Corporate Bonds in Vanguard

[afntrn56]

I have a basic 4 fund approach in my retirement fund. I have been looking into investing in more CD's with the Vanguard account but now am looking at a bond issued by goldman sachs that has a maturity of 02/15/2016 and yield of 3.15%. I am not experienced with bonds but understand they are not FDIC insured. this particular bond has a Moody rating of - and an S and P rating of A-. My question is what are the risks of this type of bond? I would plan on holding until maturity. Does anyone have experience with these and/or opinions on using this as an alternative to a CD of 7 year length?

 

[brewer12345]

I cannot comment on the specific issue.

More broadly, if you want to buy individual, non-treasury bonds you should make sure you are capable of and comfortable with doing the necessary due diligence required to be an educated buyer and avoid the landmines that are out there. If you are not familiar with financial statement analysis and investment analysis, I would suggest that you stick to funds. As an alternative, if you want stuff with a specific maturity there are target maturity bond funds where the underlying portfolio is designed to mature at a specific date.

 

[afntrn56]

Thanks for the advice! So do you think something like VFSUX or VBILX would be more appropriate and not have that kind of risk involved?

I cannot comment on the specific issue.

As an alternative, if you want stuff with a specific maturity there are target maturity bond funds where the underlying portfolio is designed to mature at a specific date.

 

[brewer12345]

Thanks for the advice! So do you think something like VFSUX or VBILX would be more appropriate and not have that kind of risk involved?

They would be more diversified by a long shot. The difference is taht yoou would be holding a pool that refreshed from time to time rather than individual bonds taht grind toward maturity over time. Some people place importance on holding to maturity, some do not.

 

[pb4uski]

Since you intend to hold to maturity, the most significant risk is that on 2/15/2016 (~4 years from now) Goldman will not be able to pay off on the bond.

While the credit risk of Goldman isn't daunting, the lack of diversification would be concerning to me but it is hard to judge not knowing how significant the investment is to your overall situation.

To illustrate, I suspect that in 2004 no one would have been particularly concerned with AIG's ability to pay off a bond in 2008.

 

[afntrn56]

They would be more diversified by a long shot. The difference is taht yoou would be holding a pool that refreshed from time to time rather than individual bonds taht grind toward maturity over time. Some people place importance on holding to maturity, some do not.

I like the idea of grinding toward maturity over time and picking up the interest along the way but the idea of default is not something that appeals to me. I guess that and the fact that I don't really feel familiar with financial statement analysis and investment analysis should keep me from buying the individual bond. As far as the fund goes the pool refreshing from time to time sounds like it doesn't have a lot to offer either. Maybe the CD isn't such a bad idea. I was just thinking I didn't want to tie up more money for another 10 year period of time. If I could get a 5 year CD for 3% I would.

 

[afntrn56]

To illustrate, I suspect that in 2004 no one would have been particularly concerned with AIG's ability to pay off a bond in 2008.

Excellent illustration there pb4uski... I think the individual bond idea is not for me. Even though Goldman Sachs may not fold you are right that I would not have predicted AIG's demise either!

BTW the investment I was thinking of making is about 3% of my total pie.

 

[pb4uski]

Excellent illustration there pb4uski... I think the individual bond idea is not for me. Even though Goldman Sachs may not fold you are right that I would not have predicted AIG's demise either!

The individual bond route makes sense if you can buy a portfolio of bonds (say 100 different issuers) so if an issuer defaults it is less of a loss and is made up by the ones that do perform - ie; diversification. A bond fund provides diversification.

Another alternative you might want to check out is BSCG - Guggenheim BulletShares 2016 Corporate Bond ETF - Guggenheim Funds Distributors, Inc.

This product is a diversified portfolio that is held to maturity and in 2016 as the underlying bonds mature the proceeds will be distributed to the fundholders so it operates similar to a held -to-maturity bond but with diversification. The weighted average coupon is 4.62% and the yield is in the 2.5% range. Interestingly, GOLDMAN SACHS GROUP INC 3.625% 02/07/2016 is the fund's largest holding.

To be clear, I'm not recommending this, just letting you know about it so you can do your own due diligence.

 

[brewer12345]

I like the idea of grinding toward maturity over time and picking up the interest along the way but the idea of default is not something that appeals to me. I guess that and the fact that I don't really feel familiar with financial statement analysis and investment analysis should keep me from buying the individual bond. As far as the fund goes the pool refreshing from time to time sounds like it doesn't have a lot to offer either. Maybe the CD isn't such a bad idea. I was just thinking I didn't want to tie up more money for another 10 year period of time. If I could get a 5 year CD for 3% I would.

The problem is that the 5 year treasury is yielding well under 1 percent, so you will not see cd rates anywhere near that for some time. Pen fed is about the best I have seen at 2.25 percent for 5 years and I would expect to see them drop that rate soon. So either accept lower rates or more risk. None of us really have a choice.