The Risk of Short-term Bond Funds

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The Risk of Short-term Bond Funds

Post by Rick Ferri »

Did you miss returns from intermediate-term bond funds because you sat in a short-term bond fund waiting for interest rates to rise? A lot of people did. This strategy has backfired as the opportunity cost of not being in intermediate-term bonds has been more costly than whatever damage rising interest rates might have taken away.

I quantified what this risk has been over the past three- and five-years in this blog; The Risk of Short-term Bond Funds

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Re: The Risk of Short-term Bond Funds

Post by billyt »

It is good to see this nice clean rebuttal of all of those 'bond panic' threads from the last few years. It is hard to understand why folks think they know more than the market. Glad I stayed the course.
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Re: The Risk of Short-term Bond Funds

Post by nisiprius »

Also relevant: on Jan 6 2014 a poster asked:
Rates up, so shift intermediate bonds to short-term bonds?
Mon Jan 06, 2014 12:11 am

...Given that interest rates can only go up, does it make sense to lessen the impact on our bond stake by shifting a portion of those intermediate bonds to a short-term bond fund or something else entirely?
Image

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Re: The Risk of Short-term Bond Funds

Post by livesoft »

Thanks for this, but isn't your article really about successful market-timing of bond funds when you listed the cherry-picked one-year returns off of the lows of 2013?

1-year returns to 6/30
3.72% VSCSX short-term corporate bond index
4.28% VBTLX US bond index

Was the interest-rate de-risking worth it? I definitely think so.

Also note that intermediate-term bond funds had a LOW about a year ago, so the above returns include the "bounce-back" from the lows. So folks who went to shorter-duration in March 2013 did better than the YTD numbers (not shown) suggest. Here's a chart for the past 18 months:
Image

So clearly, the time to switch out of shorter-term back to intermediate-term was about a year ago. Now please tell me what will happen off the chart to the right in the next year or so? :twisted:
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Re: The Risk of Short-term Bond Funds

Post by livesoft »

And another point: Even though bond funds reached their lows about one-year ago, so did equity markets. Thus one-year ago was also a great time to rebalance from fixed income into equities despite it being a good time to rebalance into bond funds. Unfortunately, one could not have it both ways. :greedy
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Re: The Risk of Short-term Bond Funds

Post by billyt »

The article shows returns since 2009 and quotes 1, 3 and 5 year returns. TBM returns more over all three time frames as is totally expected given its higher yield. TBM will always return more than a short term fund over a reasonably long time periods, as the returns of bond funds is determined almost exclusively by the yield. You would have to perfectly time the switch to short and back again to gain anything over simply holding the intermediate. The rising stock market of the since 2009 has me almost always adding to the bond side of the portfolio, with little opportunity to rebalance from bonds to stocks.
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Re: The Risk of Short-term Bond Funds

Post by abuss368 »

Excellent article Rick! I am glad we "stayed the course" with our intermediate term bond funds.

I would be interested in a comparison to the Intermediate Term TIPS fund or would this be apples to oranges?
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Re: The Risk of Short-term Bond Funds

Post by TheTimeLord »

billyt wrote:It is good to see this nice clean rebuttal of all of those 'bond panic' threads from the last few years. It is hard to understand why folks think they know more than the market. Glad I stayed the course.
Wasn't the 10 year around 1.64% last May and about 1.40% 10 months earlier? FWIW, I am waiting to see what happens in November.
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Re: The Risk of Short-term Bond Funds

Post by Longtimelurker »

I confess. I market timed like crazy with bonds over the last 36 months. Fortunately my timing was not bad, and I sought alternative uses for my bond portfolio (i.e. negotiated a 5% decrease in rent by paying all up front). But in the end I know I lost money. Everyone who bought and held TBM, then went to the beach, beat all of my consternation and market guessing.

Fortunately I have long been an ardent follower of buy & hold indexing on the equities side... but for some reason I simply haven't been able to follow that for bonds... I am however recovering from this affliction. I have simplified my portfolio to I-Bonds, Savings Account, TBM, and Vanguard Intermediate Term Tax Exempt. I am actually following my IPS and ignoring the noise.

Not a terribly costly lesson, but lesson well learned.
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Re: The Risk of Short-term Bond Funds

Post by abuss368 »

Hi Rick,

I have a question on the risk of the Total Bond Index fund that you discussed in the article. You stated that "VBTLX investors would still be ahead of VBRIX investors even if interest rates jumped by 3 percent this year." The Total Bond Index fund has a duration of 5.6 as noted in the article.

To keep the math simple, let's round that to 5. Therefore if rates rise 1%, there would be a 5% decrease approximately.

Now if rates rise by 3% as you noted, would that not be a 15% decrease? If Total Bond is presently $12,614 in the example and Short Term Bond is $11,330, a 15% decrease (i.e. $12,614 * 3% = $1,892) on the balance of $12,614 results in an adjusted balance of $10,721. Short Term wins!

Please let me know if my math is incorrect here. Did you mean to say if interest rates jumped to 3% and not by 3%.
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Re: The Risk of Short-term Bond Funds

Post by Rick Ferri »

abuss368

You're forgetting that the short-term bond fund also has interest rate risk. The duration is 2.7 years. If rates where to jump by 3% overnight, the NAV would fall by about 8.1% theoretically. So, you'd still be ahead over the entire period with a Total Bond Market index fund.

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Re: The Risk of Short-term Bond Funds

Post by abuss368 »

Rick Ferri wrote:abuss368

You're forgetting that the short-term bond fund also has interest rate risk. The duration is 2.7 years. If rates where to jump by 3% overnight, the NAV would fall by about 8.1% theoretically. So, you'd still be ahead over the entire period with a Total Bond Market index fund.

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Re: The Risk of Short-term Bond Funds

Post by abuss368 »

Rick Ferri wrote:abuss368

You're forgetting that the short-term bond fund also has interest rate risk. The duration is 2.7 years. If rates where to jump by 3% overnight, the NAV would fall by about 8.1% theoretically. So, you'd still be ahead over the entire period with a Total Bond Market index fund.

Rick Ferri
What about the TIPS fund?
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Re: The Risk of Short-term Bond Funds

Post by scone »

I'd prefer to be intermediate altogether, but I'm pretty much forced to hold Stable Value in the 401k. So that means I'm carrying a substantial amount of short bonds. Does this mean I should go a little longer with the rest of the bond allocation? Which brings up the question, what exactly is intermediate anyway? What should my target duration be, and why?
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Re: The Risk of Short-term Bond Funds

Post by richard »

The risk of longer-term bonds is that rates rise and that you don't hold and reinvest until the additional interest makes up for the initial hit to principal.

The risk of shorter-term bonds is that rates move down or stay the same, leaving you with lower earnings.

These risks can be ameliorated if you have a talent for predicting interest rates. Unfortunately, the odds are overwhelming you don't.

Some don't care about the returns from their bonds, believing bonds are just ballast for equities.
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Re: The Risk of Short-term Bond Funds

Post by billyt »

Most of us hold a balanced portfolio of stocks and bonds for our investing lifetime. We are dollar cost averaging into (accumulating) and out of (decumulating) over this long time frame. Under these conditions, an intermediate term bond fund will always significantly outperform a short term bond fund, regardless of what interest rates do. Over these time frames, all of the return comes from the interest and the impact of NAV changes sums to zero to a first approximation. Trying to time the bond market to gain some small temporary advantage under these circumstances is a complete and utter waste of time and energy. You are more likely to lose the timing game than gain from it because of the slow but inexorable impact of the monthly dividends.
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Re: The Risk of Short-term Bond Funds

Post by nisiprius »

richard wrote:The risk of longer-term bonds is that rates rise and that you don't hold and reinvest until the additional interest makes up for the initial hit to principal.

The risk of shorter-term bonds is that rates move down or stay the same, leaving you with lower earnings.

These risks can be ameliorated if you have a talent for predicting interest rates. Unfortunately, the odds are overwhelming you don't.

Some don't care about the returns from their bonds, believing bonds are just ballast for equities.
And the risk of changing back and forth between longer and shorter durations is your personal "manager risk." Sometimes you dodge bullets, sometimes you dodge into bullets. If you believe you have market-timing ability then it might be rewarded risk. Just as my wife and I managed (just barely) to stay the course in 2008-2009, taking our lumps, I've elected to stay the course in Total Bond, taking what so far looks like no more than a bad mosquito bite in 2013. The sky didn't fall very far in 2013. It might have a little farther to fall, of course.
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Re: The Risk of Short-term Bond Funds

Post by munemaker »

Rick Ferri wrote:Did you miss returns from intermediate-term bond funds because you sat in a short-term bond fund waiting for interest rates to rise? A lot of people did. This strategy has backfired as the opportunity cost of not being in intermediate-term bonds has been more costly than whatever damage rising interest rates might have taken away.

I quantified what this risk has been over the past three- and five-years in this blog; The Risk of Short-term Bond Funds

Rick Ferri
Yes, I missed returns from intermediate term bonds because I sat in short term bond funds waiting for interest rates to rise.

I don't agree with the terminology that the "strategy backfired" for a couple reasons: One is I sleep better at night without taking the interest rate risks. Two is just because rates have not risen yet does not mean they will not rise as the economy recovers. In other words, we may just have been a little early. As far as missing the returns from intermediate term bonds...big deal! The returns I missed are not enough to get excited about. I'll stay in the short term bonds for now, thank you!
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Re: The Risk of Short-term Bond Funds

Post by Doc »

nisiprius wrote:Don't tell interest rates what they can or can't do. They can darn well do whatever they please.
Or maybe whatever the Fed pleases. :twisted:
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Re: The Risk of Short-term Bond Funds

Post by Rick Ferri »

abuss368 wrote:
Rick Ferri wrote:abuss368

You're forgetting that the short-term bond fund also has interest rate risk. The duration is 2.7 years. If rates where to jump by 3% overnight, the NAV would fall by about 8.1% theoretically. So, you'd still be ahead over the entire period with a Total Bond Market index fund.

Rick Ferri
What about the TIPS fund?
It would depend on why interest rates jumped. TIPS should gain in price when interest rates shoot up due to unexpected inflation. However, if interest rates shoot up due to an increase in the real rate, then TIPS won't help.

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Re: The Risk of Short-term Bond Funds

Post by Sheepdog »

Some of us, especially retirees, are using short term bond funds as "cash" in our safe money allocation instead of MM. I do. They are earning a heckuva lot more than MM too. Intermediate bonds just would not work for me for this purpose.
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Re: The Risk of Short-term Bond Funds

Post by Dale_G »

And I suspect some of those who abandoned TBM and even Short Term Investment Grade for Prime MM back in the days of the inverted yield curve, are still sitting in Prime.

My dollar weighted duration is 6.5 years - I wouldn't have it any other way.

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Re: The Risk of Short-term Bond Funds

Post by richard »

Doc wrote:
nisiprius wrote:Don't tell interest rates what they can or can't do. They can darn well do whatever they please.
Or maybe whatever the Fed pleases. :twisted:
Which should mean the Fed has a heightened ability to forecast rates, but even their forecasting abilities aren't very good. If one doesn't have some of the best economists in the world and tremendous influence over rates, consider how much worse one's forecasting ability is likely to be.
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Re: The Risk of Short-term Bond Funds

Post by Phineas J. Whoopee »

I agree that tactically abandoning a strategic allocation to intermediate-term bonds for short-term ones is always a bad move. If, on the other hand, the alteration was driven by a changed investor risk profile, it's justified. Unless, that is, one's risk profile magically changes back to where it used to be just as the talking heads stop saying that thing about interest rates. :happy
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Re: The Risk of Short-term Bond Funds

Post by livesoft »

OK, folks … how do you explain that some folks made more money by switching to short-term bond funds than they would have made by staying in intermediate-term bond funds? I suppose those folks can switch back now and stay ahead of the case of non-switching.
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Re: The Risk of Short-term Bond Funds

Post by epilnk »

Rick Ferri wrote:Did you miss returns from intermediate-term bond funds because you sat in a short-term bond fund waiting for interest rates to rise?
Well, no, actually; I continued to add to my holdings in long munis, along with intermediate, because my ISP specifies a longer duration and we aren't close to retirement age yet (I would actually increase the duration, but CA muni durations don't give me much to work with). With the bull of the last few years almost all new money has gone into muni bonds, which was a bit painful at times, with all the chatter about bondmageddon undermining my resolve. But thanks to a well timed graph posted by nisiprius during a period of doubt, I was able to remember why I focus on the duration in the first place. Of course I know a decline will come, perhaps soon, but that's ok.

Sadly, I did cut back on the long treasuries almost 2 years ago, when the spouse hit 50. That was also in the plan and we ended up selling at a very good point, but they've served us very well and I kind of miss them.
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Re: The Risk of Short-term Bond Funds

Post by Ged »

Sheepdog wrote:Some of us, especially retirees, are using short term bond funds as "cash" in our safe money allocation instead of MM. I do. They are earning a heckuva lot more than MM too. Intermediate bonds just would not work for me for this purpose.
This is what I am doing as I have to fund expenses over the next 5 years while I wait for my SS. Here it's not clear that I'd be holding the bonds long enough for the higher interest rate to compensate for the decline in value if I was holding intermediate bonds.
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Re: The Risk of Short-term Bond Funds

Post by TheTimeLord »

Ged wrote:
Sheepdog wrote:Some of us, especially retirees, are using short term bond funds as "cash" in our safe money allocation instead of MM. I do. They are earning a heckuva lot more than MM too. Intermediate bonds just would not work for me for this purpose.
This is what I am doing as I have to fund expenses over the next 5 years while I wait for my SS. Here it's not clear that I'd be holding the bonds long enough for the higher interest rate to compensate for the decline in value if I was holding intermediate bonds.
Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.
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Re: The Risk of Short-term Bond Funds

Post by Methedras »

livesoft wrote:OK, folks … how do you explain that some folks made more money by switching to short-term bond funds than they would have made by staying in intermediate-term bond funds? ...
Market timing, plain and simple.

I would say that generally speaking, it is very wise to keep the duration of your bond holdings in accordance with when you expect to need to access those funds. Large scale moves to short-term bonds are very unlikely to yield superior investment returns.
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Re: The Risk of Short-term Bond Funds

Post by livesoft »

Methedras wrote:Market timing, plain and simple.
Thanks for that answer. I see now how that can work very successfully.
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Re: The Risk of Short-term Bond Funds

Post by midareff »

StarbuxInvestor wrote:
Ged wrote:
Sheepdog wrote:Some of us, especially retirees, are using short term bond funds as "cash" in our safe money allocation instead of MM. I do. They are earning a heckuva lot more than MM too. Intermediate bonds just would not work for me for this purpose.
This is what I am doing as I have to fund expenses over the next 5 years while I wait for my SS. Here it's not clear that I'd be holding the bonds long enough for the higher interest rate to compensate for the decline in value if I was holding intermediate bonds.
Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.

Ally is paying .85% for MM. LT Tax-Ex is yielding about 1.75% and ST IG about 2.05%. With inflation running a 12 month rate near 1.6% they are acceptable places to park several years of drawdown money while the rest of the portfolio works for you. The retired view is much different than the accumulation view.
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Re: The Risk of Short-term Bond Funds

Post by richard »

livesoft wrote:OK, folks … how do you explain that some folks made more money by switching to short-term bond funds than they would have made by staying in intermediate-term bond funds? I suppose those folks can switch back now and stay ahead of the case of non-switching.
How do you explain that some folks win the lottery or that some who toss coins get ten heads in a row?
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Re: The Risk of Short-term Bond Funds

Post by richard »

midareff wrote:
StarbuxInvestor wrote:
Ged wrote:
Sheepdog wrote:Some of us, especially retirees, are using short term bond funds as "cash" in our safe money allocation instead of MM. I do. They are earning a heckuva lot more than MM too. Intermediate bonds just would not work for me for this purpose.
This is what I am doing as I have to fund expenses over the next 5 years while I wait for my SS. Here it's not clear that I'd be holding the bonds long enough for the higher interest rate to compensate for the decline in value if I was holding intermediate bonds.
Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.
Ally is paying .85% for MM. LT Tax-Ex is yielding about 1.75% and ST IG about 2.05%. With inflation running a 12 month rate near 1.6% they are acceptable places to park several years of drawdown money while the rest of the portfolio works for you. The retired view is much different than the accumulation view.
Is out retiree likely to live much beyond 6 years? Is the retiree withdrawing a relatively small part of their bond portfolio? If yes to both, consider the advantages of reinvesting at lower prices - you end up better off than if real rates had stayed the same or declined.
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Re: The Risk of Short-term Bond Funds

Post by livesoft »

richard wrote:How do you explain that some folks win the lottery or that some who toss coins get ten heads in a row?
I explain that by chance.

Mr Ferri could have written an article titled "The Risk of Intermediate-term Bond Funds" based on what has happened in the past year. His case is not as strong as he makes it out to be. He could just as easily have picked dates that show that going short-term made more money in the past year.

Maybe I will have a new poll asking about switching back from short-term to intermediate-term to see what folks are doing?
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Re: The Risk of Short-term Bond Funds

Post by Code Commit »

livesoft wrote:Thanks for this, but isn't your article really about successful market-timing of bond funds when you listed the cherry-picked one-year returns off of the lows of 2013?
Look who's talking about cherry-picking? :twisted:

If you are going to compare "short-term corporate bond index", then shouldn't you compare it with similar credit risk for those 18 months? say, VCIT (interm-term corp index)?

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Re: The Risk of Short-term Bond Funds

Post by livesoft »

^Now we are talking! :)
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Re: The Risk of Short-term Bond Funds

Post by hudson »

I like the next to last sentence in Rick's Blog: "If your liabilities are long-term, stay in an intermediate-term bond fund for the duration."
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Re: The Risk of Short-term Bond Funds

Post by cfs »

Thanks.

Thanks Rick for the link to [another] outstanding article.

Thanks for reading.
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Re: The Risk of Short-term Bond Funds

Post by Leesbro63 »

munemaker wrote: Yes, I missed returns from intermediate term bonds because I sat in short term bond funds waiting for interest rates to rise.

I don't agree with the terminology that the "strategy backfired" for a couple reasons: One is I sleep better at night without taking the interest rate risks. Two is just because rates have not risen yet does not mean they will not rise as the economy recovers. In other words, we may just have been a little early. As far as missing the returns from intermediate term bonds...big deal! The returns I missed are not enough to get excited about. I'll stay in the short term bonds for now, thank you!
+1. Rick Ferri has been "more right" than Bernstein ('avoid any bonds but short term bonds"). And it was Mr. Ferri who made the call here on Bogleheads, near the worst of the financial crisis, that this was a final big opportunity for babyboomers to turbocharge their retirement portfolios (paraphrasing) by rebalancing into stocks. But that doesn't make Bernstein wrong...that the risk of anything of short term bonds might not be worth it. The risk isn't that rates will rise a few percentage points...it's that they'll rise 5 or 6 or 7 or 8 or more percentage points. And Bernstein makes the case that you don't want risk in your safe portion.

So I'm torn. I admit that I lost out by listening to Dr. Bernstein. But maybe not. Because it helped add to my confidence to stay the course with my equity allocation, knowing that I wasn't exposed to a 1973-4 scenario (where stocks AND bonds get pounded...your safe money turns unsafe). The fat lady hasn't sung yet, although I hope that when she does, Ferri's scenario still is what happens over Bernstein's worst case scenario. But this is still a good article...thank you, sir.
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Re: The Risk of Short-term Bond Funds

Post by baw703916 »

Code Commit wrote:
livesoft wrote:Thanks for this, but isn't your article really about successful market-timing of bond funds when you listed the cherry-picked one-year returns off of the lows of 2013?
Look who's talking about cherry-picking? :twisted:

If you are going to compare "short-term corporate bond index", then shouldn't you compare it with similar credit risk for those 18 months? say, VCIT (interm-term corp index)?

Image
This is a great time to use the TSP G Fund, if you have access to it. No credit risk, no duration risk, you literally can't have a drop in NAV, and if included on the graph above, it would have gone from 10 to 10.31 in a monotonically increasing fashion.
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Re: The Risk of Short-term Bond Funds

Post by livesoft »

baw703916 wrote:This is a great time to use the TSP G Fund, if you have access to it.
Or the TIAA Traditional Annuity. Or a stable value fund paying 3+%. Or ….
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Re: The Risk of Short-term Bond Funds

Post by Frugalman »

Rick Ferri wrote:Did you miss returns from intermediate-term bond funds because you sat in a short-term bond fund waiting for interest rates to rise? A lot of people did. This strategy has backfired as the opportunity cost of not being in intermediate-term bonds has been more costly than whatever damage rising interest rates might have taken away.

I quantified what this risk has been over the past three- and five-years in this blog; The Risk of Short-term Bond Funds

Rick Ferri

Mr. Ferri,

Thank you for the great information and your continued contributions to this forum. Your insight is very helpful and enlightening.

FM
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Kevin M
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Re: The Risk of Short-term Bond Funds

Post by Kevin M »

The same argument could be made for the superiority of long-term bonds, and for taking more credit risk. Here are some one-year and five-year returns as of June 30, 2014:

Code: Select all

Fund                         1-YR  5-YR

Total Bond Market            4.28   4.75
Long-term Treasury           5.82   7.11
Interm-term Inv-Grade        6.23   7.83
Long-term Investment-Grade  12.30  10.57
This is confusing strategy with outcome. You might as well say, "if your liabilities are long term, stick with long-term bond funds".

I was an enthusiastic buyer of investment-grade bond funds in 2008-2009. Starting in late 2011 I started gradually selling bond funds, especially short-term, and buying direct CDs that had comparable if not higher yield, no credit risk, and much less term-risk. I continue to hold about 25% of my fixed income in intermediate-term investment-grade (not TBM) and tax-exempt bond funds, but nothing in short-term bond funds. I am very pleased with this strategy, and have no complaints about the outcome so far.

No total bond market for me--too much in treasuries, direct CDs are a much better deal for the retail investor than treasuries, and I have the flexibility to not use TBM.

Kevin
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Munir
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Re: The Risk of Short-term Bond Funds

Post by Munir »

livesoft wrote:OK, folks … how do you explain that some folks made more money by switching to short-term bond funds than they would have made by staying in intermediate-term bond funds? I suppose those folks can switch back now and stay ahead of the case of non-switching.
Started switching back to intermediates a few months ago. Currently have short & mostly intermediate investment grade with some total bond market fund.
Last edited by Munir on Thu Jul 03, 2014 9:27 am, edited 1 time in total.
rleonardh
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Re: The Risk of Short-term Bond Funds

Post by rleonardh »

If you are for the long term and not worried about bonds going up or down, how would a 50/50 between Long term tresasurys and Intermidate term corporte? Would that not only protect your stocks when the market drops and produce more upswing when the market goes up?
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Sheepdog
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Re: The Risk of Short-term Bond Funds

Post by Sheepdog »

StarbuxInvestor wrote:
Ged wrote:
Sheepdog wrote:Some of us, especially retirees, are using short term bond funds as "cash" in our safe money allocation instead of MM. I do. They are earning a heckuva lot more than MM too. Intermediate bonds just would not work for me for this purpose.
This is what I am doing as I have to fund expenses over the next 5 years while I wait for my SS. Here it's not clear that I'd be holding the bonds long enough for the higher interest rate to compensate for the decline in value if I was holding intermediate bonds.
Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.
I am sorry, folks, that this answer is somewhat off of the subject of short term bond funds, but I felt I should answer the question, albeit long winded.

As has been alluded to by midareff, a retiree's handling of their funds is different than those who are accumulating, especially for those who are taking distributions for expenses. Using a separate banking institution would not work because of my system of taking money from my investments.
My method of handling distributions for expenses may be unique, but it has performed quite well in good and bad markets for almost 16 years. My "cash" or safe money is not static. I don't just have 3 to 5 years sitting there in some account as a cushion. Money is going into it and out of it regularly. I don't want to have to sell a stock containing fund during a downturn, so some of that cushion is the short term bond funds in each IRA. The dividends and capital gains from the stock containing funds in that IRA goes to that short term bond fund to keep it funded. When I take RMDs or more from that IRA that comes from it's bond fund which goes to a short term bond fund in my Vanguard taxable account and from that I send money to my checking account regularly. So my 3 to 5 year safe cushion is within 2 Vanguard IRAs and taxable accounts.
Time is the school in which we learn, time is the fire in which we burn.~ Delmore Schwartz
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grap0013
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Re: The Risk of Short-term Bond Funds

Post by grap0013 »

Isn't there some poll that shows something like 30% of bogleheads shortened their duration? I remember thinking :shock:

Also, to note, the highest slope on the yield curve over the past several years has been around the 10 year duration mark. Using Larry Swedroe's 20 basis point rule you would've been sitting there the last few years and made a lot more money than shortening up.
There are no guarantees, only probabilities.
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wshang
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Re: The Risk of Short-term Bond Funds

Post by wshang »

Rick Ferri wrote:This strategy has backfired as the opportunity cost of not being in intermediate-term bonds has been more costly than whatever damage rising interest rates might have taken away.[/url]

Rick Ferri
A common mistake is to confuse outcome with strategy. Ask Mr. Ferri about the future price of gold and he will not be shy in giving an opinion. Risk reduction here was at very little absolute cost to return.
richard
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Re: The Risk of Short-term Bond Funds

Post by richard »

Kevin M wrote:The same argument could be made for the superiority of long-term bonds, and for taking more credit risk. Here are some one-year and five-year returns as of June 30, 2014: <snip>
If you are a long-term investor, long-term bonds can be superior, as you will make up the initial drop in principle from a rate increase if you reinvest for a period equal to the duration from the drop.

No such benefit if you take more credit risk.

CDs v. bonds is a different question.
Call_Me_Op
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Re: The Risk of Short-term Bond Funds

Post by Call_Me_Op »

I have a hard time calling "opportunity cost" a risk. I prefer to think of this a la Bernstein, as Pascal's Wager; the pain of being wrong (i.e., rates rise sharply) is far greater than any satisfaction I may take (a few extra bucks if rates remain steady or drop slightly) from being right.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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