How "Safe" is Your Bond Fund?

[Riley15]

Recently in another thread Kevin M brought to my attention the case of the Schwab Yield-Plus Ultrashort Term Bond Fund (SWYPX). This was supposedly a ultrashort bond fund but marketed as a "high-yield" type money market fund with duration of less than 1 year and a "safe" place to keep cash. It went on to lose 42% of it's value in 2008.

There were many reasons for this some obvious and others not so much. The articles below talk about there were some unethical practical going on when reporting the duration and risks of the fund. On top of the debt debacle when it started losing value a liquidity crunch began deepening the losses further.

https://www.nytimes.com/2011/01/14/busi ... orris.html

https://www.vernonlitigation.com/blog-r ... bond-fund/

https://www.cbsnews.com/news/lessons-fr ... s-debacle/

https://www.slcg.com/pdf/workingpapers/ ... ldPlus.pdf

In the end there was some class action but the original investors were never made whole and the losses were Real!

I find this to be really Alarming!! What's to say this can't happen again even at Vanguard?

As individual investors we just have to go by what's listed on the Fund page with regards to Term and Credit Risks.
Who knows if there is a hidden Footnote deep somewhere in the Prospectus that the fund is much more risky than it appears. And generally people don't pay attention to credit risk if it's rated high-grade.

Does anyone actually read the Full Prospectus of the Bonds they own?
How many of us are tracking who the Fund Manager is how they are changing what the fund holds?

This was an Active Bond fund and I can imagine sticking to Index Bond Funds would minimize some of these unknown risks, Still doesn't seem foolproof because index funds can constantly change what they track.

Also if there is a Liquidity crunch in a Bond Fund shouldn't they freeze liquidations until the panic goes away to avoid being wiped out?
I believe that's what happens in Money Market funds.

[BSBHead]

While I think there are other risks, the same risks that took down the active bond funds have been mitigated. First, bond insurance backing many of these short-term bond issuances does not exist. Ambac, MBIA, etc. are gone as a result of the crisis. The credit quality of the underlying securities was predicated on the quality of the bond insurance. In a single pool of bonds, the insurance would be sufficiently funded, but in a scenario where credit was "put" back to the insurers all at the same time, the insurance failed. Second, the bond rating agencies were hammered with fines, etc. as a result of not sufficiently looking at credit quality of the underlying bonds. I think their ratings and rigor is better. Third, much of this was Mortgage Backed Securities. My own view is mortgages are more tightly written now.

There certainly are more recent risks possibly lurking in bond funds. Record issuance of high yield debt by corporations will pressure bond fund yields as these issuances mature over the next five years especially if combined with a recession limiting the refinance ability.

To your point, read the details.

[2015]

I've said it before and I'll say it again. I believe all investing, personal finance, and microeconomics are nothing more than narratives. As such, it ain't over until the morbidly obese lady sings. Nothing is "safe". Nothing is guaranteed. As a human being living in a complex adaptive system I believe there are far far more important risk factors to mitigate than whether I have the most perfect or clever investment strategy.

[arcticpineapplecorp.]

I find this to be really Alarming!! What's to say this can't happen again even at Vanguard?

Well for starters their interests are aligned with their sustomers. Jack Bogle used to say "The good book tells us that no man can serve two masters." Vanguard is owned by the mutual funds. Who own's Schwab? Wall Street. It's a publicly traded company (source: https://www.google.com/search?client=fi ... 66&bih=632). So does Schwab serve its shareholders or its customers? A business that is publicly traded is always responsible to serve its shareholders. They are the owners. So you as a customer of Schwab come second. Not last, but second. If there's one thing I've learned about advertising is what's said is rarely true. If it were, it would be self evident and not needed to be advertised at high expense. Charles Schwab may say “I made a commitment. I’m on the side of the investor.” but he's also on the side of the share/stockholder/owner of his company. So he's playing both sides. He has to. Vanguard doesn't, because they're not owned by outside shareholders, pure and simple. I believe this is what truly sets them apart.

As individual investors we just have to go by what's listed on the Fund page with regards to Term and Credit Risks.
Who knows if there is a hidden Footnote deep somewhere in the Prospectus that the fund is much more risky than it appears. And generally people don't pay attention to credit risk if it's rated high-grade.

Does anyone actually read the Full Prospectus of the Bonds they own?

If they don't, who do they have to blame?

How many of us are tracking who the Fund Manager is how they are changing what the fund holds?

This was an Active Bond fund and I can imagine sticking to Index Bond Funds would minimize some of these unknown risks, Still doesn't seem foolproof because index funds can constantly change what they track.

Index funds track a benchmark. So they only "change what they track" if the benchmark itself that the fund is tracking should change. The index fund is still extraordinarily well efficient in tracking its benchmark index. Other active funds do not have to do that at all.

I think this is one of the best takeaways that no matter what, people always seem to forget (or go into denial about):

There is no free lunch. No matter what any fund manager or investing expert tries to tell you, the iron law of investing remains in force: risk and return are inextricably linked. There is no more competitive terrain in the entire world than the financial markets -- no one is interested in giving money away. If one of the market's participants is offering you what appears to be a higher return, rest assured that it is accompanied by increased risk. Sometimes, as was the case with YieldPlus, that risk may not manifest itself for long stretches of time. But make no mistake, it remains present, and will eventually make itself known.

source: https://www.cbsnews.com/news/lessons-fr ... s-debacle/

[Doc]

In regard Schwab Yield Plus fund:

In the end there was some class action but the original investors were never made whole and the losses were Real!

I find this to be really Alarming!! What's to say this can't happen again even at Vanguard?

As individual investors we just have to go by what's listed on the Fund page with regards to Term and Credit Risks.
Who knows if there is a hidden Footnote deep somewhere in the Prospectus that the fund is much more risky than it appears. And generally people don't pay attention to credit risk if it's rated high-grade.

Does anyone actually read the Full Prospectus of the Bonds they own?
How many of us are tracking who the Fund Manager is how they are changing what the fund holds?

It was obvious from the fund documents that this was not your typical money market fund. I bought this in early 2005 and sold it in early 2007 because I didn't want to take the risk anymore. I did not have any loss. Caveat emptor.

[pdavi21]

It's the most volatile fund I own with a lower yield than my developed markets fund.

[sambb]

if in doubt, invest in treasuries or tips

[pward]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

[oldzey]

Tiaa Traditional - safe enough for me.

[bluquark]

Does anyone actually read the Full Prospectus of the Bonds they own?

I have indeed read the full prospectus of my safest holding, Vanguard Treasury Money Market VUSXX. The section on risks is very short.

Principal Risks
The Fund is designed for investors with a low tolerance for risk; however, the Fund is subject to the following risks, which could affect the Fund’s performance:
• Income risk, which is the chance that the Fund’s income will decline because of falling interest rates. Because the Fund’s income is based on short-term interest rates—which can fluctuate significantly over short periods—income risk is expected to be high.
• Manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Note no mention of credit risk or duration risk, unlike just about any other fund. If you’re paranoid, it’s a great fund.

[gmaynardkrebs]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

They should forget about the risks, because they are trivial. Even Reserve Fund lost only .9%. Stocks move that much everyday, yet people accept that risk as noise. It is noise, and so is the Reserve Fund story.

[bluquark]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

They should forget about the risks, because they are trivial. Even Reserve Fund lost only .9%. Stocks move that much everyday, yet people accept that risk as noise. It is noise, and so is the Reserve Fund story.

Institutions use money markets like checking accounts so .9% is not noise for them. If your checking account dropped .9% and it made you bounce a mortgage payment, you wouldn't consider that noise.

[gmaynardkrebs]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

They should forget about the risks, because they are trivial. Even Reserve Fund lost only .9%. Stocks move that much everyday, yet people accept that risk as noise. It is noise, and so is the Reserve Fund story.

Institutions use money markets like checking accounts so .9% is not noise for them. If your checking account dropped .9% and it made you bounce a mortgage payment, you wouldn't consider that noise.

A .9% loss that happened to a single money market fund 11 years ago is noise. A person who cuts it that close on their mortgage payment is a default waiting to happen.

[Darwin]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

I definitely remember the "breaking the buck" period. All investment includes risk, but I'm REALLY glad that I've been able to have access to the TSP G fund for 90% of my bond allocation. About as safe as it's possible to get, with a fair return based on long-term treasuries. This allows me to be more aggressive with my equities, relative to what I would have been without it.

[Call_Me_Op]

This is why I am very specific in terms of what fixed-income I own - at least in accounts where I have access to a broad array of options. These ultra-short bond funds are notorious for reaching for yield and getting hammered. If I want safety in my fixed-income, I stick with CDs (both direct and brokered within FDIC limits), individual treasuries, TIPS, savings bonds, and if in taxable, a modest allocation to Vanguard's muni bond funds (and/or BMBIX).

[Doc]

if in doubt, invest in treasuries or tips

TIPS didn't do very well when the MM funds broke the buck in '08.

Maybe it will be different next time. MAYBE.

Nominals Treasuries

[pward]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

They should forget about the risks, because they are trivial. Even Reserve Fund lost only .9%. Stocks move that much everyday, yet people accept that risk as noise. It is noise, and so is the Reserve Fund story.

Tell that to the people in 2008 that couldn't access their funds for months, years, or lost them completely. There is non-trivial risk in money markets if they are holding anything other than regular just old U.S. treasuries.

[SlowMovingInvestor]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

They should forget about the risks, because they are trivial. Even Reserve Fund lost only .9%. Stocks move that much everyday, yet people accept that risk as noise. It is noise, and so is the Reserve Fund story.

Tell that to the people in 2008 that couldn't access their funds for months, years, or lost them completely. There is non-trivial risk in money markets if they are holding anything other than regular just old U.S. treasuries.

What holders in MM funds in 2008 couldn't access their funds for months, years or lost them completely ? That could have happened if the Treasury hadn't guaranteed them, but it didnt actually happen.

I do think that currently the rate differential between Treasury MMs and regular MMs is low enough (especially considering state taxes) that holding Treasury MMs costs you almost nothing in interest.

[gmaynardkrebs]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

They should forget about the risks, because they are trivial. Even Reserve Fund lost only .9%. Stocks move that much everyday, yet people accept that risk as noise. It is noise, and so is the Reserve Fund story.

Tell that to the people in 2008 that couldn't access their funds for months, years, or lost them completely. There is non-trivial risk in money markets if they are holding anything other than regular just old U.S. treasuries.

You used the word "scary" and said that money market funds are taking undue risks of which the public is uninformed. Of course, a Treasury mm fund or an FDIC insured account is "safer," but to imply that the others are in any sense unsafe scares people unnecessarily.

[pward]

Yeah, one must be careful. How soon people forgot about the fiasco around money market funds "breaking the buck" back in 2008. Read this for more info. Scary stuff, and why I will not invest in a money market that includes anything other than U.S. treasuries. Many people are not aware of the risks their money market managers are taking with their money in order to generate higher yields so they can charge higher expense ratios: https://www.bogleheads.org/wiki/The_200 ... ket_crisis

They should forget about the risks, because they are trivial. Even Reserve Fund lost only .9%. Stocks move that much everyday, yet people accept that risk as noise. It is noise, and so is the Reserve Fund story.

Tell that to the people in 2008 that couldn't access their funds for months, years, or lost them completely. There is non-trivial risk in money markets if they are holding anything other than regular just old U.S. treasuries.

You used the word "scary" and said that money market funds are taking undue risks of which the public is uninformed. Of course, a Treasury mm fund or an FDIC insured account is "safer," but to imply that the others are in any sense unsafe scares people unnecessarily.

To tell people that money markets have no risk (which is the common thread) is not painting the full picture. I'm not saying that the probability is high that problems will arise in a money market. Quite contrary, the probability is low. But the risk is still there. Money market managers do tend to take extra risk to generate extra income, mostly so they can keep it not so they can pass it along to the customer. So the customer is assuming all of the risk, but the manager is keeping most of the extra return, they pass along just enough of the crumbs to make the yield look competitive. These are things that people should be aware of. People should look at their MM prospectus and see what exactly their money market funds are investing in and what the fund is charging for expenses. All I'm saying is people should be educated and aware of what their money is invested in. People should not take a MM for granted or assume that it is a riskless investment. Choosing an MM deserves as much due diligence as would a choice in any other bond fund.

[goaties]

For me, bond funds are "unsafe" because their share price fluctuates and, unlike buying bonds directly and holding them to maturity, there's not a thing you can do about it. That said, I still have a small percentage of my portfolio in them, but I view them as less "safe" than CDs, Tbills, and the like.

[pward]

For me, bond funds are "unsafe" because their share price fluctuates and, unlike buying bonds directly and holding them to maturity, there's not a thing you can do about it. That said, I still have a small percentage of my portfolio in them, but I view them as less "safe" than CDs, Tbills, and the like.

Eh. While like you I also buy my bonds direct, I don't think that the changing in value is any more "unsafe" in and of itself because the values of your direct purchase bonds fluctuate daily, just like the values of a bond fund fluctuate daily. In my Fidelity account they even show the changes in my bonds value daily, just like if it was a bond fund. If my bonds have a longer maturity than the average maturity of a bond fund, it will actually fluctuate more (for example, I bought some fresh 30 year treasuries at auction last week, and on Friday TLT was up .44% but my fresh 30 year bonds were up .57% because of longer maturity date). In a bond fund, sure they won't hold all bonds to maturity, but the winners and losers will tend to cancel each other out over time. I personally wouldn't choose direct bonds over a fund because of fluctuating prices, because the prices fluctuate either way. However, holding a bond directly in your name is "safer" than renting a share of a bond held in someone else's name for obvious reasons. Also, cutting out the middle man reduces fees substantially, which in bonds can be a pretty big deal over time. In the case of treasuries, purchasing bonds direct is also no more difficult than purchasing a fund so it's extra return without much extra risk or work. So I agree with your choice of directly holding bonds, but not for the same reason.

[gmaynardkrebs]

For me, bond funds are "unsafe" because their share price fluctuates and, unlike buying bonds directly and holding them to maturity, there's not a thing you can do about it. That said, I still have a small percentage of my portfolio in them, but I view them as less "safe" than CDs, Tbills, and the like.

Both fluctuate, bond/bond funds in price, and Tbills/mm funds in income. (CDs behave more like bonds.) You can't get around "fluctuation" with any asset, with the possible exception of Benjamin Franklins.

[pward]

For me, bond funds are "unsafe" because their share price fluctuates and, unlike buying bonds directly and holding them to maturity, there's not a thing you can do about it. That said, I still have a small percentage of my portfolio in them, but I view them as less "safe" than CDs, Tbills, and the like.

Both fluctuate, bond/bond funds in price, and Tbills/mm funds in income. (CDs behave more like bonds.) You can't get around "fluctuation" with any asset, with the possible exception of Benjamin Franklins.

Even with Benjamin's the value fluctuates daily, it just is not going to be readily visible.

[patrick]

As individual investors we just have to go by what's listed on the Fund page with regards to Term and Credit Risks.
Who knows if there is a hidden Footnote deep somewhere in the Prospectus that the fund is much more risky than it appears. And generally people don't pay attention to credit risk if it's rated high-grade.

Does anyone actually read the Full Prospectus of the Bonds they own?

Reading the prospectus doesn't help that much. The risks disclosures in the prospectus are mainly a generic list of risks associated with the asset class without much detail on how likely the risks are to show up or how much you could expect to lose if they do. Furthermore, in the YieldPlus case, Schwab was accused of failing to follow the prospectus.

[UpperNwGuy]

I consider all of the commonly used fixed income options to be "safe" as long as the holding period is sufficiently long. When people start talking about "unsafe" they are usually referring to changes in the net asset value. I think that's a flawed way of approaching the issue.

[gmaynardkrebs]

I consider all of the commonly used fixed income options to be "safe" as long as the holding period is sufficiently long. When people start talking about "unsafe" they are usually referring to changes in the net asset value. I think that's a flawed way of approaching the issue.

I'm not sure I understand what you are saying re how safety and a sufficiently long holding period are related.

[UpperNwGuy]

I consider all of the commonly used fixed income options to be "safe" as long as the holding period is sufficiently long. When people start talking about "unsafe" they are usually referring to changes in the net asset value. I think that's a flawed way of approaching the issue.

I'm not sure I understand what you are saying re how safety and a sufficiently long holding period are related.

Many new investors bought Total Bond a year ago and started complaining here on Bogleheads that their Total Bond investments had lost value, so they were asking about selling Total Bond and buying certificates of deposit. They were impatient. As time has passed, the NAV of Total Bond has been slowly recovering and will soon recover the value that it had in January 2018. Meanwhile, total return has been positive.

[nedsaid]

For me, bond funds are "unsafe" because their share price fluctuates and, unlike buying bonds directly and holding them to maturity, there's not a thing you can do about it. That said, I still have a small percentage of my portfolio in them, but I view them as less "safe" than CDs, Tbills, and the like.

The price of everything fluctuates where they trade or not. Many will not acknowledge this truth. My home fluctuates in value even though it has been off the market for almost 20 years.

[gmaynardkrebs]

I consider all of the commonly used fixed income options to be "safe" as long as the holding period is sufficiently long. When people start talking about "unsafe" they are usually referring to changes in the net asset value. I think that's a flawed way of approaching the issue.

I'm not sure I understand what you are saying re how safety and a sufficiently long holding period are related.

Many new investors bought Total Bond a year ago and started complaining here on Bogleheads that their Total Bond investments had lost value, so they were asking about selling Total Bond and buying certificates of deposit. They were impatient. As time has passed, the NAV of Total Bond has been slowly recovering and will soon recover the value that it had in January 2018. Meanwhile, total return has been positive.

The risks of both stocks and bonds increase over time. I think you feel otherwise, based on what has happened in the past.

[UpperNwGuy]

I consider all of the commonly used fixed income options to be "safe" as long as the holding period is sufficiently long. When people start talking about "unsafe" they are usually referring to changes in the net asset value. I think that's a flawed way of approaching the issue.

I'm not sure I understand what you are saying re how safety and a sufficiently long holding period are related.

Many new investors bought Total Bond a year ago and started complaining here on Bogleheads that their Total Bond investments had lost value, so they were asking about selling Total Bond and buying certificates of deposit. They were impatient. As time has passed, the NAV of Total Bond has been slowly recovering and will soon recover the value that it had in January 2018. Meanwhile, total return has been positive.

The risks of both stocks and bonds increase over time. I think you feel otherwise, based on what has happened in the past.

What do you mean when you say that the risks increase over time?

[gmaynardkrebs]

I consider all of the commonly used fixed income options to be "safe" as long as the holding period is sufficiently long. When people start talking about "unsafe" they are usually referring to changes in the net asset value. I think that's a flawed way of approaching the issue.

I'm not sure I understand what you are saying re how safety and a sufficiently long holding period are related.

Many new investors bought Total Bond a year ago and started complaining here on Bogleheads that their Total Bond investments had lost value, so they were asking about selling Total Bond and buying certificates of deposit. They were impatient. As time has passed, the NAV of Total Bond has been slowly recovering and will soon recover the value that it had in January 2018. Meanwhile, total return has been positive.

The risks of both stocks and bonds increase over time. I think you feel otherwise, based on what has happened in the past.

What do you mean when you say that the risks increase over time?

This gives the basic idea.

While the basic argument that the standard deviations of the annualized returns decrease as the time horizon increases is true, it is also misleading, and it fatally misses the point, because for an investor concerned with the value of his portfolio at the end of a period of time, it is the total return that matters, not the annualized return. Because of the effects of compounding, the standard deviation of the total return actually increases with time horizon. Thus, if we use the traditional measure of uncertainty as the standard deviation of return over the time period in question, uncertainty increases with time. www.econlib.org/archives/2008/01/the_fallacy_of.html

Of course, not everyone sees it that way, and it does rely on the basic acceptance of random walk/efficient market theory. This Vanguard paper looks at both sides of the debate. https://www.google.com/url?sa=t&rct=j&q ... qJFMCvQH_b

[UpperNwGuy]

I don't see how those two papers, which are about stocks, relate to whether a bond fund is "safe" or not. And they certainly don't address OP's original question.

[gmaynardkrebs]

I don't see how those two papers, which are about stocks, relate to whether a bond fund is "safe" or not. And they certainly don't address OP's original question.

You me asked me what I meant by saying that the risks of stocks and bonds increased over time. I was merely showing the courtesy answering your question.

[Park]

I'm not sure I understand what you are saying re how safety and a sufficiently long holding period are related.

Many new investors bought Total Bond a year ago and started complaining here on Bogleheads that their Total Bond investments had lost value, so they were asking about selling Total Bond and buying certificates of deposit. They were impatient. As time has passed, the NAV of Total Bond has been slowly recovering and will soon recover the value that it had in January 2018. Meanwhile, total return has been positive.

The risks of both stocks and bonds increase over time. I think you feel otherwise, based on what has happened in the past.

What do you mean when you say that the risks increase over time?

This gives the basic idea.

While the basic argument that the standard deviations of the annualized returns decrease as the time horizon increases is true, it is also misleading, and it fatally misses the point, because for an investor concerned with the value of his portfolio at the end of a period of time, it is the total return that matters, not the annualized return. Because of the effects of compounding, the standard deviation of the total return actually increases with time horizon. Thus, if we use the traditional measure of uncertainty as the standard deviation of return over the time period in question, uncertainty increases with time. www.econlib.org/archives/2008/01/the_fallacy_of.html

Of course, not everyone sees it that way, and it does rely on the basic acceptance of random walk/efficient market theory. This Vanguard paper looks at both sides of the debate. https://www.google.com/url?sa=t&rct=j&q ... qJFMCvQH_b

This following is about stocks, and not bonds.

https://www.etf.com/sections/index-inve ... nopaging=1

"Skewness of returns is -0.53 for monthly equity premiums...Skew is positive (0.25) for annual premiums and increases a lot for longer return horizons, to 3.78 for 30-year premiums...Kurtosis is 3.0 for a normal distribution, and 4.97 for monthly equity premiums. Kurtosis falls to 3.19 for annual premiums but then rises strongly for longer return horizons, to 32.37 for 30‑year returns. The combination of right skew and kurtosis means that outliers are primarily in the right (good) tail."

[gmaynardkrebs]

Many new investors bought Total Bond a year ago and started complaining here on Bogleheads that their Total Bond investments had lost value, so they were asking about selling Total Bond and buying certificates of deposit. They were impatient. As time has passed, the NAV of Total Bond has been slowly recovering and will soon recover the value that it had in January 2018. Meanwhile, total return has been positive.

The risks of both stocks and bonds increase over time. I think you feel otherwise, based on what has happened in the past.

What do you mean when you say that the risks increase over time?

This gives the basic idea.

While the basic argument that the standard deviations of the annualized returns decrease as the time horizon increases is true, it is also misleading, and it fatally misses the point, because for an investor concerned with the value of his portfolio at the end of a period of time, it is the total return that matters, not the annualized return. Because of the effects of compounding, the standard deviation of the total return actually increases with time horizon. Thus, if we use the traditional measure of uncertainty as the standard deviation of return over the time period in question, uncertainty increases with time. www.econlib.org/archives/2008/01/the_fallacy_of.html

Of course, not everyone sees it that way, and it does rely on the basic acceptance of random walk/efficient market theory. This Vanguard paper looks at both sides of the debate. https://www.google.com/url?sa=t&rct=j&q ... qJFMCvQH_b

This following is about stocks, and not bonds.

https://www.etf.com/sections/index-inve ... nopaging=1

"Skewness of returns is -0.53 for monthly equity premiums...Skew is positive (0.25) for annual premiums and increases a lot for longer return horizons, to 3.78 for 30-year premiums...Kurtosis is 3.0 for a normal distribution, and 4.97 for monthly equity premiums. Kurtosis falls to 3.19 for annual premiums but then rises strongly for longer return horizons, to 32.37 for 30‑year returns. The combination of right skew and kurtosis means that outliers are primarily in the right (good) tail."

It's exactly the same analysis for a bond fund. The only difference is that both the good and bad tails are less extreme. However, I doubt that many realize that most of the benefits of equities are from the good tail, and that most investors returns will lie below the mean.

[hudson]

This is why I am very specific in terms of what fixed-income I own - at least in accounts where I have access to a broad array of options. These ultra-short bond funds are notorious for reaching for yield and getting hammered. If I want safety in my fixed-income, I stick with CDs (both direct and brokered within FDIC limits), individual treasuries, TIPS, savings bonds, and if in taxable, a modest allocation to Vanguard's muni bond funds (and/or BMBIX).

Good plan!
For me, CDs and Vang muni intermediate....VWIUX. A reach for yield keeps me from the safest muni fund BMBIX.

How safe is VWIUX?
It’s 91% AAA/AA/A.....or relatively safe
The other 9% is safer than say Investment grade or maybe total bond overall.

[am]

This is why I am very specific in terms of what fixed-income I own - at least in accounts where I have access to a broad array of options. These ultra-short bond funds are notorious for reaching for yield and getting hammered. If I want safety in my fixed-income, I stick with CDs (both direct and brokered within FDIC limits), individual treasuries, TIPS, savings bonds, and if in taxable, a modest allocation to Vanguard's muni bond funds (and/or BMBIX).

Good plan!
For me, CDs and Vang muni intermediate....VWIUX. A reach for yield keeps me from the safest muni fund BMBIX.

How safe is VWIUX?
It’s 91% AAA/AA/A.....or relatively safe
The other 9% is safer than say Investment grade or maybe total bond overall.

I wonder if muni ratings take into account the poorly funded pensions? Next long bear may be the day of reckoning. For the record I have low six figures in vanguard int. Muni fund.

[UpperNwGuy]

This is why I am very specific in terms of what fixed-income I own - at least in accounts where I have access to a broad array of options. These ultra-short bond funds are notorious for reaching for yield and getting hammered. If I want safety in my fixed-income, I stick with CDs (both direct and brokered within FDIC limits), individual treasuries, TIPS, savings bonds, and if in taxable, a modest allocation to Vanguard's muni bond funds (and/or BMBIX).

Good plan!
For me, CDs and Vang muni intermediate....VWIUX. A reach for yield keeps me from the safest muni fund BMBIX.

How safe is VWIUX?
It’s 91% AAA/AA/A.....or relatively safe
The other 9% is safer than say Investment grade or maybe total bond overall.

I wonder if muni ratings take into account the poorly funded pensions? Next long bear may be the day of reckoning. For the record I have low six figures in vanguard int. Muni fund.

I’m sure they do. Why wouldn’t they? After all, it’s been a recurring news item for many years now.

[am]

This is why I am very specific in terms of what fixed-income I own - at least in accounts where I have access to a broad array of options. These ultra-short bond funds are notorious for reaching for yield and getting hammered. If I want safety in my fixed-income, I stick with CDs (both direct and brokered within FDIC limits), individual treasuries, TIPS, savings bonds, and if in taxable, a modest allocation to Vanguard's muni bond funds (and/or BMBIX).

Good plan!
For me, CDs and Vang muni intermediate....VWIUX. A reach for yield keeps me from the safest muni fund BMBIX.

How safe is VWIUX?
It’s 91% AAA/AA/A.....or relatively safe
The other 9% is safer than say Investment grade or maybe total bond overall.

I wonder if muni ratings take into account the poorly funded pensions? Next long bear may be the day of reckoning. For the record I have low six figures in vanguard int. Muni fund.

I’m sure they do. Why wouldn’t they? After all, it’s been a recurring news item for many years now.

Orange County was AA- until right before bankruptcy http://archive.fortune.com/magazines/fo ... /index.htm

I think we should be ok since there are thousands of bonds in that fund.

[hudson]

This is why I am very specific in terms of what fixed-income I own - at least in accounts where I have access to a broad array of options. These ultra-short bond funds are notorious for reaching for yield and getting hammered. If I want safety in my fixed-income, I stick with CDs (both direct and brokered within FDIC limits), individual treasuries, TIPS, savings bonds, and if in taxable, a modest allocation to Vanguard's muni bond funds (and/or BMBIX).

Good plan!
For me, CDs and Vang muni intermediate....VWIUX. A reach for yield keeps me from the safest muni fund BMBIX.

How safe is VWIUX?
It’s 91% AAA/AA/A.....or relatively safe
The other 9% is safer than say Investment grade or maybe total bond overall.

I wonder if muni ratings take into account the poorly funded pensions? Next long bear may be the day of reckoning. For the record I have low six figures in vanguard int. Muni fund.

Good question! I’m not an expert. I think VWIUX is OK. I’m staying.Well chosen and high quality munis are almost up there with treasuries.

Rating companies didn’t do well in 2008.
I got this from Vanguard’s VWIUX Distribution by Credit Quality:

**Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). "NR" is used to classify securities for which a rating is not available. U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under "U.S. Government." Vanguard managed taxable index bond funds, balanced funds, ETFs, and annuity portfolios: Credit-quality ratings for each issue are obtained from Barclays using ratings derived from Moody's Investors Service (Moody's), Fitch Ratings (Fitch), and Standard & Poor's (S&P). When ratings from all three agencies are available, the median rating is used. When ratings are available from two of the agencies, the lower rating is used. When one rating is available, that rating is used. Vanguard managed taxable non-index bond funds, municipal bond funds, balanced funds and annuity portfolios; Wellington Management Company managed bond funds, balanced funds and annuity portfolios: Credit-quality ratings for each issue are obtained from Moody's and S&P, and the higher rating for each issue is used. Oaktree Capital Management managed fund: Credit-quality ratings are obtained from S&P.

[Ferdinand2014]

I use Fido’s FDLXX mm fund. Pure treasuries. No funny business. No reaching for extra yield. Fido lists the liquidity at 1 day and 7 days over the past year for all there mm funds. The minimum required is 10% at 1 day and 30% at 7 days by law. FDLXX is over 90% of entire AUM available within 24 hours and 99% at 7 days. That’s the highest of any mm in Fido’s lineup. Certainly there are never guarantees in life, but I sleep well with my cash sitting in FDLXX.

[Riley15]

While everyone is well aware of Term and Credit risks with Bonds and that's what is used to make investment decisions. The hidden but one of the most important but overlooked risk is Liquidity, I think this is the critical factor that can break the bond fund in times of distress.

Term risks are well understood and can be handled accordingly and having a diverse set of bonds reduces default risks in any one or several bonds in fund.

But there is no answer to Liquidity, if everyone wants to sell their Intermediate bond funds in a crunch, the fund manager will be forced to sell longer term bonds to meet required redemptions at big losses permanently reducing NAV that will never recover when the crunch is over.

Treasury/government bonds always have a market, but how can we really gauge the liquidity of the other remaining types of bonds in a typical bond fund?

[Doc]

But there is no answer to Liquidity, if everyone wants to sell their Intermediate bond funds in a crunch, the fund manager will be forced to sell longer term bonds to meet required redemptions at big losses permanently reducing NAV that will never recover when the crunch is over.

Treasury/government bonds always have a market, but how can we really gauge the liquidity of the other remaining types of bonds in a typical bond fund?

Don't try to get these answers. Break your FI portfolio into pieces so that no matter what happens one of those pieces is likely to perform better than the others and you just spend (or rebalance) using that piece first.

If you are talking about an equity crunch most people are going to be buying Treasuries not selling them. Just look at price charts of Treasury vs. corporate funds during 2008 or to a lesser extent December of last year.