Alternative to Bond Fund?

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JDSwim3
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Alternative to Bond Fund?

Post by JDSwim3 »

Age 59, retired a little over a year.

Basically have our entire retirement savings in a 60/40 AA 3 fund portfolio, but am really questioning the bond fund as the market hedge. Inflation and the likelihood of increasing interest rates would indicate bonds will not be making even a moderate comeback anytime soon. At this point I would have been much better off with my 40 under the mattress.

Am I stuck at this point, with my bond fund down 2.5 percent. Or is there an alternative that could recoup those losses with approximately the same low risk of the bond fund? Perhaps a CD ladder?

Thank you.
aristotelian
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Re: Alternative to Bond Fund?

Post by aristotelian »

The point of bonds isn't to never lose money, ever, it is to hedge against stocks crashing. Long term, stocks are the best bet to generate real return. The hope is that when bonds go down, stocks will be going up. Just as you would expect stocks to go down periodically, it is OK to experience losses on the bond side. You just hope that it is not too much and/or correlated with stocks going up.

Anyway, the question has been asked numerous times recently. Have you read through any of these threads?
viewtopic.php?t=350971
viewtopic.php?t=345956
viewtopic.php?t=335051
viewtopic.php?t=359353&p=6258341

The bottom line is there is no better alternative, either accept some negative real return, or capitulate to the Fed and go all in stocks and risk assets.
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JDSwim3
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Re: Alternative to Bond Fund?

Post by JDSwim3 »

Thank you for the links. I should have searched first.

Yes, the bond fund allocation is purely a market hedge. Never expected growth from it, but also don't want to just give away value with no seeming end in sight. My zero-earning mattress is beating it, and my emergency cash in a 0.56% HYSA is really leaving it in the dust. Either seems a better and perhaps safer alternative at this point.

I did see another post that highlighted the date stamp of the 3 Fund Portfolio philosophy, specifically that it originated during times of high bond returns. Just wondering in today's environment if a total bond fund would be the suggested leg of the portfolio as a pure market hedge.
tibbitts
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Re: Alternative to Bond Fund?

Post by tibbitts »

JDSwim3 wrote: Wed Oct 20, 2021 1:46 pm Thank you for the links. I should have searched first.

Yes, the bond fund allocation is purely a market hedge. Never expected growth from it, but also don't want to just give away value with no seeming end in sight. My zero-earning mattress is beating it, and my emergency cash in a 0.56% HYSA is really leaving it in the dust. Either seems a better and perhaps safer alternative at this point.

I did see another post that highlighted the date stamp of the 3 Fund Portfolio philosophy, specifically that it originated during times of high bond returns. Just wondering in today's environment if a total bond fund would be the suggested leg of the portfolio as a pure market hedge.
Boglehead recommendations do vary with market conditions, more than many might admit. Of course almost any time period was a period of "high bond returns" compared to now.

However I don't agree that your mattress is necessarily beating bonds. Maybe over a few months, or a year. Over longer periods the bond fund will likely outperform. And while tempting, most of us can't consistently win if we move in and out of bonds vs. savings accounts etc. with every little event in the news. However you may have specific options available to you that make more sense than bond funds at certain times - for example I moved my traditional bond fund money to unrestricted TIAA Traditional a while back. Other people may have fixed accounts in an employer plan or other accounts that can replace bond funds in their portfolios. There are fewer discussions about some alternatives because the opportunities are specific to individuals.
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Orangutan
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Re: Alternative to Bond Fund?

Post by Orangutan »

Is your bond allocation in Total Bond? If you want to protect against inflation, you can add TIPS.
rockAction
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Re: Alternative to Bond Fund?

Post by rockAction »

Have you considered adding I-Bonds?
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Re: Alternative to Bond Fund?

Post by Call_Me_Op »

JDSwim3 wrote: Wed Oct 20, 2021 12:56 pm Inflation and the likelihood of increasing interest rates would indicate bonds will not be making even a moderate comeback anytime soon.
Not necessarily true, Rising rates are good over the longer term for short and intermediate-term bond holders.
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quisp65
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Re: Alternative to Bond Fund?

Post by quisp65 »

I'm currently doing CDs instead of bond funds. I would make a ladder out of fixed annuities but my state of California only insures these at 80% if they default. Many states insure at 100%. However they are more expensive to break these things than a bank CD. Bank CDs feel more secure to me if inflation gets out of control, since I can cancel the ones paying low rates without as much loss.

https://www.blueprintincome.com/fixed-annuities
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Re: Alternative to Bond Fund?

Post by nisiprius »

JDSwim3 wrote: Wed Oct 20, 2021 12:56 pm...Am I stuck at this point, with my bond fund down 2.5 percent...
Bond funds fluctuate, much less than stocks, but they do fluctuate and that should be expected. The duration of the Vanguard Total Bond Market Index Fund is 6.8 years. Because there's no limit to what one can imagine interest rates doing, there's no absolute guarantee, but generally speaking the duration is an "appropriate" holding period over which fluctuations should average out.

Vanguard says that mutual funds in the same general risk category as Total Bond "may be appropriate for investors with medium-term investment horizons (4 to 10 years)."

Image

For the last twelve years we've been hearing that interest rates can only go up and that it will hurt bond fund holders. But since inception, 35 years ago, when hold for at least 48 months, Total Bond has never yet lost money. That includes the last 48 months, 48 months ending at the bottom of the "taper trantrum," and 48 months ending at the bottom of the "bond massacre of 1994."

And there is no magic in investing. There may be small advantages or disadvantages, but if you find something that has much more return than bonds, it is almost certain that it will come with more risk--whether you can see it or not. If you can see it, then you can make a rational decision about whether to take it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
placeholder
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Re: Alternative to Bond Fund?

Post by placeholder »

If you have a decent stable value fund in a workplace plan that can take part of the fixed income allocation and provide lower volatility at the cost of lower return.
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grobertj
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Re: Alternative to Bond Fund?

Post by grobertj »

Orangutan wrote: Wed Oct 20, 2021 2:09 pm Is your bond allocation in Total Bond? If you want to protect against inflation, you can add TIPS.
That's exactly what I've done. I moved my Total Bond Market (BND) to VTIP which is returning around 2.5% in the short term. I'll be interested to see how the new Vanguard Core Bond Plus Fund.
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HanSolo
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Re: Alternative to Bond Fund?

Post by HanSolo »

nisiprius wrote: Wed Oct 20, 2021 5:44 pm For the last twelve years we've been hearing that interest rates can only go up and that it will hurt bond fund holders.
Actually, that goes all the way back to 19 years ago (references from 2002 cited in another thread).

To the OP, I can only say that I think the authors who advocate the three-fund portfolio already contemplated that there would be periods of over- or under-valuation for stocks as well as bonds, and considered it best to "stay the course" through those periods. I don't think they'd recommend market timing. The point is to consider the performance of the portfolio as a whole (which I'm assuming is doing pretty well right around now).

That being said, if you can come up with an improvement to the strategy as it's currently understood, and publish it, it could do us all a service. But I think it'd be hard to find the formula that would correctly determine whether to get out of bonds in a 2002-like situation (as some may have done according to the references I mentioned above) or in a 2021-like situation. It might also be worth considering how well your strategy would have worked in Japan (not that I'm assuming we're in that situation, but I can't be certain we can rule out a long-term deflationary situation).

Lastly, the choice isn't just "bonds or not" as there are various bond choices that can change the dynamics (shorter-duration, TIPS, GNMAs, etc.).

Just my two cents.
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Re: Alternative to Bond Fund?

Post by eddot98 »

placeholder wrote: Wed Oct 20, 2021 5:49 pm If you have a decent stable value fund in a workplace plan that can take part of the fixed income allocation and provide lower volatility at the cost of lower return.
That’s what we do. Our fixed income is in our 457b plan paying 1.9% now.
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Taylor Larimore
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Re: Alternative to Bond Fund?

Post by Taylor Larimore »

JDSwim3 wrote: Wed Oct 20, 2021 12:56 pm Age 59, retired a little over a year.

Basically have our entire retirement savings in a 60/40 AA 3 fund portfolio, but am really questioning the bond fund as the market hedge. Inflation and the likelihood of increasing interest rates would indicate bonds will not be making even a moderate comeback anytime soon. At this point I would have been much better off with my 40 under the mattress.

Am I stuck at this point, with my bond fund down 2.5 percent. Or is there an alternative that could recoup those losses with approximately the same low risk of the bond fund? Perhaps a CD ladder?

Thank you.
JDSwim3:

Vanguard Total Bond Market Index Fund is the largest bond fund on the planet--for good reasons. You can see below how it intigrates with the stock funds in your Three-Fund Portfolio:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3

Sources: U.S. Labor Department (CPI-U); Bloomberg Barclays Aggregate Bond Index; Standard & Poors; and DFTurner

Lessons learned:

* Past performance does not forecast future performance.

* The Aggregate Bond Index (benchmark for Vanguard Total U.S.Bond Market Index Fund) had only four negative years (all small) reflecting very low risk.

* In 2008 the S&P 500 Stock Index plunged (-38.5%). During the next 2 years it gained +41.52% (stay-the-course).

* Foreign Stocks enjoyed the highest annual return (1986).

* Diversification between stocks and bonds is important.

* Inflation climbed from 4.9% in 1976 to 13.3% in 1976. During that period a combination of Total Bond Market and stocks beat inflation.

* Think long-term.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Deep down, I remain absolutely confident that the vast majority of American families will be well served by owning their equity holdings in an all-U.S. stock-market index portfolio and holding their bonds in al all-U.S. bond-market index portfolio."
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Re: Alternative to Bond Fund?

Post by Activesloth »

I’m sure many will disagree with my approach. Since the start of the pandemic, I abandoned bond funds completely. My allocation now is 100% stocks. It makes for a very volatile portfolio but I just don’t see the sense in staying put when you already know you’re going to lose money staying in a bond fund. I considered investing in REITS such as VNQ etf, but I don’t see that it’s any better than just staying with VOO.
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Re: Alternative to Bond Fund?

Post by BernardShakey »

Activesloth wrote: Wed Oct 20, 2021 7:33 pm I’m sure many will disagree with my approach. Since the start of the pandemic, I abandoned bond funds completely. My allocation now is 100% stocks. It makes for a very volatile portfolio but I just don’t see the sense in staying put when you already know you’re going to lose money staying in a bond fund. I considered investing in REITS such as VNQ etf, but I don’t see that it’s any better than just staying with VOO.
How close are you to retiring ?
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Re: Alternative to Bond Fund?

Post by nisiprius »

Activesloth wrote: Wed Oct 20, 2021 7:33 pm...you already know you’re going to lose money staying in a bond fund...
How do you "know" such a thing?

The reaction to an interest rate change is a short-term effect. If interest rates rise and stabilize, then the likelihood is that you will make money by "staying in a bond fund" for a time about equal to the duration. The way you would lose money is by not staying in the fund.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Alternative to Bond Fund?

Post by BernardShakey »

placeholder wrote: Wed Oct 20, 2021 5:49 pm If you have a decent stable value fund in a workplace plan that can take part of the fixed income allocation and provide lower volatility at the cost of lower return.
+1. I have almost half my fixed income allocation in workplace 401k "stable value" fund. Pays about 2%.
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Re: Alternative to Bond Fund?

Post by nisiprius »

ActiveSloth, I just posted an illustration of the short- and longer-term dynamics of interest rate changes on bond funds.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Alternative to Bond Fund?

Post by sizzlefuzz »

placeholder wrote: Wed Oct 20, 2021 5:49 pm If you have a decent stable value fund in a workplace plan that can take part of the fixed income allocation and provide lower volatility at the cost of lower return.
I am looking at changing my 401k (currently 90/10) from 10% Vanguard total bond to the stable value fund alternative as it is my understanding that stable value is largely a fixed income product as well.
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Re: Alternative to Bond Fund?

Post by patrick »

Series I US savings bonds as already mentioned are likely a good idea, but beyond their limits (or for money you might need right away) note that there are checking and savings accounts paying 1% or better:

1% with no limit - T-Mobile Money
2% on the first $20,000 - Elements Financial Credit Union, requires 15 withdrawal transactions (bill pays qualify) per month
2.25% on the first $25,000 - Presidential Bank, requires $500 in direct deposits and 7 withdrawal transactions (bill pays qualify) per month, minimum balance $500
3% on 10% of direct deposits - One Finance, max $1,000 per month into the 3% account, the rest only gets 1% but can be spent or withdrawn
3.3% on the first $20,000 - Evansville Teachers Federal Credit Union, requires 15 debit card purchases per month and a monthly electronic deposit
4.07% on the first $7,500 - Genisys Credit Union, requires 10 debit card purchase per month of at least $5 each
5% on the first $500 and 3% on another $3,000 - Service Credit Union
6.17% on the first $1,000 - Digital Credit Union
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Re: Alternative to Bond Fund?

Post by Orangutan »

grobertj wrote: Wed Oct 20, 2021 6:10 pm
Orangutan wrote: Wed Oct 20, 2021 2:09 pm Is your bond allocation in Total Bond? If you want to protect against inflation, you can add TIPS.
That's exactly what I've done. I moved my Total Bond Market (BND) to VTIP which is returning around 2.5% in the short term. I'll be interested to see how the new Vanguard Core Bond Plus Fund.
Why did you change your duration? Why not intermediate for TIPS?
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Re: Alternative to Bond Fund?

Post by UpperNwGuy »

OP, think long term. Don't focus on short term variability.
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Re: Alternative to Bond Fund?

Post by grobertj »

Orangutan wrote: Fri Oct 22, 2021 8:40 am
grobertj wrote: Wed Oct 20, 2021 6:10 pm
Orangutan wrote: Wed Oct 20, 2021 2:09 pm Is your bond allocation in Total Bond? If you want to protect against inflation, you can add TIPS.
That's exactly what I've done. I moved my Total Bond Market (BND) to VTIP which is returning around 2.5% in the short term. I'll be interested to see how the new Vanguard Core Bond Plus Fund.
Why did you change your duration? Why not intermediate for TIPS?
Because the near term return is better. If the trend changes, so will I.
The only constant is CHANGE!!
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