DCA falling bond funds?

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InvestInLife
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DCA falling bond funds?

Post by InvestInLife » Wed Mar 14, 2018 12:49 am

Does it make sense to DCA my Long-Term Treasury fund (FLBAX) as it falls? What about REITs?
Some say it is a foolish notion in a season of rising interest rates. Others say yes, focus on the long-term and keep it to better diversify a portfolio that is 85% stocks. The newbie in me is tired and sad from selling new equities at a loss for the sake of tidying up my portfolio.

mega317
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Re: DCA falling bond funds?

Post by mega317 » Wed Mar 14, 2018 2:19 am

I'm afraid you're going to have to clarify what you intend to do. Usually DCA around here means investing a lump sum over time rather than all at once. Those who say "focus on the long term" would typically say no. And would also say that long-term bonds and especially REITs are not the best way to diversify a stock-heavy portfolio. Your last sentence has me baffled.

magneto
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Re: DCA falling bond funds?

Post by magneto » Wed Mar 14, 2018 3:18 am

InvestInLife wrote:
Wed Mar 14, 2018 12:49 am
The newbie in me is tired and sad from selling new equities at a loss for the sake of tidying up my portfolio.
Something seems to be horribly wrong with the Investment Plan. :?
See previous post, esp re Bond duration.
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TwstdSista
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Re: DCA falling bond funds?

Post by TwstdSista » Wed Mar 14, 2018 3:28 am

Just to clarify your question -- you want to know about DCAing into long term bonds and REITs?

I have no answer for you as I don't invest in either.... (I use a total bond fund and own a home, that's good enough for me)

InvestInLife
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Re: DCA falling bond funds?

Post by InvestInLife » Wed Mar 14, 2018 9:02 am

By DCA I mean dollar-cost averaging, by continuing to invest over time as prices fall in Long-term bonds.
So many people warn to just get out of Long-term bonds during a period of rising interest rates. But I wonder if staying in and buying on the cheap will help long term, or if bailing really is the right move.

livesoft
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Re: DCA falling bond funds?

Post by livesoft » Wed Mar 14, 2018 9:13 am

Actually, many people warn against owning long bonds in the first place. The hint was given by other responders that one should not be invested in long duration bonds without a good reason. Most prefer intermediate-term bonds on this forum over long-term bonds. And some prefer short-term bonds. The folks who use long-term bonds like you are few and far between.
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InvestInLife
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Re: DCA falling bond funds?

Post by InvestInLife » Wed Mar 14, 2018 9:41 am

Livesoft, your point is at the root of my question.
I own LTB because I have read on here multiple times that it is a better diversifier for higher stock allocated portfolios. Also, performance of LTB is better over time than TBM.

If this specific season is an unpopular one to own LTB, I wonder if continuing to buy as prices fall is a good long term strategy, as it would be for stocks, or not and should be sold at a loss.

livesoft
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Re: DCA falling bond funds?

Post by livesoft » Wed Mar 14, 2018 9:59 am

I cannot help you if you have already read up on things. I will state that the Boglehead conventional wisdom is often dogmatically to a fault not always the best advice. So when you ask a question that can be only answered with opinions, the sum of the opinions is often not satisfying and doesn't get you anywhere further.
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mega317
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Re: DCA falling bond funds?

Post by mega317 » Wed Mar 14, 2018 12:00 pm

We can also add to this rather unproductive conversation that in a portfolio of 85% stocks, it doesn't really matter at all what you do with your bonds.

And I think we're being a little loose with the use of diversify. Adding anything that's not stocks will be more diverse than holding only stocks. So if your 15% is long bonds, short bonds, dollar bills under the mattress, gold, or stamps, it's more diverse. The first four at least have no correlation to stocks.

InvestInLife
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Re: DCA falling bond funds?

Post by InvestInLife » Wed Mar 14, 2018 12:21 pm

I am not just looking for other peoples' expressions of personal preferences, but rather to increase my understanding of what bond funds do. Bonds are an asset I have read about, but have been slow to grasp. If someone were to tell me, "stocks are low, and might go lower; now is the time to sell," I would, based on boglehead wisdom, do the opposite and continue to buy as prices decline. But since the recommendation to sell bond funds is widespread even among Bogleheads, I am giving it my full attention, and asking for reasons why.

As to it not mattering what I do with 15% of my portfolio, I disagree. 15% is a significant portion of anyone's net worth, and I want to get my bond allocation right, and learn more in the process.

Da5id
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Re: DCA falling bond funds?

Post by Da5id » Wed Mar 14, 2018 12:29 pm

InvestInLife wrote:
Wed Mar 14, 2018 12:21 pm
But since the recommendation to sell bond funds is widespread even among Bogleheads, I am giving it my full attention, and asking for reasons why.
Hmm. Not sure I agree that it is widespread at all. I'd say 60% stocks/40% bonds (or thereabouts) is pretty typical boglehead portfolio. Perhaps you are seeing the postings of a few strongly anti bond folks repeatedly and thinking that the "sell bonds" or "avoid bonds" mentality is widespread?

If you want to understand bond funds behavior and purpose in a nutshell, put them up on portfoliovisualizer along with stock funds. See the relative stability but poorer return of bond funds. Compare mixtures. And know things may be different going forward (always worth considering).

Many here think long bonds are a bad idea, as the yield premium over intermediate term bonds is pretty small and the risk/volatility high. Many here think stretching for yield with junk is unwise for the same reason. I don't have much wisdom about bonds, have gone with the consensus myself.

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goingup
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Re: DCA falling bond funds?

Post by goingup » Wed Mar 14, 2018 1:02 pm

InvestInLife wrote:
Wed Mar 14, 2018 12:21 pm
But since the recommendation to sell bond funds is widespread even among Bogleheads, I am giving it my full attention, and asking for reasons why.
I think you have misinterpreted.

The conventional wisdom is hold good intermediate bond funds. Maybe some short-term. Perhaps some folks like a slice of long term, but that's not as common.

mega317
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Re: DCA falling bond funds?

Post by mega317 » Wed Mar 14, 2018 1:10 pm

InvestInLife wrote:
Wed Mar 14, 2018 12:21 pm
But since the recommendation to sell bond funds is widespread even among Bogleheads, I am giving it my full attention, and asking for reasons why.
I don't think this is true. There have been a lot of posts asking about selling bonds, moving to shorter duration or CDs or whatever, and the most experienced posters here say something like "no". Someone recently called their bond funds a "bottomless pit". From a recent peak in September, Vanguard Total Bond Index is down like 2%.
As to it not mattering what I do with 15% of my portfolio, I disagree. 15% is a significant portion of anyone's net worth, and I want to get my bond allocation right, and learn more in the process.
I don't mean it's not a significant portion of your money. I mean trying to optimize among types of investment-grade bonds is not likely to yield any significant difference. Let's say you were in a high-yield savings account earning 1.5%, and I was in total bond losing 2%. Our total portfolios are 0.25% different over the last 6 months. The stock portion of your portfolio is gaining and losing that much every day.

InvestInLife
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Re: DCA falling bond funds?

Post by InvestInLife » Wed Mar 14, 2018 4:20 pm

Da5id wrote:
Wed Mar 14, 2018 12:29 pm
InvestInLife wrote:
Wed Mar 14, 2018 12:21 pm
But since the recommendation to sell bond funds is widespread even among Bogleheads, I am giving it my full attention, and asking for reasons why.
Hmm. Not sure I agree that it is widespread at all. I'd say 60% stocks/40% bonds (or thereabouts) is pretty typical boglehead portfolio. Perhaps you are seeing the postings of a few strongly anti bond folks repeatedly and thinking that the "sell bonds" or "avoid bonds" mentality is widespread?

If you want to understand bond funds behavior and purpose in a nutshell, put them up on portfoliovisualizer along with stock funds. See the relative stability but poorer return of bond funds. Compare mixtures. And know things may be different going forward (always worth considering).

Many here think long bonds are a bad idea, as the yield premium over intermediate term bonds is pretty small and the risk/volatility high. Many here think stretching for yield with junk is unwise for the same reason. I don't have much wisdom about bonds, have gone with the consensus myself.

I think I get it: the volatility seen in long-term bonds may as well be held in stocks, which have greater returns.
I believe awareness of this volatility is why I am considering that if one does hold long-term bonds, then yes it is good to continue rebalancing them over time, which forces me to buy them now as they are dropping, then sell when they rise. Rather than naively dumping them since they are expected to lower in value in the near term as interest rates rise.

PortfolioVisualizer is how I initially chose long-term bonds; I figured if I were going to hold bonds, I may as well hold the asset which has greater longer term returns. I now understand that such returns are not guaranteed, and carry with them higher volatility.

pascalwager
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Re: DCA falling bond funds?

Post by pascalwager » Thu Mar 15, 2018 7:36 pm

mega317 wrote:
Wed Mar 14, 2018 2:19 am
I'm afraid you're going to have to clarify what you intend to do. Usually DCA around here means investing a lump sum over time rather than all at once. Those who say "focus on the long term" would typically say no. And would also say that long-term bonds and especially REITs are not the best way to diversify a stock-heavy portfolio. Your last sentence has me baffled.
Long-term bonds may be suitable at 15% of portfolio since the overall portfolio volatility is largely determined by the 85% stocks. Larry Swedroe covers this in one of his books.

pascalwager
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Re: DCA falling bond funds?

Post by pascalwager » Fri Mar 16, 2018 1:32 am

At 85/15, long bonds provide the highest expected portfolio return and also highest Sharpe ratio (Larry Swedroe).

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dodecahedron
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Re: DCA falling bond funds?

Post by dodecahedron » Fri Mar 16, 2018 3:20 am

pascalwager wrote:
Fri Mar 16, 2018 1:32 am
At 85/15, long bonds provide the highest expected portfolio return and also highest Sharpe ratio (Larry Swedroe).
How old are these Swedroe books you cite? The current yield curve looks very different now than through most of the period Larry used in his calculations.

pascalwager
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Re: DCA falling bond funds?

Post by pascalwager » Fri Mar 16, 2018 11:19 pm

dodecahedron wrote:
Fri Mar 16, 2018 3:20 am
pascalwager wrote:
Fri Mar 16, 2018 1:32 am
At 85/15, long bonds provide the highest expected portfolio return and also highest Sharpe ratio (Larry Swedroe).
How old are these Swedroe books you cite? The current yield curve looks very different now than through most of the period Larry used in his calculations.
The book is from 2010, but wouldn't Larry's in-house study cover a long-term interval and many yield curves? But right now, there doesn't appear to be much of a term premium for using LTB.

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dodecahedron
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Re: DCA falling bond funds?

Post by dodecahedron » Sat Mar 17, 2018 10:06 am

pascalwager wrote:
Fri Mar 16, 2018 11:19 pm
dodecahedron wrote:
Fri Mar 16, 2018 3:20 am
pascalwager wrote:
Fri Mar 16, 2018 1:32 am
At 85/15, long bonds provide the highest expected portfolio return and also highest Sharpe ratio (Larry Swedroe).
How old are these Swedroe books you cite? The current yield curve looks very different now than through most of the period Larry used in his calculations.
The book is from 2010, but wouldn't Larry's in-house study cover a long-term interval and many yield curves? But right now, there doesn't appear to be much of a term premium for using LTB.
I would imagine Larry's in-house study might have covered a long-term interval, but I personally don't feel comfortable with the validity of extrapolating from many decades in the past to the current environment. The interest rates observed over the past decade were not ones I expected to see in my lifetime.

There are unprecedented conditions now, things that did not exist in the past, which makes me very cautious about extrapolation to the future. Unless I had long-term fixed nominal liabilities (which I don't), I can't see any case for buying long-term nominal bonds.

Larry's data came mostly from times when no inflation-protected bonds existed, when central bankers did not contemplate negative nominal interest rates, when nobody thought of the possibility of long term deflation, when transactions costs were much higher and far more bonds were purchased and simply held to maturity, just to name a few things. During most of the post-WW II period, investors simply did not contemplate the possibility of the recent deflationary times. In this electronic era of cellphone transactions and bitcoin, the whole concept of "what constitutes money" is in flux. The proportion of US Treasury instruments owned by foreign investors is much higher now than it was throughout most of the decades Larry studied.

Greg in Idaho
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Re: DCA falling bond funds?

Post by Greg in Idaho » Sun Mar 18, 2018 9:54 am

I happened to liquidate my bond holdings when prices were at a peak (summer 2016), and have been DCAing back into them since, buying clear dips (but not into long bonds).

I am going to keep doing so...and will keep reading posts from Nispirius, who has what I find to be the most compelling accounts of why to hold bonds, and why not to fear rising rates/falling prices too much. You might do well to read in that direction...

Call_Me_Op
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Re: DCA falling bond funds?

Post by Call_Me_Op » Sun Mar 18, 2018 11:21 am

InvestInLife wrote:
Wed Mar 14, 2018 12:49 am
Does it make sense to DCA my Long-Term Treasury fund (FLBAX) as it falls?
Would you buy an individual 30-year bond paying 3%? If not, you should not be in that fund.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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