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Which BOND index fund should I pick?

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  • Zaphod
    replied
    You probably want some allocation to bonds, my points are only that you should (at least us on this site) customize it to your specific situation. Maybe thats munis to give out tax free income as a baseline or in treasuries your deferred accounts. Lots of options. Doesnt sound like you have a need for a very conservative allocation given your baseline, but you may want a small allocation just for some sequence protection and to make sure you feel comfortable next downturn.

    Also if one is fully invested and they perform as usual in a downturn, rebalancing will be your only source of cash to invest in beaten down equities. I think that is one of the biggest flaws with indexing and being fully invested, even though they are superior strategies overall, you dont get to take too much of an extra bite at the best times.

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  • Slav4ikMD
    replied
    If I stay with the employer for 20+ years, the yes, if I stay for 10 years (enough to get vested, have 2 years left) then it will be a small-ish amount, say around 35K) - in either case, assuming SS is still around it will be enough.  Given that I am also saving aggressively in several other ways I should hopefully be fine regardless.  My hope is to not even have to need to touch all this money - hence questioning the need for bonds.  But all in all, I will likely still continue to have them as part of my portfolio, likely 10-15% as of now - just because. My preferences may change of course.  I am still learning and WCI makes a good point that you never really know how your mind works until the worst big crash.

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  • Zaphod
    replied




    Zaphod. But that’s just it right. Predicting the direction of interest rates and trying to time the bond market has proven even less successful than trying to time the equity market.

    Though unlikely, I wouldn’t be shocked if in two years, we were back down to record low rates.
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    I wouldnt be shocked at that either and even expect it, but a small counter trend on an intermediate-short time frame seems in play right now. What can be absolutely known is risk/reward in bonds were terrible and skewed to all risk no reward last fall. I said as much over and over, one had only to do the basic math (ie no real return in best case scenarios over term length, huge loss risk). We have since had the fastest and biggest bond rout in history helped by the nominally low level of rates.

    Maybe that was true in the past but the fed basically telegraphs their moves now. They have said they are going to raise rates this week, and the market is positioned as such. Now, if you asked me, which they dont since I dont know whats going on, it doesnt even makes sense to raise rates as inflation could run hot for a couple years and not come into proximity of making up for lost production and gains 2/2 slow recovery. Also yoy influence of energy costs will run off cpi here in the next month or so. They know this and are still hawking so I assume they know way more as well, or maybe their just messing with the market. There is though little risk in just paying attention and not stepping in front of an expected move against you the day it is thought to occur, but maybe its priced in as they say.

    Now, rates may not get changed this week but there really is no benefit either way to stepping in front of a binary decision unless the heavy likelihood is in your favor. Take Brexit for example, the market took a nearly 50/50 chance event as a foregone conclusion to the upside and closed out near all time highs as if there was zero risk. Of course that wasnt true, and given the set up you could have taken some money off the table just in case they were wrong at a nearly free of risk cost. You may fundamentally disagree with that in reality, but the logic is solid.

     

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  • TheGipper
    replied
    Zaphod. But that's just it right. Predicting the direction of interest rates and trying to time the bond market has proven even less successful than trying to time the equity market.

    Though unlikely, I wouldn't be shocked if in two years, we were back down to record low rates.

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  • ENT Doc
    replied
    I suppose I was looking at bonds in a more fundamental way - that they're in a portfolio to protect wealth (lower standard deviation of your portfolio) so that you have more certainty about what you'll have in retirement.  In the case of a MD making (presumably) good money and having a pension to boot is there concern that there won't be a basic level to support him/her?  For example, let's say he/she puts all their money in stocks and the day he/she retires their portfolio declines by 50%.  While that stinks, there is still a pension to support basic needs.  There are several reasons to not own bonds right now, including very low real rates of return, expected interest rate increases, inflation risk, and the general debt situation our country is in.  As our seemingly incompetent overlords continue to pile on more debt there will be more taxes in the future (which lowers bond return further as compared to stocks) or lowered credit ratings.  The latter will increase yields which lower bond values.

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  • Zaphod
    replied
    I think bonds will become more attractive if we actually hike a couple more times in the near future. Then the arguments make more sense. Right now, on a short term basis (last year) they havent made any sense at all if you're building a portfolio.

    Not sure if anyone has mentioned but there is a supposed forgone conclusion this week that rates get hiked, so take that into your timing however you will.

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  • TheGipper
    replied
    Three good arguments for bonds even for a young accumulator:

    1). A slice of long term bond fund can serve as a good low correlation diversifier to an equity portfolio, particularly a balanced Swedroe style factor portfolio. Will act as a deflationary hedge (or just when FED doesn't raise rates as often as expected. See early 2016).

    2). Shorter term treasury fund as a rebalancing resorvoir to buy more stocks during the recession, in absence of other available cash.

    3) To prevent panic selling during one's first bear market (Least persuasive reason IMO).

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  • The White Coat Investor
    replied
    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.

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  • ENT Doc
    replied
    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.

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  • G
    replied
    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.

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  • DMFA
    replied
    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.

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  • WallStreetPhysician
    replied




    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)
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    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!

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  • Slav4ikMD
    replied
    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...

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  • hightower
    replied
    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.

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  • Slav4ikMD
    replied
    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.

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