Vanguard BND, a mistake to consider that bonds for AA?

[Rothman]

I have been traditionally in my growth phase with all equity AA. In 2014 I changed with market near high and had about 20% in cash. From info here I decided I should actually put cash into bonds, my pick at start of 2015 was Vanguard BND, their low expense total bond market ETF. So year to date I'm down about .4%, and if I look back a year it would have been down .8%. So what can you recommend, did I buy wrong bond fund, or was my mistake not seeing cash as better than bonds? My expectation was low return as I know prices will drop when rates rise maybe my mistake is using any bond fund as portfolio theory is based on a safe bond with fixed return and the risk should be inflation not market fluctuation. Appreciate guidance


Sent from my iPad using Early Retirement Forum

 

[ERD50]

IMO, you 'mistake' was not recognizing that bond funds can and do rise and fall, and experience periods of negative returns. If you were not prepared for this, you should have stayed in stable cash, and watched it lose value slowly and steadily to inflation.

You appear to be on the verge of making a second mistake, buy high, sell low.

Take a look at this chart of total returns (move the slider to get a longer time period).

PerfCharts - StockCharts.com - Free Charts

Some volatility, but still up about 17% in 5 years. I'd take that (and I do) over cash any day.

-ERD50

 

[panacea]

It looks like the NAV is up .87% YTD. Are you sure you're looking at the right numbers? If you are comparing your cost basis to current value on the Vanguard website the numbers can be misleading. Is the income being reinvested? Compare how much you actually invested to the current value to determine your return or just check out Morningstar.

Here's the Morningstar performance data:
Vanguard Total Bond Market ETF (BND) Total Returns

 

[Texas Proud]

Are you taking into account dividends


Bond funds do move up and down with interest rates.... long bond funds are more sensitive than short bond funds...

So, putting 'cash' in a bond fund is taking on interest rate risks for a higher interest rate... if you are not comfortable with that risk them move to a money market account...

BTW, I have my 'cash' in a ST bond fund... less price movement.... I also have some in the high yield so I get a higher monthly payout, but it is money I do not need anytime soon... just take the monthly distribution and let it go up and down as it may....

 

[samclem]

I think BND did better than you think.
But, bond funds do go up and down in price. Still, over an extended time (i.e. not just 6 months!) they have performed better than "cash".

On a more fundamental (and esoteric) level, just because an investment does worse than we thought it would, it does not mean it was a "mistake" to buy it. If the decision was smart based on all the facts available and good analysis of those facts, it remains a good decision no matter how things turn out. If somebody offers to pay me 3:1 on the flip of a fair coin, that's a good bet and I should probably take it. I've still got a 50% chance of losing, but win or lose, it was a good decision to take the bet. (Caveat: marginal utility can come into play and change all of this if the marginal utility of the money I could lose is a lot higher than the money I could win. E.g. if I could lose my last $20 needed to buy my lifesaving medicine, then taking the "good deal" 3:1 bet is not wise, despite the odds).

 

[dallas27]

Bonds rates are at historic lows, prices artificially high due to historic government policy approaching the zero bound, and the government is broadcasting that it wants to dump it's assets back onto the market as soon as reasonably possible.


I see no reason to be significantly into bonds in this environment. If you need cash like assets then Tbills are fine, but I would avoid both Tnotes and Tbonds as the environment is stacked against them.

 

[utrecht]

Bonds rates are at historic lows, prices artificially high due to historic government policy approaching the zero bound, and the government is broadcasting that it wants to dump it's assets back onto the market as soon as reasonably possible.


I see no reason to be significantly into bonds in this environment. If you need cash like assets then Tbills are fine, but I would avoid both Tnotes and Tbonds as the environment is stacked against them.

This seems to becoming more and more likely to be true, however, people including many on this forum have been saying it for a few years now. Those of us who have kept our desired AA all of this time will likely be better off than those trying to time the bond market. Timing the bond market is no easier than timing the stock market.

 

[LOL!]

BND does not trade at its ETF (except fortuitously) unlike the mutual fund share classes (VBTLX, VBMFX), so looking at NAV is not appropriate.

Vanguard says the YTD return of BND is -0.46%, but this will depend on the prices that Vanguard used to reinvest the monthly dividends and will be different for different brokers.

OK, so you lost 0.5% in your bond fund. How much did you lose in your REIT fund, maybe 4%? Do you have other losses that you are not telling us about?

Anyways, one cannot make more money than cash over the long term without investing in something that might lose money over the short term. That's fundamental to investing.

If you buy more BND equal to the amount you already own, then you will cut your percentage loss in BND in half to about 0.2%. You may even save on losses in your equity fund if you exchange from those funds to BND. This would be an act of buying low, so do not pass it up.

 

[NW-Bound]

This seems to becoming more and more likely to be true, however, people including many on this forum have been saying it for a few years now...

But, but, but the demise of bonds may just finally arrive. I recall people saying the dot-coms were phoney back in 1998-1999, yet they kept climbing up until that climax in March 2000.

I have only 5% in bonds, and see no enticing reason to get in now.

 

[utrecht]

But, but, but the demise of bonds may just finally arrive. I recall people saying the dot-coms were phoney back in 1998-1999, yet they kept climbing up until that climax in March 2000.

I have only 5% in bonds, and see no enticing reason to get in now.

Ive been 40% bonds for several years and I will stay with the same AA. If you lowered your AA to 5% bonds a couple years ago and went to cash you lost a good deal of money. If your long term AA if 5% bonds then by all means stay that way.

 

[samclem]

I'll increase my allocation to bonds back to their "normal" % once the government gets its thumb off the scale and "regular" market forces are setting rates. Or at least moreso than today.

 

[LOL!]

Morningstar is showing the BND ETF 2015 YTD performance as up 0.78% (price) and up 0.87% (NAV). Any idea on why that would differ from Vanguard's numbers?

I suspect user error. Here is a screen capture from M* showing numbers:

The small difference between Vanguard and Morningstar likely stems from the price used to reinvest BND dividends which is different at different brokers.

Your performance difference probably is because it is not YTD, but through end of the previous month.

 

[samclem]

I suspect user error. Here is a screen capture from M* showing numbers:

Yep, it was user error. I was confusing the "YTD" under the two performance charts. I deleted the post before seeing yours. Thanks!

 

[NW-Bound]

Ive been 40% bonds for several years and I will stay with the same AA. If you lowered your AA to 5% bonds a couple years ago and went to cash you lost a good deal of money. If your long term AA if 5% bonds then by all means stay that way.

My normal AA has been 70% stock, 5% bond, 20% cash as far as I can remember. Been waiting to get more into bond for the last few years.

 

[LOL!]

If one wants a short-term bond fund with the most risk, then the Vanguard short-term corporate bond index find might be worth considering. Ticker is VCSH / VSCSX. It is still up YTD, but still has 6.5 months to finish lower for the year.

 

[utrecht]

I'll increase my allocation to bonds back to their "normal" % once the government gets its thumb off the scale and "regular" market forces are setting rates. Or at least moreso than today.

How long have you been waiting for that to happen? My intermediate bond fund is up over 5% per year the last 3 years.

 

[samclem]

How long have you been waiting for that to happen? My intermediate bond fund is up over 5% per year the last 3 years.

The money has been in equities. Still want to crow?
Neither your result nor mine proves which approach was correct.

 

[utrecht]

You are timing the market. That's fine as I'm sure you know that's what you're doing. I'm not timing anything. I'm ignoring all the noise and sticking with my AA and doing just fine, as well as proving what most people already know. Nobody knows what the hell will happen short term.

A lot of people think if a bond market rout happens, it will suck stocks down as well. If that happens, you will have been better off sticking with whatever your long term AA is. If it doesnt happen and you time your re-entry back into bonds correctly, then you are smarter or luckier than most.

 

[purplesky]

I'll increase my allocation to bonds back to their "normal" % once the government gets its thumb off the scale and "regular" market forces are setting rates. Or at least moreso than today.

Regular market forces are controlling rates. Low wages for the average American are the issue.

The Feds don't want to raise rates in this low wage economy. So rates are stuck for now.

Also the already overall weak housing market cannot handle higher rates.

 

[dallas27]

Regular market forces are controlling rates. Low wages for the average American are the issue.



The Feds don't want to raise rates in this low wage economy. So rates are stuck for now.

How can you say both these things?

Unless you think the fed is a "regular market force"?



Sent from my iPhone using Early Retirement Forum

 

[NW-Bound]

Perhaps Purplesky meant that the Fed is just a captive of the market, and simply reacting to it.

 

[dallas27]

You are timing the market. That's fine as I'm sure you know that's what you're doing.

When, long term, there is only one direction the money can move it is a smart way to "time". In fact buffet calls that a soft ball. If you see negative yields and don't take a short position, you are throwing money away. You must believe in reversion to mean.


Sent from my iPhone using Early Retirement Forum

 

[utrecht]

When, long term, there is only one direction the money can move it is a smart way to "time". In fact buffet calls that a soft ball. If you see negative yields and don't take a short position, you are throwing money away. You must believe in reversion to mean.


Sent from my iPhone using Early Retirement Forum

I'm not arguing against market timing. Everyone does it to some extent. My point was that a whole lot of people moved a portion or all of their bond allocation to CDs or cash because of the impending bond rout and we've been waiting for it for years now. They lost a lot of money trying to time the market. Other people timed the market and moved more money to stocks. They have done well but they've taken on a lot of extra risk and could get hammered at any moment. If they can move into and out of stocks at the right time, then more power to them. They deserve to be rich. For me, I'll stand pat and ignore the experts. They've proven again and again that they dont know any more than anyone else.

 

[Rothman]

I don't follow some replies, the NAV return as of 6/12 inclusive of dividends is -.37%, am I wrong? I understood going in that a bond fund price fluctuates as I said in my original post, I am surprised to be negative 6 months into the year, and am wondering if bond funds don't really fit the AA model given they act so different than bonds purchased directly? I had thought after research that BND so heavily weighted in US Treasuries with a 2+ % yield was going to perform closest to a bond held to term.


Sent from my iPad using Early Retirement Forum

 

[samclem]

The bond market is being actively manipulated in a big way by the fed. That takes it out of the realm of a "normal" market. If the stock market were being manipulated, I'd have reservations about playing in that sandbox, too.

But, there's no doubt that being over-allocated in equities is risky. When the fed finally ends the QE games and interest rates climb, stocks may very well get hit hard. Putting the "normal" bond money in short duration bonds is probably the best that can be done until the games stop.