Bond Funds

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BobDawg
Posts: 10
Joined: Fri Nov 24, 2017 7:04 am

Bond Funds

Post by BobDawg »

I am recently retired adapting to moving from the accumulating phase to spending phase. I am also new to this site and I am surprised many of you only hold one bond fund. I have a total bond fund but also about one year of expenses in a Short-term Inflation Protected Bond Fund. My thought is that in the event of a bad bear market, the price of this fund won't decrease much and I can spend it first, giving my total bond fund some time for the price to go back up a bit. Why don't many of you subscribe to this strategy?
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Bond Funds

Post by dbr »

BobDawg wrote: Fri Nov 24, 2017 7:12 am I am recently retired adapting to moving from the accumulating phase to spending phase. I am also new to this site and I am surprised many of you only hold one bond fund. I have a total bond fund but also about one year of expenses in a Short-term Inflation Protected Bond Fund. My thought is that in the event of a bad bear market, the price of this fund won't decrease much and I can spend it first, giving my total bond fund some time for the price to go back up a bit. Why don't many of you subscribe to this strategy?
People talking about a bad bear market are talking about stocks, not bonds. Bonds in general do not vary a lot in value. Most people don't see the possibility of bond values declining as being a problem. Those who do see it as a possible problem try to manage it by holding a fund with shorter duration or by holding cash such as CDs. A lot of people would say intermediate bonds are a sweet spot in the trade off of risk and return.

It isn't possible to make sense of bond strategy without looking at the entire portfolio including stocks and any other assets and considering the risk and return of the whole.
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: Bond Funds

Post by livesoft »

BobDawg wrote: Fri Nov 24, 2017 7:12 amWhy don't many of you subscribe to this strategy?
I personally don't subscribe to this strategy because of extensive studies which show it is not a best strategy. For your reading pleasure today: https://earlyretirementnow.com/2016/12/ ... t-1-intro/ It might take a couple of hours to read everything and a few hours more to understand everything.
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johnra
Posts: 216
Joined: Sun Dec 28, 2014 11:07 am

Re: Bond Funds

Post by johnra »

The bond portion of my portfolio (roughly 40%) is divided (1) 1/2 aggregate bond index ETF (AGG), (2) 1/4 short term bond index ETF (ISTB), and (3) 1/4 short term high yield bond index ETF (SHYG). It is just for the reasons you point out--to have different bond buckets to draw upon depending on the times. I am thinking of making some changes in 2018, but still deciding--among the ideas are (1) have the 1/2 that is aggregate bond buy individual bonds managed by a bond professional for 0.4% fee (about the same as many total bond funds); and (2) move the high yield bond index ETF from short term (SHYG) to regular (HYG), which might yield 1-2% more.
Topic Author
BobDawg
Posts: 10
Joined: Fri Nov 24, 2017 7:04 am

Re: Bond Funds

Post by BobDawg »

dbr wrote: Fri Nov 24, 2017 8:47 am
BobDawg wrote: Fri Nov 24, 2017 7:12 am I am recently retired adapting to moving from the accumulating phase to spending phase. I am also new to this site and I am surprised many of you only hold one bond fund. I have a total bond fund but also about one year of expenses in a Short-term Inflation Protected Bond Fund. My thought is that in the event of a bad bear market, the price of this fund won't decrease much and I can spend it first, giving my total bond fund some time for the price to go back up a bit. Why don't many of you subscribe to this strategy?
People talking about a bad bear market are talking about stocks, not bonds. Bonds in general do not vary a lot in value. Most people don't see the possibility of bond values declining as being a problem. Those who do see it as a possible problem try to manage it by holding a fund with shorter duration or by holding cash such as CDs. A lot of people would say intermediate bonds are a sweet spot in the trade off of risk and return.

It isn't possible to make sense of bond strategy without looking at the entire portfolio including stocks and any other assets and considering the risk and return of the whole.
Yes, bonds are less volatile than stocks but they are not negatively correlated. I just checked my records and the bond portion of my portfolio dropped 5 % after the 2008 bear market and I was hoping to minimize that since that's what I'll be selling after the next bear market and I hate the idea of selling anything after the value drops. It's funny how memory works because before I just checked it I thought it dropped a lot more than 5 %. It's worth thinking about some more. The long term returns of short term inflation protected funds should be less than a total bond fund and the expense ratio is higher but it may save me a couple points drop after a bad bear market. I don't know if it's worth it. Maybe I'll just keep the short term fund until I start taking Social Security since I won't be drawing out as much each year at that time.
Topic Author
BobDawg
Posts: 10
Joined: Fri Nov 24, 2017 7:04 am

Re: Bond Funds

Post by BobDawg »

johnra wrote: Fri Nov 24, 2017 2:20 pm The bond portion of my portfolio (roughly 40%) is divided (1) 1/2 aggregate bond index ETF (AGG), (2) 1/4 short term bond index ETF (ISTB), and (3) 1/4 short term high yield bond index ETF (SHYG). It is just for the reasons you point out--to have different bond buckets to draw upon depending on the times. I am thinking of making some changes in 2018, but still deciding--among the ideas are (1) have the 1/2 that is aggregate bond buy individual bonds managed by a bond professional for 0.4% fee (about the same as many total bond funds); and (2) move the high yield bond index ETF from short term (SHYG) to regular (HYG), which might yield 1-2% more.
I don't know how far you are from retirement but I retired recently and part of my bond portfolio is a treasury bond ladder that started maturing at my retirement year. Now that I have it I like it a lot. It's a steady stream of money I use to live on and I don't need to be concerned about when to sell it. Every year one matures and the funds go to my settlement account and money goes from that into my checking account every month.
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ruralavalon
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Location: Illinois

Re: Bond Funds

Post by ruralavalon »

Welcome to the forum :)
BobDawg wrote: Fri Nov 24, 2017 2:55 pm
dbr wrote: Fri Nov 24, 2017 8:47 am
BobDawg wrote: Fri Nov 24, 2017 7:12 am I am recently retired adapting to moving from the accumulating phase to spending phase. I am also new to this site and I am surprised many of you only hold one bond fund. I have a total bond fund but also about one year of expenses in a Short-term Inflation Protected Bond Fund. My thought is that in the event of a bad bear market, the price of this fund won't decrease much and I can spend it first, giving my total bond fund some time for the price to go back up a bit. Why don't many of you subscribe to this strategy?
People talking about a bad bear market are talking about stocks, not bonds. Bonds in general do not vary a lot in value. Most people don't see the possibility of bond values declining as being a problem. Those who do see it as a possible problem try to manage it by holding a fund with shorter duration or by holding cash such as CDs. A lot of people would say intermediate bonds are a sweet spot in the trade off of risk and return.

It isn't possible to make sense of bond strategy without looking at the entire portfolio including stocks and any other assets and considering the risk and return of the whole.
Yes, bonds are less volatile than stocks but they are not negatively correlated. I just checked my records and the bond portion of my portfolio dropped 5 % after the 2008 bear market and I was hoping to minimize that since that's what I'll be selling after the next bear market and I hate the idea of selling anything after the value drops. It's funny how memory works because before I just checked it I thought it dropped a lot more than 5 %. It's worth thinking about some more. The long term returns of short term inflation protected funds should be less than a total bond fund and the expense ratio is higher but it may save me a couple points drop after a bad bear market. I don't know if it's worth it. Maybe I'll just keep the short term fund until I start taking Social Security since I won't be drawing out as much each year at that time.
Vanguard Total Bond Market Index Fund hardly dipped at all during the Sept.-Oct. 2008 crash, fully recovered within weeks, and finished the year up 5%. Morningstar "growth of $10k" graph VBTLX & VTSAX, 11/24/07 - 11/24/09.

That history is hardly a reason to avoid intermediate-term, good credit quality bond funds. In fact that history is a good reason to use them.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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