bond funds or CDs/Treasuries

[RunningBum]

I am a very big proponent of directly owning CDs, Treasuries, and municipal bonds - and never the funds.

When you buy the securities directly, you know everything the moment you buy - you know the exact amount and dates you will receive interest payments, and you know the exact date you will get 100% of your principal back. When you invest in a fund, there is no guarantee of anything.

You don't know everything. Specifically, you don't know what future interest rates will be, so you don't know how good of a deal it was to lock in on the rate you got. Something similar was discussed in another very recent thread and I'm not going to rehash my position but I'm just fine with bond funds as a good-sized part of my non-equity holdings. I do have some CDs coming due in a couple of months, and some in a money market fund as well.

 

[njhowie]

You don't know everything. Specifically, you don't know what future interest rates will be, so you don't know how good of a deal it was to lock in on the rate you got. Something similar was discussed in another very recent thread and I'm not going to rehash my position but I'm just fine with bond funds as a good-sized part of my non-equity holdings. I do have some CDs coming due in a couple of months, and some in a money market fund as well.

I know everything that I need/want to know - better? Knowing "how good" a deal it was to lock in the rate I got is of no importance to me - I am not looking to time the market. The guarantee of the income stream and total return for the life of the instrument is what is important to me. I buy, and I hold until maturity. Everything is guaranteed the day I buy. You do not get that guarantee with a fund. You may be able to perform some logical exercises to show that investing in a bond fund should generate similar results, but you're not going to know ahead of time, and there is certainly no guarantee of it.

I am locking in my return today, regardless of what happens to interest rates going forward. In fact, I am wanting interest rates to continue higher, because that will provide the opportunity to lock those higher rates in as I have maturities that will be rolled forward.

If you are happy with what you are doing, more power to you.

 

[OldShooter]

I really don't understand the angst over early cashing out of CDs. If there is a significant risk of this, t-bills will almost certainly be cheaper to sell before maturity and the YTM penalty has been pretty small. If I were putting together a ladder, the earliest stuff would be bills and notes, at least to the degree I thought there might be risk of needing the cash early. AFIK there is no rule that a ladder has to be homogeneous.

 

[Freedom56]

I know everything that I need/want to know - better? Knowing "how good" a deal it was to lock in the rate I got is of no importance to me - I am not looking to time the market. The guarantee of the income stream and total return for the life of the instrument is what is important to me. I buy, and I hold until maturity. Everything is guaranteed the day I buy. You do not get that guarantee with a fund. You may be able to perform some logical exercises to show that investing in a bond fund should generate similar results, but you're not going to know ahead of time, and there is certainly no guarantee of it.

I am locking in my return today, regardless of what happens to interest rates going forward. In fact, I am wanting interest rates to continue higher, because that will provide the opportunity to lock those higher rates in as I have maturities that will be rolled forward.

If you are happy with what you are doing, more power to you.

I think you are wasting time arguing bonds vs bond funds. Some people believe the bond fund propaganda without even understanding what they are buying. Bond fund holders have been getting smoked even from this paltry rise in rates over the last 18 months and the worst is yet to come for those funds. Most bond fund performance has been pathetic over the last 5 years. Even those high yield bond funds with horrible yields of 5.5% given the risk. A lot investment grade funds are holding bonds with coupons of 1.0 to 2.5%. Those bonds can lose 10-30% of their value easily and these losses are passed onto the fund holder. Some people really need to use some common sense. What is the point of hold a bond fund that yields 2.9% or worse when you can get better rates from CDs.

I have been rolling treasuries, corporate bonds, Muni bonds, and CDs, preferred shares, and even preferred CEFs for almost 30 years now. My returns have been stable and predictable in all that time with almost no market risk.

In the end it's all about generating a predictable income stream and capital preservation. A bond fund doesn't give you either.

 

[njhowie]

In the end it's all about generating a predictable income stream and capital preservation. A bond fund doesn't give you either.

Thank you - we are in violent agreement.

 

[COcheesehead]

If you buy a CD, you should be prepared to hold to maturity. If the first thing you're thinking about in purchasing a CD is withdrawing early, then maybe you should really be considering a savings or money market account.

+1

 

[OldShooter]

... Some people believe the bond fund propaganda without even understanding what they are buying. ...

That's certainly a factor. I think, though, that there is some fear of the unknown that is also a factor.

I think fear of the unknown is valid for junk, international, emerging market, bank loans, etc. where some expertise is probably required in selecting issues to buy. (But IMO the fixed income side is supposed to be the "safe" side so there is serious question about whether this stuff should be bought at all.)

For more vanilla fixed income, any size portfolio will benefit from buying govvies and agencies direct. Diversification is not an issue because these are as risk-free as it gets. A portfolio large enough to buy a reasonably diversified number of corporates can also benefit from buying direct.

 

[pb4uski]

.... In the end it's all about generating a predictable income stream and capital preservation. A bond fund doesn't give you either.

Thank you - we are in violent agreement.

Not taking sides but just putting out some facts using Vanguard Total Bond as an example, with $1m initial investment and $40k/year annual withdrawals adjusted for inflation... in all cases tested pretty good capital preservation given the defined income stream of 4% adjusted for inflation.

Last 10 years: Jan 2008 to Dec 2017... ending balance of $949,418

Last 20 years: Jan 1998 to Dec 2017... ending balance of $1,049,889

Last 30 years: Jan 1988 to Dec 2017... ending balance of $2,054,657

First 10 year period... Jan 1988 to Dec 1997... ending balance of $1,628,912

Second 10 year period.... Jan 1998 to Dec 2007... ending balance of $1,165,298

Third 10 year period... Jan 2008 to Dec 2017.... ending balance of $959,418

Most recent 10 year period.. Oct 2007 to Sept 2018... ending balance of $925,942

https://www.portfoliovisualizer.com...ividends=true&symbol1=VBMFX&allocation1_1=100

 

[COcheesehead]

Not taking sides but just putting out some facts using Vanguard Total Bond as an example, with $1m initial investment and $40k/year annual withdrawals adjusted for inflation... in all cases tested pretty good capital preservation given the defined income stream of 4% adjusted for inflation.

Last 10 years: Jan 2008 to Dec 2017... ending balance of $949,418

Last 20 years: Jan 1998 to Dec 2017... ending balance of $1,049,889

Last 30 years: Jan 1988 to Dec 2017... ending balance of $2,054,657

First 10 year period... Jan 1988 to Dec 1997... ending balance of $1,628,912

Second 10 year period.... Jan 1998 to Dec 2007... ending balance of $1,165,298

Third 10 year period... Jan 2008 to Dec 2017.... ending balance of $959,418

Most recent 10 year period.. Oct 2007 to Sept 2018... ending balance of $925,942

https://www.portfoliovisualizer.com...ividends=true&symbol1=VBMFX&allocation1_1=100

Nice work.

 

[pb4uski]

Just for kicks I took the last and worst example... Oct 2007 to Sept 2018 and solved for the withdrawal rate that would have a balance of at least $1m in Sept 2018... it was $34,000 and the resulting balance was $1,008,547.

https://www.portfoliovisualizer.com...ividends=true&symbol1=VBMFX&allocation1_1=100

 

[foxfirev5]

I maintain a 5year CD ladder. With a significant number of issues maturing regularly i can't imagine needing to cash them in early. Currently a 5 year ladder yields approx 3% with a 2.5 year duration. I would love to switch to a total bond fund if it's distribution yield, not SEC,gets above this no risk level.

 

[VanWinkle]

I have brokered CDs with varied duration, 1,2, and 3 year at most. But I have very small bond portfolio. I lost a bunch this year buying BND. I never like bond funds either. So I’m not going to repeat that mistake until FED is done raising rates. The rest of my cash is in Vanguard MMM.

It was impossible to lose more than 3% buying BND this year. Bond funds are to be aligned with your goals based on their duration and your need to withdraw money from the funds. If you lost money you needed this year or next year, they should not be in bond funds.

 

[COcheesehead]

I think for me the biggest advantage in buying individual bonds is predictability. I can specify a year and an amount that I want to be all but guaranteed to have and pull that off with bonds. I am currently doing it for the first few years of income in retirement ('21, '22, '23) with state specific muni's and short of incurring AMT, doing it double tax free/cap gains free. With those bonds in place I don't worry about equities. I can let them ride. The tax free income will also allow me the flexibility of doing Roth conversions at a lower rate to a greater extent, if I decide to.

 

[VanWinkle]

CDs and Money Markets do not act as a pure ballast to equities in a downturn. They have a place for money needed at a specific date, but bonds/funds also have a place in a portfolio. Foreign stocks have stunk this year, but I don't hear people swearing off of them forever. In a balanced portfolio, something always under performs. That is not a reason to quit using the under performer.

 

[Freedom56]

Not taking sides but just putting out some facts using Vanguard Total Bond as an example, with $1m initial investment and $40k/year annual withdrawals adjusted for inflation... in all cases tested pretty good capital preservation given the defined income stream of 4% adjusted for inflation.

Last 10 years: Jan 2008 to Dec 2017... ending balance of $949,418

Last 20 years: Jan 1998 to Dec 2017... ending balance of $1,049,889

Last 30 years: Jan 1988 to Dec 2017... ending balance of $2,054,657

First 10 year period... Jan 1988 to Dec 1997... ending balance of $1,628,912

Second 10 year period.... Jan 1998 to Dec 2007... ending balance of $1,165,298

Third 10 year period... Jan 2008 to Dec 2017.... ending balance of $959,418

Most recent 10 year period.. Oct 2007 to Sept 2018... ending balance of $925,942

https://www.portfoliovisualizer.com...ividends=true&symbol1=VBMFX&allocation1_1=100

Around January 2008, an investment grade corporate note with a duration of 10 years (A or higher) was paying 6.75% or better

Around January 1998, an investment grade corporate note with a duration of 20 years was paying about 8.25% or higher.

Around January 1988 , you could find high investment grade bonds with a 30 year duration for 10.4%

All three cases will return 100% of capital plus a superior coupon. Run your visualizer and compare with the excess funds after a 4% withdrawal re-invested. The coupons would easily cover a 4% withdrawal and have funds to re-invest.


The link below is a summary of AAA bond yield averages from 1919.

https://fred.stlouisfed.org/data/AAA.txt

AAA rates are the most conservative and very few funds (if any) are 100% AAA. Yield averages for AA, A, BBB+, BBB, and BBB- are much higher.

Bond fund holders have been getting the shaft for years and are getting smoked now.

 

[Fedup]

It was impossible to lose more than 3% buying BND this year. Bond funds are to be aligned with your goals based on their duration and your need to withdraw money from the funds. If you lost money you needed this year or next year, they should not be in bond funds.

Yeah, but we didn’t gain much this year either. Look at the Wellesley and Wellington funds. I didn’t like losing. I may have lost $1-$1.5 for a price of $80. That’s enough pain for me. Was that 3%? I don’t know.

 

[pb4uski]

.... Run your visualizer and compare with the excess funds after a 4% withdrawal re-invested. ...

Same scenario with VFICX.... Vanguard Interm-Term Invmt-Grade Inv ... mostly investment grade corporate bonds. First number Total Bond and second is VFICX. VFICX was incepted in Jan 2014. Withdrawals are the same... $40k adjusted for inflation.


Last 10 years: Jan 2008 to Dec 2017... ending balance of $949,418/$1,105,671

Last 20 years: Jan 1998 to Dec 2017... ending balance of $1,049,889/$1,281,369

Last 30 years: Jan 1988 to Dec 2017... ending balance of $2,054,657/N/A

Since inception for VFICX: Jan 1994 to Dec 2017... ending balance of $1,169,661/$1,420,719

First 10 year period... Jan 1988 to Dec 1997... ending balance of $1,628,912/ N/A

Second 10 year period.... Jan 1998 to Dec 2007... ending balance of $1,165,298/$1,205,632

Third 10 year period... Jan 2008 to Dec 2017.... ending balance of $959,418/$1,105,671

Most recent 10 year period.. Oct 2007 to Sept 2018... ending balance of $925,942/$1,059,205

 

[foxfirev5]

IMHO this thread has turned into a past performance vs future returns scenario. We all know the falling rates of the last 30 years have provided above avg returns. What does that have to do with the current climate? Not to be a wise guy but I'm trying to learn something new. FI is a very important component of my income.

 

[VanWinkle]

Yeah, but we didn’t gain much this year either. Look at the Wellesley and Wellington funds. I didn’t like losing. I may have lost $1-$1.5 for a price of $80. That’s enough pain for me. Was that 3%? I don’t know.

I just think that looking long term is better than judging stocks or bonds in one year. I have Wellesley also and agree with your pain this year. Next year will be better, or the next, or the next...... I have been reinvesting in Wellesley and BND and VBILX(In my TIRA) all year and will hope for better days. "Stay the course" has served me well in the past.

Best to you,

VW

 

[Freedom56]

Same scenario with VFICX.... Vanguard Interm-Term Invmt-Grade Inv ... mostly investment grade corporate bonds. First number Total Bond and second is VFICX. VFICX was incepted in Jan 2014. Withdrawals are the same... $40k adjusted for inflation.


Last 10 years: Jan 2008 to Dec 2017... ending balance of $949,418/$1,105,671

Last 20 years: Jan 1998 to Dec 2017... ending balance of $1,049,889/$1,281,369

Last 30 years: Jan 1988 to Dec 2017... ending balance of $2,054,657/N/A

Since inception for VFICX: Jan 1994 to Dec 2017... ending balance of $1,169,661/$1,420,719

First 10 year period... Jan 1988 to Dec 1997... ending balance of $1,628,912/ N/A

Second 10 year period.... Jan 1998 to Dec 2007... ending balance of $1,165,298/$1,205,632

Third 10 year period... Jan 2008 to Dec 2017.... ending balance of $959,418/$1,105,671

Most recent 10 year period.. Oct 2007 to Sept 2018... ending balance of $925,942/$1,059,205

I don't understand why your are bringing up another loser bond fund VFCX. In 1988 if you invested $1M in an investment grade bond fund at a coupon of 10.4% (which was not difficult to find), you would receive $104K per year interest. If you remove the $40K withdrawal, it would leave you with $64K per year to re-invest. In the worst case if you decided to stuff that $64K in a mattress at 0%, at the end of 30 years you would have a total of $1.92M stuffed in a mattress plus your original $1M principal which is far better than the loser bond funds in your example. However, if you invested that excess $64K excess in more individual bonds at an average of 6.5% you would have
$5,801,259.31 plus your original $1M all in addition to your $1.2M of withdrawals.

You can run the same type of analysis for the 10 year and 20 year cases.

There is a good reason why bond funds under-perform bond and CD ladders, they buy high and sell low with the losses reflected in their performance and passed to the fund holders. Only actively managed closed end bond funds can beat a bond ladder.

 

[pb4uski]

....In 1988 if you invested $1M in an investment grade bond fund...

Got a ticker?

 

[VanWinkle]

Got a ticker?

Not sure the over 10% was easy from 1988 to 1998---

He is picking one High rate for the next 30 years?



https://fred.stlouisfed.org/series/...erm=related_resources&utm_campaign=categories

 

[Freedom56]

Got a ticker?

Sorry I meant to say investment grade bond yielding 10.4% with a 30 year maturity.

 

[Freedom56]

Not sure the over 10% was easy from 1988 to 1998---

He is picking one High rate for the next 30 years?



https://fred.stlouisfed.org/series/...erm=related_resources&utm_campaign=categories

Sorry I was referring to individual bonds. Back in 1988 you could easily by individual investment grade bonds yielding over 10% with 30 year terms or even 10 year terms. The composite AAA rates were:

1987-12-01 10.11
1988-01-01 9.88
1988-02-01 9.40
1988-03-01 9.39
1988-04-01 9.67
1988-05-01 9.90
1988-06-01 9.86
1988-07-01 9.96
1988-08-01 10.11
1988-09-01 9.82
1988-10-01 9.51
1988-11-01 9.45
1988-12-01 9.57

A 10.4% yield was very conservative back then.

 

[OldShooter]

Is there underlying magic that the fund managers use? It seems to me that a long term investor buying an individual bond portfolio substantially similar to what a fund holds will have performance that is better than the bond fund by the amount of fund fees.

For governments, everybody is getting the same rates and the same near-zero risk. So bond funds lose.

For investment grade domestic corporates, I don't think that the funds get any kind of volume discount on original issues and on the secondary market their larger volume might cause them to end up with a lower YTM as the market moves against them/aka front running. So funds probably lose here too. Unless there is magic.

For junk and international, if one wants that sort of thing, it seems that there is a place for professional expertise. Maybe not, though, since we know that professional stock pickers on average don't add alpha.

Bond funds are simpler to buy, I guess. Maybe their extra cost is a "convenience" fee/ same reason things cost more at 7-Eleven vs the big grocery store.

Is it not this simple?