Vanguard GNMA

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Vanguard GNMA

Postby Mariah » Sun May 03, 2009 10:49 pm

Many years ago, I was invested in the Vanguard GNMA. I sold it years ago when money market rates were better. I would like to invest in it again. I was wondering if now is not the time to do this since the interest rates are going so low and because of all of the refinancing that is going on. Is the NAV at a higher risk now? Thanks in advance.
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Postby Dale_G » Sun May 03, 2009 11:53 pm

So you chased yields by selling GNMA when the yield curve inverted.

I don't know when you sold, but GNMA has had the following returns:

1 year ---- 7.54%
5 year ---- 5.75%
10 year --- 5.90%

While Prime may have yielded more than GNMA at some point, my guess is that on a total return basis, you are behind the curve. You are not alone however, apparently a large number of Bogleheads sought refuge at the very short end of the yield curve. Now they are abandoning Money Market accounts and going farther out on the yield curve.

Swap back now? I haven't the faintest idea, but it sounds like selling low and buying high - as far as total return is concerned.

My only recommendation is to choose an average fixed income duration that meets your need and risk profile and stick with it regardless of the meandering yield curve.

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Postby mpt follower » Mon May 04, 2009 12:05 am

I am a very strong beliver in Vanguard GNMA and have a significant portion of my fixed income portfolio in it. Once in a while, this fund is being discussed here, and there are some negative comments, specially since Larry Swedroe does not seem to like it. However, I look at the historical performance of this fund, through good and bad times and cannot but plainly ignore the negativities. As a retiree, I am invested for the long run, so collect my dividends monthly and worry about other more important things. Good luck, Erwin
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Postby Mariah » Mon May 04, 2009 12:20 am

Thank you for your answers. I am just curious though, with all of the refinancing and the lower interest rates do you think that the NAV will continue to go lower.
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Postby Karl » Mon May 04, 2009 7:45 am

mpt follower wrote:...and there are some negative comments, specially since Larry Swedroe does not seem to like it.


It's well past "seems" to not like it. He explicitly doesn't like it.
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Postby livesoft » Mon May 04, 2009 7:56 am

All of what refinancing? Interest rates were low a few years ago and everyone refinanced back then. There is really not much refinancing going on nowadays.

I own this fund and I believe the NAV will continue to fluctuate. If TIPS real yield goes above 2.5%, I will likely sell my GNMA shares and buy VIPSX.
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Postby ResNullius » Mon May 04, 2009 9:29 am

I have a significant portion of my fixed in Vanguard GNMA, as well as Vanguard TIP. I also have a little in Vanguard Investment Grade Short and Intermediate. The current average maturity for GNMA is around 1.5 years, so it's very short right now.
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Postby BigD53 » Mon May 04, 2009 10:24 am

Family has owned the GNMA bond fund since the 80s.

I don't ever recall the yield falling below 4 percent. This fund has been fantastic for steady monthly income. Very low volatility and price movement. Love the "AAA" rated securities and backing by the U.S. Government. Wellington management is the best.

This fund has been a winner for us. Regardless of NAV or interest rates, we buy and forget.
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Postby Valuethinker » Mon May 04, 2009 10:33 am

Mariah wrote:Thank you for your answers. I am just curious though, with all of the refinancing and the lower interest rates do you think that the NAV will continue to go lower.


If there is a big upward shift in interest rates, then homeowners will not repay. You could see fund duration move to say, 5 years, which would imply a -10% fall in prices on a 2% rise in interest rates.

The duration of the fund will move out, meaning a greater sensitivity to interest rates. low coupon also means a greater sensitivity to interest rates. These are 2 mathematical properties of mortgage backed securities the former a property called 'extension risk' or 'negative convexity'

In 1994, the worst year for bonds since 1980, the fund had a -7.55% capital return, but a +6.60% income return.

Given yields now, the implication of that -8% capital return would be c. a -4% total return.

Worse is always possible, of course, it's just 1994 is a good year to benchmark any fund for downside risk.
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Postby kcyahoo » Mon May 04, 2009 10:41 am

I also have a significant allocation to GNMA's and have had for years. NAV jumps around a bit, $10.00 plus or minus $.50. The NAV is at or close to its all time high.

I include my GNMA fund in my re-balancing scheme.

Mortgage interest rates go up and down over the years. GNMA yield payout has held up very well these past 10 years.

Here is a hypothetical example of how GNMA NAV and Yield perform over time.

http://spreadsheets.google.com/ccc?key=rKtJ1oyM6oKaoHSiPPvBXEg&hl=en
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Postby BigD53 » Mon May 04, 2009 11:25 am

In the 27 year history of the GNMA fund, it had only one minimal loss...
-0.95%, in 1994.

That's pretty darn good history to go on; and great recent performance especially considering that we are going through the worst financial meltdown that any of us can recall.

I'll continue to keep my money in the Vanguard GNMA fund going forward. Wellington management is the best.
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Postby Valuethinker » Mon May 04, 2009 11:34 am

BigD53 wrote:In the 27 year history of the GNMA fund, it had only one minimal loss...
-0.95%, in 1994.

That's pretty darn good history to go on; and great recent performance especially considering that we are going through the worst financial meltdown that any of us can recall.

I'll continue to keep my money in the Vanguard GNMA fund going forward. Wellington management is the best.


You are engaging in a couple of pieces of false logic:

- that current economic conditions have been repeated before in the last 27 years, in fact they have not. We've not had the combination of low interest rates, low inflation and plunging credit confidence before.

The performance of GNMA funds this last 18 months has been the performance of all US government securities ie risk spreads have soared, and there has been a 'flight to safety'.

In all previous bear markets of bonds, there was a rise in interest rates which precipitated a fall in bond markets (interest rate risk) but this cycle interest rates have been plunging ie credit risk.

- that if returns were -0,95% in 1994, when coupon rates were roughly double what they are now, then a similar price move now would only give a negative rate of rerturn of 0.95%. In fact, it would be closer to -4%.

This isn't to say GNMA is high risk. But if interest rates rise, it will work against you.
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Postby Ron » Mon May 04, 2009 11:44 am

I first acquired the fund about six years ago, when I was restructuring my portfolio in preperation for retirement.

In previous working years of my then 90/10 portfolio, I would shy away from any bond fund (hey, they are loosers!)

However, now working on my third year of retirement, I'm certainly glad I have this fund in my bond/cash side of my AA. So much for "loosers" :wink: ...

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Postby BigD53 » Mon May 04, 2009 12:00 pm

Thanks for your thoughts Valuethinker. To each his/her own. I will keep stashing our cash in the GNMA fund.

I have confidence in Wellington, and GNMA will continue to perform much better than other bond funds. (Current duration is only 1.8 years) AAA rated securities. Backed by the full faith and credit of the U.S. Government.

Average Annual Returns for VFIIX:

1-year: 7.54%
3-year: 7.17%
5-year: 5.75%
10-year: 5.90%
Since inception (1980) 8.44%


If someone had told me I could average 8.44% for the past 30 years, with very little risk, and only ONE miniscule down year of 0.95%... I'd jump at the chance to invest in that fund! :thumbsup
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Postby pkcrafter » Mon May 04, 2009 12:39 pm

Valuethinker's comments are exactly right. Here is a 2004 article from Vanguard on interest rates and mortgage-backed securities.

https://personal.vanguard.com/us/VanguardViewsArticle?ArticleJSP=/freshness/News_and_Views/news_PCNFV_mortgagesecurities_07122004_PB_FL_VY_CO_AO.jsp



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Postby BigD53 » Mon May 04, 2009 12:47 pm

When the rest of the world is losing 25%, 35%, 50% and 60%... I'd welcome a measly 4 percent decline in my GNMA fund. :lol:

Of course bond funds fluctuate a bit with interest rates... we all know that. Or, in the case of Short-Term Investment-Grade (VFSTX) sometimes weird things happen!

For me, I still have faith in the GNMA fund. It works for me and my family, and that's all that counts. :wink:
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Postby livesoft » Mon May 04, 2009 12:50 pm

There is no doubt that bond funds can drop in NAV and that folks can lose money by owning bond funds. Just ask all the folks who bought the Vanguard TIPS fund (VIPSX) at the wrong times in the past 2 years.

I am somewhat amused by all the love for TIPS funds and the disrespect that the GNMA fund receives only because I have the opposite opinion of many of the forum's popular posters with respect to these funds.

That written, I have a thick skin and my own degree of confidence to be able to agree to disagree. I don't feel that I have to convince the masses, but I feel that both sides of the respective stories need to be presented in a fair manner, so that folks realize that there is disagreement and different ways to look at these funds.
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Postby monterey1967 » Mon May 04, 2009 12:54 pm

BigD53 wrote:Family has owned the GNMA bond fund since the 80s.

I don't ever recall the yield falling below 4 percent. This fund has been fantastic for steady monthly income. Very low volatility and price movement. Love the "AAA" rated securities and backing by the U.S. Government. Wellington management is the best.

This fund has been a winner for us. Regardless of NAV or interest rates, we buy and forget.
this is my feelings about gnma, i've owned it since the early 90s and it been the only fund i have never worried about, in october i moved all other bonds $ to gnma and it will stay there awhile longer.
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Postby Karl » Mon May 04, 2009 1:39 pm

ResNullius wrote:The current average maturity for GNMA is around 1.5 years, so it's very short right now.


I've owned this fund for the last 12 years.

When they say the average maturity is 1.5 years aren't they making assumptions about the rate at which the mortgages will be paid, assumptions that may or may not even be close to reality depending on interest rates. If rates go to 1% I suspect that maturity will go to basically zero and if rates go to 30% I suspect the maturity will go to as long as slowly as one can possibly pay off a 5% loan.
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Postby kcyahoo » Mon May 04, 2009 1:49 pm

Valuethinker, I've read many of your posts and respect your knowledge.

Valuethinker said:
This isn't to say GNMA is high risk. But if interest rates rise, it will work against you.


I've seen this statement before and I just don't get it. I've held this fund many years and interest rates have gone up and down. I basically am not concerned about the small NAV movements, historically $10.00 plus/minus $.50. The consistently good yield just continues to plug along to my delight. I include this fund in my re-balancing scheme. So there have been times when I sell high and buy low. I sure this action also helps smooth out my average NAVs and yields.
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GNMA

Postby pkcrafter » Mon May 04, 2009 2:40 pm

I am also a fan of GNMAs and have held them for many years. But right now the NAV is 10.65, which is just off the all time high of 10.70. Over the past 20 years VFIIX has fluctuated roughly between 9.50 and 10.50. The all time low was in 1981 when it hit 7.42. I suspect the current NAV is partly due to investors piling in on what look good—recency and performance chasing. I don't think VFIIX will go to 7.42, but it could easily go to 9.50 or less. GNMA bond funds are much more volatile than funds with more stable duration.


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Postby Karl » Mon May 04, 2009 2:52 pm

I'd have to agree with Paul that it does look like some performance chasing. I don't remember anybody getting so interested in GNMA before. But then it didn't beat the hell of stock funds over the prior decade before either.
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Postby Stevewc » Mon May 04, 2009 3:07 pm

These scrimmages/discussions is where I learn the most about investing. I appreciate and respect all the input on the different funds. A lot of you folks probably don't realize how much it helps newer investors. Things like you can lose money investing in bond funds. The NAV being at all time high could increase the possibility of loosing. This fund has paid me well in retirement or been good to my family. These little things mean a lot. :lol:
I'm interested in GNMA, watching it, and the conversations.
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Postby dm200 » Mon May 04, 2009 3:30 pm

I basically am not concerned about the small NAV movements, historically $10.00 plus/minus $.50


In your example, a shift from 9.50 to 10.50 is an increase of OVER 10 per cent. The possible movement of the NAV of the GNMA fund can easily be more than this.

Whether such a change would be considered "small" varies quite a bit from one person to another. To some, such changes is what they perceive as a governmant backed investment might be large. I LOVE the GNMA fund, but reconize that there can be movement in the market value well in excess of ten per cent.
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Postby Speedy » Mon May 04, 2009 4:39 pm

Image


The graph is from the Vanguard article on volatility of GNMA duration. A few points:

1. Even though the GNMA duration moves up and down quite a bit, it generally has a shorter duration than TBM, at least over the time period addressed in the article.

2. Consider that the periods of “drastic” increases in duration seem to occur in 1999, 2002, 2003 and 2004. 1993, 1994 & 1996 also have a big increases in duration, but I don’t have return data readily available for those years.

3. Except for brief time periods, the duration of GNMA remains below the duration of TBM.

4. Assuming the proof is in the pudding (fund returns), it would appear that these periods of drastically rising duration did not cause a big problem for GNMA returns, based on a comparison of GNMA and TBM returns shown below.

5. It seems that the point of the article is that the risk of GNMA is greater than might be implied by the duration at any given point in time. The article did not state that the risk of GNMA is greater than the risk of TBM, unless I missed it somehow.

Image


The point made by VT that the last few decades may have been particularly friendly to GNMA could well turn out to be valid and there may be a huge increase in GNMA duration, perhaps taking the duration well above that of TBM. I certainly don’t know.

I do use GNMA at this point in time because I prefer the shorter duration compared to TBM as well as the zero credit risk. I am prepared to accept a lower return than TBM, and if the duration shoots way up, or the relative performance falters substantially, I reserve the option of selling it.

Regards,
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Postby kcyahoo » Mon May 04, 2009 7:56 pm

Hey Speedy Bill, very good analysis and well written.
I think this has been one of the best threads on the GNMA fund.
Thanks to all for your thoughtful comments.
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gnma

Postby pablolo » Mon May 04, 2009 9:56 pm

I too have learned a lot from everybody's input about gnma's. I think for a retiree with a 20-30year time horizon and who wants steady monthly income and willing to accept some price fluctuation then gnma fits the bill. just my 2 cents. there is no perfect portfolio. Pablolo
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Postby Mariah » Mon May 04, 2009 10:01 pm

I want to thank everyone for their help. Everyone has helped me so much!
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Postby BigD53 » Mon May 04, 2009 11:48 pm

One poster said, he has moved all of his bond money into the Vanguard GNMA fund.

Another said, this is the only fund I own that I have never worried about. :D

I realize past performance is no guarantee of the future... But I'm a conservative investor, and I regret not putting ALL my cash/bond money into the GNMA fund 29 years ago!

Average annual return, 8.44% for the life of the fund... a nice constant yield of 4 or 5 percent... and only one measly down year, -0.95%. The heck with stocks! :lol:
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Postby plats » Tue May 05, 2009 12:21 am

I've had GNMA for almost 20 years now. No complaints, but I would be wary of putting new money in now at these historically low interest rates.
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Postby Valuethinker » Tue May 05, 2009 4:25 am

kcyahoo wrote:Valuethinker, I've read many of your posts and respect your knowledge.

Valuethinker said:
This isn't to say GNMA is high risk. But if interest rates rise, it will work against you.


I've seen this statement before and I just don't get it. I've held this fund many years and interest rates have gone up and down. I basically am not concerned about the small NAV movements, historically $10.00 plus/minus $.50. The consistently good yield just continues to plug along to my delight. I include this fund in my re-balancing scheme. So there have been times when I sell high and buy low. I sure this action also helps smooth out my average NAVs and yields.


Say if the yield curve shifts out by 200 basis points (2%). ie interest rates at all relevant maturities increase by 2 %.

Then the duration of GNMA could well move to 5 years.

You'd have a price drop of -10% (definition of duration) but you would still get an interest return of c. +4% (the interest on those mortgages).

So total return -6%.

My guess, and it's only that, is the worst TOTAL return you could have from a GNMA fund would be c. -10% in a given year.

If you're happy with that, then fine. You don't have credit risk, so you are not going to drop through the floor like the High Yield (and to some extent the Investment Grade) bond market did.

GNMAs pay you a higher yield than US Treasuries because they are risky in precisely the way described: big moves down in interest rates, they don't do as well, big moves up, they do worse.

The thing is that there haven't been these sorts of big negative moves in interest rates in a long time. The last rout in the bond market was 1994, and before that 1980. Larry Swedroe's point that we should not assume the unusual never happens is seminal.

What we do know is that Mortgage Backed Securities have the behaviour described above (extension risk aka Negative Convexity). they are actually priced that way ie priced as a bond PLUS the option you have written to the borrower, to repay you at their convenience, not at yours.
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Postby Valuethinker » Tue May 05, 2009 4:29 am

Stevewc wrote:These scrimmages/discussions is where I learn the most about investing. I appreciate and respect all the input on the different funds. A lot of you folks probably don't realize how much it helps newer investors. Things like you can lose money investing in bond funds. The NAV being at all time high could increase the possibility of loosing. This fund has paid me well in retirement or been good to my family. These little things mean a lot. :lol:
I'm interested in GNMA, watching it, and the conversations.
Steve


On GNMA, I am guessing, but -10% in a worst case.

(wrong in the sense that if the US went into very high inflation say, interest rates went up 5%, nobody would repay their mortgage, GNMAs could fall 20-30%).

Remember I am talking Total Return. So you would get a positive income return of around 4% over the year (that's what GNMAs yield now) but a negative price return of -14% in that case (fall in NAV of the fund).

A more likely negative return would be -10%. Rerunning 1994 (worth looking at the performance of all bond funds in that year-- worst year since 1980) say -10% price return and therefore about -6% Total Return.

The difference from 1994 being mortgage interest rates are much, much lower, so the coupon yield on the bond is much lower, doesn't offset the price swing by as much.
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Postby BigD53 » Tue May 05, 2009 6:07 am

With all due respect, I don't buy into Valuethinkers theories at all.

I'm keeping the faith with Wellington management. :D If Vanguard's GNMA fund ever has an annual decline of 10 percent, I will personally buy every Boglehead dinner!! If that's the case, then all you investors who own the Total Bond Market Index, are in for a huge surprise! The majority of that fund is Mortgage securities?

But then again... who woulda thunk that Short-Term Investment-Grade would tank 4 percent last year?! :cry:

Another poster said: I've had GNMA for almost 20 years now. No complaints, but I would be wary of putting new money in now at these historically low interest rates. What low rates? Not for the GNMA fund! VFIIX is still yielding over 4%... and has been steady in the 4% -- 5% range for years. :thumbsup

Where you gonna get better rates??? GNMA has AAA rated securities, U.S. Government backing, and very low risk... Where you going to find a better yield? Please don't keep it a secret. :wink:

Can you tell I like the GNMA fund? Yes! :sharebeer

The fluctuating NAV price... home refinancing... mortgage rate moves... the future of interest rates... The Vanguard GNMA fund just laughs in the face of all that stuff! I don't know how Wellington management has done it for the past 30 years... but they continue to do it! They must be Diehards: I don't know, and I don't care! :lol:
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Postby Valuethinker » Tue May 05, 2009 6:09 am

BigD53 wrote:With all due respect, I don't buy into Valuethinkers theories at all.

I'm keeping the faith with Wellington management. :D If Vanguard's GNMA fund ever has an annual decline of 10 percent, I will personally buy every Boglehead dinner!! If that's the case, then all you investors who own the Total Bond Market Index, are in for a huge surprise! The majority of that fund is Mortgage securities?

But then again... who woulda thunk that Short-Term Investment-Grade would tank 4 percent last year?! :cry:

Another poster said: I've had GNMA for almost 20 years now. No complaints, but I would be wary of putting new money in now at these historically low interest rates. What low rates? Not for the GNMA fund! VFIIX is still yielding over 4%... and has been steady in the 4% -- 5% range for years. :thumbsup

Where you gonna get better rates??? GNMA has AAA rated securities, U.S. Government backing, and very low risk... Where you gonna find a better yield? Please don't keep it a secret. :wink:

Can you tell I like the GNMA fund :sharebeer

The fluctuating NAV price... home refinancing... mortgage rate moves... the future of interest rates... The Vanguard GNMA fund just laughs in the face of all that stuff! I don't know how Wellington management has done it for the past 30 years... but they continue to do it! They must be Diehards: I don't know, and I don't care! :lol:


How Mortgage Backed Securities are priced is well understood by the market.

If the repayment rate shifts, then the duration will shift.
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Postby BigD53 » Tue May 05, 2009 6:26 am

"If the repayment rate shifts, then the duration will shift."

Sir, if Vanguard and Wellington were not running VFIIX, I might have a bit of concern.

In the last 20+ years or so that my family has held the GNMA fund, I've had no worries whatsoever.

Appreciate the information, but like I mentioned, I have zero concern about NAV fluctuations, interest rate moves, duration shifts, people refinancing, the current share price... This is the one fund I never worry about. Just buy, and forget.

Now, if you ask me about equities, that's another story! :oops: Scares the heck out of me. The GNMA fund is perfect for a chicken like me. :wink: Have a good day!
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Postby ResNullius » Tue May 05, 2009 10:26 am

One thing really bothers me about historical returns for bond funds: Since the early 1980s, interest rates have maintain a fairly consistent downward path to the historic lows of today. Of course, in the late 1970s and early 1980s, interest rates were at historic highs. Yes, there have been periods of increasing and deceasing interest rates over the past 25 years, but the trend has been downward. As a result, it's hard to look at the past 25 years as indicating anything about the future, other than the future probably not being as good as the past in terms of bond funds. I've been slowly moving a larger percentage of my portfolio into fixed. In November 2007, I had around 30% in fixed. Today, I've got around 40% in fixed. I'm moving towards 50% and probably a little higher. I'm in the short end. Wintin my IRA, I've got Vanguard TIPS, GNMA, Investment Grade Intermediate and Short, plus some Limited Tax Exempt in my taxable portfolio. I anticipate moving more towards the short end down the road as the data starts to show evidence of inflation. This is just a guess, but I think we're heading into a very long period of higher inflation and higher interest rates, possibly starting in 18 months or so, then lasting for possibly 10 years, like in the 70s and 80s. I see no real chance for truly good times given the direction of Congress and the White House. What little chance we had has been dashed by the gigantic upturn in federal spending. Yes, we'll have some higher taxes, but nowhere near enough to stop runaway deficits. I hope I'm wrong, but this is what I'm preparing for. My hope is that the stock market can get within 20% of its prior highs before the bad times kick in, but I'm not sure that's possible. For the past 40 years, I firmly believed in buy and hold, but I can't see the sense in ignoring the facts. Good luck to all of us, regardless of point of view.
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Postby Jeff999 » Tue May 05, 2009 10:43 am

ResNullius wrote:... I anticipate moving more towards the short end down the road as the data starts to show evidence of inflation. This is just a guess, but I think we're heading into a very long period of higher inflation and higher interest rates, possibly starting in 18 months or so, then lasting for possibly 10 years, like in the 70s and 80s.


My strategy as well.

I would interested in hearing what others think about bond fund/bond market leading indicators of inflation. I'm afraid I don't have much faith in the CPI as a really true representation of inflation. The politicians can always find a way to manipulate CPI but they have little or no control over the market.
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Postby livesoft » Tue May 05, 2009 11:00 am

I think the price of oil is a good leading indicator of inflation.

Thus buying oil-related stocks is a good way to hedge inflation. That oil well in the back yard is also not a bad idea.
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Postby stratton » Tue May 05, 2009 11:16 am

Vanguard GNMA (VFIIX) returns from 1981 to 2006

-6.3 <== 1981
4
32.1
12.2
13.5
19.6
12.2
5.3
5.8
12
12.9
6.85
5.9
-0.95 <== 1994
17.04
5.24
9.47
7.14
0.78
11.22
7.94
9.68
2.49
4.13
3.33
4.33 <== 2006

Paul
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Postby Dan Kohn » Tue May 05, 2009 11:37 am

BigD53 wrote:With all due respect, I don't buy into Valuethinkers theories at all.

Valuethinker is an expert on bond pricing. He's not saying to sell your GNMA fund. He's just explaining that its 30 years of outperformance does not tell you anything about what will happen in the future.

We've seen again and again on this forum is that people get swept up in recency bias towards REITs, commodities, market timing, and other trends. Please step back and realize that bond funds just represent the value of their underlying bonds, and that those bonds react in eminently predictable ways to changes in the interest rate, credit risk assessments, and inflation. What GNMA has done in the past does not tell you about what will happen in the future.
BigD53 wrote:If Vanguard's GNMA fund ever has an annual decline of 10 percent, I will personally buy every Boglehead dinner!!

There is nothing special about Vanguard's GNMA fund as opposed to a GNMA index, as you can see from the performance numbers. Valuethinker explained to you a very plausible scenario where the fund can lose 10%. Ignore him at your peril.

[Edited to remove negative comment. - dan]
Last edited by Dan Kohn on Tue May 05, 2009 1:04 pm, edited 1 time in total.
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Postby stratton » Tue May 05, 2009 12:20 pm

The NAV at the end of 1981 was $8.17 when the total return was -6.3% for the year. This is after the end of year distributions. The lowest NAV for 1981 was on Sept 30 at $7.42. This is 9.3% below the end of year value. So there is quite the fluctuation within the year.

A more extreme swing: From that $7.42 low it went zooming up to $8.75 on Nov 24, 1980 for a rise of 17.9% in less than two months. Yes, GNMAs can be volatile.

Paul
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Postby BigD53 » Tue May 05, 2009 12:54 pm

"Your anti-intellectual argument is extremely unappealing."

Thanks, Dan. I think we're adult enough that we don't have to resort to derogatory comments. If you don't like my posts, just ignore them sir.

And I'm not "arguing" about anything! I'm just simply stating my fondness for a great bond fund that has served me well for many years. I'm not trying to "sell" it to anyone. Merely sharing an opinion.

I made myself clear. I completely understand all about NAV fluctuation, interest rate movements, how bonds are affected by interest rate movements, the risks involved with bond funds, people refinancing their homes, bond duration, etc... I appreciate the comments, but nothing new there. You guys think I'm just a dumb baseball player??

My family and I have been in the GNMA fund for over 20 years. I won't sell that fund anymore than you guys will be selling your Total Stock Market Index! :wink:

A 3% or 5% or even a 10% loss in my GNMA bond fund will not change my opinion one bit. Buy & hold, and stay the course! I finally drank the coolaid. :lol:

GO DODGERS! :beer
Last edited by BigD53 on Tue May 05, 2009 1:03 pm, edited 2 times in total.
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Postby dm200 » Tue May 05, 2009 1:01 pm

A 3% or 5% or even a 10% loss in my GNMA bond fund will not phase me one bit.


Perhaps it won't FAZE you either.
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Postby Dan Kohn » Tue May 05, 2009 1:09 pm

BigD53 wrote:A 3% or 5% or even a 10% loss in my GNMA bond fund will not change my opinion one bit. Buy & hold, and stay the course! I finally drank the coolaid.

Now, that comment I can agree with. I don't think there's anything wrong with GNMA, just that it's not that much better (or worse) than Total Bond Market, Intermediate Term Bond Index, and several other bond funds. Any of which, IMHO, should be balanced with a generous helping of TIPS.

Please see Bogleheads Investment Philosophy on the Bogleheads Wiki for more details.
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Postby BigD53 » Tue May 05, 2009 1:10 pm

GNMAs are "volatile?"

In the 29-year history of the Vanguard GNMA fund, it showed only ONE negative year... a miniscule loss of 0.95%, in 1994.

If that's considered "volatile", I'll take it any day!!! :lol:

(Explain "volatile" to the boys who were invested in equities during the past year. :cry: )
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Postby Speedy » Tue May 05, 2009 2:21 pm

I'm certainly no expert on bond funds, but for what it is worth, my take is that the historically low interest rates we currently have could well lead to to pain for bond fund holders when rates rise. The longer the duration, the higher the risk. The faster the rate increase the higher the risk. Only the Fed can tell us when and how fast rates will rise and I'm thinking they don't really know yet. It is quite possible that when the time comes it will be quite rapid. I think the Fed is well aware of the risk of high inflation, if they don't move fast enough when the time comes.

I realize some think the Fed may allow high inflation for the obvious reason of government self interest. I personally do not agree with this line of thinking. However, I do think it is quite possible they may not be fast enough on their feet when the time comes, leading to higher inflation than anyone wants to see.

The dilemma investors face is whether or not (and when) to react to the situation. Most will stick with their asset allocation and will most likely do quite well in the long run.

As for myself, I have about half of my bond allocation in long term individual TIPs. The other half I chose to keep in short term instruments, but like many, I'm not real happy with MM yields now and am tryng to squeeze a little bit more out of this money. So, for me it becomes a question of which funds to use for the non-TIPs allocation.

I like the diversification of TBM, but I don't like the duration in this environment. Also, I'm a little bit concerned about the large allocation to Treasury, agency and MBS which total about 75% of its holdings. At this point I'm using GNMA, Short Term Tax Exempt, Limited Term Tax Exempt, and Short Term Inv Grade. I chose not to use CDs, but I think they can be very useful in times like this, with FDIC insurance being sort of a free lunch for investors.

I have all of these holdings on a short leash, so to speak. Not very Bogleheadish, I know.

Whether GNMA is volatile depends on one's perspective and its purpose in the portfolio. I think it usually measures up to TBM in this regard and it may a be a little less volatile when duration is down, like right now. Certainly at times it is much more volatile than some of the Short Term bond funds. Investors that do not plan to sell GNMA for several years will probably do just fine with a buy and hold approach, and I do not knock that mindset at all. My life would be much simpler if I also took this approach.

I take warnings by thinkers and contributors like VT and Larry S. and others very seriously. That is in the context of what I am trying to do with my portfolio (squeeze a little bit better yield out of the short term part of my bond allocation). My approach could very well backfire. It wouldn't be the first time.

I do appreciate the back and forth on topics such as this and hope everyone can appreciate each other's points of view with respect. I know I learn more when interacting on interesting threads such as this one.

Best wishes to all.

Regards,
Bill
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Postby pkcrafter » Tue May 05, 2009 2:48 pm

Big D wrote:

Sir, if Vanguard and Wellington were not running VFIIX, I might have a bit of concern.

I'm sorry, and I don't mean this as an insult, but I don't know what you think Wellington is going to do. You may be a bit naive to believe that management is somehow going to avoid the consequences of volatile fluctuation. VFIIX is a 100% GMNA fund. If it looks like a duck and quacks like a duck, it's going to waddle like a duck.
----------------------------------------------

Just an opinion, but anyone who holds GNMA as their only bond fund is violating the fundamental rule of diversification. Yes, it has produced nice yields, but of course that's because of the risk involved. With all that has happened recently, I don't understand why some investors still don't get the basic concept of risk and diversification.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Postby stratton » Tue May 05, 2009 3:19 pm

BigD53 wrote:GNMAs are "volatile?"

In the 29-year history of the Vanguard GNMA fund, it showed only ONE negative year... a miniscule loss of 0.95%, in 1994.

-6.3% in 1981.

Paul
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Postby dbr » Tue May 05, 2009 3:27 pm

pkcrafter wrote:Big D wrote:

Sir, if Vanguard and Wellington were not running VFIIX, I might have a bit of concern.

I'm sorry, and I don't mean this as an insult, but I don't know what you think Wellington is going to do. You may be a bit naive to believe that management is somehow going to avoid the consequences of volatile fluctuation. VFIIX is a 100% GMNA fund. If it looks like a duck and quacks like a duck, it's going to waddle like a duck.
----------------------------------------------

Just an opinion, but anyone who holds GNMA as their only bond fund is violating the fundamental rule of diversification. Yes, it has produced nice yields, but of course that's because of the risk involved. With all that has happened recently, I don't understand why some investors still don't get the basic concept of risk and diversification.

Paul


I don't think the issue is that one should not hold GNMA as the entirety of one's fixed income but rather whether or not there are reasons why GNMA should be entirely avoided. Clearly Larry Swedroe sees no role for this bond fund in any AA due to uniquely disadvantageous interest rate sensitivity characteristics of this type bond.

GNMA is currently about 10% of my BOND allocation. Is the expert opinion that I should replace this completely with, for example, short or intermediate term treasury in a tax advantaged account or just dump the money into my 401K stable value fund?
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Postby Quasimodo » Tue May 05, 2009 3:48 pm

Vanguard's GNMA fund says it will normally have an average maturity of 3-10 years. Currently it has an average maturity of 1.7 years. Does Vanguard management adjust the maturity to protect NAV in anticipation of higher interest rates from time to time?

I don't know, just wondering.

John
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