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Re: recommended bond portfolio
Old 10-06-2006, 11:05 AM   #21
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Re: recommended bond portfolio

Quote:
Originally Posted by Nords
C'mon, guys, I heard you the first 7,999,999 times.

If the types of bond funds that JohnEyles is contemplating will cough up that type of total return then that's what he should do. I just have a hard time throwing money at a flat (or inverted) yield curve and then trusting expecting a manager to generate the alpha. And if he's trading his own individual bonds then we probably wouldn't have to worry about the alpha.

But I guess this is why we stick to stocks.
This is a gross simplification, but for the sake of argument the Lehman Agg/VG TBIF yields around 5% and has a duration of roughly 4. So if the economy craps out (housing-lead recession, anyone?) and the equity market goes to hell while the yield curve shifts dow 1% over the course of a year, the bond fund would return 5% (yield) plus 4% (appeciation). Meeanwhile the S&P500 has cause a round of pants-sihtting and Mr. CD has eked out 5% and chane in yield.
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Re: recommended bond portfolio
Old 10-06-2006, 11:14 AM   #22
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Re: recommended bond portfolio

Quote:
Originally Posted by brewer12345
This is a gross simplification, but for the sake of argument the Lehman Agg/VG TBIF yields around 5% and has a duration of roughly 4. So if the economy craps out (housing-lead recession, anyone?) and the equity market goes to hell while the yield curve shifts dow 1% over the course of a year, the bond fund would return 5% (yield) plus 4% (appeciation). Meeanwhile the S&P500 has cause a round of pants-sihtting and Mr. CD has eked out 5% and chane in yield.
Exactly..................I personally have never owned a CD.............

I guess because when I could have gotten a 15 year @ 13%, I had no money..............
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Re: recommended bond portfolio
Old 10-06-2006, 02:13 PM   #23
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Re: recommended bond portfolio

Quote:
Originally Posted by brewer12345
This is a gross simplification, but for the sake of argument the Lehman Agg/VG TBIF yields around 5% and has a duration of roughly 4. So if the economy craps out (housing-lead recession, anyone?) and the equity market goes to hell while the yield curve shifts dow 1% over the course of a year, the bond fund would return 5% (yield) plus 4% (appeciation). Meeanwhile the S&P500 has cause a round of pants-sihtting and Mr. CD has eked out 5% and chane in yield.
I have to confess I am clueless about bonds. Like Nords, I have never bought any bonds or bond funds. So I need some education. As I understand a regular bond (T-bill, corporate, whatever) you buy a promiss that "guarantees" a certain yield over a certain period (e.g. 5% over 5 years). If you hold the bond to maturity you get back your original priciple plus the 5 years of interest (i.e. that is total return at maturity). During the time you held the bond, its "value" if sold was moving around depending on how good it looked relative to the current market so total return if sold could be more or less than if held to maturity.

As I understand bond funds, the managers buy the real thing and tend to hold them to maturity. You buy shares in the pot at a particular point and you are affected by the value of the overall fund porfolio relative to the current market. That value jumps around in a fashion similar to that of a single "real" bond except it reflects the value of the whole pile.

Since (if?) the managers hold the underlying bonds to maturity, shouldn't the fund over time simply return the overall yield of the underlying bonds plus original principal like regular bonds? In other words, wouldn't expected long term total return be about the same as bonds (less management fees)?

I am asking all of this to make sure my understanding is correct since my ultimate question goes back to Brewer's quote. If the real estate market leads a crash in equities, I would expect bonds to go up - thus the extra 4% appreciation. That is why volatility is lower. But five years later, when the equity market catches fire, the bond fund share value would depreciate roughly as much as it went up as the fund returned to the underlying pricipal plus yield long term return wouldn't it?
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Re: recommended bond portfolio
Old 10-06-2006, 02:28 PM   #24
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Re: recommended bond portfolio

You got the part about direct ownership of bonds right.

With bond funds, I'll restrict my comments to index funds. The indexes are constantly changing, just like the equity indexes. One of the reasons they change a lot is that the indexes usually swap out bonds on a regular basis to maintain something like a consistent maturity. So the fund buys a 6 year treasury, and two years later they sel it and replace it with a new 6 year bond to move back out on the maturity curve (since the original bond is now a 4 year bond). In contrast, if you just bought the individual bond and held it, you would have a shorter and shorter maturity while the bond fund's average maturity stayed roughly stable.

Where you get a lot of mileage in owning bond funds in a downturn is by rebalancing. That's how you capture at least part of the cap gains. If you are a dirty market timer, maybe you try to capture all of the bond cap gains.
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Re: recommended bond portfolio
Old 10-06-2006, 02:50 PM   #25
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Re: recommended bond portfolio

Quote:
Originally Posted by brewer12345
For 8 millionth time: CDs = yield only, bonds & bond funds = total return.
Man, I'm clueless - help me understand. This AGG that Brewer (and many
articles I've read) recommends is yielding 4.5% and yet YTD rtn is only 1.7%.
What the heck does that mean ? That the share value has dropped by
4.5-1.7% ? I don't think so, looks like share price has fallen only about 1%
this year. YTD rtn of 1.7% sounds pretty lousy - seems like I'd be better
off with MM, T'Bill, CD, whatever. Should I even be considering bonds, or
am I misunderstanding this YTD rtn ?

To clarify my original query, I have no interest in getting into buying individual
bonds, other than Treasuries (some T'Bills in my cash positions, and maybe
some TIPS or longer term notes/bonds in my "bond" position).
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Re: recommended bond portfolio
Old 10-06-2006, 02:56 PM   #26
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Re: recommended bond portfolio

Hmm, I see total return YTD of 2.88% as of yesterday. Not blazing a trail to the moon, but not terrible either. Could you be missing some of the fund distributions (interest)?
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Re: recommended bond portfolio
Old 10-06-2006, 03:06 PM   #27
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Re: recommended bond portfolio

Hmm Morningstar shows 1 year 3.68 but Schwab shows 1.4 (NAV).
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Re: recommended bond portfolio
Old 10-06-2006, 03:09 PM   #28
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Re: recommended bond portfolio

Quote:
Originally Posted by donheff
Hmm Morningstar shows 1 year 3.68 but Schwab shows 1.4 (NAV).
And what is the difference between NAV and MKT in these ratings? Hustle Brewer we expect instant answers
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Re: recommended bond portfolio
Old 10-06-2006, 03:09 PM   #29
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Re: recommended bond portfolio

Quote:
Originally Posted by brewer12345
Hmm, I see total return YTD of 2.88% as of yesterday. Not blazing a trail to the moon, but not terrible either. Could you be missing some of the fund distributions (interest)?
I was looking at yahoo-finance, so it was as of 8/31; I see the 2.88% at Morningstar.
I still don't see why that is not way worse than MM/CD/T'Bill. That's probably because
I don't understand the relationship between the yTD return and yield. I've tried to
read some primers on it, but it still does not make sense to me.
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Re: recommended bond portfolio
Old 10-06-2006, 03:18 PM   #30
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Re: recommended bond portfolio

Hmmm. It sounds like the bond advocates are making a case for an asset with appreciation potential as the source of superiority over an equivalent maturity CD.

This sounds like either:

1) Asking investors to time not just stocks for purchase, but also bonds -- or

2) Trying to time neither, being a buy-and-holder of both asset classes and relying on the non correlative aspects of the two asset classes to provide appreciation in one when the other is depreciating.

Well, I have a problem with this. Yes, no question, a non correlated asset class will smooth the performance of a portfolio that holds some other asset class, but if the two asset classes are non-correlated there is no reason that both cannot collapse at the same time. If the goal is to smooth the collapse of one asset class, why not hold a CD as your other asset class -- since it never collapses.

In this context, firecalc suggest better performance when one picks the 5 yr bond vs LT bonds. Don't know if this counts or not.

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Re: recommended bond portfolio
Old 10-06-2006, 03:32 PM   #31
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Re: recommended bond portfolio

Quote:
Originally Posted by JohnEyles
That's probably because I don't understand the relationship between the yTD return and yield.
YTD return - The percentage of the starting balance that you would have gotten in total return (price appreciation + interest paid) had you owned the investment since the begining of the year and sold it yesterday (or at the end of the period used for the calculation).

Yield - The rate of interest that the instrument is currently paying as a percentage of the price. You can think of this as the "instantaneous rate of return", but stretched into an annualized rate.

Jim
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Re: recommended bond portfolio
Old 10-06-2006, 03:48 PM   #32
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Re: recommended bond portfolio


There's one other cool feature of CDs compared to bonds and bond funds. This one is definitely a reach, but...

If you're in a high tax bracket in one year and expect to be in a lower bracket the next year, you can buy a CD that matures in the next year (up to 12 months away), and defer the interest payment and taxes until next year. That allows you to push the income into the lower tax year.

Jim
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Re: recommended bond portfolio
Old 10-06-2006, 04:25 PM   #33
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Re: recommended bond portfolio

Quote:
Originally Posted by magellan
YTD return - The percentage of the starting balance that you would have gotten in total return (price appreciation + interest paid) had you owned the investment since the begining of the year and sold it yesterday (or at the end of the period used for the calculation).

Yield - The rate of interest that the instrument is currently paying as a percentage of the price. You can think of this as the "instantaneous rate of return", but stretched into an annualized rate.

Jim
Thanks ! Welcome to Bonds 101.

So the reason that AGG has a YTD rtn of only 2.88%, even though the yield
is 4.5% and the share price is almost flat (within a fraction percent) is that
the yield was much lower earlier in the year, or because the YTD rtn is not
annualized, or both ?
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Re: recommended bond portfolio
Old 10-06-2006, 04:28 PM   #34
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Re: recommended bond portfolio

Quote:
Originally Posted by brewer12345
Unless you really want to fiddle, I would stick with funds and treasuries. I take it you are at Schwab? If so, I would take 2/3 of the money and buy AGG (or possibly PPT if you want to play the game a bit), and use the rest to buy a 5 year TIPS at auction in a few weeks. Schwab will let you participate in treasury auctions for no cost/no fee.
Good simple answer, thanks ! Yes, at Schwab.
But shouldn't I have some short-term bond exposure, and
some junk-bond (FAGIX) ?

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Re: recommended bond portfolio
Old 10-06-2006, 04:46 PM   #35
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Re: recommended bond portfolio

Quote:
Originally Posted by JohnEyles
Thanks ! Welcome to Bonds 101.

So the reason that AGG has a YTD rtn of only 2.88%, even though the yield
is 4.5% and the share price is almost flat (within a fraction percent) is that
the yield was much lower earlier in the year, or because the YTD rtn is not
annualized, or both ?
Think we have to wait for brewer to answer the last question (my view is it is not annualized).

Regarding first question, yield was lower early this year as the mix of bonds in the index was still catching up to increased ST rates imposed by the Fed. However, I don't know what it was for AGG for example in Jan 06.

brewer also mentions AGG as his choice for a broad index bond fund.... Would like to understand the rationale behind that. I've been watching AGG for awhile (Canadians can't access US domiciled CDs for 5+%) looking to buy in once the yield curves on MMFs I currently own are about to cross AGG yield, and I also have interest in LQD on Corporate bonds. Would like brewer to comment on LQD as well when he has a chance.
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Re: recommended bond portfolio
Old 10-06-2006, 04:52 PM   #36
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Re: recommended bond portfolio

Quote:
Originally Posted by JohnEyles
So the reason that AGG has a YTD rtn of only 2.88%, even though the yield
is 4.5% and the share price is almost flat (within a fraction percent) is that
the yield was much lower earlier in the year, or because the YTD rtn is not
annualized, or both ?
I'm not sure what the yield was before, but from what I can tell the price drop on AGG was around 1.1% since Jan 1 (price was 100.64, now it's 99.53). Also, as you indicated, the 2.88% ytd return is not annualized. If you annualize it (divide it by 9/12), it comes out to around 3.4%. Then, if you add back in the 1.1% price drop, you're up to 4.5% annualized.

If my math is correct, that means that the yield hasn't changed very much since the beginning of the year. This kind of math is hard to do with intraday values since the ytd return of 2.88 was probably calculated a few days ago when the price was different. Anyhow, it gives you an idea at least...

Jim
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Re: recommended bond portfolio
Old 10-06-2006, 05:05 PM   #37
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Re: recommended bond portfolio

Actually, I'm all wet already...

First - 2.88% / .75 = 3.84% (not 3.4 as I said)

Then, I realized that according to yahoo finance at least, the 4.5% yield is ttm (trailing 12 months as of aug 31) and it's not clear if the ytd return is annualized or not. It seems to depend on the source.


Jim
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Re: recommended bond portfolio
Old 10-06-2006, 05:45 PM   #38
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Re: recommended bond portfolio

Quote:
Originally Posted by JohnEyles
Thanks ! Welcome to Bonds 101.

So the reason that AGG has a YTD rtn of only 2.88%, even though the yield
is 4.5% and the share price is almost flat (within a fraction percent) is that
the yield was much lower earlier in the year, or because the YTD rtn is not
annualized, or both ?
Its not annualized. Yields haven't changed much this year.

I would perhaps forgo junk now. You don;t have access to VG's junk fund, and junk is, in any case, no bargain right now.
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Re: recommended bond portfolio
Old 10-06-2006, 06:15 PM   #39
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Re: recommended bond portfolio

If rates drop i dont have to sit on a LONG TERM cd to get all my gains. I can sell my bond early and reap some gains up front. Since long term bonds change just based on perecption rates dont even have to change to get additional gains just the preception that they will.
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Re: recommended bond portfolio
Old 10-06-2006, 06:26 PM   #40
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Re: recommended bond portfolio

Bond funds arent very different from individual bonds. Individual bonds vary in value every day if you sell early. IF held to maturity the bonds will pay a fixed amount and all the while you collect a fixed rate of interest.

Bond funds have a maturity too,its called duration. As long as you stay in the fund for the duration value you pretty much will get very close to the same deal. The interest rate varies on a bond fund unlike a fixed bond and as rates rise your rate rises too although a drop in nav will follow the increase in rate.

So heres the deal. take a fund that cost 10.00 bucks a share and pays 5 % the day you buy in..
if the funds duration value is say 5. than it means the fund will drop 5% in value for every point rates rise

so if rates go to 6% your nav drops to 9.50 . but you will get 6% interest

the extra 1% for 5 years offset the 5% decline in nav giving you your origional return of 5% again.

Only high quality bond funds carry a duration value as you cant have any market risk in order for the value to hold true and so you wont find a duration value on hi-yielld or lower quality corporate bond funds.
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