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I don't think your solution is that great. Bonds typically perform better than cash over the long run. Just own a solid core bond fund that invests in intermediate term bonds. Something like Dodge & Cox Income, Harbor Bond, Fidelity Total Bond, Baird Core Plus Bond, or--my least favorite--Vanguard Total Bond Market Index (the worst long term performer of the above listed funds)
They're like anything else. They won't be up all the time. They will have bad years. But with a basic core bond fund, you typically don't see big swings in either direction.
You can skip global, foreign, emerging market, multi-sector, long term/duration, and bank loan funds. Those are more niche products. I personally own a multi sector bond fund and have a pretty big sake in a global bond fund because I like those specific funds. But I am the first to admit they aren't an investment necessity.
the problem is people have no idea how to use or judge bond funds .
you can't rip out one year in isolation because a bond fund's return has to be looked at over the funds duration just like stock funds can't be judged by ytd .if you are not prepared to hold the fund for at least that long it is a speculation on rates as to where you will be .
when used properly high quality bond funds tend to outperform cash instruments .
lets look at ftbfx , fidelity's total bond fund with a duration of 5.63 years . .which if you were buying in today is paying 3.50% .
well the ytd return is .72% however if you are only seeing .72% this year it means you had to be owning it previously since anyone buying in this year would have a very different return .
so lets assume you held for the last 5 years which is close to it's duration . you averaged 3.22% .
where were cd's all that time ? in the toilet , that is where . a 5 year cd likely lagged that bond fund .
so if you hold for the duration of the bond fund , almost like an individual bond you should see as a minimum the rate you got the day you bought .
managers playing the credit rating increase game or riding the yield curve can do even better for you.
so when you compare what the average is over that duration you generally come out better with bond funds then cd's because it is also about the years leading up to the year you are buying in for the owners.
not only that but a slip in rates spells appreciation too if you sell .
it is no different than looking at stocks in a down year and going why would anyone buy stocks ? i can do better in cd's ...
but those who have been in it up to that point have a different total return than just ytd .
Is this a joke or some sort of weird rationalization? Bond yields have not even kept with the very low rate of inflation for the past several years. The stock market has some short term volatility but has been doing very well over the past 10 years since the great recession. Many of us have way more than doubled our portfolios in that time period.
I think you don't understand the purpose of holding bonds. Holding Bond funds are not to gain crazy returns, it's to diversify risk into an asset class that tends to outperform in periods of massive declines in equities. In a stock market crash if you need access to some capital you can do so without incurring massive losses by selling equities at the low point. Your bond funds will be going up in value and most likely you will not have any losses.
There is some risk involved with all investing but holding investment grade bond funds is very low risk. It's laughable that some here are comparing the risk to holding stocks!
In addition, I don't subscribe to some formula such as age - XXX in Bonds etc. I hold just enough bonds to ensure that a certain amount of my portfolio is not volatile.
I understand diversification. I also understand having funds available when markets drop. For a great many years bond returns were at least respectable. Now they are dirt and on top of that at risk due to potential rises in interest rates and inflation. There are other choices for diversification besides bonds.
3 to 4% on bond funds today will likely still beat cash instruments so i am not sure why you are complaining . in fact if rates re-fall you can see some appreciation too . 6-8% would not be out of the question between interest and some appreciation .
of course with long term treasuries you can be talking getting paid over 3% to wait and in a flight to safety see a 20-30% gain if rates even fall 1% in a recession or flight to safety . i don't see that as to shabby , for someone who does not want to be 100% equities . .
today is a good example, international down sharply, domestic equities down, 10Y yields falling and BND is UP!
And what returns have you gotten from BND over the past 5 years? past 10 years? Or are you a day trader who is going to sell some BND today in order to buy the latest hot stock at a bargain?
i don't own bnd , i owned fidelity total bond until this year.
now remember you have to compare it cash instruments like cd's and bank accounts which were much worse . that is the point you miss . it is compared to almost zero return on the other non stock alternatives . i will take these over what we were getting on cd's and the like over those years any day of the week over those time frames , or did you forget .
And what returns have you gotten from BND over the past 5 years? past 10 years? Or are you a day trader who is going to sell some BND today in order to buy the latest hot stock at a bargain?
As I said I am not owning bond funds for return but to mitigate volatility. I want a small part of my portfolio (10%) to be in bonds as a safety measure. It's very unlikely that I will need it as I also have a 6 month emergency fund that is 100% cash VMMXX Prime Money market yielding 2.1%, but you just never know. I know quite a few people who had to liquidate stocks in 2008 for massive capital losses because they had no bonds.
The choices are I either invest in intermediate bonds or put my money in CDs. I don't like CDs as I can't access part of my capital without breaking the CD and paying a penalty on the whole thing. Also, I can't Tax Loss Harvest a CD if interest rates start rising. Sure, I could open multiple CDs (CD ladders etc.) but that is just too unwieldy for me and also it's dubious if that actually produces higher returns.
Long term interest rates have not gone that high despite predictions that we would be at 3.25 by now, we are at 2.85 instead and in Jan we were at 2.55. That is a paltry 30 basis points in 8 months. And due to all these headwinds we could even start falling.
it seems to me like bond funds water down your returns unless you are using them to replace money you would otherwise be holding in cash.
but, like i was thinking the other day, you could just modify your allocation a bit to have the same impact while holding a bit more stock funds and a bit less cash.
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