Your current view of Bond Funds

[Rich]

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.

Rich

 

[molly]

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.

 

[LOL!]

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.

 

[Notmuchlonger]

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.

 

[audreyh1]

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

 

[molly]

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.

 

[audreyh1]

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".

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.

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

 

[molly]

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.

 

[audreyh1]

Interesting perspectives on bond durations and future interest rates/inflation/US dollar from Gundlach of TCW when interviewed by Morningstar:

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

 

[ejman]

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

 

[audreyh1]

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

 

[Stevewc]

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/topstocks/?fpn=did%20the%20fed%20just%20kill%20the%20stock%20rally

Steve

 

[W2R]

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.

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.

 

[Stevewc]

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

 

[REWahoo]

W2R,
Are you really down to 46 days?

46 calendar days but only about three working days.

 

[Stevewc]

46 calendar days but only about three working days.

Oh, she's down to party time !!!
Fun in the Sun,
Steve

 

[Lsbcal]

...(snip)...
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.
...

Steve, the more I learn about bonds the more I find that it is an extremely efficient market and most of us are unlikely to get a jump on it. Apparently research has shown that the current yield curve is the best determiner of future rates and that moving out on the Treasury yield curve should be done if one gets on the order of 25bp more per year.

 

[W2R]

W2R,
Are you really down to 46 days? What a short timer you are !!!
Must be nice

Yes, it is! I have 46 days, but 11.5 more working days since I am taking some time off as I approach retirement. Not quite as close as REWahoo's tongue in cheek estimate, but most definitely party time.

Probably a little anxiety also.

A lot of that is worrying about whether I will have any trouble getting my pension or health benefits in place. Most people don't, but being a worrier I worry. Sometimes I worry that maybe I am completely nuts to think I can do this, but logically I know with great certainty that I can.

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.

There are very few jobs in my specialty that pay enough to live on, other than mine. I have a 0% probability of ever being able to land another one, at my age. But, I have beat my financial plan to death, assuming the most dire worst case scenarios, and really with a little LBYM I don't see much chance of it failing. I am less well prepared for the emotional aspects of retirement, but I can work on that more after retirement.

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.

Federal employment has its advantages and I am really glad I went that route. Plus, I am 61 years old already (and feeling like I am 113 today).

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

That's for sure! I have WAY more cash in MM than my plan would normally dictate, and will until we get settled up north.

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

You're close!! So close!! You're right behind me. I hear the water's warm.

 

[REWahoo]

Yes, it is! I have 46 days, but 11.5 more working days since I am taking some time off as I approach retirement. Not quite as close as REWahoo's tongue in cheek estimate...

My estimate is dead on. You may be 'at work' for 11.5 days but no way will you put in more than three days actual work.

 

[Lsbcal]

...(snip)...
Federal employment has its advantages and I am really glad I went that route. Plus, I am 61 years old already (and feeling like I am 113 today).
...

Hi W2R, you sound like a real planner, somewhat analytical and you are my age too. So I'm confident from your posts that you will do just fine. Sounds like the anticipation of this event is anxiety producing but also quite stimulating.

 

[W2R]

My estimate is dead on. You may be 'at work' for 11.5 days but no way will you put in more than three days actual work.

Hee hee! There isn't a whole lot more they can assign me. I can't do anything long term, and I have transferred almost all my paper files and all of computer files already. I would be glad to do things like technical reviews and so on, and I am sure my supervisor (who is utterly ideal) is trying to think of things like that so that I won't feel unneeded. I don't! But that is what she is probably thinking.

My last week I will be running around completing my exit clearance. That hardly counts as work. So, I'd say 3 days is about right.

Hi W2R, you sound like a real planner, somewhat analytical and you are my age too. So I'm confident from your posts that you will do just fine. Sounds like the anticipation of this event is anxiety producing but also quite stimulating.

It is pretty exciting. Plus, my only child (DD31) is getting married two weeks before I retire, plus eventually I need to get my house ready to sell. Haven't started on the latter yet.

I have a background in electrical engineering, which helped me to develop my analytical skills. And nobody cares about my money more than I do, as the saying goes.

 

[IndependentlyPoor]

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.

I am certainly no guru, but it seems that the market must react to the Fed's decision to end treasury purchases. One would think that NAVs would fall and yields rise, but who knows? How does the fact that everybody knows what is going to happen affect the market?

Normally, a phase like "artificial manipulation" would set off my paranoiac warning system, but in this case there is no question. The Fed is manipulating everything it can. Those manipulations seem to have had a significant effect on the economy. Thinking about how and when they unwind them and how the economy reacts just makes me want a quaalude.

 

[Stevewc]

Steve, the more I learn about bonds the more I find that it is an extremely efficient market and most of us are unlikely to get a jump on it. Apparently research has shown that the current yield curve is the best determiner of future rates and that moving out on the Treasury yield curve should be done if one gets on the order of 25bp more per year.

I'm still kicking my self because I had a great opportunity to jump in bond funds during the crash 2008/09 and basically watched it go away. Great timer I turned out to be. I was totally freaked out to be honest and just set and watched as far as bond funds were concerned. I did buy all the stock funds I need during the crash but just couldn't get the guts to buy bonds that were supposed to be safe steady investments (so I thought). I mean just the stock funds were like throwing money in a black hole. But it sure looks good to me today.
Steve

PS. The cash I invested and am now sitting on is new money, not something I pulled out of the market.

 

[Stevewc]

I am certainly no guru, but it seems that the market must react to the Fed's decision to end treasury purchases. One would think that NAVs would fall and yields rise, but who knows? How does the fact that everybody knows what is going to happen affect the market?

Normally, a phase like "artificial manipulation" would set off my paranoiac warning system, but in this case there is no question. The Fed is manipulating everything it can. Those manipulations seem to have had a significant effect on the economy. Thinking about how and when they unwind them and how the economy reacts just makes me want a quaalude.

Quaalude ?

Are those things still floating around?
Might be a bit stale if they are left overs from early 70's
Steve

 

[Lsbcal]

I'm still kicking my self because I had a great opportunity to jump in bond funds during the crash 2008/09 and basically watched it go away. Great timer I turned out to be. I was totally freaked out to be honest and just set and watched as far as bond funds were concerned. I did buy all the stock funds I need during the crash but just couldn't get the guts to buy bonds that were supposed to be safe steady investments (so I thought). I mean just the stock funds were like throwing money in a black hole. But it sure looks good to me today.
Steve

PS. The cash I invested and am now sitting on is new money, not something I pulled out of the market.

I think one should try to target a steady state bond position and then figure how to get there. For instance, I think my ideal now would be something like a 50/50 mix of intermediate Treasurys and TIPS. But for the reasons I think I outlined in a previous post, I'm staying short term right now. When the 5yr Treasury approaches 5% that's when I'd like to be in intermediate Treasurys. Phasing it in as the rates move up (rather then time based) might be a good approach.