Deja vu: Bond funds lose money every year

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Re: Deja vu: Bond funds lose money every year

Postby Kevin M » Mon Jul 08, 2013 4:00 pm

Red Rover wrote:I appreciate all the responses, but I'm not looking for alternatives.

Why not? In post above you stated this:
but I also am concerned that the balance of my bond fund will decline.
Just wondering why you wouldn't consider alternatives that provide similar yield with less risk. It's OK, but it might be worthwhile to articulate your reasons.

If you want to stick with a bond fund anyway, then I don't think you need to dig down into all the nitty gritty details to have a pretty good idea of what could happen.

Might the balance of your bond fund decline? Yes. How much? No one knows. If you understand the relationship between yield and price based on duration, then you can do your own rough estimates. For a bond fund with a duration of 5 years, 1 percentage point increase in rates -> 5% decline in price, 2 percentage point increase in rates -> 10% decline in price, etc. Of course it works the other way too.

Will higher rates eventually make up for losses. Yes. How long is eventually? It depends on how fast and how much rates change. You can do some rough calculations that will give you a rough idea.

Be very cautious about using any recent history as a guideline. I think you have to go back to the mid-1940s to see what might happen starting from today's low rates.

Will pulling out 4%-5% per year and not reinvesting dividends have an impact with rates at about 2%. Yes. How much? You can do some simple spreadsheet what-if calculations to get a rough idea. Again, why wouldn't you consider alternatives that might be more appropriate for your particular situation?

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

Postby avalpert » Mon Jul 08, 2013 4:01 pm

Red Rover wrote: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.


You access the value through the regular dividend distributions (typically monthly) or by selling shares.

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?

The same way you would value your holdings of individual bonds, the fair value based on current market prices of the holdings. The only reason it doesn't appear that the bonds you hold are fluctuating in price is because you don't bother looking at their current price.
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Re: Deja vu: Bond funds lose money every year

Postby Jack » Mon Jul 08, 2013 4:10 pm

Red Rover wrote: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?

The NAV is calculated the same way as for a stock mutual fund. Each bond held in the fund has a daily price at which it can be traded, just like a share of stock. Add up the prices of all the bonds, add in undistributed interest and you have the NAV.
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Re: Deja vu: Bond funds lose money every year

Postby dm200 » Mon Jul 08, 2013 8:16 pm

Red Rover wrote: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.


The calculation of the daily value (NAV) of a bond fund is done the same way, whether the bonds held have been held for two day, two months, two years or twenty years. The NAV is the total current market value of all the holdings of the fund divided by the number of shares of the fund outstanding that day.
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Re: Deja vu: Bond funds lose money every year

Postby FinancialDave » Tue Jul 16, 2013 3:37 pm

Red Rover wrote: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.


To some degree the answer to your question depends on whether you are reinvesting the dividends or they are going to a money market account. In a Vanguard account and most others I know of, where your money goes is displayed in a Transaction History Report, which will show you if your dividends/interest is being reinvested. If it is being reinvested then your total value in the bond fund is only the number of shares times the NAV, as all the distributions go to increase your share count.

So if your distributions are being reinvested it is true that you could be buying shares at a lower cost and "possibly" a higher yield, all the distributions you have taken and reinvested are losing money as well, when interest rates rise. Which of course is fine for a long term investor, as long as your investment horizon is longer than the interest rate rise.

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