Bonds vs. CDs or Money Mkt. Funds for Ballast

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USInvestor
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Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by USInvestor » Tue Jul 30, 2019 12:48 pm

In a new portfolio just being invested now after an inheritance (with a goal of about 75% in stock index funds), I am wondering what people think about the wisdom of investing the "ballast", supposedly more safe money in the Total Bond Market Index Fund as opposed to CDs (or a money market fund) given these historically low interest rates. I guess I am "anchored in the past", but it just feels a bit risky to me to invest in a bond index fund now, at these super low rates -- though personally I can see interest rates continuing to decline, I can also see them spiking. On the other hand, in a stock market swoon, (1) bonds would be likely to go up whereas CDs would just hold their value and (2) I put little credence in predictions of interest rate moves (including my own!). I understand both alternatives would help diversify the risky stock investment, and it's not an "either/or" decision on bonds vs. CDs, but I appreciate your thoughts. Thanks!

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Taylor Larimore
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by Taylor Larimore » Tue Jul 30, 2019 12:59 pm

I guess I am "anchored in the past", but it just feels a bit risky to me to invest in a bond index fund now, at these super low rates
USInvestor:

This information should easy your worries:

Vanguard's Total Bond Market Index Fund's worst annual decline was -2.66% in 1994 (it gained +18.5% in 1995).

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

UpperNwGuy
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by UpperNwGuy » Tue Jul 30, 2019 1:22 pm

I use Total Bond for that purpose in my portfolio.

sport
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by sport » Tue Jul 30, 2019 1:23 pm

If you are not sure, you can always do some of each. None of the choices are terrible.

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Sandtrap
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by Sandtrap » Tue Jul 30, 2019 1:29 pm

USInvestor wrote:
Tue Jul 30, 2019 12:48 pm
In a new portfolio just being invested now after an inheritance (with a goal of about 75% in stock index funds), I am wondering what people think about the wisdom of investing the "ballast", supposedly more safe money in the Total Bond Market Index Fund as opposed to CDs (or a money market fund) given these historically low interest rates. I guess I am "anchored in the past", but it just feels a bit risky to me to invest in a bond index fund now, at these super low rates -- though personally I can see interest rates continuing to decline, I can also see them spiking. On the other hand, in a stock market swoon, (1) bonds would be likely to go up whereas CDs would just hold their value and (2) I put little credence in predictions of interest rate moves (including my own!). I understand both alternatives would help diversify the risky stock investment, and it's not an "either/or" decision on bonds vs. CDs, but I appreciate your thoughts. Thanks!
Consider diversification of your the "fixed" side of your portfolio as well, to include: CD Ladder, Money Market or Treasury Fund, and Total Bond Market Index Fund, in a proportion that makes sense to you and fits in your overall financial strategy.

For example: 50% Total Bond Index, 30% Int. Treasury Fund (or equiv), 20% CD and MM mix.

Lot's of ways to do this. Research possible underlying funds making up the "fixed" side of your portfolio and find what works for you. It might include Total Bond and Corporate, or REITs, etc. Your call.

But, once you settle into something, stick with it.

j :happy
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ruralavalon
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by ruralavalon » Tue Jul 30, 2019 1:43 pm

USInvestor wrote:
Tue Jul 30, 2019 12:48 pm
In a new portfolio just being invested now after an inheritance (with a goal of about 75% in stock index funds), I am wondering what people think about the wisdom of investing the "ballast", supposedly more safe money in the Total Bond Market Index Fund as opposed to CDs (or a money market fund) given these historically low interest rates. I guess I am "anchored in the past", but it just feels a bit risky to me to invest in a bond index fund now, at these super low rates -- though personally I can see interest rates continuing to decline, I can also see them spiking. On the other hand, in a stock market swoon, (1) bonds would be likely to go up whereas CDs would just hold their value and (2) I put little credence in predictions of interest rate moves (including my own!). I understand both alternatives would help diversify the risky stock investment, and it's not an "either/or" decision on bonds vs. CDs, but I appreciate your thoughts. Thanks!
I don't try to time the bond market, or guess the direction that interest rates might go.

For our fixed income allocation we use only Vanguard Intermediate-term Bond Index Fund (VBILX), have used the fund for many years, and have no plans to change.

I do feel that CDs or good money market funds are suitable for all part of a fixed income allocation.
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Tyler Aspect
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by Tyler Aspect » Tue Jul 30, 2019 2:26 pm

Bonds are easy to understand. Each bond pays a fixed yield, and the principle amount is paid back at the bond's maturity date.

If the market yield for that bond's type increased, then the existing bond's net asset value will drop. This is because a new buyer could purchase the same type of bond with higher dividends. However, the net asset value recovers as the remaining dividend payments get delivered, until your principle amount is paid back (100% recovery of net asset value). At this point you can see the yield increase is to your benefit, because repurchased bond is at a higher yield.

A bond fund contains a collection of bonds, each maturing at a staggered maturity date. The same behavior I mentioned in the previous paragraph works for a bond fund as well. After a yield increase if you hold an intermediate term bond fund for 7 years or longer, then the initial net asset loss is erased by the income stream to a relative gain.

A long term investor of the total bond market index would like to see yield increases instead of yield decreases!
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dbr
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by dbr » Tue Jul 30, 2019 3:03 pm

With 75% in stocks it won't matter. Any diversified intermediate term bond fund held for the long run will be fine. CDs will be fine and MM will be fine until those instruments cost you too much return. If there is an argument it might be that as stock allocation goes to the high end long term bonds are a better complement.

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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by abuss368 » Tue Jul 30, 2019 4:20 pm

Taylor Larimore wrote:
Tue Jul 30, 2019 12:59 pm
I guess I am "anchored in the past", but it just feels a bit risky to me to invest in a bond index fund now, at these super low rates
USInvestor:

This information should easy your worries:

Vanguard's Total Bond Market Index Fund's worst annual decline was -2.66% in 1994 (it gained +18.5% in 1995).

Best wishes.
Taylor
We have invested in Total Bond for a long time. It simply does the job and lets you sleep well at night.

For good reason it is now the largest bond fund in the WORLD!
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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USInvestor
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by USInvestor » Wed Jul 31, 2019 7:19 am

Thanks everyone -- very helpful.

Cheers!

dcw213
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Re: Bonds vs. CDs or Money Mkt. Funds for Ballast

Post by dcw213 » Wed Jul 31, 2019 2:23 pm

I personally use retail CDs and Series I savings bonds as the majority of my fixed income holdings. This decision is not based on fear of rising rates - I am not sensitive to the fluctuation of principal as I believe that over the long haul it will adjust accordingly (as explained in a good response above). For one that can be patient and opportunistic, I have found retail CDs to provide significantly better yields for no or very low credit risk (which is a must for me) relative to other alternatives. I also enjoy the inflation protection and tax deferral aspect of iBonds. The downside to this approach is potential lack of liquidity if funds are needed or a rebalancing opportunity arises, but over the last 8 years I have established a pretty good ladder. If there are no screaming deals available in retail CDs, I add to total bond, and have liquidated some at times as new deals emerge. My weighted average yield is about 3.6% which I am pretty happy about in today's environment (only 10 bps off from matching my mortgage).

As others have said, either way is unlikely to make or break you, it's about personal comfort.

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