Portfolio comparison using MYGA's vs: bond funds

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rwilliam
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Portfolio comparison using MYGA's vs: bond funds

Post by rwilliam »

I have noticed that there have been several questions with replacing bond funds with MYGA's. I have also been exploring this and I would apprecite a Boglehead with professional software to compare my portfolio with a portfolio that replaces All bond funds with a fixed compounded rate of 3%, then 3.5% and 4%. Please compare average return, worst year and best year for each portfolio.

My portfolio is as follows: 28% VTI, 11% VXUS, 13% BNDX and 48% BND.

MYGA at Gainbridge (Guggenheim Life, rated A-) is currently paying 3% for a 5 year MYGA and 3.5% for a 10 year MYGA.

The 4% is an anticipated MYGA rate as interest rates rise.

I hope this comparison will help answer other members' questions concerning replacing their bond funds with an MYGA.

Thanks,

Bob
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vineviz
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by vineviz »

rwilliam wrote: Sun Jan 23, 2022 8:40 am I have noticed that there have been several questions with replacing bond funds with MYGA's. I have also been exploring this and I would apprecite a Boglehead with professional software to compare my portfolio with a portfolio that replaces All bond funds with a fixed compounded rate of 3%, then 3.5% and 4%. Please compare average return, worst year and best year for each portfolio.
I can't think of any reasonable way to run this comparison, in large parts because MYGAs aren't particularly interchangeable with bonds funds. They are more akin to CDs than anything else because of the fixed time horizon and interest rate.

For most investors I wouldn't suggest a MYGA as a replacement for a bond fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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dwickenh
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by dwickenh »

vineviz wrote: Mon Jan 24, 2022 8:48 am
rwilliam wrote: Sun Jan 23, 2022 8:40 am I have noticed that there have been several questions with replacing bond funds with MYGA's. I have also been exploring this and I would apprecite a Boglehead with professional software to compare my portfolio with a portfolio that replaces All bond funds with a fixed compounded rate of 3%, then 3.5% and 4%. Please compare average return, worst year and best year for each portfolio.
I can't think of any reasonable way to run this comparison, in large parts because MYGAs aren't particularly interchangeable with bonds funds. They are more akin to CDs than anything else because of the fixed time horizon and interest rate.
For most investors I wouldn't suggest a MYGA as a repl
acement for a bond fund.
Can you give the reasoning behind this statement?
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by dbr »

vineviz wrote: Mon Jan 24, 2022 8:48 am
rwilliam wrote: Sun Jan 23, 2022 8:40 am I have noticed that there have been several questions with replacing bond funds with MYGA's. I have also been exploring this and I would apprecite a Boglehead with professional software to compare my portfolio with a portfolio that replaces All bond funds with a fixed compounded rate of 3%, then 3.5% and 4%. Please compare average return, worst year and best year for each portfolio.
I can't think of any reasonable way to run this comparison, in large parts because MYGAs aren't particularly interchangeable with bonds funds. They are more akin to CDs than anything else because of the fixed time horizon and interest rate.

For most investors I wouldn't suggest a MYGA as a replacement for a bond fund.
I think MYGAs are mentioned some now because they substitute for CDs. Keep in mind neither CDs nor MYGAs are risk free because as time goes on the interest rate varies, while the definition of risk is variability in return. The standard deviation of returns for these things might be 2% or so. The distribution is a little skewed because no one takes out a CD or MYGA at negative return. Of course in terms of real return the return can be negative.

I am not sure what portfolio models include CDs or MYGAs as such. A more primitive tool such as FireCalc has one month T-bills to represent cash. Portfolio Visualizer has a "cash" asset class that is modelled as a 4.6% nominal return, .7% real return asset with a volatility of 1%.
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vineviz
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by vineviz »

dwickenh wrote: Mon Jan 24, 2022 8:53 am
vineviz wrote: Mon Jan 24, 2022 8:48 am For most investors I wouldn't suggest a MYGA as a replacement for a bond fund.
Can you give the reasoning behind this statement?
It's just that they're different instruments with different characteristics.

Bond funds are incredibly liquid and maintain a relatively constant average maturity over time. There is no fixed investment horizon and no guaranteed interest rate as there is with MYGAs. The MYGA will have less interest rate risk over its lifetime than a similar duration bond fund but more inflation risk. Etc.

I'm not opposed to MYGAs, and there are definitely ways to use them that make sense to me. But they are DIFFERENT enough from bond funds that I don't feel comfortable suggesting that they are interchangeable. Generally speaking, the biggest advantage of a MYGA is the ability to have a known amount of income on a particular date.

For instance, if an investor is planning to retire in 2027 but not claim Social Security until 2030 I could see some benefit to purchasing a set of MYGAs with terms of 5, 6, & 7 years to help fund living expenses during those "gap" years. That's something a MYGA arguably does better than a bond fund would.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by Stinky »

vineviz wrote: Mon Jan 24, 2022 9:15 am Generally speaking, the biggest advantage of a MYGA is the ability to have a known amount of income on a particular date.

For instance, if an investor is planning to retire in 2027 but not claim Social Security until 2030 I could see some benefit to purchasing a set of MYGAs with terms of 5, 6, & 7 years to help fund living expenses during those "gap" years. That's something a MYGA arguably does better than a bond fund would.
I agree that delivering a fixed amount of principal and interest at a specified future date is a strength of MYGAs. Another way of saying this is “for a fixed future date cashflow need, MYGAs eliminate the interest rate risk inherent in bonds”.

Another significant advantage of MYGAs over bond funds is that most MYGAs currently pay higher rates of interest than most bond funds.
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dwickenh
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by dwickenh »

vineviz wrote: Mon Jan 24, 2022 9:15 am
dwickenh wrote: Mon Jan 24, 2022 8:53 am
vineviz wrote: Mon Jan 24, 2022 8:48 am For most investors I wouldn't suggest a MYGA as a replacement for a bond fund.
Can you give the reasoning behind this statement?
It's just that they're different instruments with different characteristics.

Bond funds are incredibly liquid and maintain a relatively constant average maturity over time. There is no fixed investment horizon and no guaranteed interest rate as there is with MYGAs. The MYGA will have less interest rate risk over its lifetime than a similar duration bond fund but more inflation risk. Etc.

I'm not opposed to MYGAs, and there are definitely ways to use them that make sense to me. But they are DIFFERENT enough from bond funds that I don't feel comfortable suggesting that they are interchangeable. Generally speaking, the biggest advantage of a MYGA is the ability to have a known amount of income on a particular date.

For instance, if an investor is planning to retire in 2027 but not claim Social Security until 2030 I could see some benefit to purchasing a set of MYGAs with terms of 5, 6, & 7 years to help fund living expenses during those "gap" years. That's something a MYGA arguably does better than a bond fund would.
Thanks vineviz for the information.

VW
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by Elysium »

Stinky wrote: Mon Jan 24, 2022 10:00 am Another significant advantage of MYGAs over bond funds is that most MYGAs currently pay higher rates of interest than most bond funds.
They certainly pay higher rates today, but the rate and term is fixed, which exposes them to inflation risk if the average inflation comes out higher in that period. That is the major downside, as you need to be able to have reasonable level of confidence the rate will hold up above inflation. If we are comparing current rates, then neither bond funds or MYGAs are above current CPI, and MYGAs do not re-invest during the holding period but bond funds do get to re-invest at higher rates, especially short-term bonds with higher frequency of replacement.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by Stinky »

Elysium wrote: Fri Jan 28, 2022 8:34 am
Stinky wrote: Mon Jan 24, 2022 10:00 am Another significant advantage of MYGAs over bond funds is that most MYGAs currently pay higher rates of interest than most bond funds.
They certainly pay higher rates today, but the rate and term is fixed, which exposes them to inflation risk if the average inflation comes out higher in that period. That is the major downside, as you need to be able to have reasonable level of confidence the rate will hold up above inflation. If we are comparing current rates, then neither bond funds or MYGAs are above current CPI, and MYGAs do not re-invest during the holding period but bond funds do get to re-invest at higher rates, especially short-term bonds with higher frequency of replacement.
I’d suggest that the proper comparison of MYGAs is to reasonable alternatives, like a bond fund, rather than inflation.

Just for example - BND currently has a yield of 1.78%, and a duration of 6.9. Meanwhile, I can purchase a 7 year MYGA from a company with a rating of A- with a yield of 3.20%.

If interest rates stay the same, I’ll earn 1.42% more every year on the MYGA over BND. Clearly a winner.

If interest rates rise by 1.42% immediately (an unlikely event), the yield of BND will equal the MYGA, but the market value of BND will decline by almost 10%. I do not believe that market value decline will fully reverse itself within 7 years.

Reasonable folks can disagree. But I believe that, at the current time, MYGAs are a useful alternative to bond funds.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by dbr »

Stinky wrote: Fri Jan 28, 2022 9:07 am
Elysium wrote: Fri Jan 28, 2022 8:34 am
Stinky wrote: Mon Jan 24, 2022 10:00 am Another significant advantage of MYGAs over bond funds is that most MYGAs currently pay higher rates of interest than most bond funds.
They certainly pay higher rates today, but the rate and term is fixed, which exposes them to inflation risk if the average inflation comes out higher in that period. That is the major downside, as you need to be able to have reasonable level of confidence the rate will hold up above inflation. If we are comparing current rates, then neither bond funds or MYGAs are above current CPI, and MYGAs do not re-invest during the holding period but bond funds do get to re-invest at higher rates, especially short-term bonds with higher frequency of replacement.
I’d suggest that the proper comparison of MYGAs is to reasonable alternatives, like a bond fund, rather than inflation.

Just for example - BND currently has a yield of 1.78%, and a duration of 6.9. Meanwhile, I can purchase a 7 year MYGA from a company with a rating of A- with a yield of 3.20%.

If interest rates stay the same, I’ll earn 1.42% more every year on the MYGA over BND. Clearly a winner.

If interest rates rise by 1.42% immediately (an unlikely event), the yield of BND will equal the MYGA, but the market value of BND will decline by almost 10%. I do not believe that market value decline will fully reverse itself within 7 years.

Reasonable folks can disagree. But I believe that, at the current time, MYGAs are a useful alternative to bond funds.
Right. These things depend on the scenario that is in place. A person can always devise some "if this, then that" and do the math for it.

As you know, the math for duration would say that the value in BND for that interest rate jump will get pretty close to what would have been delivered at 1.42% given a duration of 6.9 years. But interest rates are not going to jump up in one step by that amount exactly now.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by Elysium »

Stinky wrote: Fri Jan 28, 2022 9:07 am
I’d suggest that the proper comparison of MYGAs is to reasonable alternatives, like a bond fund, rather than inflation.

Just for example - BND currently has a yield of 1.78%, and a duration of 6.9. Meanwhile, I can purchase a 7 year MYGA from a company with a rating of A- with a yield of 3.20%.

If interest rates stay the same, I’ll earn 1.42% more every year on the MYGA over BND. Clearly a winner.

If interest rates rise by 1.42% immediately (an unlikely event), the yield of BND will equal the MYGA, but the market value of BND will decline by almost 10%. I do not believe that market value decline will fully reverse itself within 7 years.

Reasonable folks can disagree. But I believe that, at the current time, MYGAs are a useful alternative to bond funds.
Inflation is a concern for fixed income investors, and any fixed income investment you make should be evaluated for various risks including inflation risk as well as deflation risk. If someone is happy to lock in 3.2% today for the next 7 years with the comfort of knowing exactly what they get and not concerned about inflation effects, then yes, they are good to go. I personally prefer investments that aren't locked in, are liquid, and have some variability in pricing depending on where things move. With bonds you also have the possibility of rates dropping which could cause their price to go up compensating with higher overall returns. When you lock in with MYGA/CD you give up ability to participate in the market fluctuations. I'd say it's a matter of personal preference, some people like CDs with fixed term & rates, others prefer bonds that are marked to market every day.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by dbr »

Elysium wrote: Fri Jan 28, 2022 9:27 am
Stinky wrote: Fri Jan 28, 2022 9:07 am
I’d suggest that the proper comparison of MYGAs is to reasonable alternatives, like a bond fund, rather than inflation.

Just for example - BND currently has a yield of 1.78%, and a duration of 6.9. Meanwhile, I can purchase a 7 year MYGA from a company with a rating of A- with a yield of 3.20%.

If interest rates stay the same, I’ll earn 1.42% more every year on the MYGA over BND. Clearly a winner.

If interest rates rise by 1.42% immediately (an unlikely event), the yield of BND will equal the MYGA, but the market value of BND will decline by almost 10%. I do not believe that market value decline will fully reverse itself within 7 years.

Reasonable folks can disagree. But I believe that, at the current time, MYGAs are a useful alternative to bond funds.
Inflation is a concern for fixed income investors, and any fixed income investment you make should be evaluated for various risks including inflation risk as well as deflation risk. If someone is happy to lock in 3.2% today for the next 7 years with the comfort of knowing exactly what they get and not concerned about inflation effects, then yes, they are good to go. I prefer investments that aren't locked in, are liquid, and have some variability in pricing depending on where things move. With bonds you also have the possibility of rates dropping which could cause their price to go up compensating with higher overall returns. When you lock in with MYGA/CD you give up ability to participate in the market fluctuations. I'd say it's a matter of personal preference, some people like CDs with fixed term & rates, others prefer bonds that are marked to market every day.
It does raise the whole issue of how much a person wants to mess around parsing out yields on this, that or the other asset rather than simply holding a portfolio as a whole with a couple of stock funds and a couple of bond funds for the long run. The long run is an accumulation lifetime of 30-40 years and a retirement of 20-30 years. For a lot of people on this forum this stuff accumulates up to an order of magnitude of $1M involved. (Order of magnitude probably means $100k to $10M.) That is not to say a person having less wealth or more wealth than that is not part of the community just as well.

The case where an asset is aligned with a specific shorter term, or definite term need is different.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by indexfundfan »

It's a tough time for a fixed income investor. Back in the summer and fall of 2020, MYGA are much more compelling compared to bond funds. Now that bond fund NAVs have come down some, bond funds are becoming more viable again. I still think MYGAs are good substitutes for CDs at this time but the case compared to bond funds is weaker now.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by Elysium »

dbr wrote: Fri Jan 28, 2022 9:35 am
Elysium wrote: Fri Jan 28, 2022 9:27 am
Stinky wrote: Fri Jan 28, 2022 9:07 am
I’d suggest that the proper comparison of MYGAs is to reasonable alternatives, like a bond fund, rather than inflation.

Just for example - BND currently has a yield of 1.78%, and a duration of 6.9. Meanwhile, I can purchase a 7 year MYGA from a company with a rating of A- with a yield of 3.20%.

If interest rates stay the same, I’ll earn 1.42% more every year on the MYGA over BND. Clearly a winner.

If interest rates rise by 1.42% immediately (an unlikely event), the yield of BND will equal the MYGA, but the market value of BND will decline by almost 10%. I do not believe that market value decline will fully reverse itself within 7 years.

Reasonable folks can disagree. But I believe that, at the current time, MYGAs are a useful alternative to bond funds.
Inflation is a concern for fixed income investors, and any fixed income investment you make should be evaluated for various risks including inflation risk as well as deflation risk. If someone is happy to lock in 3.2% today for the next 7 years with the comfort of knowing exactly what they get and not concerned about inflation effects, then yes, they are good to go. I prefer investments that aren't locked in, are liquid, and have some variability in pricing depending on where things move. With bonds you also have the possibility of rates dropping which could cause their price to go up compensating with higher overall returns. When you lock in with MYGA/CD you give up ability to participate in the market fluctuations. I'd say it's a matter of personal preference, some people like CDs with fixed term & rates, others prefer bonds that are marked to market every day.
It does raise the whole issue of how much a person wants to mess around parsing out yields on this, that or the other asset rather than simply holding a portfolio as a whole with a couple of stock funds and a couple of bond funds for the long run. The long run is an accumulation lifetime of 30-40 years and a retirement of 20-30 years. For a lot of people on this forum this stuff accumulates up to an order of magnitude of $1M involved. (Order of magnitude probably means $100k to $10M.) That is not to say a person having less wealth or more wealth than that is not part of the community just as well.

The case where an asset is aligned with a specific shorter term, or definite term need is different.
Right on. I think you said it better. The case for assigning an asset for a specific short term is different than long term AA plan. It opens the question on why mess with your long terms plans by going on these little detours with smaller chunks from your bigger pie. It just doesn't move anything in a 20-30 year timespan.
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Re: Portfolio comparison using MYGA's vs: bond funds

Post by KlangFool »

rwilliam wrote: Sun Jan 23, 2022 8:40 am I have noticed that there have been several questions with replacing bond funds with MYGA's. I have also been exploring this and I would apprecite a Boglehead with professional software to compare my portfolio with a portfolio that replaces All bond funds with a fixed compounded rate of 3%, then 3.5% and 4%. Please compare average return, worst year and best year for each portfolio.

My portfolio is as follows: 28% VTI, 11% VXUS, 13% BNDX and 48% BND.

MYGA at Gainbridge (Guggenheim Life, rated A-) is currently paying 3% for a 5 year MYGA and 3.5% for a 10 year MYGA.

The 4% is an anticipated MYGA rate as interest rates rise.

I hope this comparison will help answer other members' questions concerning replacing their bond funds with an MYGA.

Thanks,

Bob
rwilliam,

1) You cannot buy confidence from someone else. If you cannot answer the question why you should choose MYGA versus the default total bond market index fund, you should not choose MYGA.

2) Do not invest on anything that you cannot understand.

3) The short answer to your question is this: MYGA may do better or worst than total bond market index fund depending on how the interest rate move in the future. Unless you can predict the future interest rate movement, you cannot assess whether MYGA is better.

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