If there is deflation does one get to claim a tax credit for the decrease in value of the TIP? If somehow (unlikely I know) deflation wipes out the inflation gains by the time the TIP matures so its redeemed at par then all of tax paid on prior imputed gains is just a loss right? I'm just trying to understand why one would have TIPS in a taxable account.
Jonathan Clements and John Lim on bonds
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daylatedollarshort
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I don't have TIPS in a taxable account. I used that example to illustrate that the secondary market price was irrelevant (unless you sell the bond) and didn't impact taxes, inflation adjustments or interest payments. Those are all calculated on the accumulated inflation value of the bond.
Montecfo
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Sure. But, extending your logic, if I do not sell stocks at a loss, there is no market risk. That is the key similarity.
daylatedollarshort
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No, it isn't because stocks don't have a maturity date. They may go down from when you bought them and you don't have any guarantee of ever getting your money back. That is the definition of market risk in Investopedia - Market risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets.
Bonds bought at par and held to maturity do not have market risk because they get redeemed at par value, or par plus inflation in the case of TIPS, whichever is greater. This is explained on the Fidelity site on bonds vs. bond funds. A $10K nominal bond bought at par gets redeemed at par. With stocks, stock funds and bond funds without maturity dates, you may get more or less your $10K investment back at any point in the future. That is the market risk part. This isn't my personal logic or definitions, this is how these asset classes work and how market risk is defined.
The Merrill Lynch site puts it this way - Like stocks, all bonds can present the risk of price fluctuation (or "market risk") to an investor who is unable to hold them until the maturity date (when the original principal amount is repaid to the bondholder).
Come join us on the dark side in the Golden Period for bonds thread. We are all buying bonds with maturity dates and at least our fixed income investments are having a pretty decent year with the rise in rates. Individual TIPS with maturity dates and real yields are having a stellar year, better than I bonds.
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foxfirev5
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Sorry but with treasury bonds held to maturity I am very confident I know exactly what I will get. And it's getting better every day that I buy more.
daylatedollarshort
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I found part of The Bond Book by Annette Thau online at the AAII site: An Investor's Guide to Inflation Protected Securities: "Is there any advantage to buying TIPS through funds rather than by buying the individual bonds? For reasons that escape me, individual bonds and bond funds are treated in the financial press as interchangeable instruments. But they are not. For starters, if you hold individual TIPS and redeem them when they mature, you will receive, at minimum, no less than the initial face value of the bond; or more likely, the adjusted value of principal. On the other hand, a TIPS fund, like any other bond fund, has no “maturity” date. That is to say there is no date at which the entire portfolio matures. Given the volatility of the underlying bonds in the portfolio, there is no way to know what its price will be when you want to sell." https://www.aaii.com/journal/articl...protected-securities?via=emailsignup-readmore
Montecfo
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There are exactly two days when a US government bond is not at market risk: at issue and at maturity.
So for a 10 year bond it is at market risk 99.9 percent of the time.
"Intentions" do not change that.
And yes, I own them.
So for a 10 year bond it is at market risk 99.9 percent of the time.
"Intentions" do not change that.
And yes, I own them.
daylatedollarshort
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They aren't the best investment for people who frequently find themselves short on cash, and have nothing else they could sell, such as stocks. But they have no market risk for those who can hold to maturity, which seems like everybody in the Golden Period thread. Many of us sold our bond funds earlier in the year and avoided the steep NAV losses. Now even 1 year Treasuries are around 4.5% with no loss of principal, even though rates continue to climb, because of the maturity dates. Individual TIPS are at 1.6% to 1.9% real yield + CPI inflation (~8.2%).
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Wow, so the gist of this whole thread is that if you have simply held in bond funds like I have...TIPS ETFs/MFs, ultra ST and ST ETFs/CEFs... that you've made a huge mistake doing so.
Many many times i have raised this issue with an hourly FA friend and never was the advice to bail on any of these-- many held for up to 5-10 years, in a 50/50 AA.
I have very little in bonds outside of short-term or floating rate bonds. What is in longer-term bonds is in TIPS (about 8.5%) and Emerging Market Debt (less than 4%). The latter is high yielding, it isn’t very sensitive to interest rates and bond yields. Also the discounts on what are mostly CEFs, are much wider than normal, hence more appealing.
He points out - TIPS of course have an inflation component and 2) bond component, and the latter has hurt as yields have risen making the maturity value of these worth less. Also real yields have risen significantly (the yield beyond inflation) - near highs we haven't seen in decades making the real yields not that likely to increase- so losses from that happening this year seem behind us.
With a 10 year tips yield at 1.6% and inflation say at 8%, the yield is 9.6%. Hence, if yields and bond prices stay flat I achieve around 9% owning them. So, if yields will go higher and lead to some prices losses, I have a nice 9%+ cushion today to offset some of that price decline.
He suggests TIPS looks OK here but if I'm very confident long-term yields on traditional bonds will go notably higher, yes I could sell the TIPS funds.
Thing is, the damage in terms of NAV losses on all these has, IMO been done - To sell out of any of these positions here would be a classic case of selling at the bottom - and in return, forfeiting the steadily rising dividend income.
Happy to hear any feedback, tho I can imagine this is a tough room to find support for what I'm describing...which, is kind of interesting in the sense that for years i've heard so many of forums such as this crowing about not 'timing the market' and not 'selling how and buying high - and 'staying the course' and all the other hackneyed catch-phrases of the B&H mantra. Whatever.. As I say, kinda hindsight and late in the game to make any radical changes now. For me anyway...so i guess i have to roll with the mentality of playing the "long game" and ignore the bond fund naysayers. Regardless, if I'm down 15% YTD with about a 2.1M PF - and if everybody here truly believes in FireCalc...I will be fine, won't I.
Many many times i have raised this issue with an hourly FA friend and never was the advice to bail on any of these-- many held for up to 5-10 years, in a 50/50 AA.
I have very little in bonds outside of short-term or floating rate bonds. What is in longer-term bonds is in TIPS (about 8.5%) and Emerging Market Debt (less than 4%). The latter is high yielding, it isn’t very sensitive to interest rates and bond yields. Also the discounts on what are mostly CEFs, are much wider than normal, hence more appealing.
He points out - TIPS of course have an inflation component and 2) bond component, and the latter has hurt as yields have risen making the maturity value of these worth less. Also real yields have risen significantly (the yield beyond inflation) - near highs we haven't seen in decades making the real yields not that likely to increase- so losses from that happening this year seem behind us.
With a 10 year tips yield at 1.6% and inflation say at 8%, the yield is 9.6%. Hence, if yields and bond prices stay flat I achieve around 9% owning them. So, if yields will go higher and lead to some prices losses, I have a nice 9%+ cushion today to offset some of that price decline.
He suggests TIPS looks OK here but if I'm very confident long-term yields on traditional bonds will go notably higher, yes I could sell the TIPS funds.
Thing is, the damage in terms of NAV losses on all these has, IMO been done - To sell out of any of these positions here would be a classic case of selling at the bottom - and in return, forfeiting the steadily rising dividend income.
Happy to hear any feedback, tho I can imagine this is a tough room to find support for what I'm describing...which, is kind of interesting in the sense that for years i've heard so many of forums such as this crowing about not 'timing the market' and not 'selling how and buying high - and 'staying the course' and all the other hackneyed catch-phrases of the B&H mantra. Whatever.. As I say, kinda hindsight and late in the game to make any radical changes now. For me anyway...so i guess i have to roll with the mentality of playing the "long game" and ignore the bond fund naysayers. Regardless, if I'm down 15% YTD with about a 2.1M PF - and if everybody here truly believes in FireCalc...I will be fine, won't I.
Montecfo
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Mikes425,
Interesting post. There are definitely some folks who are negative on bond funds. I am not one of them as I think it depends on what you own in the fund and how liquid those holdings are. When people get spooked and head for the exits, the open-end fund manager must sell holdings, driving values lower than you might expect-which can also provide opportunity.
Holding individual bonds is not a panacea particularly if you hold corporates where you have credit risk. Bonds in funds versus direct bond holdings each have pros and cons, but the pendulum tilts toward individual holdings at market inflection points, such as now, in my view.
An exception would be closed-end funds, especially when at a discount to the underlying holdings. I like them.
Timing the market is much easier if you know the direction of interest rates. It became very clear last fall that rates were going higher. So for me that meant shortening durations to a year or less in bonds, which I began doing two years ago. It also meant selling the long-term (meaning future) secular growth stocks among my equities. Higher rates are bad for bonds, worse the longer the duration, and worse yet for stocks because a higher discount rate on future earnings reduces current values (and for other less important reasons).
Some folks think you can't time the market. Usually true, but this was an exception.
You do want to Stay Fully Invested, meaning don't sell a bunch of equities and sit in cash, though I have to say cash has been a fabulous holding this year compared to just about anything.
Just don't be discouraged by folks who may have religion-like views that contradict yours or your advisor's. Instead go to school on what they are saying, develop an educated view and see how that compares to what you are being told.
Good Investing!
Interesting post. There are definitely some folks who are negative on bond funds. I am not one of them as I think it depends on what you own in the fund and how liquid those holdings are. When people get spooked and head for the exits, the open-end fund manager must sell holdings, driving values lower than you might expect-which can also provide opportunity.
Holding individual bonds is not a panacea particularly if you hold corporates where you have credit risk. Bonds in funds versus direct bond holdings each have pros and cons, but the pendulum tilts toward individual holdings at market inflection points, such as now, in my view.
An exception would be closed-end funds, especially when at a discount to the underlying holdings. I like them.
Timing the market is much easier if you know the direction of interest rates. It became very clear last fall that rates were going higher. So for me that meant shortening durations to a year or less in bonds, which I began doing two years ago. It also meant selling the long-term (meaning future) secular growth stocks among my equities. Higher rates are bad for bonds, worse the longer the duration, and worse yet for stocks because a higher discount rate on future earnings reduces current values (and for other less important reasons).
Some folks think you can't time the market. Usually true, but this was an exception.
You do want to Stay Fully Invested, meaning don't sell a bunch of equities and sit in cash, though I have to say cash has been a fabulous holding this year compared to just about anything.
Just don't be discouraged by folks who may have religion-like views that contradict yours or your advisor's. Instead go to school on what they are saying, develop an educated view and see how that compares to what you are being told.
Good Investing!
Thanks. So in my case my bond funds have been predominantly Short term with large positions in CEFS and OEFs like VCSH and SCHO (2-yr Treasury), TIPS and Floating Rate funds (SCHP). Throughout the course of the known rate increases, My FA never suggested exiting any of these in any major way, and certainly the NAV losses were significant...losing more than equities in fact. Was he wrong not to suggest going to Cash? Perhaps - tho after the NAV losses, not much point in doing so now, vs getting at least some yield vs zero return in Cash. In any event, it is what it is and I'm down 15% with a 50/50 AA YTD. That's "presumably" better than those who've always preached and held higher equity AA (60/40 or more) even well into traditional retirement age.
I gather the FA's feels the worst of the bond fund NAV damage has already been done -(hopefully he's right) and that it's best to stay focused on the longer term, say, 1 to 3+ years out from here. Based on his analysis a fair amount of this NAV loss will progressively be offset by higher dividend/real return of those bond funds as rates may continue to rise.
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daylatedollarshort
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I can't tell you what you should do since I don't know the future. But the bonds vs. bond fund issues come up almost daily in this forum. Here is the latest discussion with some food for thought recent performance statistics - https://www.early-retirement.org/fo...ars-bank-of-america-115605-2.html#post2841464
Two wikis on the Bogleheads site which I humbly suggest may be far more worth your time than this entire thread:
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund
https://www.bogleheads.org/wiki/Rolling_ladders_versus_bond_funds
These two posts from a current thread on this topic from two of the savviest long-time investors there shed further light:
1. “I work in the field.
If you hold your bonds to maturity you have certainty over cash flows and control over your portfolio. Many people's natural reaction is that this reduces risk. Technically speaking it does not.
Are you engaged in liability matching? That is the maturity of the bond matches the time frame when the cash is needed. If so this is the exception to the rule.
Are you planning on rolling over your bonds at maturity? Or investing in the coupons that they throw off? If so, welcome to the club portfolio manager - you are now exposed to interest rate risk, just like those who invest in funds.
I can make a modest argument that one should build a bond portfolio that matches ones goals and risk tolerance. The problem is that you need a portfolio in the millions to justify the cost and complexity.”
2. “I maintained a TIPS ladder from 1998 to 2012. In this case, "diversification" not an issue for two reasons: one, being Treasury issues there is virtually no credit risk; second, there are not that many different issues; the Vanguard Inflation Protected Securities fund holds only 48, and I was holding over half that many.
The individual-bonds-versus-fund issue is much argued. I'm going to state my point of view, expecting to be contradicted by others as usual. The difference depends entirely on the degree to which you can predict and control your need to withdraw from the bond portfolio..
One extreme is full "defeasing," in which you know absolutely for sure that you will never need to buy or sell on the market, and that you will always be able to hold each bond to maturity. In this extreme you are immune to interest rate risk. With TIPS you are also immune to inflation risk; and you are unaffected by market fluctuations and don't need to take them into account. The problem is that the spending side of the equation is uncertain and risky, too, and you do not really have any certainty that you will never choose to liquidate before maturity. If you're allowed to make assumptions about how long you will be able stocks, you should be allowed to make the same assumptions about bonds.
The other, much more popular extreme is "mark to market," which is often misrepresented as saying that a portfolio of individual bonds has exactly the same risk as a fund, and it is just a psychological delusion to think anything else. In reality, "mark to market" is, absolutely, the appropriate model for a situation in which you assume that you might need to draw from the portfolio on any given day. The fluctuating daily value of your bond portfolio is meaningful is there is a probability that you will sell the bonds on any given day. However... this is where the big ideological fight comes in... the market value of an asset that is not for sale is irrelevant. Again, you can reconcile extremes by saying there is no such thing as "not for sale" and it is important to have some idea of the value of things you don't plan to sell, because humans plan and the universe laughs.
I believe that the proper evaluation of the risk of an asset must include, as input, the probability that the asset will be transacted on thus-and-such date. Really, the claims of "stocks for the long run" are claims that the risk of a stock that you know you will sell thirty years from today is different from the risk of a stock that you might sell any time.
My own firm belief is that if they are part of a well-structured serious plan that includes a credible likelihood of holding to maturity, why yes, individual bonds are less risky than a bond fund. They are less risky to the exact extent that holding to maturity will actually happen. However, the difference isn't all that dramatic.
In my case, my firm resolve to hold individual bonds to maturity was outweighed by the nuisance of managing the portfolio. And not just the nuisance of my managing it, when I started to look seriously and have seriously discussions with my significant other about where our money is, how to get it, and what to do with it, I realized that they were perfectly capable of dealing with a portfolio of five mutual funds, and that there was no way at all they could deal with a thirty-page statement. (Vanguard prints TIPS as a line and a narrow column of eight details under it, in landscape orientation, with fat headers and footers on each page. It only manages to lists two TIPS to a page!). Sticking with individual bonds was likely to make them go running for help to an advisor, which either of us wants to happen.
So I took a deep breath, wrote off my individual-bond-portfolio to "ego," and swapped them for the Vanguard TIPS fund, VAIPX.”
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund
https://www.bogleheads.org/wiki/Rolling_ladders_versus_bond_funds
These two posts from a current thread on this topic from two of the savviest long-time investors there shed further light:
1. “I work in the field.
If you hold your bonds to maturity you have certainty over cash flows and control over your portfolio. Many people's natural reaction is that this reduces risk. Technically speaking it does not.
Are you engaged in liability matching? That is the maturity of the bond matches the time frame when the cash is needed. If so this is the exception to the rule.
Are you planning on rolling over your bonds at maturity? Or investing in the coupons that they throw off? If so, welcome to the club portfolio manager - you are now exposed to interest rate risk, just like those who invest in funds.
I can make a modest argument that one should build a bond portfolio that matches ones goals and risk tolerance. The problem is that you need a portfolio in the millions to justify the cost and complexity.”
2. “I maintained a TIPS ladder from 1998 to 2012. In this case, "diversification" not an issue for two reasons: one, being Treasury issues there is virtually no credit risk; second, there are not that many different issues; the Vanguard Inflation Protected Securities fund holds only 48, and I was holding over half that many.
The individual-bonds-versus-fund issue is much argued. I'm going to state my point of view, expecting to be contradicted by others as usual. The difference depends entirely on the degree to which you can predict and control your need to withdraw from the bond portfolio..
One extreme is full "defeasing," in which you know absolutely for sure that you will never need to buy or sell on the market, and that you will always be able to hold each bond to maturity. In this extreme you are immune to interest rate risk. With TIPS you are also immune to inflation risk; and you are unaffected by market fluctuations and don't need to take them into account. The problem is that the spending side of the equation is uncertain and risky, too, and you do not really have any certainty that you will never choose to liquidate before maturity. If you're allowed to make assumptions about how long you will be able stocks, you should be allowed to make the same assumptions about bonds.
The other, much more popular extreme is "mark to market," which is often misrepresented as saying that a portfolio of individual bonds has exactly the same risk as a fund, and it is just a psychological delusion to think anything else. In reality, "mark to market" is, absolutely, the appropriate model for a situation in which you assume that you might need to draw from the portfolio on any given day. The fluctuating daily value of your bond portfolio is meaningful is there is a probability that you will sell the bonds on any given day. However... this is where the big ideological fight comes in... the market value of an asset that is not for sale is irrelevant. Again, you can reconcile extremes by saying there is no such thing as "not for sale" and it is important to have some idea of the value of things you don't plan to sell, because humans plan and the universe laughs.
I believe that the proper evaluation of the risk of an asset must include, as input, the probability that the asset will be transacted on thus-and-such date. Really, the claims of "stocks for the long run" are claims that the risk of a stock that you know you will sell thirty years from today is different from the risk of a stock that you might sell any time.
My own firm belief is that if they are part of a well-structured serious plan that includes a credible likelihood of holding to maturity, why yes, individual bonds are less risky than a bond fund. They are less risky to the exact extent that holding to maturity will actually happen. However, the difference isn't all that dramatic.
In my case, my firm resolve to hold individual bonds to maturity was outweighed by the nuisance of managing the portfolio. And not just the nuisance of my managing it, when I started to look seriously and have seriously discussions with my significant other about where our money is, how to get it, and what to do with it, I realized that they were perfectly capable of dealing with a portfolio of five mutual funds, and that there was no way at all they could deal with a thirty-page statement. (Vanguard prints TIPS as a line and a narrow column of eight details under it, in landscape orientation, with fat headers and footers on each page. It only manages to lists two TIPS to a page!). Sticking with individual bonds was likely to make them go running for help to an advisor, which either of us wants to happen.
So I took a deep breath, wrote off my individual-bond-portfolio to "ego," and swapped them for the Vanguard TIPS fund, VAIPX.”
daylatedollarshort
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Performance stats for iShares TIPS Bond ETF - https://finance.yahoo.com/quote/TIP/performance?p=TIP.
VAIPX - https://investor.vanguard.com/investment-products/mutual-funds/profile/vaipx#performance-fees
Cumulative inflation since 2012, ten year period, has been 29.3%, average annual inflation past ten years was 2.60. Inflation this past year was over 8%.
VAIPX - https://investor.vanguard.com/investment-products/mutual-funds/profile/vaipx#performance-fees
Cumulative inflation since 2012, ten year period, has been 29.3%, average annual inflation past ten years was 2.60. Inflation this past year was over 8%.
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Montecfo
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Excellent points, some of which are rarely made here due to prevailing misunderstanding of the nature of investment duration and management.
In some ways I think this post could substitute for reading the entire thread. But in other ways reading the entire thread makes clear why this post is necessary and insightful.
Thanks.
daylatedollarshort
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I think the ten year performance stats on TIPS funds could substitute for this entire thread. The whole point of buying TIPS is for inflation protection. Individual TIPS principal values, when held to maturity, have gone up 8.2% this past year, while TIPS NAV funds have gone down by around the same amount. On a $500K investment, that is a gain of $41K vs. a loss of $41K, for a total difference of $82K, on the principal / NAV amounts alone. The ten year returns on the funds haven't come close to keeping up with inflation, which is the whole point for most people in buying TIPS.
I doubt anyone with good money management skills, some cash holdings and an emergency fund, has to unexpectedly cash in anything close to $500K in TIPS, so I don't see selling prior to maturity as a huge issue, but YMMV. I'd be a lot more concerned about the $82K.
I doubt anyone with good money management skills, some cash holdings and an emergency fund, has to unexpectedly cash in anything close to $500K in TIPS, so I don't see selling prior to maturity as a huge issue, but YMMV. I'd be a lot more concerned about the $82K.
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VanWinkle
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Thanks for bringing some well thought out information to this thread. I follow your great posts on Bogleheads as well. Recency bias permeates many threads during a downturn like we are currently experiencing. Long term investors think in 10-20 year periods and are willing to match duration to the need for the funds.
VW
NW-Bound
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Caveat: The only individual bonds I hold are I bonds bought 20 years ago, and I currently have only 100 shares of BND bought a while back as a lark. I also have perhaps 1.5% of assets in Wellesley+Wellington, both having some bonds.
---------------------------
Seeing the debate about individual bonds and bond funds in several threads, I have to ask the following question:
If bond funds are currently down bad because of being "marked to value", which individual bond holders say are not justified, which implies that bond funds are mispriced.
This then means bond funds are undervalued and should be bought right now.
What's wrong with the above argument?
---------------------------
Seeing the debate about individual bonds and bond funds in several threads, I have to ask the following question:
If bond funds are currently down bad because of being "marked to value", which individual bond holders say are not justified, which implies that bond funds are mispriced.
This then means bond funds are undervalued and should be bought right now.
What's wrong with the above argument?
VanWinkle
Thinks s/he gets paid by the post
Nothing wrong, I'm buying every month while the improving yield is on sale.
NW-Bound
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Besides my I bonds which pay me more than 10% now, I also have quite a bit in TSTXX, a very short-term BlackRock fund. It shows a 30-day yield of 2.74%. BND currently has a 30-day yield of 4.24%.
The difference in yield between TSTXX and BND is 1.5%. The current consensus is the Fed will raise 0.75% next meeting. With BND duration of 6.5 years, that means an additional drop of 0.75%x6.5 = 4.875%. This drop will dwarf the 1.5% difference in yield I am not getting.
I am sticking with TSTXX for now. It has a maturity measured in days, and does not drop in value, just like a CD.
I am losing more with inflation with TSTXX than with longer bonds, but am willing to wait a little longer while interest rate keeps rising.
The difference in yield between TSTXX and BND is 1.5%. The current consensus is the Fed will raise 0.75% next meeting. With BND duration of 6.5 years, that means an additional drop of 0.75%x6.5 = 4.875%. This drop will dwarf the 1.5% difference in yield I am not getting.
I am sticking with TSTXX for now. It has a maturity measured in days, and does not drop in value, just like a CD.
I am losing more with inflation with TSTXX than with longer bonds, but am willing to wait a little longer while interest rate keeps rising.
I think the biggest issue with bond funds are forced redemptions. If a bond fund wasn’t forced to sell, then I don’t think it’s any worse than owning individual bonds, as long as you manage durations.
A lot of the discussion about bonds now fails to take in consideration bonds you would have bought when rates were low. And sure, maybe you waited with cash, but that was a long wait.
Lots of recency bias, IMO.
I should add that I don’t own bond funds. Fixed income for me can’t lose principal, so I only buy for yield with shorter durations. That’s because my risk comes from the 84%+ (and growing) in equities. I need guaranteed cash in case SHTF.
A lot of the discussion about bonds now fails to take in consideration bonds you would have bought when rates were low. And sure, maybe you waited with cash, but that was a long wait.
Lots of recency bias, IMO.
I should add that I don’t own bond funds. Fixed income for me can’t lose principal, so I only buy for yield with shorter durations. That’s because my risk comes from the 84%+ (and growing) in equities. I need guaranteed cash in case SHTF.
Freedom56
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Passive bond funds are dangerous to own. This is why a fund like BND and AGG have failed to outperform cash stuffed in a mattress over the past 10 years and pretty soon since inception. Here are the problems:
1- Bond fund purchases are driven by inflows - Bond funds will buy long duration notes and low yields that most individual bond investor would never consider. For example who in their right mind would buy a 5 year note at a yield of 0.5% or a 10 year note at 1%, or a 20-30 year bond at 2%? Certainly not many individual bond holders. Passive bond funds are programmed to make irrational decisions and buy high when rates are falling. They are holding a lot of low coupon debt that is falling fast. The notion that an individual bond hold would face the same prospects is ridiculous. No individual investor that I know of would buy a 30 year bond with a 2% coupon at or over par nor 10 year notes with a 1% coupon at or over par.
2- Bond funds are forced to sell when they receive redemptions and when rates rise or when the market falls and there is a scramble for liquidity that results in forced selling at a loss. When rates are rising bond funds are in a sell low mode. This is a pattern that has repeated over and over again (2013, 2015, 2018, 2020, and now 2022). This is why their performance is so pathetic.
3- Diversification into weak sectors. Bond funds buy weak companies in declining sectors for the sake of matching a benchmark index that makes absolutely no sense to a fixed income investor.
You can't have years and years of realized capital losses and expect to outperform an individual investor actively managing a bond or CD ladder.
1- Bond fund purchases are driven by inflows - Bond funds will buy long duration notes and low yields that most individual bond investor would never consider. For example who in their right mind would buy a 5 year note at a yield of 0.5% or a 10 year note at 1%, or a 20-30 year bond at 2%? Certainly not many individual bond holders. Passive bond funds are programmed to make irrational decisions and buy high when rates are falling. They are holding a lot of low coupon debt that is falling fast. The notion that an individual bond hold would face the same prospects is ridiculous. No individual investor that I know of would buy a 30 year bond with a 2% coupon at or over par nor 10 year notes with a 1% coupon at or over par.
2- Bond funds are forced to sell when they receive redemptions and when rates rise or when the market falls and there is a scramble for liquidity that results in forced selling at a loss. When rates are rising bond funds are in a sell low mode. This is a pattern that has repeated over and over again (2013, 2015, 2018, 2020, and now 2022). This is why their performance is so pathetic.
3- Diversification into weak sectors. Bond funds buy weak companies in declining sectors for the sake of matching a benchmark index that makes absolutely no sense to a fixed income investor.
You can't have years and years of realized capital losses and expect to outperform an individual investor actively managing a bond or CD ladder.
daylatedollarshort
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I have to correct my previous post. I must have been looking at some of the shorter term TIPS funds. VIPSX is down -12.74%, not -8%, year to date. Individual TIPS bought at auction, held to maturity, are now yielding 1.6% - 1.9% + 8.2% inflation (for the last year), around 10% total return.
Ten year trailing returns for VIPSX are .92% versus a category benchmark of 2.85% - https://finance.yahoo.com/quote/VIPSX/performance?p=VIPSX
Ten year trailing returns for VIPSX are .92% versus a category benchmark of 2.85% - https://finance.yahoo.com/quote/VIPSX/performance?p=VIPSX
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daylatedollarshort
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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What do you think of the ten year returns for VIPSX? Has this fund provided inflation protection over a 10 year period?
VanWinkle
Thinks s/he gets paid by the post
I never needed inflation protection until the last 12 months. My equities provide plenty of inflation protection. If I was 100% fixed income, I would
spend time trying to match inflation. Equities are for eating well, bonds are for sleeping well. This year is an exception, and I hope "this time is different" is not true. Cash would also have looked terrible for the last 10 years. I don't own that fund and likely never will.
VW
