Should we buy bond mutual funds now?

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Topic Author
wmaxmusic
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Should we buy bond mutual funds now?

Post by wmaxmusic »

If so, which one(s). Where would you put $50,000 right now? (We are not considering stock funds). Would like to do better than a 2.5% 16 month CD. I already have $65,000 in CDs at that rate.
We have more than a year of emergency funds, are debt free, married filing jointly. Twelve percent tax bracket (Federal). Live in GA. Retired and collecting SS. Total portfolio high six figures. Risk adverse, have about 35% in stock mutual funds, and reluctant to increase that.
Thanks!
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Phineas J. Whoopee
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Re: Should we buy bond mutual funds now?

Post by Phineas J. Whoopee »

Hi wmaxmusic, and welcome to the forum.

No bond mutual fund will have less risk of dollar-value loss than your current fixed income holdings, even if today it has an SEC yield higher than what you're earning.

Risk means you may not get the higher return. It also means you might get still more.

It's up to you to decide what you want with respect to risk. If I may say, if one considers investment-grade intermediate-term low-cost funds the choice among them probably will make little difference.

There are advocates here of long-term Treasury funds, but with such a small equity allocation the arguments in favor of them, and I'm not sure I agree but just to talk about the arguments themselves, break down.

PJW
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bluquark
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Re: Should we buy bond mutual funds now?

Post by bluquark »

It's a bit of a wild ride lately in bond funds with interest rate expectations changing quickly. So far this year, those of us holding bond funds have been happy with it as their NAV increases. And it's not nearly as wild as stock movements. Still, Total Bond NAV is up almost 8% in the last year. Would you be OK if the trend reversed and it drops 8% next year, or is your risk aversion too strong for that?
70/30 portfolio | Equity: global market weight | Bonds: 20% long-term munis - 10% LEMB
MoneyMarathon
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Re: Should we buy bond mutual funds now?

Post by MoneyMarathon »

wmaxmusic wrote: Thu Aug 15, 2019 2:01 pm If so, which one(s). Where would you put $50,000 right now? (We are not considering stock funds). Would like to do better than a 2.5% 16 month CD.
wmaxmusic wrote: Thu Aug 15, 2019 2:01 pmhave about 35% in stock mutual funds, and reluctant to increase that
wmaxmusic wrote: Thu Aug 15, 2019 2:01 pmTwelve percent tax bracket (Federal).
VLTCX - Vanguard Long-Term Corporate Bond Index Fund Admiral Shares
3.77% SEC yield
https://investor.vanguard.com/etf/profile/VCLT

The intermediate fund pays 2.98% SEC yield, with similar credit quality.
https://investor.vanguard.com/etf/profile/vcit

Long term corporate bonds have not swung around as much, lately, as long term government bonds (thanks to their higher yield, the duration exposure doesn't result in price swings quite as large).
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bluquark
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Re: Should we buy bond mutual funds now?

Post by bluquark »

MoneyMarathon wrote: Thu Aug 15, 2019 7:22 pm Long term corporate bonds have not swung around as much, lately, as long term government bonds (thanks to their higher yield, the duration exposure doesn't result in price swings quite as large).
OK, but as you know, it is still substantially riskier than Total Bond. It has risen 20% in the last year. And that's just the term risk side of it, we haven't seen the volatility from credit risk recently. Vanguard assigns Long-Term Corporate Bond a risk rating of "3/5", compared to Total Bond which is "2/5". (A bank CD would be classified as "1/5" on this scale.)

If OP is antsy about switching to a bond fund at all, I don't think a higher-yielding one is a great fit.
70/30 portfolio | Equity: global market weight | Bonds: 20% long-term munis - 10% LEMB
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unclescrooge
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Re: Should we buy bond mutual funds now?

Post by unclescrooge »

I just read an article about inflows into bond funds soaring this year.

After a 20% run up in Long term bonds, I would expect the next 12 month return on these bond funds to be negative.

If you're looking for safety, stick to short term bonds or money market funds.
MoneyMarathon
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Re: Should we buy bond mutual funds now?

Post by MoneyMarathon »

bluquark wrote: Thu Aug 15, 2019 7:28 pm
MoneyMarathon wrote: Thu Aug 15, 2019 7:22 pm Long term corporate bonds have not swung around as much, lately, as long term government bonds (thanks to their higher yield, the duration exposure doesn't result in price swings quite as large).
OK, but as you know, it is still substantially riskier than Total Bond. It has risen 20% in the last year. And that's just the term risk side of it, we haven't seen the volatility from credit risk recently. Vanguard gives it Long-Term Corporate Bond a risk rating of "3/5", compared to Total Bond which is "2/5". (A bank CD would be classified as "1/5" on this scale.

If OP is antsy about switching to a bond fund at all, I don't think a higher-yielding one is a great fit.
You're right, it carries more risk.

As you said: "No bond mutual fund will have less risk of dollar-value loss than your current fixed income holdings, even if today it has an SEC yield higher than what you're earning. Risk means you may not get the higher return. It also means you might get still more."

They said: "Would like to do better than a 2.5% 16 month CD."

The SEC yield today on Total Bond is 2.39%.

If they're not willing to take more risk than that, maybe they should stick with the CDs.
If OP is antsy about switching to a bond fund at all
I didn't read that in the OP. I read that they didn't want to buy more stocks.

They could also look for yield in lower-grade credit, but that could be bad if there's aversion to equity risk.
MoneyMarathon
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Re: Should we buy bond mutual funds now?

Post by MoneyMarathon »

bluquark wrote: Thu Aug 15, 2019 7:28 pmVanguard assigns Long-Term Corporate Bond a risk rating of "3/5", compared to Total Bond which is "2/5". (A bank CD would be classified as "1/5" on this scale.)
Intermediate-Term Corporate bonds get a "2/5" as well with a 2.98% yield and investment-grade credit quality.

https://investor.vanguard.com/etf/profile/VCIT

Maybe this is the "goldilocks" option, between the quest for yield (taking on more risk) and an aversion to taking on too much risk.

Nothing will beat the CD with the guarantees of a CD. If not ending the year down is used as a filter when choosing an investment, then just stick with CDs.
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bluquark
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Re: Should we buy bond mutual funds now?

Post by bluquark »

Yes, Intermediate-Term Corporate is the Jack Bogle-approved choice. He didn't see why Total Bond needs to have that many Treasuries in it. I think the term risk is way more significant than the credit risk for investment-grade bonds, so it's a relatively safe way to juice out a bit of extra yield.
70/30 portfolio | Equity: global market weight | Bonds: 20% long-term munis - 10% LEMB
7eight9
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Re: Should we buy bond mutual funds now?

Post by 7eight9 »

Merrick Bank is offering 2.56% on an 18 month CD.
Link --- https://merrickbank.com/Products/CDs

There may be better rates out there. i just did a quick search. Or consider opening accounts that have bonuses. Marcus (Goldman Sachs) recently offered a 1% bonus on the first $50,000 deposited in their money market account (current interest rate is 2.15%). Other banks have promotions. A good source for bank promotions is doctorofcredit.com --- https://www.doctorofcredit.com/best-ban ... t-bonuses/

CDs and bank accounts with bonuses (both FDIC insured) are your safest bets short of Treasuries or perhaps Agencies. Otherwise, place your bets and wait for the wheel to stop.
I guess it all could be much worse. | They could be warming up my hearse.
Wakefield1
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Re: Should we buy bond mutual funds now?

Post by Wakefield1 »

Those CDs sound better if they still have 2.6 APY going for at least 16 months going forward,my credit union just cut :( some of their CD rates to quite a bit less than that. Glad some of mine are at a better than the newly announced rate.
tibbitts
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Re: Should we buy bond mutual funds now?

Post by tibbitts »

I have no idea if will turn out to be a good idea - and it's definitely not Boglehead-approved - but I've been adding slowly to high-yield and emerging market bonds.
SandysDad
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Re: Should we buy bond mutual funds now?

Post by SandysDad »

Right now CD's can offer you much better returns than equivalent treasuries. So I would buy those. Hunt for yield. Still a few for 5 yrs at 3-3.5%.

While many are cheering the NAV increase in LT 10/30 year notes, one should remember that can go both ways (up or down). I focus on yield and duration only. Any NAV increase is gravy and decrease is risk that comes from duration, so make sure you are getting an appropriate term premium for going long.
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welderwannabe
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Re: Should we buy bond mutual funds now?

Post by welderwannabe »

My retirement accounts fixed income is 25% intermediate treasuries and 25% short term corporates. I feel it's a good balance with credit risk and term risk all in the right places for me.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
Topic Author
wmaxmusic
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Re: Should we buy bond mutual funds now?

Post by wmaxmusic »

bluquark wrote: Thu Aug 15, 2019 7:10 pm It's a bit of a wild ride lately in bond funds with interest rate expectations changing quickly. So far this year, those of us holding bond funds have been happy with it as their NAV increases. And it's not nearly as wild as stock movements. Still, Total Bond NAV is up almost 8% in the last year. Would you be OK if the trend reversed and it drops 8% next year, or is your risk aversion too strong for that?
I can see that if I would have bought bond funds in January, I would be doing well; but now everyone is buying them and their price is up. An 8 % drop would make me unhappy next year.
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Sandtrap
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Re: Should we buy bond mutual funds now?

Post by Sandtrap »

wmaxmusic wrote: Thu Aug 15, 2019 2:01 pm If so, which one(s). Where would you put $50,000 right now? (We are not considering stock funds). Would like to do better than a 2.5% 16 month CD. I already have $65,000 in CDs at that rate.
We have more than a year of emergency funds, are debt free, married filing jointly. Twelve percent tax bracket (Federal). Live in GA. Retired and collecting SS. Total portfolio high six figures. Risk adverse, have about 35% in stock mutual funds, and reluctant to increase that.
Thanks!
Given risk adverse:

1. Add to your CD ladder.
2. Treasuries.
3. Muni. Bonds.
4. Intermediate Term Investment Grade Corporate index fund.
5. VFSUX short term
6. Add to your bond allocation.

j
Wiki Bogleheads Wiki: Everything You Need to Know
Topic Author
wmaxmusic
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Re: Should we buy bond mutual funds now?

Post by wmaxmusic »

7eight9 wrote: Thu Aug 15, 2019 8:03 pm Merrick Bank is offering 2.56% on an 18 month CD.
Link --- https://merrickbank.com/Products/CDs

There may be better rates out there. i just did a quick search. Or consider opening accounts that have bonuses. Marcus (Goldman Sachs) recently offered a 1% bonus on the first $50,000 deposited in their money market account (current interest rate is 2.15%). Other banks have promotions. A good source for bank promotions is doctorofcredit.com --- https://www.doctorofcredit.com/best-ban ... t-bonuses/

CDs and bank accounts with bonuses (both FDIC insured) are your safest bets short of Treasuries or perhaps Agencies. Otherwise, place your bets and wait for the wheel to stop.
Thanks for the tip! What are Agencies?
Topic Author
wmaxmusic
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Re: Should we buy bond mutual funds now?

Post by wmaxmusic »

unclescrooge wrote: Thu Aug 15, 2019 7:31 pm I just read an article about inflows into bond funds soaring this year.

After a 20% run up in Long term bonds, I would expect the next 12 month return on these bond funds to be negative.

If you're looking for safety, stick to short term bonds or money market funds.
Yes, but if the Fed cuts rates again, won't the return on short term bond funds be less than CDs?
Cody
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Re: Should we buy bond mutual funds now?

Post by Cody »

It would seem like you are a bit hit and miss on your bond decisions. It does not seem very cohesive to me at all.

What does your IPS (Investment Policy Statement) plan say? (post it here if you like to see if this proposed change meets your IPS objectives). Trying to find a sweet spot is fine but tampering is often a recipe for trouble. Cd's are a valuable tool but often lead one to constantly fish for the next one in a few years, opening new accounts and more tracking and record keeping (for what?).

Step back, look at your overall plan. Seems like lots of "guess work" going on with your investments.

Finally being risk averse, like all legit feelings, should not mean you need to make rather haphazard choices in your portfolio.
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unclescrooge
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Re: Should we buy bond mutual funds now?

Post by unclescrooge »

wmaxmusic wrote: Fri Aug 16, 2019 8:23 am
unclescrooge wrote: Thu Aug 15, 2019 7:31 pm I just read an article about inflows into bond funds soaring this year.

After a 20% run up in Long term bonds, I would expect the next 12 month return on these bond funds to be negative.

If you're looking for safety, stick to short term bonds or money market funds.
Yes, but if the Fed cuts rates again, won't the return on short term bond funds be less than CDs?
Yes, but you have flexibility in sheet term bonds that you may not have with CDs. Ideally, you should match your duration to your time horizon.
7eight9
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Re: Should we buy bond mutual funds now?

Post by 7eight9 »

wmaxmusic wrote: Fri Aug 16, 2019 8:03 am
7eight9 wrote: Thu Aug 15, 2019 8:03 pm Merrick Bank is offering 2.56% on an 18 month CD.
Link --- https://merrickbank.com/Products/CDs

There may be better rates out there. i just did a quick search. Or consider opening accounts that have bonuses. Marcus (Goldman Sachs) recently offered a 1% bonus on the first $50,000 deposited in their money market account (current interest rate is 2.15%). Other banks have promotions. A good source for bank promotions is doctorofcredit.com --- https://www.doctorofcredit.com/best-ban ... t-bonuses/

CDs and bank accounts with bonuses (both FDIC insured) are your safest bets short of Treasuries or perhaps Agencies. Otherwise, place your bets and wait for the wheel to stop.
Thanks for the tip! What are Agencies?
"Agencies" is a term used to describe two types of bonds: (1) bonds issued or guaranteed by U.S. federal government agencies; and (2) bonds issued by government-sponsored enterprises (GSEs)—corporations created by Congress to foster a public purpose, such as affordable housing.
Read more at --- https://www.finra.org/investors/agency-securities
I guess it all could be much worse. | They could be warming up my hearse.
Topic Author
wmaxmusic
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Re: Should we buy bond mutual funds now?

Post by wmaxmusic »

unclescrooge wrote: Fri Aug 16, 2019 12:03 pm
wmaxmusic wrote: Fri Aug 16, 2019 8:23 am
unclescrooge wrote: Thu Aug 15, 2019 7:31 pm I just read an article about inflows into bond funds soaring this year.

After a 20% run up in Long term bonds, I would expect the next 12 month return on these bond funds to be negative.

If you're looking for safety, stick to short term bonds or money market funds.
Yes, but if the Fed cuts rates again, won't the return on short term bond funds be less than CDs?
Yes, but you have flexibility in sheet term bonds that you may not have with CDs. Ideally, you should match your duration to your time horizon.
Thanks for that; so let's say my time horizon is three years, and I can get 2.5 % on a CD. Would, say VSCSX do as well in a recession? I know that nobody has a crystal ball, but I think some people on this forum are more astute than I am.
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unclescrooge
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Re: Should we buy bond mutual funds now?

Post by unclescrooge »

wmaxmusic wrote: Fri Aug 16, 2019 12:12 pm
unclescrooge wrote: Fri Aug 16, 2019 12:03 pm
wmaxmusic wrote: Fri Aug 16, 2019 8:23 am
unclescrooge wrote: Thu Aug 15, 2019 7:31 pm I just read an article about inflows into bond funds soaring this year.

After a 20% run up in Long term bonds, I would expect the next 12 month return on these bond funds to be negative.

If you're looking for safety, stick to short term bonds or money market funds.
Yes, but if the Fed cuts rates again, won't the return on short term bond funds be less than CDs?
Yes, but you have flexibility in sheet term bonds that you may not have with CDs. Ideally, you should match your duration to your time horizon.
Thanks for that; so let's say my time horizon is three years, and I can get 2.5 % on a CD. Would, say VSCSX do as well in a recession? I know that nobody has a crystal ball, but I think some people on this forum are more astute than I am.
For 36 months, I would buy a CD and call it a day.
hudson
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Re: Should we buy bond mutual funds now?

Post by hudson »

wmaxmusic wrote: Thu Aug 15, 2019 2:01 pm If so, which one(s). Where would you put $50,000 right now? (We are not considering stock funds). Would like to do better than a 2.5% 16 month CD. I already have $65,000 in CDs at that rate.
We have more than a year of emergency funds, are debt free, married filing jointly. Twelve percent tax bracket (Federal). Live in GA. Retired and collecting SS. Total portfolio high six figures. Risk adverse, have about 35% in stock mutual funds, and reluctant to increase that.
Thanks!
Navy Federal 5 Yr CD 3.44%
Mr. Jelly
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Re: Should we buy bond mutual funds now?

Post by Mr. Jelly »

I like the Vanguard intermediate term tax exempt muni fund VWIUX, https://investor.vanguard.com/mutual-fu ... file/VWIUX. Even if the tax exempt aspect doesn't come into play for you it appears to fit for what I think you are looking for.
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Hector
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Re: Should we buy bond mutual funds now?

Post by Hector »

I think only EE bond if holding for 20 years would provide guaranteed nominal return more than 2.5%.
Topic Author
wmaxmusic
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Re: Should we buy bond mutual funds now?

Post by wmaxmusic »

hudson wrote: Fri Aug 16, 2019 3:20 pm
wmaxmusic wrote: Thu Aug 15, 2019 2:01 pm If so, which one(s). Where would you put $50,000 right now? (We are not considering stock funds). Would like to do better than a 2.5% 16 month CD. I already have $65,000 in CDs at that rate.
We have more than a year of emergency funds, are debt free, married filing jointly. Twelve percent tax bracket (Federal). Live in GA. Retired and collecting SS. Total portfolio high six figures. Risk adverse, have about 35% in stock mutual funds, and reluctant to increase that.
Thanks!
Navy Federal 5 Yr CD 3.44%
Not qualified for membership in that credit union.
Topic Author
wmaxmusic
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Re: Should we buy bond mutual funds now?

Post by wmaxmusic »

unclescrooge wrote: Fri Aug 16, 2019 12:17 pm
wmaxmusic wrote: Fri Aug 16, 2019 12:12 pm
unclescrooge wrote: Fri Aug 16, 2019 12:03 pm
wmaxmusic wrote: Fri Aug 16, 2019 8:23 am
unclescrooge wrote: Thu Aug 15, 2019 7:31 pm I just read an article about inflows into bond funds soaring this year.

After a 20% run up in Long term bonds, I would expect the next 12 month return on these bond funds to be negative.

If you're looking for safety, stick to short term bonds or money market funds.
Yes, but if the Fed cuts rates again, won't the return on short term bond funds be less than CDs?
Yes, but you have flexibility in sheet term bonds that you may not have with CDs. Ideally, you should match your duration to your time horizon.
Thanks for that; so let's say my time horizon is three years, and I can get 2.5 % on a CD. Would, say VSCSX do as well in a recession? I know that nobody has a crystal ball, but I think some people on this forum are more astute than I am.
For 36 months, I would buy a CD and call it a day.
I agree with you on that, now what would if I want to go 5 years?
drk
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Re: Should we buy bond mutual funds now?

Post by drk »

wmaxmusic wrote: Thu Aug 15, 2019 2:01 pm Twelve percent tax bracket (Federal).
Sandtrap wrote: Fri Aug 16, 2019 8:03 am 3. Muni. Bonds.
Given the details in the OP, muni bonds make no sense here.
hudson
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Re: Should we buy bond mutual funds now?

Post by hudson »

wmaxmusic wrote: Sun Aug 18, 2019 8:48 pm
hudson wrote: Fri Aug 16, 2019 3:20 pm
wmaxmusic wrote: Thu Aug 15, 2019 2:01 pm If so, which one(s). Where would you put $50,000 right now? (We are not considering stock funds). Would like to do better than a 2.5% 16 month CD. I already have $65,000 in CDs at that rate.
We have more than a year of emergency funds, are debt free, married filing jointly. Twelve percent tax bracket (Federal). Live in GA. Retired and collecting SS. Total portfolio high six figures. Risk adverse, have about 35% in stock mutual funds, and reluctant to increase that.
Thanks!
Navy Federal 5 Yr CD 3.44%
Not qualified for membership in that credit union.
I heard they were taking people related to veterans. Boglehead discussion that might help if you are interested: viewtopic.php?t=285172
Last edited by hudson on Mon Aug 19, 2019 5:51 am, edited 1 time in total.
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unclescrooge
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Re: Should we buy bond mutual funds now?

Post by unclescrooge »

wmaxmusic wrote: Sun Aug 18, 2019 8:50 pm
unclescrooge wrote: Fri Aug 16, 2019 12:17 pm
wmaxmusic wrote: Fri Aug 16, 2019 12:12 pm
unclescrooge wrote: Fri Aug 16, 2019 12:03 pm
wmaxmusic wrote: Fri Aug 16, 2019 8:23 am

Yes, but if the Fed cuts rates again, won't the return on short term bond funds be less than CDs?
Yes, but you have flexibility in sheet term bonds that you may not have with CDs. Ideally, you should match your duration to your time horizon.
Thanks for that; so let's say my time horizon is three years, and I can get 2.5 % on a CD. Would, say VSCSX do as well in a recession? I know that nobody has a crystal ball, but I think some people on this forum are more astute than I am.
For 36 months, I would buy a CD and call it a day.
I agree with you on that, now what would if I want to go 5 years?
50% global stocks, 50% bonds. And some exposure to REITs and gold carved in to this.
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