Bonds vs Bond funds

[getoutearly]

45.5 yrs old, intending to ER at 50 (if I make it that long). For the bond portion of my portfolio, is a bond fund ok, vs buying individual bonds (treasury directs etc).

Also, what I have been reading, intermediate term bonds is about as long term as I should consider now; and really should just do short term(1-5 yr?)?

Also, what percentage of the porfolio would everyone recommend in bonds? I'm currently at ~40%. Too much?

 

[TromboneAl]

I like bond funds -- much simpler than buying directly.

I recently moved from intermediate to short term. You get almost the same interest rate with less risk.

What percentage you choose depends on lots of stuff. I like 40%. You might check out the articles at fundadvice.com.

 

[cute fuzzy bunny]

A fund will give you more diversity, but if you buy them directly you can keep them through the maturity date and get all your money back. You'd have to buy a good bunch of bonds to get the diversity you need.

As far as what %, that depends on your age and risk tolerance as much as anything. As a rule of thumb, you'll get lower returns and lower volatility with bonds. Someone in their 20's-40's, still working and accumulating probably shouldnt want to hold a lot of bonds. People in their 70's-90's who have been retired for 20-30 years probably shouldnt want to hold too much in stocks. At least 20% of either is a good idea for diversity.

 

[SteveR]

I have been struggling with this a bit too. As I near ER #2, I want some stability in parts of my stash. I also handle my mother's assets and it requires a whole different mind set than mine. She, like CFB noted, is 83 and is mostly in bonds of some type. I am still sitting on part of her house equity from a recent sale and have moved 25% of it into a VG ST bond fund. The rest is sitting in a MM fund for now while I shop around for a better short time place to let it sit and grow a bit.

My bonds are spread out in everything from Munis to ST funds to EE bonds and several corporate bonds in my IRA. I would esitmate my bonds at about 30% and cash about (10%) (CD and MM); the rest 60% is in individual stocks or a variety of funds. My aftertax account is 80% individual stocks and 10% stock fund with 10% munis. I plan on rebalancing once I am in ER with a lower income to avoid the tax hit of selling off some very long term stuff with a low basis.

Bonds are a personal choice and one that needs to be at least considered. They may not work well in your specific situation (al la Nords) but may be the bulk of your holdings in your later years. Balance is the key.

 

[wabmester]

A fund will give you more diversity ...

True, and that's a good reason for some bond types -- especially junk bonds. But if you're looking at buying treasuries, diversity doesn't help much. I almost always buy treasury bonds directly instead of paying an annual fee to a useless fund manager.

The other reason to buy funds is liquidity.

My rule of thumb: if you plan to buy treasuries and hold to maturity, buy the bonds, else buy a fund.

 

[Gearhead Jim]

A bond fund usually tries to keep its maturity around a certain duration, so they sell old bonds that are getting "too" close to maturity and buy newer ones. The problem with that approach is that in a rising interest rate enviornment they keep taking capital losses as they sell the bonds before maturity. So even if your bonds have an average rate of 5%, you can end up making less or even losing money.

You can call me an dirty market timer, but I think interest rates are more likely to go up than go down over then next 20 years. Since I use bonds to reduce volitility in my portfolio, I prefer to buy individual bonds (diversified) and hold them to maturity. There are still some risks with this method, but less than with bond funds.

Or so it seems to me...

 

[Nords]

You can call me an dirty market timer, but I think interest rates are more likely to go up than go down over then next 20 years.  Since I use bonds to reduce volitility in my portfolio, I prefer to buy individual bonds (diversified) and hold them to maturity.  There are still some risks with this method, but less than with bond funds.

Or so it seems to me...

OK, if you're a dirty market timer, should those bonds be bought when interest rates are going up... or going down? Because a long bond might lose money faster than it reduces the volatility, and holding until maturity doesn't solve the "long & wrong" problem...

 

[brewer12345]

OK, if you're a dirty market timer, should those bonds be bought when interest rates are going up... or going down?  Because a long bond might lose money faster than it reduces the volatility, and holding until maturity doesn't solve the "long & wrong" problem...

If you think rates will go up, you should buy floaters or verry short maturity stuff (under a year). Buying long stuff when you think rates will go up and expecting to hold to maturity to avoid rate-related losses falls under the heading of "fooling yourself".

 

[cute fuzzy bunny]

You guys are getting it all wrong.

You dont pay any attention to the value of the bonds, just take your income and forget about those awful valuations.

Our "fixed income expert" said so...it must be true...

 

[Gearhead Jim]

My plan is to ladder out to 5 years and reinvest for 5 years when each bond comes due. That avoids the market timing issue and also fits neatly into one of the options in FIREcalc.

Last time i looked, CDs were paying better than treasuries. In a tax-deferred account, that makes the CDs look better at virtually the same credit risk. Of course individual corporate bonds yeild a little more but with more complication and theoretically less safety. Is the current situation typical for history, or unusual?

Of course, fixed income is only part of the portfolio.

 

[NYCGuy]

I agree with the earlier poster. Currently, I only buy Treasuries so I buy the bonds and not the bond funds. I also hold only T-bills at the moment as the Fed continues to raise the short-end. At some point in the next year I expect to make the call that the Fed is finished and ladder out to five years, also in Treasuries. I can't see the advantage of taking interest rate risk by buying a Treasury bond fund. And since it is very possible that we will have a slowdown or recession in the next 24 months, I don't want to take on credit risk by buying corporates or a corp bond fund.