Bonds vs Bond Funds (again)

[bmcgonig]

We've been through this many times but yet an interesting post in the WSJ today with a quote from Bernstein:

Are Individual Bonds Really Better Than Funds? - Total Return - WSJ

"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."

[RobbieB]

I figured I would split the risk and so have about a 50-50 mix of bonds and bond funds. They are both CA municipals for the double tax free goodness.

[cyber888]

Not true for all ! I thought that when the Feds raised interest, my numerous bond funds would fall. Instead, all my muni bond funds appreciated in value. I would say that last 2 months, I gained a couple of thousands from the principal going higher. Much more appreciation than my stocks.

Quote:

Originally Posted by bmcgonig "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."

[jazz4cash]

Interest rates go up?


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[audreyh1]

Quote:

Originally Posted by jazz4cash Interest rates go up? Sent from my iPhone using Early Retirement Forum

Good one!

[donheff]

I can never get my head around bond funds. Ladders are easy to understand but a PITA to mess with. I trust guys like Bernstein to get it right so I assume that for my situation (just trying to limit volatility a bit in a total return portfolio and, hopefully, provide a source for withdrawals during an equity crash) I may as well go the easy route and use bond funds. I still can't get my head around whether it makes more sense to just use total bond market type indexes or a mix of short and mid term with the thought that the rates will clear through sooner in the long predicted rate escalation.

Edit: actually reading the article was helpful. Less fuzzy now.

[pb4uski]

Quote:

Originally Posted by cyber888 Not true for all ! I thought that when the Feds raised interest, my numerous bond funds would fall. Instead, all my muni bond funds appreciated in value. I would say that last 2 months, I gained a couple of thousands from the principal going higher. Much more appreciation than my stocks.

S&P 500 on April 19: 2,100.80
S&P 500 on Feb 19: 1,917.78

Increase for 2 months: 9.5%

Either you have the wrong stocks or you are misinformed.

[pb4uski]

For me it is not an either/or. The target maturity bond funds that are out there combine the cash flow structure of individual bonds with the ease and diversification of bond funds. most of my domestic bond allocation are in 2020 target maturity corporate bond funds. CDs are also a good alternative.

[Gone4Good]

Quote:

Originally Posted by pb4uski S&P 500 on April 19: 2,100.80 S&P 500 on Feb 19: 1,917.78 Increase for 2 months: 9.5% Either you have the wrong stocks or you are misinformed.

So I guess we just ignore the Dec 29 2,078 to Feb 19 move?

[Dash man]

Quote:

Originally Posted by Gone4Good So I guess we just ignore the Dec 29 2,078 to Feb 19 move?

Ignore them all. It's called volatility. Look too close and you get motion sickness.


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[Gone4Good]

Yes, buying a fund and buying a ladder are the same thing . . . with one big exception. If I need money from my bonds on a known schedule, say for living expenses in retirement, an individual bond ladder is better than a fund.

But buying a bond fund is currently inferior to buying 5-year CDs. Not only do CDs currently yield far more than treasury bonds of the same maturity, they can be redeemed at minimal cost. So if rates go up, I can break my CD for the price of 180 days interest and swap into new securities at market rates with zero loss of principal.

[pb4uski]

Quote:

Originally Posted by Gone4Good So I guess we just ignore the Dec 29 2,078 to Feb 19 move?

Are you having trouble reading today?

I was simply responding to cyber888's assertion that for the last two months that his bonds appreciated more than his stocks. That's all.

[MRG]

Quote:

Originally Posted by pb4uski For me it is not an either/or. The target maturity bond funds that are out there combine the cash flow structure of individual bonds with the ease and diversification of bond funds. most of my domestic bond allocation are in 2020 target maturity corporate bond funds. CDs are also a good alternative.

I think you posted about this before and I stole the idea. Thank you.

[GravitySucks]

Quote:

Originally Posted by pb4uski For me it is not an either/or. The target maturity bond funds that are out there combine the cash flow structure of individual bonds with the ease and diversification of bond funds. most of my domestic bond allocation are in 2020 target maturity corporate bond funds. CDs are also a good alternative.

I have used the target maturity bond funds to build a five year ladder that should cover bare minimum expenses. Each year at rebalance time I will buy another years out.

The majority of the bond portion is in AGG though.