Anyone Else still holding Bond Funds?

[Freedom56]

Please note that if you had individual bonds and sold them prior to maturity, you would also take a loss based on decreased value. Individual bonds also decrease in value during rising rates.

Not true. It depends on what price you bought them for, their duration, and the coupon they pay. The closer they are to maturity the closer to par a bond trades. It's no different than a CD held in a brokerage account. Most people who buy individual bonds hold them to maturity and don't suffer a capital loss. For example all the notes maturing my portfolio in 2023, 2024 are trading above my purchase price and many are trading above par. I have one note maturing mid August 2022 that pays a 7.5% coupon that I bought in 2016 for $62 and then some more for $94 in 2020. It is trading just above $100 today. So I could sell today and realize a significant gain rather than wait until mid August.

 

[COcheesehead]

Please note that if you had individual bonds and sold them prior to maturity, you would also take a loss based on decreased value. Individual bonds also decrease in value during rising rates.

It depends on how you purchased them. I’ve sold bonds purchased within the last two years at a profit.

 

[Lisa99]

I have a 50/50 split of index funds in total stock market and total bond market. I don’t watch the market and have no plans to change my allocation.

I have some extra cash should CD rates look interesting, but other than that I go about my day regardless of the market is yelling about.

 

[Katsmeow]

Please note that if you had individual bonds and sold them prior to maturity, you would also take a loss based on decreased value. Individual bonds also decrease in value during rising rates.

I don't have individual bonds and have zero intention of ever having any.

 

[mathjak107]

I don't have individual bonds and have zero intention of ever having any.

Same …

My portfolio requires a certain duration to be kept so the bonds react to recession/ depression scenarios in a powerful way .

It gets to hard to try to do that with individual bonds …

I always need to sell before maturity to add longer bonds back in as the maturity date gets shorter.

It is much easier to rebalance with funds too

 

[VanWinkle]

It depends on how you purchased them. I’ve sold bonds purchased within the last two years at a profit.

How many did you sell at a loss? My guess is none. But some are advocating selling their bond funds at a loss and investing in individual bonds. That does not make sense to me. I'll wait for my bond funds duration and rising rates to make up for capital losses(not a loss unless you sell).
I'm glad individual bonds work for you. My funds will work for me.

 

[audreyh1]

How many did you sell at a loss? My guess is none. But some are advocating selling their bond funds at a loss and investing in individual bonds. That does not make sense to me. I'll wait for my bond funds duration and rising rates to make up for capital losses(not a loss unless you sell).
I'm glad individual bonds work for you. My funds will work for me.

Same here. I rebalance so when my bond funds had appreciated due to very low interest rates, I didn’t buy nearly as much. When my bond funds then drop due to rising interest rates, I buy more - unless stocks have dropped even more, like now. I also have cash and short-term bond funds in my fixed income allocation, so that’s what is helping me to buy more equities right now.

We’ve been through these cycles a few times.

 

[pb4uski]

How many did you sell at a loss? My guess is none. But some are advocating selling their bond funds at a loss and investing in individual bonds. That does not make sense to me. I'll wait for my bond funds duration and rising rates to make up for capital losses(not a loss unless you sell).
I'm glad individual bonds work for you. My funds will work for me.

But I think perhaps you don't really understand what some here are doing/advocating. The investment hypothesis is that the Fed will increase interest rates another 200 bps from here over the next 6 months or so to combat inflation.

Unrealized losses are a sunk cost whether one currently owns a bond fund or owns a portfolio of individual bonds... so selling at a loss isn't really relevant... either way, you have less today than your basis.

They are selling bond funds that have a duration of say, 6.5, at a loss and reinvesting the proceeds in a shorter duration ladder until the Fed increases interest rates, avoiding an additional 13% decline in the value of the bond fund over the next 6 months or so as a result of the 200 bps increase in interest rates. Then in 6 months or so when it appears that interest rates are plateauing, the maturing rungs of the short duration ladder will be reinvested in longer duration bonds... stretching the ladder out.

So 6 months from now the individual bond investor will end up with a 13% head start on the bond fund and will get the same advantage of higher interest rates when they lengthen the bond ladder.

So for example, let's say that rates are 3% today and will be 5% in 6 months or so. The bond fund holder will end up with 87% of what they have today in 6 months or so earning 5% but the individual bond investor will end up with 100% of what they have today in 6 months of so earning 5%.

I'm glossing over some details in the interest of simplicity, but that is the general idea... it's really at its core a market timing response to the Fed's clear signal that it intends to increase interest rates to combat inflation.

There isn't much risk because if the Fed changes course and decides not to increase rates then the individual bond investor only loses out on the difference between short and long term rates for 6 months or so and with the yield curve being so flat that opportunity cost is negligible.

 

[COcheesehead]

How many did you sell at a loss? My guess is none. But some are advocating selling their bond funds at a loss and investing in individual bonds. That does not make sense to me. I'll wait for my bond funds duration and rising rates to make up for capital losses(not a loss unless you sell).
I'm glad individual bonds work for you. My funds will work for me.

I doubled the yield of my ladder since March by reinvesting maturing bonds, flipping older bonds and adding in new money - without losing anything.
If I held a fund, I likely would be down a little or in some cases, a lot.
When folks start to tax loss out of funds later in the year, look out below.

 

[daylatedollarshort]

Please note that if you had individual bonds and sold them prior to maturity, you would also take a loss based on decreased value. Individual bonds also decrease in value during rising rates.

Has anyone in this thread advocated a strategy of buying individual bonds and selling them before maturity at a loss? It seems like we've all been discussing the exact opposite of that.

 

[VanWinkle]

Has anyone in this thread advocated a strategy of buying individual bonds and selling them before maturity at a loss? It seems like we've all been discussing the exact opposite of that.

Read my prior post to get my point-


"But some are advocating selling their bond funds at a loss and investing in individual bonds."

This is my point as no one is selling before maturity unless they panicked.

 

[Koolau]

I don't have individual bonds and have zero intention of ever having any.

Last individual bond I had was so good - it got called!

 

[daylatedollarshort]

Read my prior post to get my point-


"But some are advocating selling their bond funds at a loss and investing in individual bonds."

This is my point as no one is selling before maturity unless they panicked.

Sorry, I don't get your point. If you had a math example like pb4uski, that would make things clearer. The math viewpoint is 2.76% in 1 year Treasuries as of today, close to 0% probability of loss of principal since they have the "safety of Treasuries". Freedom56 pointed out in another thread that VBTLX has a distribution yield of 2.27% with a possible further loss of principal. How is it panicking to switch to a different asset within the same asset class (fixed income) to a higher yield and lower risk investment?

 

[Phroig]

But I think perhaps you don't really understand what some here are doing/advocating. The investment hypothesis is that the Fed will increase interest rates another 200 bps from here over the next 6 months or so to combat inflation ….

+1
Great post and example. The only risk with the strategy is if we get into a recession and inflation moderates, the Fed may cut interest rates. If that happens, fund NAVs will increase, but CDs and ST treasuries won’t appreciate.

 

[daylatedollarshort]

+1
Great post and example. The only risk with the strategy is if we get into a recession and inflation moderates, the Fed may cut interest rates. If that happens, fund NAVs will increase, but CDs and ST treasuries won’t appreciate.

This is true, but they would have to increase more than 12% to break even at this point, for those of us that sold earlier in the year. The odds right now are on interest rates going up, at least until the indicators show inflation may be leveling off. And if you kept your durations short, one could always pivot back to bond funds when interest rates are declining, like the advice in the Kiplinger article linked to previously.

 

[volfan]

What about those of us who hold bond funds through our Target retirement funds? Are using TR funds still a good option for those who want a simple portfolio?

Many years ago I watched Suze Orman and then moved on to learning more through this site and Bogleheads as she was so focused on debt then working until 70?But one thing she harped on was “DON’T use bond funds…”.
I began to disregard that when I learned about the 3 fund portfolio and saw they were in TR funds at VG also. Please don’t tell me she was right.

 

[yakers]

What about those of us who hold bond funds through our Target retirement funds? Are using TR funds still a good option for those who want a simple portfolio?

Many years ago I watched Suze Orman and then moved on to learning more through this site and Bogleheads as she was so focused on debt then working until 70��But one thing she harped on was “DON’T use bond funds…”.
I began to disregard that when I learned about the 3 fund portfolio and saw they were in TR funds at VG also. Please don’t tell me she was right.

It will be intereting to see if there are any quantative useful replies. I do not hold a descrete bond fund. I have managed funds (Wellesley, Wellington) which I rely on VG to manage the bond postion and we have Roth IRA funds in VBIAX VG 60/40 balanced fund and the bond portion really is =BND. But the dynamic balance between the two funds (or a Boglehead 3 fund) is key to very decent long term performance especially risk adjusted. And while we are 'older' (70+) our intent is generational and they will be the last thing we spend and only if we have to. So 3 fund/balanced portfolios/TR funds have all worked well with BND type funds included for the past many years and I have not seen any reason to break them up and manage all the components for a better return without added risk. But we have some very sharp people here and maybe someone has analysed how to break down and manage to reduce bond funds for a significant risk/reward.
And it has to be something that can go to autopilot as DW has little interest in things financial.

 

[Piper20]

Yakers we are in the boat without the Roth. WW in the IRA’s some balanced funds, S&P 500, REIT in after Tax. DW has no interest and it’s doubtful we’ll need it and will be passed on. DW Rmd goes back into the market. Not planning on changing a thing.

 

[Graybeard]

What about those of us who hold bond funds through our Target retirement funds? Are using TR funds still a good option for those who want a simple portfolio?

Many years ago I watched Suze Orman and then moved on to learning more through this site and Bogleheads as she was so focused on debt then working until 70?But one thing she harped on was “DON’T use bond funds…”.
I began to disregard that when I learned about the 3 fund portfolio and saw they were in TR funds at VG also. Please don’t tell me she was right.

She has been right for 6 months as rates have increased and done so fast but wrong since the early 1980 when bonds were in a bull market - as rates continued to drop having bond funds instead of bonds meant you also made income on the nav rising.

RE TDF I think it depends upon your desire to be hands off or for me my age. If you want an AA and don't want to be bothered buying bonds periodically a fund or ETF with bond funds in it is OK. I feel at my age (72) I don't want to be in a situation where I now have RMDs every year and be faced with losses in both equities and fixed income or having to wait X years of rate increases to get back to where I was due to nav loss.

I don't think there is a right answer, I think it depends upon your circumstances and what you want.

 

[daylatedollarshort]

What about those of us who hold bond funds through our Target retirement funds? Are using TR funds still a good option for those who want a simple portfolio?

Many years ago I watched Suze Orman and then moved on to learning more through this site and Bogleheads as she was so focused on debt then working until 70��But one thing she harped on was “DON’T use bond funds…”.
I began to disregard that when I learned about the 3 fund portfolio and saw they were in TR funds at VG also. Please don’t tell me she was right.

We had bond funds and some target funds for years. They were fine as long as global interest rates, both real and nominal, were trending down for decades, which they have been doing since the early 80s (The Long Decline of Global Interest Rates - https://econreview.berkeley.edu/the-long-decline-of-global-interest-rates/).

Now inflation is worldwide and so are sharply rising interest rates. Is this a momentary blip or the reversal of a decades long trend? Who knows. Many of the high inflation numbers in the U.S. and worldwide have no quick fix - global food shortages from war and drought; corporate monopoly pricing practices; China shut downs, oil prices, housing shortages, etc.

As long as we are have high inflation and negative real interest rates, the Fed will likely have to raise interest rates to above the inflation rate, if they really intend to fight inflation. Has the bond market now priced in all of the Fed's rate increases so far? Some experts say yes and some say the worst is yet to come.

If you want to go on autopilot that will work even for this investing climate, Bobcat2's posts on Bogleheads are what we have followed with a matching strategy, including a high allocation to TIPS / I bonds. We make less in good stock years though so that is the trade off with the inflation protection.

 

[copyright1997reloaded]

I can't wait to dump this fund and buy T bills but I need to wait the 30 days after 5/31 to sell and TLH against my income over the next few years. I stopped reinvesting the dividends around June 10 so this month the dividend is going into my settlement fund.

Why do you need to wait 30 days after 5/31? If you are selling the entire position and not investing it in substantially similar, there is no wash issue.

 

[pb4uski]

+1
Great post and example. The only risk with the strategy is if we get into a recession and inflation moderates, the Fed may cut interest rates. If that happens, fund NAVs will increase, but CDs and ST treasuries won’t appreciate.

Fair point. I personally think that the Fed will decide that fighting inflation is the priority even if it means a recession... IOW, a recession is a small price to pay to beat inflation down to a resonable level.

 

[Katsmeow]

I do not hold a descrete bond fund. I have managed funds (Wellesley, Wellington) which I rely on VG to manage the bond postion and we have Roth IRA funds in VBIAX VG 60/40 balanced fund and the bond portion really is =BND. But the dynamic balance between the two funds (or a Boglehead 3 fund) is key to very decent long term performance especially risk adjusted.

Our overall allocation has been about 50/50 equities/fixed for years. It can drift about 5% either way. About 23% of the overall portfolio is Wellesley which has worked well for us over the last 10 years or so that we've had it. The fixed part was not in Wellesley was in the total bond fund at Vanguard and the US Bond fund at Fidelity. Last week, I sold all of that (except the Wellesley) and put it in short term Treasury bills. I didn't well the Wellesley because I do think that VG manages it well. Our equities (Other than the Wellesley part) are all in the total stock funds at Vanguard and Fidelity.

 

[Graybeard]

Why do you need to wait 30 days after 5/31? If you are selling the entire position and not investing it in substantially similar, there is no wash issue.

Because I always reinvested the dividend, last time was 5/31. Around 6/10 I redirected the dividend to my settlement fund. 30 days after 5/31 would be 6/29 or 6/30 but I'm waiting until 7/5 to be 100% certain.

 

[copyright1997reloaded]

Because I always reinvested the dividend, last time was 5/31. Around 6/10 I redirected the dividend to my settlement fund. 30 days after 5/31 would be 6/29 or 6/30 but I'm waiting until 7/5 to be 100% certain.

If you are closing out the entire position there are no wash sale concerns.

Or am I misunderstanding the issue?