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Old 03-05-2015, 09:27 PM   #41
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I'm holding a great deal of cash in an SV account which is earmarked for bond funds; the returns are about the same as the yield on the 10 Treasuries. When the time is right the money will go to bond funds. Not getting rid of any existing shares of bond funds, thought. They serve their purpose.


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Old 03-05-2015, 11:20 PM   #42
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If I had access to a stable value fund paying north of 2% I'd keep a large chunk there too.
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Old 03-06-2015, 05:41 AM   #43
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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
The last time lawman was active in er.org, he started a thread in which I quoted from this very same article. In my case it was from peeve #2 concerning the overuse of the word "bubble". There must be something about lawman that brings out the Cliff Asness in all of us.

For the record, I agree 100% with Asness in the bond funds vs. individual bond debate, but generally don't engage in debate on this issue. As Asness says, this is not something that is likely to cost investors a significant amount of money either way.
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Old 03-06-2015, 08:30 AM   #44
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I can't find anything wrong with this analysis. Still, some people will, and their preference for ladders will continue.

Ha
Had not seen that before but Asness is able to explain what I believe but cannot articulate..A little confirmation is nice!
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Old 03-06-2015, 08:32 AM   #45
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I'm glad folks brought up the Asness article because I missed it the prior times.
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Old 03-06-2015, 09:07 AM   #46
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Is it neutral to selling/buying or does it cost you to hold?
everyone fee's are different, and of course drag on return. I'm speaking in general open market pricing terms.
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Old 03-06-2015, 09:18 AM   #47
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I hesitated to post the Asness article because I probably saw it first on bogleheads and I know a lot of forum members also view that site. But I thought the argument of interchangeability was so simple yet so clear.
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Old 03-06-2015, 09:24 AM   #48
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everyone fee's are different, and of course drag on return. I'm speaking in general open market pricing terms.
I am talking about in general as well. Would you come out even (ignoring fees) or would holding somehow lose money?
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Old 03-06-2015, 09:38 AM   #49
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I am talking about in general as well. Would you come out even (ignoring fees) or would holding somehow lose money?
(highly liquid) bonds are priced by the market, no different than a stock, it's value is relative to all other bonds at current rates. As long as you are getting a fair market value (that is, your broker isn't screwing you), you neither gain nor lose whether you sell or hold. There is no magic.

Realize the bond market is something like double or triple the size of the stock markets. It knows how to price a thing.
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Old 03-06-2015, 10:29 AM   #50
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(highly liquid) bonds are priced by the market, no different than a stock, it's value is relative to all other bonds at current rates. As long as you are getting a fair market value (that is, your broker isn't screwing you), you neither gain nor lose whether you sell or hold. There is no magic.

Realize the bond market is something like double or triple the size of the stock markets. It knows how to price a thing.
I understand the mark to market aspect. So if you think a fund that only bought bonds and held to maturity would do no worse than a fund that sells lower rate and buys higher rate than I think there is a market for a buy only bond fund.
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Old 03-06-2015, 11:21 AM   #51
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I think there is a market for a buy only bond fund.
There's a market for anything; snakeoil, yellow-cake uranium, and financial advice. It doesn't mean it is in any way beneficial.
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Old 03-06-2015, 11:41 AM   #52
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If it wouldn't do worse than an active bond fund, then it is beneficial.
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Old 03-07-2015, 09:14 AM   #53
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If I had access to a stable value fund paying north of 2% I'd keep a large chunk there too.
Same here, the one I have in my Fidelity-managed 401k is next to useless. It's been paying less than 2% for a couple of years now.

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I hesitated to post the Asness article because I probably saw it first on bogleheads and I know a lot of forum members also view that site. But I thought the argument of interchangeability was so simple yet so clear.
Appreciate the post of the CFA article, that helps my understanding of why holding bond funds is really a non-issue especially when you're in it for the long term anyway.
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Old 03-07-2015, 09:49 AM   #54
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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.
That was my logic as well going into ER at 53 with a 60/40 AA holding intermediate bond funds. The maths and US treasury rates made me think that I just had to accept 2% or 3% returns for the next 10 years for my fixed income. I wasn't really worried as my withdrawals were also 2% to 3% and I figured equities would take care of most of that. But then I got a chance to buy into an ex-employers pension plan with the following numbers.

7% starting payout
3% COLA

Internal interest rate for various ages ie how much annual gains I'd need on my lump sum to generate the same income stream as the pension.

Age Interest Rate
66 0% (I lived long enough to get my money back)
68 1.7% (getting close to 10 year US Treasuries)
70 3.6% (I'm feeling better about this)
74 6.0% (this is looking good)
80 7.7% (opening the champagne)
84 8.3% (my expected demise)

As a replacement for intermediate bonds this looks like a good deal. My numbers are significantly better than commercial ones, but some aspects are still compelling in a low interest rate environment.
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Old 03-07-2015, 11:20 AM   #55
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That was my logic as well going into ER at 53 with a 60/40 AA holding intermediate bond funds. The maths and US treasury rates made me think that I just had to accept 2% or 3% returns for the next 10 years for my fixed income. I wasn't really worried as my withdrawals were also 2% to 3% and I figured equities would take care of most of that. But then I got a chance to buy into an ex-employers pension plan with the following numbers.

7% starting payout
3% COLA

Internal interest rate for various ages ie how much annual gains I'd need on my lump sum to generate the same income stream as the pension.

Age Interest Rate
66 0% (I lived long enough to get my money back)
68 1.7% (getting close to 10 year US Treasuries)
70 3.6% (I'm feeling better about this)
74 6.0% (this is looking good)
80 7.7% (opening the champagne)
84 8.3% (my expected demise)

As a replacement for intermediate bonds this looks like a good deal. My numbers are significantly better than commercial ones, but some aspects are still compelling in a low interest rate environment.
Interesting...Not that I'm sure I would take it but I wish I had that option..
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Old 03-07-2015, 12:03 PM   #56
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Interesting...Not that I'm sure I would take it but I wish I had that option..
If I had put numbers in for a commercially available SPIA I'm sure you would not have taken the option.....I definitely would not. But after some though the offer I was given seems like a slam dunk replacement for fixed income in my portfolio given the projections for the bond market in the next 10 years and that I don't have children.

Would you take the pension if I put it like this.....I get a "withdrawal" of 7%, I have an 81% change of living to age 74 and if I live that long I'm guaranteed 6% annual return ....and I have a 50% chance of living to 84 and getting 8.3% on what is similar to fixed income.
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Old 03-07-2015, 12:12 PM   #57
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If I had put numbers in for a commercially available SPIA I'm sure you would not have taken the option.....I definitely would not. But after some though the offer I was given seems like a slam dunk replacement for fixed income in my portfolio given the projections for the bond market in the next 10 years and that I don't have children.
I can see how it could work out very well for you..I was ridiculed many many years when I was buying I-Bonds..Turns out I wish I would invested every penny I had...
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Old 03-07-2015, 12:25 PM   #58
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Bonds are necessary to get out of jail. For wealth building, not so good.

But if slow wealth erosion gets you to your finish line, bonds can help get the job done.


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Old 03-07-2015, 12:49 PM   #59
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Bonds are necessary to get out of jail. For wealth building, not so good.

But if slow wealth erosion gets you to your finish line, bonds can help get the job done.


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This might have some meaning for the accumulation phase. But when you are spending down the wealth and not trying to preserve it for heirs - not so much.
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