Vanguard Junk Bond fund

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mikebee
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Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 9:53 am

Less risk than the Vanguard S&P 500 fund, virtually no defaults in the past 10 years, duration of of only 4.4 years, a yield of 5.5%+ and a great active manager with a proven track record who buys conservatively.
Totally anti- Boglehead I know but what's not to like ?
Genuinely puzzled.

aristotelian
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Re: Vanguard Junk Bond fund

Post by aristotelian » Tue May 15, 2018 10:00 am

More risk and higher correlation to stocks than US Treasuries or Total Bond Market. I would consider it only as an "alternative" and not a substitute for your bond allocation.

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Tyler Aspect
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Re: Vanguard Junk Bond fund

Post by Tyler Aspect » Tue May 15, 2018 10:04 am

The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
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drk
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Re: Vanguard Junk Bond fund

Post by drk » Tue May 15, 2018 10:07 am

mikebee wrote:
Tue May 15, 2018 9:53 am
virtually no defaults in the past 10 years
I reckon that that might have something to do with the fact that the last ten years have seen the second-longest economic expansion in US history. Corporate leverage is high, the Fed holds about $4 trillion in assets and intends to push the risk-free rate higher, and the Treasury is issuing record amounts of debt to fund expansionary policy. At some point, those junk-issuing companies can expect a ruder greeting in the debt markets.

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Re: Vanguard Junk Bond fund

Post by Nate79 » Tue May 15, 2018 10:20 am

I assume we are talking about VWEHX? How did this fund hold up in 2008? Oh that's right, it dropped about 30% in the market crash. Now that is some stability right there.....

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:21 am

Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility. I want income. If the stock market tanks then the yield will probably rise as happened in 2009 thus compensating for principal loss. Then recovering, look at the price over that period, no cause for concern and more income to spend surely ?

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Re: Vanguard Junk Bond fund

Post by alfaspider » Tue May 15, 2018 10:22 am

mikebee wrote:
Tue May 15, 2018 10:21 am
Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility.
Then why not just keep it in equities? If you want income, just sell the equities as needed.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:24 am

drk wrote:
Tue May 15, 2018 10:07 am
mikebee wrote:
Tue May 15, 2018 9:53 am
virtually no defaults in the past 10 years
I reckon that that might have something to do with the fact that the last ten years have seen the second-longest economic expansion in US history. Corporate leverage is high, the Fed holds about $4 trillion in assets and intends to push the risk-free rate higher, and the Treasury is issuing record amounts of debt to fund expansionary policy. At some point, those junk-issuing companies can expect a ruder greeting in the debt markets.
I am sure you are right but this is not an index fund so the manager's conservatve investing might reduce the pain.

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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:31 am

Nate79 wrote:
Tue May 15, 2018 10:20 am
I assume we are talking about VWEHX? How did this fund hold up in 2008? Oh that's right, it dropped about 30% in the market crash. Now that is some stability right there.....
VWEAX. I did not claim it was stable. So the principal dropped, yes but recovered fast. Stable over the long term surely ? Do not make the mistake of confusing loss of money with volatility. The income at that time was very stable, actually increased.

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Rick Ferri
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Re: Vanguard Junk Bond fund

Post by Rick Ferri » Tue May 15, 2018 10:32 am

From a recent post on this forum:
Electron wrote:I should have noted that the link I posted with comments by Rick Ferri was posted in March 2008. It is very interesting to read the thread in that context and there are also a number of comments by Larry Swedroe. Rick Ferri made a projection of 7.2% for future returns in the fund. I just checked Morningstar and the ten year return is shown as 6.91%.


The 0.3% difference in annualized 10-year return between my 7.2% projected and 6.9% actual was the roll-down in return on income reinvestment over the past five years as interest rates fell. It was not due to greater defaults. Going forward, we may see that reverse as rates rise. Hence, a fair projection for VWEAX over the next ten years is approximately 4.0% (5.2% yield - 1.5% principal loss + 0.3% roll-up in yield reinvestment.)

This isn’t much higher than a 3.5% expected return from the Vanguard Intermediate-term Corporate Bond Fund (VICSX). But be careful here. It’s not a straight credit risk decision. The duration (interest rate risk) of VICSX is higher than VWEAX by about 1.8 years, so you’re substituting credit risk for interest rate risk.
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mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:33 am

alfaspider wrote:
Tue May 15, 2018 10:22 am
mikebee wrote:
Tue May 15, 2018 10:21 am
Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility.
Then why not just keep it in equities? If you want income, just sell the equities as needed.
Good idea. Just sell the equities when the market drops 50%. I dont think so.

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Re: Vanguard Junk Bond fund

Post by AlohaJoe » Tue May 15, 2018 10:35 am

Nate79 wrote:
Tue May 15, 2018 10:20 am
I assume we are talking about VWEHX? How did this fund hold up in 2008? Oh that's right, it dropped about 30% in the market crash. Now that is some stability right there.....
VWEAX dropped the same amount a 60/40 portfolio did. Actually, it dropped slightly less. A 60/40 portfolio dropped -30.72% while VWEAX dropped -28.76%. Do we go around telling people that a 60/40 portfolio isn't a good idea?

In any case, the OP didn't really give any indication what she actually meant. Maybe she means to go 100% VWEAX instead of having any TSM. Or maybe she means to go 60% VWEAX + 40% TBM. No indication of investing strategy was actually given, so it is hard to know what to say. Maybe she plans on buying 140% VWEAX on margin?

Going by Sharpe ratio, 100% VWEAX is clearly superior to a 60/40 portfolio.

Portfolio 1: 100% TSM
Portfolio 2: 100% VWEAX
Portfolio 3: 60/40 TSM/TBM

Image

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Tyler Aspect
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Re: Vanguard Junk Bond fund

Post by Tyler Aspect » Tue May 15, 2018 10:37 am

mikebee wrote:
Tue May 15, 2018 10:21 am
Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility. I want income. If the stock market tanks then the yield will probably rise as happened in 2009 thus compensating for principal loss. Then recovering, look at the price over that period, no cause for concern and more income to spend surely ?
Stability is always a concern regardless of portfolio size, because potential return and risk are correlated. You should only invest according to the amount of risk that you can take.

Here is a good video series on bonds.

https://www.youtube.com/watch?v=ZFRReCL_lLw
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.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:41 am

Rick Ferri wrote:
Tue May 15, 2018 10:32 am
From a recent post on this forum:
Electron wrote:I should have noted that the link I posted with comments by Rick Ferri was posted in March 2008. It is very interesting to read the thread in that context and there are also a number of comments by Larry Swedroe. Rick Ferri made a projection of 7.2% for future returns in the fund. I just checked Morningstar and the ten year return is shown as 6.91%.


The 0.3% difference in annualized 10-year return between my 7.2% projected and 6.9% actual was the roll-down in return on income reinvestment over the past five years as interest rates fell. It was not due to greater defaults. Going forward, we may see that reverse as rates rise. Hence, a fair projection for VWEAX over the next ten years is approximately 4.0% (5.2% yield - 1.5% principal loss + 0.3% roll-up in yield reinvestment.)

This isn’t much higher than a 3.5% expected return from the Vanguard Intermediate-term Corporate Bond Fund (VICSX). But be careful here. It’s not a straight credit risk decision. The duration (interest rate risk) of VICSX is higher than VWEAX by about 1.8 years, so you’re substituting credit risk for interest rate risk.
Thanks. Food for thought there. But I have a gut feeling that skilled choice of bonds is essential whereas VICSX is an index fund so commited to have no choice in bond quality ?

alfaspider
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Re: Vanguard Junk Bond fund

Post by alfaspider » Tue May 15, 2018 10:44 am

mikebee wrote:
Tue May 15, 2018 10:33 am
alfaspider wrote:
Tue May 15, 2018 10:22 am
mikebee wrote:
Tue May 15, 2018 10:21 am
Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility.
Then why not just keep it in equities? If you want income, just sell the equities as needed.
Good idea. Just sell the equities when the market drops 50%. I dont think so.
But OP just said volatility is not an issue. At least selling equities at a loss has a tax benefit. Interest payments on a bond that has dropped by 50% in value are still fully taxable.

DarkHelmetII
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Re: Vanguard Junk Bond fund

Post by DarkHelmetII » Tue May 15, 2018 10:47 am

Key reason I personally am not interested in junk bonds is medium-high correlation to market (as others have pointed out). Looking at long-term treasures or corporate bonds ... they of course have the increased interested rate sensitivity but much lower market correlation. So long-term bonds in that sense are not necessarily "safe" but the very low market correlation makes them an attractive (in my opinion) addition to further diversify a portfolio.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:52 am

AlohaJoe wrote:
Tue May 15, 2018 10:35 am
Nate79 wrote:
Tue May 15, 2018 10:20 am
I assume we are talking about VWEHX? How did this fund hold up in 2008? Oh that's right, it dropped about 30% in the market crash. Now that is some stability right there.....
VWEAX dropped the same amount a 60/40 portfolio did. Actually, it dropped slightly less. A 60/40 portfolio dropped -30.72% while VWEAX dropped -28.76%. Do we go around telling people that a 60/40 portfolio isn't a good idea?

In any case, the OP didn't really give any indication what she actually meant. Maybe she means to go 100% VWEAX instead of having any TSM. Or maybe she means to go 60% VWEAX + 40% TBM. No indication of investing strategy was actually given, so it is hard to know what to say. Maybe she plans on buying 140% VWEAX on margin?

Going by Sharpe ratio, 100% VWEAX is clearly superior to a 60/40 portfolio.

Portfolio 1: 100% TSM
Portfolio 2: 100% VWEAX
Portfolio 3: 60/40 TSM/TBM

Image
Good points, thanks. Your charts are from the past of course. Future might well be totally different. I am of the age that I am only concerned with income, it's no good to me if the stock market crashes but recovers in 10 years, just too risky for me. Please address my original question as to what is wrong with VWEAX for generating an income stream to be spent.
I dont think there are many women called Mike lol

GibsonL6s
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Re: Vanguard Junk Bond fund

Post by GibsonL6s » Tue May 15, 2018 10:56 am

I looked at portfoliovisualizer and from 2000 it beat the S&P index with a lower standard deviation. I have always thought that there is something to the income component that many overlook. I would personally look at junk bonds like pref stock and convertible bonds as a portion of the equity allocation not a bond substitute.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:57 am

alfaspider wrote:
Tue May 15, 2018 10:44 am
mikebee wrote:
Tue May 15, 2018 10:33 am
alfaspider wrote:
Tue May 15, 2018 10:22 am
mikebee wrote:
Tue May 15, 2018 10:21 am
Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility.
Then why not just keep it in equities? If you want income, just sell the equities as needed.
Good idea. Just sell the equities when the market drops 50%. I dont think so.
But OP just said volatility is not an issue. At least selling equities at a loss has a tax benefit. Interest payments on a bond that has dropped by 50% in value are still fully taxable.
True but would not the income from the bond have risen 50% so mitigating the higher tax rate ?

mptfan
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Re: Vanguard Junk Bond fund

Post by mptfan » Tue May 15, 2018 10:57 am

mikebee wrote:
Tue May 15, 2018 10:52 am
I am of the age that I am only concerned with income, it's no good to me if the stock market crashes but recovers in 10 years, just too risky for me. Please address my original question as to what is wrong with VWEAX for generating an income stream to be spent.
In my opinion there is nothing wrong with that. You will find that Bogleheads in general are very conservative in their investing philosophy, and one aspect of that very conservative philosophy is the oft repeated mantra that "bonds are for safety" as if to imply that there are no other reasons to invest in bonds. There is nothing wrong with having a very conservative investment philosophy, but in my opinion it goes too far in this context, and I don't subscribe to the "bonds are for safety" mantra. Yes, bonds can be for safety, but bonds are for income too, not to mention added diversification. Most of my bond allocation is in the Vanguard high yield bond fund and I sleep very well at night and I happily reinvest my monthly dividend payments.

By the way, I suggest that you refer to the fund using it's actual name, which is the Vanguard High Yield Corporate Bond Fund. By calling it a "junk bond fund" you are adopting derogatory words used by other people and by doing that you have already lost the argument because your own words describe your own investment as junk.
Last edited by mptfan on Tue May 15, 2018 3:13 pm, edited 6 times in total.

alfaspider
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Re: Vanguard Junk Bond fund

Post by alfaspider » Tue May 15, 2018 10:58 am

mikebee wrote:
Tue May 15, 2018 10:57 am
alfaspider wrote:
Tue May 15, 2018 10:44 am
mikebee wrote:
Tue May 15, 2018 10:33 am
alfaspider wrote:
Tue May 15, 2018 10:22 am
mikebee wrote:
Tue May 15, 2018 10:21 am


Not always so. My investments are large enough for me to be unconcerned about stability or volatility.
Then why not just keep it in equities? If you want income, just sell the equities as needed.
Good idea. Just sell the equities when the market drops 50%. I dont think so.
But OP just said volatility is not an issue. At least selling equities at a loss has a tax benefit. Interest payments on a bond that has dropped by 50% in value are still fully taxable.
True but would not the income from the bond have risen 50% so mitigating the higher tax rate ?
Not necessarily. In the 2008 crash, interest rates declined along with bond values.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 10:59 am

DarkHelmetII wrote:
Tue May 15, 2018 10:47 am
Key reason I personally am not interested in junk bonds is medium-high correlation to market (as others have pointed out). Looking at long-term treasures or corporate bonds ... they of course have the increased interested rate sensitivity but much lower market correlation. So long-term bonds in that sense are not necessarily "safe" but the very low market correlation makes them an attractive (in my opinion) addition to further diversify a portfolio.
But why worry about the correlation with stocks as long as the income stream from the bond fund is sustained and even increasing ?

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Re: Vanguard Junk Bond fund

Post by AJS » Tue May 15, 2018 11:03 am

Why would an investor care if the value drops if the investment purpose is just to receive income? With no intention to ever sell shares.
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mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 11:06 am

AJS wrote:
Tue May 15, 2018 11:03 am
Why would an investor care if the value drops if the investment purpose is just to receive income? With no intention to ever sell shares.
Thanks, my point. OP

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Rick Ferri
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Re: Vanguard Junk Bond fund

Post by Rick Ferri » Tue May 15, 2018 11:08 am

mikebee wrote:
Tue May 15, 2018 10:41 am
I have a gut feeling that skilled choice of bonds is essential whereas VICSX is an index fund so committed to have no choice in bond quality ?
I'm not so sure about that and it would be an anomaly if true. Fund managers rarely add alpha after fees. All risks being known and equal, an extremely low-cost index bond index should outperform low-cost active bond funds.
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DarkHelmetII
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Re: Vanguard Junk Bond fund

Post by DarkHelmetII » Tue May 15, 2018 11:12 am

mikebee wrote:
Tue May 15, 2018 10:59 am
DarkHelmetII wrote:
Tue May 15, 2018 10:47 am
Key reason I personally am not interested in junk bonds is medium-high correlation to market (as others have pointed out). Looking at long-term treasures or corporate bonds ... they of course have the increased interested rate sensitivity but much lower market correlation. So long-term bonds in that sense are not necessarily "safe" but the very low market correlation makes them an attractive (in my opinion) addition to further diversify a portfolio.
But why worry about the correlation with stocks as long as the income stream from the bond fund is sustained and even increasing ?
Fair point. Guess I am viewing it from a wealth accumulation phase as opposed to income generation / drawdown phase.

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Rick Ferri
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Re: Vanguard Junk Bond fund

Post by Rick Ferri » Tue May 15, 2018 11:16 am

AJS wrote:
Tue May 15, 2018 11:03 am
Why would an investor care if the value drops if the investment purpose is just to receive income? With no intention to ever sell shares.
Only to the extent that taking the entire SEC yield from a high yield corporate bond fund means you're taking out some principle, so your remaining investment value declines over time and consequently your income from that investment also declines.

The Vanguard High-Yield Corporate Fund Admiral Shares (VWEAX) current SEC yield is 5.67%. This isn't the expected long-term return. Downgrades will erode the principle. To maintain principle, all else being equal, I'd recommend taking no more than a 4.5% distribution.

Rick Ferri
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alex_686
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Re: Vanguard Junk Bond fund

Post by alex_686 » Tue May 15, 2018 11:20 am

Rick Ferri wrote:
Tue May 15, 2018 11:08 am
mikebee wrote:
Tue May 15, 2018 10:41 am
I have a gut feeling that skilled choice of bonds is essential whereas VICSX is an index fund so committed to have no choice in bond quality ?
I'm not so sure about that and it would be an anomaly if true. Fund managers rarely add alpha after fees. All risks being known and equal, an extremely low-cost index bond index should outperform low-cost active bond funds.
I will modestly take the other side. The above is true if we have a high quality index. That is, if the underlying market is liquid resulting in high quality pricing data. Inability to front run. etc. Bond indexes are of lower quality than stock indexes, high yield is of even lower quality.

IIRC, the Vanguard High-Yield Corporate Fund does not strictly follow a index yet it seems to do pretty well.

One last thought, bonds are not for stability and safety. There are many time periods where bonds have outpaced stocks. One wants the most efficient portfolio - best risk adjusted return. Don't look at assets is isolation, look at how they work together in your portfolio.

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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 11:27 am

alfaspider wrote:
Tue May 15, 2018 10:58 am
mikebee wrote:
Tue May 15, 2018 10:57 am
alfaspider wrote:
Tue May 15, 2018 10:44 am
mikebee wrote:
Tue May 15, 2018 10:33 am
alfaspider wrote:
Tue May 15, 2018 10:22 am


Then why not just keep it in equities? If you want income, just sell the equities as needed.
Good idea. Just sell the equities when the market drops 50%. I dont think so.
But OP just said volatility is not an issue. At least selling equities at a loss has a tax benefit. Interest payments on a bond that has dropped by 50% in value are still fully taxable.
True but would not the income from the bond have risen 50% so mitigating the higher tax rate ?
Not necessarily. In the 2008 crash, interest rates declined along with bond values.
Yes everything declined with one exception. Bond payout rates rocketed so my point is valid.

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Re: Vanguard Junk Bond fund

Post by Valuethinker » Tue May 15, 2018 11:33 am

mikebee wrote:
Tue May 15, 2018 9:53 am
Less risk than the Vanguard S&P 500 fund, virtually no defaults in the past 10 years, duration of of only 4.4 years, a yield of 5.5%+ and a great active manager with a proven track record who buys conservatively.
Totally anti- Boglehead I know but what's not to like ?
Genuinely puzzled.
The reason there is almost no default is that the fund will sell bonds before they get to default. As a fund investor you have taken most of the pain of default already when the fund sells (the price will reflect the market's expectations of default).

Note the NAV of this fund has been falling over the long run? In effect, you are having your capital paid out as income.

If you look at the performance of this fund in 2008-09, this was not a fun ride. It is less "junk"-ie than many other funds of this type, is conservatively run. But it still took an awful lot of pain. Behaving much more like an equity fund than a bond fund.

In portfolio terms:

- you have cut your benefits from diversification due to higher correlation between your bonds and equities in your portfolio
- it is quite tax inefficient (vs an equity/ high grade bond fund combination) because of the high payouts

10 year numbers are not particularly helpful given the 10 year number is nearing the date of the Lehman Crash. By this time in 2008, Bear Sterns had already been sold for scrap to JP Morgan, we knew we were in considerable trouble, the conservatorship of FNMA and FMAC lay just ahead, and the reef of Lehman Brothers was lying just below the surface of the water, with ship of the world financial system headed straight towards it ....

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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 11:37 am

Rick Ferri wrote:
Tue May 15, 2018 11:16 am
AJS wrote:
Tue May 15, 2018 11:03 am
Why would an investor care if the value drops if the investment purpose is just to receive income? With no intention to ever sell shares.
Only to the extent that taking the entire SEC yield from a high yield corporate bond fund means you're taking out some principle, so your remaining investment value declines over time and consequently your income from that investment also declines.

The Vanguard High-Yield Corporate Fund Admiral Shares (VWEAX) current SEC yield is 5.67%. This isn't the expected long-term return. Downgrades will erode the principle. To maintain principle, all else being equal, I'd recommend taking no more than a 4.5% distribution.

Rick Ferri
By "downgrades" do you mean defaulting bonds ? Are there other causes of loss of principal apart from rising interest rates ?
VWEAX has a stellar record of near zero defaults.
If interest rates are set to rise over the near future why do you say the expected long term return is expected to decline ? I guess you mean total return, but the income stream will increase with the general rise in interest rates - no ?

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 1:31 pm

Valuethinker wrote:
Tue May 15, 2018 11:33 am
mikebee wrote:
Tue May 15, 2018 9:53 am
Less risk than the Vanguard S&P 500 fund, virtually no defaults in the past 10 years, duration of of only 4.4 years, a yield of 5.5%+ and a great active manager with a proven track record who buys conservatively.
Totally anti- Boglehead I know but what's not to like ?
Genuinely puzzled.
The reason there is almost no default is that the fund will sell bonds before they get to default. As a fund investor you have taken most of the pain of default already when the fund sells (the price will reflect the market's expectations of default).

Note the NAV of this fund has been falling over the long run? In effect, you are having your capital paid out as income.

If you look at the performance of this fund in 2008-09, this was not a fun ride. It is less "junk"-ie than many other funds of this type, is conservatively run. But it still took an awful lot of pain. Behaving much more like an equity fund than a bond fund.

In portfolio terms:

- you have cut your benefits from diversification due to higher correlation between your bonds and equities in your portfolio
- it is quite tax inefficient (vs an equity/ high grade bond fund combination) because of the high payouts

10 year numbers are not particularly helpful given the 10 year number is nearing the date of the Lehman Crash. By this time in 2008, Bear Sterns had already been sold for scrap to JP Morgan, we knew we were in considerable trouble, the conservatorship of FNMA and FMAC lay just ahead, and the reef of Lehman Brothers was lying just below the surface of the water, with ship of the world financial system headed straight towards it ....
The share price now is the same as May 2008 so how can you claim that the NAV has declined ?

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Re: Vanguard Junk Bond fund

Post by alex_686 » Tue May 15, 2018 1:53 pm

mikebee wrote:
Tue May 15, 2018 11:37 am
By "downgrades" do you mean defaulting bonds ? Are there other causes of loss of principal apart from rising interest rates ?
VWEAX has a stellar record of near zero defaults.
First, how can you tell if VWEAX has had zero defaults?

I will extend in 2 different ways. The past 10 years have been kind to high yield debt and defaults. Also, as have mentioned before, one can see defaults coming. Bonds start at BB, then fall to B. It is fairly easy to sell junk bonds that are falling, for portfolio managers to bury their mistakes.

For your other question, it is a increasing Treasury interest rate, increasing credit spreads, increasing Option Adjusted Spread, and bankruptcy.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 2:38 pm

alex_686 wrote:
Tue May 15, 2018 1:53 pm
mikebee wrote:
Tue May 15, 2018 11:37 am
By "downgrades" do you mean defaulting bonds ? Are there other causes of loss of principal apart from rising interest rates ?
VWEAX has a stellar record of near zero defaults.
First, how can you tell if VWEAX has had zero defaults?

I will extend in 2 different ways. The past 10 years have been kind to high yield debt and defaults. Also, as have mentioned before, one can see defaults coming. Bonds start at BB, then fall to B. It is fairly easy to sell junk bonds that are falling, for portfolio managers to bury their mistakes.

For your other question, it is a increasing Treasury interest rate, increasing credit spreads, increasing Option Adjusted Spread, and bankruptcy.
You can see defaults by reading annual and semiannual reports.
Your last para just boils down to increasing interest rates, we know that, nothing new there surely.
Since 1978 VWEAX has averaged 1% annual drop in NAV, small compared with the high yields. Share price dropped from $10 to $6 in 40 years and no drop in share price in last 10 years.
Very impressive surely ?

dbr
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Re: Vanguard Junk Bond fund

Post by dbr » Tue May 15, 2018 3:55 pm

Dividends are free money fallacy. Look at the return and the risk. TANSTAAFL.

That does not mean high yield bonds cannot be part of a portfolio -- see previous discussions: https://www.google.com/search?sitesearc ... ield+bonds

FactualFran
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Re: Vanguard Junk Bond fund

Post by FactualFran » Tue May 15, 2018 5:02 pm

AJS wrote:
Tue May 15, 2018 11:03 am
Why would an investor care if the value drops if the investment purpose is just to receive income? With no intention to ever sell shares.
An investor who took the income distributions of VWEHX in cash over its history would have cared about the long-term trend. The annual amount of cash would have increased every year from 1979 (the first full year of the fund) to 1983. The cash during 1983 would have been 6.7% more than for 1979. From 1983 to 2017 the annual amount of cash would have decreased most years. The cash during 2017 would have been 75% less than than for 1983.

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Rick Ferri
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Re: Vanguard Junk Bond fund

Post by Rick Ferri » Tue May 15, 2018 5:28 pm

The NAV can decline for reasons other than default. Bonds can be downgraded and principal lost when sold. Bonds can be bought at a premium to par and will loss principal as they wind down to maturity. Bonds can be called at prices below the purchase price.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Tue May 15, 2018 6:59 pm

FactualFran wrote:
Tue May 15, 2018 5:02 pm
AJS wrote:
Tue May 15, 2018 11:03 am
Why would an investor care if the value drops if the investment purpose is just to receive income? With no intention to ever sell shares.
An investor who took the income distributions of VWEHX in cash over its history would have cared about the long-term trend. The annual amount of cash would have increased every year from 1979 (the first full year of the fund) to 1983. The cash during 1983 would have been 6.7% more than for 1979. From 1983 to 2017 the annual amount of cash would have decreased most years. The cash during 2017 would have been 75% less than than for 1983.
Nothing alarming or very surprising in this record. The 10 year treasury has been in decline since Volker raised the fed rate to 20% in 1981. Has not VWEAX paid out well compared with other bond types since that time ? If, as seems likely, we are in for a long period of interest rate rises then VWEAX dividends will now increase and non-selling holders will be very happy.
.

3funder
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Re: Vanguard Junk Bond fund

Post by 3funder » Tue May 15, 2018 7:12 pm

OP,

It's a fine fund if you wish to invest in it. Suggestion: invest the majority of your fixed income allocation in a core bond fund and use Vanguard's high-yield corporate fund to complement it.

3funder

nyclon
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Re: Vanguard Junk Bond fund

Post by nyclon » Tue May 15, 2018 9:37 pm

mikebee wrote:
Tue May 15, 2018 9:53 am
Less risk than the Vanguard S&P 500 fund, virtually no defaults in the past 10 years, duration of of only 4.4 years, a yield of 5.5%+ and a great active manager with a proven track record who buys conservatively.
Totally anti- Boglehead I know but what's not to like ?
Genuinely puzzled.
CLOs backed by junk bonds were the CDOs that "worked" and made it out of the great recession. They're still working today, very well - issuance has surpassed the pre-crisis levels.

I think junk aka high yield bonds are attractive with the right levered structure and active management. But as a standalone strategy may work as a complementary allocation but not core - passively indexing these is not a great risk/return scenario as many have pointed out above.

venkman
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Re: Vanguard Junk Bond fund

Post by venkman » Tue May 15, 2018 10:07 pm

mikebee wrote:
Tue May 15, 2018 10:57 am
alfaspider wrote:
Tue May 15, 2018 10:44 am
But OP just said volatility is not an issue. At least selling equities at a loss has a tax benefit. Interest payments on a bond that has dropped by 50% in value are still fully taxable.
True but would not the income from the bond have risen 50% so mitigating the higher tax rate ?
Assuming no defaults, the income from the bond would remain unchanged. The yield to a new purchaser of the bond would go up, but that would be irrelevant to someone who already owned it.

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whodidntante
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Re: Vanguard Junk Bond fund

Post by whodidntante » Tue May 15, 2018 10:13 pm

We Bogleheads prefer to lose our money in Vanguard Total Bond Market.

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unclescrooge
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Re: Vanguard Junk Bond fund

Post by unclescrooge » Wed May 16, 2018 12:36 am

mikebee wrote:
Tue May 15, 2018 10:21 am
Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility. I want income. If the stock market tanks then the yield will probably rise as happened in 2009 thus compensating for principal loss. Then recovering, look at the price over that period, no cause for concern and more income to spend surely ?
If u want income, look at Jeffery Gundlach's closed-end high yield fund.

Not a recommendation per se, but I have a 3% allocation.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Wed May 16, 2018 1:46 am

venkman wrote:
Tue May 15, 2018 10:07 pm
mikebee wrote:
Tue May 15, 2018 10:57 am
alfaspider wrote:
Tue May 15, 2018 10:44 am
But OP just said volatility is not an issue. At least selling equities at a loss has a tax benefit. Interest payments on a bond that has dropped by 50% in value are still fully taxable.
True but would not the income from the bond have risen 50% so mitigating the higher tax rate ?
Assuming no defaults, the income from the bond would remain unchanged. The yield to a new purchaser of the bond would go up, but that would be irrelevant to someone who already owned it.
Just not so. The income would go up but the total return would fall.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Wed May 16, 2018 1:51 am

whodidntante wrote:
Tue May 15, 2018 10:13 pm
We Bogleheads prefer to lose our money in Vanguard Total Bond Market.
Why ? Not helpful. Please address OP's first post.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Wed May 16, 2018 1:56 am

unclescrooge wrote:
Wed May 16, 2018 12:36 am
mikebee wrote:
Tue May 15, 2018 10:21 am
Tyler Aspect wrote:
Tue May 15, 2018 10:04 am
The purpose of owning bond is for stability. Junk bonds do not share that attribute during a recession.
Not always so. My investments are large enough for me to be unconcerned about stability or volatility. I want income. If the stock market tanks then the yield will probably rise as happened in 2009 thus compensating for principal loss. Then recovering, look at the price over that period, no cause for concern and more income to spend surely ?
If u want income, look at Jeffery Gundlach's closed-end high yield fund.

Not a recommendation per se, but I have a 3% allocation.
ok thanks for the suggestion but what is the expense ratio ? I am not looking for the highest junk bond return just VWEAX which is a conservatively run Vanguard fund with a good 40 year track record.

Valuethinker
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Re: Vanguard Junk Bond fund

Post by Valuethinker » Wed May 16, 2018 3:56 am

mikebee wrote:
Tue May 15, 2018 1:31 pm
Valuethinker wrote:
Tue May 15, 2018 11:33 am
mikebee wrote:
Tue May 15, 2018 9:53 am
Less risk than the Vanguard S&P 500 fund, virtually no defaults in the past 10 years, duration of of only 4.4 years, a yield of 5.5%+ and a great active manager with a proven track record who buys conservatively.
Totally anti- Boglehead I know but what's not to like ?
Genuinely puzzled.
The reason there is almost no default is that the fund will sell bonds before they get to default. As a fund investor you have taken most of the pain of default already when the fund sells (the price will reflect the market's expectations of default).

Note the NAV of this fund has been falling over the long run? In effect, you are having your capital paid out as income.

If you look at the performance of this fund in 2008-09, this was not a fun ride. It is less "junk"-ie than many other funds of this type, is conservatively run. But it still took an awful lot of pain. Behaving much more like an equity fund than a bond fund.

In portfolio terms:

- you have cut your benefits from diversification due to higher correlation between your bonds and equities in your portfolio
- it is quite tax inefficient (vs an equity/ high grade bond fund combination) because of the high payouts

10 year numbers are not particularly helpful given the 10 year number is nearing the date of the Lehman Crash. By this time in 2008, Bear Sterns had already been sold for scrap to JP Morgan, we knew we were in considerable trouble, the conservatorship of FNMA and FMAC lay just ahead, and the reef of Lehman Brothers was lying just below the surface of the water, with ship of the world financial system headed straight towards it ....
The share price now is the same as May 2008 so how can you claim that the NAV has declined ?
it is not $10.00 which is presumably where the fund was launched at? Therefore it has declined.

The whole argument really boils down to whether credit is a separate return factor (along with liquidity, term, value, size, momentum etc.) and whether you can get paid to take on that risk as an investor. Rick Ferri argues yes, Larry Swedroe has argued that it's not worth it.

AE81
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Re: Vanguard Junk Bond fund

Post by AE81 » Wed May 16, 2018 6:29 am

whodidntante wrote:
Tue May 15, 2018 10:13 pm
We Bogleheads prefer to lose our money in Vanguard Total Bond Market.
:D

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midareff
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Re: Vanguard Junk Bond fund

Post by midareff » Wed May 16, 2018 7:02 am

Nate79 wrote:
Tue May 15, 2018 10:20 am
I assume we are talking about VWEHX? How did this fund hold up in 2008? Oh that's right, it dropped about 30% in the market crash. Now that is some stability right there.....
http://quotes.morningstar.com/chart/fun ... ture=en-US

Start with 5/16/2008. Much bigger drop than Barclays Agg, much less than the S&P500. Caught the Barclay's by 3/12/2010 and the S&P500 didn't catch up until 12/2014. Larry Swedroe says don't own it, Ric Ferri says a small slice of portfolio is AOK.

dbr
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Re: Vanguard Junk Bond fund

Post by dbr » Wed May 16, 2018 8:19 am

In any case you don't pick funds by the yield but by the risk and return. Ferri and Swedroe are discussing the risk and return and how the fund correlates with other assets in a portfolio. Nobody is looking at yield to decide these things except that in taxable high yield costs a lot of money.

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