Laddering With Bond Funds

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itsallballbearings
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Laddering With Bond Funds

Post by itsallballbearings »

So my personal portfolio suffered greatly because of interest rates impact on bonds over the last couple of years. Fidelity was managing my investments and never did anything to adjust.

After shopping around for another portfolio manager, one of the firms suggested a bond fund ladder with Ishares bond funds. I decided to do my own investments, but copied this strategy for my bonds. Because I can wait to maturity, it protects me from the issues I've seen in the past. What should I be doing with my dividends (based on traditional bond ladder mentality) reivesting in the current bond fund or creating the new ladder?

Does this strategy even make any sense to do now that interest rates are less likely to rise?
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retired@50
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Re: Laddering With Bond Funds

Post by retired@50 »

Welcome to the forum, itsallballbearings.

In case others aren't aware of the origin of the user name...
See link: https://www.youtube.com/watch?v=SjJYNZirQCU

As for the dividends, I'd be looking to reinvest them in whatever my portfolio needs more of, either stocks or bonds, to maintain the desired asset mix.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
slickwillie
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Re: Laddering With Bond Funds

Post by slickwillie »

retired@50 wrote: Mon May 13, 2024 5:36 pm Welcome to the forum, itsallballbearings.

In case others aren't aware of the origin of the user name...
See link: https://www.youtube.com/watch?v=SjJYNZirQCU
I wonder if the Fidelity FA that mismanaged the bond holdings was named Ben Dover?
UpperNwGuy
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Re: Laddering With Bond Funds

Post by UpperNwGuy »

itsallballbearings wrote: Mon May 13, 2024 4:06 pm So my personal portfolio suffered greatly because of interest rates impact on bonds over the last couple of years. Fidelity was managing my investments and never did anything to adjust.
It appears to me that Fidelity was doing the right thing for your portfolio by staying the course with your bond funds. It seems like they might have done an inadequate job of explaining to you how bond funds work and why you shouldn't sell them just because the NAV declined during a period of rising interest rates. I doubt you'll find better management elsewhere.
TravelingAbroad
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Re: Laddering With Bond Funds

Post by TravelingAbroad »

Just my two cents.
People generally think that Financial Advisers will take action and save you from bad things happening in the stock market. I think some of them actually perpetuate that myth to justify their fees.
I believe that what they really do is setup your asset allocation and leave it alone. Their biggest contribution is talking us off the ledge and keeping us in the market.
muffins14
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Re: Laddering With Bond Funds

Post by muffins14 »

itsallballbearings wrote: Mon May 13, 2024 4:06 pm So my personal portfolio suffered greatly because of interest rates impact on bonds over the last couple of years. Fidelity was managing my investments and never did anything to adjust.

After shopping around for another portfolio manager, one of the firms suggested a bond fund ladder with Ishares bond funds. I decided to do my own investments, but copied this strategy for my bonds. Because I can wait to maturity, it protects me from the issues I've seen in the past. What should I be doing with my dividends (based on traditional bond ladder mentality) reivesting in the current bond fund or creating the new ladder?

Does this strategy even make any sense to do now that interest rates are less likely to rise?
I don't see why you would leave the Fidelity advisor when they are likely doing something that is totally fine for your needs. Are you trying to match some specific liability at a specific future date, or do you just want some standard mix of stocks and bonds, and you use the income for expenses like food, mortgage, rent, travel, etc in retirement?

If you don't have some specific date by which you need an exact dollar amount, a bond fund is fine. Even if you "wait til maturity" your individual bonds still lose value in the interim when yields rise. So anything you sell before maturity is sold at a loss.
Crom laughs at your Four Winds
Topic Author
itsallballbearings
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Re: Laddering With Bond Funds

Post by itsallballbearings »

So for those asking the question about why I left Fidelity, I'll give you a summary. It may be they were just doing the right thing and couldn't explain it to me well, but it didn't seem that way.

I started using Fidelity in Nov. 2021 when my portfolio was at an alltime high. I retired that year not because of the value of the stock but because of other personal reasons. Since then, my portfolio went down and I largely ignored it, content to say that market was down and Fidelity knew what they were doing. With the recent surge in stocks, my account finally recovered and almost reached that 2021 level but never quite did. With the S&P at an all time high, I thought my portfolio should be at an all time high (65 stock, 35 bond mix). I managed my own portfolio before Fidelity and that was always the case in the past. Something seemed amiss. When I asked, my advisor largely blamed it on the underperformance of my bonds.

Perhaps, it was just their fees that really made me dissatisfied. If it weren't for the fees, I would have at least been up 20,000 or so and would have seen at least some growth in 2.5 years. That is why I am now self managing.

I started talking with other advisors and, while they may have just been trying to sell me something, they all said they believed my bonds way underperformed and that I had a bit too much invested in small cap funds (which also suffer with high interest rates.) One recommended this laddering solution to ensure it wouldn't happen again.

I didn't come on here to slam Fidelity. I actually have a good relationship with my former advisor. I just want to maximize my porfolio and thought going another way at this point seemed like a good idea. I don't have any specific goals for performance only that I have enough money for my retirement. I've used multiple tools to assess this, and all indicate that I should be fine. I have to wonder though if I was flat or lost money for next three years if I would still be a good position. We are currently living off cash and my wife's salary, and won't be pulling from the retirement IRA for about five years.

As for the bonds, with Fidelity's strategy I had bond funds where you couldn't necessarily wait to maturity. Now I can with the new approach, but interest rates likely won't go up from here so maybe this is overkill? It seems like most the responders just use bond funds. Have you seen similar results to me? Are you just staying the course and trusting that bond funds will not hold your portfolio's performance back in the future? I've considered moving my bond fund with the earliest maturity dates (Dec. 2025) to a cd with 5 percent interest since it doesn't seem like I would get much better results with the fund.
Last edited by itsallballbearings on Tue May 14, 2024 12:36 pm, edited 1 time in total.
muffins14
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Re: Laddering With Bond Funds

Post by muffins14 »

itsallballbearings wrote: Tue May 14, 2024 6:40 am
As for the bonds, with Fidelity's strategy I had bond funds where you couldn't necessarily wait to maturity. Now I can with the new approach, but interest rates likely won't go up from here so maybe this is overkill? It seems like most the responders just use bond funds. Have you seen similar results to me? Are you just staying the course and trusting that bond funds will not hold your portfolio's performance back in the future? I've considered moving my bond fund with the earliest maturity dates (Dec. 2025) to a cd with 5 percent interest since it doesn't seem like I would get much better results with the fund.
The issue with thinking that waiting til maturity is a silver bullet is that once they get to maturity, what do you do? If you are not spending all of the bonds then, you need to reinvest them in something else. If you’re just going to have a rolling ladder of bonds or CDs, that’s more work to manage than a bond fund, for one, and additionally, if you’re going to change and use short term funds or CDs, you introduce reinvestment risk in that the new thing you reinvest in when the bond matures in the future may have worse rates, pushing you with less total money than had you used a more appropriate duration.

I do think fixed income lowers expected return in principle ( CDs, cash, bonds, bond funds) because the expected return is higher for stocks than for fixed income. However, having the fixed income provides some income, which may give smoother consumption and less portfolio volatility. People often like to reduce volatility, so they incorporate fixed income to their portfolio.

I hold bond funds because I would otherwise need a rolling ladder and I don’t have enough to fund the whole ladder either. The convenience is nice. I hold GOVZ because my horizon for using this money is around 35 years away on average. Yes my bonds lost value in 2023-2024. That’s what happens when market rates rise. I see that as a good thing, because now I have bonds paying 4-5% instead of 1-2%

When I am in my 60s I may build a TIPS ladder for some money, but not now at 38.

As for your relationship, I think self management is better to avoid extra fees. I’m just saying this is not something that’s like a bad move by Fidelity. It’s just what happens to bond prices when rates rise. If you like the advisor, you could just tell them you want a bond ladder instead of a fund and see what they offer.
Last edited by muffins14 on Tue May 14, 2024 7:25 am, edited 2 times in total.
Crom laughs at your Four Winds
KlangFool
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Re: Laddering With Bond Funds

Post by KlangFool »

itsallballbearings wrote: Mon May 13, 2024 4:06 pm So my personal portfolio suffered greatly because of interest rates impact on bonds over the last couple of years. Fidelity was managing my investments and never did anything to adjust.

After shopping around for another portfolio manager, one of the firms suggested a bond fund ladder with Ishares bond funds. I decided to do my own investments, but copied this strategy for my bonds. Because I can wait to maturity, it protects me from the issues I've seen in the past. What should I be doing with my dividends (based on traditional bond ladder mentality) reivesting in the current bond fund or creating the new ladder?

Does this strategy even make any sense to do now that interest rates are less likely to rise?
OP,

Your first paragraph doesn't make any sense. How can that be possible unless you are 100% bond? If you are 100% bond, then, the question will be why are you doing this?

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KlangFool
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Re: Laddering With Bond Funds

Post by KlangFool »

OP,

For active management, I put 30% of my portfolio into the Wellington fund. It costs me 0.17% per year.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Tom_T
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Re: Laddering With Bond Funds

Post by Tom_T »

muffins14 wrote: Tue May 14, 2024 6:54 am
The issue with thinking that waiting til maturity is a silver bullet is that once they get to maturity, what do you do? If you are not spending all of the bonds then, you need to reinvest them in something else. If you’re just going to have a rolling ladder of bonds or CDs, that’s more work to manage than a bond fund, for one, and additionally, if you’re going to change and use short term funds or CDs, you introduce reinvestment risk in that the new thing you reinvest in when the bond matures in the future may have worse rates, pushing you with less total money than had you used a more appropriate duration.
Bond funds have no disadvantages? This is a common type of response on this forum: explain everything that could possibly go wrong with one approach, and not mention the possible downsides of the "preferred" approach.

Also, if a bond ladder is managed via auto-roll, it literally requires no work once it's in place.
muffins14
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Re: Laddering With Bond Funds

Post by muffins14 »

Tom_T wrote: Tue May 14, 2024 7:13 am
muffins14 wrote: Tue May 14, 2024 6:54 am
The issue with thinking that waiting til maturity is a silver bullet is that once they get to maturity, what do you do? If you are not spending all of the bonds then, you need to reinvest them in something else. If you’re just going to have a rolling ladder of bonds or CDs, that’s more work to manage than a bond fund, for one, and additionally, if you’re going to change and use short term funds or CDs, you introduce reinvestment risk in that the new thing you reinvest in when the bond matures in the future may have worse rates, pushing you with less total money than had you used a more appropriate duration.
Bond funds have no disadvantages? This is a common type of response on this forum: explain everything that could possibly go wrong with one approach, and not mention the possible downsides of the "preferred" approach.
I never said any such thing. The OP clearly has already experienced that prices changed when market yields rose. They seem to have incurred no detrimental effect on their lifestyle as a result of this. The same loss would have happened with a ladder

A bond fund is just a rolling bond ladder that someone else manages for you, minus the option to sell specific bonds and minus the ability to choose the exact maturity date of the specific bonds. It is just a tool with use cases.

I also said that 1) bonds have lower expected return than stocks and 2) my bonds lost value, as did all bonds, when rates were rising. I’m not sure why this makes me part of the Bogleheads Bond Fund Conspiracy Project. I even said I was interested in a TIPS ladder.
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Zosima
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Re: Laddering With Bond Funds

Post by Zosima »

itsallballbearings wrote: Mon May 13, 2024 4:06 pm
After shopping around for another portfolio manager, one of the firms suggested a bond fund ladder with Ishares bond funds. I decided to do my own investments, but copied this strategy for my bonds. Because I can wait to maturity, it protects me from the issues I've seen in the past. What should I be doing with my dividends (based on traditional bond ladder mentality) reivesting in the current bond fund or creating the new ladder?

Does this strategy even make any sense to do now that interest rates are less likely to rise?
There are a lot of discussions on defined maturity bond ETFs such as iShares iBonds and Invesco Bulletshares, such as the following:

viewtopic.php?t=396815
viewtopic.php?t=422171
viewtopic.php?t=422550

You can find additional discussions through the search. Personally, I use them and believe they can be a good investment vehicle depending on your goals.
James.534
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Re: Laddering With Bond Funds

Post by James.534 »

Fidelity was managing my investments and never did anything to adjust.
What did you actually expect them to do? Predict the future?
UpperNwGuy
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Re: Laddering With Bond Funds

Post by UpperNwGuy »

itsallballbearings wrote: Tue May 14, 2024 6:40 am Something seemed amiss. When I asked, my advisor largely blamed it on the underperformance of my bonds.
Your advisor was correct. All bonds (both bond funds and individual bonds) underperformed when the Fed raised interest rates. However, as the NAV declined, the yields went up. I hope you're not focusing only on the NAV.
It seems like most the responders just use bond funds.
I use bond funds. I don't own any individual bonds.
Have you seen similar results to me?
My results have been the same as yours.
Are you just staying the course and trusting that bond funds will not hold your portfolio's performance back in the future?
Yes, I am staying the course. Once you understand bond funds, it makes sense to do so, assuming the duration of the funds is consistent with your need for the money.
Last edited by UpperNwGuy on Tue May 14, 2024 7:49 am, edited 2 times in total.
goblue100
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Re: Laddering With Bond Funds

Post by goblue100 »

itsallballbearings wrote: Mon May 13, 2024 4:06 pm What should I be doing with my dividends (based on traditional bond ladder mentality) reivesting in the current bond fund or creating the new ladder?
I would reinvest dividends and roll the expiring rung of the ladder over into a new rung, or spend it, if that is the plan.

My .02 on Fidelity and your bond funds is that you are not patient. There is a reason that "stay the course" and "don't just do something, stand there" are popular expressions on the forum.
"Confusion has its cost" - Crosby, Stills and Nash
UpperNwGuy
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Re: Laddering With Bond Funds

Post by UpperNwGuy »

Tom_T wrote: Tue May 14, 2024 7:13 am This is a common type of response on this forum: explain everything that could possibly go wrong with one approach, and not mention the possible downsides of the "preferred" approach.
This comment is just plain wrong, and it is insulting to forum members.
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Wiggums
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Re: Laddering With Bond Funds

Post by Wiggums »

We took a hit on our bond fund as well. We also added stock during the pandemic which has helped the overall portfolio grow.

Whatever solution you consider, make sure you have bonds of various durations. I.e., short term to intermediate bonds is a good approach.
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Tom_T
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Re: Laddering With Bond Funds

Post by Tom_T »

UpperNwGuy wrote: Tue May 14, 2024 7:53 am
Tom_T wrote: Tue May 14, 2024 7:13 am This is a common type of response on this forum: explain everything that could possibly go wrong with one approach, and not mention the possible downsides of the "preferred" approach.
This comment is just plain wrong, and it is insulting to forum members.
It's not wrong. I've been here a long time and have read thousands of posts. It's very common. You and I disagree. But this is irrelevant to the discussion, so I'll bow out.
Topic Author
itsallballbearings
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Re: Laddering With Bond Funds

Post by itsallballbearings »

Thank you everyone for taking time to answer. Seems most of you believe that bond funds are still the way to go, and I will definitely be thinking more about that choice.

As for comments regarding my percentages, I wouldn't have thought that having 30 percent of my portfolio in bonds would have resulted in the portfolio not reaching new heights either. However, that is what Fidelity and two other firms that looked at my statements told me. Again, I was looking at the total value of my portfolio and why it hadn't gone up during that time period.

As I mentioned, I did not expect Fidelity to work miracles. However, I know, based on my discussions with other firms, that some portfolio managers did make adjustments by adding bond ladders to their client accounts or moving to a larger stock portfolio (right now, I have a moved an additional 10 percent of my portfolio over to stocks into dividend funds.) Talking with my neighbors, most of them said they had significant portfolio gains during the time period I mentioned. One of those neighbors buys individual bonds and waits for them to get to maturity.

I know that Fidelity's fees did take away some of my gains. So now I am making my choices on bonds and figuring out how I think best to handle them. I will read the other items suggested and linked to in the next couple of days.
Thanks again for all your opinions.
Last edited by itsallballbearings on Wed May 15, 2024 1:13 pm, edited 1 time in total.
James.534
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Re: Laddering With Bond Funds

Post by James.534 »

Reactionary investing causes the biggest regrets. Buying more stocks after they go up and selling more bonds after they go down. Changing your asset allocation due to one market cycle. No one can predict future markets or cycles , but most data points to buy and hold and not readjust because you think you or your advisor made a bad choice in asset allocations. Conflating dividend funds and bonds gives a misperception of safety, they both produce income but for different reasons.
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