Question for an advisor about bond funds. Suggestion?

[Markola]

^^^^ Different strokes for different folks and YMMV. Cheers.

 

[pb4uski]

^^^^ Different strokes for different folks and YMMV. Cheers.

You've received sound advice and chose to ignore it. Because you didn't act before early 2022 those bond fund losses are locked in at this point. Since it looks like rates are close to plateauing the losses due to rising interest rates will eventually slow. You'll eventually get back to where you were. Good luck to you.

 

[Markola]

^^^^^ As noted above, I take the Bogleheads approach, which is entirely proven by data and legitimate, which is why I choose to ignore what active bond traders here promote. But thank you for the well wishes. As I recall, you sold all your stocks, despite abundant advice to the contrary, so good luck to you, too.

 

[pb4uski]

Yup, I did sell all my stocks as a shift to capital preservation when things were so uncertain due to covid. Our retirement is so overfunded that we didn't really need stocks to have a successful retirement and 100% success. I don't miss stocks at all even though I concede that our net worth would be higher had I stayed in.

The outlook for equities isn't compelling. As a boglehead, you're likely familiar with Vanguard's 10 year outlook for US equities of 3.7% to 5.7% and for US bonds of 4.0%-5.0%, so if they are right then my shift to fixed income isn't going to be very different... could be favorable on the down end and unfavorable on the upside, but not much different at all in the middle.

https://advisors.vanguard.com/insights/article/series/market-perspectives#projected-returns

 

[VanWinkle]

Yup, I did sell all my stocks as a shift to capital preservation when things were so uncertain due to covid. Our retirement is so overfunded that we didn't really need stocks to have a successful retirement and 100% success. I don't miss stocks at all even though I concede that our net worth would be higher had I stayed in.

The outlook for equities isn't compelling. As a boglehead, you're likely familiar with Vanguard's 10 year outlook for US equities of 3.7% to 5.7% and for US bonds of 4.0%-5.0%, so if they are right then my shift to fixed income isn't going to be very different... could be favorable on the down end and unfavorable on the upside, but not much different at all in the middle.

https://advisors.vanguard.com/insights/article/series/market-perspectives#projected-returns

I was not aware that you sold all of your equities during covid. Can you supply the date that you sold? Was the timing correct? Just curious.

 

[pb4uski]

No, in retrospect, the timing was not good. What got my attention was when in early 2020 our retirement portfolio approached what it was at the end of 2011 when I retired and the trajectory was not good and I was concerned that it would go even lower so I bailed out because of the uncertainty as to the impact of covid on the economy and equities which seemed pretty dire and uncertain at the time.

I was very surprised that stocks bounced back as quickly as they did even though the resulting valuations were very rich, but a lot of that rebound was tech related. I'm still dubious about stocks with the Alphabet, Amazon, Apple, Meta, and Netflix making up about 20% of the S&P 500 market capitalization as of September 29, 2023. If you substitute Microsoft for Netflix, it would be closer to 26%. Plus they are all at very high P/E ratios. So I'm a-ok with being out of equities.

But the reality is that we won the game and decided to stop playing. Once I start SS in a couple years our WR will be 1.85% with very generous annual spending (more than we really spend), so we really have no need for stocks and even without stocks our kids will get plenty, albeit perhaps less.

Funny thing... a couple weeks ago DW and I were riding in the car and listening to the radio and there was a report on the radio about stocks and she asked "We aren't in the market are we?" in a way that it was clear that she would prefer not to be in stocks... I just smiled.

 

[Markola]

The outlook for equities isn't compelling. As a boglehead, you're likely familiar with Vanguard's 10 year outlook for US equities of 3.7% to 5.7% and for US bonds of 4.0%-5.0%, so if they are right then my shift to fixed income isn't going to be very different...

https://advisors.vanguard.com/insights/article/series/market-perspectives#projected-returns

Well, if they are correct, we’ll get normal bond returns but lower than normal stock returns. I have just tried to allocate for all possibilities and hold.

It also says 70% chance of recession in US and 90% in Europe. If that happens, one assumes but can’t know, that rates will be slashed, causing bond index fund prices to rise. Then again, the Fed might well be engineering a recession and won’t lift a finger. I’m back to Nobody Knows Nuthin’.

 

[pb4uski]

...It also says 70% chance of recession in US and 90% in Europe. If that happens, one assumes but can’t know, that rates will be slashed, causing bond index fund prices to rise. Then again, the Fed might well be engineering a recession and won’t lift a finger. I’m back to Nobody Knows Nuthin’.

I'm not so sure that rates would be "slashed", I think it will depend on the depth of the recession. The Fed will continue to focus on inflation and employment. If a mild recession results from hiking interest rates is needed to tame inflation then I don't think that would faze the Fed at all.

And all bond prices rise when interest rates decline, not just bond index fund prices, though the price rise doesn't matter much to us individual bond investors since we typically hold to maturity anyway.

My hope is that the war on savers with artifically low interest rates of the last decade or so doesn't recur.

 

[DrRoy]

Don't look at the bond funds from the perspective of what you have lost to now. That is done. Look at what the return is from this point forward. If that is attractive, then hold.

 

[Closet_Gamer]

I do think simplicity is a factor here, which I've been learning.

I always maintained a smaller-than-typical bond allocation for a variety of reasons, but one was that I was simply unwilling to buy lots and lots of bonds at near zero yield. What I did have in bonds was in bond funds -- both total market and TIPS.

Like everyone else, I started getting spanked when rates moved. Early in 2022, I jettisoned my funds and starting buying individual bonds/CDs and leaning heavily on MM funds due to rates. This has been quite an education ... Treasuries, GSE's, Muni, ratings, Make Whole Calls, Continously Callablle, Sinking balance accounts, pros/cons of coupon rates vs. price appreciation on a low coupon bonds... and of course YTM and YTW which is extra fun when buying way below par. Oh, and even the word "par".

I like math and enjoy managing money, to me this is fun.

I have a brother who is a very unsophisticated investor. Didn't start until he was 55. Got him into a two fund, 60/40 set up and taught him to rebalance. Five years in I still get phone calls asking "Is now a good time to buy more? Should I sell?" to which I do my duty and tell him to "I have no clue, history says the best answer is to press on, but its your money."

For someone like my brother, either you go with a fund, a super simple CD ladder done at the local bank, or you find someone to manage a bond portfolio for you. I will not manage a bond portfolio for him and my main goal in life is to keep him out of the clutches of Fast Eddie or someone even worse.

So, a lot of the best approach is dependent on the person.

 

[pb4uski]

^^^ A simple approach that combines the best of both worlds is to ladder target maturity bond ETFs. iShares offer Treasury, Corporate, Municipal and High Yield target maturity ETFs for 2023-2033 maturities that can be easily laddered... a link to their ladder tool is below. Currently, a 2024-2033 ladder would yield 4.75%, 5.87%, 3.57% and 8.28% for Treasury, Corporate, Municipal and High Yield, respectively, and it provides very good diversificationat a modest cost... 0.07%, 0.10%, 0.18% and 0.35%, respectively.

I may ultimately use this product for my corporate and high-yield allocations rather than spend time researching individual credits. The product mixes the ability to hold to maturity that you can't get with a bond fund with the ease of a bond fund at a modest cost.

When I am gone it would be an easy way for DD and DW to invest in a bond ladder.

https://www.ishares.com/us/resources/tools/ibonds

 

[Closet_Gamer]

^^^ A simple approach that combines the best of both worlds is to ladder target maturity bond ETFs. iShares offer Treasury, Corporate, Municipal and High Yield target maturity ETFs for 2023-2033 maturities that can be easily laddered... a link to their ladder tool is below. Currently, a 2024-2033 ladder would yield 4.75%, 5.87%, 3.57% and 8.28% for Treasury, Corporate, Municipal and High Yield, respectively, and it provides very good diversificationat a modest cost... 0.07%, 0.10%, 0.18% and 0.35%, respectively.

I may ultimately use this product for my corporate and high-yield allocations rather than spend time researching individual credits. The product mixes the ability to hold to maturity that you can't get with a bond fund with the ease of a bond fund at a modest cost.

When I am gone it would be an easy way for DD and DW to invest in a bond ladder.

https://www.ishares.com/us/resources/tools/ibonds

That's a good idea. Thanks!

 

[pb4uski]

That's a good idea. Thanks!

I was playng around and a 70% Treasury/30% Corporate mix looks a lot like BND to me but you have better cash flow and more control in that you can decide how much of each year's maturity to reinvest.

5.09% yield vs 4.94% for BND
5.17 year weighted average maturity vs 8.8 years for BND
0.08% ER vs 0.03% for BND
4,895 bonds vs 10,646 for BND

 

[Closet_Gamer]

I was playng around and a 70% Treasury/30% Corporate mix looks a lot like BND to me but you have better cash flow and more control in that you can decide how much of each year's maturity to reinvest.

5.09% yield vs 4.94% for BND
5.17 year weighted average maturity vs 8.8 years for BND
0.08% ER vs 0.03% for BND
4,895 bonds vs 10,646 for BND

Very interesting.

I'm starting to process the reality that if long rates get much higher, even long term retirement plans can be far more anchored on bonds than over the last 15 years. Get to 6% on the 30 year and you're really cooking.

 

[savory]

If you look around here you will see lots of debates on the lack of vitrue of bond funds. Many of us got out of them long ago when it was clear that rates couldn't go any lower because they were close to nil and interest rate risk was a concern, perticularly for longer duration bond funds and bond ETFs.

It took a long time but rates finally did go up and the bond funds and bond ETFs got creamed.

Today, many of us are in individual bonds... brokered CDs, US Treasuries, agency bonds, corporate bonds with a little spice of some high quality preferred stocks. Since we intend to hold to maturity, we pretty much ignore market value fluctuations. I have 52 different positions that are still pretty short 9shorter than I would like)... a weighted average maturity of 2.6 years and weighted average yield of 5.2% with 89% of the portfolio rated A or better by S&P (78% AA+ or better).

I much prefer the control of individual bonds to bond funds or bond ETFs.

Just keep in mind that your bond fund losses are sunk costs at this point.. not much you can do about them... its the future that is more important.

This is where I landed with the help of this forum and especially Freedom's guidance.