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Old 09-14-2009, 01:09 PM   #21
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yrs, just curious as to why you would include the very long end of the curve into the mix?
Suppose we do a repeat of Japan: near zero interest rates and lethargic stock performance for a decade?
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Old 09-14-2009, 01:42 PM   #22
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Suppose we do a repeat of Japan: near zero interest rates and lethargic stock performance for a decade?
I suppose, but that appears pretty sarned unlikely.
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Old 09-14-2009, 02:45 PM   #23
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Here is a nice view from Vanguard on a few bond funds over the last 10yrs:


I would like to be maybe 50% intermediate term Treasurys and 50% TIPS but only when real rates (TIPS) are closer to historic norms. Here is the data I've got on historic real rates for Treasurys:

1yr 1.7%
5yr 2.2%
10yr 2.6%
20yr 2.7%

I think keeping these rates in mind when looking at Treasury rates and TIPS is a good idea. For instance, today the 5yr Treasury is 2.35% and unless we have near zero inflation over the next 5yrs how are you going to get the historic average real rate of 2.2% ? We could get near zero inflation but no way am I going to bet on that.

P.S. I think the bond market is very efficient and way too complicated .
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Old 09-14-2009, 10:01 PM   #24
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Forgive my ignorance, but I'm uncertain as to the advantage of bond funds over a MM. Please understand, my spouse and I have, among other investments, some Wellesley and Wellington (that's where we have our bonds) but we also have a good chunk of change in a couple of MM funds (over six figures these are in both qualified and non-qualified spots).

What are we doing wrong?

Rich
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Old 09-15-2009, 08:47 AM   #25
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Forgive my ignorance, but I'm uncertain as to the advantage of bond funds over a MM. Please understand, my spouse and I have, among other investments, some Wellesley and Wellington (that's where we have our bonds) but we also have a good chunk of change in a couple of MM funds (over six figures these are in both qualified and non-qualified spots).

What are we doing wrong?

Rich
I don't know what you mean by qualified, so maybe I should just keep quiet but...

I wouldn't say you are doing anything wrong, but the funds do behave very differently. Here is a chart showing the growth of $10K in three popular funds over the last three years.
vmmxx3.gif
You can see that the bond funds end up with more money than the money market, but the price stability of the money market fund is a huge advantage.

You give up a lot for that price stability though. Here is a chart of the same three funds over ten years. The return of the bond funds is more than 30% better than the money market.
vmmxx2.gif

Here is a chart of Vanguard's Prime Money Market fund with Wellington and Wellesley. Today (and for most of the 10 years) the two balanced funds show a better return than the money market fund, but if we were having this conversation in back in March, the money market fund would be looking awfully good.
vmmxx1.gif
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Old 09-15-2009, 03:33 PM   #26
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Dear IP:

Interesting graphs. They show that we have way too much in cash at the moment. As for "qualified" accounts, by that I mean tax deferred, such as a 401, 457, IRA, etc. I've heard them referred to by the term "qualified" (or was it tax deferred qualified, don't recall), so that's why I used the term.

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Old 09-15-2009, 04:03 PM   #27
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Many have posted their well considered thoughts on investing in bond funds at this moment and.........well..............I am still conflicted. Yes, we definitely could stay in an Intermediate fund for a long time. BUT---IF you are going to strip off the interest AND inflation rears its ugly head --- will you ever recover your NAV?

I guess "tea leaves" yeild the definitive answer.
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Old 09-15-2009, 05:16 PM   #28
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Another possibility is to use an actively-managed bond fund. Many folks have the PIMCO Total Return bond fund in their 401(k)s or employer-sponsored retirement plan. Some classes of this fund have an expense ratio below 0.4%.

I think this fund has a large amount of cash at the present time. The managers certainly shift duration, maturity, credit quality, etc. The problem is that you may not know what you are getting.
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Old 09-15-2009, 05:29 PM   #29
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Another possibility is to use an actively-managed bond fund. Many folks have the PIMCO Total Return bond fund in their 401(k)s or employer-sponsored retirement plan. Some classes of this fund have an expense ratio below 0.4%.

I think this fund has a large amount of cash at the present time. The managers certainly shift duration, maturity, credit quality, etc. The problem is that you may not know what you are getting.
We have PTLDX in our 403b. It has done fairly well. However, once we roll out of the retirement plan Im afraid the costs will be to high to keep it.
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Old 09-15-2009, 06:31 PM   #30
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Many have posted their well considered thoughts on investing in bond funds at this moment and.........well..............I am still conflicted. Yes, we definitely could stay in an Intermediate fund for a long time. BUT---IF you are going to strip off the interest AND inflation rears its ugly head --- will you ever recover your NAV?

I guess "tea leaves" yeild the definitive answer.
If you focus on total return, you don't worry about where your "income" is coming from, what your portfolio is yielding, or what happens to any fund's NAV. It really helps cut out a lot of noise.

You can't really worry about bond funds outpacing inflation when you take out the interest income, they don't work that way. Make sure there are other investments in your portfolio to help it keep pace with inflation. If so, you can trim from those investments to add to your bond holdings over time as your entire portfolio grows (hopefully).

Audrey
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Old 09-15-2009, 08:53 PM   #31
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Audrey - While your post makes a lot of sense, it also begs answers to more questions:
1 - How often to rebalance? (What "benchmarks" do you use? Just setting a predetermined "date" on a calendar seems inadequate).
2. Given that you are replenishing your bond fund - do you go with a Total Bond Fund, Intermediate or Short Term ....or all of the above with some TIPS also?

BTW --- we are reading ALL the books ...but at the end of the day, the actual mechanics of all this still isn't quite clear.

I believe the "accumulation" phase was MUCH easier.
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Old 09-15-2009, 10:49 PM   #32
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1 - How often to rebalance? (What "benchmarks" do you use? Just setting a predetermined "date" on a calendar seems inadequate).
Annual rebalancing is fine, especially if you are withdrawing annually then it makes sense to rebalance as part of the withdrawal. It's more tax efficient to rebalance 18 months to 2 years in taxable accounts, but that may be less convenient. I do something fancier - wait until an allocation is 10% out of balance (e.g. equities go from 50% to 55%). But annual is "good enough".

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2. Given that you are replenishing your bond fund - do you go with a Total Bond Fund, Intermediate or Short Term ....or all of the above with some TIPS also?.
Personally I prefer a diversified bond fund. The Vanguard intermediate index and short-term index are good diversified bond funds. Other popular well-diversified bond funds are the Pimco Total Return fund, Harbor Bond (which has the same management as Pimco Total Return but a tad lower expense ratio), and Dodge and Cox Income fund. Unlike the Vanguard bond index funds, these latter funds change their bond allocation in anticipation of market conditions and sometimes get in a bit of trouble because of that, so they can be more volatile. In terms of duration I tend to stay on the shorter (no more than 5 years) end of the curve.

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BTW --- we are reading ALL the books ...but at the end of the day, the actual mechanics of all this still isn't quite clear.
Yes, there is a lot to the mechanics of it all. I learned most about the mechanics of managing investments during retirement from web articles by Frank Armstrong. He has a couple of books available now. Amazon.com: III. Frank Armstrong: Books, Biography, Blog, Audiobooks, Kindle

"The Informed Investor" is probably closest to what I studied, and it spells out the details. Looks like he has a new book out this year, plus co-authored yet another.

Audrey
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Old 09-16-2009, 02:35 PM   #33
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Thanks to Audrey and everybody else. Confidence is lacking as we approach separation from the "paycheck" but ....I think we are starting to have a clearer picture.
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Old 09-16-2009, 04:00 PM   #34
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Interesting perspectives on bond durations and future interest rates/inflation/US dollar from Gundlach of TCW when interviewed by Morningstar:

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Gundlach: Well, I think the yield curve in the bond market is so steep that there is almost no reason to own the very short-term securities. I know a lot of people are worried about inflation, worried about raising interest rates and they say, maybe I should go into short-term securities. It seemed to me that we would be better off owning just true cash rather than short-term securities because short-term securities don't yield anything.

So, we can remember again one year ago, the Lehman experience, and in the aftermath of Lehman, we saw a real crisis in the money market industry with the breaking of the buck, and I think many, many funds really would have broken the buck if there hadn't been government intervention, and I think it would have broken the buck very, very substantially.

So short-term investments like money market funds offers zero yield with potential default risk, so they don't make any sense, so you need to move out at least in the intermediate-term bonds. And there are some reasonable opportunities there, even though the yields aren't very high, because there is deflation. So, if you can obtain yields from bond portfolios in the intermediate category that are 6% or so, which is definitely doable, that's actually a fairly a high real rate of return.

....

I think investors domestically should be focusing on dollar-based investments. I know that that's a strongly contrarian opinion, but with the deflation that is going on and with the ongoing defaults, that the great debt bomb could end up resulting in, there could be a lot of dollar destruction on the credit side, and investors need to get away from that risk by divesting from the riskiest credits and also stay in dollars because when that default destruction comes, the dollar will actually be in a shortage, believe it not.

Everybody thinks there is going to be this surplus of dollars due to the government printing, but I don't think that's really the case. I don't think the markets are telling us that. I think the government is printing some money, but the destruction of value is greater than the printing of money and, therefore, the dollar is likely to move into a shortage position and go on a very big rally.

So, dollar-based investments are the way to go. And at this juncture with the rally that has taken place in the last six months, which has been so powerful, it is time to take profits.
Morningstar Video

I don't know about looking for yields in the 6% range in intermediate bond funds - seems like that will push you towards less credit-worthy corporates. But 4%+ in a diversified intermediate bond fund is definitely doable.

I have noticed that the yield on short-term bond funds have dropped precipitously in the past couple of months. It seems that when I last looked at VBISX it was yielding around 3.25%, now the SEC yield reported by Vanguard is only 1.72% and the last payout was equivalent of 2.69%. I guess this is due to lack of availability of short-term paper that will pay much. Seems like there must be a lot of demand - a lot of crowding at this end of the duration spectrum.

Audrey
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Old 09-17-2009, 11:07 AM   #35
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Definitely don't get sucked into the idea that your investments have to generate some type of interest income. Total return is the way to go IMO. Occasionally harvesting some capital gains for annual income is far more tax efficient that trying to maximize interest income.

Audrey
Audrey, I understand and share the approach that ultimately total return is what really counts. However, for taxable accounts only do you reinvest Dividends and Capital Gains ( and thereby pay taxes on these distributions) and then take out periodically an additional distribution (that you also pay taxes on?).

Of course, I reinvest all distributions in my tax sheltered funds but the approach of reinvesting (particularly) dividends and CG on taxable funds and then taking an additional distribution latter on is a puzzle to me
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Old 09-17-2009, 12:19 PM   #36
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Audrey, I understand and share the approach that ultimately total return is what really counts. However, for taxable accounts only do you reinvest Dividends and Capital Gains ( and thereby pay taxes on these distributions) and then take out periodically an additional distribution (that you also pay taxes on?).

Of course, I reinvest all distributions in my tax sheltered funds but the approach of reinvesting (particularly) dividends and CG on taxable funds and then taking an additional distribution latter on is a puzzle to me
No, I don't automatically reinvest the distributions in a given fund if I think I'm going to sell more of it in the near term for income purposes. No reason to pay extra taxes if you don't have to! Most of the funds pay out distributions in December, so by then I have a pretty good idea of which will get trimmed in January.

Audrey
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Old 09-24-2009, 08:46 AM   #37
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This thread started as current few of bond funds so I'm going back to that line.

The fed plans to stop buying treasuries in Oct. 2009.
Do the bond guru's on this board (all of you guys) think we will start to see interest rates rise and the Nav's fall a little as this occurs?
I've been watching and waiting to see how this effects things before buying into tax exempt bond funds. Wise or unwise this I'm not sure of.

I noticed an article on line this morning that seems to go a long with my thinking. If you read this whole article you see how rates are being artificially manipulated and have to wonder. Will be adding a link as soon as I can find it to add. Be right back
Oh here it is:http://blogs.moneycentral.msn.com/to...0stock%20rally

Steve
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Old 09-24-2009, 09:05 AM   #38
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This thread started as current few of bond funds so I'm going back to that line.

The fed plans to stop buying treasuries in Oct. 2009.
Do the bond guru's on this board (all of you guys) think we will start to see interest rates rise and the Nav's fall a little as this occurs?
I've been watching and waiting to see how this effects things before buying into tax exempt bond funds. Wise or unwise this I'm not sure of.

I noticed an article on line this morning that seems to go a long with my thinking. If you read this whole article you see how rates are being artificially manipulated and have to wonder. Will be adding a link as soon as I can find it to add. Be right back
Oh here it is:Top Stocks Blog - MSN Money

Steve
I thought that article was really interesting.
Quote:
Now, the equity market must operate in a more normal environment where rising stock prices result in higher interest rates. The question is: Can the economy, with its nascent recovery, handle more expensive credit?
I think (and hope) that it can! Maybe interest rates on my MM account will eventually head upwards a little. I can dream.
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Old 09-24-2009, 09:58 AM   #39
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I thought that article was really interesting.
I think (and hope) that it can! Maybe interest rates on my MM account will eventually head upwards a little. I can dream.
W2R,
Are you really down to 46 days? What a short timer you are !!!
Must be nice Probably a little anxiety also.
I'm still trying to make my decision as to go or no go. (like NASA)
I seem to feel different about it each day. Hard decision for me.
Just the thought of giving up a good job in general is hard.
I guess the insurance coverage between now age 65 is the real problem for me. I'm 55/56 and have a lot of years I'll need to cover.
Anyway, I too thought this was a good article and I'm on the side watching.
My MM funds which have more cash than usual could use some higher rates also,
Steve

PS. My first window out of the work force is: 12/17/09 - would apply for 01/01/2010 probably !!!
I've only been waiting for this 30 years
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Old 09-24-2009, 10:01 AM   #40
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W2R,
Are you really down to 46 days?
46 calendar days but only about three working days.
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