Bond index fund driving me nuts

[tuixiu]

So I've got my asset allocation, and it is relatively simple bond index, large cap index, small cap index, and intl stock index.

Everyone believes interest rates will rise, causing bond index fund to suck. So why do I have money in this bond index fund right now then? I'd like to stay the course and maintain my asset allocation, but it is making me crazy thinking that I have this much money (28%ish) of my portfolio in something that almost seems guaranteed to underperform in the near future.

Am I putting to much faith in interest rates and ensuing results of bond index fund? What other choice is there?

Thanks, and happy Tuesday!

 

[nun]

You are thinking like a market timer and not a passive indexer. But more than that, bond funds are for income and risk/volatility reduction so they don't move much when compared to equities. If interest rates go up you'll see a fall in the bond price, but you'll get more income

 

[Animorph]

If bonds do go down, then great, rebalance and buy more bonds while they're cheap. The whole idea of that simple of a portfolio is to not worry about it. If you must, I'd stay within your AA, but you could slice-and-dice a bit and change the types of bonds you're invested in. More work for you, no guarantees.

 

[eytonxav]

Don't forget that if interest rates rise, it can also negatively affect stocks. I would not get into trying to establish your bond allocation based on what you or others believe interest rates will or will not do in the future.

 

[veremchuka]

You don't mention your age or the type of bond fund.

Assuming you have a reasonable allocation to fixed income for your age and risk tolerance then hold on. As mentioned, when rates rise the yield in the bond fund will increase offsetting the nav drop, duration will tell you how long before it's a wash.

If the fund is a long term bond fund then you have reason to worry, better to be in a short or intermediate term fund.

Do you know what duration is and how it effects bond funds?

Bonds are for stability and when equities drop you have somewhere to take money to rebalance by purchasing more equities. It is difficult to do the right thing when you want to react.

 

[DblDoc]

Look at this chart VBMFX: Vanguard Total Bond Market Index Inv Fund Chart | Morningstar. Note 1994 - a year bonds got "slaughtered" - especially long term ones. It becomes a blip on your total return...

Don't try to time the bond market. Its even harder than the stock market.

DD

 

[FinanceDude]

If you're really worried, you could always exchange it into a bond fund with a much shorter duration, that way when interest rates rise, you won't get hit as hard........

 

[easysurfer]

You really gotta look at it as just another asset class.

Prices fluctuate. So during down times if you invest regularly (such as via DCA), you be buying more shares during this down periord. So when the up trend comes, those shares you've been buying at lower prices will pay off.

 

[nun]

If the fund is a long term bond fund then you have reason to worry, better to be in a short or intermediate term fund.

Do you know what duration is and how it effects bond funds?

As the OP said it was a Bond Index I assume the duration will be "intermediate".........say 5 to 6 years

 

[Gone4Good]

For 30bp give in yield, swap into a 5-yr Ally CD and considerably reduce your interest rate exposure.

 

[tuixiu]

Bond allocation is all in VBTLX, like I said I keep it really simple.

Thanks for kind advice everyone, my mind is at ease and I'll stay the course. Will consider this nothing more than a blip on the "market timer temptation" radar, and as punishment will force myself to eat more of the leftover ribs I have from the weekend. Dry rub overnight, 4 hours on 200 in the oven, then finished with Carolina style spicy vinegar glaze contrivance.

Again, appreciate the wisdom, you guys rock.

 

[W2R]

I have a lot of my bond allocation in VBTLX too.

When bonds go down, I won't be selling. I just hope that my dividend income from VBTLX remains more or less the same. I do like that monthly income.

 

[haha]

Dry rub overnight, 4 hours on 200 in the oven, then finished with Carolina style spicy vinegar glaze contrivance.

Again, appreciate the wisdom, you guys rock.

Ribs sound super. And don't you mean you appreciate our intrepid boldness? Whether is is wisdom is yet to be determined.

Ha

 

[friar1610]

If you're really worried, you could always exchange it into a bond fund with a much shorter duration, that way when interest rates rise, you won't get hit as hard........

Even though I'm fundamentally not in favor of market timing, I have moved about 40% of my bond holdings from the Total Bond Market Index to the Short Term Bond Index (Vanguard in both cases.)

 

[JP.mpls]

Tiuxiu,
My retirement accounts are with Vanguard, and my AA is set up fairly similar to yours. My investing knowledge is limited, but I like my chances better with this simplified lower cost AA strategy over paying a financial advisor 1-3% annually for basic AA advice.

I was having the same concerns as you regarding my bond index holdings, based on constant reminders that interest rates must rise.

My novice approach to this problem:
I purchase Vanguard Wellington mutual fund shares for my bond holdings instead of a Total Bond Index . I'm relying on the Wellington fund managers to understand which bonds to avoid if and when the interest rates start to rise. Kind of silly, and more expensive than an index, but I'm now more comfortable with my bond holdings.

Perhaps Friar1610 has a better approach by just sticking with a short term bond index.

I would be very interested to hear from others on this topic. Is a short term bond index a better approach? If yes, why?
Note: I realize that Wellington is only about 40% bonds, and I believe the remaining 60% is in Large Cap holdings.

JP

 

[tuixiu]

I'm relying on the Wellington fund managers to understand which bonds to avoid if and when the interest rates start to rise.

Interesting thought. One reads over and over how only x percentage of actively managed stock funds manage to beat the large index funds, I wouldn't mind seeing what percentage of bond fund managers beat the bond index funds.

 

[Nords]

Interesting thought. One reads over and over how only x percentage of actively managed stock funds manage to beat the large index funds, I wouldn't mind seeing what percentage of bond fund managers beat the bond index funds.

If you're investing in bonds for capital gains then you might want to rethink your asset allocation.

Bonds help an AA by reducing volatility. They give you the same stream of income whether they're up by 10% or down by 10%. Other than that, I'm not sure what they contribute to a portfolio. If their fluctuating share price makes you more unhappy than their volatility benefits help you sleep at night, then maybe it's time to go back to the AA drawing board.

Boosting dividend income would mean either going way out on the longevity curve or way down on the junk ratings. At that point it'd probably be less risky to go with large-cap dividend-aristocrat equities.

Another way to stomp down volatility without worrying about share price would be a CD ladder. But you'd be giving up some yield for that "benefit".

 

[veremchuka]

Tiuxiu,


Perhaps Friar1610 has a better approach by just sticking with a short term bond index.

I would be very interested to hear from others on this topic. Is a short term bond index a better approach? If yes, why?

JP

A short term bond fund will react faster to interest rate changes. It will get thru the nav losses faster than intermediate and since the duration is shorter the nav loss will be less than an intermediate fund. Typically it is recommended to use a ST vs intermediate term fund in a raising rate environment but ST will have a lower yield.

VBTLX has a duration of 5.1 years so if rates rise 2% you'll loose approx 10% of nav at $10.76 that's 11 cents, not exactly earth shattering especially compared to what equities can lose!

As an example Vanguard Short-Term Investment-Grade Fund Admiral Shares (VFSUX) has a duration of 2.0 years so that 2% rise would be a 4% nav loss but the yield is 1.75% vs 2.73% currently. Loosing 10% and a yield of 4.7% will wash out in 5 years and in the mean time if you reinvest the dividend you buy cheaper shares and have more $ to reinvest due to the higher yield.

Bond holders are always unhappy since rising rates means decreasing capital or the rates are falling and that is less income tho the value of the shares rise.

 

[chinaco]

We shortened durations on individual bond funds (short-term index funds)

Taking advantage of 2 stable value funds in tax deferred accounts.

Holding about 5% in TIPS funds (split between taxable and taxed)... just in case inflation jumps.

There are some bond indexes inside of balanced funds... represents about 3% of the portfolio

Holding a little more than I like in money market funds. This is money to fund early FIRE income so I am leaning toward preservation of capital... It is a taxable account... so while it is not gaining much, the tax hit is nil. At this point I am going to wait till later this year to see how rates shape up before I make any investment moves. I will probably DCA some of it into other fixed investments.... mutual funds and may build a 5 year ladder (maybe 10 year ladder over several years for stable early FIRE income to supplement guaranteed income resources). Some of this money will be used to pay taxes on IRA to Roth IRA conversions over the next 10 years.


Oh yeah, did I mention that managing multiple accounts and trying to maintain the
strategic allocation is a big PITA!

 

[okapi]

Take a look at the performance of Vanguard Total Bond index the past 20 years or more.Their worst year is nothing compared to what you can lose in stocks.

 

[youbet]

Take a look at the performance of Vanguard Total Bond index the past 20 years or more.Their worst year is nothing compared to what you can lose in stocks.

And the best year is nothing compared to what you can gain in stocks.

Over the long haul, stocks have had a higher return than bonds but with the downside of volatility.

 

[FinanceDude]

And the best year is nothing compared to what you can gain in stocks.

Over the long haul, stocks have had a higher return than bonds but with the downside of volatility.

+1

 

[BTravlin]

I had the same concerns about my bond index funds so I lightened up on long & intermediate term funds and shifted to the shorter term index.

 

[norisk]

A short term bond fund will react faster to interest rate changes. It will get thru the nav losses faster than intermediate and since the duration is shorter the nav loss will be less than an intermediate fund. Typically it is recommended to use a ST vs intermediate term fund in a raising rate environment but ST will have a lower yield.

VBTLX has a duration of 5.1 years so if rates rise 2% you'll loose approx 10% of nav at $10.76 that's 11 cents, not exactly earth shattering especially compared to what equities can lose!

As an example Vanguard Short-Term Investment-Grade Fund Admiral Shares (VFSUX) has a duration of 2.0 years so that 2% rise would be a 4% nav loss but the yield is 1.75% vs 2.73% currently.

This is something I remember (from my finance classes a long time ago, so my memory may be not fully accurate) is that it how different durations bonds react also depends on the shape of the yeild curve - meaning how long-term rates are different from short-term rates. Now short-term rates are near zero (these are set by the Fed's policy) but long-term rates are determined by the market (currently at about 4% or so, on 30 year Treasury). When people talk about rates going up, I think they imply that Fed would eventually raise short-term rates rates (i.e. there is only one way to go from zero and it is up), but it most likely would do it in small increments (usually by 0.25% every quarter or so). However, it is not a sure thing that long-term rates would go up by the same amount as short-term rates, they may go up by less then short-term rates, or even not go up at all (which is known as flattening yeild curve if I remember correctly). So after all, the longer duration bonds may be no more affected than shorter duration.

Please correct me if I am wrong.

So I am (mostly) sticking with my BND (althought I did play a bit with AA within my "allowed band" which I figured about be 5% deviations from the target).

 

[Bestwifeever]

Feeling a little better about that VBTLX today: + 0.37% vs. -2.32% for VTSAX (Vanguard Total Stock Mkt Idx Adm)?