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Bond Funds for income?
Old 07-25-2011, 02:34 PM   #1
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Bond Funds for income?

I was wondering what people think about using bond funds for income?

Or is this just not the right time?

When I look at 10 year charts, I don't see bond funds losing money.

What is wrong with setting up bonds funds to generate income? & just churn dividends?

I was thinking:

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Old 07-25-2011, 02:41 PM   #2
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Of course one should use bond funds for income. Why else invest in them? Yes, they should not be as volatile as equities and thus are less risky as equities, but if they didn't provide dividends, no one would invest in them.
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Old 07-25-2011, 11:44 PM   #3
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I elected to create my own bond ladder by buying individual bonds of staggered maturities. Presently have bonds maturing every year from 2012 through 2019.

As a bond matures ( or is called ), I would need to scramble a little to find a replacement issue. had a few bad decisions and chose to sell bonds for a loss, but thankfully these were not a frequent occurrence.

The bummer in this is that BBB+ and above bonds pay only a pittance right now - about 2-3% for maturities of 2018/2019. Not that attractive.
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Old 07-26-2011, 12:15 AM   #4
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Quote:
Originally Posted by HappyEarlyRetirementForum View Post
I was wondering what people think about using bond funds for income?

Or is this just not the right time?

When I look at 10 year charts, I don't see bond funds losing money.

What is wrong with setting up bonds funds to generate income? & just churn dividends?

I was thinking:

VFICX
VBMFX
VWEHX
FKINX
PRHYX
What you suggest is my ER plan right now and has been since I ERed nearly 3 years ago. (See my signature line.)

When I first began investing in bond funds back in 1990, it was instead of my local bank's MM savings account whose interest rate had dropped from over 7% to maybe 2% in less than 12 months (mid-1989 to early 1990). I knew I was risking principal a bit but the greater rate of return, and tax-exempt (it was a muni bond fund) to boot, was very satisfying.
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Old 07-26-2011, 03:11 AM   #5
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I get most of the retirement income needed from my investments from bonds in mutual funds. The remainder comes from CD's and savings.
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Old 07-26-2011, 04:09 AM   #6
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bond funds have little place to go except down with the end of the 30 year bull market coming to an end.

income from the fund while your principal is dropping sucks!
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Old 07-26-2011, 05:07 AM   #7
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Get a book on Bonds and Bond mutual funds. You can probably get a decent one from your public library.

Get acquainted with the basics.

Bond mutual funds and bonds are commonly used for income, portfolio stability, etc.

But there are risks that you should understand.

Here is a page with a link to a VG webcast about this very topic in the context of the current economic and interest rate environment ...

https://personal.vanguard.com/us/insights/article/live-webcast-bond-investing-06242011
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Old 07-26-2011, 10:19 AM   #8
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I like bond funds over individual bonds because their NAV fluctuates. I'm a strict indexer. Rule one is wide and deep global diversification. Rule two is keep it as cheap as possible. We keep a 60/30/10 retirement portfolio and re-balance according to the following rules.

If any of the major AA components (stocks/bonds/cash) gets out of balance by 5% or more, it gets re-balanced at year's end.

If any of the sub-components inside a major component gets out of balance by 20% or more it gets re-balanced at year's end.

This philosophy forces me to buy low and sell high. It has served us well during 16 years of early retirement and two tremendous market crashes during the last decade.
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Old 07-26-2011, 12:24 PM   #9
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I like bond funds over individual bonds because their NAV fluctuates. I'm a strict indexer. Rule one is wide and deep global diversification. Rule two is keep it as cheap as possible. We keep a 60/30/10 retirement portfolio and re-balance according to the following rules.

If any of the major AA components (stocks/bonds/cash) gets out of balance by 5% or more, it gets re-balanced at year's end.

If any of the sub-components inside a major component gets out of balance by 20% or more it gets re-balanced at year's end.

This philosophy forces me to buy low and sell high. It has served us well during 16 years of early retirement and two tremendous market crashes during the last decade.
Do you use other indices than Vanguard's Total Bond?
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Old 07-26-2011, 12:49 PM   #10
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Vanguard Wellesley is a popular alternative here: diverse bonds + 35% (roughly) dividend growth stocks.
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Old 07-26-2011, 12:52 PM   #11
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Both the indexing and comment about wide and deep global diversification make sense. With respect to the latter, international bonds particularly corporates and emerging markets require the fund manager to have knowledge, experience, and local networks to get it right. I have index funds, but this is one area I don't mind paying for a proven manager.
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Old 07-26-2011, 04:36 PM   #12
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Do you use other indices than Vanguard's Total Bond?
We don't use BND because we are US NRAs. BND would cost us 1.1% in portfolio costs (ER=0.11 + USNRA taxes=0.99).

Instead, we use two offshore MANAGED bond funds (ER=0.91%). We don't pay US NRA taxes so we save 10 basis points.

If we were US citizens or residents, we would use two funds: 50% in Vanguard's Wellesey and the other 50% in Wellington. Set and forget.
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Old 07-28-2011, 09:39 PM   #13
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We don't use BND because we are US NRAs. BND would cost us 1.1% in portfolio costs (ER=0.11 + USNRA taxes=0.99).

Instead, we use two offshore MANAGED bond funds (ER=0.91%). We don't pay US NRA taxes so we save 10 basis points.

If we were US citizens or residents, we would use two funds: 50% in Vanguard's Wellesey and the other 50% in Wellington. Set and forget.
Would you really!? They aren't index funds and without small cap or much international do they make your "wide and deep" diversification goal?
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Old 07-28-2011, 09:59 PM   #14
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Would you really!? They aren't index funds and without small cap or much international do they make your "wide and deep" diversification goal?
Sound familiar

Wellesley 6%, and Wellington 12% foreign holdings - not too bad...
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Old 08-08-2011, 03:32 PM   #15
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good video..

----------------------

Tell me more about, "Is this the right time to get into bond funds?"



My problem is The FA/market took a piss on me and I have not had a
return for 4 years.

Really need to set up an income stream, but this market is !!!
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Old 08-08-2011, 06:16 PM   #16
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The biggest problem I have with bond funds at this time is that interest rates are at the lowest point I have ever seen them. In my mind they must go up at some point and when they do bond funds will lose value. I do have some bond funds that have ridden their way up over the past few years as interest rates have fallen. But, I no longer put new money into them because of the risk that interest rates will rise. On the other hand, getting 0.78% on a CD is not exactly a way to make big money. If I wanted to buy a bond fund, I would dollar cost average into it over at least two years.
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Old 08-08-2011, 06:22 PM   #17
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Wellesly is one of the few non index funds I use. I moved some bond money from a bond fund to Wellesly earlier this year. They have gone down but not as badly as the pure stock funds. Down about 1.6% today compare with over 5% for the DOW.
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Old 08-08-2011, 06:36 PM   #18
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Guggenheim recently came out with some "bullet" funds that are held to maturity bond portfolios that mature in a stated year and the proceeds from maturity will be distributed to investors. I'm thinking about laddering them to get the benefits of a ladder but with diversification. Expense ratio is 24 bps plus they are an ETF so there would be commissions on the purchase. Still thinking about these but they would seem to reduce interest rate risk compared to conventional bond funds if you can line up the maturities with your needed cash flow in retirement. Corporate bond funds have maturities from 2011 to 2017. Has anyone looked into these?
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Old 08-21-2011, 09:34 PM   #19
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Thanks

Guggenheim recently came out with some "bullet" funds that are held to maturity bond portfolios that mature in a stated year and the proceeds from maturity will be distributed to investors. I'm thinking about laddering them to get the benefits of a ladder but with diversification. Expense ratio is 24 bps plus they are an ETF so there would be commissions on the purchase. Still thinking about these but they would seem to reduce interest rate risk compared to conventional bond funds if you can line up the maturities with your needed cash flow in retirement. Corporate bond funds have maturities from 2011 to 2017. Has anyone looked into these?

I haven't looked into them but thanks for the tip, I've been trying to decide whether or not to begin buying individual bonds, these may be just right.
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Old 08-22-2011, 04:16 AM   #20
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whether your bond fund will recover or not from rate increases depends on the type of bond fund and its duration.

john boogle once said he knows of nobody who lost 1 penny in a treasury bond fund of theirs as long as they stayed long enough to meet the duration of that fund.

up until now treasuries had no risk level built in so a credit change would not throw that rule off kilter.

what john is saying is this.

lets say you pay 10 bucks for a share of a bond fund with a duration figure of 5 and were getting 4% interest .

if rates rose to 5% your bond fund would fall to 9.50 but now instead of 4% your getting 5%.. over a 5 year period you would collect an extra 1% a year so even though your fund fell 5% you got an extra 5% intereast over those 5 years equaling your origonal deal the day you bought in at 4%....

as long as you stayed 5 years in that fund you eventually were whole again.

this was only true of treasuries because credit ratings changing were the wild card on corporate bond funds.
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