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Bond funds or ind bonds?
Old 10-10-2014, 11:36 AM   #1
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Bond funds or ind bonds?

I retired about a yr ago and have been sitting on about 600k in a money market fund at Vanguard. Just looking for about 4% without too much risk.

Am about to start getting back into things, but slowly.

Plan to start with bonds. Am thinking individual bonds might be better as then can be held to maturity for full value with a set %.
What am I missing? Why is a bond fund as good or preferable to individual bonds / bond ladder?

Also, what are some of your favorites at Vanguard?

Planning about 50% bonds & 50% equities with these funds.

Thanks
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Old 10-10-2014, 11:41 AM   #2
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4% without too much risk is hard to find. But that depends on definition of "too much".
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Old 10-10-2014, 11:49 AM   #3
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Agree, its just a realistic goal. Not swinging for the fence.
Just added a bit of VGENX. Seemed like a good one at these levels.
Now back to the bonds.........
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Old 10-10-2014, 01:17 PM   #4
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I got burned very severely with Fidelity's Long Term Bond Fund back in the 1970s/80s. Interest rates went up and the NAV collapsed. The value of that fund would not ever recover until the interest rates fell back to the original level I bought them at. This is due to the LT fund bought bonds with long maturities and sold them when they were a little less than their target maturity taking a capital loss.

With individual bonds or CDs you will get your principle back if you hold to maturity. I would be happier with a bond fund that has a well diversified portfolio, low fees and holds to maturity. I've been led to believe that the Vanguard Total Bond Fund does that but I haven't been able to actually have someone at Vanguard say that. It currently yields around 2%.

I can get the same nominal 2% yield by stringing out a CD ladder over about 10 years. Once set up the maturing CDs can be replaced with new 10 yr CDs that are currently paying around 3.3%. Yes, higher interest rates will depress the value of the CD but the principle is fully recovered at maturity.

There are no "safe" 4% returns available in bonds unless you go way out.
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Old 10-10-2014, 01:32 PM   #5
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If you want to buy individual bonds I understand Fidelity has better services, if you want a bond mutual fund, I would stick with Vanguard. Funds keep bonds of a certain length, ie: Long term means higher interest, higher risk.....short term, lower interest lower risk. You can split your bond allocation between long, intermediate and short term bonds, thereby llowering risk and lowering interest rates. Actually, if you were to invest with Vanguard they probably would do an analysis for you at no cost......I think they do that when you have $500,000 or more invested with them.

I go the muni direction splitting between different length mutual funds. Munis don't vary as much when rates go up or down and for me, after tax pays more than pre tax. Again, Vanguard may run that comparison for you as well. Good luck......if you're not really up on bonds I'd stay away from buying individual bonds.....that's takes a skill that frankly I don't have after studying them for years.
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Old 10-10-2014, 01:33 PM   #6
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The "Target Maturity" Bond ETFs are another option (e.g. iShares ticker IBDF, or Guggenheim Bulletshares, etc). They hold a portfolio of bonds (so, reduce the risk of a single bond default) and all the bonds mature on a single date in the target year (so, you'll get the promised amount, like with an individual bond). You can use them to set up a ladder, as you might with CDs.
Pros: Avoid single-bond default risk, reduce interest-rate risk if held to maturity (compared to a bond MF, which has no maturity), potentially better interest rate than CDs.
Cons: Pay an ER (about .2 per year or so, which wouldn't be required with a CD or a single bond), not FDIC insured (compared to a CD).

I don't own any of these, but have frequently considered them.
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Old 10-10-2014, 02:09 PM   #7
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I use their intermediate and short term investment grade funds. As an example the intermediate went down a penny yesterday and short term didn't move....
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Old 10-10-2014, 03:09 PM   #8
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I use their intermediate and short term investment grade funds. As an example the intermediate went down a penny yesterday and short term didn't move....
Wait until the 10 yr bond is at 8%.
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Old 10-10-2014, 03:30 PM   #9
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except inflation will be at 9%
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Old 10-10-2014, 03:33 PM   #10
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LOL, your probably both right....
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Old 10-10-2014, 04:09 PM   #11
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The "Target Maturity" Bond ETFs are another option...

Cons: Pay an ER (about .2 per year or so, which wouldn't be required with a CD or a single bond), not FDIC insured (compared to a CD).
The ER is a lot higher than .2 on many of the Guggenheim offerings. And the yield is lower than I would have expected. The other big con for me is that they are so thinly traded. Most are incredibly small, around $50M total net assets, with very little trading activity and big premiums to NAV.

I'm definitely intrigued by these, but probably won't get in until the size and trading volume picks up.
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Old 10-10-2014, 05:36 PM   #12
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The ER is a lot higher than .2 on many of the Guggenheim offerings.
I only looked at a few of them, but per M*:

BSCF: (Corp Bond 2015) ER: .24
BSCH: (Corp Bond 2017) ER: .25
BSCN: (Corp Bond 2023) ER: .24

Yes, the thin amount of trading is another issue, which can lead to additional costs (bid/ask spreads) when buying these.
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Old 10-10-2014, 08:57 PM   #13
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I only looked at a few of them, but per M*:

BSCF: (Corp Bond 2015) ER: .24
BSCH: (Corp Bond 2017) ER: .25
BSCN: (Corp Bond 2023) ER: .24

Yes, the thin amount of trading is another issue, which can lead to additional costs (bid/ask spreads) when buying these.
The Guggenheim Bulletshares high-yield corporate bond ETFs range from 0.42% to 0.44% (BSJF, BSJG, BSJI, BSJE, BSJH, BSJJ, BSJK, BSJL, BSJM).
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Old 10-11-2014, 04:49 AM   #14
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i would avoid muni's at this point.

what many do not realize is that longer term muni's in a bull market get priced like 10 year bonds since they are callable.

but when the tide turns as it will and rates rise ,those bonds do not get called so they reprice as 25-30 year bonds and you can get killed.

we have been in a bond biull market for more than 30 years so few are aware this happens.
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Old 10-11-2014, 07:20 AM   #15
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I assume if you are buying individual bonds, you plan to hold to maturity, possibly in some sort of bond ladder. In that case, I would expect that individual bonds are not affected by changes in interest rates, since you have no plans to sell them. You are only taking the chance of accepting lower long term rates in a raising rate environment.

Bond funds, on the other hand, are subject to principle losses with rising rates.

At least the above is my understanding of the bond options. I'm thinking of rolling my company 401K on retirement into a Vanguard IRA and just building a bond ladder. I don't need a big return, but don't like loses. Or even CD's if rates are favorable at that time.
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Old 10-11-2014, 07:36 AM   #16
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I retired about a yr ago and have been sitting on about 600k in a money market fund at Vanguard. Just looking for about 4% without too much risk. Am about to start getting back into things, but slowly. Plan to start with bonds. Am thinking individual bonds might be better as then can be held to maturity for full value with a set %. What am I missing? Why is a bond fund as good or preferable to individual bonds / bond ladder? Also, what are some of your favorites at Vanguard? Planning about 50% bonds & 50% equities with these funds. Thanks
Almost there; you aren't missing anything vis a vis owning single bonds vs a bond fund. We have recently sold out of bond funds(a mix of short/intermediate term/high yield/municipal/foreign) and set up a bond ladder with the bonds maturing in the amount that we expect to be withdrawing by year over the next 8 years. By doing so we have taken on default risk in exchange for interest rate risk, but I find that I no longer worry about the bond portion of our portfio falling victim to a rising interest rate environment.
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Old 10-12-2014, 07:11 AM   #17
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I haven't started research on corporate bond defaults yet. I see Vanguard divides their corporate bonds into three groups. Anyone have any data on the default rates for the three divisions? Pretty easy to see by the issuers names why the risks increase with payout rates.
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Old 10-12-2014, 09:05 AM   #18
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What am I missing?
You are missing the fact that you are taking on concentrated risk with individual bonds.
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Old 10-12-2014, 06:32 PM   #19
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It is a lot of work to research individual bonds. Essentially you'll want to read the 100+ page prospectus. These are great reading if you are having trouble falling asleep, but not so good other than that. Especially for the lower rated ones which is where the higher yields than bond fund will occur. I've dabble in them a bit, and the lower rated ones, more often than not will give you a sleepless night or two, sometime in the next 5 to 20 years.


Typically you'll want to buy at least 10 and preferably 25 bonds avoid paying a large spread.. So 20 bonds for a $500K portfolio. Figure you should only buy 1/2 of the ones you look at so 40 prospectus at 1-2 hours each... Now obviously you can buy individual government issues with no research need. But I still think that Buffett is right and government bonds are return free risk.
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Old 10-12-2014, 09:43 PM   #20
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I have both the iBond and Bulletshares ETFs. As I recall the Guggenheim corporates ER is 24 bps and high yield is 42 bps and the iBond is 10 bps. While I prefer the iBond because of the lower ER they trade at a higher premium to NAV so I have been buying more Bulletshares this year.
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