Still hanging on to my Bond Fund

[Dufferin]

I have a significant investment in the Vanguard Total Bond Market Index Fund Admiral Shares(VBTLX). I have always used this fund as the fixed income portion of my asset allocation. The smart people got out when interest rates started going up and the value of this fund started dropping. Not me as I stuck with it in the anticipation that as the fund replaced its lower interest bonds with new bonds at the higher interest rates the fund would recover. This doesn’t seem to be happening. The current NAV is only $9.36 and it has been as high as $11.64.

To compound the issue, I am fully invested and when I take my annual RMD, I am forced to sell at a loss and use some of my RMD to pay taxes. What is left of the RMD, I use to buy additional shares in the same fund in a taxable account.

I am now very nervous of this fund. Should I continue to hold the course and keep this investment anticipating that it will go up eventually or should I sell and absorb the losses and invest the proceeds in CD’s or Money Market.

I would be interested in hearing suggestions.

[pb4uski]

A common question. I would sell and reinvest in a US Treasury and CD ladder.

A 10 year UST/CD ladder should yield about 4.7% based on today's interest rates. When a UST or CD matures just buy a new 10 year UST or CD to replace the maturing rung of the ladder.

If you need cash flow then the reinvestment will be smaller.

OTOH, the bonds in VBTLX are yielding 4.8% but the distribution yield is only 3.23%.

Your UST and CD may at times be less than what you paid but if you hold them to maturity any losses will magically disappear as you receive par value at maturity.

Now all of that said, what happened in the past is past, and assuming interest rates don't go up much from here and perhaps drift down over time staying in VBTLX isn't a big mistake.

[Montecfo]

I am dubious to total bond funds. I do not want to own the entire bond market. Too much Treasury. Too focused on large issuers.

Having said that the time to get out was two years ago.

So now, how do you want to invest your bond allocation? The answer to THAT question should be the driver of your action, not frustration due to what could be a once in a lifetime move in bonds, which is in the past.

[OldShooter]

Quote:

Originally Posted by Montecfo ... So now, how do you want to invest your bond allocation? The answer to THAT question should be the driver of your action, not frustration due to what could be a once in a lifetime move in bonds, which is in the past.

Yes. This is basically a sunk cost problem. Sunk costs should always be ignored, painful though that may be. (https://en.wikipedia.org/wiki/Sunk_cost)

[pb4uski]

^^^ +1 The unrealized loss on the bond fund is akin to a sunk cost. Since it is common to the stay in bond fund or drop the bond fund alternatives, it isn't a differentiating factor in the decision.

[mrfeh]

Quote:

Originally Posted by Dufferin I have a significant investment in the Vanguard Total Bond Market Index Fund Admiral Shares(VBTLX). I have always used this fund as the fixed income portion of my asset allocation. The smart people got out when interest rates started going up and the value of this fund started dropping. Not me as I stuck with it in the anticipation that as the fund replaced its lower interest bonds with new bonds at the higher interest rates the fund would recover. This doesn’t seem to be happening. The current NAV is only $9.36 and it has been as high as $11.64. To compound the issue, I am fully invested and when I take my annual RMD, I am forced to sell at a loss and use some of my RMD to pay taxes. What is left of the RMD, I use to buy additional shares in the same fund in a taxable account. I am now very nervous of this fund. Should I continue to hold the course and keep this investment anticipating that it will go up eventually or should I sell and absorb the losses and invest the proceeds in CD’s or Money Market. I would be interested in hearing suggestions.

The time to sell was 18-24 months ago. Definitely not now.

The lesson to learn from this is if you know you're going to sell something in the near future (<5 years), have those funds in something with the appropriate investment horizon (ie. not total bond).

[Tranquility Base]

Quote:

Originally Posted by mrfeh The lesson to learn from this is if you know you're going to sell something in the near future (<5 years), have those funds in something with the appropriate investment horizon (ie. not total bond).

Can you elaborate on this a bit please? I don't disagree. But I (as have others) have had it drilled into my head for decades that bonds are ballast and (as a general rule) when stocks go down bonds go up, or at least the waves and valleys with bonds won't be as high and as low as they would be with stocks. The thought/explanation was that if the market is down you will look to your bonds or bond funds for whatever money you need to pull out. The past few years have rid me of that notion. Fortunately I never had to sell anything. I sold things, but not because I needed to do so to generate income or spending money. But I got just as sick to my stomach watching the bonds and bond funds sink and not provide any of the so called ballast. What was the OP supposed to hold the funds in short of cash in a sock under the mattress? Thanks.

[COcheesehead]

Financial planning usually boils down to some variation of a bucket system - maybe not called that by some, but you need funds for immediate - intermediate expenses. Some funds to take advantage of a longer term horizon - if you have some years left and then some funds to replenish the immediate - intermediate needs.
If it’s all longer term investments, volatility risk or return sequence risk comes into play and you may have to sell when your investments are down.

[Palmtree]

This is what I posted on the Bogleheads forum a few weeks ago......

I’m retired, in my 60’s and have close to the classic 60:40 portfolio in my IRA, with the majority of my bond holdings in Vanguards total market bond index fund. I understood that stocks were for risk and bonds were for safety, so I, like many here, was taken by surprise how far it fell during the last major downturn. I’ve been through a few of these, so I didn’t panic and just waited it out. Now the stock market has rebounded nicely, but total bond funds are still a victim of rising interest rates with the prospect of a slow recovery.

Lately I'm been pondering over “Stay the Course” vs “Sunk Cost”.
For decades I’ve been a proponent of ignore the noise and stay the course. But I’m also familiar with the idea of sunk cost. What’s gone is gone. If you suddenly had the equivalent value of your investment in cash, would you invest it right back into the same thing?
Current YTD for BND is 2.64% and just 2.89% since 2007. Even at these low rates, the investment is subject to market risk.
A current 1 year T-Bill is paying 5.34% and is guaranteed by the federal government.
Current CD rates yield 5 to 6%, going out on various timelines and are FDIC insured.
So it seems my choices are: stay the course with a risker investment with a lower yield, or realizing the sunk cost and sell the bond funds then invest in higher yielding instruments with almost no risk at all.

For the past few weeks I’ve been thinking about what is the right thing to do, if anything. I certainly understand the appeal to “Stay the Course” as it has served me well. But if I suddenly had the cash equivalent, I would be very hesitant to invest it back into the bond index fund. What am I missing?"


Some people recommended stay the course. Others, cut my losses and reinvest. I'm still undecided.

[pb4uski]

Quote:

Originally Posted by Palmtree ...if I suddenly had the cash equivalent, I would be very hesitant to invest it back into the bond index fund. ...

You answered your own question.

That is on top of the difference in yield vs the bond fund distribution yield.

[COcheesehead]

The decision to hold or sell and buy current yield is a math equation. What do I need to earn to make up for my loss? The equation only works though if you know your capital won’t erode any further and that really is only a guarantee in individual issues with a par or to a somewhat lessor degree with target date bond funds.

[mrfeh]

Quote:

Originally Posted by Tranquility Base Can you elaborate on this a bit please? I don't disagree. But I (as have others) have had it drilled into my head for decades that bonds are ballast and (as a general rule) when stocks go down bonds go up, or at least the waves and valleys with bonds won't be as high and as low as they would be with stocks. The thought/explanation was that if the market is down you will look to your bonds or bond funds for whatever money you need to pull out. The past few years have rid me of that notion. Fortunately I never had to sell anything. I sold things, but not because I needed to do so to generate income or spending money. But I got just as sick to my stomach watching the bonds and bond funds sink and not provide any of the so called ballast. What was the OP supposed to hold the funds in short of cash in a sock under the mattress? Thanks.

2022 was a once-every-40-years type of event with bonds. Most of the time what you describe above is true.

For money I need in <5 years, I keep it in CDs, treasuries and short term bond funds. The average duration of most total bond funds is 6-7 years.

People also need to realize that even though the NAV of total bond dropped a lot last year, it doesn't necessarily mean you're selling at a loss. Total return (NAV change from buy to sell AND dividends received during that time) needs to be computed to see how the investment being sold performed.

Since I won't be selling any of my total bond shares for many years, I am very happy rates have increased, as I will be reaping the increased dividends for many years to come.

[Tranquility Base]

Quote:

Originally Posted by mrfeh 2022 was a once-every-40-years type of event with bonds. Most of the time what you describe above is true. For money I need in <5 years, I keep it in CDs, treasuries and short term bond funds. The average duration of most total bond funds is 6-7 years. People also need to realize that even though the NAV of total bond dropped a lot last year, it doesn't necessarily mean you're selling at a loss. Total return (NAV change from buy to sell AND dividends received during that time) needs to be computed to see how the investment being sold performed. Since I won't be selling any of my total bond shares for many years, I am very happy rates have increased, as I will be reaping the increased dividends for many years to come.

Thank you!

[Montecfo]

I think folks have been lulled into viewing a total bond fund as desirable. In my view it is not. Holding the entire bond market in a single fund does not work that well.

Another thing people have been killed into misunderstanding is interest rate risk aka duration risk.

When interest rates rise sharply both stocks AND bonds should drop in value. And longer duration bonds can drop a LOT, despite what someone made you think regarding bonds as "ballast".

So in such cases you need some low duration funds. Which is another way of saying that putting all of your bond eggs into the total bond basket (at say 6.5 duration) is not a great plan because that gives you just one bucket from which to pull funds for spending, rebalancing, etc.

Note that bond ladders, for all their benefits, also have the weakness of not providing ready funds for rebalancing.

[COcheesehead]

A ladder’s intent isn’t to provide a pot for rebalancing. It’s value is to hedge interest rate and duration risk, all the while providing an almost guaranteed return of capital.

[dknighd]

I occasionally think if all my deferred savings were suddenly turned into cash, what would I do? I certainly would not leave it all in cash. I'd probably reinvest it about the way it is now. This is assuming it all stayed in tax deferred accounts. But you have a different problem, see below.
I own some "core" bond fund (which I assume are like "total" bond). I also own some "inflation indexed" bond fund. They have not done well recently, which means it may not be a bad time to buy them, if you are willing to buy and hold during bumps in the road. But most of my "fixed income" is invested in shorter term, or guaranteed, things. This is all in tax deferred accounts.

I do not think I'd buy "total" bond fund in a taxable account. I hate paying taxes on dividends, while watching my balance go down. Been there, done that.
I think if I was forced to take RMD, not there yet, I'd take the RMD from whatever was doing best that year, then consider how I'd like it invested in a taxable account. It might be in similar accounts, or I might use that as an opportunity to change my thinking, in part because the tax issue had changed. Honestly I might put it all in a MM account just for simplicity, or maybe CD's if I knew I was not going to need the money before they matured. Only if the balance got too high would I consider complicating my tax filing by buying stock or bond funds. I value simple, and predictable, tax bills. But that could change, I suppose.

[Montecfo]

Quote:

Originally Posted by COcheesehead A ladder’s intent isn’t to provide a pot for rebalancing. It’s value is to hedge interest rate and duration risk, all the while providing an almost guaranteed return of capital.

It is the same point I made.

If someone's entire fixed income portfolio is in a bond ladder, there are no ready funds for rebalancing.

[dknighd]

Quote:

Originally Posted by Montecfo It is the same point I made. If someone's entire fixed income portfolio is in a bond ladder, there are no ready funds for rebalancing.

And, there are not ready funds for spending.

[VanWinkle]

I believe if you are pulling RMDs from this fund now, you should likely be in a shorter duration fund due to matching duration to the need for the funds, A short term treasury fund or short term bond index fund would be a better match for the duration. Even a combination of short term bonds and a money market/CD ladder would work well.

[COcheesehead]

Quote:

Originally Posted by dknighd And, there are not ready funds for spending.

On the contrary. A ladder throws off regular interest. Mine pays me about 145% of my retirement spending needs. It’s my main income source.