thepalmersinking
Recycles dryer sheets
- Joined
- Mar 29, 2015
- Messages
- 180
Open to comments
Open to comments
I have been investing in individual bonds and preferred shares for over 25 years now. I have a fairly substantial portfolio in my taxable accounts and also my in my IRA which I don't plan to touch until I'm 70 1/2. At this point I am not interested in super growth but preservation of capital and steady predictable income. I normally buy at or below par and hold the security until maturity. I ladder my portfolio and re-invest my interest in bonds or float it in a money market if I can't find anything suitable. You have to be disciplined and not buy just for the sake of being 100% invested. To me buying a corporate note is not that different from buying a brokered CD from a bank except you don't have the FDIC coverage. The default risk on investment grade and even the higher end of the high yield bonds is fairly low. You have to do your own research but that's no different than buying individual stocks except a corporate bond/note holder is higher in the capital structure. It is more work but vastly superior to buying bond mutual funds or ETFs since you do not have the market risk that owning a bond fund. Every penny of interest comes to you. Passive bond funds are the worst as they buy and sell assets based on fund flows (buy high and sell low) and even when there is a credit rating upgrade or downgrade of their holdings. Some pay their part of their distributions with return of capital. Bonds are generally illiquid and that can work to the advantage of individual bond investors and active fund managers when bond funds have to liquidate their holdings. I would rather pick and chose my holdings rather than blindly buy issues across sectors based on assets under management and fund flows and call it "diversification". If people don't want to manage their own portfolios, they are much better off buying a non-leveraged closed end fund (CEF) that is actively managed, than a passive bond ETF or mutual fund.
This makes sense to me. I’m curious what the rebuttal argument is to this from those who believe a passive bond ETF is the way to go?
In my mind the meaningful decision is how far out one goes on the maturity scale - short, medium, long. Whether one does that with a bond fund or individual bonds is up to them. And, of course, the quality of the bonds in the portfolio.William Bernstein of Efficient Frontier Advisors in Eastford, Conn., puts it as follows:It’s true; when rates rise, the price of your mutual fund falls, but from that point forward you’re getting the market rate of interest. With individual bonds, you won’t take a loss at maturity, but until then you have to bear the pain of a crummy coupon. With the bond fund, you’re ripping the bandage off quickly; with the individual bond, you’re doing it slowly. The end result is precisely the same.
I also like munis for their relative safety. Another thing that attracts me is the social consciousness factor -- I invest in American infrastructure. In fact, I often look for opportunities in my state (even own a capital improvement bond from my school district) even though they generally don't offer exemption from state income tax.
On the downside, a lot of munis are thinly traded. That can provide opportunities for buyers but isn't necessarily so good for sellers. People who can hold a bond to maturity would be OK with that, but unexpected needs do pop up.
As for funds/ETFs, I believe that the bond market's stability relative to the stock market can benefit active management. These days, the star of that show is Pimco's PONDX/PIMIX fund. It's churning out well over 5% interest, and while most fixed-income funds are losing NAV in the current market, the total return of PIMIX is -0.27% YTD vs. -1.47% for Vanguard's Total Bond Market Index Fund.
PONDX and it’s high balance cousin PIMIX ($100,000 min) do not throw off “well over 5%”, more like high 3’s to low 4’s and they have lost money YTD. They are also black box funds using derivatives and leverage to achieve those results. I am not saying to not buy them, just know what you’re getting into. If you want risk with bonds, be prepared for what happens when the economy eventually cools.
Sounds like you really understand these matters, and have devised an efficient plan to get what you are seeking. Thanks for the information.Over the past few years I've slowly migrated my portfolio to be fixed income - probably 95% (or more) at this time. I value sleeping like a baby and having a stress free life.
I follow a laddering approach, with the bulk of the maturities under 5 years. The composition of the holdings today is probably 60% CD and 40% municipal bonds.
Quality municipal bonds are very low risk to begin with. As risk averse as I am at this time, that wasn't good enough for me. I went further and have focused on pre-refunded/advance refunded and escrowed issues. These are municipal bonds which have given notice for (early) redemption, where funds for remaining interest and principal to redemption (usually anywhere from 1 to 3 years) have been deposited into an irrevocable escrow and is managed by an escrow agent (i.e. bank). Some have simply been escrowed ("defeased") to their original maturity date, which could be in 5, 10, or more years. I could go further into this, but it would get quite long quickly. If anyone has more interest, drop me a note - I'm happy to share.
I prefer the individual bonds as opposed to funds/ETFs because the day I buy the bond, I know everything - what my return will be, when I will receive my interest payments, and when I will get my principal returned - there is no uncertainty. With the fund/ETF, there is no certainty of anything.
My plan is to simply ride this rising interest rate wave higher...the day I have CDs and munis maturing I am rolling them out into new ones at higher rates. Though I am mostly focused on short-term maturities, I do pick up a longer maturity here and there to lock in acceptable rates. Once longer term rates do rise more significantly, I'll begin to pick up longer maturities more aggressively.
Well, I've been collecting about $465 monthly on my $100k investment. My calculator says $465 x 12 = 5,580, or 5.58%.
Yes, PIMIX and PONDX trade in derivatives, short sales, etc. I prefer to see a fund manager use the fixed-income market to his advantage rather than wait for the hammer to fall as interest rates trend upward.
As I said, in this rising rate environment, PIMIX has lost quite a bit less YTD than Vanguard's index bond fund.
FWIW, I would not call that a "bond fund." These funds are sometimes called "floating rate" or "bank loan" funds. They buy sub-prime floating-rate loans from banks. Typically the loans are senior to the borrowers' bonds, which are in the junk range.If you are looking for a bond fund that performs well in a rising rate environment, check out SPFPX. It’s up YTD about 1.5% with a 4.63% yield.
Fidelity reports PIMIX’s yield at 4.22%. So go figure.
FWIW, I would not call that a "bond fund." These funds are sometimes called "floating rate" or "bank loan" funds. They buy sub-prime floating-rate loans from banks. Typically the loans are senior to the borrowers' bonds, which are in the junk range.
That is not to say they are a bad thing. We hold serious six figures in SAMBX, a similar fund. But IMO to think of them as bond funds is incorrect.
For even greater risk and reward thrills there are funds of this type that use leverage.
If those are the choices I think I'd call them debt funds, then. They don't hold bonds as a main investment.A bond is debt. These are debt instruments. Call them what you like, they hold value and produce current income. I call them nice to have when rates are rising.
If those are the choices I think I'd call them debt funds, then. They don't hold bonds as a main investment.
As I said, I'm not against them. We have a ton. But to just throw out a ticker and say it's a bond fund is misleading to people IMO. Also, SPFPX is really outside of the scope of the thread. There are no individual bonds or ladders that are reasonably equivalent to a floating rate fund.