I'm not sure owning bonds has much of a payoff

[Lsbcal]

Russman, usually when equities decline in a recessionary time, Treasuries go up. During the 1970’s both bonds and stocks got battered. Bonds were less volatile then.

[ESRwannabe]

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Originally Posted by redduck I’m not sure owning bonds has paid off for me. For the younger investors, how do you think bonds in your portfolio will help you meet your financial goals? [/FONT][/SIZE]

I've made great money off of debt but only when it was leveraged (i.e. CEFs).

As far as using it as part of market portfolio theory, I would only use long term treasury, maybe tips, and cash.

I can see myself putting a good chuck of money into the etf XMPT (index of muni bond CEFs), which I think will make good returns. For debt I also like the cef HTD which is 50/50 utility stocks and preferred stocks (all qualified divs), and Vanguard's tax managed balanced fund 50/50 us stocks and muni bonds.

For a tax advantaged account I like doubeline and pimco CEFs, like DSL.

I live in a income tax free state. So muni bond CEFs are great because worst case scenario where we get high inflation I can just redirect all income to re-invest and over the long term I will actually come out ahead in a rising rates environment.

You can make stock market like returns on muni bond CEFs.

[pb4uski]

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Originally Posted by Russman ......But now that we're in an environment where the interest rate is so low, won't that fund potentially take a double hit, if the equity side crashes and interest rates continue to go up causing the bond side to decline at the same time. In 2008, interest rates were higher, and as they decreased rates, the bond portion appreciated, helping offset the equity decline. I don't see how that scenario could play out again.

Here's the theory.... the Fed will only increase rates if the economy is doing well and a good economy is good for stocks... so stocks will go up because the economy is good while bonds/fixed income will decline because of higher interest rates.... but the net impact will be favorable.

[JoeWras]

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Originally Posted by Russman Can someone give me advice on the rationale of having part of my portfolio invested in anything related to a Bond Fund (as opposed to individual bonds or fixed income like CDs, or cash), especially during a low interest rate environment that's forecasted to rise ?

Not sure anyone addressed the above.

A bond fund has a few advantages. The managers of a good fund like Wellesley will manage the risk profile of the bonds. So, risk is spread versus having just a few individual funds. Liquidity is a big advantage. You can sell immediately. A bond fund also hides all the other complexities of dealing with bonds.

Of course, you are right, the pricing will take a hit in a rising rate environment. Holding an individual bond hides that component -- unless you suddenly find you need to sell it for some reason.

[COcheesehead]

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Originally Posted by JoeWras Not sure anyone addressed the above. A bond fund has a few advantages. The managers of a good fund like Wellesley will manage the risk profile of the bonds. So, risk is spread versus having just a few individual funds. Liquidity is a big advantage. You can sell immediately. A bond fund also hides all the other complexities of dealing with bonds. Of course, you are right, the pricing will take a hit in a rising rate environment. Holding an individual bond hides that component -- unless you suddenly find you need to sell it for some reason.

A few clarifications:
You can sell an individual bond at almost anytime, even thinly traded ones. Fidelity which I use for my bonds, has an option to obtain competitive bids on your bond with literally just a click of a button. It takes a couple hours, but they will come back to you with several bids, you take the highest one and in a second the bond is sold. So liquidity when holding an individual bond is not really an issue. Pricing is market driven.

Regarding diversification, its just like equities. Don't pigeon hole yourself too much into any one industry or duration and buying quality over yield is usually a better option.

As far as individual bond complexities, Fidelity has some great tools to help you build and manage a ladder. Trust me if I can do it, anybody can do it.
https://www.fidelity.com/fixed-incom...vices/overview


Individual bond ladders in a rising rate environment can offer flexibility and income predictability.

[audreyh1]

Quote:

Originally Posted by JoeWras Not sure anyone addressed the above. A bond fund has a few advantages. The managers of a good fund like Wellesley will manage the risk profile of the bonds. So, risk is spread versus having just a few individual funds. Liquidity is a big advantage. You can sell immediately. A bond fund also hides all the other complexities of dealing with bonds. Of course, you are right, the pricing will take a hit in a rising rate environment. Holding an individual bond hides that component -- unless you suddenly find you need to sell it for some reason.

Good answer!

I prefer bond funds because:
a) I am holding a large bond allocation forever, not for some finite moment after which I will use the matured funds for something else.
b) I want a “constant maturity” type investment that a bond fund can give me. I don’t want bonds dropping in duration as they reach maturity.
c) I rebalance at least annually. I need the liquidity of the bond funds.
d) I have a large amount invested in bond funds and I don’t want to do all the work to manage my own bond fund, nor deal with the costs and individual issue risks. I don’t own individual stocks either.

The up and down “mark to market” of a bond fund: All bonds whether owned individually or through a fund are taking the same rollercoaster ride. Some folks choose to ignore that.

I practice some duration diversification in my fixed income allocation: I hold cash/equivalents, short term bond funds (~2.5 years), and the bulk in intermediate term bond funds (~5 years). I rebalance among these.

I have a fixed income allocation as a diversifier against equity funds to give me lower overall portfolio volatility. Most of the time stocks are outperforming bonds, so as I rebalance, money is added to the bond allocation. And as interest rates are rising, more money is added to the bond allocation. When stocks drop precipitously, my fixed income allocation rises in value, and I rebalance in the other direction. I stick with high quality bond funds overall, as those have lower correlation with equities and behave best during stock market crashes.

I am a total return investor.

[Chuckanut]

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Originally Posted by audreyh1 Good answer! I prefer bond funds because: a) I am holding a large bond allocation forever, not for some finite moment after which I will use the matured funds for something else. b) I want a “constant maturity” type investment that a bond fund can give me. I don’t want bonds dropping in duration as they reach maturity. c) I rebalance at least annually. I need the liquidity of the bond funds. d) I have a large amount invested in bond funds and I don’t want to do all the work to manage my own bond fund, nor deal with the costs and individual issue risks. I don’t own individual stocks either. The up and down “mark to market” of a bond fund: All bonds whether owned individually or through a fund are taking the same rollercoaster ride. Some folks choose to ignore that. I practice some duration diversification in my fixed income allocation: I hold cash/equivalents, short term bond funds (~2.5 years), and the bulk in intermediate term bond funds (~5 years). I rebalance among these. I have a fixed income allocation as a diversifier against equity funds to give me lower overall portfolio volatility. Most of the time stocks are outperforming bonds, so as I rebalance, money is added to the bond allocation. And as interest rates are rising, more money is added to the bond allocation. When stocks drop precipitously, my fixed income allocation rises in value, and I rebalance in the other direction. I stick with high quality bond funds overall, as those have lower correlation with equities and behave best during stock market crashes. I am a total return investor.

Obviously, I must add your name to the list of dangerous radicals who infest this site.

[audreyh1]

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Originally Posted by Chuckanut Obviously, I must add your name to the list of dangerous radicals who infest this site.

Apparently so!

[JoeWras]

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Originally Posted by COcheesehead A few clarifications: You can sell an individual bond at almost anytime, even thinly traded ones. Fidelity which I use for my bonds, has an option to obtain competitive bids on your bond with literally just a click of a button. It takes a couple hours, but they will come back to you with several bids, you take the highest one and in a second the bond is sold. So liquidity when holding an individual bond is not really an issue. Pricing is market driven. ... Individual bond ladders in a rising rate environment can offer flexibility and income predictability.

Thanks for the experience of your bond selling, Cheesehead. Nice!

I agree... If you go individual bonds, build a ladder. Add some diversity in that ladder (i.e. not all one company or municipality).

[Dtail]

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Originally Posted by audreyh1 Good answer! I prefer bond funds because: a) I am holding a large bond allocation forever, not for some finite moment after which I will use the matured funds for something else. b) I want a “constant maturity” type investment that a bond fund can give me. I don’t want bonds dropping in duration as they reach maturity. c) I rebalance at least annually. I need the liquidity of the bond funds. d) I have a large amount invested in bond funds and I don’t want to do all the work to manage my own bond fund, nor deal with the costs and individual issue risks. I don’t own individual stocks either. The up and down “mark to market” of a bond fund: All bonds whether owned individually or through a fund are taking the same rollercoaster ride. Some folks choose to ignore that. I practice some duration diversification in my fixed income allocation: I hold cash/equivalents, short term bond funds (~2.5 years), and the bulk in intermediate term bond funds (~5 years). I rebalance among these. I have a fixed income allocation as a diversifier against equity funds to give me lower overall portfolio volatility. Most of the time stocks are outperforming bonds, so as I rebalance, money is added to the bond allocation. And as interest rates are rising, more money is added to the bond allocation. When stocks drop precipitously, my fixed income allocation rises in value, and I rebalance in the other direction. I stick with high quality bond funds overall, as those have lower correlation with equities and behave best during stock market crashes. I am a total return investor.

Question on further granularity between individual bonds vs. bond funds.
If one for example keeps to the same duration and high quality, diversification, doesn't need the bonds for rebalancing and finally would keep the individual bonds to maturity, would you still consider bond funds to be advantageous over individual bonds in a rising interest rate environment? I realize that the bond funds would effectively replace the low yields with higher yields.

[audreyh1]

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Originally Posted by Dtail Question on further granularity between individual bonds vs. bond funds. If one for example keeps to the same duration and high quality, diversification, doesn't need the bonds for rebalancing and finally would keep the individual bonds to maturity, would you still consider bond funds to be advantageous over individual bonds in a rising interest rate environment? I realize that the bond funds would effectively replace the low yields with higher yields.

I consider that a completely different investment scenario with probably different goals than mine, and thus can’t really comment.

I really don’t worry about owning bond funds in a rising interest environment, and IMO holding individual bonds instead doesn’t provide any special interest rate protection.

[jazz4cash]

For the sake of diversification, I think you need 20 individual bonds. That’s a lot of work to manage and takes more money than buying shares in a fund. I prefer individual bonds but I don’t have enough money, time, and skill to do it properly. I’m actually using CDs in lieu of bonds right now but hope to transition in the future (when rates are better) to a few individual bonds plus a fund for diversification.

[pb4uski]

Where I am stuck right now is that there doesn't seem to be anything out there that pays a sufficient premium over 2.09% Prime MM that is of interest. A 1 year CD is only 26 bps more and 2 year CD is 71 bps more. Going out longer than 2 years doesn't pick you up much more for locking up your money for a much longer time... at most 20 bps for each additional year of maturity and really not even that. Going down in quality even to A rated corporates doesn't pick up much over a CD.

So I can limp along in VMMXX at 2.09% or lock up my money for 2 years in a 2.8% CD or a 3.16% A rated corporate.... with those alternatives and a potentially changing landscape the MM fund looks pretty good to me.... the cost of patience isn't high at those low rates.

[COcheesehead]

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Originally Posted by pb4uski Where I am stuck right now is that there doesn't seem to be anything out there that pays a sufficient premium over 2.09% Prime MM that is of interest. A 1 year CD is only 26 bps more and 2 year CD is 71 bps more. Going out longer than 2 years doesn't pick you up much more for locking up your money for a much longer time... at most 20 bps for each additional year of maturity and really not even that. Going down in quality even to A rated corporates doesn't pick up much over a CD. So I can limp along in VMMXX at 2.09% or lock up my money for 2 years in a 2.8% CD or a 3.16% A rated corporate.... with those alternatives and a potentially changing landscape the MM fund looks pretty good to me.... the cost of patience isn't high at those low rates.

The true cost is the current 2.9% inflation rate. So if you're earning less than that, well, you know the rest of the story.

[pb4uski]

I understand your point but it is my overall portfolio rate (stocks, bonds and cash) compared to inflation that is most relevant, not just what I earn on bonds.

[COcheesehead]

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Originally Posted by pb4uski I understand your point but it is my overall portfolio rate (stocks, bonds and cash) compared to inflation that is most relevant, not just what I earn on bonds.

We're on the same page.