Managed bond accounts

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G48
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Managed bond accounts

Post by G48 »

Advice on actively managed bond accounts. Charles Schwab is recommending these over bond mutual funds or bond etfs. I am currently transferring $1.2 million from my deferred comp account to my IRA (this is part of my fixed income allocation). The managed bond fund would own individual bonds managed by a company that specializes in bonds. The fees are around 0.45%. My current allocation is 80% Dodge and Cox Income and 20% Vanguard total return. Thanks
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retired@50
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Re: Managed bond accounts

Post by retired@50 »

I don't see how paying a .45% fee is much different than owning an actively managed bond mutual fund.

Based on all the reading I've done, keeping fees low is even more important with bonds than with stocks. I'd elect to use a bond index mutual fund with a super low expense ratio.

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asset_chaos
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Re: Managed bond accounts

Post by asset_chaos »

There was a thread on this or a similar Schwab offering last January. Every basis point you pay for bond management is a basis point you give up in yield. And since bonds are simple in that riskier bonds have higher yields, the only way a managed bond fund makes back its fees is by increasing risk. It seems that your Dodge & Cox managed bond fund is less costly than the Schwab separate account. What's the attraction of trading one expensive bond manager for an even more costly one?
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anon_investor
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Re: Managed bond accounts

Post by anon_investor »

asset_chaos wrote: Sat Jun 12, 2021 4:06 pm There was a thread on this or a similar Schwab offering last January. Every basis point you pay for bond management is a basis point you give up in yield. And since bonds are simple in that riskier bonds have higher yields, the only way a managed bond fund makes back its fees is by increasing risk. It seems that your Dodge & Cox managed bond fund is less costly than the Schwab separate account. What's the attraction of trading one expensive bond manager for an even more costly one?
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G48
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Re: Managed bond accounts

Post by G48 »

They say do you have more control over the bonds and you can sell any that have a loss for tax harvesting.
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asset_chaos
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Re: Managed bond accounts

Post by asset_chaos »

If tax loss harvesting is the main benefit and selling point, I don't see how the numbers work out. Maybe my grasp of the tax code is tenuous, and someone more knowledgeable will correct me. But what I see is 0.45% of 1.2 million = $5400 management cost a year, every year. My understanding is that one can only offset a maximum of $3000 a year of capital losses against income. Even in the 37% bracket the tax saving is 37% of $3000 = $1110 for that year alone in which you have the bond capital loss. If you're not in the highest tax bracket, then the tax saving from the loss is even less. Of course, as you can store the capital loss over $3000 to offset future realized capital gains, there is some future potential benefit. But who knows when you'll be able to or even want to realize that benefit, while in the meantime you're paying $5400 each and every year.

While harvesting tax losses can be beneficial, it just looks like here you're guarenteed to pay a lot more than the potential benefit is worth.
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arcticpineapplecorp.
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Re: Managed bond accounts

Post by arcticpineapplecorp. »

asset_chaos wrote: Sat Jun 12, 2021 9:46 pm If tax loss harvesting is the main benefit and selling point, I don't see how the numbers work out. Maybe my grasp of the tax code is tenuous, and someone more knowledgeable will correct me. But what I see is 0.45% of 1.2 million = $5400 management cost a year, every year. My understanding is that one can only offset a maximum of $3000 a year of capital losses against income. Even in the 37% bracket the tax saving is 37% of $3000 = $1110 for that year alone in which you have the bond capital loss. If you're not in the highest tax bracket, then the tax saving from the loss is even less. Of course, as you can store the capital loss over $3000 to offset future realized capital gains, there is some future potential benefit. But who knows when you'll be able to or even want to realize that benefit, while in the meantime you're paying $5400 each and every year.

While harvesting tax losses can be beneficial, it just looks like here you're guarenteed to pay a lot more than the potential benefit is worth.
+1

not to mention that opportunities for tax loss harvesting are greater for stocks than bonds because stocks tend to lose MORE than bonds. So if you want to maximize tax loss harvesting, you'd be looking to stocks for that, not bonds.
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anon_investor
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Re: Managed bond accounts

Post by anon_investor »

G48 wrote: Sat Jun 12, 2021 7:20 pm They say do you have more control over the bonds and you can sell any that have a loss for tax harvesting.
OP, don't get sold by a saleman, just buy a bond index fund and pay 0.05% or less.
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Re: Managed bond accounts

Post by 123 »

Just for comparison the expense ratio on the Vanguard Total Bond Market ETF (BND) is .035%. The cost of a managed bond account is over 10 times that. In addition to the cost of managing the bond account you will likely also be paying more for your bonds on an individual transaction basis.
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