Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
bond funds or CDs/Treasuries
Old 10-07-2018, 03:02 PM   #1
Recycles dryer sheets
 
Join Date: Apr 2016
Posts: 221
bond funds or CDs/Treasuries

For a number of years, the fixed income side of my portfolio has been mostly invested in high quality, relatively short term bond funds -- a mix of US corporate, global, muni, and TIPs. But I feel like I am not being compensated well for the risk in the bond funds. That risk is low, but the returns have also very been low -- and in some funds, for some periods of time, negative. So I am in the process of moving the fixed income side of the portfolio toward CDs and treasuries (more CDs). I feel like if this side of the portfolio can generate 2.5% to 3% returns (these days; it will obviously vary) with essentially zero risk, it is doing its job. The main goal on this side is capital preservation. Of course, I am happy to take what return is available, but don't want or need risk on the fixed income side of the portfolio. The other 50-55% of my portfolio is in equities and that is where I will take the risk and seek return.

I am interested in any comments you all might have about my idea of moving the fixed income side away from bond funds and toward relatively short term CDs and treasuries. Thanks.
__________________

medved 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!

Old 10-07-2018, 03:21 PM   #2
Full time employment: Posting here.
 
Join Date: Mar 2012
Posts: 504
I am a very big proponent of directly owning CDs, Treasuries, and municipal bonds - and never the funds.

When you buy the securities directly, you know everything the moment you buy - you know the exact amount and dates you will receive interest payments, and you know the exact date you will get 100% of your principal back. When you invest in a fund, there is no guarantee of anything.

2.5% to 3.0% today is completely risk free. As I posted on the CD and MM thread, you can get 2.5% today with East Boston Savings Bank in their high yield savings account - available online to everyone, for $5k to $1 million fully insured. That is money that you have full access to and not locked up like a CD, treasury, or other fixed income instrument. You can get 2.95% in two year CDs today, and it's extremely likely that will move to 3.0% by month end.
__________________

njhowie is offline   Reply With Quote
Old 10-07-2018, 03:27 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 19,532
Other than some PenFed 5-year, 3% CDs that will mature in December my entire domestic bond allocation is currently parked in Vanguard Prime MM, which has a 2.17% APY.... the yield curve is so flat nothing looks particularly compelling to me right now.

For CD's the 2-year seems to be the sweet spot at ~2.95% (vs 2.55% for the 1-year and 3.10% for the 3-year) but with VMMXX at 2.17% and a view that rates will be increasing I'm loathe to pull the trigger right now so I'll monitor this thread with a lot of interest.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is offline   Reply With Quote
Old 10-07-2018, 03:31 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 2,057
Quote:
Originally Posted by medved View Post
For a number of years, the fixed income side of my portfolio has been mostly invested in high quality, relatively short term bond funds -- a mix of US corporate, global, muni, and TIPs. But I feel like I am not being compensated well for the risk in the bond funds. That risk is low, but the returns have also very been low -- and in some funds, for some periods of time, negative. So I am in the process of moving the fixed income side of the portfolio toward CDs and treasuries (more CDs). I feel like if this side of the portfolio can generate 2.5% to 3% returns (these days; it will obviously vary) with essentially zero risk, it is doing its job. The main goal on this side is capital preservation. Of course, I am happy to take what return is available, but don't want or need risk on the fixed income side of the portfolio. The other 50-55% of my portfolio is in equities and that is where I will take the risk and seek return.

I am interested in any comments you all might have about my idea of moving the fixed income side away from bond funds and toward relatively short term CDs and treasuries. Thanks.
Still learning about investing, but did move my bond fund portfolio (only represented ~10% of total portfolio) to CD's for the exact reasons you mentioned above. I live in a no state tax state, so haven't gone to the Treasury side.
Not sure I would swear off bond funds forever, but in a clearly rising interest rate environment, not for me now. Yes, I do realize the opportunity costs,plus the bond funds reinvesting at the ever increasing rates.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 10-07-2018, 03:36 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 2,057
Quote:
Originally Posted by pb4uski View Post
Other than some PenFed 5-year, 3% CDs that will mature in December my entire domestic bond allocation is currently parked in Vanguard Prime MM, which has a 2.17% APY.... the yield curve is so flat nothing looks particularly compelling to me right now.

For CD's the 2-year seems to be the sweet spot at ~2.95% (vs 2.55% for the 1-year and 3.10% for the 3-year) but with VMMXX at 2.17% and a view that rates will be increasing I'm loathe to pull the trigger right now so I'll monitor this thread with a lot of interest.
Still working on my 2 year CD Ladder, so will continue building in Nov; otherwise would do the same as you except in Fidelity's version.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 10-07-2018, 03:39 PM   #6
Thinks s/he gets paid by the post
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 2,191
Quote:
Originally Posted by medved View Post
... don't want or need risk on the fixed income side of the portfolio. The other 50-55% of my portfolio is in equities and that is where I will take the risk and seek return. ...
+1

The only place where professional bond fund management makes sense to me is in junk, international, and emerging markets. But increasing risk and volatility in the "safe" side of the portfolio seems counterproductive. So ... no need for bond funds.

Quote:
Originally Posted by njhowie View Post
I am a very big proponent of directly owning CDs, Treasuries, and municipal bonds - and never the funds. ...
+1

Further, I just own them in our Schwab accounts. I have no urge to hassle with transferring funds back and forth to/from banks to chase a few basis points of yield, so when the solution is CDs, it is also brokered CDs. Govvies are also bought through Schwab, mostly on the auctions. KISS.

Funny story: My uncle died years ago, before online anything. He also loved to chase yield. His executor literally had to contact every bank and S&L in town to find out if Uncle Pat had any CDs there.
OldShooter is offline   Reply With Quote
Old 10-07-2018, 04:16 PM   #7
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
I have brokered CDs with varied duration, 1,2, and 3 year at most. But I have very small bond portfolio. I lost a bunch this year buying BND. I never like bond funds either. So I’m not going to repeat that mistake until FED is done raising rates. The rest of my cash is in Vanguard MMM.
Fedup is offline   Reply With Quote
Old 10-07-2018, 04:51 PM   #8
Recycles dryer sheets
gwraigty's Avatar
 
Join Date: Jan 2018
Posts: 154
Most of our fixed income holdings (non-401k) are in individual bonds, with just a little in bond funds/ETFs. I don't automatically reinvest the income from the funds, so the price movement doesn't bother me. It does frustrate me that the 401k income has to be reinvested in shares of the same fund.

Without checking rates, I'd say that if your short-term bond funds aren't paying significantly more yield than short-term CDs or other stable value investment options, go for the stable value. Brokered CDs make it easy.
gwraigty is online now   Reply With Quote
Old 10-07-2018, 06:08 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jan 2013
Posts: 1,645
All I am buying on Tuesday is four week treasuries. I expect rates to continue rising and to continue to buy short term treasuries only. The bets I placed on 6, 9, and 12 month CD's in the spring are not playing out as well as I hoped because of how fast the rise has been.

ETA: Shoulda listened to Audrey and bought Ally no-penalty CD's back then...
Another Reader is online now   Reply With Quote
Old 10-07-2018, 06:15 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 1,773
The only bond funds I own are high yield ARTFX and bank loan SPFPX both up 3-4% YTD, everything else is laddered in muni’s or corporates. Too much risk otherwise in a rising rate environment.
COcheesehead is offline   Reply With Quote
Old 10-07-2018, 06:27 PM   #11
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: 19,838
I'm OK with the bond funds. I'm holding them long enough where they will catch up. As stocks climb and bonds languish (well, mine are barely underwater anyway) I add more to them because of rebalancing.

I do own some CDs, Ibonds, treasuries etc., but that's for the cash component of my portfolio. Otherwise I have short-term and intermediate term bond funds.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 10-07-2018, 08:58 PM   #12
Thinks s/he gets paid by the post
gcgang's Avatar
 
Join Date: Sep 2012
Posts: 1,118
A five year ladder, CDs or Treasuries depending on your state tax situation, should be the core (probably 75%) of Fixed Income, IMHO.
__________________
In theory, there's no difference between theory and practice. In practice, there is. YB
gcgang is offline   Reply With Quote
Old 10-08-2018, 07:34 AM   #13
Full time employment: Posting here.
 
Join Date: Jul 2013
Posts: 525
For longer term (5+ years) needs, total bond is, IMO, still your best bet, and should be the cornerstone of your FI investments.

For less than 5 years, I suggest CDs, short term bond funds, and I Bonds. Buy whatever is most attractive at the moment.
mrfeh is offline   Reply With Quote
Old 10-08-2018, 08:06 AM   #14
Recycles dryer sheets
BeachOrCity's Avatar
 
Join Date: Jun 2016
Posts: 196
Quote:
Originally Posted by OldShooter View Post
+1

The only place where professional bond fund management makes sense to me is in junk, international, and emerging markets. But increasing risk and volatility in the "safe" side of the portfolio seems counterproductive. So ... no need for bond funds.

+1

Further, I just own them in our Schwab accounts. I have no urge to hassle with transferring funds back and forth to/from banks to chase a few basis points of yield, so when the solution is CDs, it is also brokered CDs. Govvies are also bought through Schwab, mostly on the auctions. KISS.

Funny story: My uncle died years ago, before online anything. He also loved to chase yield. His executor literally had to contact every bank and S&L in town to find out if Uncle Pat had any CDs there.


Be careful with brokered CDs. There is no early withdraw option. You basically have to sell them on the market at a market based price that will vary based on current interest rates.
BeachOrCity is offline   Reply With Quote
Old 10-08-2018, 08:12 AM   #15
Full time employment: Posting here.
 
Join Date: Mar 2012
Posts: 504
Quote:
Originally Posted by BeachOrCity View Post
Be careful with brokered CDs. There is no early withdraw option. You basically have to sell them on the market at a market based price that will vary based on current interest rates.
If you buy a CD, you should be prepared to hold to maturity. If the first thing you're thinking about in purchasing a CD is withdrawing early, then maybe you should really be considering a savings or money market account.
njhowie is offline   Reply With Quote
Old 10-08-2018, 08:21 AM   #16
Thinks s/he gets paid by the post
 
Join Date: Apr 2011
Posts: 2,029
State-specific muni bonds and funds for us.
gerntz is offline   Reply With Quote
Old 10-08-2018, 08:23 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 19,532
Quote:
Originally Posted by BeachOrCity View Post
Be careful with brokered CDs. There is no early withdraw option. You basically have to sell them on the market at a market based price that will vary based on current interest rates.
True, but the market discount may not be much different from the early withdrawal penalty.

For example, let's take a 5 year CD with a coupon rate of 3%... a $10.000 deposit would pay $11,593 in 5 years [$10,000*(1+3%)^5].

Fast forward a year.... and rates have increased to 3.5%.... the account balance would be $10,300 [$10,000*(1+3%)^1] but the fair value (what you could sell it for) would be $10,102 [$11,593/(1+3.5%)^4] ... an implicit penalty of $198 vs $150 if the EWP is a half of a year of interest.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is offline   Reply With Quote
Old 10-08-2018, 08:34 AM   #18
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: 19,838
Quote:
Originally Posted by pb4uski View Post
True, but the market discount may not be much different from the early withdrawal penalty.

For example, let's take a 5 year CD with a coupon rate of 3%... a $10.000 deposit would pay $11,593 in 5 years [$10,000*(1+3%)^5].

Fast forward a year.... and rates have increased to 3.5%.... the account balance would be $10,300 [$10,000*(1+3%)^1] but the fair value (what you could sell it for) would be $10,102 [$11,593/(1+3.5%)^4] ... an implicit penalty of $198 vs $150 if the EWP is a half of a year of interest.
You also pay a commission to sell your CD, and how liquid is it - do you get the “market value”?
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 10-08-2018, 08:39 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 19,532
I have 25 commission free trades a year but you are right that if you need to pay commission then that needs to be considered.... I would think that the markets are plenty liquid enough.

My point was that depending on how much interest rates rise that the change in value may not be that different from the early withdrawal penalty... in fact, if the increase was slight or even a decrease then it might be lower than the early withdrawal penalty or even a benefit.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is offline   Reply With Quote
Old 10-08-2018, 08:47 AM   #20
Thinks s/he gets paid by the post
 
Join Date: Mar 2011
Posts: 4,875
Still holding bond funds bought 15+ years ago.

TR Price RPSIX paying 3.77% and their high yield PRHYX paying 5.77%. All together they comprise only about 15% of my portfolio.

They've drifted down from ~5% and 8% respectively but still send me a nice paycheck every month. I expect with higher interest rates they'll now drift back up.

Waaaay back I was in CD's when they were paying 15% but haven't had any in 20 years or more.
__________________

__________________
Living well is the best revenge!
Retired @ 52 in 2005
marko 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
What do you think about Multi Asset Bond Funds instead of Core Bond Funds Glad to be retired Stock Picking and Market Strategy 2 10-24-2017 10:41 AM
Why would Individuals buy Treasuries or Treasury Funds? foxfirev5 FIRE and Money 34 09-06-2017 09:17 AM
Municipal Bond Funds vs CDs Ready FIRE and Money 30 02-02-2014 04:52 PM
CDs instead of bond funds? Packerbacker FIRE and Money 14 06-25-2013 08:27 AM
bond-cds-bond funds bobbee25 FIRE and Money 5 12-29-2008 11:34 AM

» Quick Links

 
All times are GMT -6. The time now is 10:46 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.