Wait for bond funds to recover or sell at a loss and buy CD's

[tominboise]

In my IRA, I am sitting on 5 bond funds which of course are in a loss position. I am contemplating selling (locking in the loss) and buying a CD ladder. It would take about 2 years at 5% to recover the loss from selling the bond funds. This does not account for any payments from the funds over those two years.

What are the odds ( I know no one can predict the future - just asking for opinions) that bond funds will recover over the next couple of years? Interest rates "should" start to fall as the FED gets inflation under control, but will the bond funds rise back to pre pandemic levels in that time?

I am 63 and not counting on this money for another 6 - 7 years. These bond funds are about 37% of my AA in the IRA. Stock funds make up the other 63%.

[Dash man]

IMO I think you should dump the bond funds and never use them again. CDs and treasuries are a better bet.

[latexman]

I suggest you read this thread. https://www.early-retirement.org/for...ng-114400.html It’s long, but it’s very pertinent to your query.

[Marc]

Quote:

Originally Posted by Dash man IMO I think you should dump the bond funds and never use them again. CDs and treasuries are a better bet.

Until CDs and treasuries settle back to 2-3% and don't keep up with inflation. Advantage of bond funds is the diversification into corporate bonds including those with less than stellar ratings.

There was a book out in late 80s entitled "How to Retire at 35." Their retirement was 500K that was invested in 9% CDs throwing off $45K per year; good thing they made money on their book otherwise their plan was destined for failure.

Marc

[Spock]

My crystal ball sez that rates might dip a little in the short(ish) term as victory is declared on inflation. However I see inflation roaring back as there are a lot of inflationary wheels in motion: forced energy "transition" onto less reliable sources and crappier green appliances (ex heat pumps on waterheaters), reshoring/friendshoring manufacturing out of China, nitrogen (fertilizer) and methane emissions clamp down on farming, the US Treasury is going to issue $1T in additional bonds this year alone and $5.2B per DAY for the next 10 years, etc etc etc.
The counter to the "rates gotta go up to kill inflation" is the US can't afford higher rates on the debt. The Fed will raise inflation targets to just below the torches-and-pitchfork levels and somewhere along the line there will be yield curve control on the longer term debt.
Either way I don't see bond funds recovering pre-pandemic NAVs to recover your losses in a 2 year timeframe unless interest rates are hammered back to pre-pandemic levels.

[Montecfo]

It's all about duration. Not about the vehicle. The time to sell high duration funds was 2021.

[aja8888]

Quote:

Originally Posted by Spock My crystal ball sez that rates might dip a little in the short(ish) term as victory is declared on inflation. However I see inflation roaring back as there are a lot of inflationary wheels in motion: forced energy "transition" onto less reliable sources and crappier green appliances (ex heat pumps on waterheaters), reshoring/friendshoring manufacturing out of China, nitrogen (fertilizer) and methane emissions clamp down on farming, the US Treasury is going to issue $1T in additional bonds this year alone and $5.2B per DAY for the next 10 years, etc etc etc. The counter to the "rates gotta go up to kill inflation" is the US can't afford higher rates on the debt. The Fed will raise inflation targets to just below the torches-and-pitchfork levels and somewhere along the line there will be yield curve control on the longer term debt. Either way I don't see bond funds recovering pre-pandemic NAVs to recover your losses in a 2 year timeframe unless interest rates are hammered back to pre-pandemic levels.

Read this thread (inflation causes)...

https://www.early-retirement.org/for...ml#post2969571

[tominboise]

Quote:

Originally Posted by latexman I suggest you read this thread. https://www.early-retirement.org/for...ng-114400.html It’s long, but it’s very pertinent to your query.

I have been looking at that thread for awhile, which led to my question. Seems like I should move the bond funds and re invest in different vehicles.

[tominboise]

Quote:

Originally Posted by Montecfo It's all about duration. Not about the vehicle. The time to sell high duration funds was 2021.

I've realized that for some time. Obviously I should have sold them when they got close to zero but I was in the "buy and hold" mentality at that time. Does that mean you think I should hold these funds?

[pb4uski]

Quote:

Originally Posted by tominboise In my IRA, I am sitting on 5 bond funds which of course are in a loss position. I am contemplating selling (locking in the loss) and buying a CD ladder. It would take about 2 years at 5% to recover the loss from selling the bond funds. This does not account for any payments from the funds over those two years. What are the odds ( I know no one can predict the future - just asking for opinions) that bond funds will recover over the next couple of years? Interest rates "should" start to fall as the FED gets inflation under control, but will the bond funds rise back to pre pandemic levels in that time? I am 63 and not counting on this money for another 6 - 7 years. These bond funds are about 37% of my AA in the IRA. Stock funds make up the other 63%.

I think you are on the right track. I would dump the bond funds and buy a ladder of CDs or UST or GSE bonds or a combination thereof. Dip into some highly rate (A or better) corporate bonds if you want to.

How did you end up with 5 bond funds? What were they?

[Montecfo]

Quote:

Originally Posted by tominboise I've realized that for some time. Obviously I should have sold them when they got close to zero but I was in the "buy and hold" mentality at that time. Does that mean you think I should hold these funds?

I do not know the funds and holdings, but knee jerk "sell the funds" seems a bit overwrought.

If I liked the fund holdings and durations I would not sell them due to once-a-generation losses which did not spare individual bonds of similar duration.

I personally ladder bonds for most of my fixed income and also hold selected bond funds where that makes more sense.

You can't beat the diversification and liquidity of a good bond fund. But each investment has plusses and minuses.

[Aerides]

One thing that long ago got me over the "wait to recover" idea in any investment when it's clearly underperforming:

Sure, it might recover, one day. But think of it as the last place horse in a long race. You can jump off and get on any other horse, ones that you can see have done better over the recent past.

Of course, past performance blah blah blah, but when something is stinking up the joint, better to dump it and try something else, usually.

[COcheesehead]

Cut your losses, let your profits ride.
Funds will recover, but when. Many hold bonds bought in the past when coupons were low. Many still pay below even money market interest - some like BND and AGG by a lot, almost half. It could take a long time to get back to zero.
A well constructed ladder in investment grade bonds should yield close to 6% today. CDs in the low 5% range.

[tominboise]

The funds in question are:

FIPDX - down 3.87%
FUMBX - down 5.16%
VCSH - down 7.32%
FUAMX - down 11.77%
VCIT - down 17.44%

I am thinking to keep the FIPDX and sell the other 4 funds, to convert into CD's and/or Treasuries.

[COcheesehead]

Quote:

Originally Posted by tominboise The funds in question are: FIPDX - down 3.87% FUMBX - down 5.16% VCSH - down 7.32% FUAMX - down 11.77% VCIT - down 17.44% I am thinking to keep the FIPDX and sell the other 4 funds, to convert into CD's and/or Treasuries.

Have you calculated the yield of all of these in total? You should be able to see interest yearly. Some are ok, some dogs.

[pb4uski]

You can farily easily replicate any Treasury Bond fund with a rolling Treasury ladder of similar term, so I would definitely sell those and go with a rolling Treasury ladder.

For corporate bonds, it can be done but you need to be aware of diversifying credit risk. I have some corporates in my individual bond portfolio, not enough tickers to thorughly diversify but they are all A or better so I'm not so concerned about credit risk.

For the corporates, i would sell those and either just go with Treasuries or perhaps some gonvernment sponsored entity issues.

[latexman]

Quote:

Originally Posted by tominboise I have been looking at that thread for awhile, which led to my question. Seems like I should move the bond funds and re invest in different vehicles.

IIRC, there was an estimate or three in that thread of when bond funds would recover. In every one it was a long time. So, I sold my bond funds in early 2023 and put the $ in money market funds. Right now I’m in SPAXX (4.96%) and FIGXX (5.21%).

[Montecfo]

Quote:

Originally Posted by latexman IIRC, there was an estimate or three in that thread of when bond funds would recover. In every one it was a long time. So, I sold my bond funds in early 2023 and put the $ in money market funds. Right now I’m in SPAXX (4.96%) and FIGXX (5.21%).

But of course if rates rise another 2-3 points, your current portfolio would show large losses and a "new" portfolio yielding then current rates would I guess seem like an attractive alternative.

[VanWinkle]

Only buy bonds that are going up in value, if they are not going up, sell them and buy something else that is going up. This will definitely work for a long range investment plan. I see this decision making happen on a regular basis and the results are less than stellar.

VW

[tominboise]

Quote:

Originally Posted by COcheesehead Have you calculated the yield of all of these in total? You should be able to see interest yearly. Some are ok, some dogs.

Where is your line on OK vs dog, on the annual yields?

FIPDX = 8.78%
FUMBX = 1.4%
FUAMX = 1.97%
VCSH = 2.19%
VCIT = 3.42%

It looks like the middle three are in the dog category to me.