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Suze Orman and Bond Funds
Old 10-27-2013, 09:49 AM   #1
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Suze Orman and Bond Funds

Suze has always been negative on holding bond funds, but last night on her show she formally recommended getting out of bond funds completely. She qualified that she is only talking about bond mutual funds, not individual bonds that can be held until maturity.

While this is not a new position for her, I've never seen her make such a bold statement as she did last night. I know a lot of folks here don't look to her for advice, but I'm wondering what everyone thinks of this. I have to admit, I don't see much hope for bond funds increasing in value over the next few years, and the returns are pretty weak, so there isn't much upside to holding them. However, with 40% of my money in fixed income, if I don't put them in bond funds, what do I invest in?
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Old 10-27-2013, 09:52 AM   #2
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She made the same statement when appearing on NBC Nightly News a couple of weeks ago. I'm not a big fan.
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Old 10-27-2013, 09:59 AM   #3
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If you want to follow her advice but keep your AA, switch from bond funds to individual bonds.
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Old 10-27-2013, 10:17 AM   #4
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She needs to stick to her area of expertise/competence, which (in my opinion) is in personal finance and living within one's means. I don't think she has a clue when it comes to investing.

I love her "Can I afford it?" segments and I think these are her greatest contribution to her listeners financial health and well being. If more people listened to these segments and took them to heart, they would not be so over-extended and would be so much better prepared for the future.

She has been dissing bond funds since at least 2008 that I can recall, although I don't remember if she explicitly said to get out of them. She certainly gave me the impression that she didn't like most bond funds and that she is totally enamored with munis.

I used to listen to her every week, but have grown bored with the show and never seem to listen to it any more.
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Old 10-27-2013, 10:29 AM   #5
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As long as you have a proper AA and rebalance, I don't see the worry. If bond funds go down and you rebalance, then you are buying more shares when you rebalance. Ummm...kinda like stock funds
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Old 10-27-2013, 11:13 AM   #6
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Quote:
Originally Posted by Ready View Post
....However, with 40% of my money in fixed income, if I don't put them in bond funds, what do I invest in?
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Originally Posted by GrayHare View Post
If you want to follow her advice but keep your AA, switch from bond funds to individual bonds.
Or you could go with CDs.

I have moved a significant portion of my bond allocation to the Guggenheim Bulletshare funds, which a conceptually similar to an ownership interest in a portfolio of individual bonds that mature in a specified year so they are similar to holding individual bonds but add diversification at a cost of 24bps. I view them as somewhat of a CD substitute (with a higher yield but without any FDIC protection).
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Old 10-27-2013, 11:36 AM   #7
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I have to admit, I don't see much hope for bond funds increasing in value over the next few years, and the returns are pretty weak, so there isn't much upside to holding them. However, with 40% of my money in fixed income, if I don't put them in bond funds, what do I invest in?
The upside is that they won't tank like equities.

Alternatives to bond funds are things like CDs, i-bonds, etc. If your portfolio is big enough you could also buy your own bonds directly.

Have you looked into how a bond fund would respond to an interest rate rise versus individual bonds (and how this compares to S. Orman's reasons for not wanting a bond fund)?
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Old 10-27-2013, 02:28 PM   #8
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If Buffet said to get out of stocks I'd still want to know is reasoning ... in detail. Without knowing the reasoning, we are just going on name recognition.
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Old 10-27-2013, 03:04 PM   #9
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LSbcal,

I think it was maybe a couple of months ago on her show that she talked about the same thing the OP mentioned and her reasoning behind it was that the interest rate had been all time low and it was coming back up. The value of bonds go down as interest rate climbs so bond funds are a bad idea because you have no control over what you buy (it's OK if you buy individual bonds because you can keep them until maturity and you at least won't lose your principal.) So that's why she is recommending to buy individual bonds over bond funds. She also mentioned that if you must bond funds (in case of 401K etc), to choose short term bond funds (because longer term bonds can fall more dramatically.).

I am not financial savvy, but that's what I understood from that particular episode. After that, I read some threads here and I saw some of the people have moved their money to short term bonds also (due to the interest rate going up.) so in that sense, she is thinking the same way as some of the people here. After considering a stable value fund in my 401K and looking at CD rates etc, I have moved my bond funds in my current 401K to a short term bond fund.
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Old 10-27-2013, 03:11 PM   #10
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The upside is that they won't tank like equities.

Alternatives to bond funds are things like CDs, i-bonds, etc. If your portfolio is big enough you could also buy your own bonds directly.
Clearly Suze is recommending individual bonds instead of bond funds to eliminate the net asset value fluctuation inherent in a fund rather than an individual bond. However, the disconnect I see here is that Suze's show is geared toward people with a very basic knowledge of finances. Her show focuses on whether people can afford a Gucci hand bag for $3,000 when they still have student loan debt and consumer credit debt. If people are struggling with these issues, how on earth could they figure out which individual bonds out of the thousands available are the best ones to buy? To properly diversify your bond holdings you would want to have at least 25 different individual bonds so that no one bond represents more than 2.5% of your total bond investment. You can buy one bond fund and invest a very small amount of money to be exposed to several thousand bonds. But how much money do you need to have to buy 25 different individual bonds, especially without getting whacked with high commissions?

It just seems like she never addresses this obvious issue in spite of the fact that she encourages individual bond buying. I think it's a very unrealistic thing to expect from her viewers. In fact, I suspect that many people in this forum would be challenged to decide which 25 individual bonds they would want to buy and how to determine what a good price for the bonds might be.

I read an entire book on how to buy bonds recently entitled "Bond Investing for Dummies". Even after reading the book I did not feel well prepared to go off buying individual bonds without doing much further research. You can easily get ripped off if you don't know how to determine a fair price for them, as the brokers don't have set fees or markups on them. So if I don't feel comfortable after reading an entire book on the subject, what about the people who don't have the time or desire to read a book on the subject?
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Old 10-27-2013, 03:16 PM   #11
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LSbcal,

I think it was maybe a couple of months ago on her show that she talked about the same thing the OP mentioned and her reasoning behind it was that the interest rate had been all time low and it was coming back up. The value of bonds go down as interest rate climbs so bond funds are a bad idea because you have no control over what you buy
When I said we'd have to understand her reasoning, I mean it should be in quite some detail and include historical data.

One has to evaluate even an intermediate bond fund in terms of a time frame greater then its duration. So maybe 5 years or so. In that time frame a lot can happen. Short rates can even go up faster then intermediate rates so they are not an obvious refuge. They may be better when spreads (intermediate rates - short rates) are very narrow but that is not the case right now.

Also what someone says maybe 4 months ago might not apply any more as the bond market very quickly reacts to news. Maybe even faster then equities.
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Old 10-27-2013, 03:42 PM   #12
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Clearly Suze is recommending individual bonds instead of bond funds to eliminate the net asset value fluctuation inherent in a fund rather than an individual bond. However, the disconnect I see here is that Suze's show is geared toward people with a very basic knowledge of finances. Her show focuses on whether people can afford a Gucci hand bag for $3,000 when they still have student loan debt and consumer credit debt. If people are struggling with these issues, how on earth could they figure out which individual bonds out of the thousands available are the best ones to buy? To properly diversify your bond holdings you would want to have at least 25 different individual bonds so that no one bond represents more than 2.5% of your total bond investment. You can buy one bond fund and invest a very small amount of money to be exposed to several thousand bonds. But how much money do you need to have to buy 25 different individual bonds, especially without getting whacked with high commissions?

It just seems like she never addresses this obvious issue in spite of the fact that she encourages individual bond buying. I think it's a very unrealistic thing to expect from her viewers. In fact, I suspect that many people in this forum would be challenged to decide which 25 individual bonds they would want to buy and how to determine what a good price for the bonds might be.

I read an entire book on how to buy bonds recently entitled "Bond Investing for Dummies". Even after reading the book I did not feel well prepared to go off buying individual bonds without doing much further research. You can easily get ripped off if you don't know how to determine a fair price for them, as the brokers don't have set fees or markups on them. So if I don't feel comfortable after reading an entire book on the subject, what about the people who don't have the time or desire to read a book on the subject?
I have not read the book you referenced, but I agree with the rest of your post except for one thing: If you own 25 bonds (of equal value, you implied), then each bond would represent 4% (1/25) of your total bond holdings. You would need to own 40 bonds to lower that ratio to 2.5% (1/40).
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Old 10-27-2013, 04:16 PM   #13
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I DVR the show and over the past few months I just FF through most of it, it's a lot of crap IMO. The Can I Afford It and How Am I Doing segments are the only 2 things I care about, the rest is for people that don't have a clue.

Bonds and bond funds are for stability and rebalancing. She's nuts IMO, I'd never take her investing advice as anything but her lousy (and dangerous) opinion.

I heard several stupid comments this morning and just decided to not bother writing it all down to post here when she said treasuries are paying more today because people are afraid they won't pay their coupons! Suffice to say if you listen to her you'll hear several bad advice episodes per show!

You can use a Stable Value fund if you have access to one or CD's. I have a good chunk I left in my 401k to take advantage of the SV fund and I equal amounts in Vanguard's Short and Intermediate Term Bond Funds too. The duration on the ST is 2.3 but the IT is around 5.5 so you have to accept the fact you're going to suffer some cap depreciation when rates rise in the IT fund. I reinvest the dividends in both so I'm buying more shares as the nav drops.
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Old 10-27-2013, 04:48 PM   #14
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I have not read the book you referenced, but I agree with the rest of your post except for one thing: If you own 25 bonds (of equal value, you implied), then each bond would represent 4% (1/25) of your total bond holdings. You would need to own 40 bonds to lower that ratio to 2.5% (1/40).
Yikes, my math skills are off today. My brain is already turning to mush from not working full time any more. I better buy some of those brain teaser puzzles before I completely forget how to multiply and divide!
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Old 10-27-2013, 05:03 PM   #15
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I have to admit, I don't see much hope for bond funds increasing in value over the next few years, and the returns are pretty weak, so there isn't much upside to holding them. However, with 40% of my money in fixed income, if I don't put them in bond funds, what do I invest in?
I think it's unfortunate that people look for price appreciation from their bond funds rather than income.
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Old 10-27-2013, 05:56 PM   #16
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I think it's unfortunate that people look for price appreciation from their bond funds rather than income.
Historical real returns for intermediate is about 2%. Right now maybe 0% real is OK.
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Old 10-27-2013, 06:07 PM   #17
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Clearly Suze is recommending individual bonds instead of bond funds to eliminate the net asset value fluctuation inherent in a fund rather than an individual bond.
This is what I don't understand. If interest rates rise, the individual bonds are also worth less (just like the bond fund) -- if you have to sell them you will get less than before. If you don't have to sell the individual bonds and can wait for them to mature, you could similarly wait for the increased yield on the bond fund to compensate for the drop in prices.

The advantage I see for the individual bonds is that you can precisely control when your fixed income matures which may be useful if you want to match it against a specific expenditure in the future. But is this why S. Orman is against bond funds? or maybe it's psychological and she dislikes bond funds because the explicit NAV fluctuation may cause people to no longer "stay the course"?
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Old 10-27-2013, 06:16 PM   #18
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I think it's unfortunate that people look for price appreciation from their bond funds rather than income.
Exactly! I have been investing in bond funds since 1990 and I was always in them for the income. It is no different from investing in a bond in that respect because all you expect to do with an individual bond is to get your exact principal back. I have made very few redemptions of my shares of bond funds in the last 23 years. Some of them I made a small profit, some others I had a small loss. No big deal.

My ER right now is being financed by the monthly dividends I get from a bond fund. If the NAV of the bond fund drops so its monthly income will eventually rise (as was the case a few years ago), then I am all for it.
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Old 10-27-2013, 08:52 PM   #19
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In fact, I suspect that many people in this forum would be challenged to decide which 25 individual bonds they would want to buy and how to determine what a good price for the bonds might be.
(raises hand)
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Old 10-27-2013, 10:24 PM   #20
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....I suspect that many people in this forum would be challenged to decide which 25 individual bonds they would want to buy and how to determine what a good price for the bonds might be....
+1 which is why I went with the Guggenheim Bulletshares - I give up 24 bps but they do the picking.
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