"Comfort has a Cost"

[ShadowBloom]

It seems like bond funds lost their nature of being something that went counter to stocks when the market moves. While it may never happen again, 2022 was brutal.

This^^^. Bond funds completely failed their reason for being in my portfolio. I still have money in bond funds in my 401K, but for my non-401K where I have the option, I've switched to individual bonds. It's not a large allocation, but I'm investing in only high-rated bonds and receiving a known interest rate and with a high guarantee of return of my principal. Since the purpose of a bond allocation is largely psychological, this meets that need much better than a bond fund does now.

 

[pb4uski]

This^^^. Bond funds completely failed their reason for being in my portfolio. I still have money in bond funds in my 401K, but for my non-401K where I have the option, I've switched to individual bonds. It's not a large allocation, but I'm investing in only high-rated bonds and receiving a known interest rate and with a high guarantee of return of my principal. Since the purpose of a bond allocation is largely psychological, this meets that need much better than a bond fund does now.

I suspect that you know this, but if interest rates rise both bond funds and portfolios of individual bonds will decline in value... you can't avoid that elemental truth.

I prefer individual bonds for the control it gives me to use maturities of individual bonds for spending or reinvest the proceeds if I don't need them for spending... a choice that bonds funds do not provide.

 

[Texas Proud]

This^^^. Bond funds completely failed their reason for being in my portfolio. I still have money in bond funds in my 401K, but for my non-401K where I have the option, I've switched to individual bonds. It's not a large allocation, but I'm investing in only high-rated bonds and receiving a known interest rate and with a high guarantee of return of my principal. Since the purpose of a bond allocation is largely psychological, this meets that need much better than a bond fund does now.

I suspect that you know this, but if interest rates rise both bond funds and portfolios of individual bonds will decline in value... you can't avoid that elemental truth.

I prefer individual bonds for the control it gives me to use maturities of individual bonds for spending or reinvest the proceeds if I don't need them for spending... a choice that bonds funds do not provide.

Yes... I think you have an illusion that if you owned individual bonds you would not have had the same decline in 'value'... you are wrong...


Your individual bonds would have gone down in value.. maybe more of less than the bond fund but still down.. the difference is that you might not have noticed it as it is not in your face like a fund price is... it also might not make any difference if you do not sell and hold to maturity...

 

[mathjak107]

the bond funds have an increase in their interest when rates rise at the same time he nav falls .

eventually somewhere around the duration of the fund in years you will reach a point where the interest increases equal the nav drop and what you will have is something close to the deal the day you bought in .

that will pretty much match the individual bonds which don’t get an increase in rates but dont experience a nav stop when held to maturity.

so it’s close . either way you are behind the curve if rates rise .

 

[mystang52]

I didn't read all of the replies. DW and my pensions and SS exceed our monthly spending needs. We also have a significant portfolio, and roughly 25% of that is in Total Stock Fund. Since my portfolio is not needed for income, right or wrong I spend virtually zero time looking at my holdings. And that makes me happy. If I fall under that "illusory comfort" description, so be it.

 

[enjoyinglife102]

I'm in the keep it simple camp. Interesting that many have posted their more elaborate, time consuming and record keeping strategies confident they have delivered better performance without a shred of evidence that is so. Sounds like to me they invest in a way that makes them comfortable and that's all that matters no matter what one chooses.

 

[audreyh1]

I didn't read all of the replies. DW and my pensions and SS exceed our monthly spending needs. We also have a significant portfolio, and roughly 25% of that is in Total Stock Fund. Since my portfolio is not needed for income, right or wrong I spend virtually zero time looking at my holdings. And that makes me happy. If I fall under that "illusory comfort" description, so be it.

I think it’s good not to look often and enjoy the rest of your life.

 

[almost there]

If you have won the race. Stop running. And enjoy.

 

[mathjak107]

the problem is that damn finish line is a moving target. ha ha …

markets , inflation , longevity and unexpected spending and healthcare expenses keep moving it .

 

[ShadowBloom]

Your individual bonds would have gone down in value.. maybe more of less than the bond fund but still down.. the difference is that you might not have noticed it as it is not in your face like a fund price is... it also might not make any difference if you do not sell and hold to maturity...

I don't trade bonds, or bond funds, I hold them. The difference is that if I hold individual bonds to maturity I will get back my original investment. I cannot hold onto my bond fund with any assurance at all that I will recover the change in value on a specific date. I'm completely aware there's no 100% guarantee of this, but it's more under my control than with a fund.

 

[Texas Proud]

I don't trade bonds, or bond funds, I hold them. The difference is that if I hold individual bonds to maturity I will get back my original investment. I cannot hold onto my bond fund with any assurance at all that I will recover the change in value on a specific date. I'm completely aware there's no 100% guarantee of this, but it's more under my control than with a fund.

I agree... but your previous post seem to indicate that you did not like the fund because of a drop in price and they did not do what they were supposed to do... I was just pointing out that individual bonds would have also decreased and you could say they did not do what they were supposed to do.. I think both statements are false... bonds, either holding individual bonds or bond funds do what is intended even when they go down in value...

 

[njhowie]

I think both statements are false... bonds, either holding individual bonds or bond funds do what is intended even when they go down in value...

Regardless of what is intended, when interest rates go up, bonds go down. It's a fact of life. When interest rates go up 5x in under a year, bonds are going to fall ... a lot. For anyone who believes (or intends for) bonds or bond funds to go up in the face of significantly rising interest rates, I would suggest a review of the investment approach.

I also take exception with the statement that a bond allocation is for psychological purposes.

 

[Montecfo]

I don't trade bonds, or bond funds, I hold them. The difference is that if I hold individual bonds to maturity I will get back my original investment. I cannot hold onto my bond fund with any assurance at all that I will recover the change in value on a specific date. I'm completely aware there's no 100% guarantee of this, but it's more under my control than with a fund.

I do not disagree with you but there is something lost: the ability to invest at market rates. So let's say rates rise 1% from where you bought your bond. Bonds and funds lose value. Your bond regains value as you near maturity.

Meantime, the bond fund is investing new funds at the new higher market rate. This is something you cannot do with your held-to-maturity individual bond. You receive your proceeds in a different rate environment than when you started. Something good to understand-perhaps already noted.

If planning to SPEND the proceeds, then individual bonds seem more valuable. If reinvesting the proceeds, then it is a mixed bag in my view.

I own bonds and bond funds with different objectives. Neither is better in all cases. Both are useful tools.

 

[H2ODude]

Interesting thread. I'm opting for simplicity as many others. Our needs for cash are satisfied by my pension and our SS, both of which my father taught me not to trust so I squirreled away 15-20% over the years and we got some inheritances. What I saved would just about all be in an IRA except I spent my 60's doing max Roth conversions. But, we still have about 60% in the traditional. We can't travel and other than charitable or frittering it on things we don't want or need, the investments are likely to go to next two generations and charity. I keep simplifying it down to primarily index MF's with no bonds or bond funds anymore. For some reason I like the idea of CD's for what I know I'll need from the traditional IRA to do RMD's. I wouldn't call it a ladder as they mature sort of random and in various amounts depending on rates and when I bought.

I'm definitely not looking for the last few points any more. Three years ago the one Fidelity rep I had that I didn't have a pleasant experience with talked me into a 4 year fixed annuity that gave maybe a quarter to a half percent more than a CD. Seemed worthwhile but locked in at ~2.5% with ability to take out 10% a year no charge. And I've taken that 10% last two years, and filed this year as well since rates have gone up. Might as well. But I guess they've decided they'd like to hold on to my low cost dollars as USAA (the issuer) first lost my request, and Friday I got a letter that specified two forms missing. None of which were ever required before. This lacks the simplicity I crave. It also p___es me off and I'll be dropping by the Fidelity office to tell them to straighten it out. CD's and a couple of equity mutual funds is just fine as far as I care.

 

[pb4uski]

I do not disagree with you but there is something lost: the ability to invest at market rates. So let's say rates rise 1% from where you bought your bond. Bonds and funds lose value. Your bond regains value as you near maturity.

Meantime, the bond fund is investing new funds at the new higher market rate. This is something you cannot do with your held-to-maturity individual bond. ...

Most of use who invest in individual bonds have ladders. So even if I hold to maturity in a rising interest rate environment I will reinvest maturities at the higher rates so I don't see your point.

 

[BackcountryMe]

What a crock of shite.

Like your after-inflation, after-tax return is more predictable with equities?

US Treasuries have no credit risk and are very marketable. Investment grade corporate bonds have little credit risk, especially shorter maturities. And credit risk of corporate bonds can be managed buy limiting the amount invested in any single credit. The only thing that the author got right was that some corporates are thinly traded and can be hard to sell in an emergency but I plan ahead.

I can reinvest interest with 3 clicks.

Given all that, I'm baffled why people subscribe or listen to this moron.

I second what pb4uski said. I've been buying (and selling, if needed) T-bills for a long time. They are liquid. They only time I've ever had an issue selling was two days before redemption... so I just waited two days.

 

[VanWinkle]

What a crock of shite.

Like your after-inflation, after-tax return is more predictable with equities?

US Treasuries have no credit risk and are very marketable. Investment grade corporate bonds have little credit risk, especially shorter maturities. And credit risk of corporate bonds can be managed buy limiting the amount invested in any single credit. The only thing that the author got right was that some corporates are thinly traded and can be hard to sell in an emergency but I plan ahead.

I can reinvest interest with 3 clicks.

Given all that, I'm baffled why people subscribe or listen to this moron.

I'm glad we have someone of your advanced intelligence to straighten us out when people of much higher credentials try to take us a different direction. Don't be baffled when people have a different opinion than yourself. Were you in US treasuries before 2019 when they were paying 1.4% interest? I think it is fine to give a different opinion, but calling people morons is not a recipe for a good exchange of ideas.

VW

 

[davidfin]

I’ve been squirreling away some short term money normally held in MM accounts and buying treasuries paying >5%+ for 6 and 12 months durations. These are held in both tax and tax deferred accounts. What am I missing?

 

[Gumby]

The money in the tax deferred accounts can probably be invested at a higher rate in brokered CDs. You don't need the state tax free treatment for interest on treasuries in a tax deferred account since any withdrawals from that account will be ordinary income subject to state taxation at the time of withdrawal.

 

[audreyh1]

The money in the tax deferred accounts can probably be invested at a higher rate in brokered CDs.

Not lately.

 

[davidfin]

Good point.

 

[pb4uski]

I'm glad we have someone of your advanced intelligence to straighten us out when people of much higher credentials try to take us a different direction. Don't be baffled when people have a different opinion than yourself. Were you in US treasuries before 2019 when they were paying 1.4% interest? I think it is fine to give a different opinion, but calling people morons is not a recipe for a good exchange of ideas.

VW

You're welcome VW... I'm glad to straighten you out anytime. Glad to help.

I didn't realize that piece was written by Jonathan Clements... I just read your OP. As a regular reader of the WSJ over the years I have always enjoyed Jonathan Clements. I didn't realize that he was the author since I hadn't opened the link. So I withdraw my moron comment... he's not a moron... but the paragraph that you posted was stupid. In fact, the whole article was pretty bad.

I have no problem with a different opinion... I just object to mis-informed opinions.

At this time in 2019 most of my fixed income was in 3% PenFed 5-year CDs (remember those?) and target-maturity bond funds due to a concern about interest rate risk (albeit a few years early)... no 1.4% US Treasuries... sorry. I gravitate to where the returns are.

Clements disses ibonds too... I got in while the getting was good and then got out and did very well compared to what was avaiable at the time.

... Individual bonds can be treacherous to sell if you need to unload them before maturity, plus they represent an undiversified bet and you can’t easily reinvest your interest payments, like you can with a mutual fund. What if the issuer doesn’t go bust and you hold to maturity? While the nominal return on conventional, fixed-rate bonds may be known with some precision, your after-inflation, after-tax return is up in the air, just as it is with a CD. Given all that, I’m baffled that investors prefer the illusory safety of individual bonds held to maturity to the much greater safety offered by bond mutual funds. ...

I'm not sure what he means by "treacherous to sell" but presume that he means hard to sell or that you don't get good pricing. To begin with, why in the world presume that there will be a "need to unoad them before maturity" to begin with? Most of us plan better than that so the whole premise is silly. I have never NEEDED to sell before maturity. But if you do need to sell and own Treasuries then they are so widely traded it is easy-peasy... not treacherous at all.

What is the "undiversified bet"?... sounds like credit risk to me. With US Treasuries there is no need for diversification since they are credit risk free. If he is refering to corporate bonds, it is easy to diversify credit risk by sticking to investment grade issuers and limiting your investment in any single credit.

While he is correct that you can't reinvest interest as easily as in a bond fund, you can easily reinvest interest payments. Less than 5 clicks once I am logged into Schwab.

While it is true that the after-inflation, after-tax return is up in the air, it is not any less up in the air for any other investment class so how is it relevant? Sounds intelligent at first blush but makes no sense.

Finally, he says that bond funds are much safer than individual bonds. How is that? Especially when the bond fund invests in individual bonds? A silly statement by him. We've had lots of debates here by knowledgable investors about bond funds compared to individual bonds and I can't recall a single suggestion that bond funds are "much safer". I don't see how and he doesn't explain why... he just states it and expects us to accept it because, after all, it is Jonathan Clements writing. Poppycock.

Lastly, while I can find a lot of background on him and what he has done his credentials may not be higher than mine, he has just published a lot more.

 

[pb4uski]

Not lately.

It is interesting how at certain times an x-year brokered CD yield is better than an x-year US Treasury and vice versa. It seems to ebb and flow inexplicably.

 

[pb4uski]

I’ve been squirreling away some short term money normally held in MM accounts and buying treasuries paying >5%+ for 6 and 12 months durations. These are held in both tax and tax deferred accounts. What am I missing?

When you say "short term money" I assume that you mean money that you will desire to have in 6-18 months. If so, then that sounds fine other than when you reinvest go with either brokered CDs or UST, whichever are yielding more.

 

[audreyh1]

It is interesting how at certain times an x-year brokered CD yield is better than an x-year US Treasury and vice versa. It seems to ebb and flow inexplicably.

Yes, of course, these things cycle as most investments do. Last time I bothered to buy T-bills was while the Fed raised interest rates and kept them up for a while. T-bills usually respond first. Other than a brief period during the month long banking crisis a year ago when brokered CDs suddenly popped, I haven’t bought brokered CDs. Late last year direct online bank CDs were beating the heck out of brokered CD rates. I loaded up.

Also when rates are very low and MM Funds are yielding near zero, high yield online savings accounts seem to beat all of them as well many short-term CDs.

I’m curious as to whether this time we settle quite a bit higher compared to the last decade. Seems likely unless there is a drawn out recession. 3 - 3.5%? That will more match the 2000s.

Always interesting times…..