Mutual bond fund question

[Packerbacker]

We have an IRA which we draw a small amount from as Social Security and pension take care of the rest of our expenses. We have an asset allocation of 60% bonds and 40% equities. Have done well with it until now. With the current bond environment, my question is what do you do with the bond allocation? Do you remain true to your original allocation and wait it out? Usually with equity funds you know they will eventually bounce back if they go down, but what about bond funds? Thanks for any input.

 

[REWahoo]

With the current bond environment, my question is what do you do with the bond allocation? Do you remain true to your original allocation and wait it out?

That's my strategy.

Usually with equity funds you know they will eventually bounce back if they go down, but what about bond funds?

I'm in it for the long run and expect (hope) they will bounce back from whatever decline we see. Regardless, they will continue to pay dividends, income we use to help fund our retirement.

 

[RE2Boys]

I'm moving general bond funds into short term bonds for past year. Just sold the last long duration bond fund yesterday. Will go either with short term bond fund or cash equivalent/cd.

 

[nun]

What you do with your bonds will depend of the type of bond funds you own and your satisfaction with your AA.

When I set up my AA I went with a fairly Lazy 50/50 portfolio and my bond funds have durations of around 5 years (the exception is Wellesley with a duration of 7 years). As I have intermediate duration bonds an interest rate rise will have an intermediate impact on their price and I won't have to wait long for the increased interest rates to compensate for loss in value.

So my strategy for bonds is to own intermediate term bonds and not to bother too much about interest rates as I'm prepared to hold them and rebalance. I do keep some money in short term bonds that I might need within a couple of years.

 

[David1961]

I'm in it for the long run and expect (hope) they will bounce back from whatever decline we see. Regardless, they will continue to pay dividends, income we use to help fund our retirement.

+1

 

[RockyMtn]

IMHO with interest rates having nowhere to go but up I am shortening the duration of my bond funds. This allows you to stay true to your AA while minimizing the result of an interest rate hike.

 

[W2R]

That's my strategy.

I'm in it for the long run and expect (hope) they will bounce back from whatever decline we see. Regardless, they will continue to pay dividends, income we use to help fund our retirement.

+2

I still have the same bond fund allocation that I had five years ago. My bonds are divided among Vanguard's Total Bond Index fund, Vanguard's Wellesley Fund, and the TSP's G Fund. So far a tiny pension plus the dividends from my portfolio have covered my living expenses.

 

[target2019]

We have an IRA which we draw a small amount from as Social Security and pension take care of the rest of our expenses. We have an asset allocation of 60% bonds and 40% equities. Have done well with it until now. With the current bond environment, my question is what do you do with the bond allocation? Do you remain true to your original allocation and wait it out? Usually with equity funds you know they will eventually bounce back if they go down, but what about bond funds? Thanks for any input.

There's more to the 60% bond allocation, and it might be the right time to simply look at the various parts, and try to understand what might/could happen.

 

[SoReady]

That's my strategy.

I'm in it for the long run and expect (hope) they will bounce back from whatever decline we see. Regardless, they will continue to pay dividends, income we use to help fund our retirement.

I am starting to reallocate a good portion of my portfolio to simplify it and be in good shape for retirement, which was forced upon me this month.

So, I'm trying to determine what the dividends are for a Bond Fund. When I look at Vanguard Intermediate Bond Fund (VBILX) under the tab for distributions I see the distributions for 4/30 at .02810. The reinvest price is $12. Would I be correct in estimating the yearly distribution on say $100k to be: $100k/$12(price per share)*.02810(dividend)*12(months)? I know there are LT and ST gains and dividends fluctuate, but strictly speaking on dividends, this would come to $2810 per year. Do I have this correct?

 

[ejman]

We have an IRA which we draw a small amount from as Social Security and pension take care of the rest of our expenses. We have an asset allocation of 60% bonds and 40% equities. Have done well with it until now. With the current bond environment, my question is what do you do with the bond allocation? Do you remain true to your original allocation and wait it out? Usually with equity funds you know they will eventually bounce back if they go down, but what about bond funds? Thanks for any input.

I've maintained my % bond allocation but I have been shortening duration gradually. Of course, the trade off is lower dividend income. Nobody knows how the long the present environment will last. It could be months, it could be years, it could be decades for all I know.

If it is months - go to cash or if really adventurous - go short

if it is a few years - shorten duration

if it is decades, ignore all the duration talk and go long.

Which is it going to be? I wish I knew...

 

[sengsational]

Related Question about Bond Funds vs Bonds

If I set-up a ladder myself, then I'm the one that decides if any bond will be sold in an unfavorable interest rate environment (and so give up the original guarantee of the bond). But in a bond fund, it seems like there will be turnover, just to cover people bailing out for greener pastures. So don't the buy and hold bond fund investors essentially take the hit of this "selling at the wrong time?"

 

[nun]

I've maintained my % bond allocation but I have been shortening duration gradually. Of course, the trade off is lower dividend income. Nobody knows how the long the present environment will last. It could be months, it could be years, it could be decades for all I know.

If it is months - go to cash or if really adventurous - go short

if it is a few years - shorten duration

if it is decades, ignore all the duration talk and go long.

Which is it going to be? I wish I knew...

That's why I stay in the middle with intermediate bond durations. If you just put it in Total Bond Index you'll have some money in everything, but the average duration will be 5 or 6 years. I don't like to time the market, be that equity or bonds. I'll take the price hit in the knowledge that the extra interest income will compensate.

 

[Independent]

My problem with selling bonds is "What do I buy?". Sure, bonds are going to provide very low yields from today's market prices, and their prices will go down when interest rates go up. But, for all I know, stocks are poised for a nosedive of some sort. Maybe bonds will look great with 20/20 hindsight in 2015.

If you've been rebalancing faithfully right through the financial crisis, you bought stocks when they were low and you've seen them double. I'm not going to try to beat the other investors, just stay even with them.

 

[SJ1_]

I'm moving general bond funds into short term bonds for past year. Just sold the last long duration bond fund yesterday. Will go either with short term bond fund or cash equivalent/cd.

That is pretty much what I did.
We only have about 15% of our non equity in bonds the rest is in CD's

 

[pb4uski]

Last year I got out of Total Bond because it was too Treasury heavy for my taste and have been in a mix of Short, Intermediate-Term and High Yield Corporate Bond funds.

More recently I have been transitioning to Guggenheim target date bond funds.

 

[clifp]

The 3% drop in the NAV of Vanguard GNMA over the last couple of weeks coupled with the headline in today's WSJ.
Swoon in Bonds Puts Eye on Fed

I sold 1/2 my GNMA position and will be using to pay off my HELCO.

My mom has a much large position in GNMA (she own the fund before the advent of the Total bond market fund.) I have been gradually moving it in to Wellesley and Wellington. Today I sold 2/3 of it and put the proceeds in Vanguard short term, investment grade index fund. The 1.1% yield is nothing to write home about but hopefully this will avoid the additional 5-10% drop in the GNMA fund.

 

[pb4uski]

The 3% drop in the NAV of Vanguard GNMA over the last couple of weeks coupled with the headline in today's WSJ. .....

I sold on May 15 as part of doing some other repositioning and had not looked at GNMA since so I guess I got lucky.

 

[enjoyinglife102]

Those who have been shortening up durations for the past year (or years) leave out an important part of the analysis - how much did they "lose" over the year(s) making this move? I remember investing in a 5 year CD 3 or 4 years ago and the experts were advising to wait for rates to rise. If I followed that advice, I'd still be waiting and missed all that income. Obviously current interest rates are very low but like other posters have said, I'm in intermediate bonds, will continue to enjoy the income they throw off and will rebalance taking advantage of any price declines by automatically investing in them should they end up being the underperforming asset class. I'm just not smart enough to forecast interest rates but I am smart enough to read a spreadsheet.

 

[clifp]

I sold on May 15 as part of doing some other repositioning and had not looked at GNMA since so I guess I got lucky.

I sold some on that same day, but at this point I am just keeping enough in to qualify for Admiral shares.

 

[RE2Boys]

Those who have been shortening up durations for the past year (or years) leave out an important part of the analysis - how much did they "lose" over the year(s) making this move? I remember investing in a 5 year CD 3 or 4 years ago and the experts were advising to wait for rates to rise. If I followed that advice, I'd still be waiting and missed all that income. Obviously current interest rates are very low but like other posters have said, I'm in intermediate bonds, will continue to enjoy the income they throw off and will rebalance taking advantage of any price declines by automatically investing in them should they end up being the underperforming asset class. I'm just not smart enough to forecast interest rates but I am smart enough to read a spreadsheet.

You do make a very good point in that by moving to short duration bonds one gives up income while waiting for the move in interest rates (dare I call it bond market timing?). But the duration issue is also one of how much risk one wishes to take on regarding bonds. My recent moves is to lessen the perceived risks. While out most pure bond funds except short duration, have kept significantly invested in balanced funds. Your point deserves serious consideration in the decision to change durations.

 

[rbmrtn]

Your point deserves serious consideration in the decision to change durations.

Some other points to consider. Capital gains, I sold a good chunk of bond funds in Dec, the CGs were worth about 8 years of income going forward. The income from those funds had been declining significantly as well.

For duration, short term bond funds are barely paying 1%, You can get that with online savings accounts without the risk. Longer term CDs in 1.75-2% range and you break those if needed.

 

[nun]

Those who have been shortening up durations for the past year (or years) leave out an important part of the analysis - how much did they "lose" over the year(s) making this move? I remember investing in a 5 year CD 3 or 4 years ago and the experts were advising to wait for rates to rise. If I followed that advice, I'd still be waiting and missed all that income. Obviously current interest rates are very low but like other posters have said, I'm in intermediate bonds, will continue to enjoy the income they throw off and will rebalance taking advantage of any price declines by automatically investing in them should they end up being the underperforming asset class. I'm just not smart enough to forecast interest rates but I am smart enough to read a spreadsheet.

You could equally well argue that those who have been in intermediate bonds for the last few years have given up those long term gains.....it's all just an argument for bond index investing.

I emphasize the income producing aspects of bonds, so if rates go up I'll be happy and take the eventual extra income. I've often thought about constructing a target date bond ladder when I retire, but as I'm not planning on spending down my bond allocation in ER, just taking the income, I don't really see the need. If I have to rebalance I'll be either buying bonds on the way down or selling on the way up which is ok with me. As I don't intend to sell bonds on a regular basis to support my spending a bond ladder doesn't seem to offer much advantage over a regular bond fund, but if you have a plan to spend down your bonds then a ladder would have an advantage.

 

[audreyh1]

Those who have been shortening up durations for the past year (or years) leave out an important part of the analysis - how much did they "lose" over the year(s) making this move? I remember investing in a 5 year CD 3 or 4 years ago and the experts were advising to wait for rates to rise. If I followed that advice, I'd still be waiting and missed all that income. Obviously current interest rates are very low but like other posters have said, I'm in intermediate bonds, will continue to enjoy the income they throw off and will rebalance taking advantage of any price declines by automatically investing in them should they end up being the underperforming asset class. I'm just not smart enough to forecast interest rates but I am smart enough to read a spreadsheet.

Not only that, but it seems that the short-term bonds have been bid up more than the intermediate bond by those seeking safety from an interest rate rise.

I have an allocation to short-term bond funds as part of my AA, but the rest are intermediate term, and we'll be holding those for decades (I hope).

I don't believe in shortening duration across the board in an attempt to avoid some loss. As you wait for the "dreaded event" you can be loosing out on dividends, and even when the "dreaded event" occurs, the outcome is not always permanent, or can even play out in totally unexpected ways.

Better just to rebalance (buy more) whenever a given asset class gets hit hard.

 

[Packerbacker]

Thanks to all of you for your insightful thoughts and opinions.

 

[CH]

We have an IRA which we draw a small amount from as Social Security and pension take care of the rest of our expenses. We have an asset allocation of 60% bonds and 40% equities. Have done well with it until now. With the current bond environment, my question is what do you do with the bond allocation? Do you remain true to your original allocation and wait it out? Usually with equity funds you know they will eventually bounce back if they go down, but what about bond funds? Thanks for any input.

The Vanguard government bond funds I owned (VFIJX=GNMA, VIPSX=TIPS) have traditionally moved counter-cyclical to equities. Today the DJIA fell over 200 points. In normal times, the bond funds would have almost certainly been up, but today they were down. For the last 4 weeks, VFIJX was down 2.4%, VIPSX was down 4.3%. These intermediate government bond funds are not providing the diversification I bought them for. After holding for well over a decade, I gave them the ski-doo today and bought short term high-grade bond funds and money market fund. You can stand on principle and get what you deserve...or you can think for yourself.