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duhmel1
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Re: Holding low-yielding bonds until maturity

Post by duhmel1 » Sun May 17, 2009 12:23 pm

Taylor Larimore wrote:
duhmel1 wrote:A wor of caution in using past result to predict the future. Twenty years ago the prime rate was over 10%. Interest rates have been dropping in the past 2 decades so 'total returns' of bond funds have benefitted from this trend. Going forward, there is no possible way that we will see a similar drop in interest rates - the only way for rates to go are to remain even or increase. Fund performance will therefore be capped by their yield and will have the significant potential for principal loss related to the likely increase in rates in the future. By buying individual bonds you will avoid this potential loss if you hold them to maturity.


Hi duhmell:

There are few things more discouraging than to be holding individual bonds yielding 4% or 5% when other bonds are yielding 15% as AAA corporate bonds did in 1981.


How about this 'thing'. You need the funds in 10 years - interest rates have risen significantly so when you liquidate the funds you take a bath in principal. If you had held individual bonds you would get your full principal back. YOU ARE ALWAYS WORSE OFF IF YOU SELL A BOND FUND AFTER A LARGE RISE IN INTEREST RATES. The improvement in yields will never offset the decrease in principal.
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Post by Mel Lindauer » Sun May 17, 2009 12:23 pm

I just want to say, for the record, that none of my posts were meant to convince anyone that one fixed-income method of investing was better than the other (CDs vs individual bonds vs bond funds). Rather, they were simply an attempt to correct factually incorrect statements that were made by some posters on this thread regarding Total Bond Fund's returns.
Last edited by Mel Lindauer on Sun May 17, 2009 12:26 pm, edited 1 time in total.
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Post by duhmel1 » Sun May 17, 2009 12:26 pm

sscritic wrote:
duhmel1 wrote: Going forward, there is no possible way that we will see a similar drop in interest rates - the only way for rates to go are to remain even or increase. Fund performance will therefore be capped by their yield and will have the significant potential for principal loss related to the likely increase in rates in the future. By buying individual bonds you will avoid this potential loss if you hold them to maturity.

Let's take the argument to the extreme of low rates. You buy a $10k 20 year bond at 0% interest. After 20 years, you get your guaranteed $10k back. In those 20 years, interest rates have gone up and down (but not below zero), so the value of your bond dropped, but because you held it to maturity, you got all your $10k back.

Now suppose someone else puts $10k into a bond fund paying 0% today. As interest rates rise, the NAV will fall. Others will buy into the fund, resulting in the purchase of new bonds that pay interest. It might also result in the fund buying your bond at a large discount. At the end of 20 years, can you say that the person in the fund who reinvested dividends will have less than $10k? It will depend on the sequence of interest rate changes and flows in and out of the fund.


As I just stated in my previous post, if when you sell the fund the interest rate is higher than when you bought it you will have your returns adversely affected by the decrease in NAV. If the rates go up and return to the original level you will be OK .... however wher do you think rates will be headed in the next 3-5 years?????

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Post by Mel Lindauer » Sun May 17, 2009 12:30 pm

duhmel1 wrote:
sscritic wrote:
duhmel1 wrote: Going forward, there is no possible way that we will see a similar drop in interest rates - the only way for rates to go are to remain even or increase. Fund performance will therefore be capped by their yield and will have the significant potential for principal loss related to the likely increase in rates in the future. By buying individual bonds you will avoid this potential loss if you hold them to maturity.

Let's take the argument to the extreme of low rates. You buy a $10k 20 year bond at 0% interest. After 20 years, you get your guaranteed $10k back. In those 20 years, interest rates have gone up and down (but not below zero), so the value of your bond dropped, but because you held it to maturity, you got all your $10k back.

Now suppose someone else puts $10k into a bond fund paying 0% today. As interest rates rise, the NAV will fall. Others will buy into the fund, resulting in the purchase of new bonds that pay interest. It might also result in the fund buying your bond at a large discount. At the end of 20 years, can you say that the person in the fund who reinvested dividends will have less than $10k? It will depend on the sequence of interest rate changes and flows in and out of the fund.


As I just stated in my previous post, if when you sell the fund the interest rate is higher than when you bought it you will have your returns adversely affected by the decrease in NAV. If the rates go up and return to the original level you will be OK .... however wher do you think rates will be headed in the next 3-5 years?????


Over time, rates go up and they go down. One needs to understand the meaning of a bond fund's "duration" and then invest according to one's time horizon. Just as one doesn't buy a five-year CD when the money will be needed in two years, they wouldn't invest in an intermediate-term bond fund for a short-term need. Match your investments to your time horizons.
Best Regards - Mel | | Semper Fi

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Post by tutaloo » Sun May 17, 2009 12:32 pm

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Post by Index Fan » Sun May 17, 2009 12:46 pm

Duration is key here. Short-term bond funds will deal with rising rates or inflation much better than longer-term bond funds.

Also, it depends on what you want a bond fund to do. Some hold bond funds to help stabilize their portfolios in regards to equity risk. Others might be living off of their bond fund's yield payments. There are different valid reasons for holding a fund.
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Post by duhmel1 » Sun May 17, 2009 12:51 pm

Mel Lindauer wrote:
Over time, rates go up and they go down. One needs to understand the meaning of a bond fund's "duration" and then invest according to one's time horizon. Just as one doesn't buy a five-year CD when the money will be needed in two years, they wouldn't invest in an intermediate-term bond fund for a short-term need. Match your investments to your time horizons.


Interest rates have been dropping FOR 20 YEARS. We are headed into a period of higher rates - it is very possible that we will have the inverse of the past with interest rates 10 years from now being much higher than today. If your horixon is 10 years out and you buy individual bonds you will get your principal back. If you buy a bond fund and the rates are higher - YOU WILL LOSE PRINCIPAL.

Bond fund DURATION has is not a safety net on getting back your whole principal back. Again - it is merely a way to measure the change in bond fund NAV as a function of change in interest rates.

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Post by duhmel1 » Sun May 17, 2009 1:00 pm

Index Fan wrote:Duration is key here. Short-term bond funds will deal with rising rates or inflation much better than longer-term bond funds.

Also, it depends on what you want a bond fund to do. Some hold bond funds to help stabilize their portfolios in regards to equity risk. Others might be living off of their bond fund's yield payments. There are different valid reasons for holding a fund.


Very appropriately stated. Bond funds off diversification and liquidity. However they do not off immunity to interest rate increases '.... if you hold them longer than the fund duration".

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Post by learning » Sun May 17, 2009 1:07 pm

Mel said:

Over time, rates go up and they go down. One needs to understand the meaning of a bond fund's "duration" and then invest according to one's time horizon. Just as one doesn't buy a five-year CD when the money will be needed in two years, they wouldn't invest in an intermediate-term bond fund for a short-term need. Match your investments to your time horizons.[/quote]

Mel,

A question in the shape of a comment: Since interest rates are unpredictable, it doesn't seem there can be true matching between a bond fund and a date when the money will be needed. Even if an investor chooses an intermediate bond fund for an intermediate need, a rise in interest rates can come at any point in time during that period and, in effect, push into the future the date on when that investor will break even. There is always an element of uncertainty built into bond funds which may or may not be important to an investor. Is this correct?

Thanks,
Learning

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Post by linuxizer » Sun May 17, 2009 1:10 pm

duhmel1 wrote:YOU ARE ALWAYS WORSE OFF IF YOU SELL A BOND FUND AFTER A LARGE RISE IN INTEREST RATES.

If you buy a bond fund and the rates are higher - YOU WILL LOSE PRINCIPAL.

Bond fund DURATION has is not a safety net on getting back your whole principal back.


Again, I'm not a bond fund expert and have not yet bought any myself, but it seems to me that you are being severely misleading here, no matter how many capitalized letters you use. Of course you are worse off if you sell a bond fund just after a large rise in interest rates. Similarly, you are worse off if you sell an individual bond just after a large rise in interest rates--the fact that you choose not to measure the value of individual bonds in between does not mean that their value is not fluctuating. However, when the NAV of a bond fund drops, the yield goes up. This increased yield, when held to duration, exactly (+/- market inefficiencies and the like) compensates for the loss of principal.

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Post by duhmel1 » Sun May 17, 2009 1:35 pm

linuxizer wrote:
duhmel1 wrote:YOU ARE ALWAYS WORSE OFF IF YOU SELL A BOND FUND AFTER A LARGE RISE IN INTEREST RATES.

If you buy a bond fund and the rates are higher - YOU WILL LOSE PRINCIPAL.

Bond fund DURATION has is not a safety net on getting back your whole principal back.


Again, I'm not a bond fund expert and have not yet bought any myself, but it seems to me that you are being severely misleading here, no matter how many capitalized letters you use. Of course you are worse off if you sell a bond fund just after a large rise in interest rates. Similarly, you are worse off if you sell an individual bond just after a large rise in interest rates--the fact that you choose not to measure the value of individual bonds in between does not mean that their value is not fluctuating. However, when the NAV of a bond fund drops, the yield goes up. This increased yield, when held to duration, exactly (+/- market inefficiencies and the like) compensates for the loss of principal.


The only thing that is accurate in you post is your statement that you are not an expert. The increase in yield "DOES NOT COMPENSATE FOR THE LOSS IN PRINCIPAL". Consider a scenario that rates stay constant and drop just before you want to sell. Your NAV has a big drop and you 'compensating increase in yield' is very short.

I clearly stated that buying bonds are intended to be held to maturity so your statement about losing money when selling individual bonds is totally off the point.

Do not criticize a post that you do not understand. The biggest problem in these threads about bonds vs bond funds is the vast majority of posters have never bought a bond and are just repeating 'myths' that they have read. I will now unsubsubscribe from this thread - thank you tutaloo for the issues that you brought up but I agree that there is too much misinformation by uninformed posters for this to be a meaningful discussion.

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Post by bozo » Sun May 17, 2009 2:12 pm

I think it is too funny that folks wrangle over a few basis points here or there.

Bond funds = good. Individual bonds (assuming they're guaranteed by the FDIC, NCUA) = good. CDs are nominals, after all.

Once you hit the big "60", (as in 60 years old), you'd best be thinking capital preservation. A tad of equities doesn't hurt, but "age in bonds" is my rule.

Just my $.02.

Bozo

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Post by linuxizer » Sun May 17, 2009 2:22 pm

duhmel1 wrote:
linuxizer wrote:Of course you are worse off if you sell a bond fund just after a large rise in interest rates. Similarly, you are worse off if you sell an individual bond just after a large rise in interest rates.


Consider a scenario that rates stay constant and drop just before you want to sell. Your NAV has a big drop and you 'compensating increase in yield' is very short.


I believe we are in agreement here. There can be no compensating increase in yield if you sell a bond fund before the time you originally intended to hold it until.

dulmel1 wrote:I clearly stated that buying bonds are intended to be held to maturity so your statement about losing money when selling individual bonds is totally off the point.


You are then comparing smooth skinned and crispy fruit of edible skin to an unrelated fruit with skin that must be peeled of a mixed yellow and red color. If you sell a bond in any form (fund, CD, individual, ladder) before you had intended, there is the distinct possibility of losing money. Failing to account for the fluctuations in the value of an individual bond is disingenuous, as is comparing selling a bond fund before you had intended to sell it with holding an individual bond to maturity.

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Post by spam » Sun May 17, 2009 2:54 pm

duhmel1 wrote:
Interest rates have been dropping FOR 20 YEARS. We are headed into a period of higher rates - it is very possible that we will have the inverse of the past with interest rates 10 years from now being much higher than today. If your horixon is 10 years out and you buy individual bonds you will get your principal back. If you buy a bond fund and the rates are higher - YOU WILL LOSE PRINCIPAL.


Bingo !

My estimate is that the Fed will raise interest rates in about 2 years to control inflation. My personal feeling is that the Fed's plan is to create inflation to end the deflationary cycle that we are currently in. They will likely raise interest rates to control the rate of inflation.

This is why I love my CD ladder
This is why I feel NAV is important when buying a bond fund

I still own bond funds. Eight bond funds actually (because I have more than one account and different choices in them) I will most likely be moving most of these assets into TIPs and longer term CD's to capture any interest rate spike that may come along. As a result of this discussion (thank you duhmel) I will be looking into individual bond purchases for future reference.

I think tutaloo's core argument about investors bulking up on bond funds due to performance chasing, or percieved safety is valid.

Interest rates will either stay the same, or more likely, rise over the next decade. This will be bad for dollar denominated bond funds, and neutral for individual bonds held to maturity. If there is an argument in support of lower future interest rates, then I would like to hear it.

My tea leaves say "increased interest rate risk, and inflation". My handy chart says: bad for bond funds.

Tutaloo and duhmel are right about this one.

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Post by linuxizer » Sun May 17, 2009 3:01 pm

spam wrote:My tea leaves say "increased interest rate risk, and inflation". My handy chart says: bad for bond funds.


Nearly everyone thinks that rates are at historic lows and have not much place to go than up. To me that says stay away from bonds, not stay away from bond funds, assuming you believe you can time the bond market any better than you can the stock market (what happens if the Fed keeps bond rates artificially low for the next five years...that's a lot of missed interest if you're staying in bank accounts). For reasons that have been stated here over and over, if bond rates go up, the value of bonds at lower rate goes down. Whether or not you choose to account for that new reality is irrelevant.

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Post by spam » Sun May 17, 2009 3:15 pm

bozo wrote:I think it is too funny that folks wrangle over a few basis points here or there.

Bond funds = good. Individual bonds (assuming they're guaranteed by the FDIC, NCUA) = good. CDs are nominals, after all.

Once you hit the big "60", (as in 60 years old), you'd best be thinking capital preservation. A tad of equities doesn't hurt, but "age in bonds" is my rule.

Just my $.02.

Bozo


Hi Bozo,

1) What impact could printing a few trillion dollar have on interest rates and inflation over the next decade?

2) How well do bond funds preserve capital during periods of increased interest rates and inflation?

3) Fluctuations in bond fund NAV are not good when you are out of the accumulation phase and entering the consumption phase.

4) A 10% NAV fluctuation on a $1,000,000 bond fund = a loss of 100k. If you are 30, no problem. If you are 62, and making withdrawls on principal, then pay attention.

just my $.02

spam

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Post by Sidney » Sun May 17, 2009 3:28 pm

You are then comparing smooth skinned and crispy fruit of edible skin to an unrelated fruit with skin that must be peeled of a mixed yellow and red color.
:wink:
I always wanted to be a procrastinator.

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Post by Beagler » Sun May 17, 2009 4:52 pm

spam wrote:1) What impact could printing a few trillion dollar have on interest rates and inflation over the next decade?


Potentially quite a lot. "Quantitative easing" can sure dump a lot of money into the system. Short-term bonds, anyone?


spam wrote:2) How well do bond funds preserve capital during periods of increased interest rates and inflation?


Bond fund of what duration?

spam wrote:3) Fluctuations in bond fund NAV are not good when you are out of the accumulation phase and entering the consumption phase.


Wide NAV fluctuations not fun during the distribution phase. But if you see your bond fund solely as a source of income (and don't plan on redeeming shares) then it hurts less when the NAV falls.

spam wrote:4) A 10% NAV fluctuation on a $1,000,000 bond fund = a loss of 100k. If you are 30, no problem. If you are 62, and making withdrawls on principal, then pay attention.

See last response. :D
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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Post by Electron » Sun May 17, 2009 5:15 pm

Chastemp wrote:
KAWill70 wrote:
tutaloo wrote:Intellectually, I understand, that holding a Bond Fund for the duration of the Bonds it holds, works out fine.

Bond funds maintain a perpetual maturity so one always has interest rate risk. Bonds typically are not held to maturity.

Stockcharts.com adjusts for distributions for most mutual funds.

The chart for VBMFX looks quite acceptable over time when adjusted for dividends:

http://www.stockcharts.com/charts/perfo ... html?vbmfx

Click with your mouse to the left of "200 days" and drag to the left to increase the time scale of the chart.

Kent


Kent,

I don't believe this chart includes reinvested dividends and gains, just as the Yahoo Finance chart does not either. So the returns are considerably better than the chart indicates. These charts are so misleading I don't understand why a site would produce such, or rather why don't they include the dividends. Yahoo Finance has all the data to do so as they show a dividend adjusted index column when you call up their historical returns, but they don't use that index in their charts! Why? :?

Chas


Chas,

Did you increase the timescale on the chart from Stockcharts.com?

Try a 5 year chart on Yahoo Finance and a similar time period on the Stockcharts link I sent by clicking and dragging to the left of "200 days".

There is a huge difference in the charts and I believe Total Return is shown on Stockcharts.com.

Many charting services do not adjust bond funds for Total Return, perhaps because of the effort in reinvesting monthly dividends at the precise NAV every month.

Kent

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Post by tutaloo » Sun May 17, 2009 5:18 pm

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Re: Holding low-yielding bonds until maturity

Post by tarnation » Sun May 17, 2009 5:52 pm

duhmel1 wrote:YOU ARE ALWAYS WORSE OFF IF YOU SELL A BOND FUND AFTER A LARGE RISE IN INTEREST RATES. The improvement in yields will never offset the decrease in principal.

This is very strong statement, could you please provide a mathematical proof, or at least a link to the proof which establishes this result.
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Post by Mel Lindauer » Sun May 17, 2009 7:07 pm

A couple of points that haven't been mentioned yet:

1. When bond fund NAVs are down, reinvesting dividends and distributions means the investor is buying more shares at the reduced price, thus reducing their average cost per share. Reinvesting distributions is a form of dollar cost averaging, which means buying more shares when the NAV is down.
2. Investors who didn't panic and sell out in the only two years that Total Bond Market had small negative returns (-2.66% in 1994 and -0.76% in 1999) realized out-sized gains the following years (+18.18% in 1995 and +11.39% in 2000). So TBM investors did just fine, while the market timers who paniced and sold missed those great following-year returns.
3. Bogleheads rebalance to get back to their desired asset allocation, so they're doing just the opposite of what Tutaloo is worried about. In fact, they're selling bonds to buy equities, since bonds have outperformed equities, not selling equities to buy bonds.
Best Regards - Mel | | Semper Fi

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tutaloo said

Post by sotaboy » Sun May 17, 2009 7:08 pm

It might be. It might not be.

So after many long winded posts here, you admit you have no clue what is going to happen
Neither do I, which is why I have some diversified investments.
Yes, you are right to do what's best for you and your family.
But to assume what is best for you does not mean it's the best for everyone.

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Post by bozo » Sun May 17, 2009 7:20 pm

Folks, the key is to ladder.

Don't get madder, just ladder.*

Rates are in the tank now, but they'll go up (they can't go down much from here, I think we'd all agree).

Short-term bond funds = OK.

Short-term individual bonds = OK as well.

Short-term CDs = yucky at present, but they'll turn.

If you can get anything at or about 3% these days, consider yourself lucky. Just stay below those FDIC or NCUA limits (or keep plugging in a bond fund owned by more folks than you can count; NAVs will do what they do. Market-timing can be hazardous to your health. If you're paranoid about NAVs, buy CDs. My Mom owns both a fund and CDs, and she never whines.).

Bozo

*I just made that up.

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Post by Dan Kohn » Sun May 17, 2009 10:03 pm

duhmel, you're comments on bond funds have been deeply incorrect.
duhmel1 wrote:You need the funds in 10 years - interest rates have risen significantly so when you liquidate the funds you take a bath in principal. If you had held individual bonds you would get your full principal back. YOU ARE ALWAYS WORSE OFF IF YOU SELL A BOND FUND AFTER A LARGE RISE IN INTEREST RATES. The improvement in yields will never offset the decrease in principal....

Bond fund DURATION has is not a safety net on getting back your whole principal back. Again - it is merely a way to measure the change in bond fund NAV as a function of change in interest rates.

You are not worse off after an interest rate rise after you wait the duration. In fact, a bond fund's duration is a safety net.

William Bernstein provides an insightful definition of duration as the "point of indifference" for the owner of a bond fund in dealing with interest rate changes. If interest rates rise after purchasing a bond fund, the NAV of the fund falls, which hurts the investor. However, the dividends that the bond fund throws off can now be reinvested at a higher rate. The duration is the length of time that an investor needs to hold the fund for the increased yields to compensate for the decrease in NAV. In that sense, the duration represents the length of time it could take, in the worst case, to break even on a bond fund. So, you should always hold bond funds with a duration shorter than the expected need for your money.

So, you need the money in 10 years. Just after buying an intermediate term bond fund (with a duration of, say, 5 years), interest rates skyrocket. All you need to do is hold the fund for 5 years, and you will have more than made back your principal. But notice how unlikely your example is. How many people really need their money in 10 years?

If you have a date-certain future liability in nominal dollars (like a promising to donate $100 K to your college in 10 years), then purchasing a zero coupon bond is unambiguously better than using a bond fund. However, in the real world, people use bonds and bonds funds either as ballast for their portfolio when saving money, or as a source of income when spending it. In neither case is there a date-certain liability.

If you quite likely need your money to last decades, but want to be able to pull some out along the way, than bond funds are a particularly good choice.

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Post by Dan Kohn » Sun May 17, 2009 10:11 pm

spam wrote:Interest rates will either stay the same, or more likely, rise over the next decade. This will be bad for dollar denominated bond funds, and neutral for individual bonds held to maturity. If there is an argument in support of lower future interest rates, then I would like to hear it.

My tea leaves say "increased interest rate risk, and inflation". My handy chart says: bad for bond funds.

You are deeply mistaken here on multiple levels. I want to reiterate, though, that you should invest your money however you want to.

No one knows what interest rates will do over the next decade. No one. If you did, you could make billions. Although the Fed can influence short term rates, long term rates are set by the market. That means that at any given interest rate, exactly as many people think they will go up as go down. Trying to time your investment strategy based on future interest rates is as much a fool's game as trying to market time equities. There are mountains of research and hedge fund results showing no one can do this reliably over time.

Further, even if you are correct in believing that interest rates will rise, you are also in error about what instrument will deal with that. Bond ladders respond to interest rate shifts the same way bond funds do. And CDs are just a form of bond, which is not tradeable unless you buy it from a broker. Thus, there's nothing special about bond funds.

Please look at Individual Bonds vs a Bond Fund on the Bogleheads Wiki. It is really worth understanding these issues.

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Post by Dan Kohn » Sun May 17, 2009 10:15 pm

linuxizer wrote:Mr. Kohn may have some brilliant way to do the equivalent with a bond fund without capital loss, but I don't understand bonds well enough to come up with anything. I imagine, were there some way to do so, that the solution would basically rely on losing money in the earlier-expiring bonds purchased to replace the fund, and making more money (due to the higher yield that caused the NAV to drop) on the later-expiring replacement bonds, but I'm not sure that one would offset the other.

As Mel said, you always need to hold bond funds with a duration shorter than your need for the money. If you need the money in the next couple months, than you want ultra-ultra-short-term bond funds, better known as money markets. These provide a lower expected return than a short term or intermediate term fund, in exchange for not losing principal.

And, please call me Dan.

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Re: linuxizer

Post by linuxizer » Sun May 17, 2009 10:28 pm

Dan Kohn wrote:As Mel said, you always need to hold bond funds with a duration shorter than your need for the money. If you need the money in the next couple months, than you want ultra-ultra-short-term bond funds, better known as money markets. These provide a lower expected return than a short term or intermediate term fund, in exchange for not losing principal.

And, please call me Dan.


Dan it is.

My question was in reference to the situation where unexpected needs come up and you have to liquidate fund but don't need all of it over time. I was wondering if there is a strategy similar to your solution of buying a zero-coupon bond of half the duration but that allowed for withdrawal in installments.

Thanks,
Ari

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Post by bozo » Sun May 17, 2009 10:47 pm

@Dan:

I still submit, folks who are worried about multiple FDIC limits, and/or the basis points thrown off by bond funds, as opposed to individual bonds, have a wee tad too much money on their hands.

Mind you, I'm not opposed to being rich. Being rich I like. A lot.

Bozo

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Post by sscritic » Sun May 17, 2009 11:00 pm

duhmel1 wrote:
sscritic wrote:Let's take the argument to the extreme of low rates. You buy a $10k 20 year bond at 0% interest. After 20 years, you get your guaranteed $10k back. In those 20 years, interest rates have gone up and down (but not below zero), so the value of your bond dropped, but because you held it to maturity, you got all your $10k back.

Now suppose someone else puts $10k into a bond fund paying 0% today. As interest rates rise, the NAV will fall. Others will buy into the fund, resulting in the purchase of new bonds that pay interest. It might also result in the fund buying your bond at a large discount. At the end of 20 years, can you say that the person in the fund who reinvested dividends will have less than $10k? It will depend on the sequence of interest rate changes and flows in and out of the fund.


As I just stated in my previous post, if when you sell the fund the interest rate is higher than when you bought it you will have your returns adversely affected by the decrease in NAV. If the rates go up and return to the original level you will be OK .... however wher do you think rates will be headed in the next 3-5 years?????

If your goal is to avoid principal loss, put your money under your mattress. You will achieve your goal. This is what your 0% bond does.

Your statement that interest rates have to return to the same level as today for the bond fund to produce a positive return is not true. If the interest rate goes from zero to 10%, the fund will be paying dividends and buying more shares at low prices when the interest rate is 10%. Your 0% bond will be paying 0%. If interest rates drop back to zero, the fund will have a total return that is much greater than your 0% bond which has a return of zero. Therefore, it is clear that the bond fund yielding 0% today will beat your 0% bond as long as interest rate eventually fall to some low value, but that low value is a number larger than zero. Rates do not have to fully retrace to today's level. In fact, the more volatile the rates are, the better the fund will do (think rebalancing - rebalancing doesn't work if nothing ever changes in price, or think dollar cost averaging - again dca doesn't work if the price never changes).

Here is a recent example: I bought a municipal bond fund before the "crisis." During the crisis, money flowed to Treasuries and my municipal bond fund got hammered, but it kept paying dividends and buying new shares at low prices. Those new shares earned the high interest rates municipal bonds were paying during the crisis. Now the crisis is not over and the NAV is still below where it was when I purchased the fund, but I am above water because of the dividends and the shares purchased at very low prices when interest rates were higher than today. The same thing will happen in any bond fund when interest rates go up and down. The more often the interest rates go up and down and the larger the swings, the better the bond fund does.

If you totally ignore dividends and only look at NAV, then you are correct: don't buy a bond fund when NAV is high. If you want to look at total return, a bond fund paying 0% today has a good chance of eventually having a positive return, something your 0% bond will never have.

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Post by bozo » Sun May 17, 2009 11:08 pm

Ouch, sscritic spelled it out.

Why, oh why, do folks try to time the market?

Ladder, don't get madder.

Bonds, CDs, stocks, real estate. It's all relative.

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Re: spam

Post by spam » Mon May 18, 2009 4:46 am

Dan Kohn wrote:
spam wrote:Interest rates will either stay the same, or more likely, rise over the next decade. This will be bad for dollar denominated bond funds, and neutral for individual bonds held to maturity. If there is an argument in support of lower future interest rates, then I would like to hear it.

My tea leaves say "increased interest rate risk, and inflation". My handy chart says: bad for bond funds.

You are deeply mistaken here on multiple levels. I want to reiterate, though, that you should invest your money however you want to.

No one knows what interest rates will do over the next decade. No one. If you did, you could make billions. Although the Fed can influence short term rates, long term rates are set by the market. That means that at any given interest rate, exactly as many people think they will go up as go down. Trying to time your investment strategy based on future interest rates is as much a fool's game as trying to market time equities. There are mountains of research and hedge fund results showing no one can do this reliably over time.

Further, even if you are correct in believing that interest rates will rise, you are also in error about what instrument will deal with that. Bond ladders respond to interest rate shifts the same way bond funds do. And CDs are just a form of bond, which is not tradeable unless you buy it from a broker. Thus, there's nothing special about bond funds.

Please look at Individual Bonds vs a Bond Fund on the Bogleheads Wiki. It is really worth understanding these issues.


So, the trick is to criticize but offer nothing of substance then? As criticisms are suggestions in the negative, I could argue that you are actually making your own predictions whic are cloaked in fuzzy negative statements.

I am most likely no more a market timer than you are. However, you would have to be a fool to not make subtle investment changes if interest rates go up, or if inflation returns.

Falling interest rates have been very good to bond funds. We are pretty close to zero at the moment with not much wiggle room left to go down. This means that staying even or rising rates are the only two real options. The fixed income investment landscape could soon change fundamentally over an extended period of time.

Evidently, you think it is crazy that interest rates will rise. Therefore you are betting that rates will not change. A japaneese L shaped recovery is the prediction that your body language says to me.

So, now on to the next fuzzy math problem. Which instrument will deal with interest rate increases the best. Short term bonds? GNMA proucts? TIPs? CD's? oops, I am all out of time. Sorry, but you will simply have to guess.

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Post by Sidney » Mon May 18, 2009 5:04 am

We are pretty close to zero at the moment with not much wiggle room left to go down.


True enough for nominal treasuries but most of my non-TIPS FI investment is now in ST investment grade. The YTM on STIG is just over 6% (you need to look at YTM, not the SEC yield). 2 year treasuries are about .85%. That leaves a lot of room to cover default and liquidity risk on the corporate side. In fact, in the last couple weeks, the YTM on STIG has dropped from somewhere around 7% to the current level.
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Re: spam

Post by linuxizer » Mon May 18, 2009 3:58 pm

spam wrote:So, the trick is to criticize but offer nothing of substance then? As criticisms are suggestions in the negative, I could argue that you are actually making your own predictions whic are cloaked in fuzzy negative statements.


If your point was regarding Dan's suggestion that bond funds are equivalent to bond ladders, then he has offered quite a bit of substance, in the form of the link to the Bogleheads wiki article (which I believe he wrote a substantial portion of) and the two previous relevant threads. It is clear that some people on this thread have not read the offered links, and therefore I hardly think it is incumbent upon him to offer up a third and fourth and fifth proof of why the statement he made is true.

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Re: spam

Post by spam » Mon May 18, 2009 4:35 pm

linuxizer wrote:
spam wrote:So, the trick is to criticize but offer nothing of substance then? As criticisms are suggestions in the negative, I could argue that you are actually making your own predictions whic are cloaked in fuzzy negative statements.


If your point was regarding Dan's suggestion that bond funds are equivalent to bond ladders, then he has offered quite a bit of substance, in the form of the link to the Bogleheads wiki article (which I believe he wrote a substantial portion of) and the two previous relevant threads. It is clear that some people on this thread have not read the offered links, and therefore I hardly think it is incumbent upon him to offer up a third and fourth and fifth proof of why the statement he made is true.


Hi linuxizer,

I re-read my post, and it sounded much more aggressive than I intended it to read. I do apologize for that. It was not intentional.

The difference between a bond fund and a bond ladder is that you can hold the individual bonds in the ladder to maturity, and get your principal back on a specific date.

With a bond fund, you cannot "hold to maturity" as a whole range of maturities will be present in the fund; from days to years.

There is no future date where the return of principal is guarenteed with a bond fund. There is one (or more) with a bond ladder. Therefore, I can schedule maturities to match my future needs. With a bond fund, the NAV may be up, or it may be down on any specific date.

Furthermore, a bond fund is (I feel) more liquid than a bond ladder.

These simple reasons offer a few distinctions between ladders and funds.

If is statement is that bond ladders are identical to bond funds, then I would say that Dan is wrong on multiple levels.

Another level would include the obvious fact that a bond index is made up with all different types and grades of bonds. A bond ladder, can be built with only one specific type, grade, and maturity of bond if desired.

There are noteworthy differences which make one better than the other depending on the need of the investor. There are many different types of bonds and bond funds, and they all have their place.

I did not notice the wiki link at 5am this morning, so I will take a look at it now. Thanks for pointing it out to me.

It is clear that some people on this thread have not read the offered links, and therefore I hardly think it is incumbent upon him to offer up a third and fourth and fifth proof of why the statement he made is true.


Nobody is requesting any such thing from you or him. Nice strawman though. It even has a built in ad homin fallacy.

EDIT: I just read the wiki entry. It seems that you are the one who has not read it. It reads pretty much like my above post does. I highly doubt that Dan is saying Bond Ladders = Bond funds. It is nowhere in the text. You might want to check it out. Just a thought.

spam

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Post by Qtman » Mon May 18, 2009 4:41 pm

duhmel1 wrote:
Mel Lindauer wrote:
Over time, rates go up and they go down. One needs to understand the meaning of a bond fund's "duration" and then invest according to one's time horizon. Just as one doesn't buy a five-year CD when the money will be needed in two years, they wouldn't invest in an intermediate-term bond fund for a short-term need. Match your investments to your time horizons.


Interest rates have been dropping FOR 20 YEARS. We are headed into a period of higher rates - it is very possible that we will have the inverse of the past with interest rates 10 years from now being much higher than today. If your horixon is 10 years out and you buy individual bonds you will get your principal back. If you buy a bond fund and the rates are higher - YOU WILL LOSE PRINCIPAL.

Bond fund DURATION has is not a safety net on getting back your whole principal back. Again - it is merely a way to measure the change in bond fund NAV as a function of change in interest rates.


Isn't that the reason to have a degree of your bond allocation in I-Bonds or TIPs?

Owning many individual bonds and funds, the main worry for me are reinvestment rates.

Losing principle in a bond fund(not uncommon at times) is of less impact if you own the fund for cash flow and are not liquidating shares for living expenses.
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Post by Munir » Mon May 18, 2009 4:51 pm

If in a rising interest rate environment one does not reinvest the dividends and instead spins them off into a money market to spend on living expenses, doesn't that change the picture as far as total returns for bond funds are concenred since these dividends are not being reinvested in lower net asset value shares?

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Post by Taylor Larimore » Mon May 18, 2009 7:35 pm

Munir wrote:If in a rising interest rate environment one does not reinvest the dividends and instead spins them off into a money market to spend on living expenses, doesn't that change the picture as far as total returns for bond funds are concenred since these dividends are not being reinvested in lower net asset value shares?


Munir:
I will I will answer your question by editing your quote and leaving out extranous portions:

If one does not reinvest the dividends and instead spins them off into a money market to spend on living expenses, doesn't that change the picture as far as total returns for bond funds are concerned since these dividends are not being reinvested.


The answer is "yes" to both quotes.
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Post by linuxizer » Mon May 18, 2009 7:42 pm

spam wrote:I re-read my post, and it sounded much more aggressive than I intended it to read. I do apologize for that. It was not intentional.

The difference between a bond fund and a bond ladder is that you can hold the individual bonds in the ladder to maturity, and get your principal back on a specific date.

With a bond fund, you cannot "hold to maturity" as a whole range of maturities will be present in the fund; from days to years.

There is no future date where the return of principal is guarenteed with a bond fund. There is one (or more) with a bond ladder. Therefore, I can schedule maturities to match my future needs. With a bond fund, the NAV may be up, or it may be down on any specific date.

Furthermore, a bond fund is (I feel) more liquid than a bond ladder.

These simple reasons offer a few distinctions between ladders and funds.

If is statement is that bond ladders are identical to bond funds, then I would say that Dan is wrong on multiple levels.


I kinda feel bad here putting words in Dan's mouth, so I'll try to quote. What Dan said was:
"Bond ladders respond to interest rate shifts the same way bond funds do."
"The idea that a rolling ladder of individual bonds is less risky than a bond fund (where each has the same duration) is one of the most common fallacies on the Bogleheads forum."
"But my central point is that the opportunity cost is exactly the same between deciding whether to roll over a maturing bond and deciding to sell the same amount of a bond fund. The bond ladder has not given you any additional options that you don't get with a bond fund."

I believe the point of the hold to maturity argument is that there *is*, in your words, a "future date where the return of principal is guarenteed with a bond fund":
Bogleheads Wiki wrote:"At any moment after buying a bond fund, you can always be assured of getting your principal back."


At any rate, thank you for your civility. It is much appreciated.

spam wrote:Another level would include the obvious fact that a bond index is made up with all different types and grades of bonds. A bond ladder, can be built with only one specific type, grade, and maturity of bond if desired.

There are noteworthy differences which make one better than the other depending on the need of the investor. There are many different types of bonds and bond funds, and they all have their place.

I did not notice the wiki link at 5am this morning, so I will take a look at it now. Thanks for pointing it out to me.

It is clear that some people on this thread have not read the offered links, and therefore I hardly think it is incumbent upon him to offer up a third and fourth and fifth proof of why the statement he made is true.


Nobody is requesting any such thing from you or him. Nice strawman though. It even has a built in ad homin fallacy.


It's certainly ad hominem...the frustration is too great at this point, for which I apologize. I hardly think it is a strawman, however. You wrote, "So, the trick is to criticize but offer nothing of substance then?" To me, that is a criticism for not explaining his viewpoint, which had been done in the link he provided.

spam wrote:EDIT: I just read the wiki entry. It seems that you are the one who has not read it. It reads pretty much like my above post does. I highly doubt that Dan is saying Bond Ladders = Bond funds. It is nowhere in the text. You might want to check it out. Just a thought.


Replace is for = and you have your formulation.
Dan Kohn wrote:"In fact, a bond fund is a bond ladder, just with many more rungs and where you've hired someone else to manage it for you."


Note the caveat from the Wiki:
"There's also an important distinction between owning a ladder of individual bonds designed to meet specific future liabilities, and holding a rolling bond ladder."

Dan Kohn wrote:But nearly everyone arguing against bond funds actually has a rolling bond ladder, which is no better than a bond fund.

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Post by Munir » Mon May 18, 2009 7:58 pm

Taylor,

Thank you for your succinct response. The point I was trying to make, indirectly, is that if one does not reinvest the dividends in a bond fund while intrerest rates are rising ( & the the nav dropping), then you would have a loss in the value of your principal. I assume you agree.

A related question which you may want to respond to: if one wants to use a bond fund as a source of ongoing income, should one not reinvest the dividends at all (and maybe sell some shares too if that is necessary) or keep reinvesting dividends all the time and only sell shares as a source of income?

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Post by Taylor Larimore » Mon May 18, 2009 8:53 pm

Munir wrote:Taylor,

Thank you for your succinct response. The point I was trying to make, indirectly, is that if one does not reinvest the dividends in a bond fund while intrerest rates are rising ( & the the nav dropping), then you would have a loss in the value of your principal. I assume you agree.


Yes, I agree.

A related question which you may want to respond to: if one wants to use a bond fund as a source of ongoing income, should one not reinvest the dividends at all (and maybe sell some shares too if that is necessary) or keep reinvesting dividends all the time and only sell shares as a source of income?


Most Bogleheads would not have 100% in bonds during retirement. Generally they should sell taxable stocks first. Also, it is not clear if the bonds are taxable and in tax-deferred accounts or tax-exempt bonds in taxable accounts. I think I'll pass.
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Post by Alex Frakt » Mon May 18, 2009 9:14 pm

A couple of posts were accidentally removed by a moderator who was pulling one that violated forum policies. We can't move them back, so I'm going to quote them below. Sorry about that.

linuxizer wrote:
spam wrote:I re-read my post, and it sounded much more aggressive than I intended it to read. I do apologize for that. It was not intentional.

The difference between a bond fund and a bond ladder is that you can hold the individual bonds in the ladder to maturity, and get your principal back on a specific date.

With a bond fund, you cannot "hold to maturity" as a whole range of maturities will be present in the fund; from days to years.

There is no future date where the return of principal is guarenteed with a bond fund. There is one (or more) with a bond ladder. Therefore, I can schedule maturities to match my future needs. With a bond fund, the NAV may be up, or it may be down on any specific date.

Furthermore, a bond fund is (I feel) more liquid than a bond ladder.

These simple reasons offer a few distinctions between ladders and funds.

If is statement is that bond ladders are identical to bond funds, then I would say that Dan is wrong on multiple levels.


I kinda feel bad here putting words in Dan's mouth, so I'll try to quote. What Dan said was:
"Bond ladders respond to interest rate shifts the same way bond funds do."
"The idea that a rolling ladder of individual bonds is less risky than a bond fund (where each has the same duration) is one of the most common fallacies on the Bogleheads forum."
"But my central point is that the opportunity cost is exactly the same between deciding whether to roll over a maturing bond and deciding to sell the same amount of a bond fund. The bond ladder has not given you any additional options that you don't get with a bond fund."

I believe the point of the hold to maturity argument is that there *is*, in your words, a "future date where the return of principal is guarenteed with a bond fund":
Bogleheads Wiki wrote:"At any moment after buying a bond fund, you can always be assured of getting your principal back."


At any rate, thank you for your civility. It is much appreciated.

spam wrote:Another level would include the obvious fact that a bond index is made up with all different types and grades of bonds. A bond ladder, can be built with only one specific type, grade, and maturity of bond if desired.

There are noteworthy differences which make one better than the other depending on the need of the investor. There are many different types of bonds and bond funds, and they all have their place.

I did not notice the wiki link at 5am this morning, so I will take a look at it now. Thanks for pointing it out to me.

It is clear that some people on this thread have not read the offered links, and therefore I hardly think it is incumbent upon him to offer up a third and fourth and fifth proof of why the statement he made is true.


Nobody is requesting any such thing from you or him. Nice strawman though. It even has a built in ad homin fallacy.


It's certainly ad hominem...the frustration is too great at this point, for which I apologize. I hardly think it is a strawman, however. You wrote, "So, the trick is to criticize but offer nothing of substance then?" To me, that is a criticism for not explaining his viewpoint, which had been done in the link he provided.

spam wrote:EDIT: I just read the wiki entry. It seems that you are the one who has not read it. It reads pretty much like my above post does. I highly doubt that Dan is saying Bond Ladders = Bond funds. It is nowhere in the text. You might want to check it out. Just a thought.


Replace is for = and you have your formulation.
Dan Kohn wrote:"In fact, a bond fund is a bond ladder, just with many more rungs and where you've hired someone else to manage it for you."


Note the caveat from the Wiki:
"There's also an important distinction between owning a ladder of individual bonds designed to meet specific future liabilities, and holding a rolling bond ladder."

Dan Kohn wrote:But nearly everyone arguing against bond funds actually has a rolling bond ladder, which is no better than a bond fund.


bozo wrote:A rolling CD ladder (which is, after all, a rolling ladder of nominal bonds) is just a bond ladder cutting out the middle-man.

Think about it, but not too hard.

Painfully obvious.

Bozo


linuxizer wrote:
bozo wrote:A rolling CD ladder (which is, after all, a rolling ladder of nominal bonds) is just a bond ladder cutting out the middle-man.


If the source of the riskless rate is the U.S. Federal Government, then isn't the middleman the bank? ;-)

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Post by linuxizer » Mon May 18, 2009 9:35 pm

Alex Frakt wrote:A couple of posts were accidentally removed by a moderator who was pulling one that violated forum policies. We can't move them back, so I'm going to quote them below. Sorry about that.


No worries, thanks. I reposted earlier. Did wonder if I'd found myself on the grumpy side of a mod though, when my post disappeared!

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Re: linuxizer

Post by Dan Kohn » Mon May 18, 2009 10:12 pm

linuxizer wrote:My question was in reference to the situation where unexpected needs come up and you have to liquidate fund but don't need all of it over time. I was wondering if there is a strategy similar to your solution of buying a zero-coupon bond of half the duration but that allowed for withdrawal in installments.

Let's say you have your money in the New York Long Term Tax Exempt fund, with an average maturity of 9.8 years, when you realize that you are going to need the money in the next 5 to 10 years. With a ladder of bonds, you would stop rolling over bonds as they mature until more and more of your money was in a money market. However, it might take 20 or 30 years to fully cash out your ladder.

With a bond fund, you can pursue a similar strategy. At any point, you can shorten the average maturity of a bond fund by blending it with a money market fund, such as New York Tax-Exempt. A 50/50 split of NY TE MM and NY LT TE has the effect of halving your average maturity. So, if you'll need the money in 5 to 10 years, you might decide to exchange 10% to 20% of your bond fund each year for the money market.

However, I still think this example is a little arbitrary. In the real world, retirees have an asset allocation. In retirement, one hopefully holds one's age in bonds. The simplest and best withdrawal strategy, IMHO, is to simply sell whatever assets each quarter have performed best in order to rebalance to one's preferred asset allocation. Then, each year, you can incrementally increase your bond holdings.

If at some point, you decide you have more money that you will need for your retirement, than you give a portion of your assets to family or charity. But it would be somewhat unusual to say that in 5 years, you plan to donate $x to charity. And if you did, you would probably be better off selling what was necessary immediately to purchase a zero coupon bond that would satisfy the liability in 5 years. But alternatively, you could do an annual decrease of average maturity for that money by moving 20% each year into a money market fund.

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Re: spam

Post by Dan Kohn » Mon May 18, 2009 10:27 pm

spam wrote:I am most likely no more a market timer than you are. However, you would have to be a fool to not make subtle investment changes if interest rates go up, or if inflation returns.

You are definitely far more of a market timer than I am. I allocate my bonds 50/50 between TIPS and nominal bonds (NY LT Tax Exempt, in my case, because I don't have room in tax-advantaged accounts). I continue making periodic investments in those funds totally independent of what interest rates do. When I retire, I expect to sell whatever assets have outperformed over the last quarter to rebalance to my target allocation.
spam wrote:Falling interest rates have been very good to bond funds. We are pretty close to zero at the moment with not much wiggle room left to go down. This means that staying even or rising rates are the only two real options.

I'm not sure where you get the idea that interest rates are close to zero. Do you look at the yield curve? Even what was arguably a bubble in long term rates is almost gone.
spam wrote:Evidently, you think it is crazy that interest rates will rise. Therefore you are betting that rates will not change. A japaneese L shaped recovery is the prediction that your body language says to me.

What I said and what I meant was "No one knows what interest rates will do over the next decade. No one." I don't understand how you can get from that to a claim that "rates will not change".
spam wrote:So, now on to the next fuzzy math problem. Which instrument will deal with interest rate increases the best. Short term bonds? GNMA proucts? TIPs? CD's? oops, I am all out of time. Sorry, but you will simply have to guess.

In general, I don't know and I don't care what interest rates do. I will hold my bond funds longer than their duration, which means I am largely immune to interest rate movements. I hold 50% TIPS to protect me from inflation and 50% nominal bonds to protect me from deflation. I have no idea which will be useful when. There is no timing and no predicting involved.

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Re: spam

Post by Dan Kohn » Mon May 18, 2009 10:31 pm

spam wrote:The difference between a bond fund and a bond ladder is that you can hold the individual bonds in the ladder to maturity, and get your principal back on a specific date.

With a bond fund, you cannot "hold to maturity" as a whole range of maturities will be present in the fund; from days to years.

Wrong. With a bond fund and a bond ladder, you can get your money back in about half the time of the longest maturity bond by selling everything and buying a zero coupon bond.

No one is claiming that a bond fund and a bond ladder are identical. The claim is that a bond fund is no riskier than a rolling ladder of individual bonds.

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Response

Post by Dan Kohn » Mon May 18, 2009 10:38 pm

Munir wrote:The point I was trying to make, indirectly, is that if one does not reinvest the dividends in a bond fund while intrerest rates are rising ( & the the nav dropping), then you would have a loss in the value of your principal. I assume you agree.

A related question which you may want to respond to: if one wants to use a bond fund as a source of ongoing income, should one not reinvest the dividends at all (and maybe sell some shares too if that is necessary) or keep reinvesting dividends all the time and only sell shares as a source of income?

Yes, you can lose principal in a bond fund if you don't reinvest dividends while rates are rising, and then sell a portion of the fund. But, the bond fund is not performing any worse than a ladder of individual bonds would do under the same circumstances. Not rolling over a maturing bond at the (hypothetically) very high yield has an identical opportunity cost to selling a portion of your fund at the (hypothetically) very low NAV.

In real life, most investors are better off reinvesting dividends (even during withdrawal), and then selling whichever asset has outperformed the previous quarter. On average, you would sell 4% of your bond fund every quarter. But the rebalancing with equities and between inflation-adjusted and nominal bonds would cause you to buy low and sell high.

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Post by bozo » Mon May 18, 2009 10:45 pm

One might argue that there is a "risk premium" in CDs, where you forfeit a certain amount of yield because the bank or thrift is paying a certain amount of insurance.

Of course, the trade-off is the insurance. Not real sure Millenium Bank was a handy vehicle. Or anything with "Stanford" attached to it.

By the way, as a graduate of Stanford, I'm a tad miffed at this Texan using the word "Stanford". I understand they're suing him, but I think he's broke.

Bozo

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Re: spam

Post by spam » Tue May 19, 2009 4:20 am

Dan Kohn wrote:
spam wrote:The difference between a bond fund and a bond ladder is that you can hold the individual bonds in the ladder to maturity, and get your principal back on a specific date.

With a bond fund, you cannot "hold to maturity" as a whole range of maturities will be present in the fund; from days to years.

Wrong. With a bond fund and a bond ladder, you can get your money back in about half the time of the longest maturity bond by selling everything and buying a zero coupon bond.

No one is claiming that a bond fund and a bond ladder are identical. The claim is that a bond fund is no riskier than a rolling ladder of individual bonds.


Hi Dan,

You did not claim a bond fund and a ladder fund are identical, and I did not either. Someone else did.

Thank you for the link BTW, I did not read it until the afternoon past the day I made this post. Nice read. I did have an slight disagreement with this part of the text:

Wrong. With a bond fund and a bond ladder, you can get your money back in about half the time of the longest maturity bond by selling everything and buying a zero coupon bond.


What you are talking about here is two separate transactions. You may be able to recover from a bond NAV fund loss, but you still incur the loss.

You are saying A + B = C. Therefore A = C. Or, it is like saying "Sure, I lost 10k when I sold the house, but I bought a lawnmower and will rent it out to make up the difference".

These are two separate transactions. They are independant, and I suspect you will have to sell the zero coupon bond when it matures which is the point. I do appreciate the idea of buying a zero coupon bond as an instument of recovery, I had not thougth of that, but what if you never had the bond fund loss? You would be AHEAD and not even.

I would like to say that my posts have a stronger element than I had intended. I really do mean that, and I do apologize for it. The text, and my feelings are not equal.

Sometimes this happens when discussing differences. Please, no hard feelings, and I do read all of your posts with interest.

linuxizer
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Joined: Wed Jan 02, 2008 7:55 am

Re: spam

Post by linuxizer » Tue May 19, 2009 6:05 am

spam wrote:You did not claim a bond fund and a ladder fund are identical, and I did not either. Someone else did.


The "someone else" would be me. Again, I apologize if it seemed like I was putting words in people's mouths.

That said, I stand by my copy/paste skills.... Behave essentially identically and are constructed in very similar ways would perhaps be a better way to put it.

Dan Kohn wrote: At any point, you can shorten the average maturity of a bond fund by blending it with a money market fund, such as New York Tax-Exempt.


I guess if you had a defined date where you needed to liquidate all of a pool of money by, you would then slowly shift your allocation between the bond fund and the MM so that the average duration shortened as the date approached? Again, I get your point that realistically it's just not an issue because most transactions can be dealt with via selling whatever asset class is highest in the overall portfolio (essentially over-rebalancing down to a lower portfolio total), but I can see certain life situations where this might be necessary.

I need to just bite the bullet, buy Larry's book, and sit down with a calculator or a copy of R for a while ;-)

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