VBTLX vs. Vanguard Federal Money Market Fund

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
GRS159
Posts: 19
Joined: Fri Oct 06, 2017 1:09 pm

VBTLX vs. Vanguard Federal Money Market Fund

Post by GRS159 » Wed Nov 14, 2018 9:22 am

Hello all.
Last year about this time, I placed $236,000 in VBTLX. Looking at the account today, it is down approx. $10,000 over the years time.

I recently received a mailing from Motley Fool, excerpted here: "Usually, when the stock market is down, bonds are up. Since 1926, there have been only two years when both U.S. large-cap stocks and intermediate-term bonds lost money, and the last time was 1969. Yet 2018 is close to joining that ignominious club.

The Vanguard Total Bond Market ETF is down 2.6% through October, and rising interest rates continue drag down bond prices — a landscape that's unlikely to change soon. According to the CME Fedwatch Tool, there's a 72% chance that the Federal Reserve will vote in December to hike the Fed Funds Rate an additional 25 basis points.

Higher rates are good for bond returns over the intermediate to longer term. At some point, they'll return to their historical performance of returning 2% or more above cash. But in the short term, a diversified bond fund will still face headwinds. Stick with cash (which is now paying 2% or more, if you know where to look) or high-grade individual bonds for money you need to keep absolutely safe."


I'm 62, and will probably be retiring in the next 3 years. My bond holdings are about 40% of my portfolio. So, my question is - as long as it looks like there will be incremental interest rate hikes by the FED, is there a compelling reason to leave these funds in VBTLX, vs. placing them in the VG Fed Money Market Fund?

aristotelian
Posts: 4884
Joined: Wed Jan 11, 2017 8:05 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by aristotelian » Wed Nov 14, 2018 9:42 am

Yes, as stated in the paragraph you quoted, in the intermediate to long term, bonds outperform cash, and nobody knows when interest rates will stop rising. It could be tomorrow if stocks crash for some unanticipated reason.

User avatar
friar1610
Posts: 1312
Joined: Sat Nov 29, 2008 9:52 pm
Location: MA South Shore

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by friar1610 » Wed Nov 14, 2018 12:07 pm

GRS159 wrote:
Wed Nov 14, 2018 9:22 am

I'm 62, and will probably be retiring in the next 3 years. My bond holdings are about 40% of my portfolio. So, my question is - as long as it looks like there will be incremental interest rate hikes by the FED, is there a compelling reason to leave these funds in VBTLX, vs. placing them in the VG Fed Money Market Fund?
I'm not saying this is the only or the most brilliant way to do it, but here's what I've done...

I've put about 3 years worth of RMDs from our previously all-bond fund IRA into CDs and another year into Prime MMF. That way, if rates rise, we'll take our RMDs from the maturing CDs and let the bond fund ride. (The CDs are in maturities and amounts that coincide with the amount we're required to withdraw each year.) If interest rates drop, we have the option of taking the RMDs from the bond fund (VBTLX). I'm not 100% happy with this arrangement because it has made two previously simple IRAs more complex, but it seems that it will give us a little protection no matter which way interest rates go. (The other year in Prime MMF is there just for one more option.)
Friar1610

Dandy
Posts: 5465
Joined: Sun Apr 25, 2010 7:42 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by Dandy » Wed Nov 14, 2018 1:15 pm

the major risk is on the equity side but we all like the fixed income side to be stable. I was never a "put it all in the Total Bond fund" camp. I like a bit of diversity in my fixed income which is about 57% of my portfolio. That being said Total Bond is a good fund should eventually overcome the rising rates.

Since the Fed keeps on saying it intends to raise rates, gradually over time, depending on ...? Rates are likely to go up a bit more. So, I think having some Short Term Bond funds and/or some High yield Savings or Money Market funds can make some sense. When rates stabilize you can decide whether to move it all back to Total bond for simplicity.

Oh, many will say that is market timing. Since the Fed is signaling it still intends to raise rates and it has the authority to do so it and has been doing it-- that is a lot different than following some active manager's/media guru's guess. No guarantees, the Fed could change their approach at any time. Your move --or not.

RCL
Posts: 310
Joined: Sat Jul 05, 2014 2:48 am

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by RCL » Wed Nov 14, 2018 4:02 pm

GRS159 wrote:
Wed Nov 14, 2018 9:22 am
Snipped:

I'm 62, and will probably be retiring in the next 3 years. My bond holdings are about 40% of my portfolio. So, my question is - as long as it looks like there will be incremental interest rate hikes by the FED, is there a compelling reason to leave these funds in VBTLX, vs. placing them in the VG Fed Money Market Fund?
I'm in the keep the $$ in the VBTLX asset boat.

If you planned on holding the shares for over the stated duration of the VBTLX fund, it doesn't make much difference what your current value in the fund is. A lot can happen in 3 years

The general belief in a rising rate environment, is the monthly dividend will increase as the yield goes up due to a lower NAV price, and over time, the NAV price will increase slowly (decreasing the yield) when and if interest rates stabilize.

In the meantime, if you are re-investing the dividends as new shares, you are buying them at a lower price than earlier in the year.

If you move these $$ into the MM now, you are essentially realizing the loss..and if interest rates were to drop, the MM yield will also drop.
A lot of if's to consider for sure :wink:

EDIT: I forgot to ask you your reasoning for buying bonds in the first place...there could be many reasons
It Is Best To Consult Others Before Taking Unusual Actions

GRS159
Posts: 19
Joined: Fri Oct 06, 2017 1:09 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by GRS159 » Fri Nov 16, 2018 9:36 am

Thank you to all who replied.

aristotelian - I'll take that as a vote to keep it simple and stay in VBTLX.

friar1610 - I understand the desire to maintain a keep it simple approach. That said, the options you've chosen seem like a manageable strategy while allowing you some flexibility.

Dandy - Thanks for this perspective. Can you be more specific on your approach to diversifying fixed income?

RCL - At least there's one "if" I can answer, my dividends are being reinvested. The account is an IRA, so yes, I can hold the shares for the stated duration. Reason for buying bonds - to preserve the nest egg and take some volatility out of retirement funds.

betablocker
Posts: 440
Joined: Mon Jan 11, 2016 1:26 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by betablocker » Fri Nov 16, 2018 10:00 am

I think Friar has a good idea. Essentially you are shortening your exposure by blending in money markets and you could also do short term bond funds. That's probably the best approach: diversify across the yield curve.

I personally am using a trend following system where I sell or buy based on momentum and follow the signals each month from Alpha Architect. Obviously a more complicated way to go. You don't get a big downside but you also miss any sudden flight to quality spikes. One word of caution would be all the non treasury debt in Total Bond. It's a lot riskier in my mind.

User avatar
dwickenh
Posts: 1448
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by dwickenh » Fri Nov 16, 2018 10:10 am

VBTLX Total bond is 43.3 Treasury and 64.2 Government backed. Other than a pure treasury fund, that does not sound risky to me. Many complain that it has too much exposure to government issues.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

Dandy
Posts: 5465
Joined: Sun Apr 25, 2010 7:42 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by Dandy » Fri Nov 16, 2018 12:33 pm

Dandy - Thanks for this perspective. Can you be more specific on your approach to diversifying fixed income?
I always had an allocation to cash/cash-like products. In fact, allocations used to be stated as stocks/bonds/cash a few decades back. Then it changed to stocks/bonds - was it because brokers made little or no money on cash? or because cash recently paid almost nothing? Or decades of declining interest rates which stopped. don't know. It helped me avoid debt other than mortgage and allowed me to sleep relatively well despite twice losing my job and having to deal with a loved one with a serious health problem.

There are a variety of fixed income products if you know the benefits and drawbacks of each you can make wise choices. Some do well in inflation, some avoid taxes, some rise when rates rise, some rise when rates decline, some have government guarantees, some pay higher rates, etc. If the purpose of your fixed income is to stabilize your portfolio so you can take the risk on the equity side Total Bond fund is good but isn't the only answer.

I am now 70 and feel I have sufficient assets. My goal is more asset preservation than growth I have a 43/57 allocation. A few years back I roughly adopted Dr. Wm. Bernstein's idea of having 20 years worth of drawdown in "safe" products ( I define as no loss of principal and short term bond funds). That resulted in me having about 1/3 in no loss of principal (CDs, money markets, etc.), about 1/3 in short term bond funds, and a bit more than 1/3 in intermediate bond funds (incl Tips fund).

averagedude
Posts: 349
Joined: Sun May 13, 2018 3:41 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by averagedude » Fri Nov 16, 2018 5:41 pm

Tough question with no known right answer. I would be reluctant to pull out of total bond and realize a loss. There is a possibility that the fed could ease off the gas of raising rates in 2019. There are alot of talking heads debating this issue on all financial media. Also there is a chance that the possible December rate hike is already baked into the bond prices. However if i hadn't rebalanced in a while and my stock allocation was higher than my risk tolerance, i wouldnt put all of my rebalance money in total bond.

User avatar
ruralavalon
Posts: 14250
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by ruralavalon » Fri Nov 16, 2018 5:44 pm

I suggest staying with Vanguard Total Bond Market Index Fund, rather than switch to a money market fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

GRS159
Posts: 19
Joined: Fri Oct 06, 2017 1:09 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by GRS159 » Sun Nov 18, 2018 10:00 am

Dandy wrote:
Fri Nov 16, 2018 12:33 pm
Dandy - Thanks for this perspective. Can you be more specific on your approach to diversifying fixed income?
I always had an allocation to cash/cash-like products. In fact, allocations used to be stated as stocks/bonds/cash a few decades back. Then it changed to stocks/bonds - was it because brokers made little or no money on cash? or because cash recently paid almost nothing? Or decades of declining interest rates which stopped. don't know. It helped me avoid debt other than mortgage and allowed me to sleep relatively well despite twice losing my job and having to deal with a loved one with a serious health problem.

There are a variety of fixed income products if you know the benefits and drawbacks of each you can make wise choices. Some do well in inflation, some avoid taxes, some rise when rates rise, some rise when rates decline, some have government guarantees, some pay higher rates, etc. If the purpose of your fixed income is to stabilize your portfolio so you can take the risk on the equity side Total Bond fund is good but isn't the only answer.

I am now 70 and feel I have sufficient assets. My goal is more asset preservation than growth I have a 43/57 allocation. A few years back I roughly adopted Dr. Wm. Bernstein's idea of having 20 years worth of drawdown in "safe" products ( I define as no loss of principal and short term bond funds). That resulted in me having about 1/3 in no loss of principal (CDs, money markets, etc.), about 1/3 in short term bond funds, and a bit more than 1/3 in intermediate bond funds (incl Tips fund).
Hello Dandy.
Thank you for elaborating, this is interesting and helpful. It sounds like you have identified your goals and executed a plan that is serving you well.

UpperNwGuy
Posts: 1235
Joined: Sun Oct 08, 2017 7:16 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by UpperNwGuy » Sun Nov 18, 2018 10:28 am

dwickenh wrote:
Fri Nov 16, 2018 10:10 am
VBTLX Total bond is 43.3 Treasury and 64.2 Government backed. Other than a pure treasury fund, that does not sound risky to me. Many complain that it has too much exposure to government issues.
+1

GRS159
Posts: 19
Joined: Fri Oct 06, 2017 1:09 pm

Re: VBTLX vs. Vanguard Federal Money Market Fund

Post by GRS159 » Sun Nov 18, 2018 10:42 am

averagedude wrote:
Fri Nov 16, 2018 5:41 pm
Tough question with no known right answer. I would be reluctant to pull out of total bond and realize a loss. There is a possibility that the fed could ease off the gas of raising rates in 2019. There are alot of talking heads debating this issue on all financial media. Also there is a chance that the possible December rate hike is already baked into the bond prices. However if i hadn't rebalanced in a while and my stock allocation was higher than my risk tolerance, i wouldnt put all of my rebalance money in total bond.
averagedude, thanks for this suggestion. It seems like a sound, conservative, intermediate approach with merit.
ruralavalon wrote:
Fri Nov 16, 2018 5:44 pm
I suggest staying with Vanguard Total Bond Market Index Fund, rather than switch to a money market fund.
Thank you for weighing in here. As you know, I employed the three fund approach about a year ago. The simplicity of it was - and is - appealing. I realize that the current status of my VBTLX account is just a snapshot in time, and my questioning a reallocation is likely a knee-jerk reaction. That said, it's likely because I don't have the knowledge or experience to appreciate the long view regarding VBTLX.

As RCL wrote above, "if you planned on holding the shares for over the stated duration..it doesn't make much difference what your current value in the fund is." Folks have mentioned that selling now realizes an actual loss, and staying in allows the dividends to be reinvested at lower prices (albeit while the fund shows a loss on paper in the current environment over the past year). Staying in VBTLX also maintains that goal of simplicity.

Your advice is reassuring. So, if you have thoughts beyond those cited above, please tell me why you believe staying the course with VBTXL is the right long term choice.

Post Reply