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I have had a sizable amount of money (seven figures) split between the Vanguard Intermediate-Term Tax-Exempt and the Vanguard Short-Term Tax-Exempt funds for a number of years. They have done well, and I am happy with Vanguard.
I am a California resident. I have a portion of my investible assets in bonds for all the standard reasons, including and especially having a stable pool of money to draw upon if I need to when stocks are down.
Obviously the thought of interest rates going up and their effect on my bond allocation has come to mind.
I have recently been approached by a bank that manages "custom bond allocations" for high net worth investors. They have advocated my switching from the fund approach to individual issuances.
Their motivation to garner fees is clear. They have also argued that when and if interest rates go up, the bond funds such as my Vanguard ones will take a bigger short- and medium-term hit to value than individual issuances because of the effect of large numbers of people selling their fund positions.
I'd like to hear from people more savvy than I am in attempting to decipher whether this makes good sense (on the surface, it seems to), or...
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i can't speak for the fee's you will be charged. however the bond and it's interest won't change unless you sell it in secondary market. this is totally your choice as opposed by a fund that has to sell and buy when investors want money back or want to buy in.
the risk you take is default. but assuming it is a quality bond holding until term wiil guarantee it-unless it is callable-i think i covered everything
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JBB wrote:They have also argued that when and if interest rates go up, the bond funds such as my Vanguard ones will take a bigger short- and medium-term hit to value than individual issuances because of the effect of large numbers of people selling their fund positions.
It's a good sign that they have used this argument, which is essentially about liquidity, rather than the invalid ones about NAV drops vs holding to maturity that often get floated around. It's a plausible reason to hold individual bonds, but I have yet to see it quantified to precise numbers that would help you (and me, as it turns out) decide if it's worth the increased management fees & hassle. And I still don't fully understand why the liquidity loss is not borne fully by the outgoing investors. I also have some hope that the Vanguard funds are less susceptible to investor flight because Vanguard investors are more likely (and encouraged) to stay the course. Personally, I have gone the fund route and I'm happy about it.
Maybe our expert contributor Larry Swedroe, who has recently posted about the liquidity issue, can chime in.
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In general I would avoid "wealth management" sales ideas. bond yields are so low and firms usually want a decent commission that I find it hard to believe that their help will be mutually profitable. Also with every retiree looking for yield lots of people are staying up late trying to figure how to get you to
buy their new idea. e.g. lots of fancy annuities with guarantee minimum riders etc.
I am also trying to chart a fixed income path and the options are not great. I have about 1/3 intermediate druration, 1/3 short duration and 1/3 "no loss" (e.g. CDs). This is more of a minimize loss approach than a growth or income approach.
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Vanguard has had several "white papers" comparing the pros and cons of individual bonds and bond funds. Take a look at its website for more information.
Off the bat, ask yourself how your bank is going to make its money. Are they managing your bond portfolio and taking 1% annually? Do they make their money simply on the costs imbedded in buying (and selling) munis on the secondary market? Are they advocating only secondary market bonds or do they also offer new issues? What's their philosophy on tax-loss harvesting (TLH)? One of the major benefits of individual bonds is that you can TLH more effectively than selling lots of mutual fund shares (although you can still do that with Vanguard). Transparency in secondary bond prices has been a challenge for people like you and me.
If interest rates go up, your individual bonds will definitely drop in price. Granted, that drop would not be realized unless you sold.
Are you spending the dividends or re-investing?
Would you consider splitting the national intermediate-fund with CA intermediate-fund as well?
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