Just starting checking out Bonds. Head hurts a bit.

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TheQuestionGuy
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Just starting checking out Bonds. Head hurts a bit.

Post by TheQuestionGuy » Sat Oct 21, 2017 3:34 pm

The Style Box really helped visualize how Stocks were categorized.
It doesn't appear that a Style Box exist for Bonds.

I would like to transition some of my portfolio to bonds and starting doing some research and that is when things went south fast.

Per the Boglehead philosophy I assumed an Index Fund of sorts for Bonds would be the recommendation, right or does the philosophy differ with bonds?

Is there a recommended "type" of bond?

I was a little surprised not only at the expense ratio of some Bonds but how some had very poor performance within the past few years.
The few Index Bonds I seen had at least a .45 expense ratio.

This is one place I checked out :
https://www.thebalance.com/best-index-f ... ds-4117138

If someone were to ask for the 5 or so Top Bonds from which to choose for ones portfolio what would you say?

jebmke
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by jebmke » Sat Oct 21, 2017 3:41 pm

My strategy on bonds is (1) high quality - investment grade or better (2) low cost - should be able to keep ER below 20bp and (3) low-intermediate duration (except for Tips).
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Phineas J. Whoopee
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by Phineas J. Whoopee » Sat Oct 21, 2017 5:14 pm

You may be interested in these three articles from our wiki, the last of which links to many more bond pages:

Bond Basics

Asset Allocation

Category: Bonds

PJW

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randomizer
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by randomizer » Sat Oct 21, 2017 5:20 pm

Swedroe has an amazing book on bonds. You should check it out once you've done some initial reading on the wiki.

dbr
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by dbr » Sat Oct 21, 2017 6:03 pm

TheQuestionGuy wrote:
Sat Oct 21, 2017 3:34 pm
The Style Box really helped visualize how Stocks were categorized.
It doesn't appear that a Style Box exist for Bonds.

See here https://personal.vanguard.com/us/funds/ ... 0584#tab=2 to observe that bonds are characterized by maturity (more accurately duration) and quality which play a role similar to that played by size and value for stocks. That is because bond yields go up with quality risk and with duration risk.

I would like to transition some of my portfolio to bonds and starting doing some research and that is when things went south fast.

Per the Boglehead philosophy I assumed an Index Fund of sorts for Bonds would be the recommendation, right or does the philosophy differ with bonds?

No, the philosophy does not change though at least in the case of Vanguard there are good choices in Treasury bonds that don't use an index.


Is there a recommended "type" of bond?

No

I was a little surprised not only at the expense ratio of some Bonds but how some had very poor performance within the past few years.
The few Index Bonds I seen had at least a .45 expense ratio.

The Vanguard Total Bond Index Admiral Shares has an ER of 0.05%. I don't know what you are looking at. Yes, bonds can have poor performance. Interest rates are low now for all fixed income. Why is it that you would "like" to transition some of your portfolio to bonds. That decision is supposed to depend on your determination of the risk and return properties of the portfolio as a whole and not on the performance in isolation of any one asset.

This is one place I checked out :
https://www.thebalance.com/best-index-f ... ds-4117138

If someone were to ask for the 5 or so Top Bonds from which to choose for ones portfolio what would you say?

I would say use a Vanguard or Fidelity bond fund, thought there are others that might be fine. What type, duration, or quality you would want does not have a "best." Investing is about holding the right array of assets and not about finding the "best" fund.

Nate79
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by Nate79 » Sat Oct 21, 2017 6:12 pm

Why do you want bonds?

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patrick013
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by patrick013 » Sat Oct 21, 2017 7:09 pm

Smart Bond Investing

Here's another short bond guide.

Best bonds going forward would be a 5 year CD ladder IMO.
age in bonds, buy-and-hold, 10 year business cycle

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nedsaid
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by nedsaid » Sat Oct 21, 2017 7:19 pm

Morningstar does have a stylebox for bond funds. It rates bonds by maturity and by quality.

What you want in a bond fund is Investment Grade and Intermediate Term. Lots of good funds to choose from, particularly at Vanguard. One of my biggest holdings is Vanguard US Total Bond Index. If you are ultraconservative, use US Treasury funds.
A fool and his money are good for business.

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arcticpineapplecorp.
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by arcticpineapplecorp. » Sat Oct 21, 2017 7:56 pm

like nedsaid said morningstar has a style box for bonds. For example, looking at Vanguard's total bond market index fund (admiral) you see:

Image

source: http://portfolios.morningstar.com/fund/ ... ture=en-US

pretty much tells you what you need to know: high quality, moderate interest rate sensitivity. You can also see average duration, maturity, credit quality, etc. Does that help?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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nisiprius
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by nisiprius » Sat Oct 21, 2017 8:31 pm

TheQuestionGuy wrote:
Sat Oct 21, 2017 3:34 pm
...I was a little surprised not only at the expense ratio of some Bonds but how some had very poor performance within the past few years...
How did you measure performance? The annual total return numbers are OK, but sometimes people look at price charts. Typically, you buy a bond for about $1,000, it throws off interest payments, and then when it matures you get $1,000 back. That means your expectation for a bond is that you will not get price appreciation as you do with a stock. Essentially all of the returns are in the interest payments. For a ten-year bond paying 2%/year interest, you get paid $10 every six months. By the time the bond matures, you paid $1,000 for it, you get your $1,000 back, and in addition you got twenty $10 payments. So you've invested $1,000 and you've gotten back a total of $1,200--but the $200 earnings are all in the payments, and the bond isn't worth any more at the end than at the beginning. So price charts for bond funds tend to look flat.
The few Index Bonds I seen had at least a .45 expense ratio.
Well, one of the reasons this forum mentions Vanguard so often is that the Vanguard Total Bond Market Index Fund has an expense ratio of 0.05% (if you can invest $10,000 or more; 0.15% for small amounts).

It is my personal opinion that you only need one bond fund, and that it should be a "core" bond fund that is intermediate-term, and investment-grade. That is to say, it should have the same Morningstar style box as shown in arcticpineapplecorp's posting, above. The most commonly-mentioned bond fund in this forum, and the one I have as my single largest bond holding, is the Vanguard Total Bond Market Index Fund, and it is a good starting point for consideration.
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.

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Sandtrap
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by Sandtrap » Sat Oct 21, 2017 9:24 pm

randomizer wrote:
Sat Oct 21, 2017 5:20 pm
Swedroe has an amazing book on bonds. You should check it out once you've done some initial reading on the wiki.
+1
Also, "The Bond Book" by Annette Thau
https://www.amazon.com/gp/product/00716 ... UTF8&psc=1

TheQuestionGuy
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by TheQuestionGuy » Sun Oct 22, 2017 7:52 am

Thanks for feedback and information. I will be going through much of it throughout the day today.
Makes for some good Sunday reading.

Dandy
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Re: Just starting checking out Bonds. Head hurts a bit.

Post by Dandy » Sun Oct 22, 2017 8:25 am

Think fixed income vs always thinking bonds or bond funds. There are many fixed income choices that aren't the usual bond/bond fund. e.g. CDs, Savings accounts, EE and I bonds, Stable Value Fund, Money Market Deposit Accounts etc. These options are not often mentioned by sales/investment/advisor/analyst people either because they aren't easy to trade (or cannot trade) or they don't generate commissions.
They can also make rebalancing more of a chore.

CDs are a great example of a product that might be superior to a bond fund, on occasion, but rarely if ever recommended. Bank CDs aren't really in a market like stock and bonds, each bank has unique needs and opportunities and often offer significantly higher yields than competitors. Not suggesting having 6 banks and spending every day looking for another 1/4% yield at a 7th bank offering a "special". But there are a few, especially online banks, that usually offer competitive products. In today's world, once established, you can move money to/from Vanguard or your checking account to/from that bank in a few clicks/few days.

Not pitching CDs just suggesting keeping a wider definition than just bonds/bond funds.

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