Money market vs Bond funds

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retired02
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Money market vs Bond funds

Post by retired02 » Tue Sep 11, 2018 4:11 pm

What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?

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vineviz
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Re: Money market vs Bond funds

Post by vineviz » Tue Sep 11, 2018 4:31 pm

retired02 wrote:
Tue Sep 11, 2018 4:11 pm
What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
Like any other asset, the current price of bonds already reflects current expectations about the probably course of future events (including estimates about the likelihood and/or magnitude of future interest rate hikes). Those expectations are priced in, so there is no reason to assume that those same expectations will lead one class of fixed income to offer better or worse risk-adjusted returns.

So why bond funds? Longer term bonds are viewed by some investors as generally being riskier, so they generally offer higher returns to compensate for that. Within the fixed income portion of your investment portfolio, any money you don't expect to spend in the next five or six years should probably be invested in intermediate-term bonds. Any money you don't expect to spend in the next 15 years should probably be invested in long-term bonds. Same as always.

Many people, including me, would say that things like CDs or money market funds are not investments at all. Instead, I'd say they are a form of savings and are suitable as higher return alternatives to a savings account: a good place to park money you expect to spend (or need) in the next 1 to 3 years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

sabhen
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Re: Money market vs Bond funds

Post by sabhen » Tue Sep 11, 2018 5:28 pm

I am in the same predicament as OP. For the "safe" portion of my portfolio, MM is a probably better choice in the current environment with interest rate on the rise. I am one who thinks that the best days for bonds are over after a 30+ year bull market run.

Grt2bOutdoors
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Re: Money market vs Bond funds

Post by Grt2bOutdoors » Tue Sep 11, 2018 5:52 pm

sabhen wrote:
Tue Sep 11, 2018 5:28 pm
I am in the same predicament as OP. For the "safe" portion of my portfolio, MM is a probably better choice in the current environment with interest rate on the rise. I am one who thinks that the best days for bonds are over after a 30+ year bull market run.
Bonds still will yield more over time. A long term investor should not switch from bonds to money market instruments, unless their objective has changed requiring monies to be available from 1-5 years or shorter. In that case, holding money market funds, Treasury bills and/or cd's is perfectly acceptable.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Kevin8696
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Re: Money market vs Bond funds

Post by Kevin8696 » Tue Sep 11, 2018 6:00 pm

retired02 wrote:
Tue Sep 11, 2018 4:11 pm
What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
I don't think you are missing anything, especially if you are retired (like me) and have a shorter-than-average investment horizon.

With the Fed's continuing program of raising short-term rates, the spread between the 2-yr and 10-yr Treasuries has narrowed to just 0.25% compared to a historic spread of about 2.0%. This flat yield curve has analysts saying that investors in intermediate term bond funds (such as Vanguard Total Bond Market Index Fund, VBTLX) are not being adequately compensated for the interest rate risk associated with the 6+ year duration of these funds.

As interest rates go up, bond prices go down. The rule of thumb I have read is: Duration minus SEC yield approximates the impact of a 1% increase in rates. Using this method for VBTLX, portfolio duration of 6.1 years minus the current SEC yield of 3.13% indicates a price drop of approximately 3.0% for a 1% increase in rates. At current interest rate levels, a hit like this this to principal would not be fun.

As a retiree with a substantial portion of my portfolio in fixed income, I'm not enthused about taking capital losses on the bond side of the portfolio. I recognize that the higher yielding bonds that will be added to the portfolio will eventually offset the hit to total return coming from the capital losses. In the meantime I'm seeing losses, and who knows when I'll be back in the black ?

Year-to-date results for VBTLX show total return of -1.40%. With a distribution yield of 2.77%, the fund has been taking capital losses over the last eight months. During the same period, VMMXX return has been 1.25% and shows a 7-day yield of 2.09%.

Here's the dilemma, with rates still being very low on a historic basis, is it worth rolling the dice and riding out the storm with an intermediate-term bond fund, or just go with the safety of principal and the increasing returns of the money market fund ?

I've decided to go with the money market fund, and also changed my stock/bond allocation a tad to offset the lower risk that I am now taking on the bond side of my portfolio.
Last edited by Kevin8696 on Fri Sep 14, 2018 8:11 pm, edited 1 time in total.

Chaconne
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Re: Money market vs Bond funds

Post by Chaconne » Tue Sep 11, 2018 6:23 pm

retired02 wrote:
Tue Sep 11, 2018 4:11 pm
What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
What you're doing is equivalent to looking at the attack on Pearl Harbor and assuming that Japan won World War II. If you're investing for the long haul (and, granted, you gave us no idea whether you are or not), you need to take a longer-term perspective. That is what you're missing.

InvestingGeek
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Re: Money market vs Bond funds

Post by InvestingGeek » Tue Sep 11, 2018 6:25 pm

retired02 wrote:
Tue Sep 11, 2018 4:11 pm
What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
All depends on your time horizon and appetite for risk. If you're retired and need safety of principal above all else, obviously zero-risk CDs and money market or short-term bonds is the way to go.

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EddieGee
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Re: Money market vs Bond funds

Post by EddieGee » Tue Sep 11, 2018 6:28 pm

It would seem to me that if you can get nearly comparable interest from either a MM or bond fund then the only thing you are "missing" from MM is the opportunity for appreciation if interest rates go down. Since this is highly unlikely, MM appears a prudent alternative to a bond fund at this time. If and when interest rates rise and/or the yield curve steepens, you can always shift funds from MM into bond funds.

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retired02
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Re: Money market vs Bond funds

Post by retired02 » Fri Sep 14, 2018 10:59 am

I am the writer of the original post. I failed to mention that I recently turned 80 with my wife only a few years behind me. My investment horizon is anywhere from 1 day to 20 years. I have always been a "stay the course" type investor..... probably with Vanguard for 25-30 years, so it makes it difficult for me to totally stray from usual diversification. Presently have a 33/33/34% cash/bonds/stocks allocation. I have considered the VG Target funds but I have an aversion to international stock or bond funds. Would probably make sense to be 100% in short term, liquid assets but reluctant to possibly miss more upside gains. (greed factor)

smectym
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Re: Money market vs Bond funds

Post by smectym » Fri Sep 14, 2018 11:16 am

As long as the Fed continues to hike short-term interest rates, an overweight allocation to money market funds vs. bonds is a reasonable investment decision. And if your investment horizon is shorter, then that reinforces the argument.

Smectym

aristotelian
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Re: Money market vs Bond funds

Post by aristotelian » Fri Sep 14, 2018 11:34 am

If the market crashes there is a good chance that your bonds fund goes up, while your MM fund will remain flat. That is the positive aspect of the principal risk of bond funds. The Fed is increasing rates now but that can change in a heartbeat if something happens.

Northern Flicker
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Re: Money market vs Bond funds

Post by Northern Flicker » Thu May 09, 2019 6:02 pm

retired02 wrote:
Tue Sep 11, 2018 4:11 pm
What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
Since the date of the referenced posting (9/11/2018) the total bond index and the vanguard intermediate treasury bond index fund both returned about 4.5% while the Federal Money Market fund returned about 1.5%:

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Predicting the future is hard.

dbr
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Re: Money market vs Bond funds

Post by dbr » Thu May 09, 2019 6:18 pm

retired02 wrote:
Tue Sep 11, 2018 4:11 pm
What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
You would if you wanted to invest at higher expected return at the risk that return would not show up in any particular interval of time. Of course some bond funds may not offer higher expected return than any particular money market, savings account, or CD, in which case a lot of people would not buy one of those bond funds. This trade-off continues through the gamut of investing choices including the addition of riskier higher returning investments such as stocks. Is everything you own in that money market fund?

SleepCity
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Re: Money market vs Bond funds

Post by SleepCity » Thu May 09, 2019 6:18 pm

Omg! You have to pay taxes on dividends??????????

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welderwannabe
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Re: Money market vs Bond funds

Post by welderwannabe » Fri May 10, 2019 2:51 pm

retired02 wrote:
Tue Sep 11, 2018 4:11 pm
What am I missing? Intermediate VG bond funds have lost from 1.25 to 1.50% YTD 9/2018. Short term funds have lost a small amount YTD. It would seem reasonable to expect interest rate to increase in future resulting in more loss of principal. VG Prime money market fund has a SEC yield of 2 %.
Why should one invest in bond funds over a money market?
A money market is a bond fund with really ultra ultra short term bonds and some special accounting rules that allow them to hold a $1 NAV.

Over the long term the intermediate bonds should out perform. The short term is a different story, but again one should hold assets suitable for their time horizon so I dont view it as a major issue.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

FIby45
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Re: Money market vs Bond funds

Post by FIby45 » Wed Oct 30, 2019 7:13 pm

aristotelian wrote:
Fri Sep 14, 2018 11:34 am
If the market crashes there is a good chance that your bonds fund goes up, while your MM fund will remain flat. That is the positive aspect of the principal risk of bond funds. The Fed is increasing rates now but that can change in a heartbeat if something happens.
I never thought about this. Is this the main difference?

In event of a downturn the bond fund would appreciate? I'm seeing a 0.36% interest rate difference between fzdxx (MM) and bnd at vanguard.

aristotelian
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Re: Money market vs Bond funds

Post by aristotelian » Wed Oct 30, 2019 7:24 pm

FIby45 wrote:
Wed Oct 30, 2019 7:13 pm
aristotelian wrote:
Fri Sep 14, 2018 11:34 am
If the market crashes there is a good chance that your bonds fund goes up, while your MM fund will remain flat. That is the positive aspect of the principal risk of bond funds. The Fed is increasing rates now but that can change in a heartbeat if something happens.
I never thought about this. Is this the main difference?

In event of a downturn the bond fund would appreciate? I'm seeing a 0.36% interest rate difference between fzdxx (MM) and bnd at vanguard.
That is the upside. Of course, there is risk. Take a look at various bond funds and how they performed in '08 and other periods. The idea is that a combination of stocks and bonds together will provide the best risk-adjusted returns, more so than cash.

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