Help Me Pick A Bond Fund (annuities, Ameritrade, IRA, brokerage)

[DaveinMtAiry]

I will admit to being a bit ignorant on bonds. For that reason as well as others I invest in funds and not individual bonds. I understand it's a bad bond climate that will get worse as rates continue to climb but in my late 50's I still believe it holds a place in our portfolio.

Here is where we are. I am addressing two of our buckets of money: an IRA for my wife and a regular brokerage account that will be our "third line of defense" in our emergency. But realistically barring a catastrophy the brokerage account is long term money, 5-8 years at minimum. Regarding the IRA we are 8 years from retirement. Following the "5 Index Fund" recommendation both accounts are split up into 5 index funds, the bond allocation in VG Corporate Bond Index VICSX. In another account ("second line of defense") I have money in PIMCO Multisector Bond Class D PONDX.

Despite the higher fees of the managed PIMCO fund it is doing much better and is getting higher ratings. As we have much more money in VICSX would I be wise to change that to PIMCO? I guess I'd welcome other suggestions but to be honest I want to pair down the number of funds I am invested in.

Thanks in advance, have at it.

[mathjak107]

i don't like many bond funds today except high yield .

i do use a barbell of TLT AND PIMCO MINT/SHY as a core . the barbell has the same interest rate sensitivity as a total bond fund but when stocks zip TLT can zag pretty hard right back

[leastprime]

Likewise^.
Don't particularly like bonds. What I have that is close to bonds are deferred GLWB annuities in IRA's and closed-end funds in taxable acct, holdings corporates, loans, and speculative stuff. The annuities straddle our secured retirement funds and discretionary. The CEFs are purely in the Discretionary bucket.
retired 66/70. Funded ratio >1.1

[TwoByFour]

Originally Posted by DaveinMtAiry

Despite the higher fees of the managed PIMCO fund it is doing much better and is getting higher ratings. As we have much more money in VICSX would I be wise to change that to PIMCO? I guess I'd welcome other suggestions but to be honest I want to pair down the number of funds I am invested in.

Thanks in advance, have at it.

PONDX is doing well because it carries risk. A good fraction of its holding are derivatives like Credit Default Swaps. It also is leveraged. It has a high 12-1-b fee. It has high turn-over and a hefty tax-expense ratio. It should not be held outside of an IRA.

You need to assess what your purpose is for bonds - safety, income, short-term investing, buy-and-hold, etc. That will help you know what to do.

I tend to follow boglehead investing, and that recommends putting all your risk in equities and the purpose of bonds is safety. I don't know if that is what you do, but if so, I would not invest in PONDX.

Total Bond Market (TBM) is a classic boglehead "safe" bond fund. Examples are: AGG and BND (ETF's) or VBTLX (mutual fund, from Vanguard).

I don't like TBM because it has too many long bonds so I have made my bond funds a combo of US Treasuries (short-VGSH and intermediate-VFITX) and intermediate corporates (VFICX). I want liquidity hence the two US Treasury funds.

I would not worry too much about the rising interest rates if you are a long-term investor since most of your return will come from interest, not capital gains, and rising rates will be good for the former.

[mathjak107]

if you want a total bond fund i would say use fidelity total bond . it has surpassed vanguards versions over most time frames . i owned both and fidelity's is a better choice. i was sorry i let the money ride in vanguards for as long as i did .

vanguards total bond fund uses a barbell strategy of shorter and long term bonds . average duration is really only 6 years so really not bad considering 28% are long term bonds .

fidelity is about 23% long term bonds and an average duration of 5.50 years .


as far as bond funds go when rates rise ,gaining interest and losing nav in a rising rate scenario can be a wash . but unless rates level out for a while you are always behind the curve .

what is the real killer is inflation and rising rates go together.

[mathjak107]

in theory if a bond fund is paying 5% and has a duration of 5 for every point rates rise you lose 5% in value but gain 1% in additional interest . 5 years later you made an additional 5% in interest which offsets the 5% drop in price .

the problem is your total return is 5% in a 6% world . that means inflation wise you could be behind the curve . rising bond rates are never good for existing bond holders since inflation expectations and rates are tied together .

that only apply's to treasury's since corporate bonds have credit rating's that change too . in a down turn credit rating drops can leave you well behind what interest rate changes alone would indicate . 2008 saw many corporate bond funds lose money while rates were falling . at the same time treasury's were soaring .

if you want safety treasury's are the way to go . corporates can act to stock like

[kickingprop]

Agree on the high yield bond funds as the only way to go.... I hold VYM as well as VCLT in my HSA brokerage acct. Those are my only two bond holdings and both have done relatively well for me overall..

Edit: I hold the Vanguard ETF's as they trade commission free with TD Ameritrade, which is who administers my brokerage within my HSA.

[mathjak107]

Originally Posted by kickingprop

Agree on the high yield bond funds as the only way to go.... I hold VYM as well as VCLT in my HSA brokerage acct. Those are my only two bond holdings .

SURPRISE !!!!!! vym is not a high yield bond fund . it is a high yield stock fund and is JUST ABOUT 100% EQUITY'S ,in fact it contains pretty much NO BONDS ! . someone did not do their homework if they thought they were buying a bond fund .

vanguard does not have a high yield bond fund .

[TwoByFour]

Originally Posted by mathjak107

in theory if a bond fund is paying 5% and has a duration of 5 for every point rates rise you lose 5% in value but gain 1% in additional interest . 5 years later you made an additional 5% in interest which offsets the 5% drop in price .

The drop in NAV for a bond fund when interest rates rise is not permanent, it is roughly is the length of time of the average maturity. So if your bond fund has an increase of 1% interest and has an average maturity of 5 years then by 5 years the 5% loss in NAV will have recovered. This is why holding long term the total return is dominated by interest.

[mathjak107]

that is what i said , at the end of the duration period you are even with the original deal . but you will always be behind the current total return .

so in my example you signed on for 5% interest . rates rose to 6% . you lost 5% in nav ,but gained 5% in extra interest over the 5 years .now you have your original 5% total return 5 years later back that you signed on for . but current total return is 6% and not 5% which is what your deal ended up at 5 years later . rates are at 6% because inflation expectations picked up .

when you are made whole again it is being whole based on your original deal which is 5% . your deal after 5 years is an nav worth 5% less than you paid and an interest payment of 5% more . that works out to a 5% total return , your original deal . but remember rates are at 6% total return 5 years later and you got 5%.

don't get confused . just because you are made whole again at the end of the duration period does not mean you earned 6% , nope , all the duration number does is bring you back to whole again based on the deal you signed on for .