World or US bond funds to buy now

[dtbach]

There was a previous post on someone getting out of the Acorn fund which made me look at mine. I've had it for 30 some years and it was great but I agree that now that the founding members left, it is mediocre at best.

So I'm selling too but what to buy to replace it with? For one thing, I'm quite higher in equities than I probably should be (80%+) and so thinking that I should get more bonds to balance. But right now with the interest rates so low, I'm thinking they are priced for perfection also.

So perhaps I should go into World bonds instead? They might not be so high priced and possibly better able to absorb interest rate hikes? Also, all my other bond funds are US based.

Any suggestions for me to research??

 

[springnr]

UBND is an interesting new ETF fund. (5 days old)
I have some BNDX total international ETF.

 

[ETFs_Rule]

with the interest rates so low

It's long-term bonds that are most sensitive to interest rates. If you own a total bond market index fund like AGG then your volatility is less than 10 year treasuries. Funds like AGG are also laddered portfolios that owns maturing bonds that are constantly being replaced by higher yielding bonds. If you stay the course by holding then you're fine over time.

 

[mathjak107]

but you will always be well behind the curve as the funds weighting in a rising environment will always be weighted towards the lower return bonds at any point in time.

credit down grades can worsen that .

 

[dtbach]

Thanks. I'm still doing some research. Might just leave it in cash for a bit.

 

[Big_Hitter]

isn't there a huge interest rate risk right now?


I heard German bunds were up 100 bips the last few weeks. That would kill a bond fund portfolio.

 

[Totoro]

isn't there a huge interest rate risk right now?


I heard German bunds were up 100 bips the last few weeks. That would kill a bond fund portfolio.

It happened in a few days even, from a base of 0.07% though.

If you are feeling really adventurous look into Greek bonds or maybe Ukraine. I'm staying parked in CDs though of five year durations tops.

 

[DEC-1982]

Assuming United States, cash, CDs or short term bonds for a couple of years? if the Fed is increasing rates, even intermediate bonds will take a hit, and the yield will be less than the hit (IMHO).

 

[Totoro]

If you hold the CDs to maturity you won't lose money (you might not keep up with inflation though).

Also try to buy CDs where you can get out for a penalty (of say, six months interest). A tip I learned from someone else here on this forum. If interest rates really go up, just pay the fine and re-invest.

 

[dtbach]

This money will be at Fidelity. Can I buy CD's from them? I would think so.

Perhaps I'll forget international bonds and stay with the good ol' USA. . .

 

[daylatedollarshort]

This money will be at Fidelity. Can I buy CD's from them? I would think so.

Perhaps I'll forget international bonds and stay with the good ol' USA. . .

They have broker CDs and TIPS. We have ladders in both. We'd take a hit trying to sell a broker CD before maturity if rates go up, but we ladder and hold to maturity. If it was non 401K money with more buying options I'd compare rates with credit unions and if the same or better go probably I'd with the CU CDs.

We hold to maturity and get a rolling average of interest rates over time. But we mix it up and have international bonds, stable value, and floating rate, too plus I bonds. I also have some nominal Treasuries I bought at a good price years ago.

 

[John467]

I too am in laddered CDs and individual bonds, trying to avoid the panic that may ensue when interest rates go up. I used to have a tidy 5 year ladder, but then I gradually stretched it to 10 years to keep my weighted average rate above 3%.

When rates go up, this will drive down bond fund NAVs, and if too many people start pulling out (panic!), then the bond funds may have to sell their individual bonds at a loss (instead of holding them to maturity inside the fund) to meet redemption requests from holders of the fund, thus making matters even worse.

However, if rates go up to their long term average, say 4% for 10 year treasuries, then I may put some money back into a total bond fund. Then for the next 40 years (hopefully) of my life, I can ignore the NAV as it fluctuates up and down around the mean, and just collect better interest from a properly diversified bond fund.

Yes this analysis is too simple as a panic 20 years from now may cause the same issue I fear today. In a 50/50 stock/bond portfolio, I'm thinking split the bonds between funds and a ladder of individual bonds and CDs.

Thoughts?? Better ideas?


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[ETFs_Rule]

isn't there a huge interest rate risk right now?


I heard German bunds were up 100 bips the last few weeks. That would kill a bond fund portfolio.

Risk to long term bonds. 20, 30 year bonds. Less risk as you get to short term bonds.

Rates shot up in the late 70's to 1982. The sky did not fall. Stocks did very well from 1978 - 1982. Bonds eventually caught up with the stagnant years.
Historical Returns

 

[mathjak107]

the sky didn't fall but bond funds sure did. they only recovered along with stocks when rates fell and the 40 year old bull market started .

unlike stocks which always cycle like night follows day , interest rates can take decades to cycle around , longer than many of us will still be alive.

don't forget staying in an intermediate bond fund for 5-7 years does not get you up to current rates . they only get you back to the rate you had when you bought in over coming the drop in nav.

 

[ETFs_Rule]

the sky didn't fall but bond funds sure did. they only recovered along with stocks when rates fell and the 40 year old bull market started .

unlike stocks which always cycle like night follows day , interest rates can take decades to cycle around , longer than many of us will still be alive.

don't forget staying in an intermediate bond fund for 5-7 years does not get you up to current rates . they only get you back to the rate you had when you bought in over coming the drop in nav.

Keep in mind that rates went up almost 7 percent! Are rates going to go up THAT fast? Cramer doesn't think so. We'll see.

So this is a worst case scenario for 10-year treasuries:
1977 1.29%
1978 -0.78%
1979 0.67%
1980 -2.99%
1981 8.20%
1982 32.81%

 

[mathjak107]

bond rates don't have to move much at all to do damage.. each point can cause a total bond fund to drop 6-10%.

sure over time you get a bit of an increase in interest but you can stay pretty far behind the curve pulling down the gains in what is up.

the poor performance of wellesely since bond rates went up is a good example.

since rates went up it is up 1/2% year to date. fidelity growth and income fund with less bonds is up almost 3% . my growth and income portfolio i use is up 3.70% ytd.

bonds can be a huge drag for quite a while if the tide has turned,

i am not saying avoid total bond funds but i think cutting back may be smarter .

it can be easier dealing with market risk than interest rate risk going forward.

 

[ETFs_Rule]

They are saying that these days you have to take more risk (allocate more to stocks). Maybe you can put more in consumer staples and utility stocks, although utility stocks are not immune to interest rates. And as far as bond funds you have to bite the bullet and accept more short-term bond funds for now.

 

[mathjak107]

actually i made the decision to go back to a 50/50 split .

1/2 my portfolio will remain in the fidelity insight growth and income model.

i ditched the 1/2 i had in the fidelity insight income and capital preservation model two days ago . it was far to bond heavy for my taste so with that i will go back to using the permanent portfolio so at least i am not betting 100% on stocks doing well and low rates.

i think that can be for me the most comfortable model with the outlook i see .

the two portfolio's should work out fine together.

 

[ETFs_Rule]

So what are the general makeups of these funds?
Fidelity insight growth and income model
Capital preservation model

 

[mathjak107]

well i can't disclose the funds used since we all pay for that subscription.

i have been using it for more than 25 years , most of which the time was spent in the growth model.

100k back in 1987 grew to 2,018,000.00 by jan 1 2015 in that model. the s&p 500 was 1.590,000.00 with dividends reinvested

i can tell you the growth and income model is Stocks: 70.5%- Bonds: 23.3%- Cash: 1.0%- Alternatives: 3.4%- Yield: 1.5%


the income model is Stocks: 26.6%- Bonds: 63.7%- Cash: 2.2%- Alternatives: 5.1% Yield: 1.9%

i was using a 50/50 split between the two. but betting the ranch on low rates and stocks doing well made me a bit uncomfortable going forward after 7 years in this bull market and bonds dragging things lower since the turn in rates..


i think i am more comfortable now with 50% in the growth and income model and 50% in the 4 part permanent portfolio using etf's.


the problem with total bond funds is they do not have enough ooomph to fly fighter cover in a flight to safety if money leaves stocks.

long term treasuries while volatile have enough lift in a flight to safety to undo the damage to stocks and that is why the permanent portfolio works as well as it does .

it was actually up 2% in 2008's debacle .

at this stage i am more concerned about not growing poorer than i am about growing richer.

 

[mathjak107]

bond rates don't have to move much at all to do damage.. each point can cause a total bond fund to drop 6-10%.

sure over time you get a bit of an increase in interest but you can stay pretty far behind the curve pulling down the gains in what is up.

the poor performance of wellesely since bond rates went up is a good example.

since rates went up it is up 1/2% year to date. fidelity growth and income fund with less bonds is up almost 3% . my growth and income portfolio i use is up 3.70% ytd.

bonds can be a huge drag for quite a while if the tide has turned,

i am not saying avoid total bond funds but i think cutting back may be smarter .

it can be easier dealing with market risk than interest rate risk going forward.

a good example was today markets were up almost 200 points . wellesley was up a penny.

 

[REWahoo]

Odd. We must have different Wellesley shares. Mine went up $0.19.

 

[ETFs_Rule]

The risk of being in lots of cash rather than bonds is rates might go up slowly or maybe they generally stay flat for many years.

 

[dallas27]

The risk of being in lots of cash rather than bonds is rates might go up slowly or maybe they generally stay flat for many years.

I would bet on a slow, long rise over a number of years. Well broadcasted.


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[mathjak107]

Odd. We must have different Wellesley shares. Mine went up $0.19.

yep , just noticed morningstar still has not updated. but even so .33% is still very low for a 200 point day . no doubt bonds are weighing on things fidelity growth and income was up more than 2x that.

as if you can't tell , i am a big believer not in market timing but in fitting investments better in to the big picture nudging them back on course like steering a big ship.

buy and sit worked fine for 40 years but once something like rates which can run cycles spanning decades reverses it isn't like waiting for a stock market cycle.


just my own opinion.

unless i wanted a truly defensive portfolio like the permanent portfolio which i have sat with in the past i prefer a bit more active approach .
.