Time to dump bond funds?

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bundy
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Time to dump bond funds?

Post by bundy »

So there has been lots of hype about interest rates going up lately. I have Vanguard ny long term tax exempt and intermediate term tax exempt in my taxable account. Time to get out?
Thanks
z3r0c00l
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Re: Time to dump bond funds?

Post by z3r0c00l »

If you are willing to hold and not sell over the duration of the fund, 6 years, you will be fine. Indeed 6 years is hardly long term, and vanguard is very conservative in calling it this. I feel very comfortable owning bonds around the 5 year duration right now. You may see a drop in NAV over the next few years, but that is okay because you will hold the fund and make back your money over time if rates go up. What if rates don't go up much? You will still be happy because you are earning something rather than nothing in cash.

Speaking generally, if you find yourself unable to stick to an investment plan when things change, your best bet is not to invest at all. You will do less damage that way.
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stevewolfe
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Re: Time to dump bond funds?

Post by stevewolfe »

Maybe you can say what you'd do with the cash if you got out...
Elbowman
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Re: Time to dump bond funds?

Post by Elbowman »

At no point is it ever "time to dump" any fund that was worth buying in the first place.
john94549
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Re: Time to dump bond funds?

Post by john94549 »

Just observe the duration and the SEC yield, your time horizon, and be guided accordingly. As a general rule, folks with an investing horizon longer than the duration of a bond fund will notice no long-term detriment.

Contrarian that I am, I would actually load up on bond funds over the next twenty to thirty years or so. Interest rates will increase (as we have seen over the past few months), NAVs will get cheaper, your dollar will purchase more. When interest rates peak once again (as they most assuredly will), and begin to decline (as they most assuredly will), you will be a very happy camper.
Last edited by john94549 on Fri May 31, 2013 8:39 pm, edited 1 time in total.
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hollowcave2
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Re: Time to dump bond funds?

Post by hollowcave2 »

I think you have insight into your own question by noticing lots of hype. Has investment hype ever helped you make good decisions?

I would make any decision in a calm rational way and ignore the hype.
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bottomfisher
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Re: Time to dump bond funds?

Post by bottomfisher »

z3r0c00l wrote:If you are willing to hold and not sell over the duration of the fund, 6 years, you will be fine. Indeed 6 years is hardly long term, and vanguard is very conservative in calling it this. I feel very comfortable owning bonds around the 5 year duration right now. You may see a drop in NAV over the next few years, but that is okay because you will hold the fund and make back your money over time if rates go up. What if rates don't go up much? You will still be happy because you are earning something rather than nothing in cash.

Speaking generally, if you find yourself unable to stick to an investment plan when things change, your best bet is not to invest at all. You will do less damage that way.
I agree. Considering this investment is in your taxable account, is the money invested intended to be used soon? If yes, I would take the investment out now. If its not intended to be used in the next 6 years (avg duration of holdings) then probably not. Has your taxable account plan changed? You invested in this fund for a reason in the first place. If the reasons for you choosing this particular fund hasn't changed, then I recommend not making a move a move based on current bond market specualtion. The fund has decreased recently along with other bond funds. But as noted above, if you're holding the fund long-term this shouldn't concern you.

Another consideration is at what price you bought into the fund since its in your taxable account. This is a typical consideration in taxable stock funds but not as much with bond funds. Depending on the time frame this fund was purchased, it has seen noteworthy gains that may affect you in the form of capital gains since selling from taxable account. You may want to look into this and determine if they significant enough to affect your decision.
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Artsdoctor
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Re: Time to dump bond funds?

Post by Artsdoctor »

bundy,

You have to ask yourself what you want your fixed income investments to do. Are they to stabilize your portfolio? Are they for income? What's your time horizon? The intermediate and long-term funds are not appropriate for the "dry powder" that you'll need to buy more equities when a bear market appears because they will be far more volatile (than short-term treasuries, for example) and unpredictable. It is perfectly reasonable to keep those funds if your time horizon is very, very long, but you'll have to have something much less volatile to stabilize your portfolio and easily sell during the next equity downturn. The same holds true for corporates: you'll notice that intermediate corporates and munis fell today but short-term funds weren't touched at all.

The time to dump a fund is when you don't understand what you bought in the first place. If you bought it for yield alone and are not aware of all of the risks associated with owning bond funds, please spend some time on the Vanguard website. Interest rates will undoubtedly go up but we don't know when or how quickly; when they do, you'll need to understand what will happen to your fund.

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retiredjg
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Re: Time to dump bond funds?

Post by retiredjg »

bundy wrote:Time to get out?
No, not unless you have some better idea for fixed income assets.
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Kevin M
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Re: Time to dump bond funds?

Post by Kevin M »

No, the time was about a month ago. Sorry, you missed it.

Seriously, I've been moving from bond funds to CDs for almost the past two years. I prefer to make additional moves after bond prices have gone up, not after they've gone down. My last bond fund sales were on (checking ...) 5/2/13. I rebalanced my tax-exempt funds in taxable back to target, sold all of my short-term investment-grade and half of my intermediate-term inv-grade in IRA.

Where did it go? In the IRA, into a 5-year CD earning 2% APY with an EWP of 180 days interest. In taxable, into online savings earning about 1%, which will fund spending needs for awhile (I'm retired), or maybe eventually into some CDs, or if stocks drop a lot, into stocks, or if interest rates rise a lot, maybe back into bond funds.

If rates continue to rise, and prices continue to fall, I'll continue to hold my bond funds. Once rates have risen enough, I'll probably start adding back to them, and certainly will start reinvesting dividends, which I currently am not doing.

The comments about being safe if you hold a bond fund for a time period equal to duration represent a misunderstanding of duration and the impact of changing interest rates for a bond fund. If interest rates rise continuously over that time period, or a lot toward the end of that period, you can lose money. Duration only tells you the "point of indifference" for a bond fund for a one-time change in rates near the beginning of the holding period; i.e., if rates change near the beginning of the holding period (and only then), your total return over a period equal to the duration will be approximately the same as if rates had not changed. Every time rates change, you need to reset the holding period for the duration principle to apply.

The concept applies to an individual bond over the life of the bond because the duration of an individual bond is continuously decreasing as it approaches maturity. That is not true for the typical bond fund, which is managed to keep average maturity and average duration within a certain range.

Kevin
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john94549
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Re: Time to dump bond funds?

Post by john94549 »

Kevin, you must agree that those of us into CD ladders are contrarians at heart. As a contrarian, would you not consider loading up on an asset class which will, perforce, lose favor as rates increase? I'm just thinking ahead. As more and more folks become enamoured with CDs, the law of supply and demand will take effect. More and more money will flow into retail CDs (thus keeping rates depressed), while folks will dump bond funds. I'm wondering if this presents an opportunity.

When three of the several ETFs hitting 52-week lows today were bond ETFs (AGG, BND, and TLT), it does get my attention.

My tummy always tells me to buy what others are selling, when they are selling for sub-optimal reasons.
Last edited by john94549 on Fri May 31, 2013 10:01 pm, edited 1 time in total.
Occupier
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Re: Time to dump bond funds?

Post by Occupier »

I don't agree with a lot that has been posted here. Interest rates were at historic lows a month ago with the most likely direction up at some unknown time and rate of increase. I mean it should be obvious that when they are close to zero they cant go much lower. If I were you I would exchange the long term bond fund for limited term tax exempt at Vanguard. There are still good reasons to hold bonds but not ones with high durations. Dave
AQ
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Re: Time to dump bond funds?

Post by AQ »

I think I understand the lower nav, higher yield, etc. and all is fine. But there is a catch, I believe.

In actual fund management, if a lot of investors like OP panicked, and rushed to exit, and Vanguard is forced to sell at a discount to redeem, then the remaining investors would end up eating the loss.. Is that concern to you guys? I'm trying to find an entry point to load up bond funds now that yields go up, but I'm also worried about the scenario I just described.

Would appreciate any thoughts
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Kevin M
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Re: Time to dump bond funds?

Post by Kevin M »

john94549 wrote:Kevin, you must agree that those of us into CD ladders are contrarians at heart. As a contrarian, would you not consider loading up on an asset class which will, perforce, lose favor as rates increase? I'm just thinking ahead. As more and more folks become enamoured with CDs, the law of supply and demand will take effect. More and more money will flow into retail CDs (thus keeping rates depressed), while folks will dump bond funds. I'm wondering if this presents an opportunity.

My tummy always tells me to buy what others are selling, when they are selling for sub-optimal reasons.
Hey John,

I don't think of myself as a contrarian, just as a semi-rational investor. As you well know, I think it's eminently rational to favor CDs over bond funds at current low rates. However, I just view that as shifting my fixed income around to improve the risk/return profile; I'm not changing my allocation to fixed income. And yes, if rates increase a lot, I'll probably start moving some back to bond funds, since there will be more potential reward in taking the interest-rate risk (less risk asymmetry).

I do agree that buying when prices have gone down a lot makes sense, but just following some semi-rational rebalancing strategy will get us there. Following this approach, I bought some Europe and Pacific, for example, during the last couple of big corrections over the last couple of years, and then recently sold back to target. I've also sold stocks in general not too long ago to bring my equity/debt allocation back to target. I'm actually still a tad high on equities now, and my US/Foreign and Developed/Emerging are all quite close to target.

Sure, if you look at EM MTD, it looks like it's on sale, but if you look back just 3 months, EM is up about 2%, and over the last year it's up almost 13% (not including dividends). Still doesn't look like a sale to me. :wink:

Kevin
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Re: Time to dump bond funds?

Post by abuss368 »

bundy wrote:So there has been lots of hype about interest rates going up lately. I have Vanguard ny long term tax exempt and intermediate term tax exempt in my taxable account. Time to get out?
Thanks
Your post title of "Time" to dump bond funds should answer your question for you. It is impossible to "Time" the markets. In fact many well respected investors will often note that trying to time interest rates is more difficult than the stock market.
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john94549
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Re: Time to dump bond funds?

Post by john94549 »

Japan was indeed a great trade over the past year or two. Who would have thought it, with the Nikkei mired in the depths? Of course, little solace to the average Japanese consumer paying sky-high for imported whatevers, or going abroad.
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Re: Time to dump bond funds?

Post by z3r0c00l »

Glad that you mentioned Japan... those who advocate buying or selling bonds based on a gut feeling that rates must go up soon, or that swapping between bonds and CDs based on minor changes in NAV should check out Japan for the last 20 years.
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scrabbler1
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Re: Time to dump bond funds?

Post by scrabbler1 »

stevewolfe wrote:Maybe you can say what you'd do with the cash if you got out...
A friend of mine is in some bond funds I suggested many years ago. But when the NAV began to increase in late 2011 he wanted to sell. But I always came back with the question you posed. If he did not have a good answer to it, I suggested he stay put. But if he did have a good answer to the question, which he did in late 2011 when he bought his co-op apartment, I told him that was surely a good reason to sell. He made a tidy profit on the shares and still has several thousand dollars in the fund despite selling more than he cumulatively bought excluding reinvested dividends and appreciated value, something which made him happy.
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Re: Time to dump bond funds?

Post by Call_Me_Op »

bundy wrote:So there has been lots of hype about interest rates going up lately. I have Vanguard ny long term tax exempt and intermediate term tax exempt in my taxable account. Time to get out?
Thanks
I would advise you to study-up on investing, draft a plan, implement the plan, and then stick to it.
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Re: Time to dump bond funds?

Post by YDNAL »

bundy wrote:So there has been lots of hype about interest rates going up lately. I have Vanguard ny long term tax exempt and intermediate term tax exempt in my taxable account. Time to get out?
To time the Market, the "time to get out" of NY LT TE and IT TE was December 7, 2012 (I have a clear rearview mirror :D).

Code: Select all

VNYTX 52-week high 12/07/2012 $12.03 +3.5% over Friday's price
VWITX 52-week high 12/07/2012 $14.59 +2.6% over Friday's price
IF [edit typo] your investment strategy and personal circumstances haven't changed, why would you want to get out ?
Last edited by YDNAL on Sat Jun 01, 2013 8:58 am, edited 1 time in total.
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Scooter57
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Re: Time to dump bond funds?

Post by Scooter57 »

john94549 wrote: Contrarian that I am, I would actually load up on bond funds over the next twenty to thirty years or so. Interest rates will increase (as we have seen over the past few months), NAVs will get cheaper, your dollar will purchase more. When interest rates peak once again (as they most assuredly will), and begin to decline (as they most assuredly will), you will be a very happy camper.
This statement betrays a profound lack of understanding of how bonds work.

Bonds have a set life. Just about every bond issued today will have been redeemed in 30 years. Stocking up on bonds whose price is dropping now has only one impact on your future--it limits the interest rate your investment will pay until the bonds mature to whatever today's rate is.

If you really, truly believe that inflation will be less than the rate your bond fund is paying today for the next 30 years and that there will be no alternative fixed income vehicles offering a higher rate for the next 30 years , by all means, stock up on those bonds. Because that is the only scenario under which your plan pays off. If inflation goes up another 1 or 2% you guarantee that your investment will lose purchasing power as the difference between the interest you receive and the actual inflation rate will compound year after year, worsening that buying power loss.

The likelihood that our economy will duplicate the Japanese experience over the past several decades is the same as the likelihood that it will duplicate the Russian experience in 1918 or the German experience in 1923--or the American experience in 1980. Betting on the very long end of the long tail is a very risky strategy. Fixed income is supposed to be the safe component in your portfolio.
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Re: Time to dump bond funds?

Post by z3r0c00l »

Just to be clear, this op discussion is about 6 year duration bond funds, not the long end of the tail. And buying up 5 year bond fund shares over the next 30 years is a fine strategy for part of your AA. Buying 30 year bonds today, on the other hand...
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bundy
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Re: Time to dump bond funds?

Post by bundy »

Thanks for all the responses. I recently bought these funds, and i don't see much upside to them. They might earn 3-4% per year, but if interest rates change, I stand to loose more than that. Just seems like a bad bet. I think I'll buy some shorter duration funds, or just put the rest into total stock market. When interest rates rise,
I'll reconsider.
As an aside, is the expense ratio prorated to the amount of time I hold the fund?
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Re: Time to dump bond funds?

Post by YDNAL »

bundy wrote:Thanks for all the responses. I recently bought these funds, and i don't see much upside to them.
Al (bundy], :)

Do you have an IPS ?
Link: http://www.bogleheads.org/wiki/Investme ... _Statement

The reason for my question is simple, with regards to investing, we should buy according to a well thought-out plan* that has been put together based on our personal circumstances.
  • When you bought these funds, we are to presume that they met the YOUR circumstances.
  • Wanting "to get out" after "recently buying these funds" suggests otherwise.
Good luck!

* ps. A plan doesn't mean a rigid document that shouldn't change as personal circumstances change.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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retiredjg
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Re: Time to dump bond funds?

Post by retiredjg »

bundy wrote:Thanks for all the responses. I recently bought these funds, and i don't see much upside to them. They might earn 3-4% per year, but if interest rates change, I stand to loose more than that.
You seem to have forgotten these same bond funds will start paying you more when interest rates rise.
As an aside, is the expense ratio prorated to the amount of time I hold the fund?
No. Well, yes. The expense ratio is taken out daily.
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neurosphere
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Re: Time to dump bond funds?

Post by neurosphere »

bundy wrote: When interest rates rise, I'll reconsider.
That's what I said in 2005, when I passed up EE bonds yielding a fixed 3.5%. :oops:

Though to be fair, I bought I-bonds instead, so it's not like I had the cash sitting in a checking account, but the point is the same. "Everyone" "knew" that rates had NOWHERE to go but UP. :)
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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