question for the bond fund experts out there

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LearningAlot
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Joined: Thu Aug 02, 2018 8:43 am

question for the bond fund experts out there

Post by LearningAlot »

I have my retirement savings in Vanguard funds. The bond portion is currently in an intermediate bond fund
and I want to reduce risk.

Current: VBTLX, SEC yield 1.17%, duration 6.6 years, credit quality(59% US Gov, 20% Aaa-A, 21% Baa)

I am considering moving to one of the following.
VUSFX: SEC yield 0.89%, duration 0.9 years, credit quality(1% US Gov, 71% Aaa-A3, 28% Baa1-NR)
VSGDX: SEC yield 0.96%, duration 2.2 years, credit quality(90% US Gov, 10% NR)

Would appreciate any guidance.
Thanks in advance!
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vineviz
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Re: question for the bond fund experts out there

Post by vineviz »

LearningAlot wrote: Sun Sep 13, 2020 11:30 am I have my retirement savings in Vanguard funds. The bond portion is currently in an intermediate bond fund
and I want to reduce risk.

Current: VBTLX, SEC yield 1.17%, duration 6.6 years, credit quality(59% US Gov, 20% Aaa-A, 21% Baa)

I am considering moving to one of the following.
VUSFX: SEC yield 0.89%, duration 0.9 years, credit quality(1% US Gov, 71% Aaa-A3, 28% Baa1-NR)
VSGDX: SEC yield 0.96%, duration 2.2 years, credit quality(90% US Gov, 10% NR)
What kind of risk are you trying to reduce?

In any case, it's impossible to say whether VUSFX or VSGDX will increase or decrease that risk (whatever it is) without knowing what the rest of your portfolio looks like. Can you edit your post to include all the funds you hold, with the overall percentage currently allocated to each?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Dude2
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Re: question for the bond fund experts out there

Post by Dude2 »

Just to help some people out, not having memorized fund symbols.

VBTLX = Vanguard Total Bond Market Index Fund Admiral Shares
VUSFX = Vanguard Ultra-Short-Term Bond Fund Admiral Shares
VSGDX = Vanguard Short-Term Federal Fund Admiral Shares

It appears you wish to reduce duration, or maybe you're thinking that there isn't any reason to have longer duration when the yield difference is so minuscule. Like vineviz says, reducing risk is kind of vague, mainly because, vineviz will tell you that matching your duration to when you need the money will eliminate interest rate risk -- if that particular risk is the concern here. You seem to be focusing on yield, duration, and credit quality. There are other risks, such as inflation risk.
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vineviz
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Re: question for the bond fund experts out there

Post by vineviz »

Dude2 wrote: Sun Sep 13, 2020 12:07 pm It appears you wish to reduce duration, or maybe you're thinking that there isn't any reason to have longer duration when the yield difference is so minuscule. Like vineviz says, reducing risk is kind of vague, mainly because, vineviz will tell you that matching your duration to when you need the money will eliminate interest rate risk -- if that particular risk is the concern here. You seem to be focusing on yield, duration, and credit quality. There are other risks, such as inflation risk.
Yes to all this.

And even if the OP is simply thinking of "risk" as volatility, moving from VBTLX to VUSFX would likely increase the overall volatility of the portfolio even if just marginally.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Always passive
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Re: question for the bond fund experts out there

Post by Always passive »

If you wish to reduce risk and do not know what the future will bring (who knows?), you can either build a bond ladder or if you wish to invest in funds, use a barbell strategy ( https://www.bogleheads.org/wiki/Barbell_strategy )
toocold
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Re: question for the bond fund experts out there

Post by toocold »

You could also move your money to an online high yield savings account. I think some go up to 0.8%. That'll cut your duration and reduce your interest rate and volatility risk.
Topic Author
LearningAlot
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Re: question for the bond fund experts out there

Post by LearningAlot »

LearningAlot wrote: Sun Sep 13, 2020 11:30 am I have my retirement savings in Vanguard funds. The bond portion is currently in an intermediate bond fund
and I want to reduce risk.

Current: VBTLX, SEC yield 1.17%, duration 6.6 years, credit quality(59% US Gov, 20% Aaa-A, 21% Baa)

I am considering moving to one of the following.
VUSFX: SEC yield 0.89%, duration 0.9 years, credit quality(1% US Gov, 71% Aaa-A3, 28% Baa1-NR)
VSGDX: SEC yield 0.96%, duration 2.2 years, credit quality(90% US Gov, 10% NR)

Would appreciate any guidance.
Thanks in advance!
Sorry I did not provide enough info. Here is my total picture.
Equities 40%(VTSAX), Fixed income 60% of which 1/3 is in a stable value fund and 2/3 in the above mentioned intermediate
Bond fund. I am 60 years old and retired. My withdrawal rate is 2.75%.
My concern is interest rate risk but was hoping for some guidance as I balance that with credit risk
jimkinny
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Re: question for the bond fund experts out there

Post by jimkinny »

If you are young it likely doesn't make any difference depending on the % in equities you have.

If you want to avoid a decrease in NAV due to an interest rate increase then the two funds you listed will accomplish that.

CDs at a on line bank such as Ally would guarantee you a fixed interest rate as opposed to a savings account. CDs rates are pretty low but at Ally at least (for now) are about 0.8%. A ten year Treasury yields about 0.7%. I think Ally has a 1 year CD at 0.8%. They have the same risk of default = 0. I would not want to tie up my money for 10 years at 0.7% but rates can always go down further.

I see you have access to a stable bond fund. I would likely use that.

A lot of people here feel it is important to have bonds or bond funds that benefit from the "flight to safety" in periods of equity/financial turmoil. I feel safety is more important and do really see much benefit in that but if your bonds go up when equities go down, you can sell some bonds and stocks. That is not trivial. I figure I can redeem a CD or just sell at a smallish % loss some some of my short term investment grand bond fund.
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Munir
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Re: question for the bond fund experts out there

Post by Munir »

I am a retiree in the distribution phase and no bond fund expert. I have a 70% fixed income portfolio mostly in my IRA. Since 2/2020 the bond market has had a fair amount of turbulence and I don't know if this will continue or not. I have divided my bond funds into two intermediate funds with slightly different holdings and two short term funds also with slightly different holdings. They are VCOBX (Core Bond Fund with high MBS) and VBILX (Intermediate Bond Index with no MBS), and VSGDX (Short Term Federal) again with high MBS and VBIRX (Short Term Bond Index) that is mixed.
So I have two intermediate term bond funds and two short term bond funds each different from the other in case one segment of the bond market falls significantly, hopefully the other fund with the same duration will balance it . This would also allow me to re-balance among these funds which I cannot do if all my bond fund money is in one fund.
You can plot these funds on the M* performance graph to see how they have behaved this year and what their performance has been in the past (knowing that the past is no predictor of the future etc etc).
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vineviz
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Re: question for the bond fund experts out there

Post by vineviz »

LearningAlot wrote: Sun Sep 13, 2020 3:13 pm Sorry I did not provide enough info. Here is my total picture.
Equities 40%(VTSAX), Fixed income 60% of which 1/3 is in a stable value fund and 2/3 in the above mentioned intermediate
Bond fund. I am 60 years old and retired. My withdrawal rate is 2.75%.
My concern is interest rate risk but was hoping for some guidance as I balance that with credit risk
Thank you! That helps quite a bit.

Given your age and your existing holdings, you would actually be increasing your interest rate risk by moving from an intermediate bond fund to a short-term bond fund. With (I hope) a 35+ year retirement ahead of you, you should ideally be holding long-term bonds instead of intermediate term bonds.

I won't suggest you move in that direction, necessarily, in part because the fact that 20% of your portfolio is in a stable value fund (cash, essentially) tells me that you are probably averse to volatility. But it's important to understand that you are taking on a lot of interest rate risk already, and moving from VBTLX to either VUSFX or VSGDX will make that worse, not better.

Furthermore, the biggest bond risk I see in your portfolio is actually one you didn't mention: inflation risk. With a 2.75% withdrawal rate and a portfolio that is 60% cash and nominal bonds, you're more exposed to unexpected upticks in inflation than I'd prefer to see.

My recommendation would be to move half of your VBTLX into Vanguard Inflation-Protected Securities Fund (VAIPX). This fund also has an intermediate-term duration, so it's not increasing your interest rate risk but it IS reducing your credit and inflation risks. So your fixed income would be 1/3 stable value, 1/3 VBTLX, and 1/3 VAIPX.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
livesoft
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Re: question for the bond fund experts out there

Post by livesoft »

At age 60 and a 2.75% annual withdrawal rate with presumably social security benefits coming in 10 years, I am perplexed by the idea of reducing risk.

If your stable value fund is actually something like TIAA traditional annuity paying 3% or more (and you said your stable value paid 3% elsewhere), then I might be even more gobsmacked. Although you wrote that you have your retirement funds at Vanguard, I am unaware of Vanguard offering a stable value fund.

Perhaps you are a candidate for a single premium immediate annuity or something like that?
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khart23
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Re: question for the bond fund experts out there

Post by khart23 »

This could be an instance of not seeing the Forrest for the trees - there’s also still many layers beyond what we know. I would be looking at surviving spouse considerations (if you are married), inflation risk [and that being compounded by tax hikes by 2026], and a whole number of other very impactful decisions that would need to be addressed. All things considered: you have about 20%(ish?) of your total portfolio in stable value from what it looks like? That’s going to give you ample flexibility (again assuming all other things like taxes, inflation, redemption risk, estate planning w/secure act provisions, surviving spouse protections etc are all adequately addressed).

I have been running 2-3 plans with my clients as of late to look at current v future tax scenarios, estate provisions, social security underfunding and actionable ‘if this -than that’ pre-planning. All of that being said - Michael Kitces shared a great piece on the 4% withdrawal rate that he re-posted today:

https://www.kitces.com/blog/how-has-the ... ial-crisis/
unbiased
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Re: question for the bond fund experts out there

Post by unbiased »

I'm not a fan of ultra-short bond funds, and would especially avoid them since you have access to a stable value fund. Ultra short offers little yield and, while they usually don't fluctuate wildly in value, they always seem to do so just when you think you need them.

Look at the below chart of its performance in March and how long it took to recover.
Image
https://finance.yahoo.com/chart/VUSFX#e ... F5In19fQ--
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