Bond fund choices in retirement - important or not?

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Ferd Burfel
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Bond fund choices in retirement - important or not?

Post by Ferd Burfel »

This thread involves an investor in retirement or near retirement, not in the accumulation stage.

In my portfolio, I find the stock part easy to settle on, using market index funds, with the only decision being the percent of US vs international.

However, for bond funds, I find it more complicated with the larger, more diverse market, and so am regularly revisiting my choices and allocation %.

Although bond funds will provide a smaller part of portfolio total return, I find their lower volatility an important feature to a retirement portfolio.

My current choices include funds focusing on TIPS, US government bonds, municipals, and corporates, all investment grade.

My question is, for those in retirement, do you set and forget your bond fund choices or do you spend more time reviewing these choices, trying to get the highest risk adjusted returns over time?
BirdFood
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Re: Bond fund choices in retirement - important or not?

Post by BirdFood »

I’m going to whisper that bonds also exist outside funds.

(Sacrelige!)

(Run!)
Parkinglotracer
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Re: Bond fund choices in retirement - important or not?

Post by Parkinglotracer »

Yes it’s important if you care about your money and want to sleep well at night imho.


I’d understand what one buys in the fixed income world and understand that most of fixed income is interest rate sensitive. Many people seem to be puzzled when rates increase and their bond or bond fund decreases in value. That’s the way the math works. The longer the duration of a bond or bond find, the more interest rate sensitive the bond will be. As a rule of thumb a bond or fund with X duration will go up or down X% if rates go down or up 1%.

We are a 65/35 Asset Allocation. We like money we plan to spend in the next few years in mm funds, CDs, tsp G Fixed income fund, or short term bonds. We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio. We like the transparency of a bond ladder and it helps us psychologically stay the course during times of rising rates. For the majority of our fixed income we have it in a 5 year treasury ladder. Bonds are easy to buy though vanguard brokerage. As bonds mature we either roll them over to a new rung in the ladder, rebalance them to equities, or transfer them to our mm fund for retirement spending. It is transparent and psychologically enjoyable to see a bond pay its coupon rate and return its face value when it matures. CDs do the same.

Understanding how what you are investing in bond wise will perform in the future if interest rates fluctuate up or down is a key step I think. Our wiki discusses bond ladders. Try one you may like it.
dbr
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Re: Bond fund choices in retirement - important or not?

Post by dbr »

I often make the comment that there are more choices in bonds than there are reasons to pick among them. I would say that generally there is a spectrum of term risk, credit risk, and inflation risk that one might consider and having taken those into account make any reasonable and convenient choice and then just leave it alone. It is important to understand the implications of those risks.

There are many investors that seem to want to continually manipulate fixed income holdings for any variety of reasons. You will have to hear from some of them for advice on that.
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Re: Bond fund choices in retirement - important or not?

Post by Call_Me_Op »

BirdFood wrote: Sat Jun 08, 2024 1:55 am I’m going to whisper that bonds also exist outside funds.

(Sacrelige!)

(Run!)
Yes, but I would only purchase treasuries as individual issues.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Da5id
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Re: Bond fund choices in retirement - important or not?

Post by Da5id »

Ferd Burfel wrote: Sat Jun 08, 2024 1:45 am
My question is, for those in retirement, do you set and forget your bond fund choices or do you spend more time reviewing these choices, trying to get the highest risk adjusted returns over time?
6 years into retirement I don't think fiddling is very productive, and I don't do it much. I've settled on 2/3 BND, 1/3 TIPS+I-bonds, and think that is fine. But I also think it doesn't matter all that much.
Nowizard
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Re: Bond fund choices in retirement - important or not?

Post by Nowizard »

As a retiree, the only thing that moves thought away from Total Bond Market is the aspect that reflects downward returns based on fund price as related to duration. That involves thoughts about our "duration" which was not an issue in the ever-increasing, distant past. So far, we have hung in with the combination of those thoughts we are not quite at the point of having to consider that, countered by the thought of whether we are just showing the impact of age leading to failure to respond. It is confounding from both the consumer psychology and multiple ways to invest with bonds considerations. :oops:
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Re: Bond fund choices in retirement - important or not?

Post by FoundingFather »

I am not in retirement, but my current plan for retirement is something like 80/20 stocks/bonds. For bonds, I have roughly 50% in a TIPS ladder, and 50% in a total market bond fund (BND). I have a mix of nominal and real expenses, and I figure that this 50/50 mix probably buffers my duration risk, my sequence of returns risk, and inflation risk adequately.

We'll see if I still feel good about this one I actually get to retirement. 😉

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Van
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Re: Bond fund choices in retirement - important or not?

Post by Van »

I have at 82 years of age a very conservative 20/80 asset allocation. As for the 80%, it is comprised of money market funds (mostly municipal) and bonds and CDs. I have pretty much given up on bond funds as I do not like the fluctuation in principal value as interest rates go up and down. I like CDs and Treasuries that I buy via Vanguard Brokerage because they are easy to understand and easy to buy, and I hold them until maturity for a full return of principal. I do not feel comfortable enough to buy individual municipal bonds because I do not understand all of their complexities. I wish I did.
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Re: Bond fund choices in retirement - important or not?

Post by livesoft »

Ferd Burfel wrote: Sat Jun 08, 2024 1:45 amMy question is, for those in retirement, do you set and forget your bond fund choices or do you spend more time reviewing these choices, trying to get the highest risk adjusted returns over time?
Basically, yes: We are set-and-forget. We own US Total Bond Index Fund ETFs and a little bit of TIAA traditional annuity. Occasionally, I will own some short-term corporate bond index fund shares which I believe trades credit risk for interest-rate risk.
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BirdFood
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Re: Bond fund choices in retirement - important or not?

Post by BirdFood »

Call_Me_Op wrote: Sat Jun 08, 2024 7:50 am
BirdFood wrote: Sat Jun 08, 2024 1:55 am I’m going to whisper that bonds also exist outside funds.

(Sacrelige!)

(Run!)
Yes, but I would only purchase treasuries as individual issues.
Yep. Too much to learn about the rest of the bond world.
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retired@50
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Re: Bond fund choices in retirement - important or not?

Post by retired@50 »

Ferd Burfel wrote: Sat Jun 08, 2024 1:45 am
My question is, for those in retirement, do you set and forget your bond fund choices or do you spend more time reviewing these choices, trying to get the highest risk adjusted returns over time?
I set and forget. 80% of my fixed income in Total Bond (VBTLX) and 20% of my fixed income in International bonds (VTABX).

I struggle to understand all the angst from people in this forum when it comes to bonds. I suspect the trouble enters the picture when people start reaching for yield on the one hand, and expect extreme share price stability on the other hand.

I think the bond market is extremely efficient, and higher return typically means higher risk.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Da5id
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Re: Bond fund choices in retirement - important or not?

Post by Da5id »

retired@50 wrote: Sun Jun 09, 2024 11:21 am I struggle to understand all the angst from people in this forum when it comes to bonds. I suspect the trouble enters the picture when people start reaching for yield on the one hand, and expect extreme share price stability on the other hand.

I think the bond market is extremely efficient, and higher return typically means higher risk.
I think figuring out how much in TIPs/I-bonds is more my issue than either of those you cite. And sorting out where to stash my bonds.
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Re: Bond fund choices in retirement - important or not?

Post by Dave55 »

If you have to withdraw from your portfolio, then duration is the main issue for bond funds or ETF's in retirement. For myself I have a slug of the Vanguard Short term treasury ETF VGSH for near term expenses. For money I do not need for the next 5-7 years I have Vanguard Intermediate Treasury ETF VGIT.

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Re: Bond fund choices in retirement - important or not?

Post by AlohaBill »

About half of our portfolio is in Vanguard Target Retirement Income Fund at 30/70. The other half is in Fidelity Total Stock Market Fund and Fidelity Total Bond Market Fund originally at 30/70. We retired about 7 years ago with $1,354,000 and have today around $1,800,000. We are fairly conservative with our portfolio which will probably go to our kids, but is also plan b for my wife if she needs to be warehoused (in style) at a later date.
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retired@50
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Re: Bond fund choices in retirement - important or not?

Post by retired@50 »

Da5id wrote: Sun Jun 09, 2024 12:30 pm
retired@50 wrote: Sun Jun 09, 2024 11:21 am I struggle to understand all the angst from people in this forum when it comes to bonds. I suspect the trouble enters the picture when people start reaching for yield on the one hand, and expect extreme share price stability on the other hand.

I think the bond market is extremely efficient, and higher return typically means higher risk.
I think figuring out how much in TIPs/I-bonds is more my issue than either of those you cite. And sorting out where to stash my bonds.
Putting somewhere between 25% and 50% of fixed income holdings into inflation linked bonds (TIPS and/or I-bonds) seems defensible to me. As to the "where", well, tax-deferred is typically best from a tax perspective (at least for the TIPS allocation), but your individual circumstances may vary. I realize that I-bonds can't be held in tax-deferred, but you can defer taxes on them at TreasuryDirect.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Da5id
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Re: Bond fund choices in retirement - important or not?

Post by Da5id »

retired@50 wrote: Sun Jun 09, 2024 12:54 pm
Da5id wrote: Sun Jun 09, 2024 12:30 pm
retired@50 wrote: Sun Jun 09, 2024 11:21 am I struggle to understand all the angst from people in this forum when it comes to bonds. I suspect the trouble enters the picture when people start reaching for yield on the one hand, and expect extreme share price stability on the other hand.

I think the bond market is extremely efficient, and higher return typically means higher risk.
I think figuring out how much in TIPs/I-bonds is more my issue than either of those you cite. And sorting out where to stash my bonds.
Putting somewhere between 25% and 50% of fixed income holdings into inflation linked bonds (TIPS and/or I-bonds) seems defensible to me. As to the "where", well, tax-deferred is typically best from a tax perspective (at least for the TIPS allocation), but your individual circumstances may vary. I realize that I-bonds can't be held in tax-deferred, but you can defer taxes on them at TreasuryDirect.

Regards,
Sure. I ended up with 1/3 TIPS+I-bonds. My real point was there are things to think about that aren't just yield chasing or unreasonable expectations that bonds will go up when stocks are falling.
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Ferd Burfel
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Re: Bond fund choices in retirement - important or not?

Post by Ferd Burfel »

Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?
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Re: Bond fund choices in retirement - important or not?

Post by Parkinglotracer »

Ferd Burfel wrote: Mon Jun 10, 2024 3:34 am
Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?
Great discussion. I would venture to say that one’s portfolio may end up in the same place whether they invest in either of those two bond funds. But if we had a large economic turn down I’d much rather be in the treasury fund vs the IG fund and the extra small yield isn’t worth it imho.

I buy into the idea that the 35% of my portfolio that is in a treasury bond ladder is the ballast of my portfolio when all hell breaks loose in the economy and for the bonds’ performance it should be as uncorrelated to the stock market as possible. So it’s safer to have treasuries in my bond portfolio than corporates. VFSUX that has 50% BBB rated bonds, and I don’t think the risk is worth the additional .33% yield (BBB is one step above junk). Yes VFSUX is safe. The treasury fund is just safer.

Peeling the onion a little deeper, a quick scan shows VFSUX has bonds from companies like Boeing and CVS. Great companies but more risk than treasuries. I don’t take vanguard’s risk ratings as gospel - in fact I’d question vanguard having those two funds having the same risk rating. But I realize the risk of default of most of VFSUX’s bonds is small. If we had a large economic turn down or another 2008 bank crisis I think we’d be hoping we were in treasuries. I see the vanguard total bond fund and etf have a risk rating of 2. Others have questioned that rating after its double digit decline in 2022.

So big picture it’s a bit of a purist philosophy to separate corporate risk from bond risk in one’s portfolio but I it is one I like because it helps me know when I really need that bond money it will all be there. Even in a recession or depression. Many here invest in corporate bonds so keep researching and don’t take my risk adverse stance on this as anything more than my opinion.

I have a gov cola pension that covers my living expenses and still keep 35% of my portfolio in treasuries. I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.

Here is the best recent article that I could find that delves into the risk with corporate bonds. I’d imagine the vanguard folks that gave VFSUX a risk rating of 1 might not agree with this morningstar article. lol.

https://www.morningstar.com/markets/why ... rate-bonds
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Re: Bond fund choices in retirement - important or not?

Post by mfFrom35k »

Ferd Burfel wrote: Mon Jun 10, 2024 3:34 am
Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?
See the following thread to understand more about the question above and Professor McQ's arguments and data:

viewtopic.php?t=428109

I am persuaded by Professor McQ in the linked thread and his original thread on this topic that there are good reasons to hold Treasuries only in my bond funds. I haven't been able to fully execute on this strategy due to options in my employer plan but I have done as much as I could.
UpperNwGuy
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Re: Bond fund choices in retirement - important or not?

Post by UpperNwGuy »

Ferd Burfel wrote: Sat Jun 08, 2024 1:45 am My question is, for those in retirement, do you set and forget your bond fund choices or do you spend more time reviewing these choices, trying to get the highest risk adjusted returns over time?
I am a set-it-and-forget it long-term investor. I do not engage in tactical bond investing.
Da5id
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Re: Bond fund choices in retirement - important or not?

Post by Da5id »

Ferd Burfel wrote: Mon Jun 10, 2024 3:34 am
Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.
Vanguards rating system rounds to the nearest integer. To say that VFSUX has a better risk adjusted return than VGSH on that basis isn't reasonable IMO. Perhaps VFSUX is 1.4 and VGSH is 1.1? Over the last 10 years VFSUX has a higher standard deviation and a higher max drawdown per Portfolio Visualizer, so by those measures of risk they aren't the same.
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Re: Bond fund choices in retirement - important or not?

Post by HeavyChevy »

Set and forget.

Bond portfolio makes up 36% of total portfolio. All high yield bonds split between two funds: 50 VWEAX and 50 FAGIX

(FAGIX is allowed to hold a small percentage of equity as well)
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Re: Bond fund choices in retirement - important or not?

Post by Florida Orange »

Parkinglotracer wrote: Mon Jun 10, 2024 5:39 am I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.
I'm in a very similar position to you. My grandfather was a stock broker when the stock market crashed and the Great Depression hit. Things turned out even worse for him than they did for your grandfather. That's why half my money is in bonds. I realize that a 1929 type crash is unlikely in my lifetime, but I'm not willing to risk it.
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Re: Bond fund choices in retirement - important or not?

Post by Parkinglotracer »

Florida Orange wrote: Mon Jun 10, 2024 8:27 am
Parkinglotracer wrote: Mon Jun 10, 2024 5:39 am I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.
I'm in a very similar position to you. My grandfather was a stock broker when the stock market crashed and the Great Depression hit. Things turned out even worse for him than they did for your grandfather. That's why half my money is in bonds. I realize that a 1929 type crash is unlikely in my lifetime, but I'm not willing to risk it.
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Re: Bond fund choices in retirement - important or not?

Post by vnatale »

Call_Me_Op wrote: Sat Jun 08, 2024 7:50 am
BirdFood wrote: Sat Jun 08, 2024 1:55 am I’m going to whisper that bonds also exist outside funds.

(Sacrelige!)

(Run!)
Yes, but I would only purchase treasuries as individual issues.
Same here!
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Ferd Burfel
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Re: Bond fund choices in retirement - important or not?

Post by Ferd Burfel »

Parkinglotracer wrote: Mon Jun 10, 2024 5:39 am
Ferd Burfel wrote: Mon Jun 10, 2024 3:34 am
Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?
Great discussion. I would venture to say that one’s portfolio may end up in the same place whether they invest in either of those two bond funds. But if we had a large economic turn down I’d much rather be in the treasury fund vs the IG fund and the extra small yield isn’t worth it imho.

I buy into the idea that the 35% of my portfolio that is in a treasury bond ladder is the ballast of my portfolio when all hell breaks loose in the economy and for the bonds’ performance it should be as uncorrelated to the stock market as possible. So it’s safer to have treasuries in my bond portfolio than corporates. VFSUX that has 50% BBB rated bonds, and I don’t think the risk is worth the additional .33% yield (BBB is one step above junk). Yes VFSUX is safe. The treasury fund is just safer.

Peeling the onion a little deeper, a quick scan shows VFSUX has bonds from companies like Boeing and CVS. Great companies but more risk than treasuries. I don’t take vanguard’s risk ratings as gospel - in fact I’d question vanguard having those two funds having the same risk rating. But I realize the risk of default of most of VFSUX’s bonds is small. If we had a large economic turn down or another 2008 bank crisis I think we’d be hoping we were in treasuries. I see the vanguard total bond fund and etf have a risk rating of 2. Others have questioned that rating after its double digit decline in 2022.

So big picture it’s a bit of a purist philosophy to separate corporate risk from bond risk in one’s portfolio but I it is one I like because it helps me know when I really need that bond money it will all be there. Even in a recession or depression. Many here invest in corporate bonds so keep researching and don’t take my risk adverse stance on this as anything more than my opinion.

I have a gov cola pension that covers my living expenses and still keep 35% of my portfolio in treasuries. I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.

Here is the best recent article that I could find that delves into the risk with corporate bonds. I’d imagine the vanguard folks that gave VFSUX a risk rating of 1 might not agree with this morningstar article. lol.

https://www.morningstar.com/markets/why ... rate-bonds
This is a really good explanation of your position. A few thoughts in response.

It is not like I am for only one or the other (all Treasuries or all corporates). I split my fixed income between Treasuries, TIPS, munis, and corporates plus cash, as I stated in the OP. It is just that I am never certain if I have the right percentages of each, to give me the optimal risk-adjusted return.

With that said, all investing is about risk. I am aware of the BH point that one can get the same risk adjusted return by increasing their equity position and holding only Treasuries and it is a point worth evaluating further.

The M* article from March 2023 was good but I want to extract part of it, as it gives a different take on the risks of corporate bonds.
Still, risks of defaults in the investment-grade market shouldn’t be overstated, say money managers, as defaults have historically been low and that is unlikely to change, even given the rise in BBB rated issues.

Says Morningstar’s Bruno: “BBB rated debt has a 1.5% probability of default over a five-year period, and so in essence, it’s rather few and far between that the actual risk of default materializes.”

Financial conditions in the past 10 years also account for the rise in BBB rated issues, say investment managers, noting there wasn’t a significant financial difference between the A and BBB designations, so companies chose to take on more leverage and free up working capital for their businesses.

Moreover, there were changes in insurance regulations that made it less onerous for insurance companies to invest in BBB rated corporate debt while buying A rated became more expensive, says Arvind Narayanan, senior portfolio manager of investment-grade credit at Vanguard.

Narayanan calls Verizon Communications VZ the “poster child” of a company that allowed its ratings to fall to BBB as a calculated business decision to put its capital to better use.

He points out the “vast majority of the BBB rated issues come from noncyclical sectors,” such as telecommunications, pharmaceuticals, and healthcare companies, that are better positioned to ride out a recession, and those are the areas he prefers for their earnings stability.
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Re: Bond fund choices in retirement - important or not?

Post by Parkinglotracer »

Ferd Burfel wrote: Fri Jun 14, 2024 4:35 am
Parkinglotracer wrote: Mon Jun 10, 2024 5:39 am
Ferd Burfel wrote: Mon Jun 10, 2024 3:34 am
Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?
Great discussion. I would venture to say that one’s portfolio may end up in the same place whether they invest in either of those two bond funds. But if we had a large economic turn down I’d much rather be in the treasury fund vs the IG fund and the extra small yield isn’t worth it imho.

I buy into the idea that the 35% of my portfolio that is in a treasury bond ladder is the ballast of my portfolio when all hell breaks loose in the economy and for the bonds’ performance it should be as uncorrelated to the stock market as possible. So it’s safer to have treasuries in my bond portfolio than corporates. VFSUX that has 50% BBB rated bonds, and I don’t think the risk is worth the additional .33% yield (BBB is one step above junk). Yes VFSUX is safe. The treasury fund is just safer.

Peeling the onion a little deeper, a quick scan shows VFSUX has bonds from companies like Boeing and CVS. Great companies but more risk than treasuries. I don’t take vanguard’s risk ratings as gospel - in fact I’d question vanguard having those two funds having the same risk rating. But I realize the risk of default of most of VFSUX’s bonds is small. If we had a large economic turn down or another 2008 bank crisis I think we’d be hoping we were in treasuries. I see the vanguard total bond fund and etf have a risk rating of 2. Others have questioned that rating after its double digit decline in 2022.

So big picture it’s a bit of a purist philosophy to separate corporate risk from bond risk in one’s portfolio but I it is one I like because it helps me know when I really need that bond money it will all be there. Even in a recession or depression. Many here invest in corporate bonds so keep researching and don’t take my risk adverse stance on this as anything more than my opinion.

I have a gov cola pension that covers my living expenses and still keep 35% of my portfolio in treasuries. I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.

Here is the best recent article that I could find that delves into the risk with corporate bonds. I’d imagine the vanguard folks that gave VFSUX a risk rating of 1 might not agree with this morningstar article. lol.

https://www.morningstar.com/markets/why ... rate-bonds
This is a really good explanation of your position. A few thoughts in response.

It is not like I am for only one or the other (all Treasuries or all corporates). I split my fixed income between Treasuries, TIPS, munis, and corporates plus cash, as I stated in the OP. It is just that I am never certain if I have the right percentages of each, to give me the optimal risk-adjusted return.

With that said, all investing is about risk. I am aware of the BH point that one can get the same risk adjusted return by increasing their equity position and holding only Treasuries and it is a point worth evaluating further.

The M* article from March 2023 was good but I want to extract part of it, as it gives a different take on the risks of corporate bonds.
Still, risks of defaults in the investment-grade market shouldn’t be overstated, say money managers, as defaults have historically been low and that is unlikely to change, even given the rise in BBB rated issues.

Says Morningstar’s Bruno: “BBB rated debt has a 1.5% probability of default over a five-year period, and so in essence, it’s rather few and far between that the actual risk of default materializes.”

Financial conditions in the past 10 years also account for the rise in BBB rated issues, say investment managers, noting there wasn’t a significant financial difference between the A and BBB designations, so companies chose to take on more leverage and free up working capital for their businesses.

Moreover, there were changes in insurance regulations that made it less onerous for insurance companies to invest in BBB rated corporate debt while buying A rated became more expensive, says Arvind Narayanan, senior portfolio manager of investment-grade credit at Vanguard.

Narayanan calls Verizon Communications VZ the “poster child” of a company that allowed its ratings to fall to BBB as a calculated business decision to put its capital to better use.

He points out the “vast majority of the BBB rated issues come from noncyclical sectors,” such as telecommunications, pharmaceuticals, and healthcare companies, that are better positioned to ride out a recession, and those are the areas he prefers for their earnings stability.

Yes tradeoffs of risk of default for the higher yield paid. Each person has to make that difficult decision. Boeing, CVS, Verizon, etc is going to have to pay me more than they are paying to buy their bonds when the US treasury will guarantee theirs. Obviously the financial market disagrees with me! They must not have read Taylor’s families experience during the depression or they don’t think it could ever happen. The 2008 Wall Street crisis was close enough. lol.
jimkinny
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Re: Bond fund choices in retirement - important or not?

Post by jimkinny »

Parkinglotracer wrote: Mon Jun 10, 2024 9:07 pm
Florida Orange wrote: Mon Jun 10, 2024 8:27 am
Parkinglotracer wrote: Mon Jun 10, 2024 5:39 am I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.
I'm in a very similar position to you. My grandfather was a stock broker when the stock market crashed and the Great Depression hit. Things turned out even worse for him than they did for your grandfather. That's why half my money is in bonds. I realize that a 1929 type crash is unlikely in my lifetime, but I'm not willing to risk it.
+1

Yes, one never knows. Investment grade bonds have term and credit risk. Treasuries do not have credit risk. I prefer most of my risk to be in stocks and do not see any much of reason to use any bond other than TIPS, either in a fund or a ladder, especially if you are retired. Short and intermediate TIPS funds work for me but others prefer a ladder of TIPS.
NiceUnparticularMan
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Re: Bond fund choices in retirement - important or not?

Post by NiceUnparticularMan »

For retirement savings and income purposes I have only ever been interested in two sorts of things, TIPS and a category I like to call "super cash" which includes stable value funds, the G Fund, certain cash-balance pensions, possibly certain CDs, and so on. Technically it also includes money markets when the yield curve inverts, although that is stretching the definition and also for various reasons I have never actually used MMs that way (although I might at some point). IBonds would fit into all this too if I had ever bothered to buy any.

There are some complexities to all that including the potential ability to arbitrage depending on the current shape of the yield curve (like if you can, SV/G with MM, or possibly ST TIPS with SV/G or MM depending). But I don't spend any time worrying about all of the many other sorts of fixed income I do not do anything with. I long ago decided I didn't want to mess around with that stuff and I do not revisit that decision.

Is this important? Well, if you have enough wealth and modest enough goals for that wealth, plausibly not. But I think there are virtues in having a simple plan where you understand why it is a reasonably good plan. What I personally struggle with is how what I consider to be simple plan at one point later strikes me as maybe more complicated still than it could and probably should have been.
Last edited by NiceUnparticularMan on Fri Jun 14, 2024 8:48 am, edited 1 time in total.
BitTooAggressive
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Re: Bond fund choices in retirement - important or not?

Post by BitTooAggressive »

Ferd Burfel wrote: Sat Jun 08, 2024 1:45 am This thread involves an investor in retirement or near retirement, not in the accumulation stage.

In my portfolio, I find the stock part easy to settle on, using market index funds, with the only decision being the percent of US vs international.

However, for bond funds, I find it more complicated with the larger, more diverse market, and so am regularly revisiting my choices and allocation %.

Although bond funds will provide a smaller part of portfolio total return, I find their lower volatility an important feature to a retirement portfolio.

My current choices include funds focusing on TIPS, US government bonds, municipals, and corporates, all investment grade.

My question is, for those in retirement, do you set and forget your bond fund choices or do you spend more time reviewing these choices, trying to get the highest risk adjusted returns over time?
Duration, duration, duration. Be mindful of it. If you want low volatility out of your bonds, short duration, high credit quality.

Edit: VTIP (vanguard short term tips) and BSV (vanguard short term bond)are my favorites.
Topic Author
Ferd Burfel
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Re: Bond fund choices in retirement - important or not?

Post by Ferd Burfel »

Parkinglotracer wrote: Fri Jun 14, 2024 5:03 am
They must not have read Taylor’s families experience during the depression.
I am not aware of this experience. Could you explain or post a link about this?
Topic Author
Ferd Burfel
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Re: Bond fund choices in retirement - important or not?

Post by Ferd Burfel »

mfFrom35k wrote: Mon Jun 10, 2024 7:20 am
Ferd Burfel wrote: Mon Jun 10, 2024 3:34 am
Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?
See the following thread to understand more about the question above and Professor McQ's arguments and data:

viewtopic.php?t=428109

I am persuaded by Professor McQ in the linked thread and his original thread on this topic that there are good reasons to hold Treasuries only in my bond funds. I haven't been able to fully execute on this strategy due to options in my employer plan but I have done as much as I could.
As I read it, Pr. McQ's explanation is the Treasuries assist the portfolio through negative correlation. But there is no guarantee of that, as it recent years.
xxd091
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Re: Bond fund choices in retirement - important or not?

Post by xxd091 »

Aged 78 -21 years retired
Only ever used a single Vanguard Global Bond fund for bond part of my Asset Allocation
Was 30/70 at retirement-now 35/59/6 where 6=cash
Done the job for me-so far!
xxd091
Parkinglotracer
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Re: Bond fund choices in retirement - important or not?

Post by Parkinglotracer »

Ferd Burfel wrote: Sat Jun 15, 2024 12:05 am
Parkinglotracer wrote: Fri Jun 14, 2024 5:03 am
They must not have read Taylor’s families experience during the depression.
I am not aware of this experience. Could you explain or post a link about this?
Here you go there are posts he has made about how brutal it was including family members considering suicide when losing their homes and businesses and savings

https://www.bogleheads.org/blog/2017/01 ... r-markets/
mfFrom35k
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Re: Bond fund choices in retirement - important or not?

Post by mfFrom35k »

Ferd Burfel wrote: Sat Jun 15, 2024 12:21 am
mfFrom35k wrote: Mon Jun 10, 2024 7:20 am
Ferd Burfel wrote: Mon Jun 10, 2024 3:34 am
Parkinglotracer wrote: Sat Jun 08, 2024 3:34 am We don’t do corporate bonds as we take corporate risk on our the stock side of our portfolio.
I am curious about this thinking, as this is something I am also considering.

VG rates the Short Term Treasury Index Fund (VSBSX/VGSH), comprised of 100% Treasuries, at a risk level of 1. It also rates my Short Term Investment Grade fund (VFSUX), comprised of 8% Treasuries, at a risk level of 1. The Treasury fund has 10-year returns of 0.99% and an SEC yield (best estimate of future return) of 4.88%. The IG fund has 10-year returns of 1.89% and an SEC yield of 5.21%.

As a retired investor, I would prefer my bond funds to have the highest risk adjusted return. Based on VG's rating, that would seem to be the IG fund.

Over the long run, why would would you avoid IG corporate bonds, and therefore give up this return difference? What scenario could you envision where holding the Treasury fund would provide a better long-term return than the IG fund?
See the following thread to understand more about the question above and Professor McQ's arguments and data:

viewtopic.php?t=428109

I am persuaded by Professor McQ in the linked thread and his original thread on this topic that there are good reasons to hold Treasuries only in my bond funds. I haven't been able to fully execute on this strategy due to options in my employer plan but I have done as much as I could.
As I read it, Pr. McQ's explanation is the Treasuries assist the portfolio through negative correlation. But there is no guarantee of that, as it recent years.
The problem in recent years was a function of duration during a rising rate environment. I would expect a treasury only fund of similar duration to to BND to provide similar results to BND. However, when credit (i.e., default risk) is more of an issue, the higher negative correlation with equities makes treasuries my choice (except in my employer plan which doesn’t have the option.)
Topic Author
Ferd Burfel
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Re: Bond fund choices in retirement - important or not?

Post by Ferd Burfel »

Parkinglotracer wrote: Sat Jun 15, 2024 6:30 am
Ferd Burfel wrote: Sat Jun 15, 2024 12:05 am
Parkinglotracer wrote: Fri Jun 14, 2024 5:03 am
They must not have read Taylor’s families experience during the depression.
I am not aware of this experience. Could you explain or post a link about this?
Here you go there are posts he has made about how brutal it was including family members considering suicide when losing their homes and businesses and savings

https://www.bogleheads.org/blog/2017/01 ... r-markets/
The message I got out of his story was that those investors staying the course (at least 10 years) did just fine for themselves.

This is one point about the only-Treasuries choice I do not get. People are all about the long term benefits of stock investing. But with bonds, they concentrate on the short-term (the Depression, GFC, Covid, etc.) and not the long-term returns. Is that not an inconsistent investing philosophy?
placeholder
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Re: Bond fund choices in retirement - important or not?

Post by placeholder »

The only move I made in fixed was not a retirement thing but rather swapping the roughly half in stable value to money market to take advantage of the rate difference but I don't anticipate that being a long term thing.
Northern Flicker
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Re: Bond fund choices in retirement - important or not?

Post by Northern Flicker »

Florida Orange wrote: Mon Jun 10, 2024 8:27 am
Parkinglotracer wrote: Mon Jun 10, 2024 5:39 am I remember my dad’s stories of his dad losing his job during the depression and going from being the accountant of the American bridge company in Elmira ny to being the night watchman making sure the building was locked up. At age 63, I still have grand dad’s badge to remind me things can get bad. Minimize your maximum regret - my business school teacher taught me. My 35% treasuries helps me do that.
I'm in a very similar position to you. My grandfather was a stock broker when the stock market crashed and the Great Depression hit. Things turned out even worse for him than they did for your grandfather. That's why half my money is in bonds. I realize that a 1929 type crash is unlikely in my lifetime, but I'm not willing to risk it.
It is unlikely. But an even worse outcome also is possible.
Parkinglotracer
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Re: Bond fund choices in retirement - important or not?

Post by Parkinglotracer »

Ferd Burfel wrote: Sun Jun 16, 2024 1:09 am
Parkinglotracer wrote: Sat Jun 15, 2024 6:30 am
Ferd Burfel wrote: Sat Jun 15, 2024 12:05 am
Parkinglotracer wrote: Fri Jun 14, 2024 5:03 am
They must not have read Taylor’s families experience during the depression.
I am not aware of this experience. Could you explain or post a link about this?
Here you go there are posts he has made about how brutal it was including family members considering suicide when losing their homes and businesses and savings

https://www.bogleheads.org/blog/2017/01 ... r-markets/


The message I got out of his story was that those investors staying the course (at least 10 years) did just fine for themselves.

This is one point about the only-Treasuries choice I do not get. People are all about the long term benefits of stock investing. But with bonds, they concentrate on the short-term (the Depression, GFC, Covid, etc.) and not the long-term returns. Is that not an inconsistent investing philosophy?

I think of treasury bonds performance as uncorrelated to stock performance not short term results. When investing in bonds a long term bond with a long term duration is vulnerable to duration risk. Bonds provide stability in bumpy times to one’s portfolio.

It is interesting how people see Different things in the same situation. In a communication class a teacher once told the story of how in America we know spinach makes pop-eye strong after he eats it in the cartoon. A person from another country said oh I thought it made him mad. He does seem to beat up the bad guy when he eats it.
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