Investing in 2023

[Markola]

The way I think of it is that with a bond ladder I have more control than with a bond fund. In theory, a rolling bond ladder and a bond fund should perform similarly over a long period of time.

That’s entirely fair. I, too, think a bond ladder and bond fund should, generally, perform about the same over a longer period of time, say the 6-7 year duration of BND. It only makes sense. If the two vehicles will likely end up at approximately the same destination, I don’t personally need a high level of control to get there. Rather, I want to let the low-cost, highly-diversified index fund perform its self-cleansing and recycling process, while I do other things. Personal preference.

 

[Closet_Gamer]

Interesting thread with lots of good topics.

I think 2023 -- and whether a more aggressive move into bonds makes sense -- comes down to a single word: inflation.

Continued inflation = more rates hikes = lower equities and bond values

Inflation under control = reduced rate movement = equity relief rally and bond price stability

I don't really see a likely "rates go back down in 2023" scenario. If rates do begin to retrace then the longer duration of big bond funds and the herd moving back into the bond fund market will serve to create upside where those forces have created downside in 2022.

(Disclosure: For the first time in my life I exited bond funds in my accounts I went to a short term treasury ladder in Q1 22. I left my 401k in target date funds which are invested in bond funds, so I'm in the middle on the fund vs. individual bonds debate.)

 

[sengsational]

My suggestion for the OP would be to dump the bond funds for individual bonds. As discussed, it's not like selling low in equities... you're not locking in a loss, you're just shifting to a better return.

And I'd be less inclined to shock the AA target; I'd leave it the same, or nudge it. I certainly wouldn't change it so much that in a few years, I'd be changing it back.

 

[Jerry1]

Thanks for a good discussion. I appreciate the input from this group. I’ll give it some thought and make some moves in the next week or so.

 

[eytonxav]

I've been a very conservative investor for most of my adult life which in hind sight was a mistake, although I slept better at night. I moved out of my bond funds prior to the summer months and into cash/CDs. I just did not want to fight the fed as they increased rates and I just envisioned the bond funds continuing to take a bath. I am now in laddering CDs out to 3 years, and still quite a bit in money market accounts which are paying a decent rate albeit below inflation. I am not sure if now is the time to pull out of bond funds or not, and am uncertain of when we will see a recession. If the Ukraine situation is resolved I would assume the market would react positively with equities bouncing back, but if the fed continues to raise rates, I fear it will bring on a recession.

 

[pb4uski]

That’s entirely fair. I, too, think a bond ladder and bond fund should, generally, perform about the same over a longer period of time, say the 6-7 year duration of BND. It only makes sense. If the two vehicles will likely end up at approximately the same destination, I don’t personally need a high level of control to get there. Rather, I want to let the low-cost, highly-diversified index fund perform its self-cleansing and recycling process, while I do other things. Personal preference.

I know you are a strong advocate of BND and bond funds. Personally, I think that is a big mistake, but you do you. YMMV. Good luck.

 

[target2019]

Bonds are beginning to attract attention, she says: https://www.schwab.com/learn/story/fixed-income-outlook

Lots of charts...

 

[GravitySucks]

For 2023 I'm staying with my 60/40 AA.
I have a few bonds maturing soon and just had one mature. I bought a 5 year tips with the one that just matured. I need a 2027 ladder rung and the bond maturing in January is not enough so I'll sell the needed difference from FUAMX bond fund. Assuming things stay the same I'll be buying 5 yr TIPS throughout the year as the short term bonds mature.

Steady as she goes Mr. Sulu

 

[Bruno]

I bought iShares High Yield Bond Factor ETF (HYDB) and its down about 12%. It pays a monthly dividend yield of 6%. Would i be better talking the loss and buying 6 mo. Tbills? With the dividends i could be back even in a couple of years. TIA

 

[COcheesehead]

I know you are a strong advocate of BND and bond funds. Personally, I think that is a big mistake, but you do you. YMMV. Good luck.

Yes, BND is paying about a 2.5% distribution right now. Most core sweep accounts are paying high 3’s. Money markets into the 4’s. Bonds paying into the 5’s and 6’s with no redemption drag, less expenses.

There is time and place for bond funds, but it’s not now.

 

[FREE866]

Interesting thread with lots of good topics.

I think 2023 -- and whether a more aggressive move into bonds makes sense -- comes down to a single word: inflation.

Continued inflation = more rates hikes = lower equities and bond values

Inflation under control = reduced rate movement = equity relief rally and bond price stability

Unfortunately it usually isnt that simple...or predictable...if X happens then Y...wish it was!



I'm sticking with all stocks...all low cost diversified ETFs....well, that and a couple years expenses in cash.......Its what got me here and even approaching 6 years retired has done me well....

 

[Closet_Gamer]

Unfortunately it usually isnt that simple...or predictable...if X happens then Y...wish it was!

I tend to agree...markets are complex in the same way as the weather or any other complex system.

But occassionally there is a hurricane and what matters is the hurricane. The hurricane just crushed Florida. Does it drive inland and lose steam, or does is go back out to sea, pick up energy, and then hit North Carolina?

All the weather variables that normally dictate weather in North Carolina don't matter. The hurricane will overshadows all of those for the moment and will decide what happens to the residents.

I think the inflation we're seeing right now is a hurricane. I hope it drives inland and dies out.

YMMV.

 

[Lsbcal]

We can continue this analogy. Some states won't have the hurricane. One could trend follow and travel to such a hurricane free (or reduced) state.

Hey, Cramer says there is always a bull market somewhere. Taken with a grain of salt.

 

[Closet_Gamer]

We can continue this analogy. Some states won't have the hurricane. One could trend follow and travel to such a hurricane free (or reduced) state.

 

[RetiredAt49]

I’m sticking with my 100% AA (although I have rental properties too but majority of NW is in taxable brokerage and smaller portion in IRA’s). The math, research, and history show that a high percentage of equities have the best long term returns.

 

[Markola]

Yes, BND is paying about a 2.5% distribution right now. Most core sweep accounts are paying high 3’s. Money markets into the 4’s. Bonds paying into the 5’s and 6’s with no redemption drag, less expenses.



There is time and place for bond funds, but it’s not now.

I guess that’s the difference. One is either a market timer or one is not.

 

[COcheesehead]

I guess that’s the difference. One is either a market timer or one is not.

I see it as taking advantage of an opportunity to lock in really nice, safe yields rather than taking it on the chin in a bond fund paying me less than market rates.

 

[daylatedollarshort]

Advocating to not "market time" in fixed income funds is certainly advantageous to the brokerages who manage bond funds. Then they never have to worry about investors dumping their funds for higher yielding, lower risk investments. It sure makes their job easy. They collect their bond fund fees even when their funds are paying out lower than prevailing market rates.

 

[Montecfo]

So 2 years of recency bias outweighs the prior 35 years of bond index fund returns to you? Ok, but not to me. I was taught to expect 4% nominal returns from bonds. The index fund yield alone is slowly approaching that, though the price is down. That fund has a 6.5 year average duration and we have two consecutive down years of bond returns behind us, which is nearly unprecedented. I’m looking forward to see what fund price 2023 brings.

I personally do not invest in bond indexes as I prefer active management for bonds.

But I do agree that the mantra that seems to reverberate in this thread and others that bond funds are trash is overblown.

Virtually all bonds have declined in value this year-whether held by funds, indexes or directly. And they have declined a lot.

The direct ownership advocates say, "no problem, I hold to maturity". But there IS a problem: how do you rebalance? And many folks who buy bonds directly DO sell them. Best laid plans and all that.

Further, just about any fund or index carries less default risk than any direct portfolio holding similar maturities (Excuding treasuries). Why? Diversification. Virtually impossible to beat that unless you own hundreds of issues.

So people that are here to learn, find objective research. Bond funds are not trash and direct ownership is no panacea.

Both have plusses and minuses.

Full disclosure: I own bonds directly and own bonds in funds: open end and CEF's.

 

[matjung]

The last 12 months have been a rare bright(er) spot in for my international holdings. YTD returns for our Vanguard index funds are:

Our AA is around 51% stock, 3% Bitcoin, 46% bond. I have no idea about 2023 returns but my gut and my head say we haven’t seen the worst of the markets yet. However, my gut and my head are completely untrustworthy about the future behavior of such complex systems, so I will stick to my asset allocation! [emoji5]

You still believe in Coins and Tokens?
Did you go into Bitcoin, or one of the ten thousand other coins around?

 

[Freedom56]

I personally do not invest in bond indexes as I prefer active management for bonds.

But I do agree that the mantra that seems to reverberate in this thread and others that bond funds are trash is overblown.

Virtually all bonds have declined in value this year-whether held by funds, indexes or directly. And they have declined a lot.

The direct ownership advocates say, "no problem, I hold to maturity". But there IS a problem: how do you rebalance? And many folks who buy bonds directly DO sell them. Best laid plans and all that.

Further, just about any fund or index carries less default risk than any direct portfolio holding similar maturities (Excuding treasuries). Why? Diversification. Virtually impossible to beat that unless you own hundreds of issues.

So people that are here to learn, find objective research. Bond funds are not trash and direct ownership is no panacea.

Both have plusses and minuses.

Full disclosure: I own bonds directly and own bonds in funds: open end and CEF's.

You are missing an important point. Those that hold individual bonds would not lock a 10 year treasury note at 0.5% or a 30 year treasury bond at 1.5%. Bond funds bloated themselves with low coupon debt while fixed income investors either stayed in cash or shifted to the shortest durations. When bonds stop generating income, they are no longer viable investments. Those that manage bond funds appear to have forgotten that fact. I can't think of a single fixed income investor that bought negative yield bonds but many funds did just that. The vast majority of people that buy individual bonds and CDs market time. This is normal behavior that most Bogleheads just don't understand.

 

[matjung]

Hi Jerry
I think you need to make an assumption about the inflation you expect for his year and also think about 2024..
If Bonds offered 4%, and inflation is 7%. Your loss will be certain.
If you go into Equity you have a chance of benefiting from inflation.
Go into those Equity markets where you expect stocks to benefit from inflation.
If everything gets more expensive, so will stocks.
If you move out of stocks now, you may forget to move back in a timely way.
Some stocks deliver dividends beyond 4%.
You could focus on an index that prefers dividend stocks over growth stocks.

 

[youbet]

If you move out of stocks now, you may forget to move back in a timely way.

Yep....... that's the part that seems to get away from a lot of folks........ how to know when to get out and when to re-enter.

DCA'ing into no-load, low cost TSM and S&P 500 index funds over 3+ decades served me very well. When MegaCorp booted my sorry ass out at age 58 many years ago, I was able to call it quits (called it FIRE'd instead of fired) and retired completely and permanently. I just couldn't trust myself to time the equity markets, even today.

I certainly tip my hat to those able to get in and out and in and out successfully.

 

[Markola]

You still believe in Coins and Tokens?
Did you go into Bitcoin, or one of the ten thousand other coins around?

Discussions about digital assets tend to become disrespectful on the Forum but I’m glad to chat in the DMs with you or anyone else who is genuinely interested to discuss them. Several of us compare notes and learn from each other there enjoyably and we haven’t had to block anyone yet.

 

[daylatedollarshort]

You are missing an important point. Those that hold individual bonds would not lock a 10 year treasury note at 0.5% or a 30 year treasury bond at 1.5%. Bond funds bloated themselves with low coupon debt while fixed income investors either stayed in cash or shifted to the shortest durations. When bonds stop generating income, they are no longer viable investments. Those that manage bond funds appear to have forgotten that fact. I can't think of a single fixed income investor that bought negative yield bonds but many funds did just that. The vast majority of people that buy individual bonds and CDs market time. This is normal behavior that most Bogleheads just don't understand.

There is also a big difference between nonspecific slurs, like saying "bond funds are trash", which no one here has actually posted, and pointing out factual inaccuracies perpetuated by bond funds and their advocates. Many of these inaccuracies that get posted here time and time again are easily disproved just by looking at current distribution yields and past performance stats. The distribution yields, the NAV changes over times, individual bonds held to maturity not having market risk, etc. are all simply matters of fact, not opinions or name calling.

I have posted links from Fidelity, The Fed, Investopedia and The Bond Book many times in the past about bond funds having market risk and individual bonds held to maturity having no market risk, and yet posters here still continue to try trivialize, cloud or deny the issue, when it is a key difference, as many bond fund holders have found out this year.