Holding onto bonds. You agree?

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Erwin
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Holding onto bonds. You agree?

Post by Erwin »

I have held the same bond funds for many years (Pimco investment grade bond fund - PIGIX and Fidelity New Markets fund - FNMIX) and very successfully. And as a retiree I have religiously collected the monthly dividends for the past 10 years, which along with SS and my pension give me a very nice income.
Now, for the past month or so, bond funds have been dropping drastically, more than I have seen since 2008. The difference is that in 2008 investors thought that it was the end of the world and it was only time that bonds would return to the pre 2008 values as people realized that it was not the end of the world after all. I understood that and held to bonds throughout the entire period without thinking twice.
Today, however, the situation seems to me quite different. Bonds are dropping simply because interest rates are going up. For an investor in the accumulation phase, the drop would be compensated by higher dividends being reinvested. But what is a retiree suppose to do? Continue holding the funds knowing that for close to 20 years, bond funds were the place to be as interest rates were dropping; and now it could take as long for interest rates to increase while the value of bond funds continue to drop. Any wise thoughts?
Erwin
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SimpleGift
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Re: Holding on bonds. You agree?

Post by SimpleGift »

Erwin, many of us retirees are in the same boat as yourself.

For those retirees whose falling bond values are really their biggest, most critical concern, there's always the option of switching some bond funds into cash-like investments, including CDs, stable value funds, I-bonds, etc. This will preserve the value of your capital, but you'll also be locking in today's very low interest rates.

For other retirees (myself included), the drawdown in bond values due to rising rates is not as concerning, especially if one has a balanced, diversified portfolio that includes both stocks and bonds. Sure, I expect to see some of my bond fund capital decrease, perhaps permanently (assuming interest rates rise and remain higher into the future). But I'm depending on the stock half of my portfolio for long-term capital growth and I look forward to some increased bond income from rising rates.

So, with a balanced, diversified retirement portfolio, it's just business as normal — rebalance and stay the course.
Last edited by SimpleGift on Sun Jun 23, 2013 11:29 am, edited 1 time in total.
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LH
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Re: Holding on bonds. You agree?

Post by LH »

-----I would list your asset allocation.

It is an interesting question, there are differences between accumulator and decumulator.

I have never read though, that timing works for a decumulator. That says, hey go 60/40 when near retirement, but then if things feel bad, jump out of bonds. I have just never read that.

That seems to be the central question, can you time out of your bonds now.....when things feel bad for bonds..... and be safer?

Then when you time your way out of bonds, presumably, when things feel good later for bonds, you time your way back into bonds at some point (or are you positing you get out of bonds forever?)..... rinse repeat. Success?

A priori, I would posit no.

Maybe this time is different eh?

So setting aside the framing above, it is an interesting question. But I would stay the course. Inflation has risen, and interest rates have risen before in the 70s. the stock/bond portfolios encompass those time frames in the history that Passive indexing is based on.
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Erwin
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Re: Holding on bonds. You agree?

Post by Erwin »

Since I was asked,
30% large cap stocks, mainly value, high dividend;
15% CD;
2.5% cash/very short term bonds;
52.5%?intermediate term bonds, of which 15% is EM bonds.
Erwin
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Sbashore
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Re: Holding on bonds. You agree?

Post by Sbashore »

I wouldn't look at bond valuation in isolation. What is the duration of your holdings? Even if the bond value goes down, why does it go down? Because the income stream will increase going forward. I look at my overall duration and use that as an approximation of my break even point. Of course that's not my prime consideration. I hold bonds because they don't act like equities.
Steve | Semper Fi
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SimpleGift
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Re: Holding on bonds. You agree?

Post by SimpleGift »

Erwin, a couple of further thoughts:
  • 1. The duration of your two bond funds is over 6 years. One option for lessening the capital losses from rising rates would be to shift some portion of your funds into shorter-term bond funds. Of course, you'll have less monthly income as a result.

    2. You've got quite a lot of credit risk in your bond portfolio. But if you were able to weather the price hits that your two bond funds took during the 2008-2009 financial crisis, then this may not be a problem or concern for you.
squirm
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Re: Holding on bonds. You agree?

Post by squirm »

This is the problem with bond funds and the reason why I liked individual bonds in low rate environments. I'm relatively young, but bought zero coupon muni's a few years ago, which were doing great in price, but have been losing value now...however, it doesn't bother me as I know when they mature I'll be getting the principle in interest back. I never planned on trying to profit from their price, I was going to let them mature anyways.
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pteam
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Re: Holding on bonds. You agree?

Post by pteam »

The fed has said that they will continue buying bonds til at least the fall of this year and not raise interest rates til next year . The drop you are seeing in bonds is from everybody panic selling, not interest rates.
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Spades
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Re: Holding on bonds. You agree?

Post by Spades »

pteam wrote:The fed has said that they will continue buying bonds til at least the fall of this year and not raise interest rates til next year . The drop you are seeing in bonds is from everybody panic selling, not interest rates.
It could also be that people who are buying are saying, sell to me at this rate or I'll just wait till the Fed stops buying at low rates.

:sharebeer
Harold
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Re: Holding on bonds. You agree?

Post by Harold »

Since it seems some people misunderstand how interest rates come to be, here’s a quick primer:

- Bonds are sets of future cash flows.
- Market prices for those future cash flows are determined by supply of and demand for those cash flows.
- Implicit discount rates are determined by those market prices (i.e. the rate those cash flows are discounted at to determine current prices).
- Generally when bonds are issued, the cash flows are set to correspond to prevailing interest rates at the time of issue. That doesn’t have to be the case, and the cash flows lose that relationship as the prices change.

Interest rates are determined by market prices, and the Fed isn’t the sole buyer/seller – hence interest rates change as market prices change, whether the Fed is involved or not.

The reason the Fed gets so much attention is that they have the ability to buy and sell cash flows at such a large volume that they generally can be in the neighborhood of desired target prices and desired target interest rates that they deem most propitious for the overall economy.
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Sbashore
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Re: Holding on bonds. You agree?

Post by Sbashore »

Harold wrote:Since it seems some people misunderstand how interest rates come to be, here’s a quick primer:

- Bonds are sets of future cash flows.
- Market prices for those future cash flows are determined by supply of and demand for those cash flows.
- Implicit discount rates are determined by those market prices (i.e. the rate those cash flows are discounted at to determine current prices).
- Generally when bonds are issued, the cash flows are set to correspond to prevailing interest rates at the time of issue. That doesn’t have to be the case, and the cash flows lose that relationship as the prices change.

Interest rates are determined by market prices, and the Fed isn’t the sole buyer/seller – hence interest rates change as market prices change, whether the Fed is involved or not.

The reason the Fed gets so much attention is that they have the ability to buy and sell cash flows at such a large volume that they generally can be in the neighborhood of desired target prices and desired target interest rates that they deem most propitious for the overall economy.
Well said. You beat me to it (and furnished a better explanation :happy ). I completely agree that interest rates are determined by the market and while the Fed can influence rates, they can't control them. Actually I don't even think they can influence them for a long time, if the market indicated differently.
Steve | Semper Fi
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jeffyscott
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Re: Holding on bonds. You agree?

Post by jeffyscott »

Simplegift wrote:Erwin, many of us retirees are in the same boat as yourself.

For those retirees whose falling bond values are really their biggest, most critical concern, there's always the option of switching some bond funds into cash-like investments, including CDs, stable value funds, I-bonds, etc. This will preserve the value of your capital, but you'll also be locking in today's very low interest rates.
It is bonds and bond funds that lock you into the current low rates. The cash-like options you listed, do not change in value when interest rates change, one can sell and move to higher rate options when they appear. They lock in nothing. Except for a generally small penalty for early redemption of CDs there is no cost to, at any time, move from CDs, stable value funds, I-bonds, etc. to bonds/bond funds.
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SimpleGift
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Re: Holding on bonds. You agree?

Post by SimpleGift »

Jeffy, your comment is well taken.

The OP indicated he was living off the monthly income from his bond funds. If he sold them now and bought a collection of 5-year CDs to protect the value of his capital from rising rates, his monthly income would remain at his CD rate. That is, during the period he owned the CDs, his monthly income wouldn't be benefiting from the rising rates. That's all that was meant by being "locked in."

You're of course right that, at any point, he could break the CDs and reinvest back in the higher yielding bond funds (but again risking his capital). Thanks.
core5
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Re: Holding on bonds. You agree?

Post by core5 »

Spades wrote:
pteam wrote:The fed has said that they will continue buying bonds til at least the fall of this year and not raise interest rates til next year . The drop you are seeing in bonds is from everybody panic selling, not interest rates.
It could also be that people who are buying are saying, sell to me at this rate or I'll just wait till the Fed stops buying at low rates.

:sharebeer
I like this theory :moneybag
Mitchell777
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Re: Holding on bonds. You agree?

Post by Mitchell777 »

I sounds like you live off the bond interest. do you expect to need to sell off any of the bond funds or just continue to live off the interest
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Erwin
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Re: Holding on bonds. You agree?

Post by Erwin »

Mitchell777 wrote:I sounds like you live off the bond interest. do you expect to need to sell off any of the bond funds or just continue to live off the interest

I do not need the capital for the time being.
I have set up a portfolio that along
with my SS and pension allows me to live very comfortable.
That, however, may change in 5 years when I must take min
required from the IRA and be forced to pay taxes beyond
what dividends yield.
Erwin
Mitchell777
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Re: Holding on bonds. You agree?

Post by Mitchell777 »

If you only need to withdraw the RMD starting in 5 years, it may not be a big concern. You could move some of the ~ 50% bonds into something that does not go down in value (CD's) when rates rise (and take that first for the RMD). By the time you must withdraw much of the bond fund the rising rates may not be as much of a concern (i.e. you will receive higher interest payments to make up some of the paper loss). Of course for some, and I'll include myself, the thought of seeing fixed income go down in value can have an emotional impact
RYD
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Re: Holding on bonds. You agree?

Post by RYD »

One area this decline in NAV of bond funds has raised for me is its impact on income.

As the original post states many use these funds for income as well as a balance against stocks in their AA. If the NAV drops from 1M to 500K does the income derived drop as well? I admit to being a bit confused around this point.

On one hand I can see the income going up as new bonds at higher rates replace older bonds. On the other hand if yield is some percentage of the total amount the income will decline.

IMHO if income increases the drop in NAV is somewhat dampened by the income. Seeing a large net worth makes us feel good but in many ways the income is equally important especially when one is living off their investments.
alltheway
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Re: Holding on bonds. You agree?

Post by alltheway »

RYD wrote:One area this decline in NAV of bond funds has raised for me is its impact on income.

As the original post states many use these funds for income as well as a balance against stocks in their AA. If the NAV drops from 1M to 500K does the income derived drop as well? I admit to being a bit confused around this point.

On one hand I can see the income going up as new bonds at higher rates replace older bonds. On the other hand if yield is some percentage of the total amount the income will decline.

IMHO if income increases the drop in NAV is somewhat dampened by the income. Seeing a large net worth makes us feel good but in many ways the income is equally important especially when one is living off their investments.
This is my same situation, too. I don't enjoy seeing the 'net worth' drop, BUT when the price of my muni bond fund shares goes down and conversely the 'interest/dividend rate" rises .....the amount of 'interest' I receive on my statement each month never seems vary by more than $100 or so ..... As long as I do not need any of my principle for at least 10 years .... I receive the same basic monthly income from the fund; which I use to supplement my S/S retirement income. It all covers my monthly expenses, presently.
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ogd
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Re: Holding on bonds. You agree?

Post by ogd »

RYD wrote:As the original post states many use these funds for income as well as a balance against stocks in their AA. If the NAV drops from 1M to 500K does the income derived drop as well? I admit to being a bit confused around this point.
The income in absolute terms will stay the same and eventually start rising as new, higher-yielding bonds start to show up. The NAV repricing comes from weighing that income stream against currently available yields -- e.g. if it used to yield 1.5% and now the prevailing yields at that duration are 2%, the price will decrease to bring it back in line.

Note that a 50% drop implies rates rising by something like 10% for a 5 year duration fund, e.g. from 2% to 12%. This is most unlikely, but if you're living off bond income and rates go to 12% without inflation, heaven is around the corner.
RYD
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Re: Holding onto bonds. You agree?

Post by RYD »

Thanks OGD

I used the 50% just so the math is simple. Not as an true reality.

Net is a person who plans on using TBM as part of their income would be fine with rates rising and in fact over time see income increase but have to accept that the NAV of the fund will have shrunk. Risk is if you need to sell for some reason like RMD.

There is no free lunch

Thanks
MnD
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Re: Holding onto bonds. You agree?

Post by MnD »

Agree? Something between sort of and not really.

In mid/late 2012 we went from 50-50 F Fund (TBM) and G fund (akin to a T-bond indexed stable value fund) to 100% G Fund. No change in AA and the G fund offers a unique way to maintain duration and F-fund level yields while eliminating interest risk. In spring 2013 we sold two corporate bond funds in a rollover IRA (VCIT and STHTX High Yield) and bought stock funds with the proceeds. While on the same day we sold an equal amount of stocks in the TSP and bought G fund. Again no change in allocation, although this change did decrease our overall fixed income yield.

Before: 75% equity 25% fixed income
FI positions:
35% G Fund (Stable value proxy)
35% F Fund (TBM proxy)
10% VCIT (Intermediate term corporate)
10% STHTX (High Yield corporate)
10% PTTRX (Pimco Total Return)

After: 75% equity 25% fixed income
FI positions:
90% G Fund
10% PTTRX

Why not sell PTTRX and go 100% G?
Bill Gross is supposed to be a bond genius with a flexible fund prospectus so I guess we'll take a small flyer on him being smart enough to navigate out of this scenario. :beer

The trigger for all this was simply the specific benchmarks that the Fed laid down as the criteria for ending their various interventions intended to depress both short and long-term interest rates and stimulate the economy. I noticed in later 2012 and early 2013 that the rate of change in unemployment was such that it wouldn't be all that many more months until the unemployment benchmark would be approached, and I assumed bond investors weren't going to wait until the day that the criteria was met exactly before heading for the exits. Furthermore I saw more and more signs of a strong housing recovery. Bidding wars on homes were erupting and strong price recovery exists in many markets. Housing got us into this mess and I assume housing recovery is a component of complete recovery and normalization of interest rates and the yield curve.

I'm rather fond of the "before" bond allocation and do plan to return to it when cash interest rates approach inflation and longer term interest rates yield a few percentage points above that.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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ogd
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Re: Holding onto bonds. You agree?

Post by ogd »

Even with RMD, you could sell and buy the same thing in a taxable account. The real risk would be if you actually needed the money for an emergency -- it's good to have a cash cushion for that.
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HomerJ
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Re: Holding onto bonds. You agree?

Post by HomerJ »

mpt follower wrote:as a retiree I have religiously collected the monthly dividends for the past 10 years, which along with SS and my pension give me a very nice income.
Why do you care what the value of the bond fund is? You're not selling shares, right? You're just collecting dividends.

Which will soon be going UP.

So where's the problem?
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Erwin
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Re: Holding onto bonds. You agree?

Post by Erwin »

HomerJ wrote:
mpt follower wrote:as a retiree I have religiously collected the monthly dividends for the past 10 years, which along with SS and my pension give me a very nice income.
Why do you care what the value of the bond fund is? You're not selling shares, right? You're just collecting dividends.

Which will soon be going UP.

So where's the problem?
Interest rates dropped for many years to close to zero. Now they are going back up and can take as long. So what makes you think that the bond value "will soon be going up"?
Erwin
floydtime
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Re: Holding onto bonds. You agree?

Post by floydtime »

mpt follower wrote:
HomerJ wrote:
mpt follower wrote:as a retiree I have religiously collected the monthly dividends for the past 10 years, which along with SS and my pension give me a very nice income.
Why do you care what the value of the bond fund is? You're not selling shares, right? You're just collecting dividends.

Which will soon be going UP.

So where's the problem?
Interest rates dropped for many years to close to zero. Now they are going back up and can take as long. So what makes you think that the bond value "will soon be going up"?
He was referring to dividends (not "bond value")...
You're just collecting dividends.

Which will soon be going UP.
It's a great point. If in your specific case you are living off the dividends, isn't it better for you if prices drop and yields rise?
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas
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1210sda
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Re: Holding onto bonds. You agree?

Post by 1210sda »

You're just collecting dividends.

Which will soon be going UP.
It's a great point. If in your specific case you are living off the dividends, isn't it better for you if prices drop and yields rise?[/quote]

floydtime,
If the yield rise is due entirely to the price drop, it's meaningless. For someone living off the dividends (me), it's the dollar amount of bond fund dividends that matters.

1210 (Bacon)
floydtime
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Re: Holding onto bonds. You agree?

Post by floydtime »

1210sda wrote:
You're just collecting dividends.

Which will soon be going UP.
It's a great point. If in your specific case you are living off the dividends, isn't it better for you if prices drop and yields rise?

floydtime,
If the yield rise is due entirely to the price drop, it's meaningless. For someone living off the dividends (me), it's the dollar amount of bond fund dividends that matters.

1210 (Bacon)
Thanks 1210. Well my understanding is that real yields are actually rising (well, have for a few days for whatever that's worth), and that this rise will equate to higher dividends from bond funds over the long run. Is this not correct?

Also, if the OP is living off the dividends, then even if the dividends stay the same (NAV drops, but dividends static...which I do not think is the case), then he'll still be fine (neither better off nor worse off than if the NAV stayed the same). Isn't this also true?
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas
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1210sda
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Re: Holding onto bonds. You agree?

Post by 1210sda »

floydtime wrote:
1210sda wrote:
You're just collecting dividends.

Which will soon be going UP.
It's a great point. If in your specific case you are living off the dividends, isn't it better for you if prices drop and yields rise?

floydtime,
If the yield rise is due entirely to the price drop, it's meaningless. For someone living off the dividends (me), it's the dollar amount of bond fund dividends that matters.

1210 (Bacon)
Thanks 1210. Well my understanding is that real yields are actually rising (well, have for a few days for whatever that's worth), and that this rise will equate to higher dividends from bond funds over the long run. Is this not correct?

Also, if the OP is living off the dividends, then even if the dividends stay the same (NAV drops, but dividends static...which I do not think is the case), then he'll still be fine (neither better off nor worse off than if the NAV stayed the same). Isn't this also true?
You are welcome, Floydtime. (BTW, I like your avatar). As I understand it, when the fund buys new bonds, they'll be buying at higher yields in this current interest rate environment. And yes, you are correct that the OP should be fine. (ceteris paribus)
1210
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jeffyscott
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Re: Holding onto bonds. You agree?

Post by jeffyscott »

floydtime wrote:Well my understanding is that real yields are actually rising (well, have for a few days for whatever that's worth), and that this rise will equate to higher dividends from bond funds over the long run. Is this not correct?
Judging by 10 year TIPS it's been about two months. The real yield was -0.68 two months ago and is now +0.64%, so real yield is up about 1.3% in just two months. This should result in rising dividend payouts from a TIPS fund.

Treasury real yield curve: http://www.treasury.gov/resource-center ... &year=2013
MGBGTV8
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Re: Holding onto bonds. You agree?

Post by MGBGTV8 »

Had about 20% of taxable funds in Maryland Municipal Bond Fund with T Rowe Price (MDXBX). Sold it all at 4% below high NAV, which was what it was yielding. I had stopped dollar cost averaging into the fund a few years ago to rebuild cash reserves after replacing windows on my house, and with the fund at 10-year highs, I declined to continue adding more to it over the last couple years. We all saw the bust coming (although we didn't know when), and I knew when it fell it would be swift and unpredictable. I bought this fund as an alternative to 0-yield cash. It was a good run while it lasted. I didn't sell at the peak of the run, but the point was not to lose too much off the top. The balance was trading yield obtained by staying in, vs capital loss by getting out too late. I think I generated a taxable event on the capital gains, but the fund is down another 4% from where I sold it, so I'm ahead of cash by anyone's account.

The bond fund was supposed to reduce volatility in my holdings. In 2008 and again this past month, it did NOT move inversely to stocks. Asset Allocation for taxable account will have to be revisited.
Dick D
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Re: Holding onto bonds. You agree?

Post by Dick D »

SInce retiring in 2011 at age 66, I have keep 50% in bonds and 50% in bonds. I intend to do this as long as I am here to do it.
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SpringMan
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Re: Holding onto bonds. You agree?

Post by SpringMan »

Dick D wrote: Tue Jun 25, 2013 6:53 pm SInce retiring in 2011 at age 66, I have keep 50% in bonds and 50% in bonds. I intend to do this as long as I am here to do it.
I think you meant 50% stocks and 50% bonds, a good allocation for a retiree IMO.
Best Wishes, SpringMan
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SpringMan
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Re: Holding onto bonds. You agree?

Post by SpringMan »

I noticed this thread was from June 2013. I was losing money in VBTLX (Total Bond Index). Today this has recovered and then some. I don't buy into the advice many financial advisors give that is to buy individual bonds and hold them to maturity. Individual bonds go up and down while held, holding to maturity is lost opportunity locking in lower rates for years.
Best Wishes, SpringMan
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arcticpineapplecorp.
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Re: Holding onto bonds. You agree?

Post by arcticpineapplecorp. »

Yes, HomerJ nailed it and it was what I was going to say because when you strip out most of the OP, the main points are:
And as a retiree I have religiously collected the monthly dividends for the past 10 years, which along with SS and my pension give me a very nice income...But what is a retiree suppose to do?
The answer is simple. Enjoy your higher dividend payments. Congratulations. Now you'll have MORE income to spend than before. Yes the value of your fund will drop as a result, but since you are only taking out the income what does it matter what happens to the principal? That being said, if you plan to sell shares (principal) in the future, or give them away to family/friends/charities, then yes the value of those bonds will likely drop as rates rise. But that doesn't seem to be your concern at the moment anyway.

I don't think expecting the value of one's bonds to increase is the right way of looking at it. Bonds are for income. Equities are for investing in companies that hopefully increase value over time. You're trying to get both growth AND income from your bonds. I wouldn't expect that if I were you. If you want growth AND income, you'd probably look at a fund that invests in both stocks and bonds, not just bonds. But that carries additional risks. Don't assume the Vanguard Growth and Income fund is such a fund. That fund (VGIAX) has NO bonds. It's active management and seeks to BEAT the S&P500 index (at a higher cost). It's called growth and income because "The fund has a total return goal, meaning that it seeks both capital appreciation and dividend income. The key risk for the fund is the volatility that comes with its full exposure to the stock market.

But a lifestrategy income fund could do the trick (it's 80% in bonds and 20% in stocks). "The Income Fund is the most conservative and seeks to provide current income and some capital appreciation." source: https://personal.vanguard.com/us/funds/ ... undId=0723
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