Bond Fund Question

[DenverCraig]

Hi There,

First of all, thanks for all of the help with my previous questions. This forum is a gold-mine! I'm a few years away from early retirement (my target is 59 1/2, about 2 years from now). I've been adjusting my asset allocation from the many random mutual funds I've accumulated over the years to just a few index ETF's in just a few areas. (There's also some cash in interest bearing savings). I've got the stock funds sorted out but I'm struggling to understand how to select a bond fund or funds for the more secure part of my portfolio. (This would be in my IRA so tax-deferred). The book I'm reading recommends an intermediate term bond fund, and at one level I understand what that means, but I don't understand things like:

How safe is one bond fund versus another?
Is there such a thing as an indexed bond fund or ETF?
How and when are dividends paid and how do you figure out what that return will be?
How much "guarantee" of a return is there?
I'm assuming I don't need a tax-free bond fund or ETF since it's already in a tax-deferred IRA. Correct?

And what don't I know?

Anyway, I'm just looking for some guidance. Took me a while to get my arms around stock mutual funds and ETF's. Excited to learn more about the bond thing.

Thanks again!

 

[njhowie]

> How safe is one bond fund versus another?

In general, most bond funds are "safe"...as in "safer" than stock funds when judged on volatility. In general, the bond fund will be less volatile. Assuming we are not talking about an index fund, the fund manager could employ many risky strategies, most obvious being to purchase lots of risky bonds.

> Is there such a thing as an indexed bond fund or ETF?

Indeed there is. Google for it and you will find them. Here's an article that points out a few:
https://www.thebalance.com/best-index-funds-for-bonds-4117138

> How and when are dividends paid and how do you figure out what that return will be?

Dividends can be paid at any time. They could be monthly, just annually, or periodically throughout the year. You'd need to check with the specific fund(s) you're considering.

> How much "guarantee" of a return is there?

No guarantee of return. These are investment instruments.

> I'm assuming I don't need a tax-free bond fund or ETF since it's already in a tax-deferred IRA. Correct?

Correct.

 

[Teacher Terry]

I think if you make it clear you are willing to talk kids will share as they feel comfortable. My DIL was diagnosed with a tennis ball sized brain tumor and her parents lived in Europe. They came over frequently for support and we had to keep encouraging her to tell her parents. We were careful to let them lead and only made suggestions.

 

[VanWinkle]

Bond funds are most affected by duration(sensitivity to interest rates) and type of bonds(junk, corporate, government, treasury). Treasury bond funds have been deemed the most safe in the U. S. due to the lack of default of the U.S. government. Intermediate bond funds are considered the "sweet spot" for duration based on risk and return. Total Bond funds (index funds) are available at the major brokerages and would normally serve the purpose for money not needed for 5-7 years. If you have a short term target for the money, you might consider a short term bond index(2-3 years duration). You can go to Morningstar and check the bond fund portfolio to see how much is government bonds and duration.
Dividends are often paid monthly by bond funds and the SEC interest yield is stated in Morningstar for the fund. VBTLX Vanguard Total Bond Fund is 2.52% at this time.
Nothing is guaranteed, but government bond funds are considered very safe for paying interest. The principal can vary with interest rates.

Tax free(municipal bonds) are not needed in a tax deferred account.

Best to you,

VW

 

[steelyman]

This book, Why Bother With Bonds by Rick Van Ness, was very helpful for me in getting acquainted with the basics of bonds. It’s targeted toward beginners.

https://www.amazon.com/dp/0985800402/ref=cm_sw_r_em_api_i_c_K1VlDbKW9XGDD

 

[njhowie]

I think if you make it clear you are willing to talk kids will share as they feel comfortable. My DIL was diagnosed with a tennis ball sized brain tumor and her parents lived in Europe. They came over frequently for support and we had to keep encouraging her to tell her parents. We were careful to let them lead and only made suggestions.

Wrong thread?

 

[pb4uski]

Wrong thread?

+1 I've done that before.

 

[bingybear]

I recall the saying " bonds are the place you invest in to loose money". This was more in the time frame after the great depression and the US was in a long rising rate environment.

Late 70's thru 2000 or so was falling rates and bonds were great. As rates dropped you could sell for more (CG) or keep pulling interest.

Now the environment is what? rising rates? floating low rates? There is not a long way to fall.

There are bond index funds... both broad (BND) and more focused based on numerous methods.

Bond funds may trade bonds or have to deal with bonds being called.

You need to decide what type of bond holdings and how much based on your outlook.

 

[scrabbler1]

I have been investing in bond funds for 29 years. They have been in taxable, tax-deferred; corporate, munis; intermediate-term, long term; investment-grade, borderline investment grade.


VanWinkle covered most of what I would write. Intermediate-term is a good middle-ground between the lower-yielding short-term bond funds and higher-volatility long-term ones. Investment-grade funds are less volatile than lower-grade (often called "junk bond") funds. Don't put munis in a tax-deferred account such as an IRA.


Dividends are paid monthly. Cap gain distributions are rare in bond funds and are usually very small, especially for bond funds whose prices don't bonce around much.


One ratio I calculated in order to get a better handle on the dividend return of a bond fund is to take its monthly dividend per share and divide it by its reinvestment price. Add one to it and raise it to the 12th power to annualize it. Or, multiply 12 consecutive of these together to get a smoother, 12-month moving average, as I do in my spreadsheets. I find this more useful than the total return data shown on the fact sheets because it doesn't include any movements in the share price.

 

[pb4uski]

Bonds are just another form of fixed income. You can think of a bond fund as simply owing an interest in a big bond portfolio... the interest income from the bonds is distributed to you and the overall portfolio value changes from day to day as the value of bonds change. Similar concept as stocks.

However, since a bond fund provides interest and stablility many here invest in CDs rather than bonds since they also provide interest and stability.

Fixed income has been a tough area to invest in over the past few years. My "bond" fund is an investment in Vanguard Wellesley in my tIRA. Since Wellesley is 60% bonds, my investment in Wellesley gives me easy access to Wellesley's fixed income management and the stocks are the whipped cream on top. I also have some 3.5% 5-year CDs and some Vanguard International Bond fund.

I also have a small portfolio of preferred stocks that yield a little over 5% but that is probably more work than many people are interested in doing but once I'm fully invested it is pretty easy... just monitoring.

Vanguard's Prime MM Fund, VMMXX, isn't a bad place to park funds... it is currently yielding 2.3% which is more than many longer term CDs.

 

[OldShooter]

... I'm struggling to understand how to select a bond fund or funds for the more secure part of my portfolio. (This would be in my IRA so tax-deferred). ...

@DenverCraig, implicitly you have decided to use bond funds for the fixed income portion of your portfolio. Why? Doing so raises all of the questions you have, many of which don't apply to investments in individual bonds.

I am on the investment committee for a small nonprofit. We are running around $3M in fixed income and the majority of the committee and its chairman all believe that bond funds are to be avoided. Instead, we have instructed the investment manager to buy individual bonds. He is primarily taking $10,000 positions in investment-grade corporates, though there are some TIPS in there too. All bonds will be held to maturity. With this approach, we pay no fund manager fee, we can arrange maturities to suit future cash flow needs, and we never have to worry about changes to the portfolio value due to interest rate moves.

In DW and my personal portfolio most of the fixed income money is in TIPS (https://www.investopedia.com/terms/t/tips.asp). We believe that the most serious risk to our retirement is a period of high inflation. Low probability, yes, but high impact. By holding TIPS in our tax-sheltered accounts, we have a hedge against serious inflation and if that inflation does not come we view the slight yield loss vs treasuries as an insurance premium. It's just like our house: We pay an insurance premium to protect against the low probability, high impact event of a house fire.

Investing in corporates demands diversification as we have done in the nonprofit. Hence, a significant amount of money. You can invest in treasuries and agencies ("govvies") or in TIPS without worrying about diversification, though. TIPS are especially nice because there is almost no "yield curve" -- a thing that is mostly involved with inflation predictions. Inflation predictions are unnecessary with TIPS.

From posts here, many people seem to buy bond funds because they view buying individual bonds as too much hassle. IMO it is really easy: I just call the bond desk at Schwab, talk to a real person about my needs and what is availalble, then place the order. Elapsed time less than 10 minutes. When I have a bond maturing I get an email from Schwab and, a few days before, a phone call asking what I want to do. Then the cycle begins again. I brokerchecked the bond guy I usually talk to and he had 17 years' experience in the business. So, good quality there.

(Our personal TIPS position consists of mostly one issue: 2% of 2026, bought in 2006. One decision, 13 years ago. Hardly difficult or a hassle.)

YMMV, of course, but I'd encourage you to at least consider individual bonds held to maturity. Then you don't have to pay anyone and you don't have to worry about interest rate moves affecting the value of your bond fund holdings.

 

[gwraigty]

From posts here, many people seem to buy bond funds because they view buying individual bonds as too much hassle. IMO it is really easy: I just call the bond desk at Schwab, talk to a real person about my needs and what is availalble, then place the order. Elapsed time less than 10 minutes. When I have a bond maturing I get an email from Schwab and, a few days before, a phone call asking what I want to do. Then the cycle begins again. I brokerchecked the bond guy I usually talk to and he had 17 years' experience in the business. So, good quality there.

<snip>

YMMV, of course, but I'd encourage you to at least consider individual bonds held to maturity. Then you don't have to pay anyone and you don't have to worry about interest rate moves affecting the value of your bond fund holdings.

I've bought individual bonds for years at both Schwab and Fidelity without calling the bond desk. It's easy to research and buy them online. Lately I've been buying some bond ETFs for various simplification purposes, but I continue to search out individual issues once in awhile. When I buy ETFs, I'm looking for cash flow, as with individual bonds, so I'm not overly concerned about fluctuating values.

 

[OldShooter]

I've bought individual bonds for years at both Schwab and Fidelity without calling the bond desk. ...

Yes, and actually my confession is that I call because I am lazy. In a few minutes the bond guy can give me the sweep of yields on govvies, corporates, brokered CDs, etc. There is a standard $25 fee for talking to an actual person, but often the guy waives it. Maybe the waiver is based on the size of the transaction. I don't know. (& btw those guys are salaried, so they put no spin on their recommendations)

But I think the majority of people, like @gwraigty just buy off the web sites. Sorry I didn't mention that.

 

[wolf]

OP. Been there. IMHO. Unless you are an "expert". Just stick to CD's. Very safe and
principle guaranteed if held to maturity. Only decision to make. Broker CD's which do fluctuate or Bank/Credit union CD's. Easy to understand.

If you are willing to do "internet" banking. You can find the best CD rates in the US.
Just a little more paperwork. More so if do IRA CD's. But can be rewarding.

Just be sure and check EWP penalty. They are all different, depending upon financial
institution. Some are really bad!

 

[ArmchairMillionaire23]

Vanguard's Prime MM Fund, VMMXX, isn't a bad place to park funds... it is currently yielding 2.3% which is more than many longer term CDs.

Update from Vanguard:

Effective September 29, Vanguard Prime Money Market Fund has a new name and investment strategy, and a change to its Investor share class. Here are the details of the changes:

We’ve changed the fund’s name to Vanguard Cash Reserves Federal Money Market Fund.
We’ve updated the fund’s prospectus to reflect its new investment strategy, which focuses almost exclusively on cash investments, U.S. government securities, and/or repurchase agreements collateralized solely by U.S. government securities or cash.
We’ve closed the fund’s Investor share class to new investors. Investor Shares remain available for additional purchases by current shareholders, but we’ll be phasing the Investor share class out in the months ahead. Clients can invest in the fund’s Admiral™ Shares, whose investment minimum was lowered to $3,000 in late August, making more than 1 million shareholders eligible for the lower-cost share class (0.10% for Admiral Shares compared with 0.16% for Investor Shares).

I realize this is an older thread but I found it while searching for information about bond investing. The referenced quote mentioned Vanguard Prime MM Fund so I looked that up and found out it was closed to new investors. So I thought I'd post an update for others looking at this thread like I just did.