Question for an advisor about bond funds. Suggestion?

[Jerry1]

Selling for a loss requires more information about fund placement.

Taxable, Tax-deferred, Tax-free would have some implication on the bond fund sale. At least that's my guess in the absence of data.

So what if all your bond funds are in tax-deferred (IRA’s) accounts? Why would the recommendation to sell be any different? I understand you won’t get any tax benefit from the losses, but wouldn’t the logic still suggest selling the bond funds and moving to something else?

 

[VanWinkle]

I dunno. BND's total return, with dividends reinvested for the 10 years ended in 2022 was 1.00%... even back in the days of low interest rates it is hardly inspiring.

You could cherry pick 10 years in the stock market and show that everyone should sell their equities as well. You might want to see the return from 2010 through 2019(3.68%). I'm not sure that would make it a great decision. The last 10 years are over, the next ten years are unknown unless you have found your crystal ball again.

VW

 

[target2019]

So what if all your bond funds are in tax-deferred (IRA’s) accounts? Why would the recommendation to sell be any different? I understand you won’t get any tax benefit from the losses, but wouldn’t the logic still suggest selling the bond funds and moving to something else?

Prescription without diagnosis is malpractice.

I don't know where his bond funds are. His paid advisor knows that.

Rather than selling every bond fund, irregardless of placement, it may be prudent to examine each one.

YMMV, of course.

 

[Jerry1]

Prescription without diagnosis is malpractice.

I don't know where his bond funds are. His paid advisor knows that.

Rather than selling every bond fund, irregardless of placement, it may be prudent to examine each one.

YMMV, of course.

I understand that and respect your caution. I was just wondering, in general, if the recommendation to sell the bond funds would be different if in a tax deferred account. Of course the tax benefit would be there for an after tax account and that would involve additional input, but would there be any reason to keep the bond funds just because they’re in a tax deferred account?

 

[Markola]

I think the reality is that VBTLX will never catchup to a CD ladder that you start today... the math just doesn't work…
A 5.11% bird in the hand is worth more than a 4.1% bird in the bush.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vbtlx#portfolio-composition

Again, not arguing. For me it’s a philosophical problem. I believe that passive investing beats active investing over time. Second, I’ve made my worst mistakes trying to outsmart the markets. Third, neither my Vanguard advisor, nor anything at Vanguard that I’ve seen, is suggesting I stay passive on the equities side and get active on the fixed income side. Bogleheads I respect, like nisiprius, are saying, as always, “stay the course.”

Could I squeeze out more returns with a CD ladder? You show how one could. But my beliefs, experience and instinct say that I, personally, should stay put and stay the course. YMMV.

 

[pb4uski]

You could cherry pick 10 years in the stock market and show that everyone should sell their equities as well. You might want to see the return from 2010 through 2019(3.68%). I'm not sure that would make it a great decision. The last 10 years are over, the next ten years are unknown unless you have found your crystal ball again.



VW

No particular cherry picking, just the last 10 years comparing BND's 1.00% total return to Treasuries. A bit pathetic.

Those who do not learn from history are destined to repeat it.

 

[VanWinkle]

No particular cherry picking, just the last 10 years comparing BND's 1.00% total return to Treasuries. A bit pathetic.

Those who do not learn from history are destined to repeat it.

It's a short term lesson, I'm a long term investor who likes to enjoy life instead of spending my time trying to adjust to monthly or yearly short term market trends. If you enjoy the work of fixed income/options/CEF's/Individual bonds then I salute you for your interest and dedication. Many here will take a much more passive approach and do not have your background to be able to treat there fixed income with your expertise. You may lead some down a slippery slope and that is my concern.

Your ten years are representing a time during which the rates were raised faster than any time in the past. The future will be different than the past just because it is the unknown.

Best to you and your success,

VW

 

[Exchme]

Appreciate any feedback here, because i'm about to get a review from my hourly occasional FA whom I've worked with for about 12 years now. I'm in what's considered a moderate to moderate-conservative AA PF. I'm grateful for an accumulation to about 2.6/2.5m (fluctuates depending on any given week) - have no debt, low COLA, single, sorta segueing into semi-retirement at age 65 as of this year. PF generates about 87k/yr in div income. My AA is now about 50% FI and that's comprised largely of ETFs primarily short duration;-ST bond funds, (Treasury), floating rate bond funds,TIPS, such as SCHP, a little in intermediate-VGIT, and the ST etfs are primarily SHY, VCSH, SCHO, VGIT, BILS with some international debt/bond positions too. I work less as of this year...so div. income will ultimately become more important...and i am concerned about preservation, but don't want to just dismiss Growth. Firecalc doesn't give me any indication i've got any problems even with a 4% random return per year going forward, for a 30 year timeframe....

So, my big question on this particular periodic review with him is...why am i sitting in these bond funds that lost major NAV last year - which was of course the worst year in bond history - but over the past couple of years now, in response to specific questions - FA hasn't felt any compelling reason to exit any of them - even when we can get a 5+ % return on a no-risk MM or equivalent - investment. On that note, the 'rule of bonds' does hold that if you do not sell, you will (eventually) get back to even and get your ROI, if you hold and do nothing since div income theoretically improves as interest rates stay high or increase. But by far, bond funds have been my PF's biggest losers YTD and big time in 2022; major NAV losses far exceeding equity fund losses. All this said, what would the best question be to ask him as to why, at this juncture and in these market conditions, one would want to continue to stay in bond FUNDS - even those of ultra short duration -which are in fact STILL losing NAV with the prospect of continued high or higher interest rates - versus what would amount to taking big losses in a taxable account and otherwise by selling out of these funds and putting the proceeds into say, 5% guaranteed return/zero volatility Money markets - or other no-risk FI positions - that aren't subject to more market fluctuation driven by fear and obvious political manipulation. Sorry for the long-winded post but it's rather time-sensitive as I'm frankly weighing why I'm even continuing to work with him. I would imagine the response - as in the past will be that i need to ignore the short term volatity and think long-range but it sure seems we may well be in for this sort of volatility for even years to come. OTOH maybe i'm just being over-hyped by financial media BS. Thanks alot for any thoughts. Happy to elaborate on any details/questions.

If you have no upcoming need for the money prior to the average duration held in the fund, then shortening duration is simply performance chasing and market timing. Maybe you get lucky, but probably get hurt as you have to time both when to get out and when to get back in.

You are trading NAV risk for re-investment risk, meaning that if interest rates go down, MM accounts stick you with low interest rate options in the future without recouping your 2022 losses.

Over time, bonds have done far better than cash, but no telling the future, my crystal ball broke.

Attached is my attempt to replicate inflation adjusted returns for Total Bond vs. Cash since 1926. Because Total Bond didn't exist back that far, I used a mix of 62% 10 year Treasuries and 38% cash to match Total Bond duration (somewhat unfair as Total bond also holds higher yielding things than Treasuries). You can see that Total Bond is all the way back to 2004 levels. Cash is even worse, it has been fading since the end of 2008 and is all the way back down to 1989 levels.

 

[pb4uski]

It's a short term lesson, I'm a long term investor who likes to enjoy life instead of spending my time trying to adjust to monthly or yearly short term market trends. If you enjoy the work of fixed income/options/CEF's/Individual bonds then I salute you for your interest and dedication. Many here will take a much more passive approach and do not have your background to be able to treat there fixed income with your expertise. You may lead some down a slippery slope and that is my concern.

Your ten years are representing a time during which the rates were raised faster than any time in the past. The future will be different than the past just because it is the unknown.

Best to you and your success,

VW

Thanks for the kind remarks and you have a point... I concede that I do more than what would really be necessary because I have the requisite background, enjoy it and it is sort of a hobby for me.

However, I'm not recommending that anyone do as I have done.

I'm simply suggesting a plain vanilla brokered CD/UST ladder that anyone can easily create using bond ladder tools available from Schwab or Fidelity. I'm more familiar with the Schwab tool and one can easily create a 10 year, 10 rung ladder of brokered CDs and/or US Treasuries in about 5 minutes. The only additional "work" would be to reinvest the proceeds from maturity once a year. So 15 minutes to begin and 5 minutes annually after that.

Obviously, if someone has the interest they could make it more complicated... like 20 rungs with a bond maturing every June and December, or whatever.

 

[jazz4cash]

Vanguard says that the Vanguard Total Bond Market Index Fund, for example, "may be appropriate for investors with medium-term investment horizons (4 to 10 years)," so that is the kind of time frame we should be looking at.

https://www.bogleheads.org/forum/viewtopic.php?t=360575

To my way of thinking there is a vast difference between 4 yrs and 10 yrs. I interpret Vanguards suggested investment horizon as a minimum of 10 yrs. If I plan on 4 yrs but if it takes 10 I could be in dire straits in yrs 5-9. Ten years is just too long. I’ve often heard 5yrs minimum for equities.

 

[Markola]

^^^^ I guess my own planning horizon is For Life, as I don’t plan to make any big changes to my 50/50 AA.

 

[target2019]

I understand that and respect your caution. I was just wondering, in general, if the recommendation to sell the bond funds would be different if in a tax deferred account. Of course the tax benefit would be there for an after tax account and that would involve additional input, but would there be any reason to keep the bond funds just because they’re in a tax deferred account?

I wouldn't pivot on one point. I would examine each investment, and make a decision.

I looked up some of those bond fund tickers. I don't know when OP bought them, or what portfolio percentages, but some are Short Term and *may* make sense. I noticed elsewhere in the thread that most of these may be in a taxable account. For me, that calls into question the FAs advice. I think OP is stating that also. The bond approach looks too complicated, and should be in tax-deferred.

Don't know the tax bracket either. Maybe slowly building tax-free position in taxable makes sense.

Another point is that calling the potential loss a "tax benefit" really masks the situation I see here. I may be reading too much into OP's posts, but I believe he is on an investing path that swings quite a bit over time due to news and social media - FUD.

BTW, I still have bond funds in my SEP-IRA and IRA rollover accounts. This is the SEP only, and how it has evolved.

In the rollover, I use VUSB ultra short and money market for now. But I recognize that when interest declines, I'll need to change tactics.

 

[Lsbcal]

To sell or hold bond funds, that is the question I guess. My choice would be to shift some FI to other FI if (1) you have some retirement account money in these and (2) it is appropriate for your age.

For instance, the 5 year TIPS are currently at 2.38%. So you get inflation protection and a guarantee of that real return when held to maturity. You will miss the nice run up if the nominal rates decline so this is a hedge against excess inflation and/or the rates continuing their ascent.

Yes, the nominals you hold have lost money as rates went up but you are benefiting from the past rate rise in real rates. By holding individual tips (not a fund) one avoids the fund issues continual buying mandate. A ladder of TIPS provides some additional hedging against rising rates and reinvestment risk.

 

[BeachOrCity]

To sell or hold bond funds, that is the question I guess. My choice would be to shift some FI to other FI if (1) you have some retirement account money in these and (2) it is appropriate for your age.

For instance, the 5 year TIPS are currently at 2.38%. So you get inflation protection and a guarantee of that real return when held to maturity. You will miss the nice run up if the nominal rates decline so this is a hedge against excess inflation and/or the rates continuing their ascent.

Yes, the nominals you hold have lost money as rates went up but you are benefiting from the past rate rise in real rates. By holding individual tips (not a fund) one avoids the fund issues continual buying mandate. A ladder of TIPS provides some additional hedging against rising rates and reinvestment risk.

To this point, that was my big surprise that I did not think thru in advance. If tips real rates rose, the tips “fund” would lose value. I would buy new or resale individual tips here, but I would not do a tips fund again. I don’t expect the real tips rate to go much higher from here, so at this point my tips fund should start to gain with inflation as I thought it would. All that said it’s down less than 10% but still annoying to be losing money in an inflationary environment in a fund that is supposed to guarantee inflation adjusted return.

 

[gauss]

....
I'm simply suggesting a plain vanilla brokered CD/UST ladder that anyone can easily create using bond ladder tools available from Schwab or Fidelity. I'm more familiar with the Schwab tool and one can easily create a 10 year, 10 rung ladder of brokered CDs and/or US Treasuries in about 5 minutes. The only additional "work" would be to reinvest the proceeds from maturity once a year. So 15 minutes to begin and 5 minutes annually after that.

Obviously, if someone has the interest they could make it more complicated... like 20 rungs with a bond maturing every June and December, or whatever.

If you were investing in US Treasuries, couldn't you also restrict yourself to zero-coupons? It would seem that this would avoid the reinvestment risk and work.

I was able to find zero-coupon Treasuries,today, going out into the early 2050's that had YTM's in the high 4.x% to low 5.x% range.

Do you see any downside flaw in this?

-gauss

 

[COcheesehead]

You just traded reinvestment risk for duration risk. No free lunch.

 

[Montecfo]

Again, not arguing. For me it’s a philosophical problem. I believe that passive investing beats active investing over time. Second, I’ve made my worst mistakes trying to outsmart the markets. Third, neither my Vanguard advisor, nor anything at Vanguard that I’ve seen, is suggesting I stay passive on the equities side and get active on the fixed income side. Bogleheads I respect, like nisiprius, are saying, as always, “stay the course.”

Could I squeeze out more returns with a CD ladder? You show how one could. But my beliefs, experience and instinct say that I, personally, should stay put and stay the course. YMMV.

Of course you know Vanguard's philosophy is passive to begin with, for both equities and bonds. In equities I see the argument, but in bonds I think passive completely misses the boat.

The interest rate bottom was very easy to see and foretold many times by the Fed. The passive investor and the active bond fund investor (unless very short duration) held straight into a buzz saw.

No matter your philosophy this was bad investing in my opinion.

What to do now though is another matter.

 

[target2019]

I think a common mistake is to not consider the individual investor's portfolio approach, and why they are comfortable with it.

I wouldn't call a totally-passive approach "bad investing." After all, each of us has x number of years to go, and more performance ahead to consider.

Following BH principles is an approach that I'm not ready to call bad. I don't agree with all of their message, but I recognize the worth it holds out for many.

 

[Montecfo]

Mikes,

You have asked variations of this question in a few different threads.

Your paper losses are in the past.

I think your paraphrase of your FA's response is revealing. And probably correct.

From here, most of the rate hikes have happened. If you follow the Fed they are predicting rate cuts over the next year. So things will look better for your funds.

Owning individual bonds is no panacea. Sure, you don't record losses if held to maturity. But unless you are spending the maturing funds, you must reinvest them in a different market than one you started in-with rates higher or lower. And unless you have a massive portfolio, your default risk (outside of treasuries) will be larger than with funds.

Also, any newcomer to individual bond investing ALSO has paper losses right now! So that does not go away.

There are advantages of holding funds, including risk mitigation from a larger portfolio, and simplicity. Also, as rates fall your funds will be recording gains. The hold to maturity bond fund investor misses out on those.

Funds have been unfairly maligned here in my view. The real culprit was always duration. People who tout bonds over funds often point to differences in distribution yield. Well, unlike an individual bond, the fund's yield can rise. Also, unless you are strictly living off the interest, the distribution yield does not matter very much. The bond fund's total return is more important. And it likely will exceed the distribution yield as rates fall and the funds portfolio turns.

A bond fund is a tool. A bond is also a tool. No single tool is right for all jobs.

The real question is how do you wish to manage your bond portfolio? If the answer is you want to stay in funds, then consider whether you are in the right funds given your investment objectives. If not you could benefit from some tax loss harvesting and repositioning into more appropriate funds.

If the answer is individual bonds well get busy repositioning into those.

Full disclosure: I own individual bonds and bond funds.

 

[Markola]

Of course you know Vanguard's philosophy is passive to begin with, for both equities and bonds. In equities I see the argument, but in bonds I think passive completely misses the boat.

The interest rate bottom was very easy to see and foretold many times by the Fed. The passive investor and the active bond fund investor (unless very short duration) held straight into a buzz saw.

No matter your philosophy this was bad investing in my opinion.

What to do now though is another matter.

You’re smarter than Vanguard. Got it.

 

[Montecfo]

You’re smarter than Vanguard. Got it.

Avoiding massive bond losses suffered by people wedded to passively holding seems a worthy goal.

But I am interested in learning about your better strategies.

That would be more interesting than snark.

 

[pb4uski]

Of course you know Vanguard's philosophy is passive to begin with, for both equities and bonds. In equities I see the argument, but in bonds I think passive completely misses the boat.

The interest rate bottom was very easy to see and foretold many times by the Fed. The passive investor and the active bond fund investor (unless very short duration) held straight into a buzz saw.

No matter your philosophy this was bad investing in my opinion.

What to do now though is another matter.

You’re smarter than Vanguard. Got it.

That's not it at all Markola.

Vanguard is required to stay invested in certain quality and certain duration bonds in each fund that it manages, so even when it is crystal clear that rates will be rising and bond values will decline they are hamstrung by the fund's published investment policy that they are compelled to comply with.

On the other hand, an individual investor can respond and shorten durations to reduce interest rate risk and avoid the losses caused by the higher rates. Many, many of us did take action to reduce interest rate risk in our bond portfolios and successfully avoided the 13% loss posted by BND in 2022.

The bad investing that Montecfo refers to wasn't Vanguard... they had no choice but to stay within the fund's published duration targets for a passively managed fund... it was more the bond fundholders who stayed in the fund given the clear and present threat of losses from increasing interest rates and sidestepped the buzz-saw.

 

[Markola]

^^^^ History is not over, is it?

As the links above to the Bogleheads site demonstrate, this is a long term game. Something will happen in the future and the Fed will cut rates again, causing bond index fund prices to rise. Also, we’re 2 years into the 6 year duration of BND when rates started to rise. 1 more year and half of that day’s historically low yields will have effectively cycled out of the fund. 4 more years and all of them will have, leaving BND full of higher yielding bonds. Someday, that fund will be chock full of higher yielding bonds when yields fall again, making it very attractive.

So one can try to time the market or one can wait.

Vanguard is not just passive. It is “keep trading costs low, don’t try to time the market and stay the course.” That’s what I’m doing. If someone is, as above, dismissive of the passive investing philosophy that trounces the overwhelming majority of active investors, one of the world’s largest asset managers, the late John Bogle, and long term, buy and hold investors like myself as guilty of “bad investing,” you can bet that I’ll (laugh to myself and) express a different opinion.

 

[meleana]

Appreciate any feedback here, because i'm about to get a review from my hourly occasional FA whom I've worked with for about 12 years now. I'm in what's considered a moderate to moderate-conservative AA PF. I'm grateful for an accumulation to about 2.6/2.5m (fluctuates depending on any given week) - have no debt, low COLA, single, sorta segueing into semi-retirement at age 65 as of this year. PF generates about 87k/yr in div income. My AA is now about 50% FI and that's comprised largely of ETFs primarily short duration;-ST bond funds, (Treasury), floating rate bond funds,TIPS, such as SCHP, a little in intermediate-VGIT, and the ST etfs are primarily SHY, VCSH, SCHO, VGIT, BILS with some international debt/bond positions too. I work less as of this year...so div. income will ultimately become more important...and i am concerned about preservation, but don't want to just dismiss Growth. Firecalc doesn't give me any indication i've got any problems even with a 4% random return per year going forward, for a 30 year timeframe....

So, my big question on this particular periodic review with him is...why am i sitting in these bond funds that lost major NAV last year - which was of course the worst year in bond history - but over the past couple of years now, in response to specific questions - FA hasn't felt any compelling reason to exit any of them - even when we can get a 5+ % return on a no-risk MM or equivalent - investment. On that note, the 'rule of bonds' does hold that if you do not sell, you will (eventually) get back to even and get your ROI, if you hold and do nothing since div income theoretically improves as interest rates stay high or increase. But by far, bond funds have been my PF's biggest losers YTD and big time in 2022; major NAV losses far exceeding equity fund losses. All this said, what would the best question be to ask him as to why, at this juncture and in these market conditions, one would want to continue to stay in bond FUNDS - even those of ultra short duration -which are in fact STILL losing NAV with the prospect of continued high or higher interest rates - versus what would amount to taking big losses in a taxable account and otherwise by selling out of these funds and putting the proceeds into say, 5% guaranteed return/zero volatility Money markets - or other no-risk FI positions - that aren't subject to more market fluctuation driven by fear and obvious political manipulation. Sorry for the long-winded post but it's rather time-sensitive as I'm frankly weighing why I'm even continuing to work with him. I would imagine the response - as in the past will be that i need to ignore the short term volatity and think long-range but it sure seems we may well be in for this sort of volatility for even years to come. OTOH maybe i'm just being over-hyped by financial media BS. Thanks alot for any thoughts. Happy to elaborate on any details/questions.

My FA felt the same way (But I manage our money- not him)


But I sold a bunch of them within our IRA's anyway and put them in a Treasury Money Market.


I have a lot of bond mutual funds and etf's in our brokerage accounts but didn't touch them due to Roth conversion this year and staying in 12 percent tax bracket.

 

[Montecfo]

^^^^ History is not over, is it?

As the links above to the Bogleheads site demonstrate, this is a long term game. Something will happen in the future and the Fed will cut rates again, causing bond index fund prices to rise. Also, we’re 2 years into the 6 year duration of BND when rates started to rise. 1 more year and half of that day’s historically low yields will have effectively cycled out of the fund. 4 more years and all of them will have, leaving BND full of higher yielding bonds. Someday, that fund will be chock full of higher yielding bonds when yields fall again, making it very attractive.

So one can try to time the market or one can wait.

Vanguard is not just passive. It is “keep trading costs low, don’t try to time the market and stay the course.” That’s what I’m doing. If someone is, as above, dismissive of the passive investing philosophy that trounces the overwhelming majority of active investors, one of the world’s largest asset managers, the late John Bogle, and long term, buy and hold investors like myself as guilty of “bad investing,” you can bet that I’ll (laugh to myself and) express a different opinion.

The problem is that some folks who have been taught that you can't time the equity market think that ALSO applies to bond markets. This was not the case this time. It was obvious rates were going higher and duration would be ravaged. And that is exactly what happened.

But it is fine to also hold through it. But in my case I made money through the downturn-no losses to make up. I just jettisoned duration and went with low duration funds. When the market turned I added individual bonds. I still have exposure to floating rate bonds via a fund.

Many ways to do this without becoming a bond trader.

I also am against agg indexes in bonds for a variety of reasons.