Decluttering the Bond Funds

[redduck]

Because I wasn’t paying close enough attention over the years, I think (actually I’m sure) that I ended up with way too many bond funds (they total about 45% of my entire portfolio and that’s about where I want it). There won’t be any transaction fees when I sell and/or exchange them.

This is what I have:

DODIX: Dodge and Cox Income Fund
VFIIX: a GNMA Fund (Vanguard)
TIP ( a whole lot of TIPs) (etf)
VCAIX: Calif. Tax Free Fund (Vanguard)
VWEHX: High Yield Fund (Vanguard)
VWUIX: Intermediate Bond Fund: Tax Free Vanguard Admiral
VFSUX: Short-term Bond Fund: Vanguard Admiral

I also own these two funds which contain bonds:
Wellesley Fund
Wellington Fund

Any suggestions about how to make this more manageable? I am thinking of dumping at least half of these and putting the proceeds into BND--but, I have no idea which ones should be closed out. The Wellesley and Wellington are not for sale.

 

[LOL!]

Presumably the tax-exempt bond funds are held in a taxable account. Back in December lots of folks were tax-loss harvesting there muni bond funds.

So while you won't pay transaction fees, what does the cap gain/loss situation look like?

I'd sell all losing positions. One might need to set the cost basis method to Specific Identification first.

I'd unload the funds with the highest expense ratios next.

 

[RockyMtn]

are these in after tax accounts? If so you could have capital gains.

 

[redduck]

Presumably the tax-exempt bond funds are held in a taxable account. Back in December lots of folks were tax-loss harvesting there muni bond funds.

So while you won't pay transaction fees, what does the cap gain/loss situation look like?

I'd sell all losing positions. One might need to set the cost basis method to Specific Identification first.

I'd unload the funds with the highest expense ratios next.

All the bond funds are in their correct accounts. I do need to look at the cap gain situation more closely. Luckily(?) I know I have at least one losing position (a small loss, but never-the-less a loss).

Does it make sense to merge the funds of the short-term and the intermediate fund? If so, which of the two funds would I keep? Does it makes sense to have a short-term fund and an intermediate fund?

 

[LOL!]

Does it makes sense to have a short-term fund and an intermediate fund?

I don't know if that makes sense or not, but I do it.

I own two different types of bond funds in my tax-deferred accounts only:

A. A Total US Bond Market index fund like AGG, BND, VBTLX, etc. and

B. The Vanguard Short-term corporate bond index fund.


I vary the ratio of A:B depending on market timing moves and my prediction of future returns of these funds.

So far, I've been terrible at timing that ratio.

 

[redduck]

I think I will follow in your footsteps (not to worry, I won't follow too closely). I plan on opening BND in a tax-deferred account and then also have a smaller (but not all that small) bond fund in a non-tax advantaged account which would allow me to withdraw funds (i.e. cash). That fund would either be the Vanguard Short-Term Corporate Bond index fund or Vanguard's Tax-Free Intermediate Bond fund.

 

[audreyh1]

I have simplified my bond funds by not owning some categories directly. I don't own TIPs or treasuries in general, but I do have a multi-sector bond fund FSICX that owns TIPs, treasuries, other government bonds, and foreign and emerging government bonds.

I don't own a high yield bond fund either. To me they are very closely correlated to equities and thus don't provide diversification, and I might as well own equities instead.

Most of my bonds are in diversified bond funds, and some of them are index funds. Mostly intermediate, but I do have some in short-term bond funds. I do have a muni bond fund and it seems to behave independently of most of the other bond funds, so it's good for diversification and rebalancing. I do have a small amount in GNMAs.

 

[Lsbcal]

Because I wasn’t paying close enough attention over the years, I think (actually I’m sure) that I ended up with way too many bond funds (they total about 45% of my entire portfolio and that’s about where I want it). There won’t be any transaction fees when I sell and/or exchange them.

This is what I have:

DODIX: Dodge and Cox Income Fund
VFIIX: a GNMA Fund (Vanguard)
TIP ( a whole lot of TIPs) (etf)
VCAIX: Calif. Tax Free Fund (Vanguard)
VWEHX: High Yield Fund (Vanguard)
VWUIX: Intermediate Bond Fund: Tax Free Vanguard Admiral
VFSUX: Short-term Bond Fund: Vanguard Admiral

I also own these two funds which contain bonds:
Wellesley Fund
Wellington Fund

Any suggestions about how to make this more manageable? I am thinking of dumping at least half of these and putting the proceeds into BND--but, I have no idea which ones should be closed out. The Wellesley and Wellington are not for sale.

I would determine what I want the overall AA to be. Then determine what my current AA is based on the above. Maybe VG's data will show you your current AA (with those balanced funds in the mix) or use M*.

Then I'd probably start by dumping the ones in red above. I use to own DODIX and it is a decent income fund. Just that VFIDX looked better.

FWIW, here is my bond funds besides a bit of cash and older Ibonds:
VCOBX: somewhat better then total bond market I think. It gets away from too much Treasuries. It is actively managed but low ER.

VFIDX: has a good long term intermediate term bond record.

VFSUX: I use this for holding our spending for the year plus a reserves to smooth out spending in potential very bad markets like those starting after 1966.

I should mention that I'd move the intermediate term bond funds to Treasuries should the yield curve start to invert. Not a common opinion but very easy to do when one has only a few funds.

 

[redduck]

^^^
I recently found (after many years) Vanguard's tools regarding AA. I think I could easily spend a very long-time there (and I will). Doing the hypothetical thing is a lot of fun. (Hopefully it will be helpful as well).

I sold DODIX a day or two ago.
I sold VWEHX about 10 minutes ago (after reading your post--and audreyh1's).

I'll certainly look at your Vanguard suggestions.

Thanks for sharing and thanks for the suggestions.

p.s. I can't find FWIW. Is that a Fidelity Fund?
__________________

 

[Montecfo]

The thread does raise an interesting question: within your allocation to bonds, what should you hold?

I am sure I do not have that answer. But I will say almost all of my "fixed income" holdings are in cash, CDs and short to intermediate bonds. My only longterm holding is a muni bond fund (no leverage) which has done very well. I favor funds as I believe active management is worth it in bonds. Further, when you own bond indexes you tend to be heavily into the debt of large issuers, which may be lower quality.

I also think you have to look at performance, not just expenses when selecting vehicles. I do own DODIX as one of my larger bond holdings.

As rates normalize it will make sense to redeploy some of the short into longer maturities but now is not that time, IMHO.

 

[OldShooter]

Well, part of the answer depends on how much money you have in bond funds. Assuming it is enough to buy a diversified portfolio (>$100K?), IMO you should look at holding some bonds directly.

Buying govvies and agencies like GNMA is not exactly rocket science since there is no credit risk, hence no need for judgment on the part of the managers. Why pay someone to brainlessly push paper for you?

Same story, louder, with TIPS. TIPS don't even have much of a yield curve. We have serious six figures/our TIPS money in a single issue and are quite happy with that.

Short-term, look at buying T-bills or T-notes on the auction. Or brokered CDs. Again, this is not rocket science because there is no credit risk.

Fido and Schwab have bond people who can make this almost painless for you and you will save a lot of money. Remember, the cost of fees is a big % of the fund yield, even these days of rising rates. (Example: 20bps fee on a short-term government fund that is yielding 140 bps gross is a 14% fee.)

Junk and munis are another matter. Here a fund manager (supposedly) has the judgment to buy good quality issues and, with a fund holding many bonds, individual issue risk should be diversified away. You really can't effectively do either of these on your own.

 

[Lsbcal]

...

Fido and Schwab have bond people who can make this almost painless for you and you will save a lot of money. Remember, the cost of fees is a big % of the fund yield, even these days of rising rates. (Example: 20bps fee on a short-term government fund that is yielding 140 bps gross is a 14% fee.)
..

I think individuals buying Treasury bonds is perfectly fine as you mention. But perhaps you are overstating the cost to buy a fund? Some examples,

VFIRX Vanguard Short Term Treasury, duration = 2.1 years, SEC yield = 2.41%, ER = 0.10% (min investment $50K)

VGSH Vanguard Short Term Treausry ETF, duration = 1.9 years, SEC yield = 2.55%, ER = 0.07%

 

[OldShooter]

.. perhaps you are overstating the cost to buy a fund? ...

Oh, I just grabbed those numbers out of the air to illustrate the calculation. Sorry I wasn't clear about that.

One peeve of mine is that fees based on total assets look like nice small numbers but when applied to the value the agent is actually supposed to be creating, they are not so small. The biggest example IMO is a 1% AUM fee measured against a 4% retirement withdrawal rate. That's a 25% fee less whatever additional total portfolio return that the manager provides.

 

[RobbieB]

And if you had a 1% WR, my God he's taking all of your dough. All of it, 100%.

The horror!

 

[pb4uski]

Yup.... fuzzy math.

 

[OldShooter]

And if you had a 1% WR, my God he's taking all of your dough. All of it, 100%. ...

Huh? If the WR is 1% and the FA is taking 1%, then the effective withdrawal rate is 2%. Only to the extent that the FA's management is adding value to the portfolio (beyond what the portfolio could earn using, for example, a no-FA passive strategy) will the effective withdrawal rate be lower.

 

[pb4uski]

.... One peeve of mine is that fees based on total assets look like nice small numbers but when applied to the value the agent is actually supposed to be creating, they are not so small. The biggest example IMO is a 1% AUM fee measured against a 4% retirement withdrawal rate. That's a 25% fee less whatever additional total portfolio return that the manager provides.

And if you had a 1% WR, my God he's taking all of your dough. All of it, 100%.

The horror!

Huh? If the WR is 1% and the FA is taking 1%, then the effective withdrawal rate is 2%. Only to the extent that the FA's management is adding value to the portfolio (beyond what the portfolio could earn using, for example, a no-FA passive strategy) will the effective withdrawal rate be lower.

You can't have it both ways.

If a 1% AUM fee measured against a 4% retirement withdrawal rate is a 25% fee less whatever additional total portfolio return that the manager provides, then a 1% AUM fee measured against a 4% retirement withdrawal rate is a 25% fee less whatever additional total portfolio return that the manager provides.

Alternatively, if the WR is 1% and the FA is taking 1%, then the effective withdrawal rate is 2% then if the WR is 4% and the FA is taking 1%, then the effective withdrawal rate is 5%.

We get your point but it is fun to pull your leg.