Ignorance regarding bonds

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KW2020
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Ignorance regarding bonds

Post by KW2020 »

So I am now partially invested in bonds (VBTLX)and I am trying to better understand them.

While I see that the price of this fund has climbed steadily over the past 6 months, when I display the price of this found over years (since 2001) it is essentially unchanged. This confuses me.

I wonder, is this simple the price of the bond not counting dividends that would be reinvested in a buy and hold situation?

Otherwise, as of January 1(2019) the price is about the same as it was in Nov 2001. No better than putting the $ under a mattress.

I am sure I am confused, please educate me.

Thank you,
Steve
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nps
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Re: Ignorance regarding bonds

Post by nps »

Price appreciation (or lack of it) is not the same thing as returns. You need to look at returns.
MarkBarb
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Re: Ignorance regarding bonds

Post by MarkBarb »

When you own a fund, you hope to profit in two different ways. One is by eventually selling the fund for more than you paid for it. The other is by getting dividends paid by the fund. The combination of the two is your total return. It looks like VBTLX shows very little price appreciation over time but it has paid a fairly good dividend. That's why the average annual return since inception has been 4.32%.
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Re: Ignorance regarding bonds

Post by bhsince87 »

Kind of ironic. Bonds are among the most simple financial instruments to understand.

They're a contract that tells you exactly how much money you will earn until the contract expires, and how much you will be paid back at the end.

Not much different from a CD. Except they can be traded (bought and sold), so that makes their value change over time. And that can get messy.

But bond funds aren't as simple. They sort of follow the returns of individual bonds, but not exactly.

To be honest, I don't entirely understand why.
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nps
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Re: Ignorance regarding bonds

Post by nps »

bhsince87 wrote: Fri Sep 06, 2019 7:55 pm But bond funds aren't as simple. They sort of follow the returns of individual bonds, but not exactly.

To be honest, I don't entirely understand why.
They are basically the same thing except that bond funds are obviously collections of lots of individual bonds which may vary in quality, duration, etc. They can also seem different because their reported returns include price changes, which may not be as easily seen with individual bonds.
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Re: Ignorance regarding bonds

Post by abuss368 »

Correct. The NAV of a share of the fund has not changed much. Essentially the return from a bond is the yield. The capital return is essentially zero over time.
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Re: Ignorance regarding bonds

Post by bhsince87 »

abuss368 wrote: Fri Sep 06, 2019 9:09 pm Correct. The NAV of a share of the fund has not changed much. Essentially the return from a bond is the yield. The capital return is essentially zero over time.
I disagree with this statement.

The capital return is 100% over time. Assuming it all works out.

Minus the effects of inflation, of course.

That's one of the major differences versus stocks.
Time is what we want most, but what we use worst. William Penn
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Re: Ignorance regarding bonds

Post by abuss368 »

bhsince87 wrote: Fri Sep 06, 2019 9:35 pm
abuss368 wrote: Fri Sep 06, 2019 9:09 pm Correct. The NAV of a share of the fund has not changed much. Essentially the return from a bond is the yield. The capital return is essentially zero over time.
I disagree with this statement.

The capital return is 100% over time. Assuming it all works out.

Minus the effects of inflation, of course.

That's one of the major differences versus stocks.
Reading Mr. Bogle’s books he clearly states and provides examples that a bonds return is from the interest piece.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Ignorance regarding bonds

Post by Iridium »

abuss368 wrote: Fri Sep 06, 2019 9:45 pm
bhsince87 wrote: Fri Sep 06, 2019 9:35 pm
abuss368 wrote: Fri Sep 06, 2019 9:09 pm Correct. The NAV of a share of the fund has not changed much. Essentially the return from a bond is the yield. The capital return is essentially zero over time.
I disagree with this statement.

The capital return is 100% over time. Assuming it all works out.

Minus the effects of inflation, of course.

That's one of the major differences versus stocks.
Reading Mr. Bogle’s books he clearly states and provides examples that a bonds return is from the interest piece.
I don't think you are disagreeing with each other, so much as using terminology in different ways, let me see if I can merge your statements in a way that both of you agree:

If everything works out, each bond should pay back 100% of the principal invested in them. In the long run, you would not expect bonds to deliver a capital gain; their investment return will mostly come from interest.
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Re: Ignorance regarding bonds

Post by abuss368 »

Iridium wrote: Fri Sep 06, 2019 10:36 pm
abuss368 wrote: Fri Sep 06, 2019 9:45 pm
bhsince87 wrote: Fri Sep 06, 2019 9:35 pm
abuss368 wrote: Fri Sep 06, 2019 9:09 pm Correct. The NAV of a share of the fund has not changed much. Essentially the return from a bond is the yield. The capital return is essentially zero over time.
I disagree with this statement.

The capital return is 100% over time. Assuming it all works out.

Minus the effects of inflation, of course.

That's one of the major differences versus stocks.
Reading Mr. Bogle’s books he clearly states and provides examples that a bonds return is from the interest piece.
I don't think you are disagreeing with each other, so much as using terminology in different ways, let me see if I can merge your statements in a way that both of you agree:

If everything works out, each bond should pay back 100% of the principal invested in them. In the long run, you would not expect bonds to deliver a capital gain; their investment return will mostly come from interest.
Makes sense. Like it.
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Re: Ignorance regarding bonds

Post by Stinky »

KneadingWater wrote: Fri Sep 06, 2019 6:15 pm So I am now partially invested in bonds (VBTLX)and I am trying to better understand them.

While I see that the price of this fund has climbed steadily over the past 6 months, when I display the price of this found over years (since 2001) it is essentially unchanged. This confuses me.

I wonder, is this simple the price of the bond not counting dividends that would be reinvested in a buy and hold situation?

Otherwise, as of January 1(2019) the price is about the same as it was in Nov 2001. No better than putting the $ under a mattress.

I am sure I am confused, please educate me.

Thank you,
Steve
Iridium wrote: Fri Sep 06, 2019 10:36 pm
If everything works out, each bond should pay back 100% of the principal invested in them. In the long run, you would not expect bonds to deliver a capital gain; their investment return will mostly come from interest.
OP, this is a good response. Does this answer your question?
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Re: Ignorance regarding bonds

Post by rascott »

bhsince87 wrote: Fri Sep 06, 2019 7:55 pm Kind of ironic. Bonds are among the most simple financial instruments to understand.

They're a contract that tells you exactly how much money you will earn until the contract expires, and how much you will be paid back at the end.

Not much different from a CD. Except they can be traded (bought and sold), so that makes their value change over time. And that can get messy.

But bond funds aren't as simple. They sort of follow the returns of individual bonds, but not exactly.

To be honest, I don't entirely understand why.

It is just like your went out and bought a new bond every couple of weeks. When you accumulate hundreds of them, what's your return? They are different prices every day based upon interest rate movement. So you've got an avg of the rates and the terms left on your total portfolio of bonds. That's all a bond fund is, but in perpetuity.

If you hold a bond fund for its duration, that's the rate you are sure to get (with no defaults). So you've bought basically one big bond.... but you redo it over and over as the fund keeps rolling, if you keep reinvesting the yield.
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Re: Ignorance regarding bonds

Post by 22twain »

KneadingWater wrote: Fri Sep 06, 2019 6:15 pmOtherwise, as of January 1(2019) the price [of VBTLX] is about the same as it was in Nov 2001. No better than putting the $ under a mattress.
Money under a mattress doesn't produce dividends or interest. VBTLX does.

Look up a "growth chart" (e.g. on morningstar.com) that shows the growth of a $10,000 investment in VBTLX with dividends reinvested. $10,000 on 11/30/2001 would have given $21,465.43 on 9/5/2019, i.e. about +115% over nearly 18 years, or about 4.3% per year compounded.
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Re: Ignorance regarding bonds

Post by rascott »

KneadingWater wrote: Fri Sep 06, 2019 6:15 pm So I am now partially invested in bonds (VBTLX)and I am trying to better understand them.

While I see that the price of this fund has climbed steadily over the past 6 months, when I display the price of this found over years (since 2001) it is essentially unchanged. This confuses me.

I wonder, is this simple the price of the bond not counting dividends that would be reinvested in a buy and hold situation?

Otherwise, as of January 1(2019) the price is about the same as it was in Nov 2001. No better than putting the $ under a mattress.

I am sure I am confused, please educate me.

Thank you,
Steve

No, it made 4.5% per year, see here:

https://www.portfoliovisualizer.com/bac ... 0&total3=0


Kind of a primer article here

https://www.marketwatch.com/story/dont- ... 2019-09-03
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Re: Ignorance regarding bonds

Post by bhsince87 »

Iridium wrote: Fri Sep 06, 2019 10:36 pm
abuss368 wrote: Fri Sep 06, 2019 9:45 pm
bhsince87 wrote: Fri Sep 06, 2019 9:35 pm
abuss368 wrote: Fri Sep 06, 2019 9:09 pm Correct. The NAV of a share of the fund has not changed much. Essentially the return from a bond is the yield. The capital return is essentially zero over time.
I disagree with this statement.

The capital return is 100% over time. Assuming it all works out.

Minus the effects of inflation, of course.

That's one of the major differences versus stocks.
Reading Mr. Bogle’s books he clearly states and provides examples that a bonds return is from the interest piece.
I don't think you are disagreeing with each other, so much as using terminology in different ways, let me see if I can merge your statements in a way that both of you agree:

If everything works out, each bond should pay back 100% of the principal invested in them. In the long run, you would not expect bonds to deliver a capital gain; their investment return will mostly come from interest.
Yep. I was referring to return of capital (principal), not a capital gain.

Thanks!
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Re: Ignorance regarding bonds

Post by abuss368 »

bhsince87 wrote: Sat Sep 07, 2019 2:20 pm
Iridium wrote: Fri Sep 06, 2019 10:36 pm
abuss368 wrote: Fri Sep 06, 2019 9:45 pm
bhsince87 wrote: Fri Sep 06, 2019 9:35 pm
abuss368 wrote: Fri Sep 06, 2019 9:09 pm Correct. The NAV of a share of the fund has not changed much. Essentially the return from a bond is the yield. The capital return is essentially zero over time.
I disagree with this statement.

The capital return is 100% over time. Assuming it all works out.

Minus the effects of inflation, of course.

That's one of the major differences versus stocks.
Reading Mr. Bogle’s books he clearly states and provides examples that a bonds return is from the interest piece.
I don't think you are disagreeing with each other, so much as using terminology in different ways, let me see if I can merge your statements in a way that both of you agree:

If everything works out, each bond should pay back 100% of the principal invested in them. In the long run, you would not expect bonds to deliver a capital gain; their investment return will mostly come from interest.
Yep. I was referring to return of capital (principal), not a capital gain.

Thanks!
Thanks makes sense.
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Re: Ignorance regarding bonds

Post by KW2020 »

Stinky:
"OP, this is a good response. Does this answer your question?"
I have been gone a while, but yes, good information.
The true value of a bond is the return of dividends.
When holding a bond fund (I understand what these are), dividends are (generally) reinvested.

22twain:
"Look up a "growth chart" (e.g. on morningstar.com) that shows the growth of a $10,000 investment in VBTLX with dividends reinvested. $10,000 on 11/30/2001 would have given $21,465.43 on 9/5/2019, i.e. about +115% over nearly 18 years, or about 4.3% per year compounded."

This is the tool(s) I am missing, didn't find. The tools I originally found showed the value of the fund (principle) over time, as relatively steady
I have not owned bonds long enough to see any trends in my own portfolio.

As I said, I am ignorant/inexperienced regarding bonds and how to assess their performance. Obviously, I started with the wrong charts....

Thank you for your help.

KneadingWater
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Re: Ignorance regarding bonds

Post by MotoTrojan »

Use Portfolio Visualizer instead. Adds dividends.
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Re: Ignorance regarding bonds

Post by 1789 »

BNDs are tricky and i am also not the best person to comment their returns. But if i know a little about them i can say i learned it from this book " Why Bother With Bonds" (2014-Rick Van Ness).
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Phineas J. Whoopee
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Re: Ignorance regarding bonds

Post by Phineas J. Whoopee »

nps wrote: Fri Sep 06, 2019 6:19 pm Price appreciation (or lack of it) is not the same thing as returns. You need to look at returns.
In particular, with bonds the important calculation is Yield to Maturity, YTM.

YTM takes into account the bond coupons - the dollar amounts the bond issuer has promised to pay periodically - the return of principal at maturity, and an estimate of how much one could gain by reinvesting the coupons as they come in.

It also takes into account the fact that, regardless of today's market price for the bond, its value must of necessity approach its face value, also called par value, as it approaches maturity. Who would pay much more, or accept much less, than $1,000 for a 30-year $1,000 par value bond that matures tomorrow?

A bond mutual fund holds many bonds. If you held the same portfolio of them, and manged them in the same way, the present value of your portfolio would match the movements of the fund's net asset value.

There exist investors who prefer to pretend the market values of their bonds don't fluctuate every day the capital markets are open, but all they're doing is blinding themselves to reality. As individuals rather than corporations we are legally allowed to account for them however we like. I could account for a $1,000 Treasury as if it were worth tens of billions of dollars if that's what I want. I'd just be up for a rude awakening when it matures.

Claiming such a value in conjunction with an application for credit of course would be fraud.

PJW
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KW2020
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Re: Ignorance regarding bonds

Post by KW2020 »

Thank you for all the past comments, I am coming back again, to digest them. Still working to develop some intuition about Bonds.

I do understand the basics about how a bond (loan) works, and maturation date etc.
However, I would not consider investing in a single bond, so I am generally focused on how a (total) bond index fund works in concert with a stock fund(s) in diversification, e.g. asset amortization (AA).

I realize that part of my problem with understanding bonds is that I can readily check stock market returns (too often) and the world provides a steady stream of market return graphs. On the other hand, I have to work to actually see a total bond market graph displayed in front of me. (I'll deal with this.)

Some questions:
MotoTrojan wrote: Tue Dec 17, 2019 11:49 am Use Portfolio Visualizer instead. Adds dividends.
Above I had repeated "dividends", but I think I understanding that stocks return dividends, while bonds return interest. Is that correct?
I am confused because it seems we flip back and forth.
Or, do bonds yield both interest and dividends? (Nit picking, but it all contributes to my confusion).

It 'easy' for me to scoff and guffaw at someone losing money by keeping 'retirement funds' in the bank, under a mattress or in a money market account (inflation, and cost of earning power). I feel like I can mentor others on why they should not miss the opportunity to experience the magic of compounded growth, despite possible volatility.

On the other hand, it is still not easy for me to have a 'reaction' regarding bonds, or lack thereof. I now have my retirement assets (1.15M out of 1.9M total savings) invested 50% in VBMFX. I have done this mostly due to reading (here, elsewhere) that this is the thing to do (and, a bit out of recent geopolitical fear).

As a further example, I had a conversation with my 62y-old brother about my 80+ y-old father's portfolio. Outside of a family limited partnership holding real estate, my father has close to 1.5M in mutual fund equities. I questioned why he shouldn't be more invested in bonds (e.g. 70/30 AA) and the reply was, "if interest rates go up, then bond values go down". (I do understand this, but have no feeling about it). To be clear, the rest of my family was in residential construction and they still sting from the inflation and interest costs of the 80's.

In the end, I had no argument for him. I am still trying to feel that being invested in bonds and missing out on growth (and volatility) of the market is right for me.

Simply asked, understanding and having a history with bond funds, how would you respond to my brother, if you were in my shoes. (Not looking for you to make my case for me, but looking to understand better myself.

Sorry for being so dense....
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Phineas J. Whoopee
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Re: Ignorance regarding bonds

Post by Phineas J. Whoopee »

Speaking about the US at least, because it's the legal system I'm most familiar with and not saying it's different everywhere else, bond mutual funds are organized under corporate law, therefore their non-capital distributions are called dividends.

Individual bond coupons are called interest.

It works out the same in the end, including for tax purposes.

PJW
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KW2020
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Re: Ignorance regarding bonds

Post by KW2020 »

Phineas J. Whoopee wrote: Sun Jan 12, 2020 1:39 pm ...Bond mutual funds are organized under corporate law, therefore their non-capital distributions are called dividends.
Individual bond coupons are called interest.
PJW
That explains some of the confusion!! I'll take that off my fuss list.

KW
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