Best bond fund advice for home down payment?

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mgullo
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Best bond fund advice for home down payment?

Post by mgullo » Sun Jul 26, 2020 10:57 pm

Hi Everyone,

I’m looking to move about $25,000 from my Roth IRA out of the Target Date fund it is currently in and into a bond fund. The purpose of this move is to put the money in a more stable account with the plan of withdrawing it within the next 3 years for a down payment on a home. $25,000 represents roughly 26% of my combined Roth/IRA’s total value.

DW and I have been funding our Roth IRAs over the years with the plan to withdraw some contributions from each of our accounts when we decide to purchase a home. It seems that that time may be coming close, though as I said, it is still at least a year and a half to three years away. We will most likely do the same thing with her rIRA within the T. Rowe Price family of mutual funds. 25k is roughly the same percent of my DW’s overall Roth-IRA combo value, also.

Below is a list of bond funds available with Vanguard that I pulled from their website after speaking with a representative on the phone. I only listed the treasury/agency funds and I skipped the investment-grade, below-investment-grade, and tax-exempt options as those don’t seem suitable for my current needs, but I may have that very wrong.

Feel free to give me all your opinions as to whether this is a fine idea or a bad idea (please explain why as I do not do financial work professionally nor did I study it extensively in college) and which of the funds below you think is the best option. I tend to think that VBTLX, Total Bond Market Index Admiral Shares, is the best suited fund for my needs. FWIW, VTBIX, Total Bond Market II Index Fund Investor Shares, is what the Target Date uses (currently 6.55% of the overall target date fund), but I did not see that as an option on the list of bond funds.

I know that ideally I would save for the down payment out of my paycheck, but in the area where I live, I will need between 75k and 120k for a combination of a down payment and fix-up costs, depending on the shape of the home. 25k from my Roth, 25k from my DW’s Roth, and what we currently have saved for a down payment will bring us to about 70-75k. Another one and a half to two years of saving with bring us to the high end of our target amount. We will continue to contribute to my 403(b) during this time as well.

Thanks in advance.

U.S. Bond Funds

Treasury/Agency

GNMA VFIIX

Inflation-Protected Securities VIPSX

Intermediate-Term Bond Index Admiral Shares VBILX

Intermediate-Term Treasury VFITX

Intermediate-Term Treasury Index Admiral Shares VSIGX

Long-Term Bond Index Admiral Shares VBLAX

Long-Term Treasury VUSTX

Long-Term Treasury Index Admiral Shares VLGSX

Mortgage-Backed Securities Index Admiral Shares VMBSX

Short-Term Bond Index Admiral Shares VBIRX

Short-Term Federal VSGBX

Short-Term Inflation -Protected Securities Index Admiral Shares VTAPX

Short-Term Treasury VFISX

Short-Term Treasury Index Admiral Shares VSBSX

Total Bond Market Index Admiral Shares VBTLX
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retired@50
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Re: Best bond fund advice for home down payment?

Post by retired@50 » Mon Jul 27, 2020 8:32 am

mgullo wrote:
Sun Jul 26, 2020 10:57 pm

I only listed the treasury/agency funds and I skipped the investment-grade, below-investment-grade, and tax-exempt options as those don’t seem suitable for my current needs, but I may have that very wrong.

Thanks in advance.
You might consider the Ultra Short Term Bond fund at Vanguard. It is listed as a risk level ( 1 ) on the Vanguard 1 to 5 scale. With a short duration and decent credit quality it tends to trade in a pretty small price range. See link.

https://investor.vanguard.com/mutual-fu ... view/vubfx

Regards,
This is one person's opinion. Nothing more.

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grabiner
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Re: Best bond fund advice for home down payment?

Post by grabiner » Mon Jul 27, 2020 9:33 am

mgullo wrote:
Sun Jul 26, 2020 10:57 pm
Below is a list of bond funds available with Vanguard that I pulled from their website after speaking with a representative on the phone. I only listed the treasury/agency funds and I skipped the investment-grade, below-investment-grade, and tax-exempt options as those don’t seem suitable for my current needs, but I may have that very wrong.
Tax-exempt bonds are not suitable since you are holding this investment in an IRA. Below-investment-grade (junk) bonds are not suitable for a short-term investment because they have substantial risk. Investment-grade corporate bonds are acceptable because they have low default risk.

Note that "Treasury/Agency" is a measure of the average credit quality; many of these funds hold investment-grade corporate bonds as well. Total Bond Market holds 60% bonds backed by the government, and 40% corporate bonds, so it is in the "Treasury/Agency" category. Long-Term Bond Index (which is not suitable for short-term needs) used to be placed by Vanguard in the "Investment-Grade" category, and really should still be there because it is only 40% Treasury bonds.

My choice for a three-year time horizon would be Short-Term Bond Index, or for a slightly higher yield with a bit of risk, Short-Term Corporate Bond Index. (You don't have enough for Admiral shares of Short-Term Investment-Grade, so you would be paying more in expenses for that fund than for the index.)
Wiki David Grabiner

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mgullo
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Re: Best bond fund advice for home down payment?

Post by mgullo » Wed Jul 29, 2020 8:43 pm

retired@50 wrote:
Mon Jul 27, 2020 8:32 am
mgullo wrote:
Sun Jul 26, 2020 10:57 pm

I only listed the treasury/agency funds and I skipped the investment-grade, below-investment-grade, and tax-exempt options as those don’t seem suitable for my current needs, but I may have that very wrong.

Thanks in advance.
You might consider the Ultra Short Term Bond fund at Vanguard. It is listed as a risk level ( 1 ) on the Vanguard 1 to 5 scale. With a short duration and decent credit quality it tends to trade in a pretty small price range. See link.

https://investor.vanguard.com/mutual-fu ... view/vubfx

Regards,
Thanks for that recommendation, retired@50. This fund was not on my radar as neglected to look in the investment grade funds. It seems pretty stable and safe.
Aim above morality. Be not simply good, be good for something. | -Thoreau

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mgullo
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Re: Best bond fund advice for home down payment?

Post by mgullo » Wed Jul 29, 2020 9:11 pm

grabiner wrote:
Mon Jul 27, 2020 9:33 am
mgullo wrote:
Sun Jul 26, 2020 10:57 pm
Below is a list of bond funds available with Vanguard that I pulled from their website after speaking with a representative on the phone. I only listed the treasury/agency funds and I skipped the investment-grade, below-investment-grade, and tax-exempt options as those don’t seem suitable for my current needs, but I may have that very wrong.
Tax-exempt bonds are not suitable since you are holding this investment in an IRA. Below-investment-grade (junk) bonds are not suitable for a short-term investment because they have substantial risk. Investment-grade corporate bonds are acceptable because they have low default risk.

Note that "Treasury/Agency" is a measure of the average credit quality; many of these funds hold investment-grade corporate bonds as well. Total Bond Market holds 60% bonds backed by the government, and 40% corporate bonds, so it is in the "Treasury/Agency" category. Long-Term Bond Index (which is not suitable for short-term needs) used to be placed by Vanguard in the "Investment-Grade" category, and really should still be there because it is only 40% Treasury bonds.

My choice for a three-year time horizon would be Short-Term Bond Index, or for a slightly higher yield with a bit of risk, Short-Term Corporate Bond Index. (You don't have enough for Admiral shares of Short-Term Investment-Grade, so you would be paying more in expenses for that fund than for the index.)
Thanks for the explanation regarding the low default risk for Investment-grade corporate bonds, grabiner. After looking at your recommendations and what retired@50 suggested, they all (Short-Term Corporate, Short-Term Bond Index, and Ultra Short Term Bond) seem pretty safe bets for a three year period. All three are Risk Potentials of 1 (lowest risk/reward) while Ultra Short Term's expense ration is 0.20% and the other two have E.R.s of 0.07%, but they all seem to check the boxes for what I need. I'll most likely select one of the two with the lowest E.R.
Aim above morality. Be not simply good, be good for something. | -Thoreau

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Re: Best bond fund advice for home down payment?

Post by abuss368 » Wed Jul 29, 2020 9:42 pm

I would consider a limited or ultra short or perhaps a money market fund. Protection of principal is most important.
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Re: Best bond fund advice for home down payment?

Post by S_Track » Wed Jul 29, 2020 10:28 pm

grabiner wrote:
Mon Jul 27, 2020 9:33 am
mgullo wrote:
Sun Jul 26, 2020 10:57 pm
Below is a list of bond funds available with Vanguard that I pulled from their website after speaking with a representative on the phone. I only listed the treasury/agency funds and I skipped the investment-grade, below-investment-grade, and tax-exempt options as those don’t seem suitable for my current needs, but I may have that very wrong.
Tax-exempt bonds are not suitable since you are holding this investment in an IRA. Below-investment-grade (junk) bonds are not suitable for a short-term investment because they have substantial risk. Investment-grade corporate bonds are acceptable because they have low default risk.

Note that "Treasury/Agency" is a measure of the average credit quality; many of these funds hold investment-grade corporate bonds as well. Total Bond Market holds 60% bonds backed by the government, and 40% corporate bonds, so it is in the "Treasury/Agency" category. Long-Term Bond Index (which is not suitable for short-term needs) used to be placed by Vanguard in the "Investment-Grade" category, and really should still be there because it is only 40% Treasury bonds.

My choice for a three-year time horizon would be Short-Term Bond Index, or for a slightly higher yield with a bit of risk, Short-Term Corporate Bond Index. (You don't have enough for Admiral shares of Short-Term Investment-Grade, so you would be paying more in expenses for that fund than for the index.)
Curious why short-Term Federal didn't make your top two? Thanks

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Re: Best bond fund advice for home down payment?

Post by grabiner » Wed Jul 29, 2020 11:30 pm

S_Track wrote:
Wed Jul 29, 2020 10:28 pm
grabiner wrote:
Mon Jul 27, 2020 9:33 am
My choice for a three-year time horizon would be Short-Term Bond Index, or for a slightly higher yield with a bit of risk, Short-Term Corporate Bond Index. (You don't have enough for Admiral shares of Short-Term Investment-Grade, so you would be paying more in expenses for that fund than for the index.)
Curious why short-Term Federal didn't make your top two? Thanks
Again, you don't have enough for Admiral shares, so you do not get the full reward for the risk.

However, Short-Term Federal certainly looks like it has an unusually high reward for the small risk. 88% of its bonds are government bonds (Fannie Mae and Freddie Mac are not backed by the full faith and credit of the government, but have an implicit guarantee). Short-Term Bond Index is 66% Treasuries, but the rest of its holdings are corporate bonds, mostly rated A and BBB, which implies a lot more risk.

Bond traders don't agree with this analysis, as Short-Term Bond Index holds bonds which yield 0.46% (SEC yield + expense ratio), while Short-Term Federal holds bonds which yield 1.21%.
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Re: Best bond fund advice for home down payment?

Post by nisiprius » Thu Jul 30, 2020 6:56 am

mgullo wrote:
Sun Jul 26, 2020 10:57 pm
...I’m looking to move about $25,000 from my Roth IRA out of the Target Date fund it is currently in and into a bond fund. The purpose of this move is to put the money in a more stable account with the plan of withdrawing it within the next 3 years for a down payment on a home...
The Wiki article, Using mutual funds and ETFs for short-term savings (5 years) presents risk information in a way that is helpful for deciding your own answer to this kind of questions. VBMFX is the same fund as VBTLX but has a long history. Here is the data for 5-year holding periods of VBMFX.

As always, this is historical information and doesn't predict the future, but it should at least give you a feeling for the range of things that has happened in the past.

What these analyses usually show is that if you use a bond fund for savings, you are hoping to get more than you would in a bank account, but there is a meaningful chance that you might end up with less or might even end up losing money, but the size of the losses isn't terribly big.

I ran the same analysis using a 3-year period. In particular, look at "frequency and severity of disappointing" and "reward for taking that risk." The worst thing ever to happen over three months in Total Bond's history was that it made money, but less than a money market mutual fund (or, probably, less than a bank account).

VBMFX: Vanguard Total Bond Market Index
2/1987 - 3/2020; 398 months total
(limited by start of available data for VBMFX, and by end of available data for VMMXX data):
Length of holding period: 36 months
Total number of overlapping 36-month periods: 363

Vanguard's risk potential classification: Risk level 2 (conservative to moderate): Vanguard funds classified as conservative to moderate are subject to low to moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (4 to 10 years).

Frequency and severity of disappointment:

Number of periods in which VBMFX made less than VMMXX: 20/363 = 5.5%
Average/median shortfall versus VMMXX over those 20 periods: -$167.68 (average), -$102.75 (median)
Number of periods in which VBMFX lost money: 0/363 = 0.0%
Number of periods in which VBMFX failed to keep up with inflation: 22/363 = 6.1%
Average/median real loss (inflation-corrected) over those 22 periods: -$198.07 (average), -$196.81 (median)

Worst single 36-month performance:

Compared to VMMXX, 2/1987 - 1/1990: -$578.85
Dollar loss, 5/2015 - 4/2018: +$261.73
Real loss (inflation-corrected), 6/2003 - 5/2006: -$479.24

Reward for taking that risk:
Average/median additional return above VMMXX, over 363 overlapping 36-month periods: +$906.41 (average), +$818.58 (median)

Link to Morningstar chart for that worst period:
Compared to VMMXX: VBMFX vs VMMXX, 2/1987 - 1/1990

Image
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Re: Best bond fund advice for home down payment?

Post by retired@50 » Thu Jul 30, 2020 10:12 am

mgullo wrote:
Wed Jul 29, 2020 8:43 pm
retired@50 wrote:
Mon Jul 27, 2020 8:32 am
mgullo wrote:
Sun Jul 26, 2020 10:57 pm

I only listed the treasury/agency funds and I skipped the investment-grade, below-investment-grade, and tax-exempt options as those don’t seem suitable for my current needs, but I may have that very wrong.

Thanks in advance.
You might consider the Ultra Short Term Bond fund at Vanguard. It is listed as a risk level ( 1 ) on the Vanguard 1 to 5 scale. With a short duration and decent credit quality it tends to trade in a pretty small price range. See link.

https://investor.vanguard.com/mutual-fu ... view/vubfx

Regards,
Thanks for that recommendation, retired@50. This fund was not on my radar as neglected to look in the investment grade funds. It seems pretty stable and safe.
Go get 'em Tigers!

Regards,
This is one person's opinion. Nothing more.

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mgullo
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Re: Best bond fund advice for home down payment?

Post by mgullo » Thu Jul 30, 2020 11:59 am

retired@50 wrote:
Thu Jul 30, 2020 10:12 am


Go get 'em Tigers!

Regards,

:sharebeer
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mgullo
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Re: Best bond fund advice for home down payment?

Post by mgullo » Fri Jul 31, 2020 4:59 pm

nisiprius wrote:
Thu Jul 30, 2020 6:56 am
mgullo wrote:
Sun Jul 26, 2020 10:57 pm
...I’m looking to move about $25,000 from my Roth IRA out of the Target Date fund it is currently in and into a bond fund. The purpose of this move is to put the money in a more stable account with the plan of withdrawing it within the next 3 years for a down payment on a home...
The Wiki article, Using mutual funds and ETFs for short-term savings (5 years) presents risk information in a way that is helpful for deciding your own answer to this kind of questions. VBMFX is the same fund as VBTLX but has a long history. Here is the data for 5-year holding periods of VBMFX.
Thanks for the detailed response, nisiprius. I'll read through the Wiki link this evening and it should help me with my decision. I'm slightly surprised that VBMFX failed to keep up with inflation 6% of the time, thought that means 94% of the time it was fine, so I guess that's not that big of a deal. I initially thought a bond fund was my best option as I believed bonds were more likely to outperform inflation over a money market fund/bank account. Seems I was wrong about money market index funds and that may be a better option than a bond fund. I doubt any increase in the principal of either a bond fund or money market fund will be significant, but clearly I do not want to lose value of the principal by failing to keep up with inflation.

Thanks.
Aim above morality. Be not simply good, be good for something. | -Thoreau

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