bond funds or cash reserves

I've evolved that way as well... mostly due to interest rate risk but also to some degree credit risk. Previously favored BND or even Inv Gr Corporate Fund many years ago but interest rate risk scared me off of those (shows you what I know, rates have only gone down since). More recently, credit risk is of a concern.

I found some sweet CU CD specials last year (3.0-3.5% for 5-year) but the only one I currently know of is 3% 37-month IRA CD special at Navy Federal.

I have recently parked some money in the Vanguard Short-Term Federal Fund... 1.59% SEC yield and 2.2 year duration.
 
DawgMan said:
This has been on my mind as well. It took me a while, but I made peace with the fact I should probably be looking at my bond allocation as being more a ballast against the volatility of my equity allocation, as opposed to a total fight for yield. I have been a bond ETF guy with most of my bond allocation in intermediate bonds with a portion in short term treasuries. YTD, all are up in total return in the 2 - 3% range which is better than a sharp stick in the eye (and better than money markets), but at what point do the forces say there is only one way for interest rates to go but up... or at best stay flat in the short term?? I can see there might be alternatives in individual bond & CD ladders, but should we be in anything at this point other than short term bonds (if you buy into their main objective of being a ballast) for the foreseeable future?
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I don’t worry about interest rate cycles. I focus only on the ballast case and absolutely do not chase yield. I prefer high quality which tends to be a bit lower in yield. I hold some in cash various forms, some in short-term bond index funds, and the rest in mostly regular bond index funds.

BTW I noticed the bond index ETFs went to rather deep discounts compared to their mutual fund counterparts during the worst of the March swoon. ETFs don’t seem to behave that well during panic selling.
 
I really appreciate all the insight into THOPX.
So, the question is: What to do?
1. Nothing.
2. Take our $14K loss and buy FXNAX.
3. Something else.
 
audreyh1 said:
... ETFs don’t seem to behave that well during panic selling.
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You can read here about "authorized participants:" https://www.investopedia.com/terms/a/authorizedparticipant.asp Basically they are third parties with their own P&Ls to defend and no loyalty or duty towards ETF investors.

The hidden role of authorized participants is something that has always bothered me about ETFs and I have expected that they might cause problems when the market got exciting. The facts will come out eventually, but if I were an authorized participant I might well be tempted to sit on my hands when my sweet little arbitrage deal was threatened by very fast moving prices. Maybe that's what we saw happening.
 
Maybe - I'd be interested to know more about what happened.

But I do know that spelling pressure can get very vicious when investments are being liquidated due to margin calls or other leverage gone bad.
 
tdv2 said:
Proof once again that there are no free lunches. This came up a couple of week ago with a discussion on DODIX which holds some higher yield lower quality corporates. At least that fund came back quite a bit in the last few weeks....now down 0.7% on the year. Typical intermediate core bond index funds like FSNAX or VBIUX are up better than 3% YTD.
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Well, not sure it is an issue of free lunch, it is an issue of risk/reward. This is exactly the time you would expect an AGG-based index to outperform due to portfolio composition.

Having said that, DODIX has returned 1.96% YTD according to Morningstar. over the longterm, it has outperform an AGG-type index funds.
 
pb4uski said:
I have been nervous about the interest rate risk associated with bonds, particularly bond funds, for years... still am. In 2019 many of us found some really good values in some credit union CD specials... 5-year CDs at 3.5% and 3.0%.

Only one of those remains to my knowledge... Navy Federal is still offering a 37-month 3.0% IRA CD according to its website. https://www.navyfederal.org/products-services/checking-savings/certificates-rates.php

That said, I have a lot of cash right now but that came from stock sales and not bond sales. I'm temporarily parked some in VSGDX to eek out a little more yield (1.59% SEC yield) and accepting a smidgeon of interest rate risk (2.2 duration) as I don't see interest rates going up very soon.
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I just sent in forms for the 37 month IRA CD @ 3% yesterday and rate still applies and they honor it as the date of receiving forms.Can add new money later at the same 3% rate.

Used the messages function on website to send completed forms digitally and have them fax forms to Vanguard. Checked funds transfer from Vanguard to be wired. So I think this is fastest turn around method.
Can deposit up to 150k.
 
Montecfo said:
Having said that, DODIX has returned 1.96% YTD according to Morningstar. over the longterm, it has outperform an AGG-type index funds.
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Yeah, it has. DW has a substantial part of her 401(k) in this fund, and that's been the case since 2007. It is just a frustrating fund at times, under-performing (by a lot!) most index funds in 2008-09 and last month.
 
statsman said:
Yeah, it has. DW has a substantial part of her 401(k) in this fund, and that's been the case since 2007. It is just a frustrating fund at times, under-performing (by a lot!) most index funds in 2008-09 and last month.
Click to expand...
That is how DODIX is going to behave, because it uses slightly lower credit quality to boost returns, is lower on govt bonds and higher on corporate bonds, leaning a bit more to lower quality issues.

So - you can choose a fund that is less correlated with stocks and thus does better than DODIX during bear markets and periods of credit stress, or you can choose the higher overall return of DODIX and grin and bear it during bear market times when it doesn't fare so well. That's kind of the choices.

Personally, because I want something less correlated with stocks, I prefer the bond index funds for their better bear market performance and total long term total return doesn't matter so much to me. I use equity portion of my portfolio for the better returns during good times, and as I rebalance during these good times I add more to bond index funds, increasing my ballast for those bad years.
 
Montecfo said:
Well, not sure it is an issue of free lunch, it is an issue of risk/reward. This is exactly the time you would expect an AGG-based index to outperform due to portfolio composition.

Having said that, DODIX has returned 1.96% YTD according to Morningstar. over the longterm, it has outperform an AGG-type index funds.
Click to expand...

Point taken. Bad choice of words on the free lunch....it is as you said purely a risk reward scenario less costs. I took a look at the Morningstar data this morning and see that DODIX and FXNAX are dead even on the 5 year total return (3.69%). In the front years, 3, 1 and YTD, the index /AGG style funds have outperformed. Full disclosure, I have a small position in DODIX from an old 401K plan rollover with my primary position in FXNAX. Seems that 401k plans like the DODIX fund....maybe the 0.42% ER has something to do with that.

Anyway, as Audreyh1 stated, when credit markets becomes stressed and equities are significantly lower, the higher negative correlation of the index based funds does help reduce overall volatility in a portfolio of stock and bonds. The 0.4% cost difference is a factor for me also...one of the few things I can control.
 
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tdv2 said:
Point taken. Bad choice of words on the free lunch....it is as you said purely a risk reward scenario less costs. I took a look at the Morningstar data this morning and see that DODIX and FXNAX are dead even on the 5 year total return (3.69%). In the front years, 3, 1 and YTD, the index /AGG style funds have outperformed. Full disclosure, I have a small position in DODIX from an old 401K plan rollover with my primary position in FXNAX. Seems that 401k plans like the DODIX fund....maybe the 0.42% ER has something to do with that.

Anyway, as Audreyh1 stated, when credit markets becomes stressed and equities are significantly lower, the higher negative correlation of the index based funds does help reduce overall volatility in a portfolio of stock and bonds. The 0.4% cost difference is a factor for me also...one of the few things I can control.
Click to expand...

Understood. And agree on the numbers.

One thing I wonder ( and haven't yet dug into), is what funds or indexes could be considered that are more conservative than FXNAX? Treasury based indexes would perform best during downturns, but obviously trail FXNAX and DODIX overall.

And also, if you wanted to go slightly more aggressive than DODIX, what would you invest in and how are returns relative to risk? I have not analyzed those options, but being retired now has forced me to spend more time on the bond/fixed side of the portfolio.

The portion of my bond/fixed that is safest is the CDs, but I like to have options I like across the risk spectrum.

Thanks for discussing. I always learn.
 
DawgMan said:
... I made peace with the fact I should probably be looking at my bond allocation as being more a ballast against the volatility of my equity allocation, as opposed to a total fight for yield. ...
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We have been on both sides of this fence, dipping our toes for five years into the floating rate (SAMBX) pond together with TIPS 25/75 in our fixed income tranche. In Jan. 2019 both Janet Yellen and The Economist told me that these loans wer getting risky, so we ditched the SAMBX. I doubt that we will be back. On general principles it seems odd that we (most of us) segregate our "safe" money and then immediately have the urge go looking for volatility and risk. Now over 90% of our fixed side is in TIPS.

I am always puzzled by discussions like this one that go on for pages with hardly a mention of buying Treasury securities directly. I get it for not buying corporates direct because it takes quite a bit of money and a huge amount of effort to build and maintain a diversified portfolio. But we diversify to minimize risk, which is absent from the govvie market. Buying govvies on the auctions (via Schwab for us) is easy and free. Maturities are available from weeks to decades, and the interest earned in a taxable account is not subject to state income taxes. Unlike CDs, if an unexpected event forces a sale before maturity the market is very liquid and the hit is minimal.

Hence my puzzlement.
 
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I prefer not to own any securities directly and am happy to own low cost mutual funds instead.
 
Got out of VMMXX yielding like less than half a percent and fidelity SPRXX yielding even less than that. Went in VSGBX and FXNAX. Dipping back a little back into bond funds which only make up 17% of my total fixed and cash reserve side.
 
I'm invested in bond index funds primarily because it's easy and doesn't come with high costs. Personally I'm not looking for higher risk on my fixed income side. I do fear inflation rearing it's head at some point but haven't stuck my toe in the water with any TIPS just yet...with all the government spending and stimulus going on it seems to make sense to do so.
 
I had Six 26 week Treasury Bills, and kept rolling them over til rates went to 0.156%, so my emergency funds are moving back to a higher interest online MM account for now.
The only Bonds I have are in my Vanguard Wellesley ROTH IRA and Wellington Taxable mutual funds.
 
I use CEF (Close End Fund) to get monthly income and invest in investment grade bonds. Also, my SS and monthly pension covers all my monthly expenses. So, my AA allocation is geared more towards equities. In the future, I will further decrease my bond allocations. Do have VAIPX, Vanguard inflation protection funds also. Best time to buy them when the inflation is low.
 
ripper1 said:
How much are people willing to go to cash reserves from bonds at this time? How much and why?:popcorn:
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I reallocated my 60/40 portfolio to 100% treasuries in 2019 after the yield curve inverted and I did not believe the record breaking bull run was going to last forever.

Cash makes 0% while my VUSUX 1 year performance is +31.96% and the 1st quarter 2020 performance is +20.86% during the crash. To understand this, you need to click the link below and review the historical returns in 2007 and 2008 during the last crash.

https://investor.vanguard.com/mutual-funds/profile/performance/vusux/cumulative-returns

I do not fear low interest rates since the interest return plus the capital return = total return. It is the total return that matters. To understand the portfolio holdings of VUSUX. you need to click the link below:

https://investor.vanguard.com/mutual-funds/profile/portfolio/VUSUX/portfolio-holdings

Note the maturity dates and the coupon rates of the bonds. Just because current treasuries rates are zero or even negative, the current coupon rates and maturity dates DO NOT change. There are some 0% bonds but not many. Note the difference between the face value and market value and this difference is contributing to the strong recent performance of VUSUX.

I was knowledgable of the historical returns of VUSUX and the fact that during a crash, investors tend to dump their equities and buy treasures. Remember that "interest rates" and "capital value" moves in opposite direction. I want the interest rates to decline to increase the value of my portfolio. I only humbly suggest that investors should learn about the pros and cons of treasuries.
 
pb4uski said:
I don't see anything humble in your posts at all.
Click to expand...


+1. (nothing humble in that one) Personally I want nothing to do with a high concentration of long dated treasuries in my "safe" money bucket. Not with rates where they are today.
 
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