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Old 01-23-2014, 02:16 PM   #21
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My apologies, but that was not my impression of you. There is a wide range of expertise here & your low post count on this board led me to say what I did. All the best.
No offense taken, and no apology required. All the best to you also!
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Old 01-23-2014, 02:20 PM   #22
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Investors seeking alternatives to bonds must envision a potential short-term downside risk they think they're avoiding. I posted because I'm curious whether any who quantified the potential risk would share that.
NT2
You can quantify (guess) the potential drop as well as anyone. All you need is your fund's duration and some estimate of the interest rate path of relevant rates going forward, and a range of changes and probabilities attached to each of these guesses.

No one can do this very well, as has been shown by studies of people trying. But anyone can throw his hat into the ring. In any case, the size of likely intermediate term losses in reasonable 3-6 year bond funds is tiny relative to equity volatility. No place for the rent money, but for anything with a 3 or so year horizon it is low risk. There are also good political reasons to think that all developed country central banks and governments will move mountains to avoid steep rate increases in their bonds, bills, and notes.

Ha
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Old 01-23-2014, 02:39 PM   #23
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There's a ton of good advice here along with personal information about how people have acted. I can only offer one other thought. Whatever you choose to do, make sure that if things go against you for a while, you can still sleep at night and avoid getting needlessly aggravated. Otherwise, you may panic and sell out at the bottom.

I add the above thoughts because of people I know who panicked in 2009, sold stocks at or near the bottom and then missed the recovery which would have made them whole or nearly so.
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Old 01-23-2014, 02:44 PM   #24
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I see no upside to Vanguard Total Bond Market when PenFed is paying a guaranteed rate of 3% for 5 or 7 years and only charges a flat one year penalty for early withdrawal. TBM is only paying 2% right now, and for the rate to rise the NAV has to drop. So until it begins to pay at least 3% I would rather have my money in CDs. If rates rise, I can always cash in the CD and buy into the bond fund at a lower NAV and higher yield. It seems like a no brainer to me on this one. I've dumped all my TBM funds at this point. The only bond fund I still have is CA Municipal Bonds. At least they pay close to 3%, and both federal and state tax free. They still have interest rate risk, but at least there is a slight premium over the CD to justify the risk.

I would stay away from brokered CDs at this point though. If the PenFed deal goes away, we will all have to reevaluate. But brokered CDs have the same interest rate risk as bond funds, and their yield is not much higher (if any) than a bank CD.
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Old 01-23-2014, 03:00 PM   #25
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That is why I want to have a balanced portfolio with a decent helping of stocks.
Interesting that you would go with a "decent helping." I've analyzed the situation and have chosen to go with a "significant dollup." We'll see who called it correctly in the years to come!
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Old 01-23-2014, 03:00 PM   #26
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I see no upside to Vanguard Total Bond Market when PenFed is paying a guaranteed rate of 3% for 5 or 7 years and only charges a flat one year penalty for early withdrawal. TBM is only paying 2% right now, and for the rate to rise the NAV has to drop.

+1

I sold my TBM fund at Vanguard earlier this week and sent PenFed my application for an IRA. At this point, I hope they get the funds before they drop the rate.

I've been thinking about this for a while and decided to pull the trigger after reading the bond fund threads here and at bogleheads. I really didn't want the extra hassle, but that's a lame reason - at least for me.

The following analysis also helped me decide on the move: http://thefinancebuff.com/bond-fund-vs-cd-2014.html
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Old 01-23-2014, 03:01 PM   #27
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the size of likely intermediate term losses in reasonable 3-6 year bond funds is tiny relative to equity volatility. No place for the rent money, but for anything with a 3 or so year horizon it is low risk. There are also good political reasons to think that all developed country central banks and governments will move mountains to avoid steep rate increases in their bonds, bills, and notes.
Ha, thanks for your reply.
Understanding that a long-term perspective is best, I'm still interested in the short-term perspective on bonds many investors wiser than me seem to have. Many with SV funds are placing 50% of their bond allocation there to hedge against short-term downside risk in bonds. This got my attention and interest in the logic behind it.

An investment in VBMFX today will be OK long-term. The short-term strategy allocating 50% to a SV fund earning the same yield must be with the intent/hope that in a few years VBMFX may be at a 10-15% discount to today's price. The people doing this seem savvy, so this strategy is interesting and if I can earn a comparable yield holding back 50% of my bond allocation in the SV fund then a better LT return is possible if that 10-15% discount becomes available.

Unlike with this Q on bonds, I must accept equity volatility because I'm aware of no alternative investment.

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Old 01-23-2014, 03:21 PM   #28
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I see no upside to Vanguard Total Bond Market when PenFed is paying a guaranteed rate of 3% for 5 or 7 years and only charges a flat one year penalty for early withdrawal. TBM is only paying 2% right now, and for the rate to rise the NAV has to drop. So until it begins to pay at least 3% I would rather have my money in CDs. If rates rise, I can always cash in the CD and buy into the bond fund at a lower NAV and higher yield. It seems like a no brainer to me on this one. I've dumped all my TBM funds at this point.
Ready, thanks for your reply.
Would a risk in the 5yr CD at 3% be that rates rise above 3% within 3 years? The one year penalty could cost approx 1/3 of the interest earned?
Just wondering how the thinking goes with the 5 year CD's at 3%.
Thanks-
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Old 01-23-2014, 03:41 PM   #29
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I'm also at Vanguard, approx 2/3 tax-deferred. Not moving into CD's for the same reason, and because I've realized I'm fortunate to have the SV in my 401k to take advantage of.

NT2
I have tax-deferred (IRA, Roth IRA & 401K) and taxable accounts at Vanguard. For 401K, fixed-income are all in SV fund. For IRA/Roth IRA, all bond holdings are in short-term index fund. For taxable account, 1/2 of fixed income is limited-term tax-exempt fund and the rest to PenFed 5 yr CDs.
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Old 01-23-2014, 03:56 PM   #30
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I know Vanguard's tip fund (vipsx) had a bad 2013 return. Is this a good hedge going forward for the Total Bond fund ? I have both funds in my 401k.
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Old 01-23-2014, 04:19 PM   #31
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Ready, thanks for your reply.
Would a risk in the 5yr CD at 3% be that rates rise above 3% within 3 years? The one year penalty could cost approx 1/3 of the interest earned?
Just wondering how the thinking goes with the 5 year CD's at 3%.
Thanks-
NT2
If you keep the funds in place for three years you would earn 9%. If you the pull out at the end of the third year, you lose one year interest, so you've earned 6% now over 3 years, or about 2% per year. Since the 3 year rate is only 2% anyway, you're at break-even if you terminate early at three years on a five year CD. So I see no upside to a 3 year CD at only 2%. If you think you may only keep the money in the CD for a year or two, then a shorter term CD might be more appropriate.
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Old 01-23-2014, 04:25 PM   #32
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+1

I sold my TBM fund at Vanguard earlier this week and sent PenFed my application for an IRA. At this point, I hope they get the funds before they drop the rate.

I've been thinking about this for a while and decided to pull the trigger after reading the bond fund threads here and at bogleheads. I really didn't want the extra hassle, but that's a lame reason - at least for me.

The following analysis also helped me decide on the move: Bond Fund vs CD In the Next Five Years
Nice short article that summarizes why you can't win with these bond funds compared to a 3% CD. It's disappointing that the best thing we can do with the fixed income portion of our portfolio is lock in a 3% return, but it's the price we pay for enjoying several decades of declining interest rates to the point where there's just no room left for them to decline any further.

Thanks for posting that!
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Old 01-23-2014, 04:26 PM   #33
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We use the SEC Yield and project forward for the bond fund's duration. We assume unchanging interest rates.
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 01-23-2014, 04:26 PM   #34
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I know Vanguard's tip fund (vipsx) had a bad 2013 return. Is this a good hedge going forward for the Total Bond fund ? I have both funds in my 401k.
In general, a TIPS fund can be used to hedge against inflation but is susceptible to changes in interest rates. VIPSX has a duration of about 6.4%. That means that a hypothetical 100-basis-point rise in interest rates would result in a 6.4% drop. If you are concerned with inflation, a short TIPS fund is also available at Vanguard.
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Old 01-23-2014, 04:34 PM   #35
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Ready, thanks for your reply.
Would a risk in the 5yr CD at 3% be that rates rise above 3% within 3 years? The one year penalty could cost approx 1/3 of the interest earned?
Just wondering how the thinking goes with the 5 year CD's at 3%.
Thanks-
NT2
If you pulled the 5 year CD at the end of

1 year = 0%
2 year = 1.51%
3 year = 2.02%
4 year = 2.27%
5 year = 3.04%
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Old 01-23-2014, 04:35 PM   #36
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Originally Posted by kiki View Post
+1

I sold my TBM fund at Vanguard earlier this week and sent PenFed my application for an IRA. At this point, I hope they get the funds before they drop the rate.

I've been thinking about this for a while and decided to pull the trigger after reading the bond fund threads here and at bogleheads. I really didn't want the extra hassle, but that's a lame reason - at least for me.

The following analysis also helped me decide on the move: Bond Fund vs CD In the Next Five Years
That is an interesting article. I wish he had followed that math through with a table to completely compare the options.

There may be some scenarios that are not covered in going the 5yr CD route. I'm not sure I can come up with a good one though. If real rates go up and I can now get 10yr TIPS at 2.2%, I might want my money available for the purchase. But the CD could be broken in that case I suppose.

My intermediate money is in DODIX and BOND (etf version of Total Return Fund PTTRX). Hoping they do better then the Total Bond Mkt as they have over many rolling 5 year periods in the past. See 5 year rolling returns graph from M* :

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Old 01-23-2014, 04:58 PM   #37
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If you pulled the 5 year CD at the end of

1 year = 0%
2 year = 1.51%
3 year = 2.02%
4 year = 2.27%
5 year = 3.04%
Thanks Spanky (and Ready also) for confirming 3 years is the approx break even point for early termination of the 5yr CD.

NT2
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Old 01-23-2014, 05:33 PM   #38
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Originally Posted by kiki View Post
I've been thinking about this for a while and decided to pull the trigger after reading the bond fund threads here and at bogleheads. I really didn't want the extra hassle, but that's a lame reason - at least for me.

The following analysis also helped me decide on the move: Bond Fund vs CD In the Next Five Years
I've been reading similar material also. It brings out the contrarian in me.
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Old 01-23-2014, 08:20 PM   #39
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If I had a 2.1% SV fund available to me, I think i would put my entire fixed income allocation there (or between there and PenFEd 3% 5 year CDs up to the FDIC limit).

You would be getting a competitive income return, likely will keep up with inflation and minimal interest rate risk compared to bond funds.
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Old 01-23-2014, 10:26 PM   #40
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If I had a 2.1% SV fund available to me, I think i would put my entire fixed income allocation there (or between there and PenFEd 3% 5 year CDs up to the FDIC limit).

You would be getting a competitive income return, likely will keep up with inflation and minimal interest rate risk compared to bond funds.
pb4uski, thanks for your reply-
Your perspective is similar to a couple other posters, and makes sense.
Others have endorsed the 50:50 with the SV fund and I'm still leaning that way though your strategy could easily end up better.
Keeping SV at 50% is a result of reading some cautions that although SV is "safe" a full bond allocation into SV does have risk dependent on the insurance co's providing the guarantees. Maybe I read to much into that risk.

I'm prone to paralysis by analysis -trying to avoid that but may be going there!

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