bond funds or CDs/Treasuries

[Fedup]

Quote:

Originally Posted by VanWinkle It was impossible to lose more than 3% buying BND this year. Bond funds are to be aligned with your goals based on their duration and your need to withdraw money from the funds. If you lost money you needed this year or next year, they should not be in bond funds.

Yeah, but we didn’t gain much this year either. Look at the Wellesley and Wellington funds. I didn’t like losing. I may have lost $1-$1.5 for a price of $80. That’s enough pain for me. Was that 3%? I don’t know.

[pb4uski]

Quote:

Originally Posted by Freedom56 .... Run your visualizer and compare with the excess funds after a 4% withdrawal re-invested. ...

Same scenario with VFICX.... Vanguard Interm-Term Invmt-Grade Inv ... mostly investment grade corporate bonds. First number Total Bond and second is VFICX. VFICX was incepted in Jan 2014. Withdrawals are the same... $40k adjusted for inflation.


Last 10 years: Jan 2008 to Dec 2017... ending balance of $949,418/$1,105,671

Last 20 years: Jan 1998 to Dec 2017... ending balance of $1,049,889/$1,281,369

Last 30 years: Jan 1988 to Dec 2017... ending balance of $2,054,657/N/A

Since inception for VFICX: Jan 1994 to Dec 2017... ending balance of $1,169,661/$1,420,719

First 10 year period... Jan 1988 to Dec 1997... ending balance of $1,628,912/ N/A

Second 10 year period.... Jan 1998 to Dec 2007... ending balance of $1,165,298/$1,205,632

Third 10 year period... Jan 2008 to Dec 2017.... ending balance of $959,418/$1,105,671

Most recent 10 year period.. Oct 2007 to Sept 2018... ending balance of $925,942/$1,059,205

[foxfirev5]

IMHO this thread has turned into a past performance vs future returns scenario. We all know the falling rates of the last 30 years have provided above avg returns. What does that have to do with the current climate? Not to be a wise guy but I'm trying to learn something new. FI is a very important component of my income.

[VanWinkle]

Quote:

Originally Posted by Fedup Yeah, but we didn’t gain much this year either. Look at the Wellesley and Wellington funds. I didn’t like losing. I may have lost $1-$1.5 for a price of $80. That’s enough pain for me. Was that 3%? I don’t know.

I just think that looking long term is better than judging stocks or bonds in one year. I have Wellesley also and agree with your pain this year. Next year will be better, or the next, or the next...... I have been reinvesting in Wellesley and BND and VBILX(In my TIRA) all year and will hope for better days. "Stay the course" has served me well in the past.

Best to you,

VW

[Freedom56]

Quote:

Originally Posted by pb4uski Same scenario with VFICX.... Vanguard Interm-Term Invmt-Grade Inv ... mostly investment grade corporate bonds. First number Total Bond and second is VFICX. VFICX was incepted in Jan 2014. Withdrawals are the same... $40k adjusted for inflation. Last 10 years: Jan 2008 to Dec 2017... ending balance of $949,418/$1,105,671 Last 20 years: Jan 1998 to Dec 2017... ending balance of $1,049,889/$1,281,369 Last 30 years: Jan 1988 to Dec 2017... ending balance of $2,054,657/N/A Since inception for VFICX: Jan 1994 to Dec 2017... ending balance of $1,169,661/$1,420,719 First 10 year period... Jan 1988 to Dec 1997... ending balance of $1,628,912/ N/A Second 10 year period.... Jan 1998 to Dec 2007... ending balance of $1,165,298/$1,205,632 Third 10 year period... Jan 2008 to Dec 2017.... ending balance of $959,418/$1,105,671 Most recent 10 year period.. Oct 2007 to Sept 2018... ending balance of $925,942/$1,059,205

I don't understand why your are bringing up another loser bond fund VFCX. In 1988 if you invested $1M in an investment grade bond fund at a coupon of 10.4% (which was not difficult to find), you would receive $104K per year interest. If you remove the $40K withdrawal, it would leave you with $64K per year to re-invest. In the worst case if you decided to stuff that $64K in a mattress at 0%, at the end of 30 years you would have a total of $1.92M stuffed in a mattress plus your original $1M principal which is far better than the loser bond funds in your example. However, if you invested that excess $64K excess in more individual bonds at an average of 6.5% you would have
$5,801,259.31 plus your original $1M all in addition to your $1.2M of withdrawals.

You can run the same type of analysis for the 10 year and 20 year cases.

There is a good reason why bond funds under-perform bond and CD ladders, they buy high and sell low with the losses reflected in their performance and passed to the fund holders. Only actively managed closed end bond funds can beat a bond ladder.

[pb4uski]

Quote:

Originally Posted by Freedom56 ....In 1988 if you invested $1M in an investment grade bond fund...

Got a ticker?

[VanWinkle]

Quote:

Originally Posted by pb4uski Got a ticker?

Not sure the over 10% was easy from 1988 to 1998---

He is picking one High rate for the next 30 years?



https://fred.stlouisfed.org/series/I...ign=categories

[Freedom56]

Quote:

Originally Posted by pb4uski Got a ticker?

Sorry I meant to say investment grade bond yielding 10.4% with a 30 year maturity.

[Freedom56]

Quote:

Originally Posted by VanWinkle Not sure the over 10% was easy from 1988 to 1998--- He is picking one High rate for the next 30 years? https://fred.stlouisfed.org/series/I...ign=categories

Sorry I was referring to individual bonds. Back in 1988 you could easily by individual investment grade bonds yielding over 10% with 30 year terms or even 10 year terms. The composite AAA rates were:

1987-12-01 10.11
1988-01-01 9.88
1988-02-01 9.40
1988-03-01 9.39
1988-04-01 9.67
1988-05-01 9.90
1988-06-01 9.86
1988-07-01 9.96
1988-08-01 10.11
1988-09-01 9.82
1988-10-01 9.51
1988-11-01 9.45
1988-12-01 9.57

A 10.4% yield was very conservative back then.

[OldShooter]

Is there underlying magic that the fund managers use? It seems to me that a long term investor buying an individual bond portfolio substantially similar to what a fund holds will have performance that is better than the bond fund by the amount of fund fees.

For governments, everybody is getting the same rates and the same near-zero risk. So bond funds lose.

For investment grade domestic corporates, I don't think that the funds get any kind of volume discount on original issues and on the secondary market their larger volume might cause them to end up with a lower YTM as the market moves against them/aka front running. So funds probably lose here too. Unless there is magic.

For junk and international, if one wants that sort of thing, it seems that there is a place for professional expertise. Maybe not, though, since we know that professional stock pickers on average don't add alpha.

Bond funds are simpler to buy, I guess. Maybe their extra cost is a "convenience" fee/ same reason things cost more at 7-Eleven vs the big grocery store.

Is it not this simple?

[RunningBum]

So, bond funds are probably no worse than holding individual bonds other than bond fund fees, which are really low at Vanguard. I'll take the convenience. And instead of having a bond "ladder", I've got a smoother bond "slide".

I don't know that anyone claimed a bond fund is better, unless you're bad at picking bonds. We're just saying that not (much) worse. Certainly not by the percentage of a 7-11 vs. grocery store.

If you have the need for full predictability of term and yield, individual bonds are the way to go. I don't see why I would have such a need.

[pb4uski]

I agree... at the end of the day a bond fund owns the same bonds that an individual could hold so all else being equal in the long run the returns should be similar, with the difference being fees (0.05% for VBTLX and 0.20% for VFICX as examples).

I think that funds actually get a little better pricing than individual bond investors, but we can agree to disagree on that. And funds are definitely more convenient and offer much easier diversification of credit risk than putting together an individual bond portfolio.

The disadvantage of bond funds is probably in the 10-20 bps range with the benefit being convenience and better diversification.

[Freedom56]

Quote:

Originally Posted by RunningBum So, bond funds are probably no worse than holding individual bonds other than bond fund fees, which are really low at Vanguard. I'll take the convenience. And instead of having a bond "ladder", I've got a smoother bond "slide". I don't know that anyone claimed a bond fund is better, unless you're bad at picking bonds. We're just saying that not (much) worse. Certainly not by the percentage of a 7-11 vs. grocery store. If you have the need for full predictability of term and yield, individual bonds are the way to go. I don't see why I would have such a need.

Not correct. Bond funds constantly suffer capital losses. They often buy bonds at a premium and sell at a discount depending on fund flows. This is called market risk which an individual bond buy avoids by holding to maturity. The fees are in addition to any losses they suffer. Going forward, as people exit these funds, they are forced to sell the bonds they previously bought at a premium.

[Fedup]

You have to know what you are doing with individual bonds. Thanks but not thanks. I’m generally clueless when it comes to bonds.

[audreyh1]

When bond index funds are charging less than 0.03% ER, it’s hard to object over the costs of bond funds.

The bond fund mechanics are slightly different. Bond funds don’t typically hold bonds to maturity, but rather maintain a constant maturity portfolio - just what I want, since I am holding indefinitely. I can choose the average duration that meets my investment goals.

In fact, bond fund managers add to the fund total return by "rolling down the yield curve" - selling a bond that is closer to maturity and thus has appreciated in value, and buying a longer duration bond.

I’m not interested in a guaranteed income stream from bonds since I am a total return investor. I’m also not looking for a specific time when a bond matures. To me the daily mark-to-market of the fund is no big deal, and no different than the daily mark-to-market of a collection of individual bonds. The liquidity is important to me too for rebalancing.

I’m not interested in buying individual bonds for the same reason I’m not interested in buying individual stocks. I prefer the hands-off nature and very broad diversification of funds. It’s up to me to pick good quality, low cost funds that meet my investment goals.

I didn’t retire to become my own fund manager.

[pb4uski]

Quote:

Originally Posted by Freedom56 Sorry I meant to say investment grade bond yielding 10.4% with a 30 year maturity.

Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

[Freedom56]

Quote:

Originally Posted by Fedup You have to know what you are doing with individual bonds. Thanks but not thanks. I’m generally clueless when it comes to bonds.

Then build a CD ladder and you will still come out ahead.

[Fedup]

Quote:

Originally Posted by Freedom56 Then build a CD ladder and you will still come out ahead.

Yes, that’s what I have.

[RunningBum]

"bonds constantly suffer capital losses." But never get capital gains? I think they do. This was covered in the other recent thread. As I said there, bond fund managers are taking some losses at times to improve the yield. Not going to rehash it any more than that. Sounds like people are trying to justify the extra work of building an individual bond portfolio.

[Freedom56]

Quote:

Originally Posted by pb4uski Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

Right now just a few that go beyond 2050. It all depends on the yield they are offering. They anchor my portfolio. I also have bought perpetual preferred stocks in the past if their spread relative to the long bonds from the same issuer make them worth holding. All new investment is going into 2-10 years depending on the yield. I have shopping list of investment perpetual grade preferred and long dated notes (greater than 25 years) ready for purchase as we head into tax loss selling season and fund holders start liquidating.