Bond Funds in an IRA Prognostication please

[tominboise]

We have some money in a few bond funds in our IRA's. They are now in a loss position, on the order of -10.8% from our initial investment. We are holding a 60/35/5 AA. We don't plan on tapping this money for another 7.5 years, when RMD's will start for us.

Looking back this year, I should have sold these bond funds when they approached the value of our initial investment, but didn't. I am thinking that perhaps I should sell them now and ladder some of the money into CDs or Treasuries, and put the rest into cash and stock funds. This would, of course, lock in the "loss". It would be around a $120k loss.

The alternative would be to hold the funds for the next 7.5 years and hope for them to rise back 11% (or higher) over the next 7.5 years. Is this a realistic expectation (the Prognostication part of my question)(I understand the risks of market timing and also that no one can predict the future).

This doesn't account for any dividends from the funds, nor from the money that I would earn on the CDs etc, just to keep the question simple.

What would you be doing - selling and reinvesting, or hold and hope?

 

[daylatedollarshort]

How can you lock in a loss in a bond fund?

 

[Midpack]

I sold all our bond funds earlier this year, even a little in taxable, and put all the $ into mostly 26wk TBills (a few 13wk and 52wk) When rates level off I will buy longer bonds. I also took a loss on my bond funds, but I’d owned them all since well before 2008 when lots of “experts” were insisting we should sell them. So I made quite a bit, just not as much as if I’d sold them a little sooner. IMO it’s going to take quite a while for bond funds to recover, but there are better advisors here (obviously).

 

[tominboise]

How can you lock in a loss in a bond fund?

Example - we bought the fund when it was $100/share. It's now worth $80/share. If I sell, I will realize a $20/share loss.

 

[oldtimer]

Example - we bought the fund when it was $100/share. It's now worth $80/share. If I sell, I will realize a $20/share loss.

You need to add the dividends you received to get actual loss/gain amount.

 

[Graybeard]

Example - we bought the fund when it was $100/share. It's now worth $80/share. If I sell, I will realize a $20/share loss.

You need to add the dividends you received to get actual loss/gain amount.

If you can change the cost basis to specific id that will show you exactly how much you have made or lost re the initial investment. Being an IRA, there is no cost basis as it is all taxed as ordinary income when sold but if you can select specific id try that.

 

[tominboise]

You need to add the dividends you received to get actual loss/gain amount.

I understand but as mentioned in the original post, I am ignoring those for the purpose of this question.

 

[COcheesehead]

I understand but as mentioned in the original post, I am ignoring those for the purpose of this question.

You are then ignoring total return.

 

[Dash man]

Rates will continue to rise for the near future, so the funds are likely to drop further. If you sell the funds and reinvest into individual treasuries or corporate bonds, you may see the value of the bonds drop, but you can hold until maturity to receive back your initial investment. Many folks did that at the beginning of the interest rate increases, and it’s probably wise to still make the switch. One of the most common mistakes investors make is holding on to a losing investment “hoping” to recover their loss. The smart move is to sell a loser and find a better investment.

 

[tominboise]

One of the most common mistakes investors make is holding on to a losing investment “hoping” to recover their loss. The smart move is to sell a loser and find a better investment.

This is where I am at on these bond funds.

 

[daylatedollarshort]

Example - we bought the fund when it was $100/share. It's now worth $80/share. If I sell, I will realize a $20/share loss.

I would agree with you about stock funds, but bond funds are really different. With stocks and stock funds most of us tend to hang on and then they will eventually have some big moves where you make a lot of your losses back back on a few trading days at some unknown point in the future.

Bond funds usually don't have sudden huge moves like that, and we know the direction of interest rates for the next year or so because The Fed tells us what they are going to do. They are pretty clearly going to raise interest rates for the foreseeable future to fight inflation. Usually that means raising rates above the inflation level and we've still got quite a gap on on federal funds and CPI or even PCE. The only way I could see coming out ahead in the funds if rates went to near zero again. But even then it usually doesn't happen in the course of a day. The Fed will give some notice when they are starting to level off on interest rates and you can always buy back into the funds with more money than if you stayed with the funds, if that happens. Kiplinger recommends doing exactly that - https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-3.html#post2804752

This Forbes article also covers what is happening now really well - https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309

 

[FREE866]

It's a tough call and I have a similar conundrum in my mom's account as she has a few bond ETF's that are down big. I'm hesitant to jump because "the fed said they are going to do X" as they can change their tune pretty quickly.

 

[Jerry1]

I’m thinking of doing the same thing. It’s easy to say that I should have done it sooner, but the only decision that can be made is for today and forward, not historically. I’m mostly looking at any mid and long duration bond funds that I have. It just doesn’t seem to make sense to hold them when I can buy bonds/notes that essentially guarantee better than 3.5% on a short term holding. Plus, it seems logical to get some liquidity to be ready to buy some longer term bonds if rates really take off. I remember double digit returns on CD’s in the 70’s. If you bought them toward the end of the recession, as interest rates were coming down, with inflation coming down, they would have been great holdings.

Anyway, following this thread. It goes against the buy and hold, no market timing mindset, but it just doesn’t seem like there’s any benefit to holding a bond fund over the coming year. Why not take the loss and redeploy the money in the best way possible?

 

[John Galt III]

My thinking is that if you hold A and think A is going to go down and B is going to go up, then move some or all of A to B, and reap the results. I just moved 30% of my Dodge and Cox bond fund, which has been heading down lately, into a stable value fund getting a steady 2% per year interest. Couldn't talk myself into moving 100%, lol.

 

[eytonxav]

Dumped my bond funds earlier this year, wish I had done it even a few months earlier. Will be laddering CDs and treasuries for shorter terms as I suspect rates will continue to rise.

 

[tominboise]

I’m thinking of doing the same thing. It’s easy to say that I should have done it sooner, but the only decision that can be made is for today and forward, not historically. I’m mostly looking at any mid and long duration bond funds that I have. It just doesn’t seem to make sense to hold them when I can buy bonds/notes that essentially guarantee better than 3.5% on a short term holding. Plus, it seems logical to get some liquidity to be ready to buy some longer term bonds if rates really take off. I remember double digit returns on CD’s in the 70’s. If you bought them toward the end of the recession, as interest rates were coming down, with inflation coming down, they would have been great holdings.

Anyway, following this thread. It goes against the buy and hold, no market timing mindset, but it just doesn’t seem like there’s any benefit to holding a bond fund over the coming year. Why not take the loss and redeploy the money in the best way possible?

Most of the reading I have done point to around a 7 year (maybe as long as 10 year) recovery period for longer term bond funds, following a situation like the one we are in. So a choice is to hold those funds for that period, to get back to where you were, or pull the plug and reinvest in something else that you expect to make more dollars over that 5 to 10 year period.

I am thinking that I will let go of the intermediate and long term funds and hold the short term funds. I'll put some of the cash into laddered CD's and Treasuries, and hold some to put into a total market or 500 index fund. I may buy bond funds again when the bleeding stops and the fed has signaled they are done raising rates, however long that is.

But, when doing the math on putting the whole lot of cash into a 5 year CD, I would only recover about 2/3 of the lost $ if I sold the bond funds today. This also implies that the bond funds never went back up again and never paid any dividends over that same 5 year period.

Putting the $$ into equities could result in a much better, or much worse result over the same 5 years. I would assume better, but we all know what that means.

Decisions, decisions.

 

[audreyh1]

I’m happy holding bond funds in my IRA. I don’t care if they are currently showing a loss in NAV, I’m holding them indefinitely until RMD time. I’ve been through many interest rate cycles. We manage our asset allocation over both our IRAs and taxable accounts, and when bond funds are down, if stock funds are higher, we buy more bond funds when we rebalance. Right now stock funds are down more.

Rebalancing means trimming from the winners to buy more of the losers. This is the exact opposite of the sell your losers and hold on to (or buy more of) your winners advice.

 

[ejman]

I’m thinking of doing the same thing. It’s easy to say that I should have done it sooner, but the only decision that can be made is for today and forward, not historically. I’m mostly looking at any mid and long duration bond funds that I have. It just doesn’t seem to make sense to hold them when I can buy bonds/notes that essentially guarantee better than 3.5% on a short term holding. Plus, it seems logical to get some liquidity to be ready to buy some longer term bonds if rates really take off. I remember double digit returns on CD’s in the 70’s. If you bought them toward the end of the recession, as interest rates were coming down, with inflation coming down, they would have been great holdings.

Anyway, following this thread. It goes against the buy and hold, no market timing mindset, but it just doesn’t seem like there’s any benefit to holding a bond fund over the coming year. Why not take the loss and redeploy the money in the best way possible?

I wonder if it just makes sense for the time being to just leave the proceeds from the bond funds sales in the Vanguard Federal MM account? It seems to be tracking the increasing yield in short term treasuries pretty closely. I calculated the interest rate (annualized) based on my actual dividend distribution at end of August at 2.2%. I would imagine it would be close to or over 3% by now will find out in a few days. The yield data shown on Vanguards listing for VMRXX of 0.18% for August doesn't make any sense to me based on the actual August dividend I received ($119 on VMRXX balance of $65,971) Maybe my math is wrong?

 

[tominboise]

I’m happy holding bond funds in my IRA. I don’t care if they are currently showing a loss in NAV, I’m holding them indefinitely until RMD time. I’ve been through many interest rate cycles. We manage our asset allocation over both our IRAs and taxable accounts, and when bond funds are down, if stock funds are higher, we buy more bond funds when we rebalance. Right now stock funds are down more.

Rebalancing means trimming from the winners to buy more of the losers. This is the exact opposite of the sell your losers and hold on to (or buy more of) your winners advice.

This is why I haven't done anything yet and am asking questions/seeking opinions. It goes against my last 30 years of investing practice.

 

[Lsbcal]

This is why I haven't done anything yet and am asking questions/seeking opinions. It goes against my last 30 years of investing practice.

I did a study early this year of the terrible 1994 bond market and its aftermath. This market is probably a lot worse and it is totally unclear where we go from here.

Here is the chart of some of the assets classes for the 1994 bear market in bonds and the 1995 snapback:

VMBFX = total bond market fund
VFSTX = short term investment grade fund
SP500
3 mo Treasury is right axis, the above 3 use the left axis for returns

In early 1995 the SP500 had a very steep climb. Major gains followed for the bond funds. For bond market timing, maybe the SP500 would work again ... who knows? It's interesting to observe that the 3 month Treasuries did not take a sharp drop prior to the snapback. They just leveled off. The Fed funds rate (not shown) stopped rising around April 1994. Maybe markets started to anticipate an easing in Fed policy?

So if history repeats and you've rode your bond funds this far in the gully it would be wise to just stick with them.

 

[daylatedollarshort]

This is why I haven't done anything yet and am asking questions/seeking opinions. It goes against my last 30 years of investing practice.

If you read the Forbes article in the link above, it addresses that. Up until recently, interest rates had been falling globally, in real and nominal terms, since the 1980s. This is the first time we've had high inflation and a sharp increase in interest rates in decades. Mutual funds have only been popular since the 80s and 90s, so their bond funds' performance have never really been tested out before in conditions like these.

 

[tominboise]

I did a study early this year of the terrible 1994 bond market and its aftermath. This market is probably a lot worse and it is totally unclear where we go from here.

Here is the chart of some of the assets classes for the 1994 bear market in bonds and the 1995 snapback:

VMBFX = total bond market fund
VFSTX = short term investment grade fund
SP500
3 mo Treasury is right axis, the above 3 use the left axis for returns

In early 1995 the SP500 had a very steep climb. Major gains followed for the bond funds. For bond market timing, maybe the SP500 would work again ... who knows? It's interesting to observe that the 3 month Treasuries did not take a sharp drop prior to the snapback. They just leveled off. The Fed funds rate (not shown) stopped rising around April 1994. Maybe markets started to anticipate an easing in Fed policy?

So if history repeats and you've rode your bond funds this far in the gully it would be wise to just stick with them.

This is good information - thank you.

 

[Chuckanut]

Rebalancing means trimming from the winners to buy more of the losers. This is the exact opposite of the sell your losers and hold on to (or buy more of) your winners advice.

Next you will be telling us to buy our Panama hats in winter and our parkas in summer.

Keep it up and I will put you on my list of dangerous radicals who infest this site. The list has quite a few new candidates this year, but there is room for more.

 

[aja8888]

I did a study early this year of the terrible 1994 bond market and its aftermath. This market is probably a lot worse and it is totally unclear where we go from here.

Here is the chart of some of the assets classes for the 1994 bear market in bonds and the 1995 snapback:

VMBFX = total bond market fund
VFSTX = short term investment grade fund
SP500
3 mo Treasury is right axis, the above 3 use the left axis for returns

In early 1995 the SP500 had a very steep climb. Major gains followed for the bond funds. For bond market timing, maybe the SP500 would work again ... who knows? It's interesting to observe that the 3 month Treasuries did not take a sharp drop prior to the snapback. They just leveled off. The Fed funds rate (not shown) stopped rising around April 1994. Maybe markets started to anticipate an easing in Fed policy?

So if history repeats and you've rode your bond funds this far in the gully it would be wise to just stick with them.

Note that inflation in 1994 was under 3% while now it is almost 9%. Different FED goals back then.

 

[aja8888]

Rebalancing means trimming from the winners to buy more of the losers. This is the exact opposite of the sell your losers and hold on to (or buy more of) your winners advice.

Great plan but with the stock funds and bond funds tanking at the same time it's got to be hard to accomplish this.