Alternative to bond funds?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
jdwhobrey
Posts: 2
Joined: Sun Mar 11, 2018 8:38 pm

Alternative to bond funds?

Post by jdwhobrey » Sun Mar 11, 2018 8:43 pm

My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!

PFInterest
Posts: 1381
Joined: Sun Jan 08, 2017 12:25 pm

Re: Alternative to bond funds?

Post by PFInterest » Sun Mar 11, 2018 8:58 pm

cash. mm. cd. ibonds.

i dont understand why being down in a short term bond fund bothers you. did you TLH it?

mega317
Posts: 2198
Joined: Tue Apr 19, 2016 10:55 am

Re: Alternative to bond funds?

Post by mega317 » Sun Mar 11, 2018 9:31 pm

Another alternative is stocks :twisted:

User avatar
Tyler Aspect
Posts: 1070
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: Alternative to bond funds?

Post by Tyler Aspect » Sun Mar 11, 2018 9:35 pm

One suggestion I have is to continue holding the short term bond index fund, because the amount of possible loss is much less compared to stock funds. Basically not be concerned with small losses.

An alternative is to purchase US Treasury Notes of around 15 months maturity on the secondary market. You will get a fixed rate of return (around 2.1% currently), and if the yield is higher at maturity, then you can repurchase again at the higher yield.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

z3r0c00l
Posts: 1076
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: Alternative to bond funds?

Post by z3r0c00l » Sun Mar 11, 2018 9:40 pm

The yield is 2.5% which is quite good considering current inflation. You may mean total return over a short period, such as 1 year, in which case it is basically flat. That is reasonable for this fund which has a risk rating of 1:

"Conservative funds—Risk level 1 Risk level one
Vanguard funds are classified as conservative if their share prices are expected to remain stable or to fluctuate only slightly. Such funds may be appropriate for the short-term reserves portion of a long-term investment portfolio, or for investors with short-term investment horizons (three years or less)."

The fund is up over the past three years and is quite safe. If you can't handle any price fluctuations you don't want an alternative to bonds, you may want cash. I-bonds or CDs as suggested above will offer you similar or somewhat less return, with no risk of principal loss.

User avatar
White Coat Investor
Posts: 13311
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Alternative to bond funds?

Post by White Coat Investor » Sun Mar 11, 2018 9:46 pm

jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
I'd recommend learning more about bonds. For instance, that fund has a negative return YTD, but not a negative yield. The difference matters. Consider the reason for the negative YTD return for instance. It probably increased the yield on the fund!

As Bogle said, you can keep the principle constant and vary the interest, or you can keep the interest constant and vary the principle but you can't do both.

If you don't like your principle fluctuating, don't buy bonds. Buy CDs, MMFs, or savings accounts.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

User avatar
welderwannabe
Posts: 614
Joined: Fri Jun 16, 2017 8:32 am

Re: Alternative to bond funds?

Post by welderwannabe » Mon Mar 12, 2018 6:11 am

jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
No other suggestions other than cash, or possibly purchasing individual Treasury issues and holding to term.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: Alternative to bond funds?

Post by Iliketoridemybike » Mon Mar 12, 2018 7:15 am

Build a bond ladder. The chance of a negative return is slim to none if you buy quality and keep the duration relatively short.

livesoft
Posts: 61003
Joined: Thu Mar 01, 2007 8:00 pm

Re: Alternative to bond funds?

Post by livesoft » Mon Mar 12, 2018 7:40 am

jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
I guess I would recommend keeping the wife and learning how to live with small losses in bond funds from time to time if one is going to own bond funds.

But as noted, some fixed income alternatives (I have positions in the ones marked with an *)
*Money Market Funds
Savings Accounts
CDs
*T-bills
*T-bill ETFs
*TIAA Traditional Annuity available for IRAs / 403(b)s
Stable Value fund available in some 401(k)s

One could also spend less money to make up for the minuscule loss in VBIRX. Or since equities are up, sell some equities to rebalance into VBIRX or another bond fund.
Wiki This signature message sponsored by sscritic: Learn to fish.

Dandy
Posts: 5122
Joined: Sun Apr 25, 2010 7:42 pm

Re: Alternative to bond funds?

Post by Dandy » Mon Mar 12, 2018 7:53 am

When we talk about stocks and bonds it makes it easy to forget other fixed income. Interest rates look to be on the rise. That will be a headwind for bonds/bond funds -- they will tend to dip but not lose a lot and eventually they should do fine. Another risk is inflation. It seems that the rise of inflation has been just around the corner for awhile. Inflation will also have a negative effect on most bonds/bond funds.

I always believed in more diversity in fixed income allocation as opposed to just having one product like the Total Bond fund. I feel this is even more important for retirees who usually have a large allocation to fixed income. I am retired and have about 57% allocated to fixed income. Here is my approach:

1.18% - "no" risk to principal - e.g. CDs (1-5 yrs), Money Market Funds/deposit accounts, Online Savings Account, some legacy EE bonds ( earning 4%).
2.18% - short term bond funds - VG - short term bond index, investment grade and LTD term tax exempt.
3. 21% - Intermediate bond funds - VG - Intermediate Treasury and Tax Free, Inflation Protection Fund, and the fixed income portion of Balanced Index and Wellesley Income funds.

Much more complicated than just having one bond fund. But to me that is if you are overly focused on re balancing the sub accounts. To me it doesn't really matter if there is a bit more in one category or fund than another. Fixed income is so much less risky than equities I just focus mostly on the equity vs fixed income overall allocation.

tibbitts
Posts: 7613
Joined: Tue Feb 27, 2007 6:50 pm

Re: Alternative to bond funds?

Post by tibbitts » Mon Mar 12, 2018 7:59 am

jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
I would say if you are going to time bond funds, which I wouldn't do, you're already late. There have been many times when rates were obviously going to rise over the past many years, and they didn't. They have risen a little now and may continue to, but nobody knows. One "event" and we're back at near-zero rates.

We don't know what alternatives are available to you because they might not be the same for us. Stable value at 1.9%? Not a screaming buy but maybe. Stable value at 7%? You were crazy to not have been in it before now.

smectym
Posts: 107
Joined: Thu May 26, 2011 5:07 pm

Re: Alternative to bond funds?

Post by smectym » Mon Mar 12, 2018 8:15 am

I’m currently buying 2-year notes and other short term securities on Treasury Direct. Zero expense ratio and zero commissions. Just hold to security and you’ll never see the annoying red YTD minus signs on your account statement.
TD offers the gamut, from 4 weeks to 30 years, plus savings bonds. Not sure why the service it isn’t more popular on this board. Although if you need checkwriting on the account and so on...then I’d look to a low-cost money market fund, as others suggest.

Smectym

Da5id
Posts: 2035
Joined: Fri Feb 26, 2016 8:20 am

Re: Alternative to bond funds?

Post by Da5id » Mon Mar 12, 2018 8:23 am

smectym wrote:
Mon Mar 12, 2018 8:15 am
I’m currently buying 2-year notes and other short term securities on Treasury Direct. Zero expense ratio and zero commissions. Just hold to security and you’ll never see the annoying red YTD minus signs on your account statement.
Mind you, that is is a psychological benefit rather than an actual one. If you have a bond fund of the same duration and characteristics, it will see a NAV decrease as interest rates rise. Your bond will have a similar decrease in value if you were to sell it before maturity, but that is invisible if you don't sell it until it matures. Mind you, if the NAV decrease on your bond funds is keeping you up at night, the psychological benefit of buying and holding the actual bonds may be worthwhile. But for me, I'll take my tax loss harvesting (for the small amount of non-IRA bonds I hold) and chug along.

Kennyt7
Posts: 59
Joined: Mon Jan 19, 2015 7:28 pm

Re: Alternative to bond funds?

Post by Kennyt7 » Mon Mar 12, 2018 8:28 am

ladder TAX FREE MUNIS
Malkiel suggests hi dividend paying stocks-fund for a fixed income substitute

User avatar
goodenyou
Posts: 1204
Joined: Sun Jan 31, 2010 11:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

Re: Alternative to bond funds?

Post by goodenyou » Mon Mar 12, 2018 8:44 am

White Coat Investor wrote:
Sun Mar 11, 2018 9:46 pm
jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
I'd recommend learning more about bonds. For instance, that fund has a negative return YTD, but not a negative yield. The difference matters. Consider the reason for the negative YTD return for instance. It probably increased the yield on the fund!

As Bogle said, you can keep the principle constant and vary the interest, or you can keep the interest constant and vary the principle but you can't do both.

If you don't like your principle fluctuating, don't buy bonds. Buy CDs, MMFs, or savings accounts.
The referenced Bogle comment made me think of the fallacy of believing that dividend-paying stocks are are proxy for bond funds. It stems from the desire to have increasing principle by stock appreciation AND a stable or increasing dividend. However, dividend-paying stocks are NOT a proxy for bonds.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

dbr
Posts: 27039
Joined: Sun Mar 04, 2007 9:50 am

Re: Alternative to bond funds?

Post by dbr » Mon Mar 12, 2018 8:51 am

White Coat Investor wrote:
Sun Mar 11, 2018 9:46 pm
jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
I'd recommend learning more about bonds. For instance, that fund has a negative return YTD, but not a negative yield. The difference matters. Consider the reason for the negative YTD return for instance. It probably increased the yield on the fund!

As Bogle said, you can keep the principle constant and vary the interest, or you can keep the interest constant and vary the principle but you can't do both.

If you don't like your principle fluctuating, don't buy bonds. Buy CDs, MMFs, or savings accounts.
This is also what I would recommend. The fact that there has been a negative return in some period is no reason to shift to alternatives. Also many alternatives make sense all reasons considered, but probably not for that reason in particular.

User avatar
ruralavalon
Posts: 13189
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Alternative to bond funds?

Post by ruralavalon » Mon Mar 12, 2018 9:24 am

jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
Stick with the short-term bond fund and enjoy the higher yield.

Other possibilities include short-term CDs, a savings account, or a money market fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ChinchillaWhiplash
Posts: 396
Joined: Sat Jan 20, 2018 5:40 pm
Location: Colorado

Re: Alternative to bond funds?

Post by ChinchillaWhiplash » Mon Mar 12, 2018 9:31 am

CD ladder of 3 year term or less. Yields are close to total bond index funds and no ER. Current yields for brokered CDs are 1 year 2.1%, 2 year 2.5%, 3 year 2.7%. I split my bond AA up with about 1/2 of fixed income allocation in total bond index fund and the rest in a CD ladder.

visualguy
Posts: 618
Joined: Thu Jan 30, 2014 1:32 am

Re: Alternative to bond funds?

Post by visualguy » Mon Mar 12, 2018 7:57 pm

ChinchillaWhiplash wrote:
Mon Mar 12, 2018 9:31 am
CD ladder of 3 year term or less. Yields are close to total bond index funds and no ER. Current yields for brokered CDs are 1 year 2.1%, 2 year 2.5%, 3 year 2.7%. I split my bond AA up with about 1/2 of fixed income allocation in total bond index fund and the rest in a CD ladder.
Since the yields are so close, why not put even more than half in brokered CDs?

User avatar
munemaker
Posts: 2985
Joined: Sat Jan 18, 2014 6:14 pm

Re: Alternative to bond funds?

Post by munemaker » Mon Mar 12, 2018 8:02 pm

If you are bothered by the small drop in your bond fund, wait until the stock market takes a dip!

Seriously, if you don't like fluctuations in the markets, sell your stocks and bonds and buy insured certificates of deposit.

visualguy
Posts: 618
Joined: Thu Jan 30, 2014 1:32 am

Re: Alternative to bond funds?

Post by visualguy » Mon Mar 12, 2018 9:56 pm

munemaker wrote:
Mon Mar 12, 2018 8:02 pm
If you are bothered by the small drop in your bond fund, wait until the stock market takes a dip!

Seriously, if you don't like fluctuations in the markets, sell your stocks and bonds and buy insured certificates of deposit.
It's fine not to want to lose principal on your fixed income, but still be willing to tolerate volatility on your stock.

stocknoob4111
Posts: 199
Joined: Sun Jan 07, 2018 12:52 pm

Re: Alternative to bond funds?

Post by stocknoob4111 » Tue Mar 13, 2018 1:39 am

I wouldn't be too worried, my bond fund has a YTD return of -2.2% but it's still yielding 3%, plus I get to TLH the losses to recoup some money that way, which I will do closer to year end.

In addition there is a cap to how high long term rates can go as it seriously affects equities.. when the equity market tanks there is a flight to safety driving bond yields back down.

And if the 10Y goes to 4+ % it will decimate both the equity and housing markets and you will have way more to worry about than losing $5k in your bond fund so I think this is an extreme scenario that will not happen, at least I hope not.

z3r0c00l
Posts: 1076
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: Alternative to bond funds?

Post by z3r0c00l » Tue Mar 13, 2018 6:23 am

After a significant drop during the stock market crash and "great recession" the 10 year did bounce all the way back to around 4%. It was neither disastrous for stocks or bonds. In fact, I bet most people here don't even remember it. I also don't think we will much remember this year's headwind for bonds in another10 years.

juliewongferra
Posts: 212
Joined: Fri Oct 09, 2009 10:53 am

Re: Alternative to bond funds?

Post by juliewongferra » Tue Mar 13, 2018 9:55 am

jdwhobrey wrote:
Sun Mar 11, 2018 8:43 pm
My wife and I currently have about 20% of our holdings in VBIRX (Vanguard Short-Term Bond Index Fund Admiral Shares.) This fund has a negative yield YTD, and this is also the case with many other bond funds. Any recommendations for suitable alternatives? Thanks!
This is wrong! It might have a negative performance YTD, but not a negative yield!

Don't scare me, lol!!! :happy

cheers,
jwf

User avatar
Kevin M
Posts: 9638
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Alternative to bond funds?

Post by Kevin M » Tue Mar 13, 2018 12:10 pm

The comments about CDs and ladders of individual bonds and CDs not having a risk to principal are incorrect. Although you may not see it on your statement, the value of these securities falls when the relevant yields rise, just like with your bond fund.

This is 100% accurate for brokered CDs, but for direct CDs we need to add a qualification. A direct CD usually allows early withdrawals with payment of an early withdrawal penalty (EWP). This limits the downside to the EWP if rates increase, so although there is still the potential for "loss to principal", it is limited. The lower the EWP the more valuable this is. Unfortunately, EWPs have generally risen in recent years. You used to be able to find a direct CD paying 100 basis points or more than a Treasury of same maturity with an EWP of six months of interest. Now the yield premiums are in the low tens of basis points, and the EWPs typically are one year of interest or more.

Another qualification is that although a rolling ladder has basically the same term risk as a bond with similar duration, if you are using the ladder to fund expenses as the bonds mature, the risk is lower. This is because you aren't forced to sell shares of your fund after price drops, but instead can let the bonds mature at par, and you will receive the yield you signed up for when you bought the bond.

I use both bond funds and individual CDs, Treasuries, and munis, but I have no illusions that when yields rise, as they have in recent months, that my individual fixed-income securities haven't lost value, just like my bond funds have lost value.

For no term risk, you must stick with fixed-income with zero duration, as with savings accounts and money market funds (even I Bonds have a penalty of three months of interest for the first five years, but pretty close to zero duration). Or, you can keep your duration so short that the term risk is negligible, as in rolling 4-week Treasuries (which currently might get you about the same yield as Prime money market fund, but state income tax exemption could give the Treasuries an edge).

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

jdwhobrey
Posts: 2
Joined: Sun Mar 11, 2018 8:38 pm

Re: Alternative to bond funds?

Post by jdwhobrey » Tue Mar 13, 2018 8:36 pm

Thanks everyone for all of the detailed responses! To clarify, I was interested in suggestions for other fixed asset investments, not stocks (the other 80% of our holdings are already invested in domestic and international stocks.) The vast majority of our overall money is invested in Vanguard Index funds (thank you Mr. Bogle!)

I just checked my Vanguard account and VBIRX has a YTD return of -.77% but the SEC yield is 2.51%. The SEC percentage is calculated based on underlying fund holdings yield to maturity for the prior 30 days. Does this mean that I am still net positive? If so, then that is great news! I originally chose the short term bond fund as it seemed to offer greater protection against rising interest rates.

User avatar
Kevin M
Posts: 9638
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Alternative to bond funds?

Post by Kevin M » Tue Mar 13, 2018 8:56 pm

jdwhobrey wrote:
Tue Mar 13, 2018 8:36 pm
I just checked my Vanguard account and VBIRX has a YTD return of -.77% but the SEC yield is 2.51%. The SEC percentage is calculated based on underlying fund holdings yield to maturity for the prior 30 days. Does this mean that I am still net positive?
No. The YTD return number is your return, which is negative YTD. The yield is basically the yield to maturity (YTM) of the bonds in the fund. The 30-day averaging is just that--an average of the YTM of the bonds in the fund over a prior 30-day period.

YTM is basically the return you get on a bond if you hold it to maturity. But the fund may not hold bonds to maturity, and is constantly reinvesting in more bonds. Nevertheless, people often use SEC yield as an approximation of their expected return over a time period in the ballpark of the duration of the fund, although the actual return over this time period can vary considerably from this.

So the SEC yield is a forward looking number, while the YTD return (or any past-period return) is a backward-looking number.
I originally chose the short term bond fund as it seemed to offer greater protection against rising interest rates.
A short-term bond fund typically will lose less than an intermediate-term bond fund when rates/yields are generally rising, as has been the case in recent months. However, we could see rising short-term yields while intermediate-term yields remain flat, in which case a short-term bond fund could lose value while an intermediate-term fund does not. Generally, your choice is appropriate if you are concerned about rising yields, but that doesn't mean there won't be drawdowns, which there will be at times with any bond fund.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Kevin M
Posts: 9638
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Alternative to bond funds?

Post by Kevin M » Tue Mar 13, 2018 9:14 pm

To get a sense of the risk in this fund, you can look at the drawdowns during its entire history with Portfolio Visualizer. Here is a link you can use to explore it.

Note that the recent decline, through the end of February anyway, is the tiny downward blip at the far right of the chart. Click Logarithmic Scale for a more interesting view. Note that there have been many other downward blips in the generally rising total return. To see the drawdowns in more detail, click on the Drawdowns tab.

If you look at the table of drawdowns, you'll see that the one we're in now is the fourth worst (so far) in the history of the fund. It began in September 2017, and had lasted six months as of end of February 2018, at which point the total return for the fund during the drawdown was -1.34%. The worst drawdown was -1.84%, lasted 2 two months, and took three months to recover, for a total "underwater" time of five months.

Back to the Summary page, be careful not to read much into the previous annual returns, since yields were much higher in previous years, and higher yields lead to higher returns (eventually). The silver lining in this is that as yield rise and your fund share value falls, the short-term losses will eventually be rewarded by higher long-term returns.

You can add an intermediate-term fund to PV to compare to the short-term fund. You'll see more volatility, larger drawdowns, and higher long-term returns. The drawdowns occur when yields are rising, because bond price is inversely related to bond yield.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
ruralavalon
Posts: 13189
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Alternative to bond funds?

Post by ruralavalon » Wed Mar 14, 2018 8:26 am

Kevin M wrote:
Tue Mar 13, 2018 8:56 pm
jdwhobrey wrote:
Tue Mar 13, 2018 8:36 pm
I just checked my Vanguard account and VBIRX has a YTD return of -.77% but the SEC yield is 2.51%. The SEC percentage is calculated based on underlying fund holdings yield to maturity for the prior 30 days. Does this mean that I am still net positive?
No. The YTD return number is your return, which is negative YTD. The yield is basically the yield to maturity (YTM) of the bonds in the fund. The 30-day averaging is just that--an average of the YTM of the bonds in the fund over a prior 30-day period.

YTM is basically the return you get on a bond if you hold it to maturity. But the fund may not hold bonds to maturity, and is constantly reinvesting in more bonds. Nevertheless, people often use SEC yield as an approximation of their expected return over a time period in the ballpark of the duration of the fund, although the actual return over this time period can vary considerably from this.
Just curious, is that a reasonably accurate approximation?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Da5id
Posts: 2035
Joined: Fri Feb 26, 2016 8:20 am

Re: Alternative to bond funds?

Post by Da5id » Wed Mar 14, 2018 8:34 am

ruralavalon wrote:
Wed Mar 14, 2018 8:26 am
Kevin M wrote:
Tue Mar 13, 2018 8:56 pm
Nevertheless, people often use SEC yield as an approximation of their expected return over a time period in the ballpark of the duration of the fund, although the actual return over this time period can vary considerably from this.
Just curious, is that a reasonably accurate approximation?
This thread covers that some: viewtopic.php?t=155923

In that thread, people seem to argue both sides.

dbr
Posts: 27039
Joined: Sun Mar 04, 2007 9:50 am

Re: Alternative to bond funds?

Post by dbr » Wed Mar 14, 2018 10:13 am

Da5id wrote:
Wed Mar 14, 2018 8:34 am
ruralavalon wrote:
Wed Mar 14, 2018 8:26 am
Kevin M wrote:
Tue Mar 13, 2018 8:56 pm
Nevertheless, people often use SEC yield as an approximation of their expected return over a time period in the ballpark of the duration of the fund, although the actual return over this time period can vary considerably from this.
Just curious, is that a reasonably accurate approximation?
This thread covers that some: viewtopic.php?t=155923

In that thread, people seem to argue both sides.
I don't know what you mean by an accurate approximation. Actual return is a statistical result driven by future interest rates which have unpredictable variation. It is not clear that accurate approximation as you might mean it applies to the situation. It is a statistical certainly that the actual outcome will be different from the prediction of the mean value of the distribution of possible outcomes even if the prediction of the mean value is extremely accurate. In shorter terms, if you want an accurate prediction of the future return you are going to have to come up with an accurate prediction of the future course of interest rates over time for the entire time you hold the investment. That is not going to happen.

User avatar
munemaker
Posts: 2985
Joined: Sat Jan 18, 2014 6:14 pm

Re: Alternative to bond funds?

Post by munemaker » Wed Mar 14, 2018 2:44 pm

VBIRX is where you want to be right now. You are in the catbird seat!

User avatar
Kevin M
Posts: 9638
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Alternative to bond funds?

Post by Kevin M » Wed Mar 14, 2018 4:15 pm

Da5id wrote:
Wed Mar 14, 2018 8:34 am
ruralavalon wrote:
Wed Mar 14, 2018 8:26 am
Kevin M wrote:
Tue Mar 13, 2018 8:56 pm
Nevertheless, people often use SEC yield as an approximation of their expected return over a time period in the ballpark of the duration of the fund, although the actual return over this time period can vary considerably from this.
Just curious, is that a reasonably accurate approximation?
This thread covers that some: viewtopic.php?t=155923

In that thread, people seem to argue both sides.
In that thread I showed, based on actual data for various bond funds, that it's not as accurate as people seem to think, hence the qualifier, "although the actual return over this time period can vary considerably from this".

There's a statistic that has been quoted here about subsequent 10-year returns having a very high correlation to initial yield to maturity for the US aggregate bond market--something on the order of 90%. Although my data supported a high correlation (maybe not quite 90%, but close), I found that high correlation doesn't imply high prediction accuracy.

Note that 10 years is not quite twice the duration of Total Bond Market (TBM--based on aggregate US bond market). I also looked at 5-year returns, which is closer to the duration of typical Vanguard intermediate-term bond funds, like TBM.

SEC yield is a reasonable approximation of initial YTM, with the 30-day averaging causing a bit of difference. As you'll see if you read that entire thread, the subsequent 5-year or 10-year annualized return can easily be +/- 0.5 percentage points compared to initial SEC yield, and can even be more than +/- 1 pp. So based in history, with an initial SEC yield of 2.5%, it would be reasonable to expect a subsequent 5-year or 10-year annualized return of 2.0% to 3.0%, and possibly even 1.5% to 3.5%.

So it depends what you mean by accurate. While the ranges don't seem really wide to some people when looking at annualized returns, when looking at total compounded return over 10 years, the ranges look pretty wide to me; i.e., a total compounded 10-year return of 15% seems quite different to me than one of 35% (really more like 16% to 41% with compounding).

This just reinforces the point made upthread that expected return is the mean value of an expected distribution of returns, so we shouldn't be surprised if realized returns are higher or lower than expected return considering the potential distribution of returns. And we don't really even know the mean or distribution of future returns, since we don't know the future path of bond yields. The history available to us for Vanguard bond funds is pretty much all during a period when yields were generally declining, so higher past yields led to higher returns. The realized returns tended to be higher more often than they were lower compared to initial SEC yield, and although some of this is explained by a generally positively-sloped yield curve, we might see something different if we were to see a multi-year period of rising yields in the future.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Post Reply