Bonds - Short Term or Longer

[Sunset]

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Originally Posted by audreyh1 The online bank rate will be taxed too - so don't assume you get the full 1.05% after tax. You can compare pre-tax or after tax in both cases. Look at total return when comparing. Not at NAVs. Morningstar will give you that information. The total return over the past year (ended 2/11/15) for the VCSH ETF was 1.7%, VBISX mutual fund was 1.1%. This is what you would compare to cash. So I think your fund did better than you think - 11 months isn't enough to compare to the current available 1.05% rate, you have to look at a whole year. Vanguard Funds VBISX and VCSH 1 year chart Yes - a corporate bond fund has a much higher credit risk than cash in addition to the interest rate risk. But you were compensated around 0.65% extra return for that additional risk last year. No guarantees going forward, of course.

I agree I would have to compare apples to apples, (taxable to taxable).
That's why I said:
Had this been in a taxable account, my rate would be 1.17% , as I was including the capital gain reported (but "fake" as fund went down) and the real loss in value of the fund if I sold it today.
It is better than the bank 1.05% but not by much considering the bank has zero risk of loss.

The problem I have with "total return" is that it is not real, my total return is including the real decrease in share value from the dividends give me a annual rate of 1.36%

So while I'm not pleased with it, the return is still better than I had imagined it was.

[audreyh1]

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Originally Posted by pb4uski I could not disagree more. A good portion of the 1.7% total return compared to ~.9% for online savings accounts is due to short corporate bond interest rates declining slightly during the past year... in other words, interest rate gains. But nonetheless, historical returns are not necessarily indicative of future returns. What is most important is what will happen in the upcoming year. The short term bond fund has an SEC yield of .92%. If interest rates don't change in the next year then the total return will be ~.9% the same as an online savings account but with some credit risk and significant interest rate risk. If interest rates increase then the online savings account will outperform the short term bond fund.... if interest rates decline then the short term bond fund will outperform online savings. Pick your poison.

I was not saying anything about whether the bond fund was better than cash going forward. I was explaining what the past return actually was.

[daylatedollarshort]

I should add to my previous post that we are also using stable funds and for the ladders they include mainly CDs and TIPS. I agree that CDs are often probably a better bet than at least some of our short term bond funds at current rates, but because of 401K investment restrictions on some of our retirement accounts we're using the short term funds as needed. I'd buy more credit union type CDs if I could.

[gcgang]

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Originally Posted by 2017ish I personally am flaunting the core tenet of indexing by staying in VFSUX on the expectation that rates have just gotta go up soon--but people have been thinking that for quite a while now.... Then again, the VFSUX money is not merely ballast for me, since it also is my emergency fund, so my answer is likely different than yours.

Really? The symbol is VFSUX? Too funny.


Sent from my iPad using Early Retirement Forum

[mathjak107]

the last few weeks have seen rates rising on bonds. while there are no danger lights flashing yet i did move 10% more out of my bond funds and into my gowth and income mix.

it was only just a few years ago my income model was 90% bonds and bond type funds. today i am about 40% equities as bonds have been not appreciatiing at the rates they were although last year was pretty good but overall performance has been weak the last few years..

[2017ish]

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Originally Posted by gcgang Really? The symbol is VFSUX? Too funny. Sent from my iPad using Early Retirement Forum

makes it easy to remember!

[mrfeh]

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Originally Posted by kannon Morning All - We have accumulated funds in non-IRA Vanguards Short Term Bond Fund (VFSUX). Read an article in Money Dec edition suggesting that with expected interest rate small change, better to go to Intermediate Term. We have enough liquidity in other accounts to whether storms over next 3-5 yrs so this money is more longer term. I guess I may be answering my own questions if we should go from ST to IT. As long as we have enough liquidity then better to go IT. If we do go IT, better to go Vanguard IT (VBILX 7.2 yrs avg maturity) or Vanguard Total Bond (VBTLX - 5.5 ys avg maturity) Would appreciate your thoughts. This forum has amazing amount of knowledge and insight. Thanks!! Kannon

Don't try to time the bond market. Nobody knows what's gonna happen with interest rates.

The deciding factor is your time horizon - when will you possibly need to sell the fund. I look for a fund where the average duration is between .7 and 1.0 of my time horizon. If you may not need to ever sell the fund, then just use total bond.

[mathjak107]

a duration of less than 1 is not an incvestment in my opinion ,it is justr a place to store cash until you can put it in an investment. it is like a cash return.

i have been lightening up my bond investments.

i use two portfolios both from the fidelity insight news letter. the income and preservation model is almost all boinds except a 35% stake to a balnced fund.

i use the growth and income model as well which is about 70% equities.

everytime the markets slide and the income model has a higher return i shift more money to the other model portfolio. i am at about 40% - 43% equities now. already bond rates have been slowly rising and bond fund performance stalled out . i rather take my chances with more of the growth and income model.


i would go up to about 50/50 or so as an overall allocation . but if bonds continue doing poorly i would allocatre that bond money to better types of income funds rather than conventional bonds.

[audreyh1]

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Originally Posted by mrfeh Don't try to time the bond market. Nobody knows what's gonna happen with interest rates. The deciding factor is your time horizon - when will you possibly need to sell the fund. I look for a fund where the average duration is between .7 and 1.0 of my time horizon. If you may not need to ever sell the fund, then just use total bond.

+1 for bond funds held in a retirement fund. If you are owning them for decades the intermediate duration is fine.

But I don't bother with ultra-short bond funds (sub 2 year duration) because high yield savings accounts and 1 year CDs are currently offering higher yields and are much safer investments.

[mathjak107]

just becareful as what was fine for 35 years may not be fine once bond yields turn that corner.

the last 44 years we have seen the fed push up the fed funds rate by 1% or more lots of times and 50% of the time bonds rose. in fact only in one year 1994 did they lose money.

but that was because investors saw it differently and bid bond rates down.

well with little place to go at this point that history may mean little and those bond funds falling in value may cause some real pain.

just this past 4 weeks the long treasury bond has lost 7% . intermediate term treasury lost 2.50%, , corporate bond fund lost 1.70% and total bond lost 1.00 %. most of it over the last 2 weeks .


the benchmark us aggregate bond index fell 1.25% the last month . we may have reached the point that bond yields are on the rise and bonds may act more as a dead weight than adding to the party .

worse yet is it may take away.

equities and cash may be the best way to go according to quite a few top researchers .

[LOL!]

If one is going to own VCSH instead of VSCSX, then one might as well do some trading with it. Sell when it goes above 80.20 and buy back when it goes below 79.9 or something like that. But do not be fooled when it goes ex-dividend every month.

[mrfeh]

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Originally Posted by mathjak107 just becareful as what was fine for 35 years may not be fine once bond yields turn that corner. the last 44 years we have seen the fed push up the fed funds rate by 1% or more lots of times and 50% of the time bonds rose. in fact only in one year 1994 did they lose money. but that was because investors saw it differently and bid bond rates down. well with little place to go at this point that history may mean little and those bond funds falling in value may cause some real pain. just this past 4 weeks the long treasury bond has lost 7% . intermediate term treasury lost 2.50%, , corporate bond fund lost 1.70% and total bond lost 1.00 %. most of it over the last 2 weeks . the benchmark us aggregate bond index fell 1.25% the last month . we may have reached the point that bond yields are on the rise and bonds may act more as a dead weight than adding to the party . worse yet is it may take away. equities and cash may be the best way to go according to quite a few top researchers .

Just so folks remember - if you aren't selling your bond fund shares, none of this matters. If you're holding bond funds for the long term, you want rates to go up, so that you are earning more money.

I don't plan on selling my intermediate bond funds for 10+ years, and I'm rooting for rates to go up, and the sooner the better.

[audreyh1]

Bond are just back to where they started at the beginning of this year. So it's just noise! We often go through periods of "rush to quality" when world events look scary, then rush out again when things look rosy. Repeated ad infinitum!

[mathjak107]

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Originally Posted by mrfeh Just so folks remember - if you aren't selling your bond fund shares, none of this matters. If you're holding bond funds for the long term, you want rates to go up, so that you are earning more money. I don't plan on selling my intermediate bond funds for 10+ years, and I'm rooting for rates to go up, and the sooner the better.

sorry but you are confused. rising rates do eventually cause the bond fund rates to rise for existing shareholders as older bonds are retired and new ones bought however that increase comes at a price and your nav falls to compensate.

getting 3% on a fund that fell 4% is a poor investment whether you are selling or not.

even if you stay for as long as the funds duration you can only get back to what your origonal deal was. if rates climbed to 3% your fund would have fallen enough to only get back to the origonal rate you had .

a bond fund that has a duration of 5 and an interest rate of 5% that cost 10 dollars will fall to 9.50 if rates go to 6% . you will get an extra 1% interest over 5 years but that offsets the 5% drop so you end up with the same deal.

in the real world though you always stay behind the curve when rates rise.


your net worth and value of the fund couldn't care less if you sell or not anymore than your equity performance cares if you sell. your worth is your worth.

[mathjak107]

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Originally Posted by audreyh1 Bond are just back to where they started at the beginning of this year. So it's just noise! We often go through periods of "rush to quality" when world events look scary, then rush out again when things look rosy. Repeated ad infinitum!

it isn't the fact they are where they started this year as much as the fact there seems to have been a big change in what investors are demanding as compensation for buying bonds in just the last 2 weeks.

1 to 2% drops in intermediate term funds and 7% in longer term does trigger a concern .

[karluk]

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Originally Posted by mathjak107 1 to 2% drops in intermediate term funds and 7% in longer term does trigger a concern .

Perhaps you are concerned, but I fail to see why most other investors should be. I think a number of posts in this thread were from people who were holding intermediate term bond funds in tax deferred accounts and had a time frame of over a decade. For this type of investor, a rise in interest rates should be a cause for rejoicing, not for concern. The higher interest rates will inevitably translate into better bond returns well before they expect to need the money.

As always, I am somewhat bemused by investors that are so risk averse that they are concerned by 1%-2% declines in intermediate term bonds, but at the same time are willing to hold substantial portions of their portfolios in stocks, which can be subject to 10%-20% declines in a similar time frame.

[mrfeh]

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Originally Posted by mathjak107 getting 3% on a fund that fell 4% is a poor investment whether you are selling or not.

This is where we disagree.

If I'm not selling a fund, why would I care what the NAV is?

Please look at the NAV of intermediate bond funds over large periods of time. You will see it wobble, but not stray very far, even when there are large changes in interest rates.

[mathjak107]

well how about i give you 3% and i keep all your principal. it is more than you are getting now .

[mathjak107]

Quote:

Originally Posted by mrfeh This is where we disagree. If I'm not selling a fund, why would I care what the NAV is? Please look at the NAV of intermediate bond funds over large periods of time. You will see it wobble, but not stray very far, even when there are large changes in interest rates.

do not look at a 35 year old bull market where you could sit static in bonds during our lifetime with what will happen when the cycle reverses and goes up .

[mathjak107]

Quote:

Originally Posted by karluk Perhaps you are concerned, but I fail to see why most other investors should be. I think a number of posts in this thread were from people who were holding intermediate term bond funds in tax deferred accounts and had a time frame of over a decade. For this type of investor, a rise in interest rates should be a cause for rejoicing, not for concern. The higher interest rates will inevitably translate into better bond returns well before they expect to need the money. As always, I am somewhat bemused by investors that are so risk averse that they are concerned by 1%-2% declines in intermediate term bonds, but at the same time are willing to hold substantial portions of their portfolios in stocks, which can be subject to 10%-20% declines in a similar time frame.

the concern now is just for the reasons i mention above. a reversing interest rate cycle is something we have not seen in our investing lifetime yet but we are darn close now.

as they say this new period of cycles reversing possibly for the rest of our lives isn't going to be what we ever had before.

wee had rates rise for a year and fall but basically for 35 years the trend was down. the next long term poeriod can be trending up.