Anyone with a Balanced Portfolio feeling major pain?

[Quantum Sufficit]

I am still trying to understand bond funds so take anything I say with several grains of salt. My current plan/thought is to ditch some of my bond funds (once their transfer to Schwab has been completed and the cost basis information has been transferred as well). Some of those stinkers, however, have improved a bit in the past week or so. But they still smell and are carrying an unrealized loss. I am going to mix in individual bonds (laddered) and CDs (laddered). The ballast argument doesn't work much with me anymore.


Here's an analogy that for me illustrates the difference between bond funds and individual bonds. (I am looking for the smarter folks here to start poking holes in it.)


Imagine you are going on a long drive in the car. With individual bonds, I can plan my trip pretty well balancing when and where I stop for the essentials: gas, food, bathroom breaks and stretching my legs and back. I might run into bad weather, accidents, heavy traffic, road construction, car problems, etc. But I have some options for planning for those things such as maintaining my vehicle, checking ahead of time on the weather, road construction, and traffic, planning my route to avoid major metro freeways during rush hour, etc.


With a bond fund, I am not alone in the car. I have the car full with other passengers. And as much as we might all agree in advance on a plan for when we are going to stop for gas, meals, bathroom breaks, etc., you know the chances are pretty good that as soon as we have been driving 20-30 minutes, someone in the car is going to speak up and announce that they have to go to the bathroom, or ask if we can stop at the next town so they can get a cup of coffee, or whatever. My "plan" for the trip isn't much more than a figment of my imagination.


I'd rather hold individual bonds. When I bought the individual bond I had my "plan." I was okay with the amount of principal, the interest rate and the term. If rates increase I will probably be disappointed. But I knew that was a possibility going into the deal and I still know the rate of interest I will earn if I hold the bond to maturity. I AM FINE WITH THAT. But with the bond fund, the whole plans gets screwed up as soon as someone else on this trip decides that they are hungry or they have to go to the bathroom. Then I, and everyone else in the car, have their travel plans messed up. I am not fine with that.

Yah but with my bond funds despite Nav declines the fund mgr is buying better yielding bonds with new money so I have watched my spendible income from yield sequentially albeit not quickly move up. When you buy individuals you are yield locked so it cuts both ways.

 

[COcheesehead]

Yah but with my bond funds despite Nav declines the fund mgr is buying better yielding bonds with new money so I have watched my spendible income from yield sequentially albeit not quickly move up. When you buy individuals you are yield locked so it cuts both ways.

Not if you ladder.

 

[Exchme]

Yah but with my bond funds despite Nav declines the fund mgr is buying better yielding bonds with new money so I have watched my spendible income from yield sequentially albeit not quickly move up. When you buy individuals you are yield locked so it cuts both ways.

Correct, I can't figure out why some posters on this board ignore the math and beat the drum of ladders as if they are some way to have your cake and eat it too.

If you bought bonds at 1% interest rates, then when rates rise to 5%, you have a serious loss. If you held it in bond funds, the bonds are marked to market, so loss is reported immediately as a reduction in NAV and thereafter you get market returns. If you held an equivalent length ladder of (length of 2 times the equivalent fund duration minus 1), then the loss occurs as an opportunity cost of having to accept below market returns for the duration of the ladder. Each year's loss decreases as you roll the ladder, but the total loss is the same in either funds or ladders. If you think about it, if there were a difference, the big money would figure out a way to arbitrage it.

Vanguard's Total Bond is about 6.6 year average duration, basically equal to a 12 year long ladder (6.6 x 2 -1 = 12.2). Aside from simply wishing they could market time, I think the mistake folks made with bond funds is not understanding how that equivalence works, maybe they would have shortened fund duration.

 

[COcheesehead]

Correct, I can't figure out why some posters on this board ignore the math and beat the drum of ladders as if they are some way to have your cake and eat it too.

If you bought bonds at 1% interest rates, then when rates rise to 5%, you have a serious loss. If you held it in bond funds, the bonds are marked to market, so loss is reported immediately as a reduction in NAV and thereafter you get market returns. If you held an equivalent length ladder of (length of 2 times the equivalent fund duration minus 1), then the loss occurs as an opportunity cost of having to accept below market returns for the duration of the ladder. Each year's loss decreases as you roll the ladder, but the total loss is the same in either funds or ladders. If you think about it, if there were a difference, the big money would figure out a way to arbitrage it.

Vanguard's Total Bond is about 6.6 year average duration, basically equal to a 12 year long ladder (6.6 x 2 -1 = 12.2). Aside from simply wishing they could market time, I think the mistake folks made with bond funds is not understanding how that equivalence works, maybe they would have shortened fund duration.

Because a personal ladder has no management fee, no redemption drag and no directive to invest at all points of the market. Who would buy 1% bonds? - Funds, not anyone on here. Funds also have no par - the biggest disadvantage. Bond funds are not bonds.

 

[pb4uski]

Correct, I can't figure out why some posters on this board ignore the math and beat the drum of ladders as if they are some way to have your cake and eat it too.

If you bought bonds at 1% interest rates, then when rates rise to 5%, you have a serious loss. If you held it in bond funds, the bonds are marked to market, so loss is reported immediately as a reduction in NAV and thereafter you get market returns. If you held an equivalent length ladder of (length of 2 times the equivalent fund duration minus 1), then the loss occurs as an opportunity cost of having to accept below market returns for the duration of the ladder. Each year's loss decreases as you roll the ladder, but the total loss is the same in either funds or ladders. If you think about it, if there were a difference, the big money would figure out a way to arbitrage it.

Vanguard's Total Bond is about 6.6 year average duration, basically equal to a 12 year long ladder (6.6 x 2 -1 = 12.2). Aside from simply wishing they could market time, I think the mistake folks made with bond funds is not understanding how that equivalence works, maybe they would have shortened fund duration.

A lot of what you wrote is true. A rolling ladder with an average maturity similar to a bond funds average maturity would be expected to have similar economics... and in a rising interest rate environment both would lose economic value in terms of fair value... very apparent in the case of the bond fund and pretty apparent in the case the ladder unless one is burying their head in the sand.

So if you stick slavishly to a 12 year long rolling ladder then your point that it isn't very different from investing in something like VBTLX has some merit. But most of us that buy individual bonds don't operate that slavishly and investing in individual fixed income securities gives us a lot more flexibility.

I'm not sure if you remember, but when we all reported 2022 investment performance there were many members whose reported 2022 returns were significantly better than the total returns of a combination of VTSAX and VBTLX given their reported AA, and I observed that. The reason ended up being that those with better returns were using stable value funds or bank/credit union CDs, i-bond or other things for fixed income that did a lot better than VBTLX, especially in 2022.

https://www.early-retirement.org/forums/f28/2022-investment-performance-thread-112573-21.html
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Though I would note that in the 1% to 5% scenario that you describe the owner of a bank CD ladder would experience a much lower decline in value because the holder could withdraw and pay 6 or 12 months of interest... 0.5-1.0%... and reinvest at 5%. Many of us who had bank or credit union CDs did do that in the last 6 months, including yours truly, and those were 3.0% to 3.5% CDs rather than 1% CDs. Another anomaly that many of us took advantage of recently were i-bonds and VBTLX can't do i-bonds and my portfolio incuded a 6% return on my i-bonds.

There are other potential benefits of investing in individual fixed income securities over a bond fund that you are ignoring. Back in 2019 for whatever reasons, a number of credit unions offered 3.0-3.5% 5-year CD specials that many of us took advantage of. Ditto for the 3% 5-year PenFed CD back in 2013. Or over the last few weeks, 5%+ brokerage CD yields have been particularly attractive compared to similiar maturity Treasuries and many of us have taken advantage of that temporary market anomaly.

Also, an indexed bond fund like VBTLX has no choice but to invest excess cash in bonds of certain maturities even when interest rates are low. As a bond portfolio investor I could shorten things up back when interest rates were low for so long rather than lock into 1% for 10 years knowing that it was much more likely that interest rates would be going up rather than down because a 1% rate couldn't go down much (at least if you believed policymakers claim that they would not allow rates to go negative). That is the main reason that I jettisoned bond funds many years ago.

That and VBTLX currently includes ~25% A and BBB securities and even though they are investment grade I prefer higher credit quality.

 

[rkser]

I just do not know what to do, all our IRAs are nothing but all BND for a long time, just buy & hold since we were working.

Now we are retired and see the carnage, and we still have close to a 7 figure $ of BND combined in my & DW’s IRAs.
These rate hikes have had nothing but doomed the IRAs. 13% loss last year, do not know yet about this year.

Have bought a few CDs of 1 yr or 18 month CDs, but it has not put a dent.

Some IRA BNDs get sold at a loss when we do Roth Conversions where we hold VTI.

Our AA presently is 67/33 stocks/bonds, we are 67/62, we have been buy & hold investors, we have in total 5 investments, 4 index Vanguard ETFs & 1 Vanguard Muni Fund .

 

[target2019]

I hold equity and income (bond) index funds in IRA, etc.

My opinion is that one needs to capture some equity growth to keep pace. Bond index funds will recover, but it is painful to look at. It's easy for me to suggest you continue to hold (but not reinvest), because I won't hit RMD's for another 2-3 years.

 

[yclipse]

> I have an hourly advisor who isn't suggesting any changes at all.

Listen to her. Respect the expertise.

In general, the idea of a balanced portfolio is that some sectors shine when others slumber.

 

[ER Eddie]

I'm 65/35 in low-cost index funds, and I seem to be doing okay. I was surprised to see that my balance has been up on the last two times I have checked. From listening to the mood, I expected my balances to be in the toilet, but I'm actually doing just fine. Even if I wasn't, I'm a "buy and hold," "set it and forget it" type investor, so I wouldn't have changed anything.

One thing that helped was to check once a quarter, rather than every month. Checking monthly felt too much like a rollercoaster and I think contributed to a sense of uncertainty.

 

[Major Tom]

I'm 65/35 in low-cost index funds, and I seem to be doing okay. I was surprised to see that my balance has been up on the last two times I have checked. From listening to the mood, I expected my balances to be in the toilet, but I'm actually doing just fine. Even if I wasn't, I'm a "buy and hold," "set it and forget it" type investor, so I wouldn't have changed anything.

One thing that helped was to check once a quarter, rather than every month. Checking monthly felt too much like a rollercoaster and I think contributed to a sense of uncertainty.

You and I are in the same boat. My portfolio is split ~70/30 between VTSAX and VBTLX. The ratio varies quite a lot, as I don't rebalance, other than to sell shares once a year to generate income. I don't check my balances too often but my portfolio, at it's peak a year or so ago, was at around $1.2M. A couple of days ago, it was at $1.06M, representing a figure about 12% down from the peak. I did have some VTIAX, but sold the last of it last year in order to simplify my portfolio. Two funds is good.

Nothing that the market has done over the last year has freaked me out. I'm too busy hanging out with my cat to worry about what the S&P500 is doing. Not sure how I'd react if we had a much steeper drop, but I'm sure I'll find out at some point before I shuffle off this mortal coil

 

[rkser]

.

One thing that helped was to check once a quarter, rather than every month. Checking monthly felt too much like a rollercoaster and I think contributed to a sense of uncertainty.

I used to check my portfolio that infrequently in the past while working.
But now when I am retired I do check it much more frequently much to my dismay. I seem to have lost the discipline as I am getting older.
Maybe having the apps on my phone of Fidelity & Schwab is not helping me. I also keep checking what the S&P is doing during the day, as I do have lots of the Total Stock Market etf VTI which moves similar.

 

[yakers]

IMHO it’s not how often you check it’s how often you play with it.

 

[foxfirev5]

Absolutely. A well designed plan requires infrequent intervention.

 

[rkser]

IMHO it’s not how often you check it’s how often you play with it.

Thankfully I just check, but do not make changes on the fly, apart from in IRA doing Roth Conversions on Market downs (2022).

I just have the same 5 Vanguard Index Funds for a long time

 

[Healthy Lifestyle]

I used to check my portfolio that infrequently in the past while working.
But now when I am retired I do check it much more frequently much to my dismay. I seem to have lost the discipline as I am getting older.
Maybe having the apps on my phone of Fidelity & Schwab is not helping me. I also keep checking what the S&P is doing during the day, as I do have lots of the Total Stock Market etf VTI which moves similar.

I am also a new retiree with too much free time to check all my accounts.
One thing that I avoid, is I do not use the mobile apps on my phone.
I don't need more temptation to fiddle with my accounts.

 

[Markola]

> I have an hourly advisor who isn't suggesting any changes at all.



Listen to her. Respect the expertise.



In general, the idea of a balanced portfolio is that some sectors shine when others slumber.

+1. Passive investors are supposed to calmly build a durable, diversified portfolio during the good times that is then kept through all weather. Others prefer to try to outsmart the markets and good luck to them. Personally, I’m glad to pay our advisor a little bit to keep me from hitting the panic button during turbulence at exactly the wrong time, like now for example, as abundant data shows that most investors tend to do.

 

[jazz4cash]

It’s funny how different perspectives can be. I like to look at the balance frequently. It eliminates the shock of seeing a big change and I don’t worry about how it’s doing in the interim. I admit to tweaking things now and then but I am very deliberate and it is often just window dressing. I am constantly looking for deals so it’s hard not to notice the balance.

 

[steelyman]

I rely on Google Sheets and Quicken (Windows) to keep track of things.

It took a long while to set up the workbook in Sheets but I really appreciate the function GoogleFinance to provide updated quotes for funds and individual stocks. It simplifies things tremendously.

Because Google Sheets is cloud based it’s available on all the platforms I use (mobile and desktop). This allows me to easily check where things are frequently but I rarely do anything about the investments.

 

[Montecfo]

I just do not know what to do, all our IRAs are nothing but all BND for a long time, just buy & hold since we were working.



Now we are retired and see the carnage, and we still have close to a 7 figure $ of BND combined in my & DW’s IRAs.

These rate hikes have had nothing but doomed the IRAs. 13% loss last year, do not know yet about this year.



Have bought a few CDs of 1 yr or 18 month CDs, but it has not put a dent.



Some IRA BNDs get sold at a loss when we do Roth Conversions where we hold VTI.



Our AA presently is 67/33 stocks/bonds, we are 67/62, we have been buy & hold investors, we have in total 5 investments, 4 index Vanguard ETFs & 1 Vanguard Muni Fund .

I am not a fan of owning a bond fund tied to the Agg. Two reasons: 1) ambiguous duration 2) securities in the Agg that I do not want to own in those proportions

Heading into 2021 and definitely late in 2021 it became very clear that you wanted to reduce duration sharply to avoid large bond losses. I think folks who follow Bogle on the equity side get confused and think it is great to own the entire market in bonds. In my view you want to be selecting specific credit quality. The greatest bond issuers are not necessarily the best companies.

Also, treasuries and corporates are so different in behaviour and return, I want to own known slivers of each depending on market cycle. So I do not want to own the Agg, with an amorphous and ever expending allocation to treasuries (75% treasuries and agencies). So there is little credit exposure. It is just about all rate risk.

At this point, the damage is done but you should be seeing some recovery as rates decline. At some point once rates are lower you may want to retool your bond portfolio. But understand 2022 has never happened before. Would not expect a whipsaw that large to occur frequently but you have to be ready.

 

[mikes425]

I am not a fan of owning a bond fund tied to the Agg. Two reasons: 1) ambiguous duration 2) securities in the Agg that I do not want to own in those proportions

Heading into 2021 and definitely late in 2021 it became very clear that you wanted to reduce duration sharply to avoid large bond losses. I think folks who follow Bogle on the equity side get confused and think it is great to own the entire market in bonds. In my view you want to be selecting specific credit quality. The greatest bond issuers are not necessarily the best companies.

Also, treasuries and corporates are so different in behaviour and return, I want to own known slivers of each depending on market cycle. So I do not want to own the Agg, with an amorphous and ever expending allocation to treasuries (75% treasuries and agencies). So there is little credit exposure. It is just about all rate risk.

At this point, the damage is done but you should be seeing some recovery as rates decline. At some point once rates are lower you may want to retool your bond portfolio. But understand 2022 has never happened before. Would not expect a whipsaw that large to occur frequently but you have to be ready.

Thanks, and to all others in this thread as well. Very helpful perspective. I appreciate it. I think the takeaway for me is to remain calm and carry on basically. This is a long-term portfolio. There is no market timing. It's about years, not days or months. Sometimes it helps to get a reality check on that point.

 

[yakers]

IMHO that is the right/a good idea….if you have time. DW & I are 70+ and retired for 15 years. Don’t want to see a lot of losses right now although we could survive them

 

[slowsaver]

I hold a lot of Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX), as well as stocks. My AA is about 60/40.

Sometime last year, I noticed I had enough VWIUX that my monthly income from it (alone) was almost enough to cover all my expenses. I'm thinking about never selling those funds, because I love the tax-free income.

Because of that, I don't really care what the share price is.

I realize I would be much richer if I were in stocks instead, but I'm pretty happy with my situation.

(Having said that, my new money has been going more toward CDs while I wait for the bond fund yield to inch up.)

 

[redraptor]

"Invest in what you know"

This is good advice.

 

[BeTheMarket]

LOTS of discussion on bond funds vs buying individual bonds. I'll admit, I'm still not educated enough on the matter to have a strong opinion that I feel like I'm capable of defending.

I decided to dip my toe into the water last year. I decided to park my emergency fund in I-bonds and now have 4 months of living expenses parked there, and about 2-3 months in cash.

Other than that, I have a small holding of FXNAX(total US bond index fund) that I bought early this year and have been investing 20% of my 401k contribution to weekly since then, in order to see how DCA into that fund works.

My rate of return is currently 1.78%, and the 30 day yield is 4.09%. Based on this, would I be substantially ahead (at this precise moment in time) if I had instead purchased individual bonds/CD's/treasuries? Let's assume I am not eligible for I-Bond purchases this year.

Were I retired and living off returns, does this mean that not only would my NAV be up by 1.78%, but that I could also be spending the 4.09% yield without selling anything? If this is the case, does this mean that FXNAX is performing as well or better than doing everything manually?

 

[COcheesehead]

LOTS of discussion on bond funds vs buying individual bonds. I'll admit, I'm still not educated enough on the matter to have a strong opinion that I feel like I'm capable of defending.

I decided to dip my toe into the water last year. I decided to park my emergency fund in I-bonds and now have 4 months of living expenses parked there, and about 2-3 months in cash.

Other than that, I have a small holding of FXNAX(total US bond index fund) that I bought early this year and have been investing 20% of my 401k contribution to weekly since then, in order to see how DCA into that fund works.

My rate of return is currently 1.78%, and the 30 day yield is 4.09%. Based on this, would I be substantially ahead (at this precise moment in time) if I had instead purchased individual bonds/CD's/treasuries? Let's assume I am not eligible for I-Bond purchases this year.

Were I retired and living off returns, does this mean that not only would my NAV be up by 1.78%, but that I could also be spending the 4.09% yield without selling anything? If this is the case, does this mean that FXNAX is performing as well or better than doing everything manually?

You can make comparisons to a lot of other fixed income assets available earlier this year.
Money markets are yielding in the 4.6%+ range
You could have bought CDs in the 4.9% - 5.4% range
Treasuries were over 5% recently.
Some investment grade corporates were over 6%
Agency bonds were over 6%
A ladder of bonds should easily be yielding over 5% with no loss of capital.