Bond Funds for income?

[HappyEarlyRetirementForum]

I was wondering what people think about using bond funds for income?

Or is this just not the right time?

When I look at 10 year charts, I don't see bond funds losing money.

What is wrong with setting up bonds funds to generate income? & just churn dividends?

I was thinking:

VFICX
VBMFX
VWEHX
FKINX
PRHYX

 

[LOL!]

Of course one should use bond funds for income. Why else invest in them? Yes, they should not be as volatile as equities and thus are less risky as equities, but if they didn't provide dividends, no one would invest in them.

 

[Coolius]

I elected to create my own bond ladder by buying individual bonds of staggered maturities. Presently have bonds maturing every year from 2012 through 2019.

As a bond matures ( or is called ), I would need to scramble a little to find a replacement issue. had a few bad decisions and chose to sell bonds for a loss, but thankfully these were not a frequent occurrence.

The bummer in this is that BBB+ and above bonds pay only a pittance right now - about 2-3% for maturities of 2018/2019. Not that attractive.

 

[scrabbler1]

I was wondering what people think about using bond funds for income?

Or is this just not the right time?

When I look at 10 year charts, I don't see bond funds losing money.

What is wrong with setting up bonds funds to generate income? & just churn dividends?

I was thinking:

VFICX
VBMFX
VWEHX
FKINX
PRHYX

What you suggest is my ER plan right now and has been since I ERed nearly 3 years ago. (See my signature line.)

When I first began investing in bond funds back in 1990, it was instead of my local bank's MM savings account whose interest rate had dropped from over 7% to maybe 2% in less than 12 months (mid-1989 to early 1990). I knew I was risking principal a bit but the greater rate of return, and tax-exempt (it was a muni bond fund) to boot, was very satisfying.

 

[Alan]

I get most of the retirement income needed from my investments from bonds in mutual funds. The remainder comes from CD's and savings.

 

[mathjak107]

bond funds have little place to go except down with the end of the 30 year bull market coming to an end.

income from the fund while your principal is dropping sucks!

 

[chinaco]

Get a book on Bonds and Bond mutual funds. You can probably get a decent one from your public library.

Get acquainted with the basics.

Bond mutual funds and bonds are commonly used for income, portfolio stability, etc.

But there are risks that you should understand.

Here is a page with a link to a VG webcast about this very topic in the context of the current economic and interest rate environment ...

https://personal.vanguard.com/us/insights/article/live-webcast-bond-investing-06242011

 

[galeno]

I like bond funds over individual bonds because their NAV fluctuates. I'm a strict indexer. Rule one is wide and deep global diversification. Rule two is keep it as cheap as possible. We keep a 60/30/10 retirement portfolio and re-balance according to the following rules.

If any of the major AA components (stocks/bonds/cash) gets out of balance by 5% or more, it gets re-balanced at year's end.

If any of the sub-components inside a major component gets out of balance by 20% or more it gets re-balanced at year's end.

This philosophy forces me to buy low and sell high. It has served us well during 16 years of early retirement and two tremendous market crashes during the last decade.

 

[WilliamG]

I like bond funds over individual bonds because their NAV fluctuates. I'm a strict indexer. Rule one is wide and deep global diversification. Rule two is keep it as cheap as possible. We keep a 60/30/10 retirement portfolio and re-balance according to the following rules.

If any of the major AA components (stocks/bonds/cash) gets out of balance by 5% or more, it gets re-balanced at year's end.

If any of the sub-components inside a major component gets out of balance by 20% or more it gets re-balanced at year's end.

This philosophy forces me to buy low and sell high. It has served us well during 16 years of early retirement and two tremendous market crashes during the last decade.

Do you use other indices than Vanguard's Total Bond?

 

[Rich_by_the_Bay]

Vanguard Wellesley is a popular alternative here: diverse bonds + 35% (roughly) dividend growth stocks.

 

[Col. Klink]

Both the indexing and comment about wide and deep global diversification make sense. With respect to the latter, international bonds particularly corporates and emerging markets require the fund manager to have knowledge, experience, and local networks to get it right. I have index funds, but this is one area I don't mind paying for a proven manager.

 

[galeno]

Do you use other indices than Vanguard's Total Bond?

We don't use BND because we are US NRAs. BND would cost us 1.1% in portfolio costs (ER=0.11 + USNRA taxes=0.99).

Instead, we use two offshore MANAGED bond funds (ER=0.91%). We don't pay US NRA taxes so we save 10 basis points.

If we were US citizens or residents, we would use two funds: 50% in Vanguard's Wellesey and the other 50% in Wellington. Set and forget.

 

[WilliamG]

We don't use BND because we are US NRAs. BND would cost us 1.1% in portfolio costs (ER=0.11 + USNRA taxes=0.99).

Instead, we use two offshore MANAGED bond funds (ER=0.91%). We don't pay US NRA taxes so we save 10 basis points.

If we were US citizens or residents, we would use two funds: 50% in Vanguard's Wellesey and the other 50% in Wellington. Set and forget.

Would you really!? They aren't index funds and without small cap or much international do they make your "wide and deep" diversification goal?

 

[fritz]

Would you really!? They aren't index funds and without small cap or much international do they make your "wide and deep" diversification goal?

Sound familiar

Wellesley 6%, and Wellington 12% foreign holdings - not too bad...

 

[HappyEarlyRetirementForum]

good video..

----------------------

Tell me more about, "Is this the right time to get into bond funds?"



My problem is The FA/market took a piss on me and I have not had a
return for 4 years.

Really need to set up an income stream, but this market is !!!

 

[Chuckanut]

The biggest problem I have with bond funds at this time is that interest rates are at the lowest point I have ever seen them. In my mind they must go up at some point and when they do bond funds will lose value. I do have some bond funds that have ridden their way up over the past few years as interest rates have fallen. But, I no longer put new money into them because of the risk that interest rates will rise. On the other hand, getting 0.78% on a CD is not exactly a way to make big money. If I wanted to buy a bond fund, I would dollar cost average into it over at least two years.

 

[Chuckanut]

Wellesly is one of the few non index funds I use. I moved some bond money from a bond fund to Wellesly earlier this year. They have gone down but not as badly as the pure stock funds. Down about 1.6% today compare with over 5% for the DOW.

 

[pb4uski]

Guggenheim recently came out with some "bullet" funds that are held to maturity bond portfolios that mature in a stated year and the proceeds from maturity will be distributed to investors. I'm thinking about laddering them to get the benefits of a ladder but with diversification. Expense ratio is 24 bps plus they are an ETF so there would be commissions on the purchase. Still thinking about these but they would seem to reduce interest rate risk compared to conventional bond funds if you can line up the maturities with your needed cash flow in retirement. Corporate bond funds have maturities from 2011 to 2017. Has anyone looked into these?

 

[2Moutal]

Thanks

Guggenheim recently came out with some "bullet" funds that are held to maturity bond portfolios that mature in a stated year and the proceeds from maturity will be distributed to investors. I'm thinking about laddering them to get the benefits of a ladder but with diversification. Expense ratio is 24 bps plus they are an ETF so there would be commissions on the purchase. Still thinking about these but they would seem to reduce interest rate risk compared to conventional bond funds if you can line up the maturities with your needed cash flow in retirement. Corporate bond funds have maturities from 2011 to 2017. Has anyone looked into these?

I haven't looked into them but thanks for the tip, I've been trying to decide whether or not to begin buying individual bonds, these may be just right.

 

[mathjak107]

whether your bond fund will recover or not from rate increases depends on the type of bond fund and its duration.

john boogle once said he knows of nobody who lost 1 penny in a treasury bond fund of theirs as long as they stayed long enough to meet the duration of that fund.

up until now treasuries had no risk level built in so a credit change would not throw that rule off kilter.

what john is saying is this.

lets say you pay 10 bucks for a share of a bond fund with a duration figure of 5 and were getting 4% interest .

if rates rose to 5% your bond fund would fall to 9.50 but now instead of 4% your getting 5%.. over a 5 year period you would collect an extra 1% a year so even though your fund fell 5% you got an extra 5% intereast over those 5 years equaling your origonal deal the day you bought in at 4%....

as long as you stayed 5 years in that fund you eventually were whole again.

this was only true of treasuries because credit ratings changing were the wild card on corporate bond funds.

 

[Lsbcal]

...(snip)
When I look at 10 year charts, I don't see bond funds losing money.
...

You will not get a good picture of bond returns without looking at a much longer stretch. In the 1950 - 1980 period rates went up in general. See here for a picture: 10-Year Treasury Constant Maturity Rate (GS10) - FRED - St. Louis Fed

Returns are composed of yield plus rate change. If you are just looking at total returns you must realize which direction rates went at the begin and end of that period.

As other have said rates are incredibly low now, back to Eisenhower era rates. Do not expect the past 10 year returns going forward for the next 10 years.

P.S. Oops -- just noticed this is a pretty old thread.

 

[Chuckanut]

Old thread or not, you bring up a good point and something that worries many of us - The Historically Low Interest Rates. I have not purchased new bonds of any sort for several years. In fact, I recently sold some GNMA fund shares because I thought they can't go up much more. Of course, then the Fed announced low rates for the next two years, so I probably jumped the gun.

 

[Lsbcal]

Old thread or not, you bring up a good point and something that worries many of us - The Historically Low Interest Rates. I have not purchased new bonds of any sort for several years. In fact, I recently sold some GNMA fund shares because I thought they can't go up much more. Of course, then the Fed announced low rates for the next two years, so I probably jumped the gun.

Larry Swedroe has a new article on GNMA's here: GNMAs: You Can Do Better - CBS MoneyWatch.com

Haven't read it myself yet.

 

[clifp]

Larry Swedroe has a new article on GNMA's here: GNMAs: You Can Do Better - CBS MoneyWatch.com

Haven't read it myself yet.

While Larry is probably right that intermediate treasury outperformed GNMA. What he didn't point out was that GNMA outperformed that benchmark bond fund (at least in this forum) Vanguard Total bond market. I believe (it's been a while since I ran the numbers) that GNMA's actually had less risk also.

The problem is like so many other things "past performance does not equal future success." Over the last decade+ we've seen very easy credit, over the last 3 years we've seen a remarkable rush to safety. So it is not at all surprising that "safest" bonds have been the best performing, nor that the almost as safe GNMA bonds would be the next best performing bond.

However, I and more importantly many bond experts like Bill Gross expect that the next 5-10 years will not be at all kind to Treasuries.

He raises good points but about the likely behavior of GNMA (i.e. pretty bad during rising interest rates due to people not refinancing cheap mortgages) although I don't think they did that bad in the late 70s and early 80s.

 

[Lsbcal]

...(snip)...
However, I and more importantly many bond experts like Bill Gross expect that the next 5-10 years will not be at all kind to Treasuries.

He raises good points but about the likely behavior of GNMA (i.e. pretty bad during rising interest rates due to people not refinancing cheap mortgages) although I don't think they did that bad in the late 70s and early 80s.

Yes, adjusting to change is a difficult act to perform in investing. Years ago I made lot's of $'s in Fannie and Freddie, now they're not even listed as stocks.

I've got a big chunk of our bond portfolio invested with Gross. He has not been right on the Treasuries short term but I expect that PTTRX will do better over time. A similar Treasury outperformance occured in 2008 -- flight to safety isn't permanent unless this is Armageddon.