|
|
03-04-2015, 07:20 PM
|
#1
|
Thinks s/he gets paid by the post
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
|
Bond Mutual Funds
Haven't been here in nearly a year but a question brings me back.Seems that almost everyone hates bond mutual funds these days..For short term investors I get it. For long term investors I don't..Intermediate bond funds should theoretically completely turn over in 8 - 10 years..Assuming one does not want out in the next 10 years why are folks so hung up on interest rate risk..I am heavy into bond funds and I wish interest rates would go up and the sooner the better..My only concern is that something could cause people to make a mass run for the exits forcing managers to sell when buyers are few and far between but for those managers who were able to pick up those bonds at bargain prices it seems to me they would stand to do quite well..So please help me understand the error of my thinking..
__________________
Life is good. Then you die.
|
|
|
|
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!
|
03-04-2015, 07:23 PM
|
#2
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2013
Posts: 9,358
|
There is not much upside potential in bond funds these days compared to a huge amount of downside risk. And bond funds never mature, so with rising interest rates you may be able to do better with a fixed income ladder with set maturity dates.
__________________
Even clouds seem bright and breezy, 'Cause the livin' is free and easy, See the rat race in a new way, Like you're wakin' up to a new day (Dr. Tarr and Professor Fether lyrics, Alan Parsons Project, based on an EA Poe story)
|
|
|
03-04-2015, 07:26 PM
|
#3
|
Thinks s/he gets paid by the post
Join Date: Feb 2004
Location: Mid Hudson Valley
Posts: 1,781
|
When they head for the exits its not gonna be pretty. Meanwhile I've been overweight DBLTX with some TGLMX.
__________________
In a panamax down by the river.
|
|
|
03-04-2015, 07:27 PM
|
#4
|
Thinks s/he gets paid by the post
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
|
Quote:
Originally Posted by daylatedollarshort
There is not much upside potential in bond funds these days compared to a huge amount of downside risk. And bond funds never mature, so with rising interest rates you may be able to do better with a fixed income ladder with set maturity dates.
|
That's what everyone says..Now tell me more about this huge downside risk.
__________________
Life is good. Then you die.
|
|
|
03-04-2015, 07:44 PM
|
#5
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2013
Posts: 9,358
|
Quote:
Originally Posted by lawman
That's what everyone says..Now tell me more about this huge downside risk.
|
Interest rates have only so far to fall to get to zero, but could go up to 10% or more.
More on this here:
Bond Funds are Not Exactly Safe Shelters
http://djcoregon.com/news/2002/08/13...-really-loans/
When rates go up, bond prices fall. If you own a bond outright, you can hold it to maturity. In a fund you may never recoup your lost original principal.
__________________
Even clouds seem bright and breezy, 'Cause the livin' is free and easy, See the rat race in a new way, Like you're wakin' up to a new day (Dr. Tarr and Professor Fether lyrics, Alan Parsons Project, based on an EA Poe story)
|
|
|
03-04-2015, 07:54 PM
|
#6
|
Thinks s/he gets paid by the post
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
|
Quote:
Originally Posted by daylatedollarshort
Interest rates have only so far to fall to get to zero, but could go up to 10% or more. More on this here:
Sometimes You Should Buy The Bonds Directly - Sun Sentinel
"bond funds never mature, because the fund manager is buying new bonds to replace those that mature, or those he sells. So the fund's share price can go up or down, mostly in response to changes in interest rates, and you can never be sure of getting your principal back when you sell the fund shares."
And even more in Annette Thaus' The Bond Book, where she discusses the pros and cons to bond funds. There are many pros, but less so in a rising interest rate environment because bond funds never mature, so you may never recoup your principal. You have to decide what works for you.
|
I get that..I guess what makes it different for me is that I do not want to go back into stocks and I'm quite happy to never get out of bonds..
__________________
Life is good. Then you die.
|
|
|
03-04-2015, 08:03 PM
|
#7
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2013
Posts: 9,358
|
Quote:
Originally Posted by lawman
I get that..I guess what makes it different for me is that I do not want to go back into stocks and I'm quite happy to never get out of bonds..
|
Sorry, I changed my post as I found a less ad ridden article. If you stay with bond funds you will not be likely to go broke and lose all your money. You just might have better odds of making a higher total amount of money in a rising interest rate environment with a ladder. If you like the ease of funds there is no law that says you have to forego them for a more complicated choice, even if the more complicated choice has better odds of a higher total long term return (interest plus market gain / losses). The fund is likely to suffer high market losses if interest rates rise significantly.
__________________
Even clouds seem bright and breezy, 'Cause the livin' is free and easy, See the rat race in a new way, Like you're wakin' up to a new day (Dr. Tarr and Professor Fether lyrics, Alan Parsons Project, based on an EA Poe story)
|
|
|
03-04-2015, 08:32 PM
|
#8
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
|
Below is a chart showing the huge increase in interest rates on the 10-year note back in 2013 (blue line). The red line is the price (NAV) of a bond mutual fund FSITX (Fidelty Spartan Total US Bond index fund). The red line does NOT show reinvested dividends.
Certainly, the bond fund lost some money, but not enough to really worry about. The bond fund has since recovered.
|
|
|
03-04-2015, 08:47 PM
|
#9
|
Thinks s/he gets paid by the post
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
|
I think what I understand least regarding bond funds is liquidity risk..If managers were forced to sell bonds in order to meet redemptions is that something one could ride out without loss or is that something one might never recoup? I think one might never recoup that but I don't know just how great that risk is? To my knowledge something like that that has never happened on a large scale but it doesn't mean it couldn't..
__________________
Life is good. Then you die.
|
|
|
03-04-2015, 08:49 PM
|
#10
|
Thinks s/he gets paid by the post
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
|
Quote:
Originally Posted by LOL!
Below is a chart showing the huge increase in interest rates on the 10-year note back in 2013 (blue line). The red line is the price (NAV) of a bond mutual fund FSITX (Fidelty Spartan Total US Bond index fund). The red line does NOT show reinvested dividends.
Certainly, the bond fund lost some money, but not enough to really worry about. The bond fund has since recovered.
|
That is very interesting...Thanks
__________________
Life is good. Then you die.
|
|
|
03-05-2015, 02:04 AM
|
#11
|
Thinks s/he gets paid by the post
Join Date: Mar 2009
Posts: 2,976
|
Over the last 7 years there have been constant projections that interest rates will rise not fall. Each year that has been largely proven wrong. This has led to a certain smugness of bond fund holders when they announce that these forecast were wrong and the TBM gained xxx last year.
However, this could very well end badly as some of the above posters have mentioned. Not having much choice I am forced to hold my nose and invest in the total bond market fund in my 401k. However, upon retirement, I will rollover to an IRA and ladder CD's, maybe some bonds, and minimize a portion of this risk.
The fixed income portion of my portfolio is to add ballast and stability. I don't care about the possible capital gains on bond funds as they very well may turn into losses in the future.
__________________
Took SS at 62 and hope I live long enough to regret the decision.
|
|
|
03-05-2015, 04:30 AM
|
#12
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2013
Location: Limerick
Posts: 5,633
|
If there is a run to exit bond funds it could cause a liquidity crisis possibly resulting in the closure of the fund or the company running the fund.
|
|
|
03-05-2015, 05:37 AM
|
#13
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
|
Here is a close-up of just the YTD part of the previous chart. I show it because bond funds were UP 2% in January alone. Staid bond funds do not go up 2% in one month. But one sees that it was because of interest rates, the FOMC meeting, ECB announcements, Greece worries, and so on. When all those things played out, interest rates settled again and bond funds gave up in February most of the 2% gains they had in January.
So if plus-or-minus 2% to 5% volatility per month in a bond fund bothers you, then you should not be in a bond fund.
(Chart made at finance.yahoo.com, so you can make your own chart of interest rates compared to bond fund NAV.)
|
|
|
03-05-2015, 06:52 AM
|
#14
|
Recycles dryer sheets
Join Date: May 2012
Posts: 90
|
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.
|
|
|
03-05-2015, 07:20 AM
|
#15
|
Thinks s/he gets paid by the post
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
|
Quote:
Originally Posted by hlfo718
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.
|
I can stand a small loss that will almost certainly recover in a few years. What keeps me awake is being in something that can make $1.00 grow to be $.80 in six years like happened between Jan. 1, 1969 and Dec. 31, 1974..
I would be interested in knowing how that compares to the worst 6 year intermediate term bond fund performance in th last 50 years..
CAGR of the Stock Market: Annualized Returns of the S&P 500
__________________
Life is good. Then you die.
|
|
|
03-05-2015, 07:48 AM
|
#16
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
|
Quote:
Originally Posted by lawman
What keeps me awake is being in something that can make $1.00 grow to be $.80 in six years like happened between Jan. 1, 1969 and Dec. 31, 1974.
|
This is where charitable giving comes into play. You just cut out your charitable giving for 5 years and save that 20% for yourself.
|
|
|
03-05-2015, 08:05 AM
|
#17
|
Thinks s/he gets paid by the post
Join Date: Jun 2010
Posts: 2,301
|
Quote:
Originally Posted by daylatedollarshort
When rates go up, bond prices fall. If you own a bond outright, you can hold it to maturity. In a fund you may never recoup your lost original principal.
|
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
Quote:
Bond funds are just portfolios of bonds marked to market every day. How can they be worse than the sum of what they own?
|
Quote:
If you own the bond fund that fell in value, you can sell it right after the fall and still buy the portfolio of individual bonds some say you should have owned to begin with (which, again, also fell in value!). Then, if you really want, you can still hold these individual bonds to maturity and get your irrelevant nominal dollars back. It’s just the same thing.
|
|
|
|
03-05-2015, 09:00 AM
|
#18
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 37,931
|
Quote:
Originally Posted by photoguy
|
Thanks for the link. I am another investor who is mystified by the warnings to own bonds instead of bond funds if you are investing for the rest of your life.
The "never matures" argument has always seemed meaningless to me since a long term direct bond investor has to manage a ladder, and that ladder never matures either.
I'm comfortable with the bulk of my fixed income in intermediate term bond funds. It doesn't concern me that they sell and buy bonds to maintain a duration in the range I picked.
I've never looked at my investments in terms of what is "principal" either. I know where I started I know where I am now. I only care that it doesn't run out in my lifetime. Being able to grow an inflation adjusted portfolio even while withdrawing from it in retirement would be nice, but is not necessary for our plan to succeed.
__________________
Retired since summer 1999.
|
|
|
03-05-2015, 09:35 AM
|
#19
|
Thinks s/he gets paid by the post
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,213
|
__________________
Life is good. Then you die.
|
|
|
03-05-2015, 10:00 AM
|
#20
|
Recycles dryer sheets
Join Date: Sep 2012
Posts: 58
|
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.
|
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Thread Tools |
|
Display Modes |
Linear Mode
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|