When to get back in to bond funds?

[John467]

I keep my non-stock portfolio all in individual bonds and CDs to avoid principal loss in bond funds when interest rates rise. My bond/cd holdings yield a weighted average of 3.1%, all arranged in a 10 year ladder. I live off of stock dividends and bond/CD interest, and I have 35 years left to live.

If I'm living off interest, why worry about a principal loss in a bond fund? I just want to preserve the principal for my kids to inherit someday. However, this strategy gives me poor bond diversification (vs a bond fund), and I get poorer yields buying from The Vanguard bond desk as a small time buyer of individual bonds. Therefore, I would like to get back to bond funds someday, maybe when interest rates hit 4%? Then rates might drift up and down from there, averaging out the principal gains and losses over the years.

Is anybody else on this fence? Am I too paranoid about interest rates? This "maybe not so clever" strategy has cost me a lot of principal gain in the last 5 years as interest rates find magical ways to go lower!


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[Mulligan]

Personally for me, I have skipped the bonds entirely and own preferred stocks. Mostly investment grade yielding close to 6.5%. I wont be thrilled with principal loss naturally but Im only worried about yield, and safe yield at that. A few that I one are at the nearly same price as when treasury was over 4% a dozen years ago. So I am not worried about rising yield impacting price. These are issues that have never missed a dividend in 25-60 years since issuance. Fwiw, I invest in electrical utility preferreds. Always understand and know what and why you are investing in anything though. But for me its a perfect match....collect my pension and clip my 6-7% safe coupons!


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[pb4uski]

I feel and share your pain. I have been using Guggenheim Bulletshare and Blackrock IBonds target maturity bond funds instead of individual bonds because they offer better diversification and (I think) lower cost (expense ratio is 0.24% and 0.10%, respectively).

Like you, I took a return hit last year compared to being in a longer duration intermediate term bond fund, but I look on that as the price of lower interest rate risk. I will likely transition back into bond funds when the 10 year treasury is around 4%.

[John467]

Mulligan thanks for the tip on preferred shares. Do you mind sharing your top 10 choices? My buying of those will just drive up your principal! 😀


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[John467]

Thanks PB4. I have dabbled in those fixed maturity funds too, and their better yields are part of what keeps my weighted total yield above 4. They seem great in concept, but there newness worries me. They don't seem to be creating new funds with later maturity dates. Any idea why?


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[wolf]

Quote:

Originally Posted by John467 Mulligan thanks for the tip on preferred shares. Do you mind sharing your top 10 choices? My buying of those will just drive up your principal! �� Sent from my iPhone using Early Retirement Forum

+1, Are we allowed to give out Stock Names on this site?
I'm also curious as to you choices.

[Mulligan]

Quote:

Originally Posted by John467 Mulligan thanks for the tip on preferred shares. Do you mind sharing your top 10 choices? My buying of those will just drive up your principal! [emoji3] Sent from my iPhone using Early Retirement Forum

Funny you mention a list, as I correspond with another good forum member which I wont drag his good name through the mud when discussing these lists! Preface my remarks by reminding I said study and be informed as their really is "no free lunch". The price that I have been willing to pay is are though very safe historically speaking they are also illiquid and way past call which means company could call. Now they have been callable for decades but that doesn't mean they wouldn't call them this year. I do not know. So generally I buy and buy more when the next dividend is declared and that would cover the difference between purchase price and "par" call price. CNLPL, CNTHP (sister preferred issues from Connecticut Light and Power, now owned by Eversource) AILLL (Ameren Illinois owned by Ameren) BGE-B (Baltimore Gas and Electric owned by Excelon are my favorites. They are also fenced in utilities which means the parent company cant rape them of their assets or have creditors from parent company come after the original utility over debt concerns which provides safety. WFC-L ( Wells Fargo preferred which is an old bought Wachovia issue yielding 6.2% that is a "busted convertible" that will never be called in our lifetime as Wells Fargo stock has to reach around $200 before they can call it) EMQ is actually a "baby bond" and is insured by an insurance company from Entergy. For a bit of friskiness that I am not losing sleep over ARCPP is a preferred Reit from ARCP. Common dividend has been temporarily suspend due to accounting issues that have been resolved but ARCPP monthly dividend keeps humming along at a 7% or so clip.
The key with these though is to set a bid limit and let then come to you. Their are other more liquid utility preferreds but, they pay more in the mid 5% range. Liquidity is not a concern as I will hold and continue to add. You can google the 20 year record of the above utility issues and see very little change in stock price except during the 08-09 period which sucked everything down. But the dividends kept coming!
I have been looking at SCEDN is an attractive variable rate preferred from Southern California Edison. CHSCM and CHSCL issues from Ag giant CHS Inc. deserve mention also too at the right price. Consult Quantumonline for more details of above issues.

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[Mulligan]

As an added note, everyone has their individual investment needs. But if there are people who are more interested in income/yield than capital appreciation preferred stock deserves some consideration in a portfolio. Many will dismiss them as "essentially junk bonds with no maturity dates" but that is not an accurate assessment of the ones I buy. Though they are certainly out there, that is why I stick to old issued utility and some higher quality bank ones. Life insurers also have them such as Met Life ( MET-B amongst others) which also have investment grade ratings. You don't have to buy the wildcat oil drilling or unprofitable companies issues. Those are the junk! Some are concerned that bond debt gets priority and that is true. But as one person I read said....Who cares who gets fed first as long as there is enough food for everyone to eat. I stick with the ones who have plenty of food. Just ones opinion that I am sharing. And I may add I learned alot from members on this forum, but they know preferreds are not loved here so they will not mention them!


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[wolf]

Thanks Mulligan. You seem very knowledgeable. Agree with your philosophy. Holding Preferred Stock, takes a certain mindset.
(Income, not worried about principle fluctuations).
Always tempted to try, but guess I'm to risk avoidance.
But, again, I do agree with your logic.

[Totoro]

Quote:

Originally Posted by John467 Is anybody else on this fence? Am I too paranoid about interest rates? This "maybe not so clever" strategy has cost me a lot of principal gain in the last 5 years as interest rates find magical ways to go lower!

I'm in CD ladders vs. long-term bonds just like you, although it is not my preferred situation.

Not too worried about losing out on principal gain as much I am on risk of principal loss. a 2% interest raise on a 20 year bond can really hurt.

Personally don't feel you're too paranoid. Consider a stable dividend payer of 3%,(sometimes even 4%) and compare it with a bond of 2% - does that make sense? I don't think so.

In addition current long term bonds can easily end up in real-negative yields when the Fed hits its publicly maintained inflation targets of around 2%.

Don't have a crystal ball, but I'm comfortable with my choices give the possible paths forward.

[John467]

Thanks folks, this is really helping to expand my horizons. Mulligan - maybe you should be freelancing for a bond fund somewhere. Your knowledge of preferreds and willingness to share is great!!


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[marko]

I've been in two bond funds (TRP's RPSIX and PRHYX) for over 10 years now. Just bought and held 'em.

Been providing a steady dividend/interest payment, fairly consistent month after month, before, during and after the Recession.

Trying to keep it simple and not over think the market.

[Mulligan]

Quote:

Originally Posted by John467 Thanks folks, this is really helping to expand my horizons. Mulligan - maybe you should be freelancing for a bond fund somewhere. Your knowledge of preferreds and willingness to share is great!! Sent from my iPhone using Early Retirement Forum

John, a few others turned me on to them and then I decided this was my income choice instead of bonds/CDs. Most people like me have heard about them over the years but promptly dismissed them. Brokers and Mutual Fund managers have no understanding or use for them because they cannot buy into these issues due to the small size. I have one issue that hasn't changed in ask price since Feb. 20. I bet you would have to think real hard to ever come up with a time when a CNBC talking head analyst was touting a preferred stock! But all they do is pay and pay on time. Its way easier to find successful income preferred stocks than it is to buy common stocks (for me). So I buy indexed mutual funds for them and individual securities for the income.


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[wolf]

Mulligan, Interesting, when you explain your reasoning, for investing in
Preferreds. I think some posters do not understand your "logic".

[Mulligan]

Quote:

Originally Posted by wolf Mulligan, Interesting, when you explain your reasoning, for investing in Preferreds. I think some posters do not understand your "logic".

Wolf, you see how the threads on "Should I pay off the mortgage or not" go round and round here....Well its the same way when the "Income investors" and the "Total return investors" square off in investing forums. I do not think there are many converts to the opposing side.


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[Golden sunsets]

Quote:

Originally Posted by Mulligan Funny you mention a list, as I correspond with another good forum member which I wont drag his good name through the mud when discussing these lists! Preface my remarks by reminding I said study and be informed as their really is "no free lunch". The price that I have been willing to pay is are though very safe historically speaking they are also illiquid and way past call which means company could call. Now they have been callable for decades but that doesn't mean they wouldn't call them this year. I do not know. So generally I buy and buy more when the next dividend is declared and that would cover the difference between purchase price and "par" call price. CNLPL, CNTHP (sister preferred issues from Connecticut Light and Power, now owned by Eversource) AILLL (Ameren Illinois owned by Ameren) BGE-B (Baltimore Gas and Electric owned by Excelon are my favorites. They are also fenced in utilities which means the parent company cant rape them of their assets or have creditors from parent company come after the original utility over debt concerns which provides safety. WFC-L ( Wells Fargo preferred which is an old bought Wachovia issue yielding 6.2% that is a "busted convertible" that will never be called in our lifetime as Wells Fargo stock has to reach around $200 before they can call it) EMQ is actually a "baby bond" and is insured by an insurance company from Entergy. For a bit of friskiness that I am not losing sleep over ARCPP is a preferred Reit from ARCP. Common dividend has been temporarily suspend due to accounting issues that have been resolved but ARCPP monthly dividend keeps humming along at a 7% or so clip. The key with these though is to set a bid limit and let then come to you. Their are other more liquid utility preferreds but, they pay more in the mid 5% range. Liquidity is not a concern as I will hold and continue to add. You can google the 20 year record of the above utility issues and see very little change in stock price except during the 08-09 period which sucked everything down. But the dividends kept coming! I have been looking at SCEDN is an attractive variable rate preferred from Southern California Edison. CHSCM and CHSCL issues from Ag giant CHS Inc. deserve mention also too at the right price. Consult Quantumonline for more details of above issues. Sent from my iPad using Tapatalk

Hi Mulligan; I am wondering why BGE-B and not also BGLEN which is currently at 103.50 with a yield of 6.5%. Is it the above par premium on this one that makes BGE-B preferable? Also QOL shows that BGLEN is elligible for the 15% div rate while BGE-B is shown as not qualifying for 15% treatment. Are there any differences between these two preferred issues that I am not seeing?

PS Thanks for your insight and willingness to share

[Coolius]

The entire area of preferred stock/ETD is not widely known.

In the past when equities were the rage, and bonds were the " quality and risk-off " alternative, few regarded Preferred Stock as a worthwhile investment vehicle.

Today, this antiquated perception is what keeps the sector from being overheated, which I believe is why it continues to offer value. Yes, there are pros & cons, one still needs Due Diligence as with everything else.

The Preferred sector, for the past few years has been providing the bulk of my retirement income, ( I have no pension ). Average yield for the past few years has been 5.7%.

Like Mulligan says, there are many great websites that provide a very comprehensive grasp of this sector - I suggest QuantumOnline as a start.

Perhaps, if there are enough members interested, a separate thread could be started ?

[Strevlac]

Quote:

Originally Posted by John467 If I'm living off interest, why worry about a principal loss in a bond fund? I just want to preserve the principal for my kids to inherit someday.

If you have 35 years left to live (nice thing to know....or not), I'm not sure why you are worrying about fluctuations in bond fund NAVs. Bond fund NAVs will always fluctuate just like the market value of your individual bonds will fluctuate, and often in unpredictable ways. In a perfect all-else-equal world, bonds fund NAV will fall when interest rates rise, and slowly creep back up to even over the duration of the fund. But in this imperfect, nothing is ever equal world it's never that simple. What if the mere expectation of interest rates rising has already been priced in? I don't know. Maybe, maybe not.

But I do know that bond volatility is a small fraction of the magnitude of swings in the equity market. So I'm not scared of bond funds one bit and I don't worry about it.

I would also say that substituting preferred stocks for fixed income investments is not the wisest strategy, IMO. If one is buying preferred, they should be aware of the risks and count it as what it is, equity. Fixed income is not the place to take that kind of risk, imo.

[John467]

Strevlac - I agree that the NAV will vary all over the place in my remaining years, but since we are at century level lows, I'm concerned that the NAV may never go back up to current levels because interest rates may never go this low again. Therefore, maybe the trick is to wait until we hit say 4% on 10 year treasuries before getting back into funds because we will have as many down years as up. Takes a crystal ball I know, but just hoping for some different ways to think about it.


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[Strevlac]

Quote:

Originally Posted by John467 Strevlac - I agree that the NAV will vary all over the place in my remaining years, but since we are at century level lows, I'm concerned that the NAV may never go back up to current levels because interest rates may never go this low again. Therefore, maybe the trick is to wait until we hit say 4% on 10 year treasuries before getting back into funds because we will have as many down years as up. Takes a crystal ball I know, but just hoping for some different ways to think about it. Sent from my iPhone using Early Retirement Forum

You have to remember a bond is just an agreement saying essentially "you pay us $X now, and we pay you $X in interest periodically and on X date the bond matures and you get $X maturity value. As long as a bond is purchased at an amount below which any price premium will be recovered my maturity, you will get your money back (unless the debtor defaults).

A bond fund is just a collection of bonds, constantly maturing and re-buying. So while the fund as a whole lacks a "maturity date" the NAV will always "go back up to current levels" over time (roughly the "duration" of the bond fund) unless interest rates start going up and keep going up and never stop going up. That is unlikely to happen. And over 35 years it's a pretty good bet that rates will go up, and then they will go down, and then they will go up again, then they will move sideways for a bit, then go down, and then up, etc etc.