Rebalancing and bond funds

[Montecfo]

The main problem that I have with bond funds is that you can't hold a bond fund to maturity but you can hold individual bonds to maturity. Big advantage.

True. And also a disadvantage as noted above. Your bond matures in a very different market than the one you invested in, and no opportunity to reinvest in the interim since you are holding to maturity.

It is really hard to paint with a broad brush. How a fund performs depends on underlying holdings. But funds have advantages and disadvantages as do individual bonds. That's why I hold both. Mostly individual bonds but about 25% in funds. And no index funds or illiquid ETFs.

 

[sengsational]

What I don't like about bond funds is when the market gets spooked, there's a flight to cash, even bond fund holders. So fund managers are forced to sell at an inopportune time. So that's when I buy their forced sale individual issues... bargains galore!

 

[pb4uski]

True. And also a disadvantage as noted above. Your bond matures in a very different market than the one you invested in, and no opportunity to reinvest in the interim since you are holding to maturity.

It is really hard to paint with a broad brush. How a fund performs depends on underlying holdings. But funds have advantages and disadvantages as do individual bonds. That's why I hold both. Mostly individual bonds but about 25% in funds. And no index funds or illiquid ETFs.

Even if you intend to hold to maturity, you can always sell and reinvest if a better opportunity comes along. I don't usually do it but I could. As a practical matter, I don't often have problems finding a suitable invetment for maturity or call proceeds.

 

[TickTock]

But funds have advantages and disadvantages as do individual bonds.

I respect your opinion on these matters. What do you see as fund and individual bond advantages and disadvantages?

My view (from a high level):

Fund advantages

• Diversification
• Liquidity
• Low transaction costs

Individual bond advantages

• Ability to hold or sell based on what's best for the investor's situation

 

[audreyh1]

What I don't like about bond funds is when the market gets spooked, there's a flight to cash, even bond fund holders. So fund managers are forced to sell at an inopportune time. So that's when I buy their forced sale individual issues... bargains galore!

Exactly!

 

[audreyh1]

Even if you intend to hold to maturity, you can always sell and reinvest if a better opportunity comes along. I don't usually do it but I could. As a practical matter, I don't often have problems finding a suitable invetment for maturity or call proceeds.

I just don’t like dealing with individual issues.

 

[Koolau]

I just don’t like dealing with individual issues.

Right. I just never thought I had the skills or the guts to deal individual issues. I'm sure that attitude has cost me, but I sleep well and have enough.

 

[sengsational]

Right. I just never thought I had the skills or the guts to deal individual issues. I'm sure that attitude has cost me, but I sleep well and have enough.

I got a lot of confidence with the chatter on this forum and expanded my individual holdings beyond treasuries. It's not rocket surgery

 

[pb4uski]

I respect your opinion on these matters. What do you see as fund and individual bond advantages and disadvantages?

My view (from a high level):

Fund advantages

• Diversification
• Liquidity
• Low transaction costs

Individual bond advantages

• Ability to hold or sell based on what's best for the investor's situation

For Treasury bonds or CDs, diversification doesn't matter since they are all effectively credit risk free. Even for corporates it isn't hard to create a diversified portfolio. Traded bonds, especially Treasuries are extremely liquid. Corporates less so and brokered CDs not so much. And my transaction cost are negligible.

IMO the biggest advantage of bond funds are simplicity and convenience.

 

[TickTock]

^ ^ ^
I agree with most of the above; I was as stated looking from a high level to avoid getting into the nitty-grit details (I know, what's the chances of that happening on these boards? )

 

[Stormy Kromer]

Individual bonds, particularly US Treasuries are highly liquid. You can't get better credit quality, or lower cost or better liquidity than a US Treasury ladder.

With a bond fund, when you rebalance you effectively buy or sell a smidgen of each bond in the fund. With a ladder, when you rebalance you have choices. You can defer a little and use the proceeds from the next maturity to rebalance or you can chose what bonds in "you bond fund" to sell to rebalance... you can't do that with a bond fund or bond ETF.

The main problem that I have with bond funds is that you can't hold a bond fund to maturity but you can hold individual bonds to maturity. Big advantage.

Great advice.

Bonds have their place if you hold the to maturity. I learned this too late.

 

[Montecfo]

I respect your opinion on these matters. What do you see as fund and individual bond advantages and disadvantages?

My view (from a high level):

Fund advantages

• Diversification
• Liquidity
• Low transaction costs

Individual bond advantages

• Ability to hold or sell based on what's best for the investor's situation

I think this covers the high points.

There are also characteristics of a bond fund (meaning open end) which may be advantages in some markets and disadvantages in others:

Bond fund: new money getting invested at current market rates/possibility of gain or loss.

Individual bond: no possibility for gain or loss if held to maturity. But proceeds are reinvested in a different rate climate (so you do have rate risk) if proceeds are being reinvested.

The main disadvantages of an individual bond are: default risk and transaction costs if you need to sell.

Of bond fund: has no fixed maturity (but see bullet shares et al).

There are also idiosyncratic issues with bond funds at market inflection points.

 

[LTSTRYAGIN]

Not bond fund question if thats ok
I'm researching and my DD for starting muni bonds bucket
What do feel is the sweet spot in coupon and price?
The income payment not priority maybe no call till 2030 and mature max 2040
Buying Over par feels wrong for some reason
Will probably hold to maturity although i imagine coupon important if wanted to sell
Wish I was better at the math to tabulate best option
So far looking into GO bds no schools or senior centers
Learning how to use screener for options making progress

 

[COcheesehead]

Not bond fund question if thats ok
I'm researching and my DD for starting muni bonds bucket
What do feel is the sweet spot in coupon and price?
The income payment not priority maybe no call till 2030 and mature max 2040
Buying Over par feels wrong for some reason
Will probably hold to maturity although i imagine coupon important if wanted to sell
Wish I was better at the math to tabulate best option
So far looking into GO bds no schools or senior centers
Learning how to use screener for options making progress

The sweet spot is what works for your goals. There is no “perfection”, only what works for you.

 

[steelyman]

I follow a specific allocation in my retirement portfolio (accumulated while working in a 403(b) plan). I recently moved a small percentage from FXNAX to the BNDX ETF (international).

Back when I was starting the only int’l bond fund offering from Fidelity was FNMIX and that wasn’t what I was looking for so I didn’t stay long.

I have no idea how BNDX will do but I’m willing to hang on for a while. All my fixed income is in a traditional IRA (stocks are in Roth).

 

[Al18]

Wow, BNDX total 5 year return is 0.27%. I’m making over 20x that in CD’s over the past 5 years.

 

[mrfeh]

Wow, BNDX total 5 year return is 0.27%. I’m making over 20x that in CD’s over the past 5 years.

The future is what matters, not the past.

 

[Al18]

The 5 year treasury is currently just over 4.0%, which tracks fairly closely with a 5 year CD. Another 20% will be here in 5 years.

 

[Diogenes]

Bond funds are fine. Those folks who exited bond funds after the big drop traded one risk for another. If we have another big rate drop as many expect then it will be clear they closed the barn door after the horses escaped-and recorded large losses permanently.

Agreed, on the futility of after-the-fact grousing. I had, and continue to have, a sizeable position in Vanguard's intermediate-term tax-exempt bond fund. No reason to sell out of it now... but also not reason to add to it, or to rebalance into it. My lesson has been, that even intermediate-duration bond funds, can be a dangerous source of volatility. They no longer have a reliable negative correlation with stocks. They're not a cushion in equity bear markets... but they don't recover when equities recover. So I suppose that it would be more accurate to say, that they have positive correlation with stocks when stocks do badly, but negative correlation when stocks do well. Recency bias? Maybe, but we're talking 5 years of "recency", and the underlying bonds are supposed to have around 5 years of time-to-maturity. So, what exactly is "recent"?

TLDR: do nothing.

 

[Mark1]

Wow, BNDX total 5 year return is 0.27%. I’m making over 20x that in CD’s over the past 5 years.

Wow, I'm amazed you were able to find CDs paying 5% back in 2020 and 2021. I guess I need to look harder
next time, since all I found back then was sub 1% CDs. Luckily, I didn't hold any bond funds during the interest climb of 2022 and 2023, but my CDs weren't all paying 5% either.

 

[Al18]

Over the past 5 years (2021-2025) my average interest rate from all my CD’s was a cumulative 18.0%. Over the past 5 years my highest interest rate CD was 23.1%. I buy 1yr to 5 yr CD’s.

 

[Montecfo]

Agreed, on the futility of after-the-fact grousing. I had, and continue to have, a sizeable position in Vanguard's intermediate-term tax-exempt bond fund. No reason to sell out of it now... but also not reason to add to it, or to rebalance into it. My lesson has been, that even intermediate-duration bond funds, can be a dangerous source of volatility. They no longer have a reliable negative correlation with stocks. They're not a cushion in equity bear markets... but they don't recover when equities recover. So I suppose that it would be more accurate to say, that they have positive correlation with stocks when stocks do badly, but negative correlation when stocks do well. Recency bias? Maybe, but we're talking 5 years of "recency", and the underlying bonds are supposed to have around 5 years of time-to-maturity. So, what exactly is "recent"?

TLDR: do nothing.

But the implied action would be to sell bonds and buy stocks would it not?

 

[Echard]

When I retired in 2020, a bit unexpectedly, I had very few bonds or bond ETFs. So I got lucky when prices crashed. I spent two years developing my fixed income strategy, asking questions on here and elsewhere. I went through some false starts and finally realized I had to invest in a way that fit my personality and my tax situation. I ended up with a lovable mutt of fixed income. I bought CD’s at 5%, I bought individual treasuries, corporate bond ETFs, total market bond ETFs, inflation ETFs, an international bond ETF, and target maturity ETFs. I also traded in and out of individual corporate bonds. I structured a rough 9 year ladder that mixed securities with defined maturities with ETFs that kept constant maturities. I placed money on the yield curve where it best matched my maturity vs yield desires. Over time I’ve tweaked it a bit but am overall pretty happy with what I have. After I made some money on corporate bonds and ETFs, I shortened my average duration below five years and increased my government bonds to prepare for the current market uncertainty. I wasn’t perfect in my decisions, but did pretty good overall so far.

 

[ali]

Our current allocation of our portfolio is:
Stock Funds - 61.1%
Bond Funds - 25.5%
Cash - 8.3%
CDs/Tbills - 5.0%

I am thinking to rebalance a bit and carve some off of the stock funds to get below 60%, since the market has recovered some lately. I was thinking of buying straight corporate AAA bonds with the rebalance dollars. That made me look and think about my current bond fund collection and does it make sense these days. The percentages listed are my holdings in these funds as a percentage of my total holdings in Bond funds.

My current bond funds are:

FIPDX	FIDELITY INFLAT-PROT BD INDEX FUND	9.00%
FUMBX	FIDELITY SHORT TERM TREASURY BOND INDEX	7.92%
VCSH	VANGUARD SCOTTSDALE FDS VANGUARD SHORT-TERM CORPORATE BD INDEX FD ETF SHS	5.97%
FUAMX	FID INTER TREASURY BOND INDEX FUND	4.85%
VCIT	VANGUARD SCOTTSDALE FUNDS VANGUARD INTER-TERM CORP BD ETF	4.17%

Do people put money in bond funds any more? Should I consolidate these somewhat into something like BND? I was contemplating leaving the FIPDX and VCSH alone, and consolidating the other three into BND.

What has kept me and my husband's accounts doing very well (since this market frenzy started a month ago),is the fact that we have always done corp bonds ladders . The bonds have always been with 10 year maturity terms plus rates of over 6% (now averaging close to 7%). We do have some "protective stocks like MO, VZ etc but regarding the full mix probably 65% in corp bonds and the rest in stocks., some ETF's But note buying individual corp bonds takes a lot a lot of research (but we rather be the ruler of our own destiny opposed to leaving & paying for some else , who could easily error). Note we have mostly been a fan of the bond ladders over the last 10-15 years & while paying a premium perhaps for the first 1-2 years Now we are reaping the rewards of over 6% dividends :some as high as 9% : every 6 months. Now this approach works for us now in our early early 70's & has been looked at from time to time with our Fidelity team! We are staying the course and that is the main objective as each person needs to evaluate Their long term plan and just stick with it as ALL THE NOISE RIGHT NOW happens during any early term on any new President . IE during the Biden years all of our investments (on paper)were down down down big time , but thanks to most of it then being with the guaranteed semi annual dividend ladders of our corp bond ladders WE STILL got the nice fat income (opposed if we were in funds etc our pay out "income would of REALLY have been down!

 

[tominboise]

What has kept me and my husband's accounts doing very well (since this market frenzy started a month ago),is the fact that we have always done corp bonds ladders . The bonds have always been with 10 year maturity terms plus rates of over 6% (now averaging close to 7%). We do have some "protective stocks like MO, VZ etc but regarding the full mix probably 65% in corp bonds and the rest in stocks., some ETF's But note buying individual corp bonds takes a lot a lot of research (but we rather be the ruler of our own destiny opposed to leaving & paying for some else , who could easily error). Note we have mostly been a fan of the bond ladders over the last 10-15 years & while paying a premium perhaps for the first 1-2 years Now we are reaping the rewards of over 6% dividends :some as high as 9% : every 6 months. Now this approach works for us now in our early early 70's & has been looked at from time to time with our Fidelity team! We are staying the course and that is the main objective as each person needs to evaluate Their long term plan and just stick with it as ALL THE NOISE RIGHT NOW happens during any early term on any new President . IE during the Biden years all of our investments (on paper)were down down down big time , but thanks to most of it then being with the guaranteed semi annual dividend ladders of our corp bond ladders WE STILL got the nice fat income (opposed if we were in funds etc our pay out "income would of REALLY have been down!

Biggest problem (meaning opportunity) I have is learning how to research and pick corporate bonds.