Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: Bond Funds
Old 04-14-2006, 01:25 PM   #21
Thinks s/he gets paid by the post
 
Join Date: Apr 2006
Location: North Bay
Posts: 1,026
Re: Bond Funds

Good discussion. What I've gotten out of it is that laddered Treasuries can create a very low risk cash flow instrument (2B), while bond funds look better when viewed as part of a total return, allocated asset portfolio. So if you are likely to need to use your principal in the short- to medium-term, buy short- to medium-term bonds to avoid interest rate risk. If you want to invest part of your nest egg in bonds for the long term you can get diversification and automatic reinvestment more conveniently in bond funds.
__________________

__________________
scrinch is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Bond Funds
Old 04-14-2006, 01:30 PM   #22
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: Bond Funds

Quote:
Originally Posted by scrinch
I finally realized that in a rising interest rate environment, just like I would, the fund will hold the bonds to maturity and realize a 100% return of principal also.* So if I am willing to hold the bond for 10 years, then I should be willing to hold the bond fund for 10 years, and the fund would get its principal back despite the temporary paper loss of value in the intervening years.
That is not true. The classical bond mutual fund targets a specific maturity -- short term, medium or long. They buy bonds on the high side of their target and then sell them several years later on the low side. They don't hold bonds to maturity.

There are closed end bond funds that do hold their bonds to maturity. They are a whole nother thread.
__________________

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 01:39 PM   #23
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: Bond Funds

Quote:
Originally Posted by brewer12345
I think you got a bunch of responses trashing bond funds because many of the people who buy individual bonds are the ones who are terrified of losing principal.* What they seem not to realize is that they earn total return on bonds just like you would in a bond fund.
I would like to point out that I am the only one trashing bond mutual funds.

The only way the bond fund's total return will exceed that of an individual bond is in a falling interest rate environment. There the bond mutual fund will continue to pay the same interest payment indefinitely and a capital gain will be available at any time.

Of course, in a rising interest rate environment, the interest payment stays the same and a capital loss will be realized when the fund is sold.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 02:20 PM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

Of course, in a rising interest rate environment, the interest payment stays the same and a capital loss will be realized when the fund is sold




no the intrest rate never stays the same in a bond fund ..its always variable along with the principal thats variable....they equal out to the origional purchase deal when duration is met
__________________
mathjak107 is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 02:43 PM   #25
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: Bond Funds

I used the work "payment" and not "interest rate." In reality the payment will move a little but it will stay pretty close to the same dollar amount as when purchased. The interest rate of the bond mutual fund will vary with the market. That's where the principal changes come from. It's just about the same for an individual bond -- except at maturity you know how much the asset will be worth.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 04:38 PM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Re: Bond Funds

Quote:
Originally Posted by 2B
Again, I don't buy bonds to speculate in interest rates.* I buy bonds to make sure I have a certain amount of cash on a certain future date.* I can't do that with a bond mutual fund!
I buy bond funds to balance out my equities. Bonds are poorly correlated with stocks, so they serve as a good diversifier for equity funds. This is not interest rate speculation, this is classic asset allocation. I couldn't care less about bonds maturing - I will always hold x% of my assets in bond (funds). I don't need X amount of cash by a certain date - I hold y% of cash as part of my asset allocation.

Bond funds give me access to a wide diversity of offerings. I don't care to manage holding individual bonds.

People have different investment techniques - that's all.

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 04:58 PM   #27
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

Quote:
Originally Posted by audreyh1
I buy bond funds to balance out my equities. Bonds are poorly correlated with stocks, so they serve as a good diversifier for equity funds.* This is not interest rate speculation, this is classic asset allocation.* I couldn't care less about bonds maturing - I will always hold x% of my assets in bond (funds).* I don't need X amount of cash by a certain date - I hold y% of cash as part of my asset allocation.

Bond funds give me access to a wide diversity of offerings. I don't care to manage holding individual bonds.



i think bonds and stocks have a very high correlation except in a recession..whats good for bonds is even better for stocks............i hold bonds to serve as extra money to buy on dips and corrections...
__________________
mathjak107 is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 05:12 PM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Re: Bond Funds

Quote:
Originally Posted by mathjak107
i think bonds and stocks have a very high correlation except in a recession..whats good for bonds is even better for stocks............i hold bonds to serve as extra money to buy on dips and corrections...
That's not what the studies show.* Yes, there are periods where they act correlated, but there are other periods when they act inversely correlated.* *Asset allocation is based on the lower correlation between those asset classes.* In other words over long periods of time the correlation is low enough to help improve portfolio performance via diversification.

Don't you remember 2002?* How did stocks do?* How did bonds do?* Sure that's anecdotal, but over time, you can reduce the risk (volatility) in your portfolio, yet get a high amount of the returns, holding a mix of stocks and bonds, rather than stocks alone.

I guess the recession or fear of recession occurs often enough to pay off in the long run!* Your "hold bonds to serve as extra money to buy on dips and corrections" is EXACTLY the point - they are indeed a diversifier!* If they were highly correlated, they would go down too and you wouldn't be able to use bonds to buy on the dips.

And if equities become overvalued (above your asset allocation), you sell equities, buy bonds, and if equities have a correction you can buy even MORE to buy on the dips!

Modern Portfolio Theory - http://www.investorsolutions.com/v2c...ok/ch5/ch5.cfm

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 06:30 PM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

the early 2000's was a recession...but i cant think of any other scenerio where interest rates were going down or stable and markets werent rising.if anyones got a chart of bonds and stocks put er up
__________________
mathjak107 is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 06:51 PM   #30
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

interesting reading

http://nbr.infometrics.co.nz/bonds-i...value_442.html
__________________
mathjak107 is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 08:40 PM   #31
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Bond Funds

Quote:
Originally Posted by ESRBob
Nords,
I sure feel like a doofus -- I bought 30k of Ibond for everyone in my family in Fall 2000, self-limiting and assuming there was some sort of central repository of this info,* and now find that everyone else was just buying away, and that I could have been loading up on them since no one was really looking?* Ay Ay Ay!* Those still rank as my all-time best bond purchases.* (See 2B, I do buy bonds as well as funds!)*
No, no, don't feel that way, I think Treasury Direct busted Mel at his limits. There is a central database and apparently it works.

He bought his $30K in I bonds from Treasury Direct under his SSN, $30K Treasury Direct under his wife's SSN, $30K paper under his SSN, and another $30K paper under her SSN. Then he got curious about the "What could they do to me?" impact. When he tried to go back to Treasury Direct and enter an order under his SSN they already "knew" about his paper bonds and wouldn't let him buy more.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Bond Funds
Old 04-14-2006, 10:07 PM   #32
Recycles dryer sheets
 
Join Date: Apr 2006
Posts: 84
Re: Bond Funds

Quote:
Originally Posted by mathjak107
Strange, according to Gummy's analysis a negative correlation between stock and bonds is quite common. He infers that this is due to investor behavior.

Correlations VBMFX VFSTX VWEHX VBIIX VWESX
S&P500 Index -8.1% -7.8% 54.3% -7.4% 0.7%
Fed Rate 12.4% 24.3% -4.8% 6.9% 1.0%
(data from Oct, 1996 - Oct, 2004)

Note also the positive correlation that is common between bonds and the Fed int. rate. This contrasts the common assumption that bonds move in the opposite direction as Fed rates.

From http://gummy-stuff.org/bonds-rates.htm
__________________
&quot;The one who creates does not wait for an opportunity, blaming circumstances, the fates, and the gods.&nbsp; He seizes opportunities or creates them with the magic wand of his will, effort, and searching discrimination&quot;<br />-Yogananda
veritasophia is offline   Reply With Quote
Re: Bond Funds
Old 04-15-2006, 03:15 AM   #33
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

problem with gummys chart is the time frame..most of that period was a recession......think about it ,,,there really isnt many situations i can come up with where whats good for bonds isnt better for stocks...and the part pertaining to being better in recessions only pertains to treasuries..corporate bonds can drop in a recession because of credit risk.....it just seems that bonds have pretty much all the same risks as stocks do but with out the gains......only good reason for them is to keep me from putting all my money in stocks thereby lessening the daily drops. and also to give me a source of money in the event of a drop so i can buy more stock...yes the bonds may drop to but its like arbatrage...sell some bonds that dropped a little to buy some stock that dropped alot....right now id say my mix is 55% stock 5% commodities,15% bonds (very short) and the reast cash
__________________
mathjak107 is offline   Reply With Quote
Re: Bond Funds
Old 04-15-2006, 09:39 AM   #34
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Re: Bond Funds

Mathjak - you keep saying that it only happens in recessions. Yet those recessions (or fears of recession) happen often enough to justify holding bonds in the long run!

You keep pointing out that bonds go down much LESS when stocks correct so it allows you to buy more stocks when they are cheaper. That's the whole point!

I think you are arguing that they aren't a good diversifier when you yourself use them for diversification.

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Re: Bond Funds
Old 04-15-2006, 09:58 AM   #35
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

yes they are handy to have but not for the low correlation ..i think the low correlation to stocks was the issue we are discussing.actually we have only had 2 periods in the last 20 years that i can rememberwhere bonds went up and stocks down
the day of the crash in 1987 but then they followed stocks up for the next 13 years........and after 9/11 until we bottomed out ..
as i said i dont see them as much of a diversifier 90% of the time as far as correlation ,just a less volatile parking spot for cash to tame the swings in a portfolio
__________________
mathjak107 is offline   Reply With Quote
Re: Bond Funds
Old 04-15-2006, 10:04 AM   #36
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Re: Bond Funds

Quote:
Originally Posted by mathjak107
as i said i dont see them as much of a diversifier 90% of the time as far as correlation ,just a less volatile parking spot for cash to tame the swings in a portfolio
= good diversifier.

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Re: Bond Funds
Old 04-15-2006, 10:05 AM   #37
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

diversifier agreed.....
low correlation to stock movement =disagree ha ha ha
__________________
mathjak107 is offline   Reply With Quote
Re: Bond Funds
Old 04-15-2006, 10:13 AM   #38
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,413
Re: Bond Funds

a money market is a diversifier too..it to can go up when stocks rise ,if rates are rising......it can drop when stocks are rising if rates are falling...the thing i think we can agree on is bonds are primarly a diversifier based on an interest play regardless of what stocks may be doing...
__________________

__________________
mathjak107 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Bond holdings - thoughts on switching funds? Lusitan FIRE and Money 6 04-04-2007 12:39 PM
Global bond funds LOL! FIRE and Money 10 02-27-2007 04:23 PM
My 401k's expense ratios, Bogle, lowest-cost quartile data for stock funds? Dude FIRE and Money 19 02-07-2007 02:17 PM
Inverse bond funds - why the dismal performance? soupcxan FIRE and Money 1 02-08-2005 06:03 AM
Bond funds now? Roger_R FIRE and Money 2 06-02-2004 11:20 AM

 

 
All times are GMT -6. The time now is 02:03 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.