Anyone with a Balanced Portfolio feeling major pain?

[mikes425]

OP - sounds like your advisor does the buying for you .
I buy my own stocks and bonds, in a self managed account and don't pay a yearly fee for that privilege.

I have learned, going forward, I'll not buy bond funds again. I got to enjoy some bond fund lowering of NAV like lots of people.

It's just as easy to buy Treasuries, CD's, or bonds of very safe companies like a few banks.

I'll keep enough money short term, to not have to sell the bonds at a loss, so not lose my principal.

Thanks, actually no, i do all trades myself. Just get input from him… Bond fund rule of thumb being that i dont lose the $$ if i hold them long enough….i think i’ll be ok… the market is just particularly frustrating now. And of course that applies to all sectors. I went heavier into Small Cap beginning early this year and was enjoying the rise only to watch all gains and then some wiped out in that ETF in the past week or so,…

 

[pb4uski]

.... My non-mathematically based opinion is that it's not going to make too very much difference in the grand scheme if you stay in your funds vs dumping them and buying individual bonds. This, because I imagine/guess most of the rate increases are behind us. Sure, you could get an immediate bump in cash getting thrown off if you bailed from the fund and made a ladder. That difference is probably going to shrink as time goes on. I don't see that there's a financial down-side to doing your own bonds. In other words, you probably won't do worse than the bond fund if you follow some basic rules. The down-side is just having to fiddle with individual bonds. And for many here, it's a plus (hobby).

I'm not so sure. Let's take Vanguard Short-Term Bond Index Fund Admiral Shares VBRIX as an example. The portfolio has a 2.8 year average maturity and 2.4% average coupon as of 2/28/23 and a 2.02% distribution yield.

Let's use an extreme example where I buy VBRIX on 3/1/23 at its $9.84 NAV and Vanguard immediately puts the portfolio into runoff. Over the next 5.6 years I'll get the 2.4% coupons and the bonds will converge to par so the 6.81% unrealized losses will unwind but I'll also get the 1.22% realized loss.

I don't see how I get much more than a 3-1/2% return from the bonds in the portfolio as of 2/28/2023.

Meanwhile, one can construct a 6 year CD ladder today that will yield 5%+

So if I have $100k in VBRIX, how can I go wrong just selling and creating a 6 year CD ladder?

 

[Exchme]

I'm not so sure. Let's take Vanguard Short-Term Bond Index Fund Admiral Shares VBRIX as an example. The portfolio has a 2.8 year average maturity and 2.4% average coupon as of 2/28/23 and a 2.02% distribution yield.

Let's use an extreme example where I buy VBRIX on 3/1/23 at its $9.84 NAV and Vanguard immediately puts the portfolio into runoff. Over the next 5.6 years I'll get the 2.4% coupons and the bonds will converge to par so the 6.81% unrealized losses will unwind but I'll also get the 1.22% realized loss.

I don't see how I get much more than a 3-1/2% return from the bonds in the portfolio as of 2/28/2023.

Meanwhile, one can construct a 6 year CD ladder today that will yield 5%+

So if I have $100k in VBRIX, how can I go wrong just selling and creating a 6 year CD ladder?

Your method of valuation of VBRIX seems to differ pretty substantially from what the SEC tells investors (SEC yield 4.69%) or the yield to maturity (4.9%).

 

[marinauser]

But let's not kid ourselves. When you buy individual bonds, the value of the bonds you hold decrease as interest rates rise and if you needed to sell for any reason, you would experience the same loss as someone holding a bond fund of similar maturity. But the response is usually that I don't sell and will hold to maturity. You most likely will then collect less interest than a bond fund of similar duration would yield as rates rise. There just is no free lunch and I expect that this has been discussed to death over the years.

 

[MichaelB]

I'm not so sure. Let's take Vanguard Short-Term Bond Index Fund Admiral Shares VBRIX as an example. The portfolio has a 2.8 year average maturity and 2.4% average coupon as of 2/28/23 and a 2.02% distribution yield.

Let's use an extreme example where I buy VBRIX on 3/1/23 at its $9.84 NAV and Vanguard immediately puts the portfolio into runoff. Over the next 5.6 years I'll get the 2.4% coupons and the bonds will converge to par so the 6.81% unrealized losses will unwind but I'll also get the 1.22% realized loss.

I don't see how I get much more than a 3-1/2% return from the bonds in the portfolio as of 2/28/2023.

Meanwhile, one can construct a 6 year CD ladder today that will yield 5%+

So if I have $100k in VBRIX, how can I go wrong just selling and creating a 6 year CD ladder?

That’s no different than saying select CDs have a higher return than Treasuries. If there’s a difference in total return it’s not fund vs individual bond, it’s CD vs Treasuries.

 

[mrfeh]

Your method of valuation of VBRIX seems to differ pretty substantially from what the SEC tells investors (SEC yield 4.69%) or the yield to maturity (4.9%).

+1

The SEC yield is a good approximation of what you'll get over <duration> years.

 

[pb4uski]

Your method of valuation of VBRIX seems to differ pretty substantially from what the SEC tells investors (SEC yield 4.69%) or the yield to maturity (4.9%).

Yes, and that is the big disconnect.

SEC yield
A non-money market fund's SEC yield is based on a formula developed by the SEC. The method calculates a fund's hypothetical annualized income as a percentage of its assets.

A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience. As a result, income distributions from the fund may be higher or lower than implied by the SEC yield.

I'm just struggling to see how the portfolio will ever achieve the 4.69% SEC return given what they disclose about the portfolio. The only possibility that I can imagine is that that they bought many, many bonds at a deep discount to par and then the value of the bonds declined in value even more.

Given the uncertainty, I'd rather have the ladder where I know and can see what the yield will be over some hypothetical black box. Besides, even if the ultimate income was the 4.9% portfolio yield-to-maturity less the 0.07% ER, so 4.83% yield is still less than the 5%+ that a 6-year CD ladder would yield at today's rates so I'll take 5%+ that I can see over 4.83% in a black box.

 

[youbet]

My non-mathematically based opinion is that it's not going to make too very much difference in the grand scheme if you stay in your funds vs dumping them and buying individual bonds.

I'm leaning that way as well. The fixed component of my FIRE portfolio is a mixture of actively managed bond funds and individual instruments. Most of the bond fund money is in one actively managed fund which is currently paying 6.6% and has returned 1.21% ytd............ about as much as if I had sold it at the first of the year and bought CD's. So, I'm just going to hang with that one and watch and reinvest its divs and new fixed money into individual instruments.

I understand the thinking of folks who've dumped everything and gone to 100% individual fixed instruments. But I'm thinking I'll stick to my 60/40 (or so) AA with equities predominantly in VTI (or similar) and fixed in a mix of individual instruments and my favorite actively managed fund (which has outperformed BND over the last decade).

It'll be fun to compare notes in a decade or so......... I fully accept that my strategy may put me in the poorhouse or........ who knows?

 

[Markola]

I just rebalance as needed. This is a long game. You’ll drive yourself crazy otherwise.

+1 on the long game. I might be thinking incorrectly but we’re in year 2 of higher rates and the VG total bond index has an average effective maturity of 8.9 years and average duration of 6.57 years. If rates stay high, the fund is gradually swelling with higher yield bonds. Eventually, when rates decline again, due to a recession or other shock, the fund ought to outperform for years thereafter the individual bonds and CDs on the market at that time. Plus there’s value in diversification, extremely low fees and passive investing works. Plus, I only expect bonds to to return 4% historically and that fund is up 3.06 YTD. YMMV.

For the OP, I have a balanced portfolio but no one ever promised me no major pain.

 

[Gearhead Jim]

Since most people use bonds as a counter to the volatility of their equity investments; they don't want to endure volatility in their bonds.
We are retired and don't want to get clobbered by a "sequence of returns" problem that forces us to sell equities for living expenses and then don't have the equities left to benefit from the inevitable(?) rise in stocks.

We have enough in CD's and govt bonds to live for fifteen years by cashing them in at maturity, so no interest rate risk for us. If the equities don't start to recover in 10 years, we'll have to start selling them or other assets.

The best thing I ever learned from this site is that bond funds aren't bonds. For someone already retired and living off their investments, bond funds seem to be the worst of both worlds.

 

[Montecfo]

Your bond ladder IS a bond fund! If you hold to maturity you do not realize losses on those securities. BUT, when you reinvest in new bonds you invest at the market rate then in effect. That is interest rate risk, the bogeyman that some individual bond investors claim they avoid.

Bond ladders only defeat interest rate risk when the proceeds will not be reinvested e.g., when the proceeds will be spent at maturity. Most of us will be reinvesting.

Bonds seem consistently better than bond funds to some because they compare an investment in bonds made at current market rates with an existing portfolio of lower coupon bonds in a fund.

But serious bond investors will also own low coupon bonds bought when rates were lower, just as bond funds do. And as their bonds mature they must reinvest at current market rates, not the rates in effect when they started the ladder.

At certain points in a market cycle bond funds may not be a good buy because of fund flow dynamics. But to say individual bonds are always better is just false. A bond fund is an investment tool as is a bond. Each has pros and cons and works best for some tasks and less well with others.

We had a really nice thread discussing pros and cons of bonds and bond funds. But this was made untenable by some folks' intense desire to insist bonds are always better, carry no market risk, etc.

I am glad this is not that type of discussion and hope it can stay as such.

 

[target2019]

Thanks, actually no, i do all trades myself. Just get input from him… Bond fund rule of thumb being that i dont lose the $$ if i hold them long enough….i think i’ll be ok… the market is just particularly frustrating now. And of course that applies to all sectors. I went heavier into Small Cap beginning early this year and was enjoying the rise only to watch all gains and then some wiped out in that ETF in the past week or so,…

No matter the specifics of your timing move, things happen as you describe. There is Wheeee! on the way up, and on the way down.

The height and depths of your investing roller coaster come from the risk you build in, or leave out along the path.

If you modify the structure (your asset allocation), then your ride changes.

 

[PointBreeze]

5-6 months ago I got out of the majority of my bond funds and put together a CD ladder, ranging from 4.5% - 5%. I'm sleeping better now.

 

[mrfeh]

5-6 months ago I got out of the majority of my bond funds and put together a CD ladder, ranging from 4.5% - 5%. I'm sleeping better now.

...........

 

[Markola]

^^^^[emoji846]

 

[pb4uski]

^^^^ But that's an incomplete comparison. You don't know what PointBreeze's fixed income portfolio is worth today vs 10/24/2022, what the interest rate risk is in his portfolio vs VBTLX and lots of other things. I know my 4.5-5%+ fixed income portfolio is very different from VBTLX, much shortermuch less interest rate risk etc. and also not the 13% loss in value in 2022 or 11% loss in value from the beginning of 2022 until the end of February 2023!

 

[mrfeh]

^^^^ But that's an incomplete comparison. You don't know what PointBreeze's fixed income portfolio is worth today vs 10/24/2022, what the interest rate risk is in his portfolio vs VBTLX and lots of other things. I know my 4.5-5%+ fixed income portfolio is very different from VBTLX, much shortermuch less interest rate risk etc. and also not the 13% loss in value in 2022 or 11% loss in value from the beginning of 2022 until the end of February 2023!

...or the 8.7% and 7.7% VBTLX returned in 2019/2020.

I wasn't trying to make a direct comparison. I'm trying to point out that it looks like lots of people on this forum sold bond funds last year, due to recency bias. Time will tell, but I'd be willing to bet most of them bought high, sold low, and will come to regret it.

 

[pb4uski]

...or the 8.7% and 7.7% VBTLX returned in 2019/2020 ....

Or, since you brought up 2019/2020, the +0.14% with dividends reinvested from Jan 2019 to Feb 2023.

 

[mrfeh]

Or, since you brought up 2019/2020, the 0.14% with dividends reinvested from Jan 2019 to Feb 2023.

You can cherry pick dates all you want. Looking at a 4 year period is senseless with this fund.

Just more recency bias.

 

[mikes425]

I just rebalance as needed. This is a long game. You’ll drive yourself crazy otherwise.

Exactly. Hence in retrospect, why, as the OP, i think this whole thread is "moot." : ) Time to return to the Long-term view. Market timing doesn't work. I'm done with watching the daily weekly machinations of the broad indexes. It all "is what it is."

Have a nice weekend everybody!

 

[HaveEnough]

"Invest in what you know"

My parents had some rentals. I had some rentals. When working at mega corp, was looking for rentals. Mom and dad had more time than money, I had more money than time then thanks to my mom and dad insisting on an engineering degree.

I'm in 99% real estate, well maybe 98% in geographically distinct areas and different types of investments. Some apartments, storage, senior housing and a bunch of fix and flip first position notes that I vet personally. So far the losses are minimal, as far as overall portfolio hit, low single digits percentage

Invest in what you know

 

[Freedom56]

You can cherry pick dates all you want. Looking at a 4 year period is senseless with this fund.

Just more recency bias.

I agree... you need to lock back at least 10 years for that impressive 1.08% return and that's including the recent "dead cat bounce".

 

[mrfeh]

I agree... you need to lock back at least 10 years for that impressive 1.08% return and that's including the recent "dead cat bounce".

That's the past, which includes the worst year for bonds ever. Still cherry picking.

Should folks have stopped investing in equity funds after the lost decade of the '00s? That's what your "logic" indicates.

 

[pb4uski]

... Should folks have stopped investing in equity funds after the lost decade of the '00s? That's what your "logic" indicates.

No, because we did not stop investing in bonds... we just stopped investing in bond funds... we are creating our own bond fund where we have more transparency and control. What's the matter with that?

 

[mikes425]

I agree... you need to lock back at least 10 years for that impressive 1.08% return and that's including the recent "dead cat bounce".

Ok, so I always gotta ask.. when you cite that return figure, are you factoring in, for whatever duration - the actual return including all dividend income?, or are you just looking at NAV performance of the fund category youre referring to ?