I sold all of my bonds...did I make a mistake?

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Cmpliance
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I sold all of my bonds...did I make a mistake?

Post by Cmpliance »

So, I have a confession to make. At the end of December, I finally began looking at my 401K. I knew nothing that I know now about allocation and so forth. All I know is that I sold off basically all of my bonds and put that money into more equity. Since then, I've got an account at Vanguard and researched more on what exactly to do.

My goal allocation is 80% equity (60% US / 20% Intl) / 20% stock

When I went to buy bonds, there is a restricted time period of I believe 60 days until I can repurchase and I'm wondering how much "damage" I've done to my account

The allocation right now is

79.21% US / 20.38 INTL / .39% Bonds

Once the restriction period ends, which should be the end of February, I plan on selling some of the US equity in my 401k and investing that money into the bonds in my 401k account. If I were to do that now, my allocation would change to:

60.75% US / 20.38 INTL / 18.90% Bonds which to me is a nice allocation but I can't make that trade until February. Is it OK that I did this or did I royally mess up
Tristrex
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Re: I sold all of my bonds...did I make a mistake?

Post by Tristrex »

Two suggestions regarding the restriction period, but I'm sure others will have more useful things to say. First, Vanguard has more than one bond fund, some which are quite similar to each other. For example, If you exchanged out of the Total Bond Market fund, maybe you can exchange into the Intermediate Term Treasury fund for a couple of months until the trade lock expires. They're not exactly the same, but they're certainly a lot more similar than bonds and stocks. Second, you can get around the frequent trading restriction by placing a trade by mail. I've never done this, but a search on the forums should turn up a bunch of results with more details.

In terms of possible mess-ups, I don't think one qualifies as anywhere close to royal :)
Topic Author
Cmpliance
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Re: I sold all of my bonds...did I make a mistake?

Post by Cmpliance »

Tristrex wrote:Two suggestions regarding the restriction period, but I'm sure others will have more useful things to say. First, Vanguard has more than one bond fund, some which are quite similar to each other. For example, If you exchanged out of the Total Bond Market fund, maybe you can exchange into the Intermediate Term Treasury fund for a couple of months until the trade lock expires. They're not exactly the same, but they're certainly a lot more similar than bonds and stocks. Second, you can get around the frequent trading restriction by placing a trade by mail. I've never done this, but a search on the forums should turn up a bunch of results with more details.

In terms of possible mess-ups, I don't think one qualifies as anywhere close to royal :)
Sorry, I have to clarify that I have a 401K and Roth IRA.

The bonds were in my 401K while my Roth IRA contains my international fund and some additional US equity funds. My 401K contains the bond fund, and two US equity funds.
Jim180
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Re: I sold all of my bonds...did I make a mistake?

Post by Jim180 »

Sounds like you are investing based upon emotions, and getting "whipsawed" in the process. In 2013 stocks did well, but bonds didn't. So you sold what was doing poorly to get into what was hot. Now in 2014 bonds got off to a good start, but not stocks, so you want to switch back into bonds. You did not give your age so I don't know what your AA should be, but you need to design a plan and stay with it regardless of market conditions.
Texas hold em71
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Re: I sold all of my bonds...did I make a mistake?

Post by Texas hold em71 »

Looking at your other posts, you are pretty young. You have time to make up for mistakes now. Sounds to me like you bought bonds high, sold low, bought equities high and now want to sell those low. This is not how you make money.

Chalk this up to a learning experience or a stupid tax. We all pay one sometime.

Your choices now are to buy another bond fund that you are not locked out of or to wait out the lock. You have the lock in the 401(k)? Can you buy bonds in the Roth and get to your desired AA?
Topic Author
Cmpliance
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Re: I sold all of my bonds...did I make a mistake?

Post by Cmpliance »

Jim180 wrote:Sounds like you are investing based upon emotions, and getting "whipsawed" in the process. In 2013 stocks did well, but bonds didn't. So you sold what was doing poorly to get into what was hot. Now in 2014 bonds got off to a good start, but not stocks, so you want to switch back into bonds. You did not give your age so I don't know what your AA should be, but you need to design a plan and stay with it regardless of market conditions.
I'm not buying into bonds because they are doing well. I'm buying into bonds because I need to get my allocation on par haha. I sold my bonds without any type of investing knowledge. Then I found this site, started doing research and found out that I need to balance my portfolio.
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LH
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Re: I sold all of my bonds...did I make a mistake?

Post by LH »

yeah, you made a mistake, unless you have timing ability. If you do, just go time successfully and become rich :) (extraordinarily unlikely)

How old are you?

If you are young 20s early 30s, 80/20 stocks bonds is fine.

Make sure you buy something like TIPS bonds, or Aggregate bonds. Both of which are US treasuries and pay either next to nothing, or you pay them in inflation adjusted terms.

High yield bonds are not "bonds" as we would discuss them here for instance.

good luck,

LH
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drbagel
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Re: I sold all of my bonds...did I make a mistake?

Post by drbagel »

Put your bond money into cash until the restrictions expire. At current interest rates, bonds don't earn much more than cash anyway.
tigermilk
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Re: I sold all of my bonds...did I make a mistake?

Post by tigermilk »

HardHitter wrote:
Jim180 wrote:Sounds like you are investing based upon emotions, and getting "whipsawed" in the process. In 2013 stocks did well, but bonds didn't. So you sold what was doing poorly to get into what was hot. Now in 2014 bonds got off to a good start, but not stocks, so you want to switch back into bonds. You did not give your age so I don't know what your AA should be, but you need to design a plan and stay with it regardless of market conditions.
I'm not buying into bonds because they are doing well. I'm buying into bonds because I need to get my allocation on par haha. I sold my bonds without any type of investing knowledge. Then I found this site, started doing research and found out that I need to balance my portfolio.
That is not the correct answer, You should or shouldn't buy bonds because people on a forum do or don't buy them. It should be based on an overall strategy. I'm 44 and have 0% bonds. Why? Because with other fixed income streams down the road (pension, SS, personal savings outside IRA), I can afford to have a more aggressive stance. There are pros and cons to every strategy, and no strategy is without risk (including both strong bond or equity positions). It's important to know those pros and cons and how they fit into your unique situation.
sambb
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Re: I sold all of my bonds...did I make a mistake?

Post by sambb »

put your money in life strategy growth and don't look at it for 20 years. you'll be happy.
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nisiprius
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Re: I sold all of my bonds...did I make a mistake?

Post by nisiprius »

This is important: you did not make a terrible mistake. And John C. Bogle has said "Successful investing involves doing just a few things right and avoiding serious mistakes."

Here is why you did not make a terrible mistake. You made what could be in the long run a serious mistake if you keep on doing it, because you tried to time the market and you made a large, dramatic change in your portfolio, all at once, based on short-term fluctuations and your guesses about what was going to happen.

Your "mistake" was not that you guessed wrong and maybe missed out on a 1% or 2% gain. Your mistake is that you didn't have a plan, didn't stick to a plan, and acted on impulse. Bogle has also said "Time is your friend, impulse is your enemy."

Here is why it was not a terrible mistake. It was in bonds, and because bonds don't fluctuate much, the size of your mistake was small.

It is very confusing because in financial writing it is customary to scale the Y axis so that all fluctuations use the whole chart, which means they all look the same. Thus, a chart of the Vanguard Total Bond Market Index Fund's price per share doesn't look terribly different from a chart of Vanguard Total Stock Market Index Fund, except of course that the price per share of the stock fund has been going up recently and the price per share of the bond fund has been going down.

Image
Image

Both look like mysterious zig-zaggy up and down lines. Everybody, and I mean everybody, can't help looking for and thinking they see patterns and trends and so forth in them--our brains are wired that way--just like you can't stop yourself from seeing animal shapes in clouds and faces in rocks--even though they mostly aren't there.

But if you look at the vertical axis, you will see that the fluctuations in the stock funds are huge, like from less than 20 to over 40, a factor of more than two. While the fluctuations in the bond fund are much smaller--the whole chart only goes from 9.5 to 11.5, so you could say it's 10.5 ± 1, or maybe ±10%.

It becomes clear if you plot them both together.

Image

So, what I'm saying is--OK, you made some kind of instinctive guess based on your feeling of the directions things were moving in, which is bad; and you acted on it, which is worse. You happened to guess wrong, but that's not the problem. But because you are talking about a bond fund, the fluctuations aren't big, and, for example, if you pick a sensible asset allocation and buy back in right now, if you actually look at how much of a loss you locked in or how much of a gain you missed out on--we're talking about a few percent.

Well, maybe, you will say, "A few percent? This is money we're talking about, this is my hard-won savings." Yes, it is, and unfortunately if you put your money into anything riskier than a bank account or a money market mutual fund, you need to get used to pretending you don't care about a few percent. The stock market can and often jiggles up and down by one percent from one day to the next.

One other point about the charts I posted. They are ten year charts, and I suggest that you start getting in the habit of looking at the longest-term charts you can find. And another, they are price charts and you should try to AVOID looking at price charts. It's funny, fans of dividend stocks are always pointing out how important stock dividends are, but the dividend payouts from bond funds are much higher (usually!) and ignoring them is an even bigger mistake. Growth charts show total return. They show what you would actually see in your account, on your statement, investing the way most of us do--reinvesting dividends. If we plot these two funds together as ten-year growth charts, this is what it looks like.

Notice that now, not only does the bond fund have smaller fluctuations, but by including fund dividends it has suddenly acquired a pretty nice, pretty steady upward slope.

The little circle shows the approximate size of the amounts that might be gained or lost by short-term impulsive moves in your bond fund. It's just not a big deal!
Image
To summarize:
  • Think long-term.
  • Don't look at price charts, look at growth charts.
  • Choose your % stocks and % bonds and stay the course.
  • "Time is your friend, impulse is your enemy"--John C. Bogle
  • Don't ever call bad guesses or bad luck "mistakes" (and don't call good guesses or good luck "smart").
  • Always think about magnitude, not just direction. "Up" and "down" don't matter, it's how far up and how far down. Number of wins and number of losses don't matter, it's total number of dollars in all the wins and total number of dollars in all the losses.
  • Don't get upset about fluctuations, wins, losses, whatever that are only a few percent
  • Don't ever lose sight of the fact that bonds are less risky than stocks, and stocks are more risky than bonds. That, of course, is why stocks are expected to have higher returns.
Last edited by nisiprius on Wed Feb 05, 2014 12:05 pm, edited 4 times in total.
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Call_Me_Op
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Re: I sold all of my bonds...did I make a mistake?

Post by Call_Me_Op »

Friend, you need a lot more than a few weeks of study to become a competent investor. Keep-up the study and compose an IPS.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Scooter57
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Re: I sold all of my bonds...did I make a mistake?

Post by Scooter57 »

I sold all my bonds last year and put the money into 2% to 3% CDs.

I'm very happy. Some of the bonds and funds I sold were very longterm and have lost quite a bit since I sold them. Some muni funds held Puerto Rican bonds that have just been downgraded to junk and dropped a lot.

I sleep well knowing exactly how my Fixed Income will perform. I don't have to read anything about the bond market anymore.

My CDs are all breakable and I know exactly at what interest rate it would make sense to break them. They are invested in several different stable credit unions and a couple internet banks.

I was in bonds all the way down from the hyper Inflation of the 80s. I see no reason to take risk now for a lousy 1%-2.something% return--before taxes and inflation.

There is a lot of highly questionable advice repeated on this forum about bonds by people who sound like they are trying to convince themselves. CDs work great for individuals' Fixed Income Allocation. Paid advisors don't earn anything from your holding Credit Union CDs so they are mysteriously silent about them.
Code Commit
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Re: I sold all of my bonds...did I make a mistake?

Post by Code Commit »

Scooter57 wrote:There is a lot of highly questionable advice repeated on this forum about bonds by people who sound like they are trying to convince themselves. CDs work great for individuals' Fixed Income Allocation. Paid advisors don't earn anything from your holding Credit Union CDs so they are mysteriously silent about them.
You would have been right if the OP had kept his fixed income allocation by moving from bonds to CDs. That's not what the OP did. He/she moved from bonds to equities (not really clear why, other than performance chasing or not knowing).
Steadfast
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Re: I sold all of my bonds...did I make a mistake?

Post by Steadfast »

It is not urgent that you achieve your desired asset allocation right away. Do not make sudden moves. Take your time. You have decades to go.

If it's an option, consider leaving your equities alone and instead, allocate an appropriate portion of new deposits into the account to bonds. For example, 50% of new deposits go to bonds, until the 20% bond allocation is achieved. Then adjust new deposits down to 20% bonds thereafter.

Rebalancing by allocating new deposits to achieve an overall asset allocation gradually, may be better for you than selling existing securities to achieve it immediately.

Write and IPS, and stay the course.
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HurdyGurdy
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Re: I sold all of my bonds...did I make a mistake?

Post by HurdyGurdy »

HardHitter, if you add more information as suggested by http://www.bogleheads.org/forum/viewtop ... f=1&t=6212, people would be able to give you more specific guidance. For instance, it would be good to know what funds are available in your 401k plan.

Edit:
I see that you have had multiple threads:
http://www.bogleheads.org/forum/viewtop ... 1#p1922651
http://www.bogleheads.org/forum/viewtop ... 1#p1933861
http://www.bogleheads.org/forum/viewtop ... 5#p1926295

Too much anxiety, it seems! You had a very good plan already. Stay the course!
Last edited by HurdyGurdy on Wed Feb 05, 2014 5:09 pm, edited 1 time in total.
Daniel O
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Re: I sold all of my bonds...did I make a mistake?

Post by Daniel O »

HardHitter wrote: Once the restriction period ends, which should be the end of February, I plan on selling some of the US equity in my 401k and investing that money into the bonds in my 401k account. If I were to do that now, my allocation would change to:

60.75% US / 20.38 INTL / 18.90% Bonds which to me is a nice allocation but I can't make that trade until February. Is it OK that I did this or did I royally mess up
It's okay. The end of February is fine, and you've learned a good lesson in the process.

Regards
Daniel
~ daniel
HurdyGurdy
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Re: I sold all of my bonds...did I make a mistake?

Post by HurdyGurdy »

If you have Target Retirement funds available (like Vanguard Target 2030 perhaps?), at decent Expense Rates, you can just use it and call it quits.
Calm Man
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Re: I sold all of my bonds...did I make a mistake?

Post by Calm Man »

As nisiprius points out, I would not view this as a mistake. Rather it is a cheap lesson. You have proved to yourself that you have no clue about market direction and that you will be wrong more often than right when you make timing moves. In fact, you sold bonds at the very bottom and now plan to get back in at a higher price. Probably at the top. You are not alone in not being able to time markets. Nobody can and I for one have made far more extensive errors than you have and that have cost a lot more.

How many of us were getting edgy about the bond fund decline through late last year? Probably most.
How many of us were getting edgy about stocks late last week and through Monday of this week? Probably most.
But how many of us knew to do nothing? Probably almost all of us.
If you can learn that lesson, you have benefited from this experience. A very inexpensive piece of education.
Good luck and repeat after me: "I know nothing about how an asset class will do in the near term. I cannot time markets." Then say it again.
Scooter57
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Re: I sold all of my bonds...did I make a mistake?

Post by Scooter57 »

Code Commit wrote: You would have been right if the OP had kept his fixed income allocation by moving from bonds to CDs. That's not what the OP did. He/she moved from bonds to equities (not really clear why, other than performance chasing or not knowing).
One highly possible reason is because he has been brainwashed into thinking that his only choices were equities or bonds, since those are the only alternatives discussed in investig books and articles.
jdilla1107
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Re: I sold all of my bonds...did I make a mistake?

Post by jdilla1107 »

Scooter57 wrote:
Code Commit wrote: You would have been right if the OP had kept his fixed income allocation by moving from bonds to CDs. That's not what the OP did. He/she moved from bonds to equities (not really clear why, other than performance chasing or not knowing).
One highly possible reason is because he has been brainwashed into thinking that his only choices were equities or bonds, since those are the only alternatives discussed in investig books and articles.
The OP says 401k. Do you think there are CDs in the 401k?
basspond
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Re: I sold all of my bonds...did I make a mistake?

Post by basspond »

If you buy back all at once your 2nd mistake will be bigger because you didn't learn from the first which is stop making irrational investment decisions based on emotions. Get back into the "game" slowly. This road is a long one and the safest and quickest way to get to the destination is staying on it. If you can't stop from playing your game reserve about 5% of your portfolio to satisfy your itch.
Topic Author
Cmpliance
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Re: I sold all of my bonds...did I make a mistake?

Post by Cmpliance »

Guys,

I appreciate all of your feedback and help but here is what happened.

In November/December, I looked at my 401K for the first time after 4 years of starting it after finishing college. I had no idea what I was doing, but just saw that my equities are doing well so I sold my bonds and placed it into the equities.

Fast forward to January and I started researching and making posts. Since then I learned what it means to have a balanced portfolio, how to have asset allocations and how to "stay the course"

I started taking action by increasing my 401K contribution from $6k to $10k (will be maximizing next year) and opening a Roth IRA account and max contributing for both 2013 and 2014. I wanted to properly allocate my funds but due to my selling the bonds in December, I can't buy back into the bonds until end of February.

I will provide you my action plan:

Background:
Emergency funds: Expenses covered for 1.5 years
Debt: $164k mortgage @ 3.75%; No other debt (car, student loans, etc)
Tax Filing Status: Single
Tax Rate: 28% Federal, 9.3% State
State of Residence: California
Age: 27
Desired Asset allocation: 80% Equity/20% Bonds
Asset Allocation Breakdown: 60% US Equity / 20% International Equity / 20% Bonds

My 401K
BEEMT – Blackrock Extended Equity Market Fund - .12% Expense - US Equity - 25.89%
VKPMG – Vanguard Employee Benefit Index Fund - .02% Expense - US Equity - 26.04%
GGOIX - Goldman Sachs Growth Opportunities Fund - 1.01% Expense - US Equity - 18.46%
VBMPX – Vanguard Total Bond Market Index Fund - .05% Expense - Bonds - .39%

Roth IRA
VTSMX - Vanguard Total Stock Market Index Fund - .17% Expense - US Equity - 8.82%
VGTSX - Vanguard Total International Stock Index Fund - .22% Expense - International Equity - 20.38%

As you can see, the GGOIX has a high expense ratio. My plan is the sell the GGOIX amount and put it into the VBMPX to get my allocation back in line to what I want as well as to have simplicity of just 3 funds.

Is that what you would suggest or do you suggest I change my 401K contribution for the majority of my contributions to go into bonds until my allocation is back. I really don't want the GGOIX due to the high expense ratio...
basspond
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Re: I sold all of my bonds...did I make a mistake?

Post by basspond »

You learn quick young grasshopper! Change your allocations then look for opportunities to sell. You are not alone, most of us have made some really bad mistakes. But a collective we have/will learn from them. Sounds like you have a good foothold on your future.
livesoft
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Re: I sold all of my bonds...did I make a mistake?

Post by livesoft »

@hardHitter,

In your situation, you could buy a bond fund in your Roth IRA if you wanted bonds right now. You could exchange in your Roth IRA VTSMX into VBMFX. In order to make up for the VTSMX sold in your Roth, you can then adjust your 401(k) by exchanging GGOIX into VKPMG (I'll guess it is S&P500 index fund) and BEEMT. Of course, I don't know how all your fund exchanges have been restricted, so you may not be able to do something like this. But don't do something like this without a plan.

See also: http://www.bogleheads.org/wiki/Approxim ... ock_market
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