Advice on ditching Bond Funds to CD's or Treasury

[mystang52]

I'm a classic lazy "investor." I have my IRA's in Vanguard Total Stock and Total Bond funds. Other than changing the percentage mix I have been blissfully (?) ignorant. But while very late to the game, I can't now ignore the poor performance of Bonds. This is especially the case when -at least so I thought- Bond funds are supposed to be a somewhat stable aspect of the total portfolio.
If I really want dollar-stability it seems I should just dump the Bond fund and go all in on CD's and/or Treasuries. I haven't called Vanguard, yet. My questions to the wise folks here: Am I missing something? Any downsides to my thought process?
DW and I are conservative by nature, our current mix is roughly 75/25 Bond/Stock. Our pensions and SS provide more than our lifestyle expenses.

[Surewhitey]

My gut says you're too late as rate move up seems toppy from here. But what do I know? I understand that the last year's rate increase is what collapses the bond values & I'd stay put (& am doing just that with ours). My past 6-9 months, new money, is in 5% CD's, mostly 5 year.

[Spock]

Be aware that the book value of individual CDs and T's will drop if interest rates rise farther. This means nothing if you hold them until maturity as you'll get 100% of the principal back.
Another problem now with the CDs is most new issues are callable. Right now (to me anyway) T's offer nearly the same return, are not callable, and (for now) are liquid if you want/need to sell some before maturity.
Even with the above I have moved out of all my bond funds (a Stable Value fund in the 401K that was the lone bright spot during the dark years of 0% rates) and am almost fully invested in individual bonds now. I'm hedging my bets by splitting about 1/2 into higher yielding callables and 1/2 into lower yielding Ts of the same-ish maturities.

[Montecfo]

What do you hope to accomplish with this move?

The losses happened. They are history.

Not a fan of bond indexes, but switching horses now should be for good reason.

Individual bonds are not better, they are different.

[mystang52]

Quote:

Originally Posted by Montecfo What do you hope to accomplish with this move? The losses happened. They are history. Not a fan of bond indexes, but switching horses now should be for good reason. Individual bonds are not better, they are different.

My plan, from way back when, was for Bonds to be the stable portion of the portfolio, and Equities as inflation protection. I knew about values going inversely to interest rates. But it took a dinner discussion for me to take another look, and DW and I both feel Treasuries/CD's are more in tune with our objectives at this point. We plan to make this transition in a few stages, and reassess.

[COcheesehead]

Investment grade individual fixed income assets: high quality bonds, CDs, T’s by their nature virtually assure capital preservation if held to maturity. Something not possible with a bond fund, if that is important to you.

[pb4uski]

Quote:

Originally Posted by mystang52 I'm a classic lazy "investor." I have my IRA's in Vanguard Total Stock and Total Bond funds. Other than changing the percentage mix I have been blissfully (?) ignorant. But while very late to the game, I can't now ignore the poor performance of Bonds. This is especially the case when -at least so I thought- Bond funds are supposed to be a somewhat stable aspect of the total portfolio. If I really want dollar-stability it seems I should just dump the Bond fund and go all in on CD's and/or Treasuries. I haven't called Vanguard, yet. My questions to the wise folks here: Am I missing something? Any downsides to my thought process? DW and I are conservative by nature, our current mix is roughly 75/25 Bond/Stock. Our pensions and SS provide more than our lifestyle expenses.

Quote:

Originally Posted by mystang52 My plan, from way back when, was for Bonds to be the stable portion of the portfolio, and Equities as inflation protection. I knew about values going inversely to interest rates. But it took a dinner discussion for me to take another look, and DW and I both feel Treasuries/CD's are more in tune with our objectives at this point. We plan to make this transition in a few stages, and reassess.

While I think that interest rates are close to plateauing so unrealized losses from your bond funds should decline, I think that an individual bond portfolio is better than a bond fund.

Many of us saw the likely rise in interest rates... they were so low they coupldn't realistically go any lower without becoming negative which the Fed said it would not do, so it was an easy decision to shorten duration and reduce interest rate risk. While you could do that with a bond fund by selling longer durations and buying shorter duration bond funds most people stayed the course and got creamed as a result.

I prefer the control of an individual bond portolio. If I have an upcoming cash flow need I can just take part of a current maturity and invest that in my 5.22% money market fund and then reinvest the remainder in my ladder.

I'll concede that managing an individual bond fund is more work, but I enjoy it. OTOH, it can be made as simple as a 10-year rolling Treasury ladder and just reinvesting maturities in another 10-year Treasury once a year.

[Surewhitey]

Quote:

Originally Posted by Spock Be aware that the book value of individual CDs and T's will drop if interest rates rise farther. This means nothing if you hold them until maturity as you'll get 100% of the principal back. Another problem now with the CDs is most new issues are callable. Right now (to me anyway) T's offer nearly the same return, are not callable, and (for now) are liquid if you want/need to sell some before maturity. Even with the above I have moved out of all my bond funds (a Stable Value fund in the 401K that was the lone bright spot during the dark years of 0% rates) and am almost fully invested in individual bonds now. I'm hedging my bets by splitting about 1/2 into higher yielding callables and 1/2 into lower yielding Ts of the same-ish maturities.

This is what really bugs DW. Fidelity shows book value and she wants to see hold-to-maturity value. I just tell her not to worry about it and she gets angrier. I'm surprised I haven't heard any grumbling about the past 6-7 weeks performance...it's probably right around the corner.

[COcheesehead]

Quote:

Originally Posted by Surewhitey This is what really bugs DW. Fidelity shows book value and she wants to see hold-to-maturity value. I just tell her not to worry about it and she gets angrier. I'm surprised I haven't heard any grumbling about the past 6-7 weeks performance...it's probably right around the corner.

Go to Fidelity’s fixed income analysis report. It will show interest and maturing bond totals by year. The DW will like that better than looking at a daily mark to market statement.

[pb4uski]

Quote:

Originally Posted by Surewhitey This is what really bugs DW. Fidelity shows book value and she wants to see hold-to-maturity value. I just tell her not to worry about it and she gets angrier. I'm surprised I haven't heard any grumbling about the past 6-7 weeks performance...it's probably right around the corner.

I don't have any bonds at Fidelity, but at Schwab it shows "Quantity" which is par value and for me in most cases my cost is close to par with some exceptions. My cost and fair value are within 1% for my portfolio, so I don't fret about unrealized gains or losses.