Need your thoughts on Bond Funds

[canuck5]

My wife and I WILL pull the trigger this year, both at 62. We have $3.3MM+ in, investable assets, with a paid off $400K house. I've been investing since 1987, so I've seen lots of ups and downs in the stock market, and although, I threw up a little , I stayed the course and kept investing and only started to shift from stocks to bond funds about 5 years ago.

Right now, we're about 55% in simple S&P 500 or Total Stock market funds, with about 10% of that, in overseas funds. 18% in Total Bond Market funds (6 year duration), 5% in short term Bond funds, 20% in 5 year CD's averaging just under 3% and the balance, in cash.

I feel comfortable here, but my wife feels a little uneasy about our bond allocation, since it has gone down a little in value, recently. She's looking at the increasing interest rates and the affect it will have on it. I know that it will go down a little, then gradually work it's way back up. Or it could have minimal affect if rates only go up another 1/2%

Right now, we have $1.1MM in tax differed accounts and $500K in Roths. The balance or about $1.8MM in taxable accounts. The CD's will be used first and added to if/when interest rates increase.

$70,000 (taxes included here) + $25,000 for healthcare costs (till Medicare in 3 years) +$25,000 in discretionary spending (fun) = $120,000 in spending - $25,000 in a small pension which we will start this year, so I really have to come up with about $95,000/yr, until we start to take SS at 70. We're flexible if that needs to change.

My plan is to do Roth Conversions on the tax deferred, yearly.

The real question here is, does anyone have any great suggestions on our bond portion? Anything different than a Total Bond Market Index that meets our risk comfort level? I'm a believer that bonds will hopefully give me a return "of" my investment and stocks will give me a return "on" my investment.

[Senator]

I am about 95% US Equities and 5% cash. Bonds are going to leak for a long while.

[Ready]

Your allocation is almost identical to mine. Since bonds do carry interest rate risk, I keep some of my fixed income in CDs. However, bonds often go up in value when equities are declining, so they provide an important ballast in your portfolio.

While we do expect interest rates to rise, the rate of increase will likely be extremely slow given what we've seen over the past decade. Your bonds are mostly short term so a small increase in rates will only minimally impact the value of your bond funds, and over time the funds will reinvest in higher yielding bonds, providing a higher yield on the fund.

Depending on your tax situation, you may want to look at adding some municipal bonds to your taxable accounts. The yields can be attractive if you are in a high tax bracket. I'm not sure what state you are living in but if you can find a bond fund that is based in your state you would be both federal and state tax free on the dividends.

Based on a need to withdraw $95K per year you're WR is only 3%, so I think you've set yourself up very nicely for retirement.

[Sunset]

I have the same question basically, because bonds seem to be such a disappointment.

We are about 92% equities.
Have moved a little to BND as an easy default choice, and BSJJ, BSJM due to higher return.
Also did pick up some preferred shares of various companies, since they pay 6% -> 7%
We also just have CD's as they seem be practically a better deal paying 1.75% and zero decline in value.

[audreyh1]

I don’t worry about the short-term performance of bonds. They are the ballast in my portfolio. When I rebalance, I add to them as stocks power ahead. When stocks have a panic, bonds are there to lean on.

Interest rate moves may be sudden in the short term, but smooth out over the longer term. A low or negative return year is often followed by a strong year.

I also expect interest rate trends to be extremely slow over the long term even if there are some short-term choppy bits - those tend to at least partially reverse. Rebalancing opportunity.

[pb4uski]

I'm in a similar boat... similar AA and I'm currently like a deer in the headlights on bonds. I currently have a extra 3% sitting in cash earning 1.3% because I'm unsure.

While I know intellectually that this money won't be used for some time that is well beyond the duration of Total Bond I just can't pull the trigger.

Recently, I have been investing in target maturity bond funds from Guggenheim or Blackrock... sort of like a CD substitute for me... or 3-5 year CDs might be an alternative... or TIPs since I don't currently own any... or I may join Mulligan and his disciples and get into some preferreds.

[Ready]

Quote:

Originally Posted by pb4uski Recently, I have been investing in target maturity bond funds from Guggenheim or Blackrock... sort of like a CD substitute for me... or 3-5 year CDs might be an alternative... or TIPs since I don't currently own any... or I may join Mulligan and his disciples and get into some preferreds.

I'd like to take a look at those. Can you suggest a few specific funds you've looked at and found investment worthy? Are the fees reasonable?

[golfnut]

How about vipix (TIPS Fund)? Is this a good investment given alot of the talking heads are predicting rising interest rates and inflation?

Really don't know, just asking.

[pb4uski]

I own BSCK, BSCM and IBDC... ERs are 24 bps for the Guggenheim corporate funds and 10 bps for the Blackrock, but I suspect that in both cases the funds get better bond pricing that I would if I owned individual bonds because they are buying much larger lots so that better pricing offsets the fees in whole or in part.

[canuck5]

Thanks everyone!!! I do appreciate the options and knowing, I'm not the only one contemplating all this!

[LOL!]

Your description of your portfolio looks like you have a great portfolio. Bond funds are not CDs and not meant to not lose money. That is, bond funds go up and down in price, but total return is usually pretty decent even though sometimes one loses money.

So how would your wife even know that the your bond funds went down in the past few months? Aren't they up for the past year?

What does your wife say when your equity funds go down in value?

Anyways, I wouldn't change a thing about your portfolio.

[Happyras]

Quote:

Originally Posted by pb4uski I own BSCK, BSCM and IBDC... ERs are 24 bps for the Guggenheim corporate funds and 10 bps for the Blackrock, but I suspect that in both cases the funds get better bond pricing that I would if I owned individual bonds because they are buying much larger lots so that better pricing offsets the fees in whole or in part.

Thanks for sharing these funds. I did some playing with these ETFs and VVIAX the VG value index Admiral shares in allocation similar to VWIAX, the VG Wellesley fund Admiral.

VWIAX is 60% bonds (mix with Corp and shorter term with Duration 5.6 years) and 40% value stocks with dividends. If you allocate 60% to these bond ETFs and 40% to VVIAX, the return is very similar over several periods I scanned. It could be only slightly better to hold the bond funds separate from the value stocks under low volatility periods.

Even though the ER is slightly higher to hold these managed balanced funds, the performance is strong.

I too have been struggling with the thought of maintaining bond allocation separate from equities, but I have been using VWIAX and VWENX (as well as now VGWAX Global Wellington) to let Wellington manage the bond side as they seem to have a good tract record. With a quick review I am not seeing a real advantage in managing my bond allocation another way. I do hold other pure equity funds like Primecap and Capital Opportunity, and indexed funds for equity allocation.

I am going to continue to look for the advantages......

[canuck5]

Quote:

Originally Posted by LOL! Your description of your portfolio looks like you have a great portfolio. Bond funds are not CDs and not meant to not lose money. That is, bond funds go up and down in price, but total return is usually pretty decent even though sometimes one loses money. So how would your wife even know that the your bond funds went down in the past few months? Aren't they up for the past year? What does your wife say when your equity funds go down in value? Anyways, I wouldn't change a thing about your portfolio.

Yes, the bond funds were up last year, but with all the talking heads speaking of Bond Armageddon, she looked at the funds and they were down for a few days this month and now got concerned. Surprisingly, she does understand and feels better about stocks, but since bonds are relatively new to us and we plan to retire this year, she's gotten concerned.

Thanks LOL!

[Lsbcal]

Here is how I think about the current bond rates. You look at the TIPS rates and then figure you might get some extra if you take (1) unexpected inflation risk, plus (2) some credit risk.

So for example the 5 year TIPS is at 0.46%. That is the real rate you'll get with no unexpected inflation risk and no credit risk. So "maybe" you'll then get 1% real return over 5 years in a decent intermediate term bond fund like VFIDX or a bit less with Total Bond Mkt. If inflation shows up big time then eventually the bonds should reflect that in their yield but it might be a painful ride.

Here is a source for the real (and nominal) Treasury rates: https://www.treasury.gov/resource-ce...data=realyield

Any critiques on this way of thinking? I'm no bond guru.

FWIW, I have 50% in intermediate bonds and 50% in low duration. Total duration = 3.7 years. Another investor on Bogleheads that I respect had 50% intermediate Treasuries and 50% intermediate inflation protected Treasuries.

[bw5972]

I agree with your wife. My asset allocation includes 35% bond funds but ALL have durations under 2.

[bloom2708]

Whew. Lots of interesting comments about bond funds. It seems a lot of people look at the change in NAV (Net Asset Value) and use that as the gain or loss.

Bonds are for safety and some return. Many also take too much risk on the bond side. Use a good intermediate-term bond index (Total US, Int-Term Tax-Exempt) and up your stock percentage if you want more risk.

I hope in some of these threads the little nuggets of truth come through in the end.

[scrabbler1]

I am in bond funds for two different reasons. In my taxable account, I am in them because of the monthly dividends they give me to cover my expenses in ER. What the NAV does over time means nothing. In my IRA, I am in them to offer balance, or a counterweight, to the more volatile stock fund holdings in there.

[pb4uski]

Quote:

Originally Posted by canuck5 Yes, the bond funds were up last year, but with all the talking heads speaking of Bond Armageddon, she looked at the funds and they were down for a few days this month and now got concerned. Surprisingly, she does understand and feels better about stocks, but since bonds are relatively new to us and we plan to retire this year, she's gotten concerned. Thanks LOL!

Just show her a graph of Total Bond with dividends reinvested for any 3 year period that she cares to look at.

[walkinwood]

The vanguard total bond index returned 3.56% last year. Below the long term average, but it isn't losing money. Not even in real terms.

[bw5972]

Quote:

Originally Posted by pb4uski Just show her a graph of Total Bond with dividends reinvested for any 3 year period that she cares to look at.

Be sure to include a 3 year period with rising interest rates.