Actively traded bond funds vs indexes

[cute fuzzy bunny]

Theres plenty of data to suggest that historically, active equity fund traders fail to beat broad market indexes over periods of time, but I cant say I've seen an analysis of actively traded bond funds vs bond indexes.

Anyone have anything? I'm off to look.

 

[cute fuzzy bunny]

Ok that was easy.

It appears in this case, the index approach is even more effective with bond funds than it is with equity funds.

 

[ats5g]

Not sure if you read this one, but:

Bond Fund Returns and Expenses: A Study of Bond Market Efficiency

- Alec

 

[wabmester]

DFA makes some good arguments for active bond fund management here:

http://www.dfaus.com/strategies/fixed/

Frankly, for most bond types, I don't see a compelling case for using funds at all. But if you're going to buy a bond fund, it makes sense to ensure they're using the standard tricks of the trade (as outlined by DFA above).

 

[MetryOp]

Why not just use the bond iShares, either or both the Lehman 20+year Treasury Bond Fund (symbol TLT) or the 7-10 year Treasury Fund (symbol IEF). Both are optionable, so you can buy "put" insurance or even write covered calls against them. They both pay monthly interest.

 

[cute fuzzy bunny]

There is a compelling case for bond funds if you dont have enough money to create a broad set of them, or to effectively ladder a broad set. Or if you simply dont feel comfortable buying them yourself for whatever reason.

With regards to the longer term bond funds or ishares, the interest rate yields over short term bonds dont come close to offsetting the interest rate risk these carry. Interest rates rising just a couple of percent would wipe out not only the better interest rate but all of the interest. In this environment it might be a good idea to stick with bonds with a duration of under 5 years, and once interest rates rise (if they do), move some of that into <10 year duration.

 

[cute fuzzy bunny]

DFA makes some good arguments for active bond fund management

Yep they do, but I didnt see the fund cost factors for active management, trading costs, or the cost of the fund advisor you need to get access to the DFA funds.

But there are a couple of 'tricks' you can use that sometimes enhance bond returns. Sometimes the 'tricks' backfire and reduce returns.

That having been said, experienced bond management that doesnt cost you anything extra in terms of advisor or management fees isnt necessarily a bad thing. Vanguards Wellesley and Wellington funds include an actively managed fixed income component and their fund costs are roughly .20 to .36% per year, depending on which fund and whether you qualify for admiral shares.

 

[unclemick]

Hard core conservative - 50% Wellesley/50% Dodge and Cox Balanced - no down years 1995 - 2003 (Dick Young's Intelligence report). Sort of along TH's line of thinking?

 

[cute fuzzy bunny]

Yep, I owned DODBX for a while, and these days have about 2/3 of my holdings in Wellesley admiral shares.

I wish the Wellesley shares charged a higher rate (.20% right now) so I'd be more motivated to move into index funds. I love the lack of volatility, the historic performance is pretty smooth, and the dividends are pretty good compared to the risk.

 

[charlie]

I talked my depression era mother into investing
in Wellesley in about '89, I think. She would only
put $3,000 in to appease me. The fund has grown
to over $15,000 now. Pretty good for a conservative
investment. She is 88 now and still going strong,
but she still won't let me put the bulk of her money
in anything more aggressive than GNMA.

I owned Wellesley, Wellington, Windsor II and
Health Care until last year when I was Bogleized
and transferred to balanced index investing.

Cheers,

Charlie (aka Chuck-Lyn)

 

[John Galt]

My folks are depression era also. My Dad
especially had it tough. He's a smart guy, but like
a lot of us he is not nearly as smart as he thinks he
is. Unfortunately, although he is pretty thrifty, he
is quite ignorant in finances. For example, he tells
me the other day that he has 60k sitting in his
checking account (banks love these people). When I
pointed out that this money could be earning interest
he said he "didn't want to bother". He is quite prickly
and we get along well, so I'm not going to push it.
Another thing that bugs me is that he and Mom drive
cars built in the 1980s with small motors. He always buys premium gas. Go figure!!

John Galt

 

[cute fuzzy bunny]

My dads the same way. Everything in EE bonds. About 30k in checking. I convinced him to open a money market account at his bank. He decided it was a "mutual fund", which I sort of guess it is, but it was spoken of with suspicion and disdain.

When the bank levied a fee of five dollars, which was in error, he decided that all this funny business was too much trouble and the money market was closed. Back into the checking.

Its funny though, his bank (one of the two biggies in the state) seems to slip some 3, 5 or 10 charge for something onto his account, he always catches it, they always take it off. I wonder how much money they're making off of a few bucks here and there "in error" with customers who dont scrutinize their statements like he does.

Premium gas. One of my favorite misnomers. About the only difference is the increased octane, which put simply causes the fuel to become more stable and produce linearly less energy than its less stable "un premium" fuel. Unless you have an engine requiring the more stable gas to eliminate "knock" or "ping", which is simply unstable preignition of the fuel due to high engine compression/heat, you will actually get less "bang" out of it, less power, and lower gas mileage.

Some premium.

 

[unclemick]

To put it mildly, the Great Depression cast a long shadow in my parents minds. In 1958, my father bought a new house with the inheritance(10-15K) from an aunt('Swedish' maid all her life) after he sold the 'evil stock mutual fund' and made arrangements to ship and bury her in the old sod. Never once questioned how she saved and invested. That's the first time I looked up mutual funds at the library. My mother only lets 'me' have money in Lifestrategy Income for her 'because I'll get it when she dies' - therefore it's okay for me to be 'unsafe' since she's living with us and has about ten years(in her mind) of cash and EE bonds - just in case. She's 87.

 

[John Galt]

My parents both came through the depression.
Since they were married (1940??) they have lived in
maybe 4 different places. Only ever owned one house
in which they remain today. Hell, I have lived in more
different places in the last 7 years than they have in their entire married lives. Depression people have a whole different mindset. It's okay though. My Dad
is quite comfortable financially, and when he needs
help, I will step in.

John Galt

 

[Nords]

Re:  Depression-era frugality

A famous story (or urban legend) about computer hackers is the guy who came up with the bright idea of reprogramming a bank computer to deposit fractions of a cent to his account. When the computer calculated monthly interest on all of its customer's accounts, the whole-cent amount was deposited to their accounts and the fractions went to the hacker's account.

The scheme was disrupted by a Depression-era senior citizen who routinely manually calculated the interest that he was owed on his average-daily-balance account. One month he noticed that he received 25 cents instead of the 25.8 cents he calculated he should have earned, and he brought the rounding error to the bank's attention. (He probably wore down their customer service people by going over the math step-by-step, an approach I aspire to master.) Eventually some poor techie was assigned to "chase down the problem" and a major scandal had to be covered up. (No bank would ever want to have this problem come up in a court of law with press coverage.)

For computer experts, the moral of the story is to ensure that your programs correctly round off instead of truncating.

I don't think I could live the life of someone with Depression-era habits, but I've learned to pay attention & shamelessly plagiarize the techniques that my family will put up with. As my father-in-law points out, when you're retired your time is worthless. Whether you spend one hour on a project or one hundred, it's all the same cost. And that's why he'll turf his entire yard by splitting & transplanting one bunch of grass that he was given by a neighbor. It takes a few years but the end result is the same as a $1500 landscaper's job!

 

[JOhn Galt]

Nords, I understand your father-in-law's comment
about his time being "worthless", but I take the opposite view, i.e. after retirement your time is priceless.

The rounding off scheme reminded me of one I heard about
tears ago. A guy who ran a grocery store had a
checkout aisle which was not being used. He brought his own cash register from home and set it up on the
extra aisle. This was way before scanners/bar codes and so
I assume the lost groceries showed up as "shrinkage",
while the cash went directly into his pocket. I always thought this was most ingenious. Don't recall how
they caught him.

John Galt

 

[mickeyd]

I love all of this recalling of our depression-era parent's thinking and consrevative investing/saving.

My folks were exactly the same but I learned from them that saving a bit of everything that you earn each time(week, month or year) is an easy way to save.

Along came Investment/savings plans at work followed by 401(k), 403(b) and IRA and my, already formed savings mentality, just fell in line and I signed up at the earliest chance.

The results? After 40+ years of this kind of "forced savings" my wife and I probably have more stashed away than we will ever spend.

I wonder if my young adult kids will look back on my investment history some day and wonder why I thought it was such a great idea to invest in mutual funds and later (as I got wiser) indexed mutual funds. Will they see the wisdom of my actions as I see my parent's wisdon so clearly?

regards,
mickeyd

 

[John Galt]

Hello mickeyd! I predict not only will your children not learn/understand the saving/investment habits of
previous generations, they likely will not care.
Most children have to learn this stuff on their own.

John Galt

 

[unclemick]

My Depression era parents got the savings part but stocks were a no no. I learned on my own, my sister didn't (savings or investment), at least two of her kids are hopefully Bogleheads(I gave them the book and the lecture). My sister's husband is a saver and fairly conservative but slips and trys to market time on occasion. Sometime it takes - sometime it doesn't.