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I am an advocate for passive/ index funds but feel in some allocations that having low turnover active management has it's place and high yield bond funds is one. Micro cap stocks may be another as well as some international sector funds. I am all for creating a low cost properly asset allocated portfolio using index funds so I am not going to get into the argument of passive vs active at this time.
I am an advocate for passive/ index funds but feel in some allocations that having low turnover active management has it's place and high yield bond funds is one. Micro cap stocks may be another as well as some international sector funds. I am all for creating a low cost properly asset allocated portfolio using index funds so I am not going to get into the argument of passive vs active at this time.
Agreed and in the cases you described above. But not everyone is ready for that level of investment. 20 somethings and early 30 somethings coming here for advice need to just begin. The best place to begin to save for retirement is in a couple passively managed index funds that cover the entire market. Once they have begun to build a portfolio they can add in those extras to balance the portfolio out.
New investors should start here with two directions. Both should be done at the same time. One of those is to have an emergency fund and the second is to start a retirement account. It can be IRA or 401k but that has to begin as soon as you can. Sooner if possible. The emergency fund is not there to fund a car unless that is an absolute last resort. It should be used if you lose income for a period of time to health or job loss.
A tIRA for the tax deduction is also very important for young families. Yes a Roth might be better later on but having that added benefit to saving now and not letting it hurt quite as hard is invaluable in getting started.
I have been thinking about ways that my portfolio a can get good returns but still be relatively safe. I see that while high yield bond funds have more ups and downs than conservative bond funds/ETF's, like AGG and BND, they usually don't drop as much as a total stock market fund in bear markets.
For example, during the dead period for stocks from 2000-2009, stocks lost money, but a high yield fund like HYG, went up for the ten year period. VTI (Total stock market) lost 55% from top to bottom in the 2007-2009 bear market, and took four years to recover, HYG (a junk bond ETF) only dropped 30% and took less time to recover.
Maybe it would be time to put part of my stock assets into high yield bond to get both growth and income.
(I am looking at the long term here)
High yield bonds are paying very low interest rates right now--so they are not a good value. In a stock market downturn, high yield bonds typically get hit pretty hard, maybe not as hard as stocks, but they are stock-like.
I am not a big fan of high yield bonds. It's tough to pick a good high yield bond fund that is consistent over a long time period. I personally do like "strategic income" type bond funds that can invest a big chunk in high yield (usually up to 30% to 35%) yet still get in and out of high yield as they see fit. Funds I'm thinking of would be Fidelity Strategic Income and Loomis Sayles Bond. Fidelity Strategic Income would be the more conservative of the two. Both have decent long term returns--better than your typical investment grade bond fund, but they are also more volatile than your typical investment grade bond fund.
If you must go with an all high yield fund, I'd go with something conservative like Vanguard High Yield Corporate. They invest in the higher rated high yield bonds, so it shouldn't lose as much in a market downturn.
That is market timing! Maybe 2017 prices are high over 2016 but I am talking risk and reward for the next 30 years.
Honestly, high yield bond risk/reward isn't that great, IMO. Trailing 20 year returns for Vanguard's High Yield Corporate fund are 6.05%. A multi-sector bond fund like Loomis Sayles Bond returned 7.35% over the same 20 year period. A fairly conservative investment grade bond fund like Dodge & Cox Income returned 5.73%--a slightly lower return for much less volatility than a high yield bond fund.
I think you'd be better off in a fund like Vanguard Wellesley Income. 60% investment grade bonds and 40% dividend paying stocks. It actually returned 7.42% over the last 20 years--also beating Vanguard's high yield fund--and it did so with less volatility. And Vanguard's high yield fund is one of the least volatile in the category.
IMO, the only time to buy junk bonds is when the yield spread is at least 5%-6% over Treasuries (and stocks are usually an even bigger bargain at those times, so one should just do bargain shopping in the stock market). If you buy when the spread is low, most or even all of the extra yield will get eaten up by losses from defaults, and no amount of time will "fix" that problem.
Yes, spot on.
I forget which program I was watching, but I just heard a bond fund manager say the very same thing that you said about defaults. High yield bonds as an asset class are currently priced as if there will be no defaults. Yet high yield has a high default rate.
High yield bonds are paying very low interest rates right now--so they are not a good value. In a stock market downturn, high yield bonds typically get hit pretty hard, maybe not as hard as stocks, but they are stock-like.
I am not a big fan of high yield bonds. It's tough to pick a good high yield bond fund that is consistent over a long time period. I personally do like "strategic income" type bond funds that can invest a big chunk in high yield (usually up to 30% to 35%) yet still get in and out of high yield as they see fit. Funds I'm thinking of would be Fidelity Strategic Income and Loomis Sayles Bond. Fidelity Strategic Income would be the more conservative of the two. Both have decent long term returns--better than your typical investment grade bond fund, but they are also more volatile than your typical investment grade bond fund.
If you must go with an all high yield fund, I'd go with something conservative like Vanguard High Yield Corporate. They invest in the higher rated high yield bonds, so it shouldn't lose as much in a market downturn.
i like fidelity strategic income . it is a very nice go anywhere bond fund that adjusts along the way. it holds a bit of everything and it makes a nice addition to a core total bond fund . it has presence in the areas a total bond fund lacks .
He's hardly the first or only one to write about this. Peter Lynch wrote about it in one of his books. Lynch actually has several rules of thumb for choosing bonds over stocks, small caps over big caps, junk over investment grade, convertible debt vs. straight debt, etc.
I am an advocate for passive/ index funds but feel in some allocations that having low turnover active management has it's place and high yield bond funds is one. Micro cap stocks may be another as well as some international sector funds. I am all for creating a low cost properly asset allocated portfolio using index funds so I am not going to get into the argument of passive vs active at this time.
The problem I find with high yield bond funds is it's hard to find one that isn't streaky in terms of returns. It's easier to find a consistent stock fund than a consistent high yield bond fund, at least in my experience.
Vanguard's high yield bond fund is ok, but nothing special. Low volatility and less risk for the category. T. Rowe Price's high yield bond fund is pretty consistent, with above average returns, but has been closed to new investors for years. If you know of a good high yield bond fund with above average returns and without insane volatility, I'd love to hear about it.
I like Fidelity Strategic Income (FSICX). It is a very nice go anywhere bond fund that adjusts along the way. it holds a bit of everything and it makes a nice addition to a core total bond fund. It has presence in the areas a total bond fund lacks .
Yep, I completely agree. It has a below average expense ratio of .70%, too. I own Loomis Sayles Bond (LSBRX), but FSICX has a lot going for it. Lower expenses & more consistent than LSBRX.
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