hold that too, they can do it through separate short funds, but they shouldn't be forced to. I would hate it if 30% of my funds invested in an IT fund were dead money on the lower rungs of a ladder.

Despite this, the "return to face value at maturity" effect is alive and well inside bond funds. A bond purchased with low coupon, then depreciated by an interest rate increase, then held for a few years and sold before maturity, still recovers a significant amount of the value lost. At the point it's sold, it often would have made peanuts for the remaining term.
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Re: Deja vu: Bond funds lose money every year

Postby ogd » Sun Jul 07, 2013 7:10 pm

P.S: we can quantify the value of holding to maturity with an example from current Treasury data:

12/31/2014 0.125 99.7813 99.7891 0.268

Columns are: maturity, coupon, current price bid / ask, yield (based on ask price).

So waiting for this depreciated bond to "return your principal" gives you a yield of 0.268% / year for the remaining 1.5 years. Why would you want that?
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Re: Deja vu: Bond funds lose money every year

Postby GTF » Sun Jul 07, 2013 7:25 pm

Red Rover wrote:How should an individual who will retire in 6 months and begin taking distributions from their portfolio approach investing in bond funds in the current market with the potential pending dowturn if QE is "tapered" starting soon and ends next year? Does Warren Buffet's comment that bonds are a bad investment right now apply to buying and holding a bond fund for the long haul?

While I respect Warren Buffet much of what he says is noise to small individual investors. He has no need for bonds "nada".

My objective is to buy and hold a 70/30 AA, taking 4-5% annual distributions to supplement my pension. All my assets are tax deferred.

IMHO 70/30 has lots of risk for the hoped for gain in retirement. I used to believe 70/30 would be good too, but running 70/30 against returns from 2000-2009 changed that thought. I will probably be 45/55 in the near future (1-2 years).

My understanding of bond funds is that money can be lost because bonds in a fund are/may be sold before reaching maturity, i.e. the feature of individual treasuries with a guaranty at maturity does not apply to a fund. I don't have a 20 year window anymore so waiting even 10 years to draw interest is not an option; I will be drawing out a portion of my assets annualy.

Let's say that bond funds continue to underperform for several years. Based on my plan to buy and hold and take 4-5% annually, can the money lost in the short term be made up by holding the fund for 20+ years?


Here is a really good article on bonds and funds.

http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/bonds/should_you_worry_about_bond_funds_if_interest_rates_rise.html

GTF
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Re: Deja vu: Bond funds lose money every year

Postby livesoft » Sun Jul 07, 2013 7:48 pm

tetractys wrote:Thanks Livesoft, nice chart. So far this is a down year for bonds, sigh. I guess it's a little late for most of us to sell all our bonds screaming in panic--ha ha. It will be interesting to see just how long it takes for the higher rates to show up as dividends. -- Tet

I have to admit that the poll in the spring about shortening durations got to me: viewtopic.php?f=1&t=112412 Because of that poll, I did something back then. It was also partly because of a RBD in small-cap value back then, too.
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Re: Deja vu: Bond funds lose money every year

Postby dm200 » Sun Jul 07, 2013 8:45 pm

Twins Fan wrote:
dm200 wrote:
billyt wrote:The bonds held in the fund are guaranteed to return their principal at maturity. The fund is equivalent to a rolling bond ladder. Even though the NAV will take a hit as interest rates rise, the total return of the fund will improve over time. Rising rates are good for bond funds.


As best I understand, not exactly. The guarantee at maturity would only apply to some bond funds, such as Treasury and GNMA. The bonds in a fund may also have been purchased at a premium, in which case the premium is not guaranteed at all. In addition, I believe most bond funds do not hold the bonds to maturity, but rather keep the average maturity/duration within the goals of the fund.


I have been wondering about this situation myself lately, as all the bond talk got me studying up more on bonds. Go figure... :D

But, here is the breakdown for Vanguard Intermediate Term Bond Index...

Under 1 Year 0.2%
1 - 3 Years 0.1%
3 - 5 Years 3.4%
5 - 10 Years 96.1%
10 - 20 Years 0.2%
20 - 30 Years 0.0%
Over 30 Years 0.0%
Total 100.0%

As you can see, pretty much everything is in 5 - 10 years... the intermediate range. But, if bond funds are basically bond ladders, shouldn't there be about 33% in each group... 1 - 3, 3 - 5, and 5 - 10 years??

Is it a bond ladder from 5 - 10 years, as in they buy 10 year bonds and then when they get to 5 years from maturity Vanguard sells them to keep it a true, or constant intermetiate term fund?

Any help would be appreciated. I really don't know, but have been curious since I've been looking into it.


They must buy and sell (perhaps exchange) quite a bit, even in an index fund. That fund (Vanguard Intermediate Term Bond Index) had the following turnover rates: 2012: 51% 2011: 67% 2010: 58% 2009: 77% 2008: 101%. So, the way I read this, each year, during the last five calendar years, at least 51% (on average) of the holdings turned over during the year. In 2008, the entire fund's holdings (on average) turned over. Hardly a "buy and hold" bond ladder!
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Re: Deja vu: Bond funds lose money every year

Postby Eureka » Mon Jul 08, 2013 5:00 am



The Schwab article seems to indicate that increased income will make up for declining net asset value eventually even if you do not reinvest dividends. I have not seen this take before. Do I understand this correctly?
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Re: Deja vu: Bond funds lose money every year

Postby billyt » Mon Jul 08, 2013 6:18 am

I will say it again. Rising rates are good for bond funds. It increases the total return of the fund (increased income offsets declining NAV). If you buy a bond fund with an SEC yield of 2%, you can expect a total return of roughly 2% per year if you hold the fund for the duration, regardless of rate changes. If you hold past the duration, you will earn more than 2% per year total return in a rising rate scenario, or make less than 2% per year in a falling rate scenario. If you own bonds, you should be happy if rates are rising, especially from these abysmally low rates. Not to mention the fact that you can add to your shares at a lower price if you are still accumulating.
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Re: Deja vu: Bond funds lose money every year

Postby Red Rover » Mon Jul 08, 2013 11:11 am

Eureka wrote:


The Schwab article seems to indicate that increased income will make up for declining net asset value eventually even if you do not reinvest dividends. I have not seen this take before. Do I understand this correctly?


This is the point that I don't understand so please, all, excuse my bond fund ignorance.

I am contemplating a 20-40% AA in VG Total Bond and/or a VG Treasury fund with shorter maturity as I will shortly enter the distribution phase of my investing. It will be in a tax deferred account. I plan to take a 4-5% distribution each year of all my AA including the equities portion, but I also am concerned that the balance of my bond fund will decline. The research I have done indicates that experienced managers, including Vanguard themselves (see links below), say that bond funds may be losers over the next few years and possibly more. This concerns me since my goal for the bond AA is to preseve equity.

http://vanguardblog.com/2012/07/30/the-outlook-for-bonds-and-what-to-do-about-it/

http://bigstory.ap.org/article/vanguard-exec-shares-outlook-fears-bond-bubble

Unlike an individual bond, I don't see how one can hold a bond fund to maturity since you buy into the fund and you then own shares of whatever bonds the fund owns/buys/sells. What determines the total value of my bond fund, other than the NAV? I believe that if the fund is down in NAV and I take a distribution, I have incurred a loss on that portion, correct?

I guess my real question is do I keep losing equity when the NAV continues to decline? How does a bond fund in a tax deferred investment grow or decline other than the NAV? In a fund that I was continuing to buy, I would be pleased to dollar cost average as the NAV declines. Since I won't be buying more, except during balancing, I am concerned that a bond fund, right now, may actually lose money until the NAV rises.

If I understand what has been posted above from those more knowledgable than I am, the fund NAV should eventually rise again as newer, higher interest bonds enter the fund portfolio.
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Re: Deja vu: Bond funds lose money every year

Postby dm200 » Mon Jul 08, 2013 11:50 am

Red Rover wrote:
Eureka wrote:


The Schwab article seems to indicate that increased income will make up for declining net asset value eventually even if you do not reinvest dividends. I have not seen this take before. Do I understand this correctly?


This is the point that I don't understand so please, all, excuse my bond fund ignorance.

I am contemplating a 20-40% AA in VG Total Bond and/or a VG Treasury fund with shorter maturity as I will shortly enter the distribution phase of my investing. It will be in a tax deferred account. I plan to take a 4-5% distribution each year of all my AA including the equities portion, but I also am concerned that the balance of my bond fund will decline. The research I have done indicates that experienced managers, including Vanguard themselves (see links below), say that bond funds may be losers over the next few years and possibly more. This concerns me since my goal for the bond AA is to preseve equity.

http://vanguardblog.com/2012/07/30/the-outlook-for-bonds-and-what-to-do-about-it/

http://bigstory.ap.org/article/vanguard-exec-shares-outlook-fears-bond-bubble

Unlike an individual bond, I don't see how one can hold a bond fund to maturity since you buy into the fund and you then own shares of whatever bonds the fund owns/buys/sells. What determines the total value of my bond fund, other than the NAV? I believe that if the fund is down in NAV and I take a distribution, I have incurred a loss on that portion, correct?

I guess my real question is do I keep losing equity when the NAV continues to decline? How does a bond fund in a tax deferred investment grow or decline other than the NAV? In a fund that I was continuing to buy, I would be pleased to dollar cost average as the NAV declines. Since I won't be buying more, except during balancing, I am concerned that a bond fund, right now, may actually lose money until the NAV rises.

If I understand what has been posted above from those more knowledgable than I am, the fund NAV should eventually rise again as newer, higher interest bonds enter the fund portfolio.


1. Your references go back over six months. A few things may have changed.
2. In a bond fund, there is no assurance that the NAV will rise to any previous level. Why do you think that the NAV would rise? There are a lot of factors involved in what causes the NAV to go up or down (or stay the same), but (somewhat oversimplified) - at a given NAV, if everything in the bond market stayed exactly the same (all rates, risk levels and perceived risk levels of bonds held, and the fund's allocation and mix of holdings), then the NAV would stay the same. It would not go up as bonds are replaced.
3. If you are not comfortable with the risks of a given bond fund, don't buy it. Instead, buy something that fits your risk tolerance.
4. Over time, you can come out ahead even if the NAV declines and/or does not go back to a previous higher value - IF the income generated is greater than the decline in value because of the lower NAV.
5. In looking at the historical NAV, be careful to note drops in the NAV due to capital gains distributions. Those drops do not cause any loss of value. The drop in the NAV is identical to the amount distributed.
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Re: Deja vu: Bond funds lose money every year

Postby Red Rover » Mon Jul 08, 2013 1:03 pm

dm200, based on #4;
4. Over time, you can come out ahead even if the NAV declines and/or does not go back to a previous higher value - IF the income generated is greater than the decline in value because of the lower NAV.


How does an investor in my situation, i.e. totally tax deferred, receive income from a bond fund? Is the interest paid reflected seperately from the NAV? Aren't the total value of my holdings and the dollar value of my 4-5% annual distributions determined by the NAV?
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Re: Deja vu: Bond funds lose money every year

Postby dm200 » Mon Jul 08, 2013 1:47 pm

Red Rover wrote:dm200, based on #4;
4. Over time, you can come out ahead even if the NAV declines and/or does not go back to a previous higher value - IF the income generated is greater than the decline in value because of the lower NAV.


How does an investor in my situation, i.e. totally tax deferred, receive income from a bond fund? Is the interest paid reflected seperately from the NAV? Aren't the total value of my holdings and the dollar value of my 4-5% annual distributions determined by the NAV?


In most Bond Funds, the NAV does not reflect the accumulated income from the Bond holdings. I know this is true, for example, for the Vanguard GNMA Fund. As I understand your question, yes the dividends are separately recorded. In a tax deferred account, everything you take out is taxable and there are no tax consequences of what you do inside the account. The total value of your holdings are the sum of the # of shares times the NAV PLUS the distributions.

In an even slightly volatile market (probably due to interest rate changes) it may not be possible to stick precisely to, say, a 4% per year withdrawal rate and still maintain the principal remaining in a precise way. Over time, though, in lower risk bond funds (such as GNMA or total bond market of Intermediate index) the dividend distributions will tend to offset the possible drop in the NAV.

If you have holdings that are mixed between some very stable principal ones, and some low risk (but still possibly volatile) bond funds, then the 4-5% withdrawal could pull from different portions of the holdings depending on value changes.

In this recent low interest rate environment, with holding bond funds, a 4-5% withdrawal rate is almost certain to deplete the principal over time. Only time will tell if that will change. Only rising interest rates will get back to a longer sustainable 4-5% withdrawal rate.
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Re: Deja vu: Bond funds lose money every year

Postby Jack » Mon Jul 08, 2013 1:54 pm

Red Rover wrote:Unlike an individual bond, I don't see how one can hold a bond fund to maturity since you buy into the fund and you then own shares of whatever bonds the fund owns/buys/sells. What determines the total value of my bond fund, other than the NAV? I believe that if the fund is down in NAV and I take a distribution, I have incurred a loss on that portion, correct?

The general rule is to match the duration of the bond fund to the time when you will be withdrawing from it. So most of your portfolio could be held in an intermediate term or total bond fund with a duration of 5 or 6 years. The amount you plan on withdrawing in the next two or three years should be held in a short term bond fund with a duration of 2.5 years. The amount you plan on withdrawing in the next year should be in a money market or short term CD. Each year you move some money from intermediate to short and from short to money market. That is how you avoid most of the risk of withdrawing with a loss on NAV.

For example, lets say that you have a $500,000 bond porfolio and plan to withdraw $25,000 (5%) each year. You put $25,000 in a money market or 1-year CD to cover next year's withdrawal. You put $75,000 in a short term bond fund to cover the next three years and you put the rest, $400,0000 in an intermediate or total bond fund.

Each year you move $25,000 from intermediate to short and $25,000 from short to money market. Your bond durations are matched to your withdrawal needs.
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Re: Deja vu: Bond funds lose money every year

Postby Kevin M » Mon Jul 08, 2013 2:38 pm

Red Rover, if you are concerned about fluctuations in principal value, why don't you simply use non-brokered CDs instead of a bond fund, at least for a large portion of your fixed income allocation?

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Re: Deja vu: Bond funds lose money every year

Postby Red Rover » Mon Jul 08, 2013 3:42 pm

I appreciate all the responses, but I'm not looking for alternatives. I am looking for a better understanding of bond funds. Based on the reply from dm200 (which makes sense), I just want to know how my total value in a bond fund (the sum of the # of shares times the NAV PLUS the distributions) is recorded and accessed for withdrawls in an index bond index if not by selling shares at a given NAV.

Since bonds are bought and sold frequently (as someone pointed out in a prior post), sometimes before maturity, and there is no specific bond to hold to maturity, how is the daily value calculated?


dm200: In most Bond Funds, the NAV does not reflect the accumulated income from the Bond holdings. I know this is true, for example, for the Vanguard GNMA Fund. As I understand your question, yes the dividends are separately recorded. In a tax deferred account, everything you take out is taxable and there are no tax consequences of what you do inside the account. The total value of your holdings are the sum of the # of shares times the NAV PLUS the distributions.
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Re: Deja vu: Bond funds lose money every year

Postby GTF » Mon Jul 08, 2013 3:47 pm

Red Rover wrote:dm200, based on #4;
4. Over time, you can come out ahead even if the NAV declines and/or does not go back to a previous higher value - IF the income generated is greater than the decline in value because of the lower NAV.


How does an investor in my situation, i.e. totally tax deferred, receive income from a bond fund? Is the interest paid reflected seperately from the NAV? Aren't the total value of my holdings and the dollar value of my 4-5% annual distributions determined by the NAV?


Go to M* and build a portfolio just like the one you will be starting with in retirement. If you want buy all the shares 12-31-12 then you can see how your designed portfolio has done YTD. You have to remember that as Bogleheads "we believe in the markets LONG TERM". We will hit some losing times but we plan to get more return than losses in the long run.

Now when I compare my VBTLX it indicates a value loss of 3.6% YTD. Now I let Portfolio Manager add in the distributions and my loss to date is 2.3%. Granted they are both losses but, not all comes from the change in NAV.
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