Moving Away from Individual Bonds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
retired-early
Posts: 63
Joined: Sat May 14, 2022 10:24 am

Re: Moving Away from Individual Bonds

Post by retired-early »

Artsdoctor wrote: Sun Jun 04, 2023 9:20 am
retired-early wrote: Sun Jun 04, 2023 6:58 am A lot of Vanguard recommendations. I’m with Fidelity so not sure if there’s equivalent funds or maybe need to think about moving my accounts over there. Also not interested in equities. I’m just not wired to potentially lose up to 50% of my investment. I’m going to keep moving to cash (CD, treasuries, etc) but if rates go way down may need to look at alternatives.
If you're at Fidelity and don't mind ETFs, the Vanguard intermediate-term tax-exempt ETF (VTEB) is reasonable, and you can also consider MUB. You lose the ability to tax-loss harvest easily and efficiently but with a little effect, it'll work.
I may go this route. It’s going to be a hassle to completely move from Fidelity. External accounts are all linked and it’s easy to transfer money around. I’ve got a 2% cash back card and would have to find an alternative. Most of my bills pay directly from that card. It’s all doable just takes time.
Topic Author
retired-early
Posts: 63
Joined: Sat May 14, 2022 10:24 am

Re: Moving Away from Individual Bonds

Post by retired-early »

dbr wrote: Sun Jun 04, 2023 9:21 am
retired-early wrote: Fri Jun 02, 2023 8:43 pm
000 wrote: Fri Jun 02, 2023 8:24 pm Biggest risk to a 100% nominal fixed income portfolio is inflation. Fortunately TIPS are available, but it is still generally recommended to have some exposure to the businesses that make so many of the things we use.
I read TIPS can lose money if there’s deflation. Not sure if that’s anything to be concerned about though.
Of course the indexed value of a TIPS falls when the CPI falls. That is the very meaning of being a real indexed bond. Strangely enough they let you off the hook at the point where the the value hits the bond face value and any further drop in the index stops. They didn't have to do that. Objectively with TIPS you stay even under inflationary and deflationary circumstances, so that would seem to be a good thing either way.

How much a concern that would be depends on what one thinks happens to other assets when economic conditions result in deflation. By all odds it is indeed good in those circumstances to have someone owe you a fixed number of nominal dollars which are becoming more valuable in terms of purchasing power assuming deflation includes the goods one wants continuing to be conveniently available in the face of economic disruption going with deflationary events. When there is inflation one should be a nominal borrower and pay back with inflated (less valuable) dollars as time goes on.
Thanks! My comment above was about losing on the originally invested principal. It sounds like that can’t happen. When TIPS mature you can never get back less than the original principal.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Moving Away from Individual Bonds

Post by dbr »

retired-early wrote: Sun Jun 04, 2023 12:18 pm
dbr wrote: Sun Jun 04, 2023 9:21 am
retired-early wrote: Fri Jun 02, 2023 8:43 pm
000 wrote: Fri Jun 02, 2023 8:24 pm Biggest risk to a 100% nominal fixed income portfolio is inflation. Fortunately TIPS are available, but it is still generally recommended to have some exposure to the businesses that make so many of the things we use.
I read TIPS can lose money if there’s deflation. Not sure if that’s anything to be concerned about though.
Of course the indexed value of a TIPS falls when the CPI falls. That is the very meaning of being a real indexed bond. Strangely enough they let you off the hook at the point where the the value hits the bond face value and any further drop in the index stops. They didn't have to do that. Objectively with TIPS you stay even under inflationary and deflationary circumstances, so that would seem to be a good thing either way.

How much a concern that would be depends on what one thinks happens to other assets when economic conditions result in deflation. By all odds it is indeed good in those circumstances to have someone owe you a fixed number of nominal dollars which are becoming more valuable in terms of purchasing power assuming deflation includes the goods one wants continuing to be conveniently available in the face of economic disruption going with deflationary events. When there is inflation one should be a nominal borrower and pay back with inflated (less valuable) dollars as time goes on.
Thanks! My comment above was about losing on the originally invested principal. It sounds like that can’t happen. When TIPS mature you can never get back less than the original principal.
If you buy a TIPS at a premium the payback at maturity is the indexed face value, which would be less than you paid for the bond in real dollars. That is how the real yield on a TIPS can be negative. The same math applies to nominal bonds bought at a premium. The reason you don't see the loss in nominal values most of the time for TIPS is that inflation is usually positive enough for long enough to overcome the lost premium in nominal dollars. TIPS coupons, on the other hand, tend to be small. In the case of nominal bonds one almost never sees a premium so high that the yield to maturity goes negative given that coupons are usually decent.
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Moving Away from Individual Bonds

Post by Artsdoctor »

^ Two easy things.

You can build a terrific at Fidelity, and even use Vanguard ETFs if you like. Nowadays, there are fees to trade Vanguard ETFs at Fidelity so there's no reason to move if have everything you need at Fidelity.

Second, TIPS can be peculiar in several ways. Most investors would know that the principal naturally increases as the CPI increases so there's that built-in safety net with inflation. During deflationary periods, and it's hard to imagine that occurring right now, the TIPS principal will decrease as the CPI decreases, as you'd expect. If you happen to buy your TIPS at auction, the principal will decrease with the CPI while you're holding the bond but when the bond matures, you will always get back the bond at par (and not the reduced CPI factor); however, if you buy your TIPS on the secondary market and the principal is above par (meaning, the inflation factor is > 1), your principal will continue to fall along with the CPI even if the CPI is below it was when you bought it. So when the bond matures, your principal would be less than it was when you bought it. This is unlikely to occur because it would require a significant deflationary period, but it's theoretically possible.
User avatar
Electron
Posts: 2658
Joined: Sat Mar 10, 2007 7:46 pm

Re: Moving Away from Individual Bonds

Post by Electron »

There are Municipal Bond ETFs with defined maturities that might be of interest to some investors.

https://www.invesco.com/us/en/solutions ... -etfs.html

https://www.ishares.com/us/strategies/b ... nd-ladders

I also wanted to mention that Portfolio Visualizer can show the performance when dividends are not reinvested. The results are quite interesting. You can see the value of the shares over the time period (NAV performance) and also the dividend payments. The links below show the same three Vanguard funds with dividends reinvested and dividends not reinvested.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Enjoying the Outdoors
Sagenick48
Posts: 376
Joined: Sat Nov 02, 2013 8:22 am

Re: Moving Away from Individual Bonds

Post by Sagenick48 »

Electron wrote: Sun Jun 04, 2023 6:02 pm There are Municipal Bond ETFs with defined maturities that might be of interest to some investors.

https://www.invesco.com/us/en/solutions ... -etfs.html

https://www.ishares.com/us/strategies/b ... nd-ladders

I also wanted to mention that Portfolio Visualizer can show the performance when dividends are not reinvested. The results are quite interesting. You can see the value of the shares over the time period (NAV performance) and also the dividend payments. The links below show the same three Vanguard funds with dividends reinvested and dividends not reinvested.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

https://www.portfoliovisualizer.com/bac ... ion3_3=100
A word of caution, with mutual funds or ETFs with maturity dates.

One of my first bond investments was units of a muny bond trust with “maturity date.” When the maturity date came the trust still had bonds (revenue bonds) that had matured but not paid out, they were in default, and it took years before it was resolved. This caused me to have to report the winding up process over several years citing an obscure revenue ruling.

That was in the days of paper tax returns. I wonder what happens today with electronic filing, or if H&R or TurboTax, knows how to deal with it. Based on my experience with my sometimes unusual tax issues, you will have to paper file, and they don’t.

I avoid all these issues with CDs and keeping my amounts invested under the FDIC insured amount.

When you have won the game, make it easy for yourself.
The market goes up, the market goes down.
Topic Author
retired-early
Posts: 63
Joined: Sat May 14, 2022 10:24 am

Re: Moving Away from Individual Bonds

Post by retired-early »

Sagenick48 wrote: Sun Jun 04, 2023 10:17 pm
Electron wrote: Sun Jun 04, 2023 6:02 pm There are Municipal Bond ETFs with defined maturities that might be of interest to some investors.

https://www.invesco.com/us/en/solutions ... -etfs.html

https://www.ishares.com/us/strategies/b ... nd-ladders

I also wanted to mention that Portfolio Visualizer can show the performance when dividends are not reinvested. The results are quite interesting. You can see the value of the shares over the time period (NAV performance) and also the dividend payments. The links below show the same three Vanguard funds with dividends reinvested and dividends not reinvested.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

https://www.portfoliovisualizer.com/bac ... ion3_3=100
A word of caution, with mutual funds or ETFs with maturity dates.

One of my first bond investments was units of a muny bond trust with “maturity date.” When the maturity date came the trust still had bonds (revenue bonds) that had matured but not paid out, they were in default, and it took years before it was resolved. This caused me to have to report the winding up process over several years citing an obscure revenue ruling.

That was in the days of paper tax returns. I wonder what happens today with electronic filing, or if H&R or TurboTax, knows how to deal with it. Based on my experience with my sometimes unusual tax issues, you will have to paper file, and they don’t.

I avoid all these issues with CDs and keeping my amounts invested under the FDIC insured amount.

When you have won the game, make it easy for yourself.
I agree 100% and that’s the direction I’m moving. CDs, Treasuries, maybe TIPS. All within my Fidelity account. I don’t need to build more wealth at this point in my life.
Post Reply