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Old 08-03-2009, 08:50 AM   #21
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Not all bond funds behave the same.......

For those of you lamenting the behavior of diversified bond funds in your portfolio, I had the same unpleasant experience. Dodge and Cox Income which has evolved to become my "core" bond fund at over 60% of my bond allocation did a spectacular nose-dive last year and it was the best behave one!

In fairness, the total return for DODIX in 2008 was fractionally positive, so it didn't actually lose money for the year but that is not what I wanted my bond allocation to do during a bear market! At the points where I rebalanced it was also showing a significant loss (for a bond fund). I did not realize that DODIX had eschewed government bonds in favor of corporate bonds - admittedly very high quality corporates. But still, not what I expected. Fortunately, DODIX has recovered very well after the debacle, and continues to rally.

So I as I rebalance going forward, I plan to gradually replace DODIX with Vanguard's Short-Term Index fund VBISX. This is a higher credit quality bond fund and another benefit is the duration fixed at around 2.5 years which I think is a great number for "short-term". Exactly the goal I have for my bond allocation - short-term very high quality bonds.

An AA purist might ask why not only use a government bond fund as the asset class to balance out equities as they are even less correlated? Well, other than the unattractive longer duration of an intermediate fund like Fidelity Government Income FGOVX, my instincts push me so strongly towards more diversification in a bond fund that I just can't quite bring myself to do that. Obviously, I am not a purist! I just needed to find the "right" kind of diversification and duration. VBISX is quite a steady-eddie in spite of owning some corporate bonds. It should still work well for rebalancing against equities.

I've been tracking the relative performance of the three different bond funds for quite a while. Here is a comparative Yahoo chart:


Here is the link to the Yahoo page you can play around with the comparisons and time lines. 2 Year Chart of DODIX vs VBISX vs FGOVX
You can click on the S&P box to also compare equities, but that distorts the chart pretty badly - hard to see anything else with the huge S&P swing.

Audrey

P.S. Knocking on wood so I don't jinx anything.
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Old 08-03-2009, 09:05 AM   #22
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Audrey

P.S. Knocking on wood so I don't jinx anything.
Whatever you do, don't say "Wheeee..."
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Old 08-03-2009, 09:21 AM   #23
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Whatever you do, don't say "Wheeee..."


I must admit that recent market events have inspired some glee!!!
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Old 08-03-2009, 09:21 AM   #24
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Whatever you do, don't say "Wheeee..."
LOL! I'll try not to! I don't think I've actually said that in a long time, unless it was when we were running some rapids in a canoe last month!

Audrey

P.S. Want2Retire! For Gosh Sakes girl! Restrain yourself! Keep cool .
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Old 08-03-2009, 09:26 AM   #25
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Another option right now is a savings account with Discover Bank (FDIC insured) at 2%. Money can be withdrawn at any time.
For high interest savings accounts, there's SmartyPig - silly name but they give 2.75% interest right now. SmartyPig is set up to make it easy for people to reach a savings goal they have for buying something specific. But there's no reason you can't just use it as a place to park some cash for a while. It's not a regular bank account though - you can't make small withdrawals - I think you have to withdraw the whole amount when you say you've reached your goal. It's FDIC insured.
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Old 08-03-2009, 10:03 AM   #26
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I'm about 4 years from FIRE and 50% stocks 50% bonds and MM. I have one year's expenses in a MM and the rest of my conservative money is divided between Vanguard Bond Index, Wellesley Fund and Vanguard Inflation Protected Securities Fund. I'm going to eliminate the MM and start creating a CD ladder with 4 years of expenses because the MM and not FDIC insured, but the CDs will be and I want maximum security in my cash buffer. The money I have left after creating the CD ladder I'll keep at a 50/50 ratio using the funds mentioned along with US and International equity index funds
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Old 08-03-2009, 10:11 AM   #27
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We are the knights who until recently said "whee."
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Old 08-03-2009, 10:15 AM   #28
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We are the knights who until recently said "whee."
Don't say it! Say ni! ni! Only say ni! That's safe.

Audrey
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Old 08-03-2009, 10:15 AM   #29
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For many years I have evenly divided my short term reserves between a MMF and the Vanguard ST bond index fund. I have never had to tap the STB portion yet, but often dip into the MMF to pay large bills.
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Old 08-03-2009, 06:33 PM   #30
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For many years I have evenly divided my short term reserves between a MMF and the Vanguard ST bond index fund. I have never had to tap the STB portion yet, but often dip into the MMF to pay large bills.
Just curious, do you recharge the MMF from the Vanguard ST bond index bucket or from other sources?
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