The Risk of Short-term Bond Funds
- Rick Ferri
- Posts: 9707
- Joined: Mon Feb 26, 2007 10:40 am
- Location: Georgetown, TX. Twitter: @Rick_Ferri
- Contact:
The Risk of Short-term Bond Funds
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
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
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Re: The Risk of Short-term Bond Funds
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.
- nisiprius
- Advisory Board
- Posts: 52211
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: The Risk of Short-term Bond Funds
Also relevant: on Jan 6 2014 a poster asked:
Don't tell interest rates what they can or can't do. They can darn well do whatever they please.
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?
Don't tell interest rates what they can or can't do. They can darn well do whatever they please.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: The Risk of Short-term Bond Funds
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:
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?
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:
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?
Re: The Risk of Short-term Bond Funds
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.
Re: The Risk of Short-term Bond Funds
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.
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: The Risk of Short-term Bond Funds
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?
I would be interested in a comparison to the Intermediate Term TIPS fund or would this be apples to oranges?
John C. Bogle: “Simplicity is the master key to financial success."
- TheTimeLord
- Posts: 12130
- Joined: Fri Jul 26, 2013 2:05 pm
Re: The Risk of Short-term Bond Funds
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.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.
Last edited by TheTimeLord on Wed Jul 02, 2014 1:01 pm, edited 2 times in total.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. |
Run, You Clever Boy! [9085]
-
- Posts: 471
- Joined: Fri Dec 13, 2013 7:23 am
Re: The Risk of Short-term Bond Funds
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.
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.
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: The Risk of Short-term Bond Funds
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%.
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%.
John C. Bogle: “Simplicity is the master key to financial success."
- Rick Ferri
- Posts: 9707
- Joined: Mon Feb 26, 2007 10:40 am
- Location: Georgetown, TX. Twitter: @Rick_Ferri
- Contact:
Re: The Risk of Short-term Bond Funds
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
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
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: The Risk of Short-term Bond Funds
I have been looking at "numbers" to long today! You got me. Thanks!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
John C. Bogle: “Simplicity is the master key to financial success."
- abuss368
- Posts: 27850
- Joined: Mon Aug 03, 2009 2:33 pm
- Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
- Contact:
Re: The Risk of Short-term Bond Funds
What about the TIPS fund?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
John C. Bogle: “Simplicity is the master key to financial success."
Re: The Risk of Short-term Bond Funds
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?
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
Re: The Risk of Short-term Bond Funds
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.
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.
Re: The Risk of Short-term Bond Funds
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.
- nisiprius
- Advisory Board
- Posts: 52211
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: The Risk of Short-term Bond Funds
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.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.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: The Risk of Short-term Bond Funds
Yes, I missed returns from intermediate term bonds because I sat in short term bond funds waiting for interest rates to rise.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
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!
Re: The Risk of Short-term Bond Funds
Or maybe whatever the Fed pleases.nisiprius wrote:Don't tell interest rates what they can or can't do. They can darn well do whatever they please.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
- Rick Ferri
- Posts: 9707
- Joined: Mon Feb 26, 2007 10:40 am
- Location: Georgetown, TX. Twitter: @Rick_Ferri
- Contact:
Re: The Risk of Short-term Bond Funds
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.abuss368 wrote:What about the TIPS fund?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
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Re: The Risk of Short-term Bond Funds
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.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
- Dale_G
- Posts: 3466
- Joined: Tue Feb 20, 2007 4:43 pm
- Location: Central Florida - on the grown up side of 85
Re: The Risk of Short-term Bond Funds
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.
Dale
My dollar weighted duration is 6.5 years - I wouldn't have it any other way.
Dale
Volatility is my friend
Re: The Risk of Short-term Bond Funds
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.Doc wrote:Or maybe whatever the Fed pleases.nisiprius wrote:Don't tell interest rates what they can or can't do. They can darn well do whatever they please.
- Phineas J. Whoopee
- Posts: 9675
- Joined: Sun Dec 18, 2011 5:18 pm
Re: The Risk of Short-term Bond Funds
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.
PJW
PJW
Re: The Risk of Short-term Bond Funds
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.
Re: The Risk of Short-term Bond Funds
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.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?
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.
Re: The Risk of Short-term Bond Funds
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.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.
- TheTimeLord
- Posts: 12130
- Joined: Fri Jul 26, 2013 2:05 pm
Re: The Risk of Short-term Bond Funds
Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.Ged wrote: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.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.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. |
Run, You Clever Boy! [9085]
Re: The Risk of Short-term Bond Funds
Market timing, plain and simple.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 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.
Re: The Risk of Short-term Bond Funds
Thanks for that answer. I see now how that can work very successfully.Methedras wrote:Market timing, plain and simple.
Re: The Risk of Short-term Bond Funds
StarbuxInvestor wrote:Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.Ged wrote: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.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.
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.
Re: The Risk of Short-term Bond Funds
How do you explain that some folks win the lottery or that some who toss coins get ten heads in a row?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.
Re: The Risk of Short-term Bond Funds
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.midareff wrote: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.StarbuxInvestor wrote:Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.Ged wrote: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.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.
Re: The Risk of Short-term Bond Funds
I explain that by chance.richard wrote:How do you explain that some folks win the lottery or that some who toss coins get ten heads in a row?
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?
-
- Posts: 138
- Joined: Mon Mar 04, 2013 10:42 am
Re: The Risk of Short-term Bond Funds
Look who's talking about cherry-picking?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?
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)?
Re: The Risk of Short-term Bond Funds
^Now we are talking!
Re: The Risk of Short-term Bond Funds
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."
Re: The Risk of Short-term Bond Funds
Thanks.
Thanks Rick for the link to [another] outstanding article.
Thanks for reading.
Thanks Rick for the link to [another] outstanding article.
Thanks for reading.
~ Member of the Active Retired Force since 2014 ~
Re: The Risk of Short-term Bond Funds
+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.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!
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.
Re: The Risk of Short-term Bond Funds
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.Code Commit wrote:Look who's talking about cherry-picking?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?
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)?
Most of my posts assume no behavioral errors.
Re: The Risk of Short-term Bond Funds
Or the TIAA Traditional Annuity. Or a stable value fund paying 3+%. Or ….baw703916 wrote:This is a great time to use the TSP G Fund, if you have access to it.
Re: The Risk of Short-term Bond Funds
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
Re: The Risk of Short-term Bond Funds
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:
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
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
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
If I make a calculation error, #Cruncher probably will let me know.
Re: The Risk of Short-term Bond Funds
Started switching back to intermediates a few months ago. Currently have short & mostly intermediate investment grade with some total bond market fund.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.
Last edited by Munir on Thu Jul 03, 2014 9:27 am, edited 1 time in total.
Re: The Risk of Short-term Bond Funds
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?
Re: The Risk of Short-term Bond Funds
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.StarbuxInvestor wrote:Just curious but why is this preferable to an onlline savings account with Ally or Am Ex? The rates seems close.Ged wrote: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.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.
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.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
Re: The Risk of Short-term Bond Funds
Isn't there some poll that shows something like 30% of bogleheads shortened their duration? I remember thinking
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.
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.
Re: The Risk of Short-term Bond Funds
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.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
Re: The Risk of Short-term Bond Funds
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.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>
No such benefit if you take more credit risk.
CDs v. bonds is a different question.
-
- Posts: 9881
- Joined: Mon Sep 07, 2009 2:57 pm
- Location: Milky Way
Re: The Risk of Short-term Bond Funds
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