Short Bond Funds or Tips Funds or Bond Ladder

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frederickj
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Short Bond Funds or Tips Funds or Bond Ladder

Post by frederickj » Sun Nov 11, 2018 11:14 am

I need to have readily available investments available
many suggest a Bond Ladder for this purpose

it was my experience in 2008-2009 that Tips mutual funds were volatile with wide swings in values

this is one of the reasons Bond Ladders are preferred

I have no experience w Bond Ladders and ask if a Short Term Bond Index Fund would essentially serve the same purpose as a Bond Ladder
at least until I set up a Ladder
I believe that the Short Term Bond Index Fund was stable in 2008-2009

Thanks


frederickj

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vineviz
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by vineviz » Sun Nov 11, 2018 11:21 am

frederickj wrote:
Sun Nov 11, 2018 11:14 am
I need to have readily available investments available
many suggest a Bond Ladder for this purpose
Can you expand a little on what you mean by "readily available investments available"?

In particular, do you mean you need to regularly withdraw money from the portfolio or do you mean that you MIGHT need to withdraw money unexpectedly with very short notice?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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patrick013
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by patrick013 » Sun Nov 11, 2018 2:33 pm

frederickj wrote:
Sun Nov 11, 2018 11:14 am
I need to have readily available investments available
many suggest a Bond Ladder for this purpose
CD Ladder

Fidelity has 2 and 5 year CD ladders ready for push button investment.
Or you can make your own for any maturity. They usually yield more
than a ST Bond fund and a TRSY10. They've been popular lately. One
of my favorite places.
age in bonds, buy-and-hold, 10 year business cycle

frederickj
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by frederickj » Sun Nov 11, 2018 5:54 pm

VINEVIZ

might need to have cash available for an extended period-2 o 3 years-to meet an anticipated emergency

and Patrick013
a push button investment would be what I'm looking for

I would prefer to keep all my funds with Vanguard
I'll have to check with Vanguard what they offer

a couple of books I've referenced prefer buying the bonds direct from the treasury and not in the secondary market

would you have any comment on buying direct and w what Vanguard might offer

Thank you both

Frederickj

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vineviz
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by vineviz » Sun Nov 11, 2018 6:16 pm

frederickj wrote:
Sun Nov 11, 2018 5:54 pm
might need to have cash available for an extended period-2 o 3 years-to meet an anticipated emergency
If you have a good idea of WHEN the emergency might strike, and it's in the next couple of years, I'd probably just buy a single CD or TIPS that matures right before that date.

If the date of the emergency is uncertain, and could be anytime in the next five years, I think the only good choice would a short-term TIPS mutual fund like Vanguard Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX) perhaps in combination with Vanguard Prime Money Market Fund (VMMXX). The sooner you think the emergency might occur, the more money market fund you might want to keep (up to maybe a 50/50 ratio).

If the date of the emergency is uncertain, having a ladder of bonds or CDs would likely to be possible to liquidate on short notice but you might find yourself paying a penalty and/or taking on an undue amount of stress. I'd keep it simple.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

frederickj
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by frederickj » Mon Nov 12, 2018 1:16 pm

VINEVIZ


let me share a wine word first
walking through a shop w local art shown in Maine last summer
I saw something I had to have
it was a long 18 inch by 4 inch light green rough hewn board
that said simply

WINE IS THE ANSWER followed in smaller print by Now What Was The Question

it cost me $8 and I nailed it to the wall in my kitchen,happily

About the finances, I understand your suggestions but have been warned about TIPS mutual funds not holding their value in times of crisis
have you experience with this charge and would appreciate your comments

thanks again

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vineviz
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by vineviz » Mon Nov 12, 2018 1:43 pm

frederickj wrote:
Mon Nov 12, 2018 1:16 pm
About the finances, I understand your suggestions but have been warned about TIPS mutual funds not holding their value in times of crisis
have you experience with this charge and would appreciate your comments
As with most advice, the real answer is "it depends".

In this case it depends on the type of TIPS in the fund, i.e. whether they are long-term bonds or short-term bonds. A long-term TIPS fund can experience abrupt changes in value, so they are not an appropriate place to invest money that might be needed soon or on short notice. A short-term TIPS fund is much safer and will experience much less fluctuation in value.

For instance, here's a comparison of drawdowns for a short-term TIPS fund to a broad TIPS fund (which includes many long-term bonds).

Image

You can see that in times of crisis the drops of the short-term TIPS fund was significantly less than the broad-market TIPS fund.

The tradeoff, of course, is that the long-term bonds have higher returns because of their higher risk. If you can hold on through the market crisis, you'll be wealthier with the broad market fund than with the short-term fund.

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

rich126
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by rich126 » Mon Nov 12, 2018 8:52 pm

vineviz wrote:
Mon Nov 12, 2018 1:43 pm
frederickj wrote:
Mon Nov 12, 2018 1:16 pm
About the finances, I understand your suggestions but have been warned about TIPS mutual funds not holding their value in times of crisis
have you experience with this charge and would appreciate your comments
As with most advice, the real answer is "it depends".

In this case it depends on the type of TIPS in the fund, i.e. whether they are long-term bonds or short-term bonds. A long-term TIPS fund can experience abrupt changes in value, so they are not an appropriate place to invest money that might be needed soon or on short notice. A short-term TIPS fund is much safer and will experience much less fluctuation in value.

For instance, here's a comparison of drawdowns for a short-term TIPS fund to a broad TIPS fund (which includes many long-term bonds).

Image

You can see that in times of crisis the drops of the short-term TIPS fund was significantly less than the broad-market TIPS fund.

The tradeoff, of course, is that the long-term bonds have higher returns because of their higher risk. If you can hold on through the market crisis, you'll be wealthier with the broad market fund than with the short-term fund.

Image
In either case, both portfolios end up with zero or a negative real return. Unfortunately portfoliovisualizer doesnt adjust the cagr when inflation adjusted is checked, only the charts (unless I’m missing something). While I’ve been reading tons of posts on bonds, cds, tips, etc. to see what I might be missing, I’ve yet to see a need for tips. In the long run they seem to provide a slightly negative real return. You can probably do that with CDs, if not better.

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vineviz
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by vineviz » Mon Nov 12, 2018 11:27 pm

rich126 wrote:
Mon Nov 12, 2018 8:52 pm
In either case, both portfolios end up with zero or a negative real return. Unfortunately portfoliovisualizer doesnt adjust the cagr when inflation adjusted is checked, only the charts (unless I’m missing something). While I’ve been reading tons of posts on bonds, cds, tips, etc. to see what I might be missing, I’ve yet to see a need for tips. In the long run they seem to provide a slightly negative real return. You can probably do that with CDs, if not better.
Any fund can produce a negative real return over a short enough period of time, but TIPS are not special in that regard.

When inflation shows up about as expected, TIPS and nominal treasuries SHOULD have similar returns and that's what has occurred. When inflation runs unexpectedly high is when TIPS will really show their worth.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

frederickj
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by frederickj » Tue Nov 13, 2018 11:54 am

VINEVIZ

your graphs are very instructive

are these 2 Pimco funds comparable to Vanguard's Short Inflation fund w a maturity and duration of 2.7 and Vanguard's other inflation bond fund-- the Inflation Protected fund with a maturity of 8.3 and duration of 7.4 ???

I do note and appreciate that Inflation funds protect against unexpected inflation and nominal bond funds will or may protect against expected inflation

Frederickj

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vineviz
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by vineviz » Tue Nov 13, 2018 12:16 pm

frederickj wrote:
Tue Nov 13, 2018 11:54 am
VINEVIZ

your graphs are very instructive

are these 2 Pimco funds comparable to Vanguard's Short Inflation fund w a maturity and duration of 2.7 and Vanguard's other inflation bond fund-- the Inflation Protected fund with a maturity of 8.3 and duration of 7.4 ???

I do note and appreciate that Inflation funds protect against unexpected inflation and nominal bond funds will or may protect against expected inflation

Frederickj
The PIMCO funds do roughly correspond to the Vanguard funds you mention.

It’s also worth noting that if inflation is LOWER than expectedly that nominal bonds would likely outperform TIPS. For this reason, few investors put all of their bond allocation in TIPS.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

rich126
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by rich126 » Wed Nov 14, 2018 12:32 pm

As while things seem bad for bonds right now due to rising interest rates, its hard to fathom that we will have high inflation any time soon. The economy just isn't that strong. A lot of the corporate profits seem to be aided by the recent tax law changes.

frederickj
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Re: Short Bond Funds or Tips Funds or Bond Ladder

Post by frederickj » Thu Nov 15, 2018 10:04 am

thanks again

you could look at pp 116 to 119 in THE FINANCE BUFFS'S short book EXPLORE TIPS. It is a short discussion of what percentage of BONDS should be nominal or TIPS

overall the very informative and easy to red book is an explanation of the several ways to buy TIPS

Frederickj

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