Rethinking bond fund

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UncleBogle
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Rethinking bond fund

Post by UncleBogle » Sat Jul 21, 2018 12:25 am

When rebalancing my three fund portfolio, I was looking at the options for my bond fund picks (I'm with Fidelity). They were pretty abysmal. All with YTD in the red.

Most feel that interest rates will continue to rise. Given rates have been incredibly low for several years, I'd tend to agree. This could spell trouble for bond funds.

This made me wonder if it might be a wiser choice to place the cash I was going to invest in the bond fund into a high interest CD?

I realize that some may want to scream - "Don't try and time the market!", but my thought is this: A steady 3.75%, is near the lifetime record of most of these bond funds. I'm just looking at it from a risk/reward standpoint.

Any thoughts?

livesoft
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Re: Rethinking bond fund

Post by livesoft » Sat Jul 21, 2018 12:33 am

My thoughts haven't changed: Do what you want to do. I presume you are a consenting adult. You will live with the consequences whatever they are. If you are right, the consequences are minor; if you are wrong the consequences are minor. In the end messing around with bond funds, CDs, and other fixed income products does not make much difference as long as one is doing it tax-efficiently and with no fees and very low expense ratios.
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Sandtrap
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Re: Rethinking bond fund

Post by Sandtrap » Sat Jul 21, 2018 12:46 am

UncleBogle wrote:
Sat Jul 21, 2018 12:25 am
When rebalancing my three fund portfolio, I was looking at the options for my bond fund picks (I'm with Fidelity). They were pretty abysmal. All with YTD in the red.

Most feel that interest rates will continue to rise. Given rates have been incredibly low for several years, I'd tend to agree. This could spell trouble for bond funds.

This made me wonder if it might be a wiser choice to place the cash I was going to invest in the bond fund into a high interest CD?

I realize that some may want to scream - "Don't try and time the market!", but my thought is this: A steady 3.75%, is near the lifetime record of most of these bond funds. I'm just looking at it from a risk/reward standpoint.

Any thoughts?
You may be more comfortable with Brokered CD's, Secondaries, CD ladder, or Treasuries, etc. You might consider a percentage of your bond funds in those fixed income vehicles if it helps "stay the course".
j

Always passive
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Re: Rethinking bond fund

Post by Always passive » Sat Jul 21, 2018 1:52 am

I gave up and place all the money I planned to hold in bond funds in a short term fund. It is all in an IRA. I will wait as necessary and when I feel that the Fed got sick of rising rates, I may buy longer bond funds. I may be wrong, it may cost me a few bucks, but I think that the damage is not substantial.

Sconie
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Re: Rethinking bond fund

Post by Sconie » Sat Jul 21, 2018 8:23 am

OP, FWIW, I have some of the exact same thoughts and concerns that you do......
I know that you think you understand what you thought I said, but I don't think you realize that what I said is necessarily what I meant......

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dwickenh
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Re: Rethinking bond fund

Post by dwickenh » Sat Jul 21, 2018 8:55 am

I think it all depends on the timeline for the assets in bond funds. I won't touch mine for 7 more years at RMD time and feel that a 5.7 year duration
will recover and pay me for "staying the course". If my timeline was shorter, I would reduce my duration to match the need for the funds. That could be in CDs, Money Market, treasuries, or short term bond funds.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

gmaynardkrebs
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Re: Rethinking bond fund

Post by gmaynardkrebs » Sat Jul 21, 2018 9:17 am

Of the many bogus arguments against bonds, pushed mostly by CNBC, Fox Business news, commissioned stock brokers and other relentless stock pushers, fear of rising rates has to rank as the most bogus narrative of all. The bond market is highly efficient. Today's interest rates are, in both theory and practice, the best prediction of future rates. Another way of putting this is that the expected path of future rate increases (or decreases) is fully baked into the price you pay for your bond fund or your individual bonds. You will be hurt only if rates rise faster than the market expects. If you think the market is wrong, and that rates will rise faster than expected, by all means stay short. But recognize, that you are saying that your prediction is better than the market's. I'd add, that I'm not a naive believer in the EMH. In fact, I think I think it's foolish to put too much faith in the EMH in the stock market, where there is just so much pie in the sky thinking and falsely optimistic narratives baked into the prices. The bond market has a much simpler task, as it only has only two things to look at: the risk of default, and the path of future interest rates. It does both tasks extremely well. It would be better to spend your time thinking about how to pick the right duration for your bond holdings, to match your duration to your future liabilities/needs.
Last edited by gmaynardkrebs on Sat Jul 21, 2018 9:47 am, edited 3 times in total.

columbia
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Re: Rethinking bond fund

Post by columbia » Sat Jul 21, 2018 9:22 am

Given investors’ discomfort with interest rate risk for bonds, one would think that there would be a larger demand for stable value funds. Perhaps the CD market fills that demand?

aristotelian
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Re: Rethinking bond fund

Post by aristotelian » Sat Jul 21, 2018 9:26 am

If interest rates rise, the market value of your CD will drop by just as much as your bond fund. Your principal will never decline, but you could really screw yourself by tying up a lot of money in a 5 or 7 year CD as rates increase, and if you tried to sell your CD, you would get less than you paid. Up to you which prospect is more comfortable for you but the risk and return is almost exactly the same.

If you are omniscient and you are certain of interest rates increasing, you should go to cash and then buy long term bonds when rates peak. Generally the better approach is to buy and hold a constant allocation hedged against various risks. If you want to hedge against interest rates increasing, you would want a large portion of your allocation in short term bonds.

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Cyclesafe
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Re: Rethinking bond fund

Post by Cyclesafe » Sat Jul 21, 2018 9:28 am

Very tired topic.

Bottom line: If one "feels" more comfortable in a CD bond ladder go ahead. It makes little difference versus a treasury mutual fund or treasury ladder of the same average duration - even when relief from state income taxes is considered. Market expectations for interest rate changes are already baked in to all of these vehicles, so unless one's uncle is passing him/her undisclosed information from federal reserve committee meetings, the investor is saying that they know more than the market when they act to favor one vehicle or the other. There are, of course, plenty of other reasons - other than interest rate expectations - to chose....

gmaynardkrebs can type faster than me...

Call_Me_Op
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Re: Rethinking bond fund

Post by Call_Me_Op » Sat Jul 21, 2018 9:29 am

UncleBogle wrote:
Sat Jul 21, 2018 12:25 am
When rebalancing my three fund portfolio, I was looking at the options for my bond fund picks (I'm with Fidelity). They were pretty abysmal. All with YTD in the red.

Most feel that interest rates will continue to rise. Given rates have been incredibly low for several years, I'd tend to agree. This could spell trouble for bond funds.

This made me wonder if it might be a wiser choice to place the cash I was going to invest in the bond fund into a high interest CD?

I realize that some may want to scream - "Don't try and time the market!", but my thought is this: A steady 3.75%, is near the lifetime record of most of these bond funds. I'm just looking at it from a risk/reward standpoint.

Any thoughts?
Nobody ever claimed that bonds post a positive return every year. I think you don't understand the role of bonds in your portfolio.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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nedsaid
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Re: Rethinking bond fund

Post by nedsaid » Sat Jul 21, 2018 9:42 am

UncleBogle wrote:
Sat Jul 21, 2018 12:25 am
When rebalancing my three fund portfolio, I was looking at the options for my bond fund picks (I'm with Fidelity). They were pretty abysmal. All with YTD in the red.

Most feel that interest rates will continue to rise. Given rates have been incredibly low for several years, I'd tend to agree. This could spell trouble for bond funds.

This made me wonder if it might be a wiser choice to place the cash I was going to invest in the bond fund into a high interest CD?

I realize that some may want to scream - "Don't try and time the market!", but my thought is this: A steady 3.75%, is near the lifetime record of most of these bond funds. I'm just looking at it from a risk/reward standpoint.

Any thoughts?
The bond market is the least of my worries right now. If you are relatively young, just reinvest the dividends. Over time, rising interest rates will actually boost your return from your bonds, the key is time and reinvestment. Vanguard has a white paper out there on this.

If you are close to retirement, FDIC Insured CDs or Short Term Bond Funds would be excellent choices.
A fool and his money are good for business.

3funder
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Re: Rethinking bond fund

Post by 3funder » Sat Jul 21, 2018 9:45 am

You have a bond allocation for a reason. I wouldn't mess with it too much. Lower prices beget higher yields anyway.

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knpstr
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Re: Rethinking bond fund

Post by knpstr » Sat Jul 21, 2018 9:46 am

UncleBogle wrote:
Sat Jul 21, 2018 12:25 am
When rebalancing my three fund portfolio, I was looking at the options for my bond fund picks (I'm with Fidelity). They were pretty abysmal. All with YTD in the red.

Most feel that interest rates will continue to rise. Given rates have been incredibly low for several years, I'd tend to agree. This could spell trouble for bond funds.

This made me wonder if it might be a wiser choice to place the cash I was going to invest in the bond fund into a high interest CD?

I realize that some may want to scream - "Don't try and time the market!", but my thought is this: A steady 3.75%, is near the lifetime record of most of these bond funds. I'm just looking at it from a risk/reward standpoint.

Any thoughts?
You're thinking too much.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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