Why does anyone own bond funds?

[floss187]

I don't understand why anyone would own these or recommend these.

I put a few bucks in long ago and have dripped over time, expecting to at least make 3 or 4%.
reality is that they have ALL lost significant money.

Exhibit A

SPAB
in 2017, i bought 25 shares of spab and set it to drip.
i bought 1 and then 5 a few years later to help reduce cost bias.


It's lost 11% in these past 9 years on the original investment.
With dripping, it's -8.5% over these 9 years.

There has not only been no gains, but no wealth preservation.

Datasheet: spab


Exhibit B

BND

IN 2020-2022, i bought some small lots chasing downward prices.
in late 2022, i set it to drip and let it run its course.

Original purchases are down 16%.
Total return with drip on the last 4 over 6 years is 6%, or about 1% in gains a year (simple math)

Inflation eroded value is negative.


Datasheet: BND


So, what's the point? 2 longer term tests. Why do you feel it's 'safe' or 'better' to use bonds in retirement, even at a 10-20% portfolio level when all it does is erode value.
you're better off with a CD ladder.

 

[Koolau]

I can't comment on these particular funds, but the theory says that bonds tend to smooth your financial ride and provide some stability. In theory, stocks and bonds are not well correlated (though sometimes they do seem to be).

With rates being what they are, now is a "bad" time to own bonds (funds) it would seem. Full disclosure: I recently sold my last bond fund. I'm using various cash/cash-like funds (such as MYGAs) for ballast. YMMV

 

[yhoomajor]

Bonds funds are meant to make money for companies that run those funds. If investors happen to make any money in them.. thats happenstance!

 

[floss187]

Even with low rates, the fund should be stable, not negative. it's not so much the return percentage, it's the downward nav.

 

[Koolau]

Bonds funds are meant to make money for companies that run those funds. If investors happen to make any money in them.. thats happenstance!

There have been long runs where bond funds made money - back when high FED discount rates were dropping. We could be poised for such a windfall but I'm not going to count on it in the relatively short time I have remaining to consider bonds/funds. I have other strategies now for balance of my equites.

 

[Al18]

BND performance over the past 5 years has a CAGR of 0.33%. If you invested $10,000 5 years ago, you would now have $10,169. I don't invest directly in bond funds. I'm a long time investor of CD's and see the appeal of holding individual bonds or treasury's. I don't invest in the later two because it requires more investigation and knowledge, while a CD that's FDIC insured is guaranteed to $250K per person.

 

[Pointby2]

Why do some people own bond funds? Inside my company's 401K they only offered funds, stock, bonds blended and money market. Common advice is to have some in bonds and if you look at the historical returns they had decent returns. So I made them a small percent of my investments back twenty years ago.

I think I lost money in all of them. Lesson learned.

 

[marko]

I've held a high yield bond fund for over 10 years now. Pays 6.25% reliability yoy. Playing with house money now.

Price has barely budged. Bought at $6.35 around 2015. Currently at $5.97.

 

[Koolau]

I've held a high yield bond fund for over 10 years now. Pays 6.25% reliability yoy. Playing with house money now.

Price has barely budged. Bought at $6.35 around 2015. Currently at $5.97.

Sounds like a very nice ride. Do you DRIP it or take the cash?

Playing with house money feels very good, indeed. Enjoy.

 

[scrabbler1]

I have been in bond funds since 1990, when I began investing outside my 401k. That was a triple-tax-free NY bond fund so its interest was tax-free.

Most recently, I put a huge amount into a borderline junk-bond fund which invests in bonds rated just at or just below investment grade. The monthly income from this fund has been paying all or nearly all my bills in ER since late 2008. I'm not in this fund to profit from its NAV. What I care about the most is it monthly dividends per share, which when multiplied by the number of shares, is what I collect every month.

I would never be able to find enough bonds with these ratings to buy myself. That's what I pay the bond fund managers to do. And in today's high interest rate environment, that monthly DPS has grown in the last few years, boosting my income even if the NAV drops.

 

[yhoomajor]

There have been long runs where bond funds made money - back when high FED discount rates were dropping. We could be poised for such a windfall but I'm not going to count on it in the relatively short time I have remaining to consider bonds/funds. I have other strategies now for balance of my equites.

Thats true as well (Most bond funds will move higher if interest rates start going significantly lower).

In my experience, better investment returns can be had by buying Individual bonds, rather than Bond funds. Bond funds do a lot of churn (due to various reasons, market triggers), which you can avoid with individual bonds.

 

[Spock]

One problem is time periods cited include the one of the fastest Fed rate increase (bad for funds) trajectories after decades of rates trending downward (good for funds). Bond funds work for things like munis or HY but you have to dump out of them if the market starts sniffing out rate increases.

 

[Diogenes]

Bond-skepticism and bond-cheerleading threads come and go, sometimes with passionate intensity. But here's the thing... imagine that it's 2010, instead of 2026, and the passion is instead over stocks. Would there not be quite sincere and well-informed folks telling us, that stocks are a dangerous and irresponsible gamble, and that the smart money belongs in bonds? By the numbers, indeed that would have been true.

My conclusion is that bonds go through long-period bull and bear markets. As with stocks, these are hard to predict (otherwise the prophesy would refute itself!).

 

[Dtail]

Moved out of bond funds years ago and into individual CD's and MYGA's. Minimum research required. Too much work (for me) for individual bonds.
Don't really see the advantage of bond funds unless we are in a very high interest rate environment directionally moving lower.

 

[audreyh1]

I’m comfortable with bond index funds which are generally very high credit quality, and is why I switched to them long ago from actively managed bond funds. Bond index funds also have extremely small expense ratios. I rebalance occasionally and appreciate the liquidity. I definitely don’t want to manage individual bond issues. Because I rebalance occasionally the fund volatility is not a problem for me.

I may be the only one left, ha ha.

 

[Koolau]

Bond-skepticism and bond-cheerleading threads come and go, sometimes with passionate intensity. But here's the thing... imagine that it's 2010, instead of 2026, and the passion is instead over stocks. Would there not be quite sincere and well-informed folks telling us, that stocks are a dangerous and irresponsible gamble, and that the smart money belongs in bonds? By the numbers, indeed that would have been true.

My conclusion is that bonds go through long-period bull and bear markets. As with stocks, these are hard to predict (otherwise the prophesy would refute itself!).

Yeah, I think I was one of 'em. If you leave out the "well informed" part, anyway.

 

[engineernerd]

The reason I own bond funds: as compared to other fixed-income holdings bond funds are less work to own than CDs or individual bonds. You don't have to track maturity dates, you can just buy and hold/buy and forget.

BTW, I own BND and agree that its returns are meh. You do seem to have bought at a particularly bad time, though.

 

[GrayHare]

Periods of declining interest rates are usually good for bonds. Bonds did well from 1980 or so to about 2010.

 

[Markola]

Vanguard and many other experts taught me that bond index funds are “ballast” for one’s stock position. I believed them. 2022 taught me that they are a boat anchor.

 

[Onda]

You are much better off with SCHD, PM, MO, KO, and VIG than with a bond fund. I have never owned one, and frankly, I never understood the emotional appeal of owning one.

 

[audreyh1]

You are much better off with SCHD, PM, MO, KO, and VIG than with a bond fund. I have never owned one, and frankly, I never understood the emotional appeal of owning one.

It’s simply a preferred asset allocation. Not all of us want to be 100% equities.

 

[YellowSubmarine]

I own mostly individual bonds; and my annual average return is 6.56% or so. I will continue to receive that return and hold these 243 issues until maturity; at which time I receive par. I am my own bond fund and I buy at opportune times. The two funds you cited never recovered from 2022 thus far: green/red is your SPAB. Real disasters.

 

[Al18]

It’s no work to buy brokered CD at Fidelity. When the CD matured, the money is deposited into your core MM fund, paying 3%+ interest. If buy directly thru a bank or credit union, you do need to track maturity date. Over the past 5 years, I’ve averaged 3.60% interest per year

 

[dobig]

Bond-skepticism and bond-cheerleading threads come and go, sometimes with passionate intensity. But here's the thing... imagine that it's 2010, instead of 2026, and the passion is instead over stocks. Would there not be quite sincere and well-informed folks telling us, that stocks are a dangerous and irresponsible gamble, and that the smart money belongs in bonds? By the numbers, indeed that would have been true.

My conclusion is that bonds go through long-period bull and bear markets. As with stocks, these are hard to predict (otherwise the prophesy would refute itself!).

True enough. The only real winners during the lost decade (2000 - 2012) were bonds and to a lesser degree S&P dividend stocks that average a real rate of return of 2%/year.

With current government spending projections and the lack of will of either party to show even the most modest of financial constraints it doesn't seem like bond funds are the best place to park money.

 

[dobig]

You are much better off with SCHD, PM, MO, KO, and VIG than with a bond fund. I have never owned one, and frankly, I never understood the emotional appeal of owning one.

Can't beat a good dividend growth etf. The high quality ones like SCHD, DGRO, VYM, VIG, etc,. are just about bulletproof.