Active Bond Fund

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cliff
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Active Bond Fund

Post by cliff » Tue Jun 14, 2016 3:43 pm

I am in the process of changing my asset allocation and need to add bonds. My equities are purely index funds. In the current environment, however, I'm questioning whether I should go with a more active bond fund rather than the total index.

Vanguard recently opened up an active fund – Core bond. Another option would be to go with Wellesley, as it invests about two thirds bonds. I'm just questioning in an uncertain interest environment whether an active trader will do better in responding to decisions from the Fed etc. Bond funds will be placed in a tax deferred account.

A secondary question is that I will need to trade total index from my IRA and place it in my taxable account in order to make room for the bonds. I currently hold total index in my taxable and have so for quite a long period of time. This raises the question of Capital gains.

Being that hit it has been owned for quite a while determining cost basis is not easy. I can always do average cost basis but if and when the need comes to sell I would prefer to pick individual lots. Therefore I am considering buying The S&P 500 and tax manage small-cap to get close to replicating total. Does that make sense?

lack_ey
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Re: Active Bond Fund

Post by lack_ey » Tue Jun 14, 2016 3:54 pm

There's always an "uncertain interest environment." If anything it's less uncertain than other times, with for example volatility not really being anything special at all:
http://www.cboe.com/micro/volatility/tyvix/default.aspx

An active bond fund doesn't have an edge unless it knows what's going to happen better than other active traders and can outposition them, taking into consideration all kinds of macroeconomic factors, trends, and Fed action or inaction, and also the quality of underlying issuers, among other things. That's true in any market environment. What's special about now?

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ruralavalon
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Re: Active Bond Fund

Post by ruralavalon » Tue Jun 14, 2016 4:02 pm

cliff wrote:I am in the process of changing my asset allocation and need to add bonds. My equities are purely index funds. In the current environment, however, I'm questioning whether I should go with a more active bond fund rather than the total index.

Vanguard recently opened up an active fund – Core bond. Another option would be to go with Wellesley, as it invests about two thirds bonds. I'm just questioning in an uncertain interest environment whether an active trader will do better in responding to decisions from the Fed etc. Bond funds will be placed in a tax deferred account.

There are many good managed bond funds. Vanguard offers several such as Vanguard Intermediate-Term Investment-Grade Fund, and Vanguard Core Bond Fund.

I have seen no reason to suspect that active fund managers will do better than index fund managers in "an uncertain interest environment".

cliff wrote: A secondary question is that I will need to trade total index from my IRA and place it in my taxable account in order to make room for the bonds. I currently hold total index in my taxable and have so for quite a long period of time. This raises the question of Capital gains.

Being that hit it has been owned for quite a while determining cost basis is not easy. I can always do average cost basis but if and when the need comes to sell I would prefer to pick individual lots. Therefore I am considering buying The S&P 500 and tax manage small-cap to get close to replicating total. Does that make sense?

I do not understand this second question. Specifically which funds are currently in which account, and which will need to be moved?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

cliff
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Re: Active Bond Fund

Post by cliff » Tue Jun 14, 2016 4:07 pm

I will Need to exchange total stock index for the bond fund in an IRA. I will then purchase either total or a combination of S&P 500/tax managed small cap in a taxable account .

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Taylor Larimore
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Re: Active vs Index Bond Fund?

Post by Taylor Larimore » Tue Jun 14, 2016 4:30 pm

cliff wrote:I am in the process of changing my asset allocation and need to add bonds. My equities are purely index funds. In the current environment, however, I'm questioning whether I should go with a more active bond fund rather than the total index.

According to the latest Dow Jones SPIVA Scorecard (Report 11), during the past 10-years, every managed bond fund category underperformed its index benchmark.

https://us.spindices.com/documents/spiv ... d-2015.pdf

Consider the very diversified Total Bond Market Index Fund for portfolio safety. It's worst annual return was -2.66% in 1994 (it gained +18.5% in 1995).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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ruralavalon
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Re: Active Bond Fund

Post by ruralavalon » Tue Jun 14, 2016 4:34 pm

cliff wrote:I will Need to exchange total stock index for the bond fund in an IRA. I will then purchase either total or a combination of S&P 500/tax managed small cap in a taxable account .

Still not understood, sorry.

What funds are currently in the taxable account?

What funds are currently in the IRA?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

cliff
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Re: Active Bond Fund

Post by cliff » Tue Jun 14, 2016 6:06 pm

OK...if i go with total bond is there any reason to supplement overweighting any sector? Mortgage? Tips, etc.

Total stockindex held in IRA will exchanage for bonds.

Currently hold Total stock in taxable and will purchase more with cash to offset selling total stock in IRA

The second part of the question I likely need to think thru more, but the gist is does it make sense to substitute equivalent fund(s) for Total Stock as cost basis is impossible to compute as held for quite long.

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ogd
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Re: Active Bond Fund

Post by ogd » Tue Jun 14, 2016 6:54 pm

cliff wrote:The second part of the question I likely need to think thru more, but the gist is does it make sense to substitute equivalent fund(s) for Total Stock as cost basis is impossible to compute as held for quite long.

cliff wrote:Being that hit it has been owned for quite a while determining cost basis is not easy. I can always do average cost basis but if and when the need comes to sell I would prefer to pick individual lots. Therefore I am considering buying The S&P 500 and tax manage small-cap to get close to replicating total. Does that make sense?

No, not really. The new lots you'd buy will be much easier to track because of the broker-tracking support introduced by regulation in 2012. So you will be able to sell individual lots of the new kind ("covered shares"), while the old investments will be the same problem they'll always be, but thankfully separate. You can even use average cost for the old (if you give up on the archaeology) and Specific ID for the new.

So you wouldn't gain anything from using separate funds.

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ruralavalon
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Re: Active Bond Fund

Post by ruralavalon » Tue Jun 14, 2016 6:59 pm

cliff wrote:OK...if i go with total bond is there any reason to supplement overweighting any sector? Mortgage? Tips, etc.

Vanguard Total Bond Market Index Fund is fine by itself for your bond allocation. I would not supplement that with TIPS, mortgage backed securities, etc.

Vanguard Total Bond Market Index Fund is about 60-70% government bonds or bonds of government agencies. Some people think that more corporate bonds are appropriate, and so add Vanguard Intermediate-term Corporate Bond Index Fund or Vanguard Intermediate-term Investment Grade Bond Fund.

cliff wrote:Total stockindex held in IRA will exchanage for bonds.

Currently hold Total stock in taxable and will purchase more with cash to offset selling total stock in IRA

The second part of the question I likely need to think thru more, but the gist is does it make sense to substitute equivalent fund(s) for Total Stock as cost basis is impossible to compute as held for quite long.

I am still not sure that I understand the second question.

Inside the IRA the cost basis is not important. Inside the IRA exchanging Vanguard Total Stock Market into Vanguard Total Bond Market will not create any income tax liability.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

cliff
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Re: Active Bond Fund

Post by cliff » Tue Jun 14, 2016 7:22 pm

So to follow up. If I buy more total stock index in taxable I can cost basis average what I have now (old shares) and specify lots going forward for anything I buy in the future (new covered shares)? I do not have to cost average everything?

jalbert
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Re: Active Bond Fund

Post by jalbert » Tue Jun 14, 2016 7:41 pm

cliff wrote:So to follow up. If I buy more total stock index in taxable I can cost basis average what I have now (old shares) and specify lots going forward for anything I buy in the future (new covered shares)? I do not have to cost average everything?


You can choose the cost basis method with vanguard and liquidate the shares with the cost basis you prefer. If you reinvest dividends, you already have shares with different basis values.

The low interest rate environment is probably making it harder for active bond managers to beat the market because their fee is a larger percentage of portfolio yield then when rates were higher. Low rates seem to ended pimco's long streak of beating the market.

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ogd
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Re: Active Bond Fund

Post by ogd » Tue Jun 14, 2016 7:43 pm

cliff wrote:So to follow up. If I buy more total stock index in taxable I can cost basis average what I have now (old shares) and specify lots going forward for anything I buy in the future (new covered shares)? I do not have to cost average everything?

Yes! I'm not a tax lawyer and know this because of my tax returns, but I found you a decent reference: https://ttlc.intuit.com/questions/19134 ... on-covered

The cost basis methods are separate for covered and non-covered shares.

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Kenkat
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Re: Active Bond Fund

Post by Kenkat » Tue Jun 14, 2016 9:14 pm

Vanguard's active bond funds are very low cost, almost as low cost as their index bond funds, so performance would be expected to be similar. As to whether a manager could add value, there's no guarantees either way. I personally own Vanguard Total Bond Index as my core bond holding but have an active bond fund in my 401k as it seems to be the best choice. Both have done fine overall.

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