Need Help With Bond Funds and Comfort Level. Or...

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GetSmarter
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Need Help With Bond Funds and Comfort Level. Or...

Post by GetSmarter » Fri Nov 08, 2019 1:42 pm

I need help clearing the cobwebs from my bond fund/MM/CD thinking, and devise a workable plan for my "bond" allocation. I've been under stress due to California wildfires and the death of parent. I don't want to make a mistake, and I have significant money sitting on the sidelines in a MM getting less than 1.8 interest due to falling interest rates. Maybe I shouldn't care and give myself more time to heal but I feel putting off decisions may hurt my long-term outcome. I'm 60 years old with a 45/55 stock/bonds portfolio. 1.2 mil of which is in MM

I sold a property and have 700k that I want to keep liquid to use within year for option to purchase another property. (possibly outside of California so I'll start exploring soon) I figure that money should remain in MM or no-penalty CDs getting a higher interest rate than current Fidelity MM. Regarding the no-penalty CD, currently getting a higher interest rate, the idea of having more banks to pay attention to and wonder how protected I am, brings me back to Bogle's simplicity. I have written here twice asking for advice but realize my question may not have allowed for the more robust answer I need.

Outside of the money earmarked for "real estate" I have 480k in MM funds getting less than 1.7-1.8 and this money I feel should be invested better with a plan I believe in. Or I need to accept that until I relocate, and get away from smoke and fine particulates lingering in the air and fogging my brain, just keep my MM status quo.

I'm content with my 45% equities allocation.

I have never invested much in bond funds. The few times I did, before I read John Bogle, I'd observe the funds going down relative to my equity funds and then I'd sell taking losses. Never gave them a fighting, hold 'em, chance. So last month I put my toe in the bond fund waters again with a little less than 10k, and I see that money value going down relative to everything else.

I want income from my potential bond fund portfolio, like I was getting from my money market fund but that MM income gets smaller every month due to the sinking interest rate. Can you help me figure out and accept my simplicity/income plan for my bond portion? Get over my fears of bond funds? My fears are more like - I have no experience investing in bond funds well because I never gave them a hold 'em chance.

I wrote about specifics in my portfolio viewtopic.php?f=1&t=291041&p=4761537#p4761537:

Thank you.
“The more simple we are, the more complete we become.” August Rodin | | “The less I needed, the better I felt.” Charles Bukowski

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Wiggums
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by Wiggums » Fri Nov 08, 2019 2:03 pm

I understand what you are saying about bond funds. I feel the same way. However, you cannot compare equities and bonds. Both need to be held for many years before you can past judgement on them. You don’t want your bond fund to perform like equities. Furthermore, even losses in bond funds will right itself as the interest rate changes. So be patient.

I don’t make this suggestion often, but if you were in an all in one type fund, you wouldn’t focus on the bond portion. Just a thought.

Vanguard Fan 1367
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by Vanguard Fan 1367 » Fri Nov 08, 2019 5:42 pm

I also recommend looking at the long term.

I like the higher yield of the long and intermediate term Vanguard Corporate bond funds.

I have watched them go down and watched them go up. A buy and hold plan has worked for many years with those funds.

Whatever bonds you are comfortable with you need to be patient because especially with long term the value can drop for a while.

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Hector
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by Hector » Fri Nov 08, 2019 6:00 pm

Since you never invested in bond, I think it would not be easy for you to sleep well at night if you hold intermediate or longer term bond when they drop.
You need to accept either risk that comes with bond or get used to low return.
You need to go beyond 10 year treasury note to get more than 2% safe return.

I think MM is a good place right now for people who can not see their bond prices falling.
Look for direct CDs.
You can put $10k per person in I Bond which is guaranteed to give you 2.2% return at least for 6 months.
If you don't need to touch money for 20 year, you can put $10k per person in EE bond; ~3.6% return.
Last edited by Hector on Fri Nov 08, 2019 6:01 pm, edited 1 time in total.

rkhusky
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by rkhusky » Fri Nov 08, 2019 6:00 pm

It is all about risk versus return. Savings accounts, CD’s, and money markets are very safe and therefore return the least. Total Bond Fund is about 70% in Treasuries and 30% in corporate bonds, with intermediate risk in the bond universe and should pay a little more. A full corporate bond fund, especially a high yield corporate bond fund, has the most risk and therefore returns more. Corporate bonds also tend to drop when the stock market drops, while Treasuries might go up a little.

Total Bond Fund is middle of the road regarding risk versus return and is what many choose for their bond allocation.

Except for high yield corporate (junk) bonds, any of the bond funds have substantially less risk than stocks.

You should really be more worried about your stocks than your bonds. Your bond fund is very unlikely to drop 50% in a few months, whereas stock funds have.

rkhusky
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by rkhusky » Fri Nov 08, 2019 6:48 pm

Another thing that might help in thinking about bond funds is the duration of the fund. Duration is basically the length of time that you have to wait until the extra interest earned from a rate increase equals the drop in price (or NAV) caused by the interest rate increase. The price is generally expected to drop an amount equal to the duration times the interest rate increase. That is, if your bond fund has a duration of 5 years and rates increase by 1%, then your bond fund will drop 5% and it will take 5 years of interest to equal that 5% drop in price.

Savings accounts, CD’s, and money markets essentially have a duration of zero, since their price doesn't change with interest rate changes. As noted above, they generally have the lowest return. There exist short term bond funds with durations on the order of 1-3 years. Intermediate term bond funds have durations on the order of 4-6 years, and long term bond funds have durations of 15-20 years.

So, for funds that you might need in the next 1-3 years, you could invest in Savings accounts, CD’s, and money markets. For money that you might need in the next 5 years, you could invest in a short term bond fund. And for money that you might need in 10+ years, you could invest in an intermediate bond fund. That would provide enough time that you would recoup any price decrease caused by an interest rate increase.

Along with the concept of duration, there is also credit quality, which measures the likelihood that a bond will be defaulted, i.e not pay the interest that was promised. In order of safeness, there are Treasuries (and other government bonds), and different grades of corporate bonds from AAA - BBB in the better quality categories. Junk bonds are rated substantially less than BBB (or Baa).

So, in order of decreasing safety, you could invest in an Intermediate Treasury fund, Total Bond fund or Intermediate Bond fund, with a mix of Treasury and corporate bonds, or an Intermediate Corporate fund. The same holds for short term and long term bonds. There are a few other odds and ends, but those are the major categories.

Everything is approximate and there are no hard and fast rules on how things will play out. Timing the bond market is just as difficult as timing the stock market.

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Tyler Aspect
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by Tyler Aspect » Fri Nov 08, 2019 7:10 pm

Before buying any bonds in a taxable account your tax advantaged accounts should be entirely composed of bonds, such as the total bond market index (BND). Intermediate Term Bond index ETF (BIV) might be better than BND in the taxable account in the state of California.

Bonds in general have a lower level of return compared to stocks, but bonds are more stable in producing return. If bonds lose value because the market yield has gone up that is not the end of the world; this is merely a trade-off of net asset loss versus higher income. Higher income wins if your holding period is longer than the bond fund's duration measurement.
Last edited by Tyler Aspect on Fri Nov 08, 2019 10:10 pm, edited 1 time in total.
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Kevin M
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by Kevin M » Fri Nov 08, 2019 8:41 pm

rkhusky wrote:
Fri Nov 08, 2019 6:48 pm
Savings accounts, CD’s, and money markets essentially have a duration of zero, since their price doesn't change with interest rate changes. As noted above, they generally have the lowest return.
CDs do not have a duration of 0 years, and they do not necessarily have the lowest return.

Brokered CDs change in price as yields change, just like bonds. You'd know this if you ever owned any brokered CDs and paid attention to the values shown online on on your statements.

The reason direct CDs do not have a duration of 0 years is because of the early withdrawal penalty, so they do have some downside risk. If the withdrawal penalty is mild enough, the downside risk can be much less than a bond of same maturity though. There is no upside in terms of duration risk with a direct CD. Due to these unique features, the duration concept doesn't apply very well to direct CDs--at least in terms of liquidation value.

Many of us have recently been buying 2-year CDs at 3.00% APY and 3-year CDs at 3.25% APY. This is when 2-year and 3-year Treasury (bond) yields have been around 1.6%, so the CDs will for sure have a much higher return than the Treasuries of same maturity held to maturity.

Kevin
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Dandy
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by Dandy » Sat Nov 09, 2019 8:22 am

I think the term fixed income is better than bonds. I opt for a variety of fixed income products. I cover some of my fixed income needs by investing in Balanced Index and Wellesley Income funds in my TIRA. I have short term bond funds, Intermediate Treasury, Inflation Protected and Intermediate and Ltd Term muni funds. I have a CD ladder, money market, and on line Savings.

Part of the reason for such variety is that I roughly follow Dr. Wm Bernstein's idea of having 20 or so years worth of drawdown in "safe" products. For me that is short term bond funds and FDIC/money market products. I also don't like to put a lot of assets in one product.

Is that too complicated? Not for me so far since I don't worry about rebalancing sub allocations -- e.g. does it really make a difference if you have 1% more in a money market fund vs a short term bond fund? I keep an eye on the overall equity vs fixed income allocation and that I have enough "safe assets" in short term bonds and FDIC/money markets.

The Total Bond Fund is a very good choice. It doesn't include Inflation Protected Securities, Muni funds, or FDIC/money market products. I do.

Topic Author
GetSmarter
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Re: Need Help With Bond Funds and Comfort Level. Or...

Post by GetSmarter » Mon Nov 11, 2019 8:11 pm

Thank you for sharing your process!
“The more simple we are, the more complete we become.” August Rodin | | “The less I needed, the better I felt.” Charles Bukowski

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