A Dangerous Misunderstanding about Bond Rates?

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby dm200 » Mon Jul 15, 2013 10:05 pm

ogd wrote:
Kevin M wrote:Of course there is something actionable, and it's been discussed extensively in other threads (as I think you know): use non-brokered CDs with reasonable early withdrawal terms to reduce your interest-rate risk. You can deride it as market timing if you want, but the closer rates are to 0%, the more sense NB CDs make. And it doesn't have to be all or nothing; as I've mentioned many times, I have gradually moved about 2/3 of my fixed income into CDs as rates have declined, and still have about 1/3 in bond funds (but no treasuries for me, thank you very much; NB CDs provide a higher return with less risk up to 5 year maturities).

Yes, in some situations non-brokered CDs might be better. The case is less clear-cut as 3 months ago (when, like we discussed, I was a fan of using them instead of shorter Treasuries), and they do have their drawbacks: liquidity, state taxes, can't be used in 401k and general hassle of dealing with random credit unions.


What is the "state taxes" drawback on non-brokered CDs? As far as I know, interest on bank and credit union CDs is classified as "interest" by the IRS and is taxable (federal and state) whether brokered, direct from bank or credit union.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby ogd » Mon Jul 15, 2013 10:34 pm

dm200 wrote:What is the "state taxes" drawback on non-brokered CDs? As far as I know, interest on bank and credit union CDs is classified as "interest" by the IRS and is taxable (federal and state) whether brokered, direct from bank or credit union.

The comparison (not 100% clear in my post, sorry about that) was non-brokered CDs vs Treasuries. The latter are exempt from state taxes.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Electron » Tue Jul 16, 2013 3:22 pm

ogd wrote:
Electron wrote:The Vanguard site shows the SEC yield for the Total Bond Market Index fund at 3.50% on 7/14/03. Morningstar shows the Ten Year compounded return for the same fund at 4.39% on 7/12/13. Falling interest rates likely played a role in the return being higher than the forecast.

Electron: careful with that conclusion. The path is important. For example, the SEC yield on 07/14/2008 was 4.80% (so rising rates, generally speaking), total return between 2003-2008 was 4.9%. So the rising rates period actually helped quite a bit, more than the falling rates since 2008.

Thanks for making an excellent point. It looks as though anyone concerned about rising rates should study several past periods and see how the bond index actually performed. Rising rates typically do add to total return but it may not show up for a period of time.

In terms of earlier forecasts using the simple bond model, the Vanguard website provides SEC yield for VBMFX going back to 1993. I've also found a way using Morningstar charts and a calculator to determine ten year compounded returns from any starting point.

Lastly, the rolling returns available on Morningstar charts can show quite a bit. The rolling period can range from 3 months to 60 months (5 years). Note the negative 12 month rolling returns in the chart below for years such as 1994. Now change the chart to 60 month rolling returns. Rolling returns appear to be looking forward in time.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Sun Jul 21, 2013 11:50 am

Hello,

I have a good question. I'm 33 and all I do is ccontribute to 401k, set AA, rebalance once per year. I have bonds in my fund.

Does all this bond talk effect me? I don't plan on retiring for another 32 years. Shoul I care what bonds are doing now?

Thanks
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby ogd » Sun Jul 21, 2013 1:09 pm

goodoboy: with that kind of long horizon I don't think there's anything to worry about.

It's clear that the perception of interest rate risk is right now elevated; this can be seen in the yields that the market demands to hold, say, 10 year vs. 3 year treasuries. However: the nature of interest rate risk is such that losses due to rates are necessarily followed by gains from increased yields, so in the long term you will benefit from an increase now. One might be tempted to try to exit the market to avoid the losses and get back in in time to reap the gains -- but this is essentially trying to move ahead of a market driven by professionals who do precisely this for a living; as mentioned, they have already adjusted the prices to reflect their perception of risk, and they do this every second the market is open. So the only reason to move from here is if you think that they got it wrong. Which is possible, but unlikely (not to mention presumptuous) and conflicts with most boglehead principles.

Finally, if nothing else, bonds are still fulfilling their primary role in a 33-year old's portfolio, which is to cushion any blows to the larger and much more volatile equity portion.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Kevin M » Sun Jul 21, 2013 4:21 pm

goodoboy, if your entire portfolio is in your 401k, then you are limited to the choices in the 401k (i.e., you don't have access to non-brokered CDs as a safer alternative). The most important allocation is between stocks and fixed income, so you don't want to abandon that. So the only question relevant to you is which fixed income alternatives to use in the 401k. In the long run, it may not make much difference, as your stocks are likely to dominate the return of the portfolio (assuming you have a reasonable allocation to stocks for someone your age).

Do you have access to a stable value (SV) fund, and if so, what is the yield? Some folks have posted about SV funds in their 401k/403b plans that have comparable or higher yields than say a total bond market fund, and many of them are taking advantage of them to lower the risk of their fixed income allocation without sacrificing expected return.

Other than that, you have to choose between the bond funds available to you and perhaps a money market fund. The shorter the duration of the fund, the lower the risk and the lower the expected return.

A money market fund has a duration of 0, but also probably a return close to 0%. As is typical in investing, you sacrifice higher expected return for more safety. Moving up the risk scale, a short-term bond fund will have higher return and risk than a MM fund but lower return and risk than an intermediate-term bond fund. You could blend a MM fund with an intermediate-term bond fund to simulate a shorter-term bond fund. Although I think that is fine, most Bogleheads would probably disapprove, and consider it unnecessarily complex given the relative safety of bonds compared to stocks.

Edit: I posted more than relevant to the topic raised in OP because you referenced "all this bond talk", which is more general. If you look at the OP, it's just cautioning folks that the dollar amount of dividends may not increase quickly as rates increase, and that it could actually decrease. Whether or not this is true, this particular aspect has little relevance to you since you probably don't even pay attention to the dollar dividend amounts (do you?).

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Sun Jul 21, 2013 4:37 pm

ogd wrote:goodoboy: with that kind of long horizon I don't think there's anything to worry about.

It's clear that the perception of interest rate risk is right now elevated; this can be seen in the yields that the market demands to hold, say, 10 year vs. 3 year treasuries. However: the nature of interest rate risk is such that losses due to rates are necessarily followed by gains from increased yields, so in the long term you will benefit from an increase now. One might be tempted to try to exit the market to avoid the losses and get back in in time to reap the gains -- but this is essentially trying to move ahead of a market driven by professionals who do precisely this for a living; as mentioned, they have already adjusted the prices to reflect their perception of risk, and they do this every second the market is open. So the only reason to move from here is if you think that they got it wrong. Which is possible, but unlikely (not to mention presumptuous) and conflicts with most boglehead principles.

Finally, if nothing else, bonds are still fulfilling their primary role in a 33-year old's portfolio, which is to cushion any blows to the larger and much more volatile equity portion.


Thank you. I recently switched contributions from bonds to Stable Fund offering 3% return from all this Bonds gossip. I really don't have time to keep up with the latest and greatest Bonds talk.

I just want to contribute the hell out my 401k and do nothing else. Now I don't know rather to go back to bonds.

I am 80/20, so just 20% going to Stable Fund now.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Sun Jul 21, 2013 4:54 pm

Kevin M wrote:goodoboy, if your entire portfolio is in your 401k, then you are limited to the choices in the 401k (i.e., you don't have access to non-brokered CDs as a safer alternative). The most important allocation is between stocks and fixed income, so you don't want to abandon that. So the only question relevant to you is which fixed income alternatives to use in the 401k. In the long run, it may not make much difference, as your stocks are likely to dominate the return of the portfolio (assuming you have a reasonable allocation to stocks for someone your age).

Do you have access to a stable value (SV) fund, and if so, what is the yield? Some folks have posted about SV funds in their 401k/403b plans that have comparable or higher yields than say a total bond market fund, and many of them are taking advantage of them to lower the risk of their fixed income allocation without sacrificing expected return.

Other than that, you have to choose between the bond funds available to you and perhaps a money market fund. The shorter the duration of the fund, the lower the risk and the lower the expected return.

A money market fund has a duration of 0, but also probably a return close to 0%. As is typical in investing, you sacrifice higher expected return for more safety. Moving up the risk scale, a short-term bond fund will have higher return and risk than a MM fund but lower return and risk than an intermediate-term bond fund. You could blend a MM fund with an intermediate-term bond fund to simulate a shorter-term bond fund. Although I think that is fine, most Bogleheads would probably disapprove, and consider it unnecessarily complex given the relative safety of bonds compared to stocks.

Edit: I posted more than relevant to the topic raised in OP because you referenced "all this bond talk", which is more general. If you look at the OP, it's just cautioning folks that the dollar amount of dividends may not increase quickly as rates increase, and that it could actually decrease. Whether or not this is true, this particular aspect has little relevance to you since you probably don't even pay attention to the dollar dividend amounts (do you?).

Kevin


Thank you Kevin for the help.

http://www.screencast.com/t/leVGLmuVN

there is my options in 401k for the fixed income. I have the stocks section figured out, just confused on fixed income option. I have Stable Fund and switch to this two weeks ago for my fixed income allocation. I am 80/20. I was contributing the 20% to all bonds, now that 20% goes to Stable Fund. At least I get a 3% return, but I will miss all the dividends accumulation over the years from not sticking to bonds when they are cheap. I am investing for the next 32 years, I don't need this money now'

Don't know rather to stick to bonds or just stay in Stable Fund. Any help is appreciated.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Kevin M » Sun Jul 21, 2013 5:55 pm

goodoboy wrote:I have the stocks section figured out, just confused on fixed income option. I have Stable Fund and switch to this two weeks ago for my fixed income allocation. I am 80/20. I was contributing the 20% to all bonds, now that 20% goes to Stable Fund. At least I get a 3% return, but I will miss all the dividends accumulation over the years from not sticking to bonds when they are cheap. I am investing for the next 32 years, I don't need this money now'

Don't know rather to stick to bonds or just stay in Stable Fund. Any help is appreciated.

A stable value fund yielding 3% is an excellent choice for fixed income. The yield is quite a bit higher than something like total bond fund (2%-2.2%), and the risk is much less. It's a win/win as far as I'm concerned.

I haven't looked at your plan choices yet, but even without doing so ...

You are not missing out on anything except the possibility of missing a short-term gain if rates decline much, but trying to take advantage of this is just speculating. Say rates drop to 0% across the yield curve; you could see a gain of about 10% in an intermediate-term bond fund (duration 5 years), but of course then you're earning only 0%, so the temporary gain will gradually erode. On the other hand, if rates increase to say 4%, you could be looking at a short-term loss of about 10%. So with your SV fund, you just eliminate the interest-rate risk, which could cut either way.

Vanguard estimates 10-year total return for the aggregate bond market as about the current yield, so call it 2.2%. At 3%, you are earning more than this now. If yields increase and bond fund prices go down, you could gradually switch back into a bond fund if the yield rises enough above the SV fund yield.

In another thread I recommended something like move 25% of your fixed income into the bond fund for each 0.5 percentage point increase above the SV fund yield. So if the intermediate-term bond fund yield increases to 3.5% and the SV fund yield remains at 3%, move 5% of your portfolio (25% of 20%) into the bond fund. Rinse and repeat if the bond fund yield rises to 4% and the SV fund yield remains at 3%, etc.

However, with an 80% allocation to stocks, and since you're trying to save a lot, your fixed income is unlikely to make a huge difference. The stock portion of your portfolio is likely to dominate your returns. Don't sweat the fixed income too much. Enjoy the safe 3% from the SV fund!

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Kevin M » Sun Jul 21, 2013 6:04 pm

goodoboy wrote:http://www.screencast.com/t/leVGLmuVN

there is my options in 401k for the fixed income.

This shows historical returns. Better to look at yield (SEC yield, which a bond fund must provide) and duration (which indicates interest-rate risk). I don't think a SV fund is required to provide SEC yield, but hopefully they provide some kind of yield, and if not, you can estimate it by looking at YTD returns and then multiplying that by the appropriate factor to estimate annual return for the current year (for SV fund only since yields change slowly; not for a bond fund where recent past returns have nothing to do with returns going forward).

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Sun Jul 21, 2013 6:38 pm

Thanks for your help,


Just a few questions:

Kevin M wrote:
A stable value fund yielding 3% is an excellent choice for fixed income. The yield is quite a bit higher than something like total bond fund (2%-2.2%), and the risk is much less. It's a win/win as far as I'm concerned.



Where can I see the total bond fund yield is returning 2-2.2%? From here https://personal.vanguard.com/us/FundsS ... =INT#tab=4 I see 2.29%.


Kevin M wrote:Vanguard estimates 10-year total return for the aggregate bond market as about the current yield, so call it 2.2%. If yields increase and bond fund prices go down, you could gradually switch back into a bond fund if the yield rises enough above the SV fund yield


can you provide a link for this 10 yr estimates, so I can read or see?

Kevin M wrote: if the intermediate-term bond fund yield increases to 3.5% and the SV fund yield remains at 3%, move 5% of your portfolio (25% of 20%) into the bond fund. Rinse and repeat if the bond fund yield rises to 4% and the SV fund yield remains at 3%, etc.


This is good advice. So what I have to do is once or twice per year check if the bond fund yield in my 401K options is rising above the yield of the SV? Then consider moving in increments as you explained above.

If invested in bond fund, do I receive dividends or is this the yield you are referring to?

I will enjoy the 3% from the Stable Fund, my only problem is knowing when to switch back to the bond fund. And you answered it: whenever bond yields rise above SV yields. Pretty simple.

Thanks for help
Last edited by goodoboy on Sun Jul 21, 2013 7:05 pm, edited 1 time in total.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Sun Jul 21, 2013 6:48 pm

Kevin M wrote:It's a win/win as far as I'm concerned.


Is it win-win to choose SV because I don't lose any principal money and guaranteed return? And if choose bond fund, the principal could be losing and the return is 2-2.2%, which is lower than SV yield?

Is my understanding correct?

If I can get 3% forever in my fixed income portion of portfolio forever, I am happy.

Thanks
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Kevin M » Sun Jul 21, 2013 7:12 pm

goodoboy wrote:Where can I see the total bond fund is returning 2-2.2%? From here https://personal.vanguard.com/us/FundsS ... =INT#tab=4

Starting at your link, on the far right in the first row is the SEC yield, which is the yield that is most commonly used to estimate future returns.

The distribution yields are based on what the fund actually distributed at the end of each month, and currently are higher for most bond funds. This is because the funds hold bonds priced above par (face value) that have higher coupon payments. As the bonds approach maturity, the values of these "premium" bonds will gradually decline. The SEC yield is a form of yield to maturity (YTM) that factors in this gradual erosion of bond value into the yield, which is why it is lower.

The SEC yield is an average YTM based on the previous 30 days. If rates rise quickly, it is likely to be somewhat lower than the average YTM for the fund. This is why I am being generous and bumping it up a bit; also, I usually use yields for Admiral shares, which are a bit higher.

You can see yields for all Vanguard bond funds by going to Vanguard - Vanguard funds, the selecting Bonds under Asset Class on the left. You can then click in the style box to select a subset of bonds. Click the top middle box (medium maturity, high credit quality) to see TBM and other high-quality intermediate-term bond funds. I see TBM admiral shares by default, since $10,000 is selcted by default on the left. You can select $50,000 to show only admiral funds of the other funds (you also can select Admiral shares lower down).

SEC yield is shown on the default "Performance" tab. You can select the Distributions tab to also see distribution yields. The SEC yield of TBM admiral is 2.01%. You can see average YTM by selecting Attributes & Expense Ratio tab, then Bond attributes. Average YTM of 2.3% is shown as of 6/30. Rates haven't changed much since 6/30, and the fund expense is 0.1% (YTM does not subtract expenses, SEC yield does), so I guestimate the current average YTM, after expenses, as about 2.2%.

For the Pimco bond funds in your plan, your plan should provide the SEC yield somewhere in their literature or on their website. I believe this now is required. You also can go to the Pimco site and look it up, since mutual funds are required to provide SEC yield.

Also note, since Pimco bond funds are actively managed, they could do better or worse than TBM based on the bets the fund managers make.

Yes, you receive the dividends. I think in a 401k/403b plan they are automatically reinvested, and you may not see them directly on your transaction history. They may be shown on summary performance reports or monthly/quarterly statements.

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby SnapShots » Sun Jul 21, 2013 7:27 pm

OMG!!! I read all these posts about bonds. I've read books about bonds. Just when I think I know, then I don't think I know. May be if I took a graduate level course about bonds, I'd eventually get it. :shock:

I'm sticking with a 60/40 or 70/30....and going to bed.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Kevin M » Sun Jul 21, 2013 7:29 pm

goodoboy wrote:Is it win-win to choose SV because I don't lose any principal money and guaranteed return? And if choose bond fund, the principal could be losing and the return is 2-2.2%, which is lower than SV yield?

Basically yes. The bond fund has lower yield and more risk. The risk could show up as short-term gains or losses--that's the nature of risk.

Although rising yields would result in shorter-term losses in the bond fund, eventually your returns would be higher due to the higher yields, but you may have to be patient to see this. I figure you might as well get the more certain returns from the SV fund for now, and they you always can take advantage of higher yields later (if/when the appear) without taking as much risk in the meantime.

Some people here like to say "bonds are for safety". Although this is an oversimplification IMO, if you believe that, then why not select the safer fund if it's also generating a higher yield?

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Kevin M » Sun Jul 21, 2013 7:45 pm

goodoboy wrote:
Kevin M wrote:Vanguard estimates 10-year total return for the aggregate bond market as about the current yield, so call it 2.2%. If yields increase and bond fund prices go down, you could gradually switch back into a bond fund if the yield rises enough above the SV fund yield


can you provide a link for this 10 yr estimates, so I can read or see?

Here is one: Ken Volpert on the current bond landscape

You can read the transcript, but you have to watch the video to see the chart that shows that yields have historically be a pretty reliable indicator of future 10-year returns for the aggregate bond market, which is the benchmark for TBM. I posted the chart in a thread in the last couple of days.

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby digit8 » Sun Jul 21, 2013 8:40 pm

SnapShots wrote:OMG!!! I read all these posts about bonds. I've read books about bonds. Just when I think I know, then I don't think I know. May be if I took a graduate level course about bonds, I'd eventually get it. :shock:

I'm sticking with a 60/40 or 70/30....and going to bed.



+1. Somebody has to come up with a clever term for that point where a bubble(which might or might not exist) has not yet burst(if it will), but panic about that bubble bursting(if it does) has met (or exceeded) the appropriate level of fear for the actual damage the inevitable bursting of that bubble could ever do(if indeed it does).....
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Mon Jul 22, 2013 7:35 pm

Kevin M wrote:
Yes, you receive the dividends. I think in a 401k/403b plan they are automatically reinvested, and you may not see them directly on your transaction history. They may be shown on summary performance reports or monthly/quarterly statements.

Kevin


Thank you for the reply. Is the dividends a person receives monthly the distribution yield?
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Mon Jul 22, 2013 7:41 pm

Kevin M wrote:Some people here like to say "bonds are for safety". Although this is an oversimplification IMO, if you believe that, then why not select the safer fund if it's also generating a higher yield?

Kevin


Yes, I agree. I want the win-win situation. If bonds is returning a lower yield and decreasing in NAV, can't think of any reason of investing my money in bonds, when I can easily switch to SV fund and get 3% and not lose a dime.

Once the bonds fund in my 401k increase its yield above the SV yield, then it I will start moving the money towards bonds.

Unless I am missing something with my idea?
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby ogd » Mon Jul 22, 2013 8:30 pm

goodoboy: while I stand by what I said about the bond fund vs your horizon, I concur with Kevin that at 3% the stable value fund is a better idea, if you have one available. A good deal is a good deal.

See http://www.bogleheads.org/wiki/Stable_Value_Fund#Risks for an idea of what to watch out for.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Kevin M » Mon Jul 22, 2013 9:49 pm

goodoboy wrote:Thank you for the reply. Is the dividends a person receives monthly the distribution yield?

Basically, yes. If you hover your mouse over the Distribution Yield column header when looking at bond funds on the Vanguard site (Vanguard mutual funds, Distributions tab), you'll see a pop-up note telling you exactly how they calculate it. They take the per-share dividend in dollars (shown in the "Most Recent" column), annualize it by dividing by the number of days in the month then multiplying by 365, then divide by the average NAV during the month and express it as a percentage.

You can get the NAV values for the month, put them into a spreadsheet and calculate the average, and verify the calculation yourself.

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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Wed Jul 24, 2013 9:14 pm

ogd wrote:goodoboy: while I stand by what I said about the bond fund vs your horizon, I concur with Kevin that at 3% the stable value fund is a better idea, if you have one available. A good deal is a good deal.

See http://www.bogleheads.org/wiki/Stable_Value_Fund#Risks for an idea of what to watch out for.


Thanks buddy. It makes sense to me too. I am taking Kevin M advice and staying in SV until the yields in my 401k bond funds exceed the SV funds. Nice and easy.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby goodoboy » Wed Jul 24, 2013 10:07 pm

Kevin M wrote:
goodoboy wrote:Thank you for the reply. Is the dividends a person receives monthly the distribution yield?

Basically, yes. If you hover your mouse over the Distribution Yield column header when looking at bond funds on the Vanguard site (Vanguard mutual funds, Distributions tab), you'll see a pop-up note telling you exactly how they calculate it. They take the per-share dividend in dollars (shown in the "Most Recent" column), annualize it by dividing by the number of days in the month then multiplying by 365, then divide by the average NAV during the month and express it as a percentage.

You can get the NAV values for the month, put them into a spreadsheet and calculate the average, and verify the calculation yourself.

Kevin


Thanks for the help Kevin. The advice helped me. I just joined new company and rolled over to Vanguard Target funds, so i am starting from $0 in the new job account.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby fundtalker123 » Wed Jul 24, 2013 10:41 pm

Kevin M wrote:A stable value fund yielding 3% is an excellent choice for fixed income. The yield is quite a bit higher than something like total bond fund (2%-2.2%), and the risk is much less. It's a win/win as far as I'm concerned.

Kevin


I have a different opinion of SV funds - at At least the ones available to me - that I have absolutely no Idea how safe they are. Just because it's called "stable" doesn't mean it's safe. I'm very suspicious because it sounds like free lunch with the higher yield But at the same time giving one the option to bail out and switch back to Bond fund at any time. Such a scenario should not be Possible in an efficient market. My attempts to look into the details of the stable value plan available to me found that the details are very sketchy, it seemed that the so-called safe guarantee that the value would remain stable is merely a no expectation of one particular insurance company offering the vehicle, Which I had never heard of before, and which could be subject to corporate failure just as much as any random company. To say that is more safe than investing the funds that invest in treasury bonds of defined materities seems crazy.
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Re: A Dangerous Misunderstanding about Bond Rates?

Postby Phineas J. Whoopee » Thu Jul 25, 2013 12:52 pm

fundtalker123 wrote:
Kevin M wrote:A stable value fund yielding 3% is an excellent choice for fixed income. The yield is quite a bit higher than something like total bond fund (2%-2.2%), and the risk is much less. It's a win/win as far as I'm concerned.

Kevin


I have a different opinion of SV funds - at At least the ones available to me - that I have absolutely no Idea how safe they are. Just because it's called "stable" doesn't mean it's safe. I'm very suspicious because it sounds like free lunch with the higher yield But at the same time giving one the option to bail out and switch back to Bond fund at any time. Such a scenario should not be Possible in an efficient market. My attempts to look into the details of the stable value plan available to me found that the details are very sketchy, it seemed that the so-called safe guarantee that the value would remain stable is merely a no expectation of one particular insurance company offering the vehicle, Which I had never heard of before, and which could be subject to corporate failure just as much as any random company. To say that is more safe than investing the funds that invest in treasury bonds of defined materities seems crazy.

Hi fundtalker123,

I don't (very much at least :wink: ) mean to rehash risks already covered in this thread, but problems with Stable Value funds in the past, which as it happens have been very rare, were not so much about the funds losing value, but about investors being restricted from selling their shares for months at a time (during which the yield may decrease). You're absolutely right that there cannot be more expected return without more risk. With SV funds the (very-unusually-realized) risk is mostly one of liquidity, rather than capital loss.

The insurance mechanism can indeed fail, and some funds (those which invest in Guaranteed Investment Contracts, as opposed to those which invest in the newer Synthetic Guaranteed Investment Contracts - I won't try to explain here - if you're interested follow the links) are more exposed to the failure of a single insurer (hence "Guaranteed" in "Guaranteed Investment Contracts") than others.

Also see the Bogleheads wiki on Stable Value Funds and their risks.

PJW
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Phineas J. Whoopee
 
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