Which bond fund should I use in my 401k?

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2021reset
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Which bond fund should I use in my 401k?

Post by 2021reset »

My options are (fund/ER/description):

FAHCX .75 High Income Advtg Fund
EFIPX .50 Fidelity Advisor Limited Term Bond Fund - Class I
FIPDX .05 Inflation-Protected Bond Index Fund
FUAMX .03 Intermediate Treasury Bond Index Fund
FNBGX .03 Long-Term Treasury Bond Index Fund
FUMBX .03 Short-Term Treasury Bond Index Fund
FXNAX .32 US Bond Index Fund

I am not expecting to touch this for 10+ years, I am probably in 24-35% bracket for the rest of my life, and this is where I hold all my bonds (well, eventually, still dealing with moving some muni in taxable to this).

I had read that you should match your bond term to your investment timeline, so I went with the long term treasury bonds, but I've had them for less than a year and they're down around 12%, so it seemed worthwhile to ask if this is indeed the correct choice for me.

I don't really view this as market timing, just never really looked into what bond funds to hold and want to make sure I'm in the correct one. If I just got in at the worst time and just need to hold tight and wait that's fine too.

Thank you.
secondopinion
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Re: Which bond fund should I use in my 401k?

Post by secondopinion »

Is 10+ years like 10-15 or far longer? If it is the former, you should consider holding some intermediate bonds. If the holding period is longer, then you have it okay. Just remember to take out money from the longer funds over time to the shorter ones as you get closer to spending some of the money. Look at the minimum maturity of the long-term and other fixed term index funds for that information.

In short, it is does not need to be a one-fund choice. Not that you should not have just one fund, but that have more than one is okay.
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rkhusky
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Re: Which bond fund should I use in my 401k?

Post by rkhusky »

When the price goes down, interest rates are going up.

The duration of FNBGX is 18 years. For a 1% increase in interest rates, you can expect the fund to drop by 18%. And it will take about 18 years for the fund to get back to even.

If we are in a period of slowly rising interest rates for the next 40 years, the payback period would be about 35 years (2y-1).

Is that the type of risk that you want? For an intermediate bond fund with a duration of 6 years, the payback period drops by a factor of 3x.
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vineviz
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Re: Which bond fund should I use in my 401k?

Post by vineviz »

2021reset wrote: Wed Mar 30, 2022 1:02 am I had read that you should match your bond term to your investment timeline, so I went with the long term treasury bonds, but I've had them for less than a year and they're down around 12%, so it seemed worthwhile to ask if this is indeed the correct choice for me.
The reason for the general guidance to " match your bond term to your investment timeline" is that the thing we want want to control is not (or, more accurately, should not) be price volatility but instead consumption volatility.

In other words, although the dollar value a particular long-term bond might be down 12% or whatever over recent months the future cash flows of that bond have not changed one iota. The fact that many bonds get wrapped up into a bond fund doesn't change that fact.

Many investors find it difficult to get over their tendency for myopic loss aversion, and if you think that might be true for you then choosing a bond duration which is shorter than your investment horizon is one solution.

This shortening would be less financially optimal but might be more optimal behaviorally, because one of the most damage-inflicting moves an investor can make is to sell an otherwise appropriate investment only because it has exhibited recent poor price performance.
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djshackesq
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Re: Which bond fund should I use in my 401k?

Post by djshackesq »

FXNAX has an ER of 0.025%, not 0.32%. That’s what I go with in my 401(k).
jimkinny
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Re: Which bond fund should I use in my 401k?

Post by jimkinny »

I have a myopic loss aversion when it comes to bonds. Now is a better time to buy bonds than last year. Whether or not now is a good time to buy, only time will tell.

I do not know what will turn out to be the best bond fund in 5-20 years but my loss aversion steers me toward intermediate term Treasury bonds as a general rule. Last year my loss aversion steered me to short term bonds or just a saving account.

It used to be that people on this site would routinely recommend buying 50 % nominal Treasuries and 50% inflation protected Treasuries. I think this recommndation came about because we do not know which will be best in the future.
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vineviz
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Re: Which bond fund should I use in my 401k?

Post by vineviz »

jimkinny wrote: Wed Mar 30, 2022 8:28 am It used to be that people on this site would routinely recommend buying 50 % nominal Treasuries and 50% inflation protected Treasuries. I think this recommndation came about because we do not know which will be best in the future.
It is certainly true that we do not know which will be "best" in the future, but luckily we can choose not to frame the question in the nature of a horse race.

We might not be able to draw a general conclusion about whether a hammer or a screwdriver is the "best" tool, if you're in a position to know the particular type of fastener you need to install you can certainly draw a conclusion about which tool is the "most appropriate" tool for you to use.

Bonds are like this: investors are in a position to know when they expect to use their portfolios to fund future consumption and whether that consumption will be denominated in nominal or inflation-adjusted terms, so investors are in a position to know which duration is most appropriate FOR THEM and what mix of TIPS/nominal bonds is most appropriate FOR THEM.

In other words, the assets that most closely match your liabilities are the "best" for you not the ones that "win" some arbitrary contest.
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retiredjg
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Re: Which bond fund should I use in my 401k?

Post by retiredjg »

2021reset wrote: Wed Mar 30, 2022 1:02 am My options are (fund/ER/description):

FAHCX .75 High Income Advtg Fund
EFIPX .50 Fidelity Advisor Limited Term Bond Fund - Class I
FIPDX .05 Inflation-Protected Bond Index Fund
FUAMX .03 Intermediate Treasury Bond Index Fund
FNBGX .03 Long-Term Treasury Bond Index Fund
FUMBX .03 Short-Term Treasury Bond Index Fund
FXNAX .32 US Bond Index Fund
Can you check the ER on that Fidelity US Bond Index? Seems wrong for it to be so much higher than the retail ER.

If the ER is correct, I'd split between US Bond Index and Intermediate Treasury Bond Index (or the Inflation Protected Bond Index if you prefer) to lower costs.

If the ER is wrong, I'd just use the US Bond Index. It contains bonds that are short, intermediate and long term and is widely diverse.

I had read that you should match your bond term to your investment timeline, so I went with the long term treasury bonds, but I've had them for less than a year and they're down around 12%, so it seemed worthwhile to ask if this is indeed the correct choice for me.
This is why some Bogleheads do not recommend using only long term bonds - they tend to act more like stocks sometimes.
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Re: Which bond fund should I use in my 401k?

Post by dbr »

I am 15 years into retirement and find intermediate bonds, specifically intermediate TIPS, to be about right. That was the same some years ago where probably that duration was a little conservative, but I don't work very hard at duration matching concepts. I would say that as age progresses one would not go shorter as the prospect of passing on the assets to younger people looms more even though one's own horizon shortens.

I do think all long bonds can be unsettling for most investors, whether or not that is logically rational.
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2021reset
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Re: Which bond fund should I use in my 401k?

Post by 2021reset »

secondopinion wrote: Wed Mar 30, 2022 1:58 am Is 10+ years like 10-15 or far longer? If it is the former, you should consider holding some intermediate bonds. If the holding period is longer, then you have it okay.
RMDs start in ~20 years, and I doubt spend any of it (other that potential rebalancing) before then.
djshackesq wrote: Wed Mar 30, 2022 8:17 am FXNAX has an ER of 0.025%, not 0.32%. That’s what I go with in my 401(k).
retiredjg wrote: Wed Mar 30, 2022 8:51 am Can you check the ER on that Fidelity US Bond Index? Seems wrong for it to be so much higher than the retail ER.
Mea culpa! I had just googled "fxnax expense ratio" and google considered the first result canonical, and that says .32, but that is clearly wrong.

Thanks everyone for your thoughts. I still haven't really internalized how bond yields work, but it's sounding like fxnax is the way to go for me, and I can always revisit later.
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telemark
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Re: Which bond fund should I use in my 401k?

Post by telemark »

It's good to have that many choices, and other than the first two you can't go very wrong with any of them. Long term bonds will fluctuate more than intermediate bonds and you did buy in at a bad time. If you aren't comfortable with that, it would make sense to switch to intermediate, but as you note this is money you won't be needing for a while. Ultimately you need to decide for yourself why you have bonds in your portfolio. Some common reasons are for safety, for income, or for a low correlation with stocks (and a possible rebalancing bonus).
dbr
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Re: Which bond fund should I use in my 401k?

Post by dbr »

I would not stick assets in a short term fund for a long term investment portfolio. So the options that are out are really the first, second, and sixth.

While the three fund porfolio concept falls on the more diversified total bond market, one can argue for Treasuries or even only just TIPS. If there is an issue with return, bond choices do not have to eschew adjusting the stock/bond allocation a little. I don't agree TIPS are only for retirees. What logic is that. TIPS remove both inflation risk and credit risk. Duration risk is supposed to be addressed by duration matching.
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Re: Which bond fund should I use in my 401k?

Post by ruralavalon »

2021reset wrote: Wed Mar 30, 2022 1:02 am My options are (fund/ER/description):

FAHCX .75 High Income Advtg Fund
EFIPX .50 Fidelity Advisor Limited Term Bond Fund - Class I
FIPDX .05 Inflation-Protected Bond Index Fund
FUAMX .03 Intermediate Treasury Bond Index Fund
FNBGX .03 Long-Term Treasury Bond Index Fund
FUMBX .03 Short-Term Treasury Bond Index Fund
FXNAX .32 US Bond Index Fund

I am not expecting to touch this for 10+ years, I am probably in 24-35% bracket for the rest of my life, and this is where I hold all my bonds (well, eventually, still dealing with moving some muni in taxable to this).

I had read that you should match your bond term to your investment timeline, so I went with the long term treasury bonds, but I've had them for less than a year and they're down around 12%, so it seemed worthwhile to ask if this is indeed the correct choice for me.

I don't really view this as market timing, just never really looked into what bond funds to hold and want to make sure I'm in the correct one. If I just got in at the worst time and just need to hold tight and wait that's fine too.

Thank you.
I suggest either:
Fidelity US Bond Index Fund (FXNAX) 0.025%, a very diversified total bond market index fund; or
Fidelity Intermediate Treasury Bond Index Fund (FUAMX)ER 0.03%.
Last edited by ruralavalon on Wed Mar 30, 2022 10:10 am, edited 1 time in total.
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retiredjg
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Re: Which bond fund should I use in my 401k?

Post by retiredjg »

2021reset wrote: Wed Mar 30, 2022 9:27 am
secondopinion wrote: Wed Mar 30, 2022 1:58 am Is 10+ years like 10-15 or far longer? If it is the former, you should consider holding some intermediate bonds. If the holding period is longer, then you have it okay.
RMDs start in ~20 years, and I doubt spend any of it (other that potential rebalancing) before then.
djshackesq wrote: Wed Mar 30, 2022 8:17 am FXNAX has an ER of 0.025%, not 0.32%. That’s what I go with in my 401(k).
retiredjg wrote: Wed Mar 30, 2022 8:51 am Can you check the ER on that Fidelity US Bond Index? Seems wrong for it to be so much higher than the retail ER.
Mea culpa! I had just googled "fxnax expense ratio" and google considered the first result canonical, and that says .32, but that is clearly wrong.
Even this might not be right. The expense ratio for a fund inside a 401k may be different from what is offered on the retail market. You have to find out the expense ratios inside your plan.

It is possible they will all be the same, but sometimes they are not.
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Re: Which bond fund should I use in my 401k?

Post by HuckFinn »

I'm in a very similar situation. I'm a married "youngish" retiree (53). I have a 3-fund tax efficient 65% Stock/35% Bond portfolio. Right now our entire bond nest egg is in our rollover IRA's and will not be touched until we have our minimum distributions 20 years from now. Presently, we have the entire balance in BND (Vanguard Total Bond Index). This portion of our portfolio is the only portion I "think about" despite efforts to leave it alone.
For those advocating Intermediate Tip Funds would you be specifically referring to one such as VGIT (Vanguard Intermediate-Treasury ETF)?
* The reason I'm presently back to debating our Bond choice is we are selling our home and moving into an apartment. We will have an influx of cash going into the taxable brokerage account (essentially invested into our two Total Stock Index Funds) but we will have to sell some stock in the IRA's and replace it with Bonds to maintain our asset allocation so I'm tempted to shuffle the deck just slightly to diversity further.
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Re: Which bond fund should I use in my 401k?

Post by dbr »

I use SWRSX in an account at Schwab. I did have VAIPX but the ER of SWRSX is less and it trades NTF at Schwab. Besides just not holding everything from Vanguard appeals. Pimco and iShares have TIPS etfs if you want to avoid a Vanguard fund. They may or may not be more expensive. Schwab and Fidelity TIPS funds are index funds and the Vanguard one is not, not that it makes any difference.
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Re: Which bond fund should I use in my 401k?

Post by cascadian »

What does the rest of the portfolio look like? What are your risk tolerances?

Total Bond Fund is an easy set & forget core holding, so likely the best option.

I like the current holdings in long-term bonds since you've already taken the hit on duration. They are the best hedge to equity volatility and aligns with your time-horizon of 30+ years. I asked the questions above since they could serve as an opportunity to adjust asset allocation in your overall portfolio to either increase/decrease this exposure. Look at the long-term bond fund as the safety valve in the portfolio and best to add when it's on sale like it is today.

Worst option if you are looking to tinker (despite market timing never working since you need to be right twice on the buy & sell), is the short-term fund given all the volatility and rising rates we might see in the near-term.
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Re: Which bond fund should I use in my 401k?

Post by puravida »

Based on where we are at today with inflation outlook, would any of the bond fund recommendations in this thread change? I'm looking to move bond index fund from Taxable to IRA to slow down IRA growth. The RPM model (thanks Bigfoot!) is forecasting high future RMD's & taxes, and I have plenty of room for more bonds in IRA. So in Taxable, sell muni bond fund, buy equity index fund. In IRA, sell equity index fund, buy bond index fund. Age 65, semi-retired, intermediate duration is fine.

Bond funds being considered for IRA, all have very low ER's:
. FXNAX (my current 3-fund bond holding) - default is to just add to this fund
. FIPDX inflation protected intermediate - but perhaps more inflation protection needed
. FUAMX intermediate treasury bond index
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Varsh
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Re: Which bond fund should I use in my 401k?

Post by Varsh »

My suggestion is 50/50 - FUAMX and FIPDX….
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Re: Which bond fund should I use in my 401k?

Post by vineviz »

puravida wrote: Wed May 25, 2022 2:41 pm . FIPDX inflation protected intermediate - but perhaps more inflation protection needed
. FUAMX intermediate treasury bond index
These are both good funds, IMHO, but it's hard to say which to prefer without knowing your overall stock/bond allocation. If you have more than 30% in bonds, I'd probably go with FIPDX.
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Re: Which bond fund should I use in my 401k?

Post by dbr »

Varsh wrote: Wed May 25, 2022 4:04 pm My suggestion is 50/50 - FUAMX and FIPDX….
I don't know if this conversation would interest you, not a recommendation but just some thoughts. It is about TIPS.

viewtopic.php?t=376283
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Re: Which bond fund should I use in my 401k?

Post by puravida »

Thanks Vineviz. 70% equities, 30% bonds (mostly in FXNAX - nominals). Not too concerned with income from bonds side just ballast/safety / diversification, estimated withdraw rate will be under 2%. We'll fully retire in 2023 maybe, and then be more able to do some Roth conversions up to top of 24% bracket. In retrospect, wish I'd switched from IRA to Roth contributions years ago.

Thanks dbr. Excellent thread that you supplied, I'm half way thru it now. It seems no right answer without a good crystal ball but removing some inflation risk seems appealing, i.e. FIPDX.
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Re: Which bond fund should I use in my 401k?

Post by grabiner »

2021reset wrote: Wed Mar 30, 2022 1:02 am My options are (fund/ER/description):

FAHCX .75 High Income Advtg Fund
EFIPX .50 Fidelity Advisor Limited Term Bond Fund - Class I
FIPDX .05 Inflation-Protected Bond Index Fund
FUAMX .03 Intermediate Treasury Bond Index Fund
FNBGX .03 Long-Term Treasury Bond Index Fund
FUMBX .03 Short-Term Treasury Bond Index Fund
FXNAX .32 US Bond Index Fund

I am not expecting to touch this for 10+ years, I am probably in 24-35% bracket for the rest of my life, and this is where I hold all my bonds (well, eventually, still dealing with moving some muni in taxable to this).
The US Bond Index would be a default recommendation, but given the extra cost, it's probably better to hold Treasuries instead, for less risk and less return. You would not need quite as much in Treasuries to get the same diversification benefit.

How sensitive are you to inflation risk? This determines whether you should prefer nominal bonds (probably intermediate-term) or TIPS. You should get similar expected return for either, but TIPS will outperform if actual inflation is higher than expected inflation. For example, if you will have a fixed-dollar pension, then inflation will decrease its value, so you should use TIPS for your bonds. If you have a fixed-rate mortgage, then inflation decreases the cost of paying it off, so you should prefer nominal bonds.
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Re: Which bond fund should I use in my 401k?

Post by mega317 »

vineviz wrote: Wed Mar 30, 2022 8:39 am Bonds are like this: investors are in a position to know when they expect to use their portfolios to fund future consumption and whether that consumption will be denominated in nominal or inflation-adjusted terms
Isn’t essentially all distant future spending, with the notable exception of a mortgage, inflation sensitive?
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Re: Which bond fund should I use in my 401k?

Post by vineviz »

mega317 wrote: Wed May 25, 2022 7:28 pm
vineviz wrote: Wed Mar 30, 2022 8:39 am Bonds are like this: investors are in a position to know when they expect to use their portfolios to fund future consumption and whether that consumption will be denominated in nominal or inflation-adjusted terms
Isn’t essentially all distant future spending, with the notable exception of a mortgage, inflation sensitive?
For many people I'd say that a lot of their future consumption is probably more "real" (inflation sensitive) than "nominal", but the evidence suggests that it's not as dominant as many people assume.

Economically speaking, an inflation shock (i.e. realized inflation that is sharply higher or lower than expected) is essentially a real income shock. At a very simplistic level of approximation, we can observe that the marginal propensity to consume from income shocks for people of retirement age (e.g. over 70) is significant but far less than 1.0. In fact, it's about 0.15 to 0.25 for most of age income range on average.

This means that a temporary $1 increase in income results in a consumption increase of just $0.25. And a temporary loss of $1 in income results in a consumption decrease of $0.25. How does this happen? For one thing, consumers are much better at (and happy with) substitutions than most price index models assume. Hedonic adaptation is a very real force, and most retirees will engage in substitution even if they don't "need" to.

The goal in retirement planning is to match the portfolio's income to the path of consumption not necessarily to the path of prices. And since retirement consumption tends to grow at a rate less than inflation, even for wealthy retirees, it might not make sense for retirees to exclusively hold inflation-indexed bonds.
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Re: Which bond fund should I use in my 401k?

Post by dbr »

vineviz wrote: Thu May 26, 2022 8:06 am
The goal in retirement planning is to match the portfolio's income to the path of consumption not necessarily to the path of prices. And since retirement consumption tends to grow at a rate less than inflation, even for wealthy retirees, it might not make sense for retirees to exclusively hold inflation-indexed bonds.
That probably is right. A more complex problem is combining a portfolio of stocks and bonds and also income streams part of which are fixed nominal and part of which are inflation indexed.

I think it is very difficult to find a clear preference for given characteristics in bonds as part of the overall financial position of an individual. Thinking about bonds as an isolated asset might allow more specific analysis but is also artificial. An example of the complexity is that bond holdings will be altered to rebalance a portfolio and the relative spending supported by bonds will change over time relative to diminishing fixed income streams, not diminishing indexed income streams, and very possibly increasing income obtained from portfolios. The significance of choosing between nominal and inflation bonds in a 50/50 portfolio that in turn is responsible for less than half of spending might be hard to determine.
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Re: Which bond fund should I use in my 401k?

Post by HMSVictory »

FXNAX for the win.

I like the 3 fund portfolio and I like simplicity. You own everything (minus TIPS) with US Bond Index.
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Re: Which bond fund should I use in my 401k?

Post by ruralavalon »

I suggest either:
1) FXNAX .32??? US Bond Index Fund; or
2) FUAMX .03 Intermediate Treasury Bond Index Fund.
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mega317
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Re: Which bond fund should I use in my 401k?

Post by mega317 »

Thanks vineviz and dbr, this is an interesting discussion.
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