Bond Fund Question

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HonBee
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Joined: Sat Sep 22, 2012 6:27 am

Bond Fund Question

Post by HonBee » Sat Sep 22, 2018 5:30 am

Hi.... I've previously posted bond fund questions and am still trying to get an understanding of Bond funds.

I currently have money in the Total Bond Index fund as part of my retirement investments (following the 3 fund approach).

I've been reading about the Short Term Investment Grade Bond Fund which seems to have shorter duration of maturity.
I've seen my holdings in the Total Bond Fund producing negative returns and I think I understand the reasons for this given the higher interest rate environment. I've been investing in this fund for about 8 years.

My question is..... would I benefit from transferring some of the money in my Total Bond Fund to the Short Term Investment Grade Bond Fund? I realize I should have some holdings in bond(s) fund of some sort.

I'm 64 and planning to start tapping my retirement funds when I turn 66. My funds are all non taxable accounts.

Thank you for your thoughts.

livesoft
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Re: Bond Fund Question

Post by livesoft » Sat Sep 22, 2018 5:55 am

HonBee wrote:
Sat Sep 22, 2018 5:30 am
My question is..... would I benefit from transferring some of the money in my Total Bond Fund to the Short Term Investment Grade Bond Fund?
Below is a chart I made at Morningstar.com comparing the Growth Of $10,000 in VBTLX (total bond) and VFSUX (short-term investment grade) over the past 3 years:

Image

You can see that the answer to your question is impossible to know because you want to know what will happen off the right hand side of the chart.

But if you look at the past 3 years, one would would have benefited sometimes by holding some VFSUX and sometimes one would not have benefited.

It's basically roll the dice or market time the switching between Total Bond and Short-term Investment Grade. As for market timing, next week the FOMC meets and bond funds are going to be jumping up and down by about 0.2% to 0.4% every day for a little while, so it would be easy to move to ST investment grade and then have Total Bond jump up 0.4% more than ST Investment grade did.

Here's what I suggest: Never move money from Total Bond to Short-term Invest Grade when a chart like above shows the blue line below the orange line. That would be selling low.
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tibbitts
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Re: Bond Fund Question

Post by tibbitts » Sat Sep 22, 2018 6:38 am

You might also consider how the bonds might perform in a 2008/2009 scenario, where pretty much government bonds were the only ones that came through relatively unscathed. The "too-high" percentage of government bonds in Total Bond Market could be your friend sometimes.

I have no total bond or other Treasury-heavy funds, because all my bonds are in deferred accounts and it just seems like I'm wasting their (state) tax status. Plus I know that even if equities plunged 90% I wouldn't rebalance; I wouldn't really have to since all my high-yield and emerging market bonds would probably be in the tank almost that much so not much change to my allocation percentages. Wow I almost made that sound like a feature.

HonBee
Posts: 55
Joined: Sat Sep 22, 2012 6:27 am

Re: Bond Fund Question

Post by HonBee » Sat Sep 22, 2018 7:23 am

thank you both for your help.

I see what you're pointing out, Livesoft.... so maybe what I do is leave my Total Bond as is, but for future contributions, put into the Short Term Bond fund (at least diversify the bond holdings).....

thanks again.

HonBee
Posts: 55
Joined: Sat Sep 22, 2012 6:27 am

Re: Bond Fund Question

Post by HonBee » Sat Sep 22, 2018 7:23 am

thank you both for your help.

I see what you're pointing out, Livesoft.... so maybe what I do is leave my Total Bond as is, but for future contributions, put into the Short Term Bond fund (at least diversify the bond holdings).....

thanks again.

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dumbbunny
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Re: Bond Fund Question

Post by dumbbunny » Sat Sep 22, 2018 7:36 am

HonBee wrote:
Sat Sep 22, 2018 7:23 am
thank you both for your help.

I see what you're pointing out, Livesoft.... so maybe what I do is leave my Total Bond as is, but for future contributions, put into the Short Term Bond fund (at least diversify the bond holdings)....
You would then have a Four Fund portfolio. Is that what you really want?
“It’s the curse of old men to realize that in the end we control nothing." "Homeland" episode, "Gerontion"

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vineviz
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Re: Bond Fund Question

Post by vineviz » Sat Sep 22, 2018 7:43 am

HonBee wrote:
Sat Sep 22, 2018 7:23 am
thank you both for your help.

I see what you're pointing out, Livesoft.... so maybe what I do is leave my Total Bond as is, but for future contributions, put into the Short Term Bond fund (at least diversify the bond holdings).....

thanks again.
As long as you are contributing to the portfolio, total bond is almost certainly the only bond fund you need or should be investing in.

Maybe when you start withdrawing the strategy could change, but for now just keep saving.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

livesoft
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Re: Bond Fund Question

Post by livesoft » Sat Sep 22, 2018 11:25 am

I would be putting money into Total Bond now rather than Short-term Investment Grade (STIG) simply because the blue line is below the orange line.

When the orange line goes below the blue line, then I would put money into STIG.

When they are close together, then it really doesn't matter what one does. Only when they diverge is action warranted. They are diverged now.
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Taylor Larimore
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Four reasons I prefer Total Bond Market Index Fund

Post by Taylor Larimore » Sat Sep 22, 2018 12:12 pm

HonBee wrote:
Sat Sep 22, 2018 5:30 am
Hi.... I've previously posted bond fund questions and am still trying to get an understanding of Bond funds.

I currently have money in the Total Bond Index fund as part of my retirement investments (following the 3 fund approach).

I've been reading about the Short Term Investment Grade Bond Fund which seems to have shorter duration of maturity.
I've seen my holdings in the Total Bond Fund producing negative returns and I think I understand the reasons for this given the higher interest rate environment. I've been investing in this fund for about 8 years.

My question is..... would I benefit from transferring some of the money in my Total Bond Fund to the Short Term Investment Grade Bond Fund? I realize I should have some holdings in bond(s) fund of some sort.

I'm 64 and planning to start tapping my retirement funds when I turn 66. My funds are all non taxable accounts.

Thank you for your thoughts.
HonBee:

I recommend that you continue holding your Vanguard Total Bond Market Index Fund, now the largest bond fund in the world, for four primary reasons:

1. Bonds are for safety. In the 2008 bear market for stocks, Total Bond Market gained +5%; Vanguard Short-Term Investment Grade fell -4.65%

2. Total Bond Market is very diversified--The only "free lunch" in investing.

3. Total Bond Market ALREADY holds short-term investment grade bonds.

4. Simplicity. Read my "Simplicity" link below.

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

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watchnerd
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Re: Four reasons I prefer Total Bond Market Index Fund

Post by watchnerd » Sun Sep 23, 2018 11:06 am

Taylor Larimore wrote:
Sat Sep 22, 2018 12:12 pm
HonBee wrote:
Sat Sep 22, 2018 5:30 am
Hi.... I've previously posted bond fund questions and am still trying to get an understanding of Bond funds.

I currently have money in the Total Bond Index fund as part of my retirement investments (following the 3 fund approach).

I've been reading about the Short Term Investment Grade Bond Fund which seems to have shorter duration of maturity.
I've seen my holdings in the Total Bond Fund producing negative returns and I think I understand the reasons for this given the higher interest rate environment. I've been investing in this fund for about 8 years.

My question is..... would I benefit from transferring some of the money in my Total Bond Fund to the Short Term Investment Grade Bond Fund? I realize I should have some holdings in bond(s) fund of some sort.

I'm 64 and planning to start tapping my retirement funds when I turn 66. My funds are all non taxable accounts.

Thank you for your thoughts.
HonBee:

I recommend that you continue holding your Vanguard Total Bond Market Index Fund, now the largest bond fund in the world, for four primary reasons:

1. Bonds are for safety. In the 2008 bear market for stocks, Total Bond Market gained +5%; Vanguard Short-Term Investment Grade fell -4.65%
Yes, but....if offsetting stock risk is the main goal for bonds, Treasuries performed even better in that scenario.

If offsetting equity risk is the main goal, why hold TBM instead of a Treasury index fund?

Vanguard has several now.

Bernstein, Swensen, Swedroe, others have said that if 2008-2009 taught us anything is that if you really want to offset equity, you need to hold the risk free asset.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

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watchnerd
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Location: Seattle, WA, USA

Re: Bond Fund Question

Post by watchnerd » Sun Sep 23, 2018 11:21 am

In the following example for 2008-2009 taken from Portfolio Visualizer:

Portfolio 1 = 100% Total US Stock Market
Portfolio 2 = 100% Total US Bond Market
Portfolio 3 = 100% Intermediate Treasuries

Portfolio || Initial Balance Final Balance CAGR US Mkt Correlation
Portfolio 1 $10,000 $8,103 -9.98% 1.00
Portfolio 2 $10,000 $11,129 5.49% 0.35
Portfolio 3 $10,000 $11,140 5.55% -0.03
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

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watchnerd
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Location: Seattle, WA, USA

Re: Bond Fund Question

Post by watchnerd » Sun Sep 23, 2018 11:27 am

tibbitts wrote:
Sat Sep 22, 2018 6:38 am
You might also consider how the bonds might perform in a 2008/2009 scenario, where pretty much government bonds were the only ones that came through relatively unscathed. The "too-high" percentage of government bonds in Total Bond Market could be your friend sometimes.
I think there are two risk management choices:

1. If you want the best risk offset to stocks, Treasury bond funds are a better choice than Total Bond Market
2. If you're willing to sacrifice some risk insurance for better returns during 'normal' times, TBM might give a higher return

Personally, as Taylor says, I like to simplify, but I do it differently: keep your risk on the equity side.

I use a modified 3 fund port, swapping in Treasuries for TBM for the superior risk insurance. If I want more risk, I get more equities.

Simple.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

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vineviz
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Re: Bond Fund Question

Post by vineviz » Sun Sep 23, 2018 11:43 am

watchnerd wrote:
Sun Sep 23, 2018 11:27 am

I use a modified 3 fund port, swapping in Treasuries for TBM for the superior risk insurance. If I want more risk, I get more equities.

Simple.
Yes.

In fact, because treasuries are more effective diversifiers than corporate bonds you probably SHOULD hold more equities than if you were using total bond. Typically this will provide better risk-adjusted returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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watchnerd
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Re: Bond Fund Question

Post by watchnerd » Sun Sep 23, 2018 12:18 pm

vineviz wrote:
Sun Sep 23, 2018 11:43 am
watchnerd wrote:
Sun Sep 23, 2018 11:27 am

I use a modified 3 fund port, swapping in Treasuries for TBM for the superior risk insurance. If I want more risk, I get more equities.

Simple.
Yes.

In fact, because treasuries are more effective diversifiers than corporate bonds you probably SHOULD hold more equities than if you were using total bond. Typically this will provide better risk-adjusted returns.
My only nit vs Vanguard with regard to Treasuries is their lack of a total Treasury index fund.

iShares has GOVT, which holds maturities from 1-30 years, which has a certain intellectual / academic appeal in owning the 'total treasury market'.

On the other hand, the ER = .15 (twice that of VGIT ER=.07), and the average durations (GOVT = 5.89 yrs, VGIT = 5.2 yrs) and SEC yields (GOVT = 2.71%, VGIT = 2.80%) are close enough to make them substitutable goods, with a slight edge to VGIT.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

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