Is this a bad time to buy shares of a bond index fund?

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mocorroco
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Is this a bad time to buy shares of a bond index fund?

Post by mocorroco » Wed Sep 11, 2019 3:36 pm

I read a few posts on this topic on the forum but I was not able to find an answer to my question:

I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.

We are right now at historically low-interest rates (high bond prices). It seems that bond prices have nowhere to go but down from here.

VBTLX (Vanguard total bond index fund) has a 30-sec yield of 2.20%
Vanguard federal money market fund has a 30-sec yield of 2.04%

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?

Thanks

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banhbao
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Re: Is this a bad time to buy shares of a bond index fund?

Post by banhbao » Wed Sep 11, 2019 4:04 pm

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
...bond prices have nowhere to go but down from here.
There are a lot of threads right now about interest rates... I doubt anyone knows whether they'll go up or down from here. Unless you have some specific insight, you are basically trying to time the market.

tj-longterm
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Re: Is this a bad time to buy shares of a bond index fund?

Post by tj-longterm » Wed Sep 11, 2019 4:06 pm

It seems like it could be. But since the last time I thought that, not that long ago when everyone expected rates to all start going up, my bond funds have all made nice profits 😂

Rates could certainly go down, or may just not change for a long long time.

So 🤷‍♂️

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Re: Is this a bad time to buy shares of a bond index fund?

Post by Hector » Wed Sep 11, 2019 4:11 pm

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
I read a few posts on this topic on the forum but I was not able to find an answer to my question:

I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.

We are right now at historically low-interest rates (high bond prices). It seems that bond prices have nowhere to go but down from here.

VBTLX (Vanguard total bond index fund) has a 30-sec yield of 2.20%
Vanguard federal money market fund has a 30-sec yield of 2.04%

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?

Thanks
1. For extra basis points.
2. Thinking interest rates would stay where they are or will go down and bond price will appriciate.

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Re: Is this a bad time to buy shares of a bond index fund?

Post by Taylor Larimore » Wed Sep 11, 2019 4:31 pm

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
I read a few posts on this topic on the forum but I was not able to find an answer to my question:

I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.
You are correct. Bonds are very different. Bonds are loans to a business. Stock are ownership of a business.

We are right now at historically low-interest rates (high bond prices). It seems that bond prices have nowhere to go but down from here.
No one knows whether bond prices will go up or down--but prices are relatively unimportant. Bonds are for safety--not for higher returns. In fact, bonds with the highest yield/return are invariably the bonds with the most risk of loss. There is no free-lunch in bonds (except diversification). Use stocks for higher returns.

VBTLX (Vanguard total bond index fund) has a 30-sec yield of 2.20%
Vanguard federal money market fund has a 30-sec yield of 2.04%

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?
16/100 of 1% is immaterial.

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?
Either one will do the job of providing safety in a portfolio when stocks plunge. I prefer a bond fund for it's greater liquidity, higher expected return (and slightly more risk). Total Bond Market Index Fund has never had an annual loss exceeding -2.66%.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Deep down, I remain absolutely confident that the vast majority of American families will be well served by owning their equity holding in an all-U.S. stock market index portfolio and holding their bonds in an all-U.S. bond-market index portfolio."
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Re: Is this a bad time to buy shares of a bond index fund?

Post by abuss368 » Thu Sep 12, 2019 8:30 am

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
I read a few posts on this topic on the forum but I was not able to find an answer to my question:

I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.

We are right now at historically low-interest rates (high bond prices). It seems that bond prices have nowhere to go but down from here.

VBTLX (Vanguard total bond index fund) has a 30-sec yield of 2.20%
Vanguard federal money market fund has a 30-sec yield of 2.04%

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?

Thanks
Welcome to the forum!

No one can know for sure which way interest rates are heading. For the better part of the last decade there was a lot of discussion of a bond market crisis and panic which has not materialized to date. Discussions that range from avoiding bonds, only investing in short term bonds, and using money markets and CD's in place of bonds. In fact bonds have provided the expected return over the last ten years. Will the future be different?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

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Re: Is this a bad time to buy shares of a bond index fund?

Post by abuss368 » Thu Sep 12, 2019 8:31 am

In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

Select a bonds fund, tune out the noise, and stay the course!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

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Re: Is this a bad time to buy shares of a bond index fund?

Post by MotoTrojan » Thu Sep 12, 2019 8:40 am

It’s a fallacy that bond markets are easier to time, there really is no difference. Just like with stocks, if it was certain rates were going back up, the price would already reflect that. I agree with above, pick a short or better yet intermediate fund you’re comfortable with (I prefer treasuries) and let it ride.

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Re: Is this a bad time to buy shares of a bond index fund?

Post by MikeG62 » Thu Sep 12, 2019 8:49 am

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?
What if rates don’t go up but go down?

You are aware that there is currently over $16 trillion in negatively yielding foreign sovereign debt in the world right now?

ECB announces new round of stimulus this morning.

Our president is doing everything he can to get our Federal Reserve to cut the discount rate (to zero or below based upon his tweet yesterday).

Hard to imagine rates increasing meaningfully in this environment. No guarantees though.
mocorroco wrote:
Wed Sep 11, 2019 3:36 pm

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?

Thanks
4/8 week treasuries are currently yielding around 2.0%. Yet 10 year is under 1.70%. So what does that tell you? Seems the fixed income market is betting short-term yields are going to come down. So if you buy short-term paper or go with a MMF now you may find rates on those products lower in the coming months/quarters.

Having said all of this the 10-year rate actually increased ~30bps in the last week, but has pulled back a bit this morning.
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Re: Is this a bad time to buy shares of a bond index fund?

Post by Stinky » Thu Sep 12, 2019 8:53 am

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?
Welcome to the Forum! Thanks for posting your question.

For the fixed income portion of a portfolio, I'd pick a bond fund. While bond interest rates today are rather low, they have been lower in the recent past, and no one knows what will happen in the future. Bond funds automatically re-adjust their interest rates over time as older bonds in the portfolio mature and are replaced by newer bonds, purchased at then-current market interest rates.

If you're really, really concerned about future interest rate increases, you could mitigate your risk by buying an intermediate-term or short-term bond fund, rather than a total bond fund.
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Re: Is this a bad time to buy shares of a bond index fund?

Post by livesoft » Thu Sep 12, 2019 9:04 am

Welcome to the forum.

Yes, this is a bad time to buy shares of a bond index fund. At least one can always find many people who think that every single day of any year. I don't think that fact is going to change going forward into the future.

OTOH, ...

No, this is not a bad time to buy shares of a bond index fund. At least one can always find many people who think that every single day of any year. I don't think that fact is going to change going forward into the future.

Where does that leave you? I don't know, but I will post a chart of 2 different Vanguard bond index funds. The chart shows the "growth of" the 2 funds over the past 3 years. The two funds ended up at about the same place even though one of them was predicted to do worse than the other:

Image

What I do know though is that money market funds did much worse over the past 3 years.
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Re: Is this a bad time to buy shares of a bond index fund?

Post by dratkinson » Thu Sep 12, 2019 9:59 am

I don't understand a lot of academic investing theory, so I look for "simple action steps" in the recommended readings.



During a crash...
--Stocks can lose 50-90%. (Lost 40% during 2008-2009, 90% during Great Depression.)
--Bonds can lose 5-15%.
--Stock-bond crashes are not typically coincidental.

Simple action step. Don't sweat owning good bond funds. (Worst case, you can TLH (tax-loss harvest) them exactly like you can good stock funds.)



When investing for "total return"---asset appreciation + distributions (dividends + capital gains)---the major portion of bond fund total return comes from dividends.

Simple action step. Within reason, I prefer more dividends to less. (You'll need to decide for yourself what is "within reason".)



For nervous/new investors, it's recommended to DCA (dollar cost average) into investments. But since the long-term market trajectory is upward, a lump sum investment should work better.

Simple action step. If you have the money and want to invest, then now is the best time to do so. (Just decide which is more appropriate for you: DCA or lump sum. Then do it.)



Recommended books. (Get them from the public library.)
--The Only Guide to a Winning Bond Strategy You'll Ever Need, Swedroe.
--The Bogleheads' Guide to Investing.

Simple action steps.
--In a TA (tax advantaged: 401k, IRA,...) account, can use a TDR (target date retirement) fund and let the fund manager worry about the correct bonds.
--In a taxable account and <30% effective fed tax bracket, use VBMFX/VBTLX (total bond market index).
--In a taxable account and >=30% effective fed tax bracket, use VWITX/VWIUX (intermediate-term tax-exempt).



The above simple action steps should take care of you if you want to act today, before you come up to speed on your required readings.

Or, do your required reading first, then post your financial situation in the format requested in the sticky "Asking Portfolio Questions" and the forum will review everything and offer suggestions to better fit your situation. Your required reading will help you understand your replies.

Your choice.



Disclosure. In my beginning, I followed my forum review's wise/safe advice while I learned about investing and my true risk tolerance, and gathered hands-on investing experience. It took me ~5yrs to figure it out for myself, after which time I tweaked my investments to better fit me. You should expect the same delay in learning and course correction.

Simple action step. Start with safe investments while you gather experience and learn more about investing and yourself.



Welcome.
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Re: Is this a bad time to buy shares of a bond index fund?

Post by 1789 » Thu Sep 12, 2019 10:25 am

abuss368 wrote:
Thu Sep 12, 2019 8:31 am
In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

Select a bonds fund, tune out the noise, and stay the course!
Agreed +1

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Re: Is this a bad time to buy shares of a bond index fund?

Post by abuss368 » Thu Sep 12, 2019 10:28 am

1789 wrote:
Thu Sep 12, 2019 10:25 am
abuss368 wrote:
Thu Sep 12, 2019 8:31 am
In my opinion any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

Select a bonds fund, tune out the noise, and stay the course!
Agreed +1
I have followed that my investing career and have learned to tune out the noise.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

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Re: Is this a bad time to buy shares of a bond index fund?

Post by abuss368 » Thu Sep 12, 2019 10:28 am

MotoTrojan wrote:
Thu Sep 12, 2019 8:40 am
It’s a fallacy that bond markets are easier to time, there really is no difference. Just like with stocks, if it was certain rates were going back up, the price would already reflect that. I agree with above, pick a short or better yet intermediate fund you’re comfortable with (I prefer treasuries) and let it ride.
David Swensen, Yale University CIO, recommends Treasuries and TIPS in an investment portfolio.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

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Re: Is this a bad time to buy shares of a bond index fund?

Post by abuss368 » Thu Sep 12, 2019 10:30 am

MikeG62 wrote:
Thu Sep 12, 2019 8:49 am
You are aware that there is currently over $16 trillion in negatively yielding foreign sovereign debt in the world right now?
I read about this in The Wall Street Journal. I had no idea is was $16 TRILLION in bonds that have negative interest rates. Hard to get your head around that. I read that the banks are not paying the customers but charging fees to offset.
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Re: Is this a bad time to buy shares of a bond index fund?

Post by goodenyou » Thu Sep 12, 2019 2:18 pm

This is not an attempt to thread jack. but is this a bad time to buy shares of a stock index fund?
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Re: Is this a bad time to buy shares of a bond index fund?

Post by vineviz » Thu Sep 12, 2019 2:25 pm

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.
No, they aren't different. Not with regard to the wisdom of market timing, any way.

Figure out how much market volatility you can tolerate, and pick your asset allocation accordingly. Build a globally diversified portfolio of equity funds for the "stock" part and bond index fund that matches your investment horizon for the "fixed income" part.

It's as simple as that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Is this a bad time to buy shares of a bond index fund?

Post by ruralavalon » Thu Sep 12, 2019 6:38 pm

Welcome to the forum :) .

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
I read a few posts on this topic on the forum but I was not able to find an answer to my question:

I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.

We are right now at historically low-interest rates (high bond prices). It seems that bond prices have nowhere to go but down from here.

VBTLX (Vanguard total bond index fund) has a 30-sec yield of 2.20%
Vanguard federal money market fund has a 30-sec yield of 2.04%

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?

Thanks
It is no easier to time the bond market.

Interest rates may not go up anytime soon. Bond prices may not go down.

I recall 2009, everyone was saying that interest rates had to go UP UP UP UP. They didn't. Rates didn't really go up for many years, until late 2016 and in 2017. "Federal Funds Target Rate History".

Anyone who went from intermediate-term bonds to cash in 2009 based on that prediction lost a lot of return in those 7-8 years.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Is this a bad time to buy shares of a bond index fund?

Post by goodenyou » Thu Sep 12, 2019 6:52 pm

ruralavalon wrote:
Thu Sep 12, 2019 6:38 pm
Welcome to the forum :) .

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
I read a few posts on this topic on the forum but I was not able to find an answer to my question:

I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.

We are right now at historically low-interest rates (high bond prices). It seems that bond prices have nowhere to go but down from here.

VBTLX (Vanguard total bond index fund) has a 30-sec yield of 2.20%
Vanguard federal money market fund has a 30-sec yield of 2.04%

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?

Thanks
It is no easier to time the bond market.

Interest rates may not go up anytime soon. Bond prices may not go down.

I recall 2009, everyone was saying that interest rates had to go UP UP UP UP. They didn't. Rates didn't really go up for many years, until late 2016 and in 2017. "Federal Funds Target Rate History".

Anyone who went from intermediate-term bonds to cash in 2009 based on that prediction lost a lot of return in those 7-8 years.
I agree with that. Do you think the emotions are/were driven by fear of credit risk and not interest rate risk?
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: Is this a bad time to buy shares of a bond index fund?

Post by ruralavalon » Fri Sep 13, 2019 8:57 am

goodenyou wrote:
Thu Sep 12, 2019 6:52 pm
ruralavalon wrote:
Thu Sep 12, 2019 6:38 pm
Welcome to the forum :) .

mocorroco wrote:
Wed Sep 11, 2019 3:36 pm
I read a few posts on this topic on the forum but I was not able to find an answer to my question:

I think I understand the logic behind not trying to time the market for stocks.

However, It seems to me that bonds are different.

We are right now at historically low-interest rates (high bond prices). It seems that bond prices have nowhere to go but down from here.

VBTLX (Vanguard total bond index fund) has a 30-sec yield of 2.20%
Vanguard federal money market fund has a 30-sec yield of 2.04%

Is the extra 16 basis points for the Bond fund worth the risk of interest rates going back up?

My question: why would someone favor a bond fund over a money market fund for the fixed income part of their portfolio?

Thanks
It is no easier to time the bond market.

Interest rates may not go up anytime soon. Bond prices may not go down.

I recall 2009, everyone was saying that interest rates had to go UP UP UP UP. They didn't. Rates didn't really go up for many years, until late 2016 and in 2017. "Federal Funds Target Rate History".

Anyone who went from intermediate-term bonds to cash in 2009 based on that prediction lost a lot of return in those 7-8 years.
I agree with that. Do you think the emotions are/were driven by fear of credit risk and not interest rate risk?
No, my guess is that interest rate risk was involved.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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