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Old 03-05-2015, 11:22 AM   #21
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The same questions have been asked many times, what happens when rates rise? or Will my fund tank if rates rise? That was tested, although briefly, in 2013 when rates rose over 1%. Did your portfolio collapsed? I know my balanced portfolio did more than fine.

And when rates do rise more, I am more than ok with that since all maturities and interest payments in the bond fund will be buying higher yielding bonds.

Will I freak out over a 5% or 10% loss? Hell no. Should worry more about the equity side where is can drop a lot more.
Not to mention that almost all of the simple portfolio recommendations at bogleheads and elsewhere still recommend using Vanguard TBM or something similar. Yeah I know, it's because they're simple but I think if the prevailing wisdom had shifted about bond funds we'd see much different recommendations and we're not.
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Old 03-05-2015, 11:32 AM   #22
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Are there any bond funds that hold all bonds to maturity? I guess I could google it, but I wondered if there were any in existence. Seems relevant to this topic.
Yes - Fidleity has some target maturity date bond funds. But I ask - why would you do this unless you needed the funds on date X?
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Old 03-05-2015, 11:46 AM   #23
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I found the original AAII article referenced in the link above by Annette Thau here:

Bond Market Strategies for a Rising Rate Environment
AAII: The American Association of Individual Investors

The guidelines at the end are what we generally follow in our household. YMMV. The mutual fund companies are never going to recommend anything but funds because they have a vested interest in funds. There are many advantages to funds but I don't think you will ever hear about the disadvantages from the companies that profit from managing them. Annette Thau doesn't seem to have a vested financial interest in any particular type of investment over another so personally I enjoy her advice.
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Old 03-05-2015, 11:56 AM   #24
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I found the original AAII article referenced in the link above by Annette Thau here:

Bond Market Strategies for a Rising Rate Environment
AAII: The American Association of Individual Investors

The guidelines at the end are what we generally follow in our household. YMMV. The mutual fund companies are never going to recommend anything but funds because they have a vested interest in funds.
In our retirement portfolio fixed income we have: 5% in cash and cash equivalents such as CDs and IBonds, 5% in high quality short-term bond fund, and the remainder (37%) in intermediate bond funds, most of which are the broadly diversified bond funds.

This seems to match what she recommends at the end of her (2003/2004?) paper.
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Old 03-05-2015, 12:09 PM   #25
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Yes - Fidleity has some target maturity date bond funds. But I ask - why would you do this unless you needed the funds on date X?
I meant with different maturity dates, like basically the fund does the laddering for you, but without ever selling any of the existing bonds in the fund, if that makes sense.
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Old 03-05-2015, 12:40 PM   #26
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I meant with different maturity dates, like basically the fund does the laddering for you, but without ever selling any of the existing bonds in the fund, if that makes sense.
I'm not sure what you gain.

I don't have any problem with a fund manager selling a bond early if he thinks he can make a better value investment with the proceeds. Many bond fund managers also add value by "playing the rate curve".

They don't ONLY hold bond funds in a certain maturity range. They hold a wide range of maturities, shaped like a bell curve, which then average out to the target window duration of the fund. Look at the composition of a bond fund and you'll see this. They don't actually "have" to sell a bond to manage the fund maturity. They can choose to buy a longer term bond to adjust the average duration. It all depends on where they perceive the better value to be.

They sell bonds if they think it is more valuable appreciation-wise to sell them early rather than wait for maturity, compared to the bonds they can buy with the proceeds.

Honestly, I think if there were a major benefit such a product would have been available already.
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Old 03-05-2015, 12:51 PM   #27
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I'm not sure what you gain.

I don't have any problem with a fund manager selling a bond early if he thinks he can make a better value investment with the proceeds. Many bond fund managers also add value by "playing the rate curve".

They don't ONLY hold bond funds in a certain maturity range. They hold a wide range of maturities, shaped like a bell curve, which then average out to the target window duration of the fund. Look at the composition of a bond fund and you'll see this. They don't actually "have" to sell a bond to manage the fund maturity. They can choose to buy a longer term bond to adjust the average duration. It all depends on where they perceive the better value to be.

They sell bonds if they think it is more valuable appreciation-wise to sell them early rather than wait for maturity, compared to the bonds they can buy with the proceeds.

Honestly, I think if there were a major benefit such a product would have been available already.
I don't know if there is a value there or not. I'm guessing there is as a fund manager is prone to make mistakes. But if one doesn't exist, perhaps I should create it and retire earlier.
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Old 03-05-2015, 12:57 PM   #28
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I too am curious as to the warnings on bond funds.

I have a moderate stake in TRPrice's RPSIX Spectrum fund.

For the past 10 years the price has held fairly stable --from 12.08 to 12.79 today-- (ok, it did take quite a dip in the 2008-09 time frame) and during that time has delivered a respectable and repeatable 3.4% yoy.

I'm open to arguments to the contrary but can't quite see what my concern should be if I'm in it for the long haul.
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Old 03-05-2015, 01:01 PM   #29
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I'm not sure what you gain.

I don't have any problem with a fund manager selling a bond early if he thinks he can make a better value investment with the proceeds. Many bond fund managers also add value by "playing the rate curve".

They don't ONLY hold bond funds in a certain maturity range. They hold a wide range of maturities, shaped like a bell curve, which then average out to the target window duration of the fund. Look at the composition of a bond fund and you'll see this. They don't actually "have" to sell a bond to manage the fund maturity. They can choose to buy a longer term bond to adjust the average duration. It all depends on where they perceive the better value to be.

They sell bonds if they think it is more valuable appreciation-wise to sell them early rather than wait for maturity, compared to the bonds they can buy with the proceeds.

Honestly, I think if there were a major benefit such a product would have been available already.
That's why I prefer to pay a fund manager..I think he can managethose bonds better than I..Not to mention the benefit spreading out the credit risk..I learned a hard lesson from Enron..
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Old 03-05-2015, 01:05 PM   #30
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This holding a bond thing is nonsense. You have to respect the time value of money and what you are losing by holding to maturity. It doesn't' get you ahead. A bond is worth what a bond is worth for a good reason. Holding onto it doesn't recoup anything. Grrr.

Net present value.
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Old 03-05-2015, 01:19 PM   #31
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That's why I prefer to pay a fund manager..I think he can managethose bonds better than I..Not to mention the benefit spreading out the credit risk..I learned a hard lesson from Enron..
Most of my current investment in bond funds was made in the early 2000s. So at some level I am pretty sanguine since most of my "principal" went in when rates were much higher than they are today and I have already held through several "fund duration" periods. [P.S. I don't track my "principal" anyway, so it's a non-issue].

I have watched those funds and their behavior for over 15 years now. There was a 2002 credit crisis that hit high-yield and some ultra-low duration funds hard. There was a 2003-2006 steep interest rate rise period that hit some funds hard at first, but the intermediate bond funds pretty much sailed right through it (because longer term interest rates weren't hit, only short-term). The 2008 bear market hammered all but the best quality govt-back bond funds, and high-yield and ultra low-duration funds were creamed. Most of these recovered very well (exception ultra low duration bond funds). There was the 2013 "taper tantrum" that caused some temporary bond funds losses but didn't hit longer rates much, so most funds did fine over 2013 and recovered very very well during 2014.

I think Dodge and Cox, Fidelity, Metropolitan West, and some other fund companies have very skilled and experienced bond fund managers, and have good track records over long periods of time. There are occasional years when a fund may do poorly. I notice that the subsequent year usually recovers, so I'm comfortable with rebalancing into bond funds after a "poor" year. And a poor year in bond funds is considerably less painful than a poor year in stock funds.

The only bond fund area that I've seen that did super poorly a couple of times and didn't recover well have been the ultra-low bond type funds that hold corporate paper or high-yield type paper. I don't buy those types of bond funds any more. Amazingly the intermediate funds didn't ever exhibit those kinds of problems. I can only assume the ultra-short term funds took on way more credit risk than they ever should have because the duration was so short. I don't hold high-yield bond funds either as IMO they are too closely correlated to equity funds and I like my bond funds to be poorly correlated with my stock funds.
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Old 03-05-2015, 02:29 PM   #32
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You can avoid the primary interest rate effect on a bond fund if you never sell it until all be bonds in it have matured and interest rates are stable or falling. Pretty much the same as individual bonds, but maybe harder to ladder like individual bonds.


I think if you are holding the bond fund long-term and will not be selling, a bond fund and an individual bond will not be too different. If you need to sell while rates are rising you'd probably do better if you could sell a maturing individual bond.
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Old 03-05-2015, 02:29 PM   #33
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This holding a bond thing is nonsense. You have to respect the time value of money and what you are losing by holding to maturity. It doesn't' get you ahead. A bond is worth what a bond is worth for a good reason. Holding onto it doesn't recoup anything. Grrr.

Net present value.
Is it neutral to selling/buying or does it cost you to hold?
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Old 03-05-2015, 02:43 PM   #34
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A bit more advice that might be useful on managing maturity risk, this time from Forbes:

How To Manage Maturity Risk In Bond Funds As The Fed Pulls Back - Forbes

"When an investor owns a broadly diversified bond portfolio, such as the iShares Core Bond ETF (NYSEARCA: AGG) or the Vanguard Total Bond Fund (NYSEARCA: BND), they own a basket of thousands of individual bonds with the vast majority of securities maturing between one and 30 years. Owning a fund with all those bonds are great for diversifying away issuer risk, however, duration risk doesn’t diversify, it simply averages across the portfolio.

The weighted average duration of these portfolios is 5.26 and 5.5 years respectively. This significant duration risk can become a problem when a swift increase in interest rates takes place, similar to what we witnessed after the market’s response to the Fed’s initial taper in late May 2013. Investors were left clamoring to make changes to long duration bond holdings at the most inopportune moment."
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Old 03-05-2015, 02:49 PM   #35
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Just an observation, but my total bond market fund was THE ONLY non-correlated asset in 2008-2009...


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Old 03-05-2015, 03:05 PM   #36
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A bit more advice that might be useful on managing maturity risk, this time from Forbes:

How To Manage Maturity Risk In Bond Funds As The Fed Pulls Back - Forbes

"When an investor owns a broadly diversified bond portfolio, such as the iShares Core Bond ETF (NYSEARCA: AGG) or the Vanguard Total Bond Fund (NYSEARCA: BND), they own a basket of thousands of individual bonds with the vast majority of securities maturing between one and 30 years. Owning a fund with all those bonds are great for diversifying away issuer risk, however, duration risk doesn’t diversify, it simply averages across the portfolio.

The weighted average duration of these portfolios is 5.26 and 5.5 years respectively. This significant duration risk can become a problem when a swift increase in interest rates takes place, similar to what we witnessed after the market’s response to the Fed’s initial taper in late May 2013. Investors were left clamoring to make changes to long duration bond holdings at the most inopportune moment."
Except those who didn't clamor to flee their funds did great in 2014. None of my intermediate bond funds lost money in 2013, and they did great in 2014.

This article was written in early 2014, based on concerns that the end of Fed "qualitative easing" would result in an interest rate rise. That did not happen - interest rates dropped instead. The examples they presented in the article were useless.

IMO, focusing on short-term market events with bond funds, and trying to position yourself on what you think interest rates will do in the next year or two is a useless exercise. If you guess wrong, you can end up hurting yourself. It's better to think about how long do you plan to hold bond funds, and which bond funds do you think will work best as part of your asset allocation as diversifiers against your equity holdings.

I do expect interest rates to rise over the long term - but very, very gradually, with plenty of fluctuation and opportunities for rebalancing the portfolio. If you look at the long terms charts, the process can take decades, so I don't sweat about continuing to own intermediate bond funds (that I have already owned for 15 years).
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Old 03-05-2015, 04:12 PM   #37
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Are there any bond funds that hold all bonds to maturity? I guess I could google it, but I wondered if there were any in existence. Seems relevant to this topic.
Yes, google "target maturity etf". iBond and Bulletshares are two that I am familiar with and own. I use them as a CD substitute and they mature in 2020. I also use them for my hi-yield allocation and those mature from 2017 to 2020.
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Old 03-05-2015, 04:28 PM   #38
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I think there is a good chance that equities will remain flat or worse for a decade or so again. We don't have bonds to buoy the portfolio as in the past few decades. Holding a few years in laddered CDs or bonds would come in handy under those circumstances. If these so called gurus claim that a poor sequence of returns early on is really bad for portfolio preservation, imagine how bad it will be in a era of low interest rates. It doesn't sound like Plau or others have adequately considered today's environment of high equities and low interest rates in their research.
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Old 03-05-2015, 04:39 PM   #39
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I've been holding bond funds (no individual bonds) in my tax-favored accounts and will continue to do so.

The only thing I'll do over the next few weeks is to swap (not convert) as many of those funds from tax-free to tax-deferred accounts as possible. My reasoning is that I want the highest expected long-term growth in the Roths,
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Old 03-05-2015, 05:09 PM   #40
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I've often heard this argument that individual bonds are safer than bonds but it never resonated with me. Here's a counterpoint by Asness:

http://www.cfapubs.org/doi/pdf/10.2469/faj.v70.n1.2

See page 28 (article starts on page 22), item #10
I can't find anything wrong with this analysis. Still, some people will, and their preference for ladders will continue.

Ha
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