Sell bond index funds at a loss in order to buy CDs?

[Lsbcal]

You and others that worship Vanguard need to see for yourself what VFSUX is holding. ....

Socialization skill refresher course is in order.

 

[Markola]

We built our portfolio soberly, during the good times, to best weather the storms over the long term. I can’t see tossing the plan overboard because there’s a storm. The Total Bond Index is on track for 2 down years in a row. Odds are, a third one is unlikely, as noted below. Besides, that fund is down less than the Total Stock Market Index Fund this year, which means it’s doing its job as portfolio ballast during one of these occasional periods when everyone is selling everything. I’ve invested through several of those and my attempts to “optimize for current conditions” cost me a lot of money in hindsight.

 

[Trooper]

Thanks for the data @Markola, which I assume is for BND/VBTLX. I have all of 90% of my fixed income allocation in VBTLX/VFSUX, and like you I am 100% a "stay the course" investor - no market timing nor changes to my IP due to current market conditions.

However I am struggling in this environment, especially after reading this thread. Your data can be interpreted as you have, i.e. that the likelihood of more down years is low, given the history. But we all know know that prior returns are not a guarantee of future results.

I am considering dipping my toe, for the first time, in T-Bills/Notes/Bonds. All of my bond fund $ are in traditional IRAs, so no tax consequence from selling and reinvesting. But first I need to get better educated on Treasuries, as well as the mechanics of buying/selling/laddering.

 

[ejman]

Fascinating discussion and resulting actual experiment between folks in the "market timing for bonds is the way" vs the "stay the course" St. Bogle trained group. At least on this thread it seems that the market timers are way ahead and they have a very powerful voice with the posts of Freedom56 who appears to the untrained eye (moi) to have vast bond knowledge. Hope am still around 3-5 years down the line to see which camp actually comes out ahead by that time. As to myself, I'm still sitting on the fence as all my previous attempts at market timing prove disastrous since what I thought was insight on my part was following the herd along with so many others. I just don't know which herd will come out ahead!!

 

[daylatedollarshort]

Fascinating discussion and resulting actual experiment between folks in the "market timing for bonds is the way" vs the "stay the course" St. Bogle trained group. At least on this thread it seems that the market timers are way ahead and they have a very powerful voice with the posts of Freedom56 who appears to the untrained eye (moi) to have vast bond knowledge. Hope am still around 3-5 years down the line to see which camp actually comes out ahead by that time. As to myself, I'm still sitting on the fence as all my previous attempts at market timing prove disastrous since what I thought was insight on my part was following the herd along with so many others. I just don't know which herd will come out ahead!!

Is it really "market timing" to know that bond prices are going to drop when the members of The Fed, who set the federal funds rates, say they are going to significantly raise the federal funds rates for the coming year? Market timing means using "predictive measures", so just following what the Fed says they are going to do and reacting accordingly doesn't exactly seem like Ouija board territory to me.

 

[Lsbcal]

I think "market timing" is just a slur and means nothing without a full analysis of the investment methods.

 

[daylatedollarshort]

I think "market timing" is just a slur and means nothing without a full analysis of the investment methods.

I get the feeling it is a slur propagated by some in the fund industry to keep people from ever selling money losing bond funds. There is no Fed for stocks so the same logic doesn't necessarily apply to bond funds.

 

[Freedom56]

Is it really "market timing" to know that bond prices are going to drop when the members of The Fed, who set the federal funds rates, say they are going to significantly raise the federal funds rates for the coming year? Market timing means using "predictive measures", so just following what the Fed says they are going to do and reacting accordingly doesn't exactly seem like Ouija board territory to me.

Couldn't agree more and add, is it really "market timing" to apply some common sense and hold cash rather than lock a 5 year note at 0.33%, a 10 year note at 0.9%, or a 30 year bond at 1.6%. Cash and Fixed income are the most predictable asset classes.

 

[ejman]

Is it really "market timing" to know that bond prices are going to drop when the members of The Fed, who set the federal funds rates, say they are going to significantly raise the federal funds rates for the coming year? Market timing means using "predictive measures", so just following what the Fed says they are going to do and reacting accordingly doesn't exactly seem like Ouija board territory to me.

Fair enough. Only question is how can you be 100% certain that the Fed will actually do what they say they will do? You saw what England just went thru didn't you? If you know the future with 100 % certainty I suspect you have quite a unique gift. But peace, I'm really don't enjoy this discussion much mainly because I'm rather dumb on this subject as I am on many others so I'll just bow out. You guys have fun. I'll read this thread for entertainment purposes only. Bye

 

[daylatedollarshort]

Fair enough. Only question is how can you be 100% certain that the Fed will actually do what they say they will do? You saw what England just went thru didn't you? If you know the future with 100 % certainty I suspect you have quite a unique gift. But peace, I'm really don't enjoy this discussion much mainly because I'm rather dumb on this subject as I am on many others so I'll just bow out. You guys have fun. I'll read this thread for entertainment purposes only. Bye

Because the Fed members said their top priority was inflation, a target rate of 2% annual inflation and one member was talking about 6 -7 rate increases at the beginning of the year. Historically interest rates have to go higher than the inflation rate to bring down inflation. That is what Volker did. Earlier in the year annual CPI inflation was at 8 - 9 %, and the federal funds rate was at .25 - .50%. That means real interest rates were around -8%, maybe a little less if you use the PCE index instead of CPI, but that is still a huge gap by historical standards.

As the Fed raise rates inflation should start coming down, but if raising rates and inflation meet in the middle that still meant a 4% increase in interest rates. Now it is looking like interest rates may need to go even higher, based on latest job growth and inflation numbers.

I don't have a unique gift. I just remember what Volker did to end high inflation and and that there aren't a lot of other options for the Fed to take. Many economists, including Larry Summers, have been posting about this all year and I have previously posted links to some of their articles.

Related link: Raising interest rates is a lesson Powell learned from former Fed chair Paul Volcker - https://www.npr.org/2022/09/22/1124...powell-learned-from-former-fed-chair-paul-vol

 

[Chuckanut]

Couldn't agree more and add, is it really "market timing" to apply some common sense and hold cash rather than lock a 5 year note at 0.33%, a 10 year note at 0.9%, or a 30 year bond at 1.6%. Cash and Fixed income are the most predictable asset classes.

I sold all my long and medium term bond fund holdings about two years ago when I read that some banks in Europe had gone to [-]paying[/-] collecting negative interest on customer savings. Several working class Germans were featured in the article. IIRC, my Ally savings were all paying well under 1% here in the USA. Much less and they would need to introduce negative interest like the Germans and others. Put in $100 on Jan 1, end up with $99.5 on Dec 31.

Is that market timing? Maybe to an extent. It was pretty obvious at that point if interest rates moved even as little as 1% it had to be up. I doubt if any USA bank could have got away with collecting money from Joe and Jane Citizen based upon negative interest rates.

If I was really a market timer (and a good one) I would have also ditched my short-term money funds at the time.

 

[PointBreeze]

OP here. Thanks to everyone for a spirited and enlightening discussion.

I moved half of my fixed income allocation to five-year ladder of 4.8% - 5% CDs and feel quite good about that decision. YMMV, but I’m sleeping better.

 

[Trooper]

Thanks for the update, OP. Is there a reason you chose CDs over Treasuries (bills, notes)?

 

[PointBreeze]

Thanks for the update, OP. Is there a reason you chose CDs over Treasuries (bills, notes)?

Good question, Trooper. The primary reason is because I didn’t have to wait for the particular duration note/bill I wanted to come up for auction. I was able to purchase the CDs when it was convenient to me. Secondarily, I have more experience with CDs than with Treasuries.

 

[Trooper]

Good question, Trooper. The primary reason is because I didn’t have to wait for the particular duration note/bill I wanted to come up for auction. I was able to purchase the CDs when it was convenient to me. Secondarily, I have more experience with CDs than with Treasuries.

Thanks PointBreeze. I'm choosing T-Bills for now because I am ramping up the learning curve on Treasuries, and I didn't want the CD early-cancellation penalty risk in the event rates rise.

 

[rkser]

Another guy here with lots of BND in Tax deferred accounts & do not know what the heck to do with them. Been a Index buy & hold guy so far. Do not understand Bonds well at all.

Trying to learn fixed income or give fixed income to fidelity to manage at 0.4% fee. We are in our 1st yr of retirement & am spending dividends from taxable VTI + cash from savings so far & plan to sell VTI soon for living expenses in Taxable to get back to 60/40 from 67/33.

The only time I sold BND this year at a loss in IRA is when I did roth conversions. Yes our IRAs are bleeding when I sell, I can postpone selling them for a few years as I do not want to lock in a loss.

I am sorry for my babble above

 

[COcheesehead]

Another guy here with lots of BND in Tax deferred accounts & do not know what the heck to do with them. Been a Index buy & hold guy so far. Do not understand Bonds well at all.

Trying to learn fixed income or give fixed income to fidelity to manage at 0.4% fee. We are in our 1st yr of retirement & am spending dividends from taxable VTI + cash from savings so far & plan to sell VTI soon for living expenses in Taxable to get back to 60/40 from 67/33.

The only time I sold BND this year at a loss in IRA is when I did roth conversions. Yes our IRAs are bleeding when I sell, I can postpone selling them for a few years as I do not want to lock in a loss.

I am sorry for my babble above

Do not pay to have someone manage fixed income.

 

[sengsational]

My problem was I had money in an account that had limited investment options: no individual bonds. And although I never liked bond funds, to get to my asset allocation target, I had their bond fund. Too late, but finally I realized I could dump the bond fund there, replacing with equities, and concurrently selling equities in an account with the ability to buy individual bonds. I waited too long, to do it, though.

 

[Chuckanut]

My problem was I had money in an account that had limited investment options: no individual bonds. And although I never liked bond funds, to get to my asset allocation target, I had their bond fund. Too late, but finally I realized I could dump the bond fund there, replacing with equities, and concurrently selling equities in an account with the ability to buy individual bonds. I waited too long, to do it, though.

I think we all make these mistakes from time to time. We make the best decision we can at that time, but there is no guarantee it is the right decision. Only time will tell us which decisions are the right ones.

 

[wolf]

I don't want to start up the bond fund wars; so, yes, I get now why bond index funds are problematic

At this point I feel willing to sell at least 1/2 of the money we have in the bond index funds at a loss to stop the bleeding and put the money into a CD ladder at 4.5+%.

What are your thoughts?

Exactly the same as yours.
About 35 years ago. Followed recommended advice. Stock and bond allocation. Not happy. Made a change back then.
Had similar experience. No control over Bond index price. For me. difficult to buy individual new issue bonds. So, I changed my investment style.

Now, continue "stock index" purchases. But switched over to CD's for my fixed income allocation. So much easier. And I control what I pay, and
what the rules are. ie. Regular CD's, or Broker CD's.

Good luck.

 

[pb4uski]

Do not pay to have someone manage fixed income.

Heck, even if the proceeds from the sale of BND sits in a money market fund until rsker figures out what to do with it it will be better than staying with BND. My money market fund, SWVXX is yielding 3.8%.

 

[COcheesehead]

Heck, even if the proceeds from the sale of BND sits in a money market fund until rsker figures out what to do with it it will be better than staying with BND. My money market fund, SWVXX is yielding 3.8%.

Exactly

 

[rkser]

Thankyou for the feedback,

I am trying to think through the decision to sell BND at this stage with -13% loss for the yr, for the history books.

Is it not true that most of a Bond return is from the yield (dividend) it pays & not its price ?.
If I do not use the BND funds for living expenses for say another 8 yrs does it have a chance to recover its losses, I know nobody can answer that. I will use taxable dividends + VTI instead.

I am at 67/33, gradually selling VTI for expenses will help me get towards the desired AA of 60/40

Although, I do sell the BND only when I do Roth conversion, & do lock in a loss with that transaction.

IF there is a recession next year(In the press), would the FED lower the rates, helping the BND recover ? I know it is just a speculation.

The gurus, much more knowledgeable folks on this Forum & on Bogleheads have used VBTLX/BND & recommended in their 3 Fund Portfolio. I wonder what they are doing now.

Had I just sold BND earlier in the year....... but that train has left.

At present we have lost a lot in our IRAs, just like the VTSAX losses in 2008, but it is just a paper loss unless I sell at these sell off prices.

I keep thinking.... reading......asking people..... trying to learn

Thanks

 

[pb4uski]

You are way overthinking this. That 13% loss is a sunk cost. Ditto with any VTI losses this year. It is psychologically hard to sell investments at a loss because even though you should know better, in the back of your mind it is conceding to failure. We are all just wired that way.

What is relevant is what BND will do from here vs what a similarly safe alternative will do.

Whether most bond return for a particular period is from price or distributions depends on what interest rates do, but look at BND as an example. The NAV at 12/31/2021 was $84.77 and is $73.60 today. During 2022 it paid out $1.70 in distributions and had $9.47 loss in value.

BND's Dec 6 monthly distribution was 0.164606/share... times 12 months is $1.98 annual distributions divided by $73.60 share price is a 2.7% yield. Or alterrnatively, if the $1.70 of 2022 distributions was repeated in 2023 that is only 2.3% of the current $73.60 NAV.

SWVXX, Schwab's money market fund is currently paying 3.8%. Below are current CD and bond yields from Schwab.

If you sold BND which is yielding 2.7% and bought a CD ladder where the rungs yield 4.37% to 4.80% and as rungs mature roll the proceeds into a new rung, which do you think you will come out ahead with?

	3 Mo	6 Mo	9 Mo	1 Yr	18 Mo	2 Yr	3 Yr	4 Yr	5 Yr	10 Yr	20 Yr	30 Yr+
CDs	4.37	4.65	4.77	4.70	4.70	4.70	4.65	4.80	4.60	--	--	--
Bonds
U.S. Treasuries	4.39	4.67	4.52	4.58	4.52	4.25	3.98	3.79	3.68	3.49	3.80	3.54
U.S. Treasury Zeros	--	--	--	4.41	4.25	4.04	3.81	3.74	3.69	3.66	3.89	--
Government Agencies	--	4.37	--	4.54	--	5.30	4.17	4.26	5.33	4.61	--	--

Could BND outperform a CD ladder rolling over over 10 years... perhaps, but I doubt it .

 

[rkser]

Pb4uski,
Thankyou for your clear explanation, as I have said before I learn from your posts.