Vanguard Prime Money Market instead of bond fund

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
alwayshedge
Posts: 209
Joined: Sat Nov 30, 2013 7:43 pm

Vanguard Prime Money Market instead of bond fund

Post by alwayshedge » Sun May 13, 2018 2:11 pm

I've noticed the Vanguard Prime MM is yielding quite a bit now. When designing a portfolio in the current state, would it be advisable to substitute say the total bond fund with the Prime MM?

livesoft
Posts: 69600
Joined: Thu Mar 01, 2007 8:00 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by livesoft » Sun May 13, 2018 2:12 pm

For how long? You can chart the total return of VBTLX and VMMXX and see that VBTLX outperforms in the long run.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
Clever_Username
Posts: 1416
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Vanguard Prime Money Market instead of bond fund

Post by Clever_Username » Sun May 13, 2018 2:13 pm

Depends on the purpose of the money and time horizons. Time was, portfolio suggestions often had a cash portion in addition to the bond portion.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

User avatar
sperry8
Posts: 2000
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: Vanguard Prime Money Market instead of bond fund

Post by sperry8 » Sun May 13, 2018 2:16 pm

livesoft wrote:
Sun May 13, 2018 2:12 pm
For how long? You can chart the total return of VBTLX and VMMXX and see that VBTLX outperforms in the long run.
That was in a bond bull market. Perhaps if the bear is here... history won't look like the future?
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282

User avatar
ruralavalon
Posts: 17119
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Vanguard Prime Money Market instead of bond fund

Post by ruralavalon » Sun May 13, 2018 2:40 pm

alwayshedge wrote:
Sun May 13, 2018 2:11 pm
I've noticed the Vanguard Prime MM is yielding quite a bit now. When designing a portfolio in the current state, would it be advisable to substitute say the total bond fund with the Prime MM?
In my opinion, no it would not be an acceptable substitute for long-term investing.

Vanguard Prime Money Market Fund (VMMXX) currently has a SEC Yield =1.85%, but Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) currently has a SEC Yield = 3.10%.

And over the long-term Vanguard Total Bond Market Index Fund has a better total return. Morningstar, "Growth of $10k" graph, VBTLX vs VMMXX, showing total returns over the last 30 years. You can use the "custom" function to study returns during any period within those 30 years.

It's a different story if you want cash savings for a specific purpose in the near future, then Vanguard Prime Money Market Fund (VMMXX) would be the best choice.
Last edited by ruralavalon on Sun May 13, 2018 2:55 pm, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

dbr
Posts: 31257
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard Prime Money Market instead of bond fund

Post by dbr » Sun May 13, 2018 2:48 pm

alwayshedge wrote:
Sun May 13, 2018 2:11 pm
I've noticed the Vanguard Prime MM is yielding quite a bit now. When designing a portfolio in the current state, would it be advisable to substitute say the total bond fund with the Prime MM?
Just putting a kind of arbitrary post in the ground, but 5% would be "quite a bit." I don't think cash is earning much right now just because it has climbed back up from zero.

bltn
Posts: 604
Joined: Mon Feb 20, 2017 9:32 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by bltn » Sun May 13, 2018 3:17 pm

While I think market timing is usually ill advised, with interest rates still recovering from extreme lows, the liquidity of current investment in intermediate term bonds is going to be significantly compromised until interest rates quit rising and stabilize for a few years. To improved the liquidity of bond investments, near future additions to fixed income should be in short duration funds, particularly for those with needs possibly in the next 10 years or less.

A possible compromise between Vanguard s Prime mmf and the Total Bond Fund would be their Ultra Short Term Bond Fund. Duration of 0.9 years and a yield of 2.3%. And the intent of the managers is to hold each bond until maturity. When interest rates stabile for a year or so, the principal value of the fund should catch up.
At some point , when the yield curve steepens or interest rates rise a bit more , a move into longer duration funds could be reconsidered.

Putting new investment money into intermediate duration bonds now, like The Total Bond Index Fund, means that interest rates will have to remain stable or drop again to produce an advantage over short term funds. Depends on the time horizon of the investment and the perceived need for liquidity.

User avatar
whodidntante
Posts: 7122
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Vanguard Prime Money Market instead of bond fund

Post by whodidntante » Sun May 13, 2018 3:29 pm

Did you also notice that Total Bond has been losing money recently? Is that really the trigger for your AA change?

aristotelian
Posts: 6681
Joined: Wed Jan 11, 2017 8:05 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by aristotelian » Sun May 13, 2018 3:33 pm

I use it for my emergency fund. I would not do it for my entire bond allocation as such a low yield will likely lose to inflation and underperform bond market index. Therefore, you will either need to save a lot more or take more risk on the stock side in order to generate the same returns as a standard three fund portfolio.

User avatar
JoMoney
Posts: 8176
Joined: Tue Jul 23, 2013 5:31 am

Re: Vanguard Prime Money Market instead of bond fund

Post by JoMoney » Sun May 13, 2018 5:13 pm

For money expected to be needed 1 year or less, sounds good to me.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

stan1
Posts: 8022
Joined: Mon Oct 08, 2007 4:35 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by stan1 » Sun May 13, 2018 6:10 pm

If you wanted to market time between a money market fund and total bond market you would have wanted to make the switch 1-2 years ago.

User avatar
munemaker
Posts: 4147
Joined: Sat Jan 18, 2014 6:14 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by munemaker » Sun May 13, 2018 7:34 pm

stan1 wrote:
Sun May 13, 2018 6:10 pm
If you wanted to market time between a money market fund and total bond market you would have wanted to make the switch 1-2 years ago.
I am wondering why you say that.

For 2017, the Vanguard Total Bond Market Fund VBTLX had a positive return of 3.56%. Year to date 2018, the return is -2.28%. To me, this indicates the the beginning of this year would have been a fine time to make the switch (and the return of VBTLX seems to be trending down).

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by lack_ey » Sun May 13, 2018 7:42 pm

munemaker wrote:
Sun May 13, 2018 7:34 pm
stan1 wrote:
Sun May 13, 2018 6:10 pm
If you wanted to market time between a money market fund and total bond market you would have wanted to make the switch 1-2 years ago.
I am wondering why you say that.

For 2017, the Vanguard Total Bond Market Fund VBTLX had a positive return of 3.56%. Year to date 2018, the return is -2.28%. To me, this indicates the the beginning of this year would have been a fine time to make the switch (and the return of VBTLX seems to be trending down).
Ideal is more like switching in July 2016 despite the positive returns in 2017.

Image

Back then, the 30/10/2-year yields were 2.11%/1.37%/0.56% compared with today's 3.10%/2.97%/2.54%. At the time, people were thinking that maybe the Fed might have to bring short rates back down to 0 if things deteriorated, and there a number of concerns. Still, I don't imagine the 10-year at 1.37% in 2016 was a good bet ex-ante.

Based on expectations of forward rates available at the time, term premium estimates, etc., I think today's yields are definitely more reasonable for bonds relative to cash than they were at that peak, though still not particularly inspiring. The yield curve is upwards sloping but not by a lot and also combined with market expectations of a couple more hikes left in the year.

User avatar
munemaker
Posts: 4147
Joined: Sat Jan 18, 2014 6:14 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by munemaker » Sun May 13, 2018 7:55 pm

lack_ey wrote:
Sun May 13, 2018 7:42 pm
munemaker wrote:
Sun May 13, 2018 7:34 pm
stan1 wrote:
Sun May 13, 2018 6:10 pm
If you wanted to market time between a money market fund and total bond market you would have wanted to make the switch 1-2 years ago.
I am wondering why you say that.

For 2017, the Vanguard Total Bond Market Fund VBTLX had a positive return of 3.56%. Year to date 2018, the return is -2.28%. To me, this indicates the the beginning of this year would have been a fine time to make the switch (and the return of VBTLX seems to be trending down).
Ideal is more like switching in July 2016 despite the positive returns in 2017.

Image
True that would have been optimum, but IF you changed at the beginning of 2018, you would be ahead of someone who did not switch, at this point in time. Market timing is a risky game, and you could still be successful without hitting the optimum decision points.

tibbitts
Posts: 9412
Joined: Tue Feb 27, 2007 6:50 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by tibbitts » Sun May 13, 2018 7:57 pm

alwayshedge wrote:
Sun May 13, 2018 2:11 pm
I've noticed the Vanguard Prime MM is yielding quite a bit now. When designing a portfolio in the current state, would it be advisable to substitute say the total bond fund with the Prime MM?
"Quite a bit" would be 2% real or so. Not seeing that.

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by lack_ey » Sun May 13, 2018 8:00 pm

munemaker wrote:
Sun May 13, 2018 7:55 pm
True that would have been optimum, but IF you changed at the beginning of 2018, you would be ahead of someone who did not switch, at this point in time. Market timing is a risky game, and you could still be successful without hitting the optimum decision points.
Yes, you don't need perfect timing to come out ahead. I was just defending somebody else's claim of 1-2 years ago being a good time, which I think is reasonable.

User avatar
munemaker
Posts: 4147
Joined: Sat Jan 18, 2014 6:14 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by munemaker » Sun May 13, 2018 8:09 pm

lack_ey wrote:
Sun May 13, 2018 8:00 pm
munemaker wrote:
Sun May 13, 2018 7:55 pm
True that would have been optimum, but IF you changed at the beginning of 2018, you would be ahead of someone who did not switch, at this point in time. Market timing is a risky game, and you could still be successful without hitting the optimum decision points.
Yes, you don't need perfect timing to come out ahead. I was just defending somebody else's claim of 1-2 years ago being a good time, which I think is reasonable.
Your graph demonstrated that very effectively. Thanks

BlackcatCA
Posts: 103
Joined: Sat Jan 20, 2018 2:55 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by BlackcatCA » Sun May 13, 2018 8:15 pm

bltn wrote:
Sun May 13, 2018 3:17 pm
To improved the liquidity of bond investments, near future additions to fixed income should be in short duration funds, particularly for those with needs possibly in the next 10 years or less

When interest rates stabile for a year or so, the principal value of the fund should catch up.

Putting new investment money into intermediate duration bonds now, like The Total Bond Index Fund, means that interest rates will have to remain stable or drop again to produce an advantage over short term funds. Depends on the time horizon of the investment and the perceived need for liquidity.
Agree that new money should be invested in short term bond funds or even money market.

How about longer term bond funds that were purchased years ago? Is there any advantage to trade them to shorter bond funds or even cash? This is in a tax deferred account. (I assume there's some advantage to trade in taxable if it is a TLH opportunity.)

bltn
Posts: 604
Joined: Mon Feb 20, 2017 9:32 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by bltn » Sun May 13, 2018 9:02 pm

BlackcatCA wrote:
Sun May 13, 2018 8:15 pm
bltn wrote:
Sun May 13, 2018 3:17 pm
To improved the liquidity of bond investments, near future additions to fixed income should be in short duration funds, particularly for those with needs possibly in the next 10 years or less

When interest rates stabile for a year or so, the principal value of the fund should catch up.

Putting new investment money into intermediate duration bonds now, like The Total Bond Index Fund, means that interest rates will have to remain stable or drop again to produce an advantage over short term funds. Depends on the time horizon of the investment and the perceived need for liquidity.
Agree that new money should be invested in short term bond funds or even money market.

How about longer term bond funds that were purchased years ago? Is there any advantage to trade them to shorter bond funds or even cash? This is in a tax deferred account. (I assume there's some advantage to trade in taxable if it is a TLH opportunity.)
If I strongly felt interest rates would rise over the next two years, I would get rid of long duration funds. I would keep mid duration funds only to the extent that I didn t need the fund liquidity.

Larry2623
Posts: 63
Joined: Sat Jul 15, 2017 9:23 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by Larry2623 » Sun May 13, 2018 10:31 pm

sperry8 wrote:
Sun May 13, 2018 2:16 pm
livesoft wrote:
Sun May 13, 2018 2:12 pm
For how long? You can chart the total return of VBTLX and VMMXX and see that VBTLX outperforms in the long run.
That was in a bond bull market. Perhaps if the bear is here... history won't look like the future?
That is my concern...most people here have never even seen a bond bear market and I wonder how that affects their advice

User avatar
ResearchMed
Posts: 9457
Joined: Fri Dec 26, 2008 11:25 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by ResearchMed » Sun May 13, 2018 10:50 pm

BlackcatCA wrote:
Sun May 13, 2018 8:15 pm
bltn wrote:
Sun May 13, 2018 3:17 pm
To improved the liquidity of bond investments, near future additions to fixed income should be in short duration funds, particularly for those with needs possibly in the next 10 years or less

When interest rates stabile for a year or so, the principal value of the fund should catch up.

Putting new investment money into intermediate duration bonds now, like The Total Bond Index Fund, means that interest rates will have to remain stable or drop again to produce an advantage over short term funds. Depends on the time horizon of the investment and the perceived need for liquidity.
Agree that new money should be invested in short term bond funds or even money market.

How about longer term bond funds that were purchased years ago? Is there any advantage to trade them to shorter bond funds or even cash? This is in a tax deferred account. (I assume there's some advantage to trade in taxable if it is a TLH opportunity.)
The question to ask about *any* holding in a non-taxable account ("tax" could change the answer) is: "If you had $XYZ in cash right now, would you invest it as it is in <current holding> or put it into <newly considered holding>.

"You are here now."
What's the best thing to do with your money?
(Or, in many cases, other life decisions...)
Otherwise, you are dealing with some flavor of the sunk cost fallacy.

This is NOT meant to suggest lots and lots of trading. This isn't a day to day (or hour to hour!) decision strategy (not for most people).

RM
This signature is a placebo. You are in the control group.

aristotelian
Posts: 6681
Joined: Wed Jan 11, 2017 8:05 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by aristotelian » Sun May 13, 2018 11:05 pm

bltn wrote:
Sun May 13, 2018 9:02 pm

If I strongly felt interest rates would rise over the next two years, I would get rid of long duration funds. I would keep mid duration funds only to the extent that I didn t need the fund liquidity.
If you felt that stocks were going to go down in the next two years, would you get out of stocks?

NoHeat
Posts: 308
Joined: Sun Sep 18, 2016 10:13 am

Re: Vanguard Prime Money Market instead of bond fund

Post by NoHeat » Sun May 13, 2018 11:36 pm

sperry8 wrote:
Sun May 13, 2018 2:16 pm
livesoft wrote:
Sun May 13, 2018 2:12 pm
For how long? You can chart the total return of VBTLX and VMMXX and see that VBTLX outperforms in the long run.
That was in a bond bull market. Perhaps if the bear is here... history won't look like the future?
Good point.

Bonds were in a bull market for more than three decades. That's an unusually long bull market. I wonder how many investors look at a chart of the most recent 20 or 30 years and mistakenly judge that it indicates what's normal, for the "long run."

Its long duration of 6 years did wonderful things to VBTLX during the many years of declining rates. It's easy to forget that the reverse can happen just as easily. It wouldn't require a vicious bear market for bonds to make VBTLX underperform VMMXX -- by my calculation that only requires that long-term rates creep up by 25 basis points per year.
Last edited by NoHeat on Mon May 14, 2018 1:21 am, edited 2 times in total.

Dead Man Walking
Posts: 903
Joined: Wed Nov 07, 2007 6:51 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by Dead Man Walking » Mon May 14, 2018 12:59 am

If you trust Vanguard's website for total returns, you will notice that the total return for Prime Money Market has been higher than Total Bond Market Fund for the last year. I can't make an argument against the time in the market is better than the timing the market argument; however, the bond market is different than the equity market. I was lucky enough to invest in bonds in a falling interest rate environment. The current market is the opposite of what I was lucky enough to experience. If you are an active investor, you may want to time the market by simply shifting between Prime Money Market Fund and Total Bond Market Fund when the total return reported by Vanguard indicates that Total Bond Market Fund is performing better than Prime Money Market Fund. I will be criticized for market timing because the market has already priced in the rising interest rate environment. My argument would be "show me the money."

DMW

User avatar
JoMoney
Posts: 8176
Joined: Tue Jul 23, 2013 5:31 am

Re: Vanguard Prime Money Market instead of bond fund

Post by JoMoney » Mon May 14, 2018 1:32 am

NoHeat wrote:
Sun May 13, 2018 11:36 pm
sperry8 wrote:
Sun May 13, 2018 2:16 pm
livesoft wrote:
Sun May 13, 2018 2:12 pm
For how long? You can chart the total return of VBTLX and VMMXX and see that VBTLX outperforms in the long run.
That was in a bond bull market. Perhaps if the bear is here... history won't look like the future?
Good point.

Bonds were in a bull market for more than three decades. That's an unusually long bull market. I wonder how many investors look at a chart of the most recent 20 or 30 years and mistakenly judge that it indicates what's normal, for the "long run."

Its long duration of 6 years did wonderful things to VBTLX during the many years of declining rates. It's easy to forget that the reverse can happen just as easily. It wouldn't require a vicious bear market for bonds to make VBTLX underperform VMMXX -- by my calculation that only requires that long-term rates creep up by 25 basis points per year.
Here's a Morningstar growth chart with the Ibbotson SBBI data showing a very rough multi-decade period from 1945 to 1984 where 30day TBills outperformed a rolling portfolio of intermediate or long-term government bonds:
Chart Link

I don't encourage the idea of "timing" bond purchases, but I do think if you desire certainty in the returns of your bonds, it might be worthwhile to make sure the maturities or relative duration of your bond portfolio is tied to your expected need of the money.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
ruralavalon
Posts: 17119
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Vanguard Prime Money Market instead of bond fund

Post by ruralavalon » Mon May 14, 2018 9:33 am

tibbitts wrote:
Sun May 13, 2018 7:57 pm
alwayshedge wrote:
Sun May 13, 2018 2:11 pm
I've noticed the Vanguard Prime MM is yielding quite a bit now. When designing a portfolio in the current state, would it be advisable to substitute say the total bond fund with the Prime MM?
"Quite a bit" would be 2% real or so. Not seeing that.
What I see is Vanguard Prime Money Market Fund (VMMXX) yield in the same general range as inflation, so no longer a guaranteed negative real return. It's also in the same general range as a good savings account. Therefore it's a now a reasonable choice for a savings vehicle.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
munemaker
Posts: 4147
Joined: Sat Jan 18, 2014 6:14 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by munemaker » Mon May 14, 2018 11:11 am

What if you moved your long term money from bond fund to money market fund temporarily until the rate increases diminish (and bond fund returns turn positive), and then move your long term money back into the bond fund? Then you would still have the long term benefit of superior bond fund returns while minimizing a drop in principal while the rates are rising. Yes, your long term money would be in a short term instrument for a period of time, but if you come out ahead in the long run, so what?

BlackcatCA
Posts: 103
Joined: Sat Jan 20, 2018 2:55 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by BlackcatCA » Mon May 14, 2018 12:36 pm

munemaker wrote:
Mon May 14, 2018 11:11 am
What if you moved your long term money from bond fund to money market fund temporarily until the rate increases diminish (and bond fund returns turn positive), and then move your long term money back into the bond fund? Then you would still have the long term benefit of superior bond fund returns while minimizing a drop in principal while the rates are rising. Yes, your long term money would be in a short term instrument for a period of time, but if you come out ahead in the long run, so what?
This is what I'm thinking also, but then a dilemma: if I trade the LT bond funds that has already suffered a price drop to short term/money market, am I also losing the supposedly increased yield of those LT bond funds? How does one keep the "long term benefit of superior bond returns" when one doesn't own the fund?

A related question: is there any analysis to know whether the 2-3 Fed rate increases have been priced into the NAV of ST, LT and Total bond funds?

onourway
Posts: 2160
Joined: Thu Dec 08, 2016 3:39 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by onourway » Mon May 14, 2018 1:03 pm

munemaker wrote:
Mon May 14, 2018 11:11 am
What if you moved your long term money from bond fund to money market fund temporarily until the rate increases diminish (and bond fund returns turn positive), and then move your long term money back into the bond fund? Then you would still have the long term benefit of superior bond fund returns while minimizing a drop in principal while the rates are rising. Yes, your long term money would be in a short term instrument for a period of time, but if you come out ahead in the long run, so what?
You intend to buy high and sell low?

Bond prices have been *falling*. Now should be the time to buy, not sell.

bltn
Posts: 604
Joined: Mon Feb 20, 2017 9:32 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by bltn » Mon May 14, 2018 1:21 pm

aristotelian wrote:
Sun May 13, 2018 11:05 pm
bltn wrote:
Sun May 13, 2018 9:02 pm

If I strongly felt interest rates would rise over the next two years, I would get rid of long duration funds. I would keep mid duration funds only to the extent that I didn t need the fund liquidity.
If you felt that stocks were going to go down in the next two years, would you get out of stocks?
Maybe. But I ve never felt as bad about stocks over a 2year period as I do about bond prices in our current interest rate environment. Until recently I only purchased individual bonds and held until maturity. Now as I invest in bond funds, there is no maturity, except for very low duration funds. With long term bonds funds, with their historically low yields, catching up to even a 1% interest rate rise over the next two years is very doubtful.
I agree with Warren Buffet that long term, bonds are not a very good investment when compared to stocks. And possibly real estate. Bonds simply supply my portfolio with a measure of stability and liquidity. Currently I don't think long term bonds (or intermediate term bonds) do either. But I m still trying to learn about fixed income investing. And all investing.

User avatar
munemaker
Posts: 4147
Joined: Sat Jan 18, 2014 6:14 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by munemaker » Mon May 14, 2018 2:30 pm

onourway wrote:
Mon May 14, 2018 1:03 pm
munemaker wrote:
Mon May 14, 2018 11:11 am
What if you moved your long term money from bond fund to money market fund temporarily until the rate increases diminish (and bond fund returns turn positive), and then move your long term money back into the bond fund? Then you would still have the long term benefit of superior bond fund returns while minimizing a drop in principal while the rates are rising. Yes, your long term money would be in a short term instrument for a period of time, but if you come out ahead in the long run, so what?
You intend to buy high and sell low?

Bond prices have been *falling*. Now should be the time to buy, not sell.
The Fed has promised to continue raising interest rates and unwind their balance sheet, so I expect Bond fund prices will continue to face a strong headwind. It is a lot different environment than the decades of falling interest rates we are all conditioned to. I wish it were over but I think we are a long way from that.

NoHeat
Posts: 308
Joined: Sun Sep 18, 2016 10:13 am

Re: Vanguard Prime Money Market instead of bond fund

Post by NoHeat » Mon May 14, 2018 4:33 pm

onourway wrote:
Mon May 14, 2018 1:03 pm
Bond prices have been *falling*. Now should be the time to buy, not sell.
Do you have a reason to believe bonds will not continue to fall for years?

Or that they will not underperform money market funds for decades?

It could very easily happen. Or not. There are no certainties.

zengolf2011
Posts: 141
Joined: Tue Jul 21, 2015 1:27 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by zengolf2011 » Mon May 14, 2018 6:41 pm

Don't rising rates help holders of bond funds if shares are held past the duration period? I thought that's what Vanguard says.

dbr
Posts: 31257
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard Prime Money Market instead of bond fund

Post by dbr » Mon May 14, 2018 6:58 pm

zengolf2011 wrote:
Mon May 14, 2018 6:41 pm
Don't rising rates help holders of bond funds if shares are held past the duration period? I thought that's what Vanguard says.
Yes, but you have a minor misunderstanding. Waiting the duration period works for time past the last increase in interest rates. For continually increasing interest rates at a constant rate of increase I think something like twice the duration gets you to a point of indifference. After that you are actually ahead to have higher interest rates. In reality interest rates are noisy and also move differently for different maturities and different bonds.

But it is still true that long term investors in bonds eventually are better off at higher interest rates, shorter durations sooner and longer durations later. For very long bonds such problems, especially in the presence of high inflation can be bad, for intermediate durations it is probably practical to just hold through. Short durations are not very sensitive but also sacrifice return.

User avatar
ResearchMed
Posts: 9457
Joined: Fri Dec 26, 2008 11:25 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by ResearchMed » Mon May 14, 2018 6:59 pm

zengolf2011 wrote:
Mon May 14, 2018 6:41 pm
Don't rising rates help holders of bond funds if shares are held past the duration period? I thought that's what Vanguard says.
The problem/question refers to what happens prior to that (which could take years, depending upon duration of fund).

I *hate* the "explanation" that "... and if you wait <long enough> you'll eventually make up what you lost..."

Well, as with OP, I'd rather not lose that in the first place and then need to depend upon the *later* increased interest to "make it up".

As suggested, IF one timed it (right, a non-trivial situation, obviously), then one could seemingly sell, sit out the fund drop, and then get back in later, as the "increase from the higher rates" kicks in seriously.

Or not?

RM
This signature is a placebo. You are in the control group.

dbr
Posts: 31257
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard Prime Money Market instead of bond fund

Post by dbr » Mon May 14, 2018 7:21 pm

ResearchMed wrote:
Mon May 14, 2018 6:59 pm
zengolf2011 wrote:
Mon May 14, 2018 6:41 pm
Don't rising rates help holders of bond funds if shares are held past the duration period? I thought that's what Vanguard says.
The problem/question refers to what happens prior to that (which could take years, depending upon duration of fund).

I *hate* the "explanation" that "... and if you wait <long enough> you'll eventually make up what you lost..."

Well, as with OP, I'd rather not lose that in the first place and then need to depend upon the *later* increased interest to "make it up".

As suggested, IF one timed it (right, a non-trivial situation, obviously), then one could seemingly sell, sit out the fund drop, and then get back in later, as the "increase from the higher rates" kicks in seriously.

Or not?

RM
The proposition that if one timed it right to come out ahead then one would come out ahead is an obvious circular argument, aka logical fallacy. What is needed is outlining of method known to successfully obtain the correct timing.

But I think the thought process "make up what one lost" is misguided. Future interest rates are an unknown other than we know they go up and down, maybe in a noisy way and maybe in secular trends with noise on top. That translates via duration into noisy variation in return maybe with a secular trend underneath. This situation is what is called risk. Cash is least risky, short bonds a tad more risky, intermediate bonds more risky than that, long bonds even more risky, and finally stocks are even more, as in very, risky. More than that, if you do everything in real dollars, evs there are no cash denominated inflation indexed investments except I bonds. Across that universe, the more risk, the more expected return.

Anyway, the point of interest is the risk and return of the whole portfolio, which can be adjusted by stock/bond allocation using lots of choices of bonds. The only person who should care if a bond is at a loss or not is someone who wants to keep money ready in the short term or at a specific point in time with no tolerance for volatility. Those people know who they are and what to do to meet that goal.

zengolf2011
Posts: 141
Joined: Tue Jul 21, 2015 1:27 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by zengolf2011 » Tue May 15, 2018 8:09 am

dbr:
Anyway, the point of interest is the risk and return of the whole portfolio, which can be adjusted by stock/bond allocation using lots of choices of bonds. The only person who should care if a bond is at a loss or not is someone who wants to keep money ready in the short term or at a specific point in time with no tolerance for volatility
Thank you, dbr, great explanation. I think this makes the case for a combination of fund durations to avoid turning paper losses into real losses.

onourway
Posts: 2160
Joined: Thu Dec 08, 2016 3:39 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by onourway » Tue May 15, 2018 8:28 am

NoHeat wrote:
Mon May 14, 2018 4:33 pm
onourway wrote:
Mon May 14, 2018 1:03 pm
Bond prices have been *falling*. Now should be the time to buy, not sell.
Do you have a reason to believe bonds will not continue to fall for years?

Or that they will not underperform money market funds for decades?

It could very easily happen. Or not. There are no certainties.
I have no reason to believe that bond prices will go in either direction. Looking back at the past though I am confident in the dictum to 'stay the course'.

From late 2002 until mid-2007 the Federal Funds rate went from just over 1% to well over 5%.

Image

During that period Vanguard's Total Bond Market returned over 4% annually, despite suffering a maximum draw-down of 3.5%

Image

All this talk about switching out of bonds because we've seen a similar 3.5% decline over the past couple of years is simply justification for market timing. We know how well that typically works out.

CnC
Posts: 846
Joined: Thu May 11, 2017 12:41 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by CnC » Tue May 15, 2018 8:35 am

Larry2623 wrote:
Sun May 13, 2018 10:31 pm
sperry8 wrote:
Sun May 13, 2018 2:16 pm
livesoft wrote:
Sun May 13, 2018 2:12 pm
For how long? You can chart the total return of VBTLX and VMMXX and see that VBTLX outperforms in the long run.
That was in a bond bull market. Perhaps if the bear is here... history won't look like the future?
That is my concern...most people here have never even seen a bond bear market and I wonder how that affects their advice
I wonder about that too. Nearly everyone here is gun shy about going heavy stocks and I understand we had tow sizable drops in the last 20 years and we will likely have another one in the next decade.

But they all pretend like bonds are never going to be money losers. I'm not saying that they say bonds can't lose money, just that there is the overwhelming expectation that bonds are safe. So much so I didn't realize that you can lose lots and lots of money in bonds.

Now this is my opinion, but I think 30 year bonds are extremely risky.

https://www.bloomberg.com/view/articles ... sses-alone

CnC
Posts: 846
Joined: Thu May 11, 2017 12:41 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by CnC » Tue May 15, 2018 8:44 am

I understand the mantra "don't time the market" I really do.

But how does that coincide with knowingly locking in historically low yields in bonds?

There is little to no evidence to suggest that your investment will produce any more money than the yield states which is quite a bit below ±50% of the average historical yield. There is quite a bit of evidence that the fed will raise rates making future bonds more valuable.


Isn't there a difference between timing the market and knowingly purchasing something that is practically guaranteeing you sub average returns? This is an honest question. I can see it being a hedge I can see it being used for immediate and intermediate cash but at this point there appears to be a very minimal upside and a very considerable downside.

CedarWaxWing
Posts: 746
Joined: Sun Nov 02, 2014 12:24 pm

Re: Vanguard Prime Money Market instead of bond fund

Post by CedarWaxWing » Tue May 15, 2018 9:33 am

dbr wrote:
Mon May 14, 2018 6:58 pm
zengolf2011 wrote:
Mon May 14, 2018 6:41 pm
Don't rising rates help holders of bond funds if shares are held past the duration period? I thought that's what Vanguard says.
Yes, but you have a minor misunderstanding. Waiting the duration period works for time past the last increase in interest rates. For continually increasing interest rates at a constant rate of increase I think something like twice the duration gets you to a point of indifference. After that you are actually ahead to have higher interest rates. In reality interest rates are noisy and also move differently for different maturities and different bonds.

But it is still true that long term investors in bonds eventually are better off at higher interest rates, shorter durations sooner and longer durations later. For very long bonds such problems, especially in the presence of high inflation can be bad, for intermediate durations it is probably practical to just hold through. Short durations are not very sensitive but also sacrifice return.
One question in regards to "point of indifference" in regards to bond funds is puzzling to me.

IF one has a bond fund long term simply as an example, but I imagine this applies to int and short also, and IF all the "payouts" dividends/interest I presume, are used for living expenses, as interest rates creep up slowly, how does that affect the time to reach the point of indifference as opposed to continual reinvestment of those payouts?

IF the bonds in the funds are never sold until maturity it would seem that eventually the drops in value are all recovered, just as in a bond ladder.

IF the bonds in the funds are sold off before maturity, then a loss is locked in.

It seems difficult to know how much of an index bond fund turnover is due to maturing of bonds and then replacing, vs from selling and replacing.

I hope this question makes sense.

thanks

Post Reply