bond funds or CDs/Treasuries

[RunningBum]

So, bond funds are probably no worse than holding individual bonds other than bond fund fees, which are really low at Vanguard. I'll take the convenience. And instead of having a bond "ladder", I've got a smoother bond "slide".

I don't know that anyone claimed a bond fund is better, unless you're bad at picking bonds. We're just saying that not (much) worse. Certainly not by the percentage of a 7-11 vs. grocery store.

If you have the need for full predictability of term and yield, individual bonds are the way to go. I don't see why I would have such a need.

 

[pb4uski]

I agree... at the end of the day a bond fund owns the same bonds that an individual could hold so all else being equal in the long run the returns should be similar, with the difference being fees (0.05% for VBTLX and 0.20% for VFICX as examples).

I think that funds actually get a little better pricing than individual bond investors, but we can agree to disagree on that. And funds are definitely more convenient and offer much easier diversification of credit risk than putting together an individual bond portfolio.

The disadvantage of bond funds is probably in the 10-20 bps range with the benefit being convenience and better diversification.

 

[Freedom56]

So, bond funds are probably no worse than holding individual bonds other than bond fund fees, which are really low at Vanguard. I'll take the convenience. And instead of having a bond "ladder", I've got a smoother bond "slide".

I don't know that anyone claimed a bond fund is better, unless you're bad at picking bonds. We're just saying that not (much) worse. Certainly not by the percentage of a 7-11 vs. grocery store.

If you have the need for full predictability of term and yield, individual bonds are the way to go. I don't see why I would have such a need.

Not correct. Bond funds constantly suffer capital losses. They often buy bonds at a premium and sell at a discount depending on fund flows. This is called market risk which an individual bond buy avoids by holding to maturity. The fees are in addition to any losses they suffer. Going forward, as people exit these funds, they are forced to sell the bonds they previously bought at a premium.

 

[Fedup]

You have to know what you are doing with individual bonds. Thanks but not thanks. I’m generally clueless when it comes to bonds.

 

[audreyh1]

When bond index funds are charging less than 0.03% ER, it’s hard to object over the costs of bond funds.

The bond fund mechanics are slightly different. Bond funds don’t typically hold bonds to maturity, but rather maintain a constant maturity portfolio - just what I want, since I am holding indefinitely. I can choose the average duration that meets my investment goals.

In fact, bond fund managers add to the fund total return by "rolling down the yield curve" - selling a bond that is closer to maturity and thus has appreciated in value, and buying a longer duration bond.

I’m not interested in a guaranteed income stream from bonds since I am a total return investor. I’m also not looking for a specific time when a bond matures. To me the daily mark-to-market of the fund is no big deal, and no different than the daily mark-to-market of a collection of individual bonds. The liquidity is important to me too for rebalancing.

I’m not interested in buying individual bonds for the same reason I’m not interested in buying individual stocks. I prefer the hands-off nature and very broad diversification of funds. It’s up to me to pick good quality, low cost funds that meet my investment goals.

I didn’t retire to become my own fund manager.

 

[pb4uski]

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

Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

 

[Freedom56]

You have to know what you are doing with individual bonds. Thanks but not thanks. I’m generally clueless when it comes to bonds.

Then build a CD ladder and you will still come out ahead.

 

[Fedup]

Then build a CD ladder and you will still come out ahead.

Yes, that’s what I have.

 

[RunningBum]

"bonds constantly suffer capital losses." But never get capital gains? I think they do. This was covered in the other recent thread. As I said there, bond fund managers are taking some losses at times to improve the yield. Not going to rehash it any more than that. Sounds like people are trying to justify the extra work of building an individual bond portfolio.

 

[Freedom56]

Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

Right now just a few that go beyond 2050. It all depends on the yield they are offering. They anchor my portfolio. I also have bought perpetual preferred stocks in the past if their spread relative to the long bonds from the same issuer make them worth holding. All new investment is going into 2-10 years depending on the yield. I have shopping list of investment perpetual grade preferred and long dated notes (greater than 25 years) ready for purchase as we head into tax loss selling season and fund holders start liquidating.

 

[foxfirev5]

Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

Who in the world knows what interest rates are going to do long term?

 

[audreyh1]

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.

Exactly! Bond funds certainly do go through periods of capital gains. High quality bond funds and bonds appreciate when the SHTF whereas cash does not. Bond funds/bonds are less correlated with stocks than cash, so they do better for rebalancing against stocks/stock funds.

 

[njhowie]

Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

I have some municipal bonds going out to 2040, not 30 years, but certainly what would be considered long term.

 

[Dtail]

I have some municipal bonds going out to 2040, not 30 years, but certainly what would be considered long term.

Do you only go "AAA" on the munis?

 

[jazz4cash]

Who in the world buys 30 year bonds? Not any individuals that I know. How many 30 year bonds do you own?

If they paid 10.4% I would buy a truckload.

 

[audreyh1]

If they paid 10.4% I would buy a truckload.

Even if they were Greek 30 year bonds?

 

[RunningBum]

Don't forget that many bonds are callable. So you may think you have locked into a sweet rate for many years, but if the issuer can get a better deal as rates drop, you'll get paid back and won't keep getting the high interest rate. Bond funds get hit by the same thing, so it's an uncertainty that both face.

 

[njhowie]

Do you only go "AAA" on the munis?

The very high majority of what I buy are pre-refunded/advance refunded municipal bonds. These have already been issued calls and are refunding usually in 3 years or less. For all intents and purposes, these are AAA because they are pre-refunded, irrevocably escrowed with government/treasury securities which pay all remaining interest and principal, and there is an external escrow agent (bank) which manages it through redemption. I like these a lot because they are about as safe as you can get. The funny thing is that you can regularly find them trading at bargains where they are yielding more than munis of significantly lower quality. Like everything else where there is a market, pricing can be illogical. Last week I was able to get some with yield to maturity/redemption of 3.5% for 13 months, another for 3.32% for 10 months, and one for 4.87% for 2 years. Again, irrevocably pre-refunded and escrowed with government/treasury securities.

Of the small remainder (maybe 5% to 10%), most are not AAA, but certainly well above the cutoff for what is considered investment grade. Everything I have here is rated A or better.

 

[COcheesehead]

Don't forget that many bonds are callable. So you may think you have locked into a sweet rate for many years, but if the issuer can get a better deal as rates drop, you'll get paid back and won't keep getting the high interest rate. Bond funds get hit by the same thing, so it's an uncertainty that both face.

I own dozens of bonds and have had only one called. I still made money on it. I took the proceeds and reinvested in a new one. No harm, no foul.

 

[HI Bill]

Even if they were Greek 30 year bonds?

Or Puerto Rican?

 

[VanWinkle]

If they paid 10.4% I would buy a truckload.

Most people didn't as they wondered whether the rates would go higher and they would be locked into "lower" rates. Hind sight is always 20/20.

 

[Freedom56]

Don't forget that many bonds are callable. So you may think you have locked into a sweet rate for many years, but if the issuer can get a better deal as rates drop, you'll get paid back and won't keep getting the high interest rate. Bond funds get hit by the same thing, so it's an uncertainty that both face.

Sure many bonds are callable. I just had two with coupons of 7% and one with 7.5% called on September 4th. But I bought them about 9% below par so I got the capital gain plus the coupon payments while holding them. Nothing wrong with that. I just re-invested the proceeds. It's all part of managing a large portfolio. I have had a lot of issues called over the past 4 years. But I buy bonds at or below par to mitigate a call risk which most funds do not. I would never buy an issue with a coupon lower than 4% and YTM less than 4.5% for short term maturities. Bond funds on the other hand buy up coupons as low as .75% when even CDs pay higher rates. I prefer managing my own investments. Some people don't. To each their own. I prefer concentrating on strong companies in strong sectors such as technology, e-commerce, pharma, financial, and telecom. Some people want more diversification and buy bond funds that hold winners like ToysRus, Sears, JC Penny, Sea Drill, Frontier, Chesapeake Energy, and wonder why they lose money.

 

[HI Bill]

Most people didn't as they wondered whether the rates would go higher and they would be locked into "lower" rates. Hind sight is always 20/20.

At 10.4%, if I thought that the bonds were safe, and inflation were under control, I'd move 90+% of my assets to them. Then, instead of a 4% withdrawal rate, I could bump up to a 7% rate in perpetuity, givin me a much higher lifestyle. Unfortunately, nothing is completely safe, and the federal deficit will eventually catch up to US bonds...

 

[jazz4cash]

Most people didn't as they wondered whether the rates would go higher and they would be locked into "lower" rates. Hind sight is always 20/20.

Yeah and those bonds were issued when inflation made them look mediocre but high inflation can’t last 30 yrs.

 

[COcheesehead]

Sure many bonds are callable. I just had two with coupons of 7% and one with 7.5% called on September 4th. But I bought them about 9% below par so I got the capital gain plus the coupon payments while holding them. Nothing wrong with that. I just re-invested the proceeds. It's all part of managing a large portfolio. I have had a lot of issues called over the past 4 years. But I buy bonds at or below par to mitigate a call risk which most funds do not. I would never buy an issue with a coupon lower than 4% and YTM less than 4.5% for short term maturities. Bond funds on the other hand buy up coupons as low as .75% when even CDs pay higher rates. I prefer managing my own investments. Some people don't. To each their own. I prefer concentrating on strong companies in strong sectors such as technology, e-commerce, pharma, financial, and telecom. Some people want more diversification and buy bond funds that hold winners like ToysRus, Sears, JC Penny, Sea Drill, Frontier, Chesapeake Energy, and wonder why they lose money.

If you’re getting 4.5% YTM short term, your credit quality has to be pretty low. That would be my only concern with your methods, but to each their own.