Should I Sell my Bond Funds

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kgoodman16
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Joined: Sun Nov 13, 2011 4:58 pm

Should I Sell my Bond Funds

Post by kgoodman16 » Sun Mar 08, 2020 4:39 pm

So my portfolio is roughly 60 / 40 Stocks to Bonds. Obviously over the last couple of Corona fueled weeks of chaos, my equity index funds have gone down while my bond funds have increased in value. Conversely, my earnings yield on those bond funds is 1% or less right now. Moreover my broker is charging me 75 basis points to manage my portfolio (I know, but let's leave that discussion for another time), so I'm basically earning 0% on the bond.
Secondly I assume that at some point in the next several years, bond yields will climb back to the 2% -- 3% range, wiping out the recent gains.

Is the any reason that I shouldn't sell my long term bond funds ( they're mostly in IRA accounts), and move the money to an IRA savings account at Ally or some other online bank, yielding 1.6% or more, and then move it back after LT rates normalize? Can anyone tell me what I'm missing. All I see is locking in the gain on the bond funds (not a bad thing), and increasing the return by 1.6% or more. Thanks for your thoughts.

Ken

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ruralavalon
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Location: Illinois

Re: Should I Sell my Bond Funds

Post by ruralavalon » Sun Mar 08, 2020 4:52 pm

kgoodman16 wrote:
Sun Mar 08, 2020 4:39 pm
So my portfolio is roughly 60 / 40 Stocks to Bonds. Obviously over the last couple of Corona fueled weeks of chaos, my equity index funds have gone down while my bond funds have increased in value. Conversely, my earnings yield on those bond funds is 1% or less right now. Moreover my broker is charging me 75 basis points to manage my portfolio (I know, but let's leave that discussion for another time), so I'm basically earning 0% on the bond.
Secondly I assume that at some point in the next several years, bond yields will climb back to the 2% -- 3% range, wiping out the recent gains.

Is the any reason that I shouldn't sell my long term bond funds ( they're mostly in IRA accounts), and move the money to an IRA savings account at Ally or some other online bank, yielding 1.6% or more, and then move it back after LT rates normalize? Can anyone tell me what I'm missing. All I see is locking in the gain on the bond funds (not a bad thing), and increasing the return by 1.6% or more. Thanks for your thoughts.

Ken
Works fine if there will be no more gains in your bond fund.

Works fine if you know what in advance when to switch back.

Market timing usually turns out poorly.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Phineas J. Whoopee
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Re: Should I Sell my Bond Funds

Post by Phineas J. Whoopee » Sun Mar 08, 2020 4:57 pm

Fixed income's role in a portfolio stays the same. If you'd prefer a savings account to a bond fund, the first of which over the long term has lower expected return, then go ahead. A savings account still will fill the role of fixed income in a portfolio.
PJW

bitdocmd
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Re: Should I Sell my Bond Funds

Post by bitdocmd » Sun Mar 08, 2020 5:09 pm

kgoodman16 wrote:
Sun Mar 08, 2020 4:39 pm
So my portfolio is roughly 60 / 40 Stocks to Bonds. Obviously over the last couple of Corona fueled weeks of chaos, my equity index funds have gone down while my bond funds have increased in value. Conversely, my earnings yield on those bond funds is 1% or less right now. Moreover my broker is charging me 75 basis points to manage my portfolio (I know, but let's leave that discussion for another time), so I'm basically earning 0% on the bond.
Secondly I assume that at some point in the next several years, bond yields will climb back to the 2% -- 3% range, wiping out the recent gains.

Is the any reason that I shouldn't sell my long term bond funds ( they're mostly in IRA accounts), and move the money to an IRA savings account at Ally or some other online bank, yielding 1.6% or more, and then move it back after LT rates normalize? Can anyone tell me what I'm missing. All I see is locking in the gain on the bond funds (not a bad thing), and increasing the return by 1.6% or more. Thanks for your thoughts.

Ken
I don't think that's how that works. My understanding is that it's the relative change in interest rates (someone willing to buy for a lower or even negative yield) that helps the price of your bond fund to go up. I admit I don't fully understand bonds but am confident that interest rates are going down. If interest rates continue to decline your bond fun would increase in value.

I could be wrong on this and look forward to other responses.

MikeG62
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Re: Should I Sell my Bond Funds

Post by MikeG62 » Sun Mar 08, 2020 5:21 pm

Timing of interest rates may be as hard as timing the equity markets. So there is that.

Having said that, I understand how you feel. Have you considered a partial IRA transfer to a bank or CU so you can move “some” of your bond position to CD’s?

FWIW, I moved some money to a CU back in the fall from my rollover IRA to jump on a promotional 36-month 3.25% CD. In the process of moving another decent chunk to another CU to jump on their 37-month 3.0% IRA CD. I am not however bailing on bonds funds or bonds. This was stuff invested at the very short end of my FI exposure.
Real Knowledge Comes Only From Experience

hudson
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Re: Should I Sell my Bond Funds

Post by hudson » Mon Mar 09, 2020 7:00 am

kgoogman16,

I go for the best payout...I look at (and track) distribution yield...for funds. I do not buy and hold in fixed income. Since you're in a tax advantaged account, you don't have to take into account capital gains.
At this time, I prefer 5 year CDs. There were 3%+ CDs available just a few days ago...they could all be gone.

I don't pay any attention to predictions about future rates; I deal with the present and go for the best available (intermediate duration and "safe").
If rates change, and I get stuck with an ugly CD, that's the way it goes. I'll just adjust the sails and move on.

I feel your pain for those 75 basis points that you are losing...ouch.

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mickeyd
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Re: Should I Sell my Bond Funds

Post by mickeyd » Mon Mar 09, 2020 7:59 am

Follow your Investment Policy Statement. That's what I have done for 15 years. This bump in the road will be forgotten (believe it or not) before you know it.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

Nowizard
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Re: Should I Sell my Bond Funds

Post by Nowizard » Mon Mar 09, 2020 8:04 am

Not something we are doing with a similar stock/bond ratio. Our bond funds are currently doing exactly what they are designed to do and mitigating losses. In fact, it is technically close to the time to consider whether to rebalance or that the market is moving us toward a changing risk tolerance and has already "rebalanced" us to that new level.

Tim

Almond
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Re: Should I Sell my Bond Funds

Post by Almond » Mon Mar 09, 2020 8:37 am

I still don’t understand how bonds work


IF you buy 10k LTT or ITT and rates go to 0 or negative instead of being paid a dividend to hold bonds it could cost you? But the share price could also increase? You could sell and reinvest the % increase in stocks to rebalance.

I am so confused can someone explain how it works.

Thank you

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mickeyd
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Re: Should I Sell my Bond Funds

Post by mickeyd » Mon Mar 09, 2020 10:32 am

My bond funds are there to tamp down risk, not to generate income for me. They do a beautiful job.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

hudson
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Re: Should I Sell my Bond Funds

Post by hudson » Mon Mar 09, 2020 10:42 am

Almond wrote:
Mon Mar 09, 2020 8:37 am
I still don’t understand how bonds work


IF you buy 10k LTT or ITT and rates go to 0 or negative instead of being paid a dividend to hold bonds it could cost you? But the share price could also increase? You could sell and reinvest the % increase in stocks to rebalance.

I am so confused can someone explain how it works.

Thank you
A bond sold at issue can be a very simple instrument. Bond funds confuse the issue because they don't always buy new; and they don't always hold the bonds to maturity. Yes, fixed income can be confusing...and that may be an understatement.

If you buy a bond etf or fund and then later the rates go down, the share price should go up.
You will continue to be paid the dividend or interest on the existing holdings at the existing rates on those holdings.
Those rates will not go down. If the interest rates stay down, the funds overall payout may drop because the fund or etf will need to replace holdings with bonds paying lower rates.

Almond
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Re: Should I Sell my Bond Funds

Post by Almond » Mon Mar 09, 2020 1:26 pm

hudson wrote:
Mon Mar 09, 2020 10:42 am
Almond wrote:
Mon Mar 09, 2020 8:37 am
I still don’t understand how bonds work


IF you buy 10k LTT or ITT and rates go to 0 or negative instead of being paid a dividend to hold bonds it could cost you? But the share price could also increase? You could sell and reinvest the % increase in stocks to rebalance.

I am so confused can someone explain how it works.

Thank you
A bond sold at issue can be a very simple instrument. Bond funds confuse the issue because they don't always buy new; and they don't always hold the bonds to maturity. Yes, fixed income can be confusing...and that may be an understatement.

If you buy a bond etf or fund and then later the rates go down, the share price should go up.
You will continue to be paid the dividend or interest on the existing holdings at the existing rates on those holdings.
Those rates will not go down. If the interest rates stay down, the funds overall payout may drop because the fund or etf will need to replace holdings with bonds paying lower rates.
TY. If I understand you is where things might get tricky is if rates turn negative. — instead of being paid dividend to hold it it could cost you? Unless the share price is going up to compensate negative yields it can be too risky. I know some have said countries in Europe are paying negative yields is that what happened there?

I never really thought about bond yield when buying bonds. I just bought them as part of AA, and that they will move up when stocks are down, minimizing the loss

hudson
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Joined: Fri Apr 06, 2007 9:15 am

Re: Should I Sell my Bond Funds

Post by hudson » Mon Mar 09, 2020 1:45 pm

Almond wrote:
Mon Mar 09, 2020 1:26 pm
hudson wrote:
Mon Mar 09, 2020 10:42 am
Almond wrote:
Mon Mar 09, 2020 8:37 am
I still don’t understand how bonds work


IF you buy 10k LTT or ITT and rates go to 0 or negative instead of being paid a dividend to hold bonds it could cost you? But the share price could also increase? You could sell and reinvest the % increase in stocks to rebalance.

I am so confused can someone explain how it works.

Thank you
A bond sold at issue can be a very simple instrument. Bond funds confuse the issue because they don't always buy new; and they don't always hold the bonds to maturity. Yes, fixed income can be confusing...and that may be an understatement.

If you buy a bond etf or fund and then later the rates go down, the share price should go up.
You will continue to be paid the dividend or interest on the existing holdings at the existing rates on those holdings.
Those rates will not go down. If the interest rates stay down, the funds overall payout may drop because the fund or etf will need to replace holdings with bonds paying lower rates.
TY. If I understand you is where things might get tricky is if rates turn negative. — instead of being paid dividend to hold it it could cost you? Unless the share price is going up to compensate negative yields it can be too risky. I know some have said countries in Europe are paying negative yields is that what happened there?

I never really thought about bond yield when buying bonds. I just bought them as part of AA, and that they will move up when stocks are down, minimizing the loss
No...it would take a bond fund years to go negative.
Bond funds hold bonds with interest rates locked in.

Almond
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Joined: Wed May 01, 2019 3:11 pm

Re: Should I Sell my Bond Funds

Post by Almond » Mon Mar 09, 2020 2:49 pm

hudson wrote:
Mon Mar 09, 2020 1:45 pm
Almond wrote:
Mon Mar 09, 2020 1:26 pm
hudson wrote:
Mon Mar 09, 2020 10:42 am
Almond wrote:
Mon Mar 09, 2020 8:37 am
I still don’t understand how bonds work


IF you buy 10k LTT or ITT and rates go to 0 or negative instead of being paid a dividend to hold bonds it could cost you? But the share price could also increase? You could sell and reinvest the % increase in stocks to rebalance.

I am so confused can someone explain how it works.

Thank you
A bond sold at issue can be a very simple instrument. Bond funds confuse the issue because they don't always buy new; and they don't always hold the bonds to maturity. Yes, fixed income can be confusing...and that may be an understatement.

If you buy a bond etf or fund and then later the rates go down, the share price should go up.
You will continue to be paid the dividend or interest on the existing holdings at the existing rates on those holdings.
Those rates will not go down. If the interest rates stay down, the funds overall payout may drop because the fund or etf will need to replace holdings with bonds paying lower rates.
TY. If I understand you is where things might get tricky is if rates turn negative. — instead of being paid dividend to hold it it could cost you? Unless the share price is going up to compensate negative yields it can be too risky. I know some have said countries in Europe are paying negative yields is that what happened there?

I never really thought about bond yield when buying bonds. I just bought them as part of AA, and that they will move up when stocks are down, minimizing the loss
No...it would take a bond fund years to go negative.
Bond funds hold bonds with interest rates locked in.

right but that is for what you already hold. If down the road rates go to 0 or negative why would people buy them and thus who would you sell to.

I find this bond thing tricky to understand and it seems most people have some difficulty with it.

hudson
Posts: 2899
Joined: Fri Apr 06, 2007 9:15 am

Re: Should I Sell my Bond Funds

Post by hudson » Mon Mar 09, 2020 3:31 pm

Almond wrote:
Mon Mar 09, 2020 2:49 pm
right but that is for what you already hold. If down the road rates go to 0 or negative why would people buy them and thus who would you sell to.

I find this bond thing tricky to understand and it seems most people have some difficulty with it.
Intermediate bonds won't go there for several years, so that would be something that may or may not happen.
I don't predict or worry with what ifs; I just deal with the present and try to get through the day.

Bonds hard to understand: Yes! But, you can get there!

Almond
Posts: 87
Joined: Wed May 01, 2019 3:11 pm

Re: Should I Sell my Bond Funds

Post by Almond » Mon Mar 09, 2020 4:05 pm

hudson wrote:
Mon Mar 09, 2020 3:31 pm
Almond wrote:
Mon Mar 09, 2020 2:49 pm
right but that is for what you already hold. If down the road rates go to 0 or negative why would people buy them and thus who would you sell to.

I find this bond thing tricky to understand and it seems most people have some difficulty with it.
Intermediate bonds won't go there for several years, so that would be something that may or may not happen.
I don't predict or worry with what ifs; I just deal with the present and try to get through the day.

Bonds hard to understand: Yes! But, you can get there!
TY :happy

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Phineas J. Whoopee
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Re: Should I Sell my Bond Funds

Post by Phineas J. Whoopee » Tue Mar 10, 2020 2:49 pm

Almond wrote:
Mon Mar 09, 2020 8:37 am
I still don’t understand how bonds work


IF you buy 10k LTT or ITT and rates go to 0 or negative instead of being paid a dividend to hold bonds it could cost you? But the share price could also increase? You could sell and reinvest the % increase in stocks to rebalance.

I am so confused can someone explain how it works.

Thank you
The problem is people saying, thinking, and believing interest rates, when the correct thing to look at is Yield to Maturity, YTM, which is calculated based on the bond's current market value. A fund of bonds simply holds many of them, and behaves like your portfolio would if you held the same ones and managed them the same way.

When YTM becomes negative one does not have to write a check to the issuer every six months.

What happens is the bond gets bought above its face value. Its coupon payments, whatever they are, stay the same. YTM includes the fact that as a bond approaches maturity its market value must approach its par value. Who would pay much more, or accept much less, than $1,000 for a 30-year $1,000 par value bond that matures tomorrow?

YTM includes coupon payments, the inevitable approach of a bond's market value to its par value over time, and also reinvestment of coupons.

Does that help?

PJW

michaeljc70
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Re: Should I Sell my Bond Funds

Post by michaeljc70 » Tue Mar 10, 2020 3:04 pm

It is hard to ignore that you are paying someone to manage your portfolio yet asking on an online forum how you should manage your portfolio. Knowing your age/years to retirement and risk tolerance would be important to answering whether your current AA is appropriate. I wouldn't make big changes based on where bonds (or stocks for that matter) are this week or month or year.

Nightowl99
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Re: Should I Sell my Bond Funds

Post by Nightowl99 » Tue Mar 10, 2020 4:30 pm

"Is the any reason that I shouldn't sell my long term bond funds (they're mostly in IRA accounts), and move the money to an IRA savings account at Ally or some other online bank, yielding 1.6% or more, and then move it back after LT rates normalize?"

I'm thinking that if the long term bond funds are being sold from a taxable IRA, you'll owe taxes on any amounts withdrawn. Then, if LT rates don't normalize as quickly as you'd like them to, you could end up losing money to inflation if you keep too much in savings accounts for too long.

Still, I can see what you're saying about how much bonds have risen lately. I've been thinking of lowering the total duration of my bond funds and recently decided to exchange a little (not all) of my total bond fund and another one, the intermediate bond fund, for a short-term bond fund and the short-term inflation protected fund, along with purchasing another I Bond. I may regret this tinkering around a bit later on, since it is sort of like market timing, but at least I didn't make any major changes. I'm not suggesting this is what anyone else should do--my understanding of bonds is somewhat limited.

Good luck with whatever you decide to do.

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