Investment advice

[OldShooter]

... If I own a bond I can always hold it to maturity a ...

It would seem so, but the missing piece is risk. I'm on the investment committee for a small nonprofit and our policy is to avoid funds for exactly the reasons you cite. I think we're running $2-3M in bonds right now, mostly BBB corporates and we hold about 200 positions carefully diversified across sectors. I don't know what the magic number for diversification in a retail portfolio is, but it's certainly larger than 10 or 20. So you not only have to have a pretty good chunk of change to diversify but you also have to do a lot of work -- knowing that the professionals have a much better knowledge of the risks in any individual issue you may look at. IOW if the YTM and YTW looks good, there is a reason.

For that reason, DW and I are exclusively in govvies (bills,notes, bonds, agencies, etc.). No risk so no real need for diversification.

 

[WhenIsItTime]

This will be popular...

How about putting it in a stock / stock fund and pulling it out when you hit +3%? Volatility is your friend. That will cover you for 365 days. I had similar amount in cash wondering what to do in January. I picked two stocks. Made 8+% in about 30 days. Can go back to cash and let it sit for 2 years.

 

[Finance Dave]

This will be popular...

How about putting it in a stock / stock fund and pulling it out when you hit +3%? Volatility is your friend. That will cover you for 365 days. I had similar amount in cash wondering what to do in January. I picked two stocks. Made 8+% in about 30 days. Can go back to cash and let it sit for 2 years.

And what does the OP do if right after putting it in, the market drops 10% and doesn't recover for a year?

 

[lawman]

And what does the OP do if right after putting it in, the market drops 10% and doesn't recover for a year?

Or a decade

 

[target2019]

This will be popular...

How about putting it in a stock / stock fund and pulling it out when you hit +3%? Volatility is your friend. That will cover you for 365 days. I had similar amount in cash wondering what to do in January. I picked two stocks. Made 8+% in about 30 days. Can go back to cash and let it sit for 2 years.

Depends on how much you can afford to lose. Granted, you may lose just a portion, but I like to think in extremes.

If it's 1K to invest, I'd do it, and bet on a company or two to do well coming out of recession.

If it's 100K, then I'm gonna be risk-off. I think that's kinda where the OP is on this...

 

[WhenIsItTime]

And what does the OP do if right after putting it in, the market drops 10% and doesn't recover for a year?

So VOO is up 1.74% already today. The market is hypersensitive to news.
There will be good news and bad news. I predict more good than bad with the continued reopening events. Volatility is my friend.

Or a decade

Average crash in stocks corrects in 3 years. Last crash corrected in 120 days.

With everything, context matters. Cash as a % of portfolio. Annual burn rates. Timeframe in which the cash is needed. For the time being, bond ETF returns are pitiful. My preference is to take portion of my cash and trade stocks and make a small return. VOO, bank stocks with strong dividends, healthcare have been working great. Have I done this will all my cash. No. Do I tie up what I need for next 3 years, no. Is everybody comfortable with this, clearly not. YMMV.

I'm impressed by those more patient and willing to work hard to snuff out basis points of improvement on safe investments with small returns. I also like sharing my unpopular approach to test the water.

 

[Markola]

Generally, bonds should be held in tax-advantaged accounts. I guess I fail to see the point of seeking a 2-3% yield if a chunk of this modest $2,000-$3,000 is handed right back in taxes (and investing fees). You might be better off figuring out your projected after-tax yield and then considering your plan in light of that reality.

 

[lawman]

In my opinion the Fed has taken advantage of those conservative investors whose dream was to work hard, make a decent living and safely invest in order to provide for a comfortable retirement. The effect has been to encourage higher risk investing which is equities. Now those who have been most responsible are forced to either see their savings lose purchasing power or risk losing their comfortable retirement they had planned for....Interest rates have been kept artificially low for far too long..It has served the risk takers at the expense of the risk averse..and I don't like it. At some point the house of cards may fall.

I will probably sit tight on my cash and try to catch this market down from current levels and then put it in SCHD but I would much prefer to be investing in an ETF bond fund that would pay me 5%

 

[Montecfo]

Can I hijack this thread with a question about bond funds? I only have options inside my Megacorp plan for Short Term and Intermediate Term bond index funds. The latter says it tries to replicate the Bloomberg Barclays U.S. Aggregate Bond Index. How do I think about owning an index fund like this vs owning the underlying bonds? If I own a bond I can always hold it to maturity and get my principal back and have a guaranteed coupon rate right? But if I own an index fund are the managers going to be buying and selling bonds to match the index? So I will be "gambling" on the index itself? If my objective is to lock in my gains and have a conservative hedge on inflation is this the place to go? Sorry if these are newbie questions - I've been a 100% equity investor to date.

There are pluses and minuses of owning bonds in funds, indexes, and direct. Suggest you seek out recent threads on this topic or start a new one.

Short answer is there is no single right approach as it depends on your priorities. I own funds as I prefer active management over passive indexes and prioritize diversification. I'm keeping maturities short 0-5 years.

 

[Freedom56]

OP is looking for a conservative investment. Based on the bonds you bought last March, it looks like you are investing in sub-investment grade corporates, not really what I would call conservative. Please let us know when you settle at a discount on those 1 to 3 year corporates with 4.25% to 7.5% coupons in this rate environment. The bid on the 3 year 7.5% coupon right now is 111.4, and that's a BB- credit rating, well into sub-investment grade. It's got a long way to drop to get under par.

I buy bonds of corporations based on their operating income, cash flow, interest coverage, and leverage trends (i.e. are they paying back debt) and their coupon. The rating agencies are not a reliable indicator of default. Look what happened in 2008/9. The rating agencies rated subprime mortgage back securities as AAA and they defaulted. They rated Boeing as A+ and now it's BBB- and is burning through cash every quarter. It should be rated junk. I only buy bonds in corporations in strong sectors from companies with positive cash flow such as Telecom, technology, pharma, and biotechnology and avoid loser sectors such as retail, energy, mining, and industrials. As for the 7.5% coupon bond, take a look at the chart for this corporate note that I have purchased multiple times since 2016 (after the issue date) and always below par:

Bonds Detail

The corporate note dropped below par due to fund selling and quickly recovered. I have seen this pattern for several decades and it is the reason why I always time my bond purchases. I know that blended funds (stocks and bonds) are forced to sell during periods of high redemptions. So I wait for those events to occur. The other corporate note from Seagate technology (another very profitable company with very strong demand for their products) followed a similar pattern since 2018 after the issue date:

Bonds Detail

In the case of Seagate, the company has issued two tender offers for their notes at $104.88 and $103.78 after I bought it below par from those bond funds that sold them to me.

If you think, investment grade bonds are safe, think again. Macy's, Bed Bath and Beyond, Transocean, were at one time investment grade. Look at them now. Bond ratings are a lagging indicator not forward looking. Credit default swap rates (the cost of insuring a bond from default) are better indicators.

Here is an example how an investment in a AA+ bond can go south pretty fast. There is nothing wrong with the company Apple, but only a bond fund would buy a 30 year corporate bond with a 2.4% coupon at or over par. Look at it now and only pain lies ahead for the funds that purchased it.

Bonds Detail

Passive bond funds buy high and sell low. Their buying and selling decisions are based on inflows and outflows. There is no hunting or waiting for deals. Consider this total loser of a bond fund BND:

https://investor.vanguard.com/etf/profile/BND

It has a yield to maturity of 1.2% and 30 day SEC yield of 1.27%. Who in their right mind would buy that? The YTM of 1.2% is a good indicator that this fund is an expert at buying high and selling low.

Investors buy individual stocks without blinking but bonds from the same companies carry even less risk. I fail to see why people are mystified by individual bonds but not stocks. Bonds are debt obligations. Broad diversification can hurt your performance. Would you lend money to JC Penny, AMC Theaters, Bed Bath and Beyond? Many bond funds did. The people who manage them don't care. It's other peoples money and they collect a fixed fee that has nothing to do with performance.

The one other point I will make is you want to own high yield bonds when the economy is recovering and avoid low yielding investment grade bonds. As rates rise, the low coupon bonds (like the one from Apple) will get destroyed.

 

[aja8888]

In my opinion the Fed has taken advantage of those conservative investors whose dream was to work hard, make a decent living and safely invest in order to provide for a comfortable retirement. The effect has been to encourage higher risk investing which is equities. Now those who have been most responsible are forced to either see their savings lose purchasing power or risk losing their comfortable retirement they had planned for....Interest rates have been kept artificially low for far too long..It has served the risk takers at the expense of the risk averse..and I don't like it. At some point the house of cards may fall.

Yep! The war against savers continues on.

 

[coveredbridge]

I buy bonds of corporations based on their operating income, cash flow, interest coverage, and leverage trends (i.e. are they paying back debt) and their coupon. The rating agencies are not a reliable indicator of default. Look what happened in 2008/9. The rating agencies rated subprime mortgage back securities as AAA and they defaulted. They rated Boeing as A+ and now it's BBB- and is burning through cash every quarter. It should be rated junk. I only buy bonds in corporations in strong sectors from companies with positive cash flow such as Telecom, technology, pharma, and biotechnology and avoid loser sectors such as retail, energy, mining, and industrials. As for the 7.5% coupon bond, take a look at the chart for this corporate note that I have purchased multiple times since 2016 (after the issue date) and always below par:
You bought it when it was a 6 year bond and a 5 year bond and a 4 year bond when the world was coming to an end last year with covid.
What's going to drive it down 12 points now as a 3 yr bond? This company is highly leveraged and deserves its junk rating.
Bonds Detail

The corporate note dropped below par due to fund selling and quickly recovered. I have seen this pattern for several decades and it is the reason why I always time my bond purchases. I know that blended funds (stocks and bonds) are forced to sell during periods of high redemptions. What blended funds are holding sub-investment grade debt? So I wait for those events to occur. The other corporate note from Seagate technology (another very profitable company with very strong demand for their products) followed a similar pattern since 2018 after the issue date:
The yield chart on this issue basically tracks the 5 yr treasury, except again when the world was ending from covid. What is going to drive this one year bond below par? Again, I don't know of blended funds that hold junk bonds. BTW Seagate is classified as an industrial, one of those sectors you said you don't like.
Bonds Detail

In the case of Seagate, the company has issued two tender offers for their notes at $104.88 and $103.78 after I bought it below par from those bond funds that sold them to me.

If you think, investment grade bonds are safe, think again. Macy's, Bed Bath and Beyond, Transocean, were at one time investment grade. Look at them now. Bond ratings are a lagging indicator not forward looking. Credit default swap rates (the cost of insuring a bond from default) are better indicators.
Agreed. What is your source for CDS rates?
Here is an example how an investment in a AA+ bond can go south pretty fast. There is nothing wrong with the company Apple, but only a bond fund would buy a 30 year corporate bond with a 2.4% coupon at or over par. Look at it now and only pain lies ahead for the funds that purchased it.
This bond actually performed better than the 30-yr treasury over the same period. Price volatility on 30 yr debt is naturally going to be much higher than on 3 year debt.
Bonds Detail

Passive bond funds buy high and sell low. Their buying and selling decisions are based on inflows and outflows. There is no hunting or waiting for deals. Consider this total loser of a bond fund BND:

https://investor.vanguard.com/etf/profile/BND

It has a yield to maturity of 1.2% and 30 day SEC yield of 1.27%. Who in their right mind would buy that? The YTM of 1.2% is a good indicator that this fund is an expert at buying high and selling low.

Investors buy individual stocks without blinking but bonds from the same companies carry even less risk. I fail to see why people are mystified by individual bonds but not stocks. Bonds are debt obligations. Broad diversification can hurt your performance. Would you lend money to JC Penny, AMC Theaters, Bed Bath and Beyond? Many bond funds did. The people who manage them don't care. It's other peoples money and they collect a fixed fee that has nothing to do with performance.

The one other point I will make is you want to own high yield bonds when the economy is recovering and avoid low yielding investment grade bonds. As rates rise, the low coupon bonds (like the one from Apple) will get destroyed.

I believe that the market is efficient. If you are getting paid an above market return then you are assuming above market risk. The trick is knowing how to identify that risk.

 

[Markola]

In my opinion the Fed has taken advantage of those conservative investors whose dream was to work hard, make a decent living and safely invest in order to provide for a comfortable retirement. The effect has been to encourage higher risk investing which is equities. Now those who have been most responsible are forced to either see their savings lose purchasing power or risk losing their comfortable retirement they had planned for....Interest rates have been kept artificially low for far too long..It has served the risk takers at the expense of the risk averse..and I don't like it. At some point the house of cards may fall.



I will probably sit tight on my cash and try to catch this market down from current levels and then put it in SCHD but I would much prefer to be investing in an ETF bond fund that would pay me 5%

But when the Fed tries to raise interest rates, it tanks bond and bond fund prices. Is that really what you want as a bond investor?

 

[jurgs01]

In my opinion the Fed has taken advantage of those conservative investors whose dream was to work hard, make a decent living and safely invest in order to provide for a comfortable retirement. The effect has been to encourage higher risk investing which is equities. Now those who have been most responsible are forced to either see their savings lose purchasing power or risk losing their comfortable retirement they had planned for....Interest rates have been kept artificially low for far too long..It has served the risk takers at the expense of the risk averse..and I don't like it. At some point the house of cards may fall.



I will probably sit tight on my cash and try to catch this market down from current levels and then put it in SCHD but I would much prefer to be investing in an ETF bond fund that would pay me 5%

That's not an opinion, it is a fact. FED monetary policy favors the risk takers over savers. Wall Street over Main Street.

 

[jurgs01]

But when the Fed tries to raise interest rates, it tanks bond and bond fund prices. Is that really what you want as a bond investor?

Would I rather have an economy built on savings and investment rather than leverage, debt and speculation? Yes.

People only care about bond prices going down if they bought them at the height of a 40 year bull market. No way I would buy any bonds at yields below inflation.

Now, if higher quality bonds start yielding over 5%, I'd jump in the bond game.

 

[Freedom56]

You bought it when it was a 6 year bond and a 5 year bond and a 4 year bond when the world was coming to an end last year with covid. What's going to drive it down 12 points now as a 3 yr bond? This company is highly leveraged and deserves its junk rating.

My buy dates were 2016 (8 year note), 2017 (7 Year), end of 2018 (6 Year Note), 2020 (4 year note). A significant market correction will bring all low yield investment grade and high yield bonds down. GE and Boeing are more leveraged and cash flow negative than this company and yet they are still rated investment grade. You can't rely on rating agencies to decide which bond issue is safe and which isn't. Centurylink (Lumen technology) has been buying back debt and reducing leverage over the past 6 quarters from free cash flow. Netflix is also rated junk, I would buy Neftlix notes before I would buy GE or Boeing notes.

The yield chart on this issue basically tracks the 5 yr treasury, except again when the world was ending from covid. What is going to drive this one year bond below par? Again, I don't know of blended funds that hold junk bonds. BTW Seagate is classified as an industrial, one of those sectors you said you don't like.

Seagate is a storage technology company not an industrial. Demand for storage is growing and will continue. They are very profitable. Centurylink/Lumen technology is the largest Tier 1 ISP and has the most expansive network in the world. Just about every Tier 2 ISP uses their network and pays a toll. They also provide content delivery through their networks for companies like Netflix. It doesn't take a "world ending event" to cause a sell-off in fixed income. Look back over the past 8 years to see how frequently bonds and preferred stocks have sold off from prices 10-18% over par to 10-20% below par. Last March some exchange traded bonds and preferred stocks sold off as much as 60% below par (I was at the buying end of many of issues). Those same preferred stocks and exchange traded bonds are trading above par.

Market driven CDS rates are a much better indicator of credit quality than rating agencies that have serious conflicts of interest (i.e. they are paid by the companies that issue the bonds/notes). The data is not free but well worth it for managing a bond portfolio.

https://ihsmarkit.com/products/pricing-data-cds.html

You also have to consider the company's financial performance, balance sheets, and industry trends. You can get burned badly by relying on so called "investment grade" ratings from agencies.

https://theconversation.com/why-cre...-still-getting-away-with-bad-behaviour-117549

To give you some idea on just how clueless rating agencies are, read this report from S&P on Advanced Micro Devices from 2016. They rated AMD notes CCC+ after the company announced some of the most revolutionary products to the market. In 2020, S&P rated AMD notes investment grade.

https://www.streetinsider.com/Credi...);+Rates+New+Senior+Conv.+Notes/12010151.html

 

[lawman]

But when the Fed tries to raise interest rates, it tanks bond and bond fund prices. Is that really what you want as a bond investor?

Yes absolutely! I'm a long term investor.. As such I prefer high interest rates.

 

[lawman]

Would I rather have an economy built on savings and investment rather than leverage, debt and speculation? Yes.

Exactly

 

[Freedom56]

We are going to be in a low interest rate environment for a long time with the occasional minor blip. I have said this for many years. Now banks in Europe are discouraging people from keeping cash in their savings accounts by charging fees to save money. The war on savers has been going on since 2003 and we may soon enter a phase where it costs you to save money You either adapt to this environment or park you money in a low yielding savings account where it is safe and spend it over time. In the end, you can't take your money with you.

 

[lawman]

So should we be thinking in terms of P. E. 's in the 40's instead of the 20's as being the norm? https://www.multpl.com/s-p-500-pe-ratio/table/by-year

 

[sengsational]

The corporate note dropped below par due to fund selling and quickly recovered. I have seen this pattern for several decades and it is the reason why I always time my bond purchases. I know that blended funds (stocks and bonds) are forced to sell during periods of high redemptions. So I wait for those events to occur.

Back in the late 80's was the last time I had bond funds. They said bonds zigged when equities zagged. Wrong! When the flight to cash happens, everything get trounced. I knew I didn't want bond funds, but didn't think too hard about getting on the other side of it. But you have. My stability position is a 401k guaranteed income fund that might keep up with inflation, depending how one defines it.

Do me a favor? Next time the opportunity arises (flight to cash, forcing bond funds to sell low), please make us a "take advantage of bond fund investor" thread, and give us enough info to screen and find the good ones.

 

[Freedom56]

So should we be thinking in terms of P. E. 's in the 40's instead of the 20's as being the norm? https://www.multpl.com/s-p-500-pe-ratio/table/by-year

I don't own equities but historically, PE ratios expand when companies are growing and shrink as business mature. Stocks trade base on supply and demand pure and simple. The stock manias of the past three decades have proven that. The recent rise in worthless companies like Gamestop, AMC Theaters, Hertz, are Kodak are just some examples. PE ratios have no meaning in a highly speculative market.

 

[Freedom56]

Back in the late 80's was the last time I had bond funds. They said bonds zigged when equities zagged. Wrong! When the flight to cash happens, everything get trounced. I knew I didn't want bond funds, but didn't think too hard about getting on the other side of it. But you have. My stability position is a 401k guaranteed income fund that might keep up with inflation, depending how one defines it.

Do me a favor? Next time the opportunity arises (flight to cash, forcing bond funds to sell low), please make us a "take advantage of bond fund investor" thread, and give us enough info to screen and find the good ones.

I post my ideas on preferred stock threads and have been doing so for many years. The only type of fixed income funds I that I have bought in the past are actively managed CEFs when they traded significantly below their asset values (back in 2014). Passive bond and preferred funds are for the most part horrible for the investors but great for asset managers that collect fees.

 

[Freedom56]

Do me a favor? Next time the opportunity arises (flight to cash, forcing bond funds to sell low), please make us a "take advantage of bond fund investor" thread, and give us enough info to screen and find the good ones.

Actually that's not a bad idea. As the next sell off happens, I'll start the "Let's take advantage of the corporate bond and preferred stock fund investor" thread. I'll cover both high yield and investment grade securities. The focus will be on technology, telecom, e-commerce, pharma, and biotechnology sectors only as I avoid everything else.

 

[2177V]

I have $100,000.00 cash in a savings account I want to invest. I am looking for 2% - 3% return and want a conservative investment..I'm thinking intermediate term corporate bond fund but I don't know how to research them..Are there other options? What funds are good and what are their symbols?

It all depends on your time horizon and your risk tolerance. You did mentioned a conservative investment so equities may be too risky. Bonds are lower risk and CD are lower still. However, there is an inverse relationship of rewards and risk. Low risk = Low rewards. AAA bonds are low risk but the returns are not 2% to 3%. investment grade BBB or higher will give you 2% to 3% but there is a higher risk of default. Your first step is understanding the bond ratings:

I do not know how you define "conservative". I suggest that you research the Bond ratings above to determine your own "risk" versus "reward". The reward component is usually easy since this is the % return by that company issuing that bond. The risk component is more difficult. To reduce the risk, then a bond mutual fund may be the way to go but you should also look at the top ten holdings of the bond fund to estimate the composite risk. The reward of a Bond fund will also vary in comparison to an individual bond. There is no easy answer except doing more research. If you have a longer intermediate time horizon, then a corporate bond fund such as VICSX may be suitable but you should do comparison shopping to determine what is best for you.

https://investor.vanguard.com/mutual-funds/profile/VICSX