Which BOND index fund should I pick?

[Slav4ikMD]

Forgive me is this is a naïve question, but I am trying to decide where most of my bond funds should be:  as I am in NY, is it a no-brainer to pick the tax exempt NY bond fund https://personal.vanguard.com/us/funds/snapshot?FundId=0076&FundIntExt=INT or go with the total bond market https://personal.vanguard.com/us/FundsSnapshot?FundId=0084&FundIntExt=INT or is there a more sophisticated way to approach this?  (So far I've had very very little in bonds and had some target retirement funds, but I am trying to get rid of target retirement stuff as fees are a bit higher, etc)

[Slav4ikMD]

BTW having just read this thread https://www.whitecoatinvestor.com/forums/topic/starting-to-invest-in-taxable/ I am wondering if I should have any bonds at all...  It's a tough decision.  (What I definitely need to do is get rid of target retirement funds - which of course have bonds - in a taxable account... Just learned about having made this mistake!  A good reason I need someone to review my stuff maybe.)  I read some people say that having some bonds is a must, others say if you are young don't bother...  I am 37.  If any other info about me would help, let me know!

[Joseph]

Asset allocation is where you need to start.  It is a personal decision.

There are very successful investors who use only one Target fund as their portfolio.

Spend some time thinking about your investing strategy and what you want to do.

Keeping your total bond fund in a tax-advantaged account is the most popular choice.

[Slav4ikMD]

I think I would still want to have some bonds, not a lot but some.

I do think that Vanguard funds can be great, and that's what I started with, but I think one can do well with having slightly lower fees.

I posted this mostly with a goal of getting some input on the bond funds - I recently came across the NY tax exempt one and it seems to be a great choice - my main question is whether it is reasonably to make that my ONLY bond choice, or is that not diversified enough within bonds...

[StarTrekDoc]

Assumption: You've max'd out tax sheltered accounts, funded 529 plans, paid off debts, and built up your emergency funds and now building out the taxable fund with at least 28% tax bracket+NY Income tax.

If yes, then whatever risk tolerance you want in bonds, the NY Muni fund would be viable. Keep in mind if parking for 1-2 years, Long term MUNI may not be the best place to leave it with 3+ rate hikes on the horizon.  MUNI pricing is gonna take a dive even further

[The White Coat Investor]

The good news is it doesn't matter a lot.

Your two choices are good, but one doesn't make much sense in tax-protected and the other doesn't make much sense in taxable. Where are you planning on holding your bonds? That'll probably make your decision right there.

[Slav4ikMD]

@StarTrecDoc:  Yes, all assumptions are correct.  (re debt:  house not paid off, on track for 15 year plan; loans almost paid off).  And I am talking long-term retirement investments and making bonds a small-ish part of a portfolio.

@WCI:  So maybe do both?  The NY muni into a taxable one and some total bond market fund into tax-protected?  The latter being a much larger one.

(BTW I am 38, not 37 lol  Not sure if that was a typo or wishful thinking.)

[Slav4ikMD]

This is probably for a separate discussion, but I am basically wondering whether I need bond funds at all, given that 1) I still have at least two decades of saving and investing to do and 2) I am also accumulating a state pension which will provide an income stream starting age 62, so I would be able to withstand more of a fall in the portfolio (although a few years before that time I would still want to become more conservative and hold more bonds).  I am just thinking out loud here... I realize this all doesn't matter all that much.

[hightower]

Most people advise that you have your age minus 10 in bonds.  So you'd want something around 20-30% bonds in your portfolio.  Having a portfolio that is 100% stocks can be pretty risky from a behavior standpoint when you see your first bear market.  Are you really going to be able to resist not selling low when the stock market drops 20% or more?  If you have bonds the losses seem less severe and helps a lot of people stay the course.  I would highly recommend you spend some time reading up on asset allocation and investing philosophy over at bogleheads.org before making up your mind on this. There's a great wiki over there for starters with lots of advice on everything you're asking about.  Plus you can search through the old thread discussions on similar topics.

[Slav4ikMD]

Thanks, will do!  So back to the original question:  let's assume I don't put any bonds at all into a taxable account, does having a tax exempt bond fund in a pre-tax retirement account offer any advantage?  Hypothetically, if I were to be very close to retirement age and converted my entire portfolio to the tax exempt bonds, would I not owe ANY taxes when withdrawing? (That would just be too good to be true...)  Just trying to understand the mechanics of it...

[WallStreetPhysician]

Slav4ikMD wrote:

Forgive me is this is a naïve question, but I am trying to decide where most of my bond funds should be:  as I am in NY, is it a no-brainer to pick the tax exempt NY bond fund https://personal.vanguard.com/us/funds/snapshot?FundId=0076&FundIntExt=INT or go with the total bond market https://personal.vanguard.com/us/FundsSnapshot?FundId=0084&FundIntExt=INT or is there a more sophisticated way to approach this?  (So far I’ve had very very little in bonds and had some target retirement funds, but I am trying to get rid of target retirement stuff as fees are a bit higher, etc)

Click to expand...

Excellent choices. In general, I would do the total bond index fund if investing in a retirement account, and your tax-exempt NY bond fund in a taxable account.

If you go with the tax-exempt NY fund, I would use the admiral share version (VNYUX) instead of the investor share (VNYTX) that you linked to in your original post. Good luck!

[DMFA]

The total bond funds are never really *wrong* (assuming they're in a tax-advantaged account and that you should have bonds in the first place, mind you), but if you get a significant state income tax break from buying the munis, especially in a tax-heavy state like NY or CA, then putting those funds into a standard "taxable" brokerage account may be a better choice.

Another argument is whether to use bond *funds* at all, instead of the individual bonds themselves, as turnover from the fund managers changing bonds in the funds creates a "phantom tax."

I like the "Bonds Go in Taxable!" post. That challenged a lot of preconceived notions (esp among the Bogleheads) using some simple math. It breaks from knee-jerks and "it is because it is" perspectives and gets you to think about what your money is actually doing, and what you're doing with it.

[G]

I agree that it doesn't matter with your good options.

But the primary reason i clicked on the topic was to see if Johanna burst her aneurysm...I'm a little concerned that she hasn't posted yet.

[ENT Doc]

If you're going to be collecting a pension at 62, do you really need to invest in bonds?  I'm assuming the pension is enough to cover basic living expenses by that time.

[The White Coat Investor]

It's hard for me to say if you need bonds or not as I don't know if stocks will outperform bonds in the future as they have in the past nor do I know if you can stay the course with a 100% stock portfolio. Figure out the answer to those two things and you'll have your answer. Otherwise, hedge your bets, at least until you go through your first bear market.