Do bond funds ever recover from losses? - part 2

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restingonmylaurels
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Do bond funds ever recover from losses? - part 2

Post by restingonmylaurels »

I wanted to extract this posting from Taylor, which he has posted in other threads, because it is one I often remember when bond investing.

And because I am wondering if, at the end of this year, assuming inflation expectations remain unchanged in the next 6 months, Taylor will have to update his intro to say "It is unusual for bond funds to have annual losses. Vanguard's Total Bond Market Index Fund worst annual loss was -11.0% in 2022. In the table below you can see how stock and bond losses usually offset each other in The Three-Fund Portfolio, except that strategy did not work in 2022:"

As the thinking here is pretty central to how BH's invest, is there a new corollary, and if so, what is it?
Taylor Larimore wrote: Fri Jun 24, 2022 12:44 pm restingonmylaurels:

It is unusual for bond funds to have annual losses. Vanguard's Total Bond Market Index Fund worst annual loss was -2.9% in 1994. In the table below you can see how stock and bond losses offset each other in The Three-Fund Portfolio:

Past rate of inflation (CPU) and fund returns in The Three-Fund Portfolio:

YEAR--INFLATION--BOND INDEX--S&P 500 INDEX------MSCI EAFE 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
2021-------7.0---------(-1.7)---------------25.7-------------------8.6

Sources: Vanguard, U.S. Labor Department (CPI-U), Standard & Poor's, Bloomberg Barclays Aggregate Bond Index, and DFTurner

Past performance does not forecast future performance.

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 holding in an all-U.S. stock-market portfolio and holding their bonds in an all-U.S. bond-market portfolio."
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Re: Do bond funds ever recover from losses? - part 2

Post by Northern Flicker »

The index and the Vanguard fund were created in 1986. There is backfilled data for precursor indices, but mortgage-backed securities were not a part of the precursor indices. I generally discount the data from before 12/86 when the fund was created.

Also, 1931 would have been a tough year for a similar portfolio with corporate bonds down almost 16%, and the 10-yr treasury was down about about 2.5%.
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

A lot can happen to either stock or bond prices in 6 months. And they are affected by more than just inflation expectations. So it seems a bit early to be making assumptions about what the calendar year results are going to be.

But, I'm not really too interested in results that are restricted to discrete calendar years, anyway. I would want to look at the worst 365 day period. Losing X% from July to June is no different than losing X% from January to December.
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Re: Do bond funds ever recover from losses? - part 2

Post by nisiprius »

Since the duration of the Vanguard Total Bond Fund is 6.7 years, and since Vanguard literally says that funds in that risk category "may be appropriate for investors with medium-term investment horizons (4 to 10 years)," it is not reasonable to look at single years. (Similarly, it is not reasonable to complain that stocks have not kept up with inflation 5/31/2021 through 5/31/2022).

:oops:

Previously I posted some totally wrong information here.
Last edited by nisiprius on Sun Jun 26, 2022 8:51 am, edited 1 time in total.
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

^The chart is total stock

I'm pretty sure total bond is not ahead of inflation, certainly not by nearly 8%.

edit:
Total bond 4 year real return is actually -2.16%.
And an inflation adjusted investment of $10,000 on Dec. 31 2018 has lost about 12% in real terms and so it would take a bit over a 13% increase in order to make that a 0% real return for the 4 year period of 2019-2022.
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Re: Do bond funds ever recover from losses? - part 2

Post by IDpilot »

jeffyscott wrote: Sun Jun 26, 2022 6:58 am ^The chart is total stock

I'm pretty sure total bond is not ahead of inflation, certainly not by nearly 8%.

edit:
Total bond 4 year real return is actually -2.16%.
And an inflation adjusted investment of $10,000 on Dec. 31 2018 has lost about 12% in real terms and so it would take a bit over a 13% increase in order to make that a 0% real return for the 4 year period of 2019-2022.
You appear to only be considering the change in price per share and ignoring the distributions.
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Re: Do bond funds ever recover from losses? - part 2

Post by nisiprius »

jeffyscott wrote: Sun Jun 26, 2022 6:58 am ^The chart is total stock

I'm pretty sure total bond is not ahead of inflation, certainly not by nearly 8%.

edit:
Total bond 4 year real return is actually -2.16%.
And an inflation adjusted investment of $10,000 on Dec. 31 2018 has lost about 12% in real terms and so it would take a bit over a 13% increase in order to make that a 0% real return for the 4 year period of 2019-2022.
You are right. That was really an unusually dumb mistake, even for me. Sorry. :oops:

Total Bond has lost real value over the past 48 months, and if it falls -4% or -5% more during the last half of the year, it will have lost money (numbers of dollars) over the four-year period 2019 through 2022.
Last edited by nisiprius on Sun Jun 26, 2022 8:55 am, edited 1 time in total.
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Re: Do bond funds ever recover from losses? - part 2

Post by AnnetteLouisan »

Im wondering this too. I have BCOIX (Baird Core Bond Institutional Index), which has dropped like a stone. However, I am hanging onto it. I stopped buying more of it years ago, so it is what it is. It does shake off some income though.
Last edited by AnnetteLouisan on Sun Jun 26, 2022 8:56 am, edited 1 time in total.
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Re: Do bond funds ever recover from losses? - part 2

Post by Marseille07 »

restingonmylaurels wrote: Sun Jun 26, 2022 1:24 am I wanted to extract this posting from Taylor, which he has posted in other threads, because it is one I often remember when bond investing.

And because I am wondering if, at the end of this year, assuming inflation expectations remain unchanged in the next 6 months, Taylor will have to update his intro to say "It is unusual for bond funds to have annual losses. Vanguard's Total Bond Market Index Fund worst annual loss was -11.0% in 2022. In the table below you can see how stock and bond losses usually offset each other in The Three-Fund Portfolio, except that strategy did not work in 2022:"

As the thinking here is pretty central to how BH's invest, is there a new corollary, and if so, what is it?
Taylor's table is excellent, but we want pre-1976 data, ideally 1960~1975. This covers the worst starting retirement year for 60/40 that is 1966.
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Re: Do bond funds ever recover from losses? - part 2

Post by delamer »

I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
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Re: Do bond funds ever recover from losses? - part 2

Post by marathonwmn »

Are y'all reinvesting dividends in Fidelity's Total Bond Market Index Fund within your IRAs? I hold the fund and have been reinvesting the dividends. I'm taking RMDs.

What are the pros and cons?

Thank you.
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

IDpilot wrote: Sun Jun 26, 2022 8:45 am
jeffyscott wrote: Sun Jun 26, 2022 6:58 am ^The chart is total stock

I'm pretty sure total bond is not ahead of inflation, certainly not by nearly 8%.

edit:
Total bond 4 year real return is actually -2.16%.
And an inflation adjusted investment of $10,000 on Dec. 31 2018 has lost about 12% in real terms and so it would take a bit over a 13% increase in order to make that a 0% real return for the 4 year period of 2019-2022.
You appear to only be considering the change in price per share and ignoring the distributions.
Nope, unless that's what portfolio visualizer is doing:
Image
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

nisiprius wrote: Sun Jun 26, 2022 8:51 am
jeffyscott wrote: Sun Jun 26, 2022 6:58 am ^The chart is total stock

I'm pretty sure total bond is not ahead of inflation, certainly not by nearly 8%.

edit:
Total bond 4 year real return is actually -2.16%.
And an inflation adjusted investment of $10,000 on Dec. 31 2018 has lost about 12% in real terms and so it would take a bit over a 13% increase in order to make that a 0% real return for the 4 year period of 2019-2022.
You are right. That was really an unusually dumb mistake, even for me. Sorry. :oops:
It was pretty fancy getting the pop-up to appear in the screenshot, though. You inspired me to figure out how to do that (I set a 3 second delay, giving me enough time to point at it).
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Re: Do bond funds ever recover from losses? - part 2

Post by toddthebod »

delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
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Re: Do bond funds ever recover from losses? - part 2

Post by exodusNH »

toddthebod wrote: Sun Jun 26, 2022 10:43 am
delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
I think it's mostly because bonds are down with stocks. People have gotten accustomed to them moving in opposite directions.
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Re: Do bond funds ever recover from losses? - part 2

Post by Marseille07 »

toddthebod wrote: Sun Jun 26, 2022 10:43 am I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
Because it's not so short-term when BND mathematically takes 7 years to recover.
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Re: Do bond funds ever recover from losses? - part 2

Post by toddthebod »

Marseille07 wrote: Sun Jun 26, 2022 12:17 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
Because it's not so short-term when BND mathematically takes 7 years to recover.
Let me rephrase then: I can't believe the amount of handwringing going on over a bond fund behaving exactly as expected.

Besides, I'd rather suffer a few years of paper losses than continue earning 0.5% coupon payments forever.
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Re: Do bond funds ever recover from losses? - part 2

Post by toddthebod »

exodusNH wrote: Sun Jun 26, 2022 12:13 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am
delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
I think it's mostly because bonds are down with stocks. People have gotten accustomed to them moving in opposite directions.
They aren't supposed to move in opposite directions, they are supposed to move independently. They can both be up, both be down, or one up one down. I count only six years out of 45 on the chart in the first post where both bonds and stocks underperformed long-term averages in the same year (this year might be #7, but it's way too early to say for stocks.) Good thing I'm investing for longer than a one year time horizon.

What's the alternative anyways? Put everything in equities which are down 20%?
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Re: Do bond funds ever recover from losses? - part 2

Post by barnaby444 »

delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
The title seems to be a callback to a recent thread with the same title (sans "part 2") where the question was whether bond funds that decline in value due to a rise in interest rates effectively make those losses "permanent" when they sell bonds that are in a loss position. Many people pointed out that the increase in yield should offset the one-time decline in NAV within the fund's duration (or much more quickly if the sold bonds were already close to maturity). Nevertheless I think the OP left with their notion unchanged that the losses are indeed somehow "permanent."

I interpret this new question as, I guess, more generally whether bond funds are still good investments even if they sometimes don't out-earn NAV declines within a year? To that I would say that the numbers in the table, even if we add 2022 (and assume it ends today), are pretty good evidence that the answer is "yes."

EDIT: I mistakenly said the two threads had different OPs.
Last edited by barnaby444 on Sun Jun 26, 2022 1:28 pm, edited 1 time in total.
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Re: Do bond funds ever recover from losses? - part 2

Post by exodusNH »

toddthebod wrote: Sun Jun 26, 2022 12:45 pm
exodusNH wrote: Sun Jun 26, 2022 12:13 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am
delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
I think it's mostly because bonds are down with stocks. People have gotten accustomed to them moving in opposite directions.
They aren't supposed to move in opposite directions, they are supposed to move independently. They can both be up, both be down, or one up one down. I count only six years out of 45 on the chart in the first post where both bonds and stocks underperformed long-term averages in the same year (this year might be #7, but it's way too early to say for stocks.) Good thing I'm investing for longer than a one year time horizon.

What's the alternative anyways? Put everything in equities which are down 20%?
Oh, I know. However, over the last years, bonds have generally gone up when stocks go down. People have come to expect that behavior and are (understandingly) confusing near-zero correlation with negative correlation.

It doesn't help that people say "bonds are for safety" without defining what "safe" means and forgetting that the performance of bonds over 7 months means nothing in a fund with a 7 year duration. (Unless, of course, you need to sell your bonds to eat.)
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Re: Do bond funds ever recover from losses? - part 2

Post by tvubpwcisla »

Some believe that bonds are more risky than stocks and this is one of the reasons why.
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Re: Do bond funds ever recover from losses? - part 2

Post by delamer »

exodusNH wrote: Sun Jun 26, 2022 1:27 pm
toddthebod wrote: Sun Jun 26, 2022 12:45 pm
exodusNH wrote: Sun Jun 26, 2022 12:13 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am
delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
I think it's mostly because bonds are down with stocks. People have gotten accustomed to them moving in opposite directions.
They aren't supposed to move in opposite directions, they are supposed to move independently. They can both be up, both be down, or one up one down. I count only six years out of 45 on the chart in the first post where both bonds and stocks underperformed long-term averages in the same year (this year might be #7, but it's way too early to say for stocks.) Good thing I'm investing for longer than a one year time horizon.

What's the alternative anyways? Put everything in equities which are down 20%?
Oh, I know. However, over the last years, bonds have generally gone up when stocks go down. People have come to expect that behavior and are (understandingly) confusing near-zero correlation with negative correlation.

It doesn't help that people say "bonds are for safety" without defining what "safe" means and forgetting that the performance of bonds over 7 months means nothing in a fund with a 7 year duration. (Unless, of course, you need to sell your bonds to eat.)
One alternative is to take all price risk in stocks. So hold a relatively higher stock allocation and keep the rest of the portfolio in cash equivalents. Instead of 60/40 stocks/bonds, use 75/25 stocks/cash.

But then people would complain that the cash return wasn’t keeping up with inflation. :?
Last edited by delamer on Sun Jun 26, 2022 2:57 pm, edited 1 time in total.
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Re: Do bond funds ever recover from losses? - part 2

Post by delamer »

Marseille07 wrote: Sun Jun 26, 2022 12:17 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
Because it's not so short-term when BND mathematically takes 7 years to recover.
What do you mean by mathematically in this context?
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Re: Do bond funds ever recover from losses? - part 2

Post by billaster »

delamer wrote: Sun Jun 26, 2022 2:55 pm
Marseille07 wrote: Sun Jun 26, 2022 12:17 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
Because it's not so short-term when BND mathematically takes 7 years to recover.
What do you mean by mathematically in this context?
Good question. Mathematically makes no sense. You do not know how long a bond fund will take to recover because no mathematical equation will tell you what interest rates will be in the future. Could be more than 7 years and could be less than 7 years. Could even be one year or less.
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Re: Do bond funds ever recover from losses? - part 2

Post by Marseille07 »

delamer wrote: Sun Jun 26, 2022 2:55 pm What do you mean by mathematically in this context?
If the yield stays the same, it takes the duration (6.9 years or something for BND) to make back the NAV loss is what I understand.
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Re: Do bond funds ever recover from losses? - part 2

Post by delamer »

Marseille07 wrote: Sun Jun 26, 2022 3:12 pm
delamer wrote: Sun Jun 26, 2022 2:55 pm What do you mean by mathematically in this context?
If the yield stays the same, it takes the duration (6.9 years or something for BND) to make back the NAV loss is what I understand.
Thanks. And that is nominal, correct?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Do bond funds ever recover from losses? - part 2

Post by exodusNH »

delamer wrote: Sun Jun 26, 2022 2:53 pm
exodusNH wrote: Sun Jun 26, 2022 1:27 pm
toddthebod wrote: Sun Jun 26, 2022 12:45 pm
exodusNH wrote: Sun Jun 26, 2022 12:13 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am

I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
I think it's mostly because bonds are down with stocks. People have gotten accustomed to them moving in opposite directions.
They aren't supposed to move in opposite directions, they are supposed to move independently. They can both be up, both be down, or one up one down. I count only six years out of 45 on the chart in the first post where both bonds and stocks underperformed long-term averages in the same year (this year might be #7, but it's way too early to say for stocks.) Good thing I'm investing for longer than a one year time horizon.

What's the alternative anyways? Put everything in equities which are down 20%?
Oh, I know. However, over the last years, bonds have generally gone up when stocks go down. People have come to expect that behavior and are (understandingly) confusing near-zero correlation with negative correlation.

It doesn't help that people say "bonds are for safety" without defining what "safe" means and forgetting that the performance of bonds over 7 months means nothing in a fund with a 7 year duration. (Unless, of course, you need to sell your bonds to eat.)
One alternative is to take all price risk in stocks. So hold a relatively higher stock allocation and keep the rest of the portfolio in cash equivalents. Instead of 60/40 stocks/bonds, use 75/25 stocks/cash.

But then people would complain that the cash return wasn’t keeping up with inflation. :?
This was part of the reasoning that Schwab's roboadvisor's cash position wasn't as much as a drag as it seemed it should be. They upped the stock allocation because of the safer cash allocation.
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Re: Do bond funds ever recover from losses? - part 2

Post by Marseille07 »

delamer wrote: Sun Jun 26, 2022 3:13 pm Thanks. And that is nominal, correct?
I think so, but I'm not an expert. I've just seen some posters showing the math along this line.
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Re: Do bond funds ever recover from losses? - part 2

Post by delamer »

exodusNH wrote: Sun Jun 26, 2022 3:13 pm
delamer wrote: Sun Jun 26, 2022 2:53 pm
exodusNH wrote: Sun Jun 26, 2022 1:27 pm
toddthebod wrote: Sun Jun 26, 2022 12:45 pm
exodusNH wrote: Sun Jun 26, 2022 12:13 pm

I think it's mostly because bonds are down with stocks. People have gotten accustomed to them moving in opposite directions.
They aren't supposed to move in opposite directions, they are supposed to move independently. They can both be up, both be down, or one up one down. I count only six years out of 45 on the chart in the first post where both bonds and stocks underperformed long-term averages in the same year (this year might be #7, but it's way too early to say for stocks.) Good thing I'm investing for longer than a one year time horizon.

What's the alternative anyways? Put everything in equities which are down 20%?
Oh, I know. However, over the last years, bonds have generally gone up when stocks go down. People have come to expect that behavior and are (understandingly) confusing near-zero correlation with negative correlation.

It doesn't help that people say "bonds are for safety" without defining what "safe" means and forgetting that the performance of bonds over 7 months means nothing in a fund with a 7 year duration. (Unless, of course, you need to sell your bonds to eat.)
One alternative is to take all price risk in stocks. So hold a relatively higher stock allocation and keep the rest of the portfolio in cash equivalents. Instead of 60/40 stocks/bonds, use 75/25 stocks/cash.

But then people would complain that the cash return wasn’t keeping up with inflation. :?
This was part of the reasoning that Schwab's roboadvisor's cash position wasn't as much as a drag as it seemed it should be. They upped the stock allocation because of the safer cash allocation.
Makes sense to me.

As noted upthread (or maybe in another thread?), a lot of investors really don’t understand bonds and their pluses & minuses relative to stocks.

Cash is pretty straightforward. If you stick with it and stocks, your investing life is simpler. That’s particularly true when you are in the withdrawal stage.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

delamer wrote: Sun Jun 26, 2022 3:13 pm
Marseille07 wrote: Sun Jun 26, 2022 3:12 pm
delamer wrote: Sun Jun 26, 2022 2:55 pm What do you mean by mathematically in this context?
If the yield stays the same, it takes the duration (6.9 years or something for BND) to make back the NAV loss is what I understand.
Thanks. And that is nominal, correct?
Yes, nominal but that's to end up with approximately the same return as you would have had had there been no change in interest rates.

To just get back to 0 should be around 3-4 years. Since current yield is around 3.3%, that's 10% in 3 years.
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Re: Do bond funds ever recover from losses? - part 2

Post by Charles Joseph »

Inflation will come down. Interest rates will fall. Bond prices will rise. Stocks will become more attractive. Equity valuations will increase.

And on it goes, this thing of ours.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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Re: Do bond funds ever recover from losses? - part 2

Post by Marseille07 »

jeffyscott wrote: Sun Jun 26, 2022 3:28 pm Yes, nominal but that's to end up with approximately the same return as you would have had had there been no change in interest rates.

To just get back to 0 should be around 3-4 years. Since current yield is around 3.3%, that's 10% in 3 years.
That's not bad at all then, but it still assumes the yield stays flat, not going up iiuc.
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

Marseille07 wrote: Sun Jun 26, 2022 9:00 pm
jeffyscott wrote: Sun Jun 26, 2022 3:28 pm Yes, nominal but that's to end up with approximately the same return as you would have had had there been no change in interest rates.

To just get back to 0 should be around 3-4 years. Since current yield is around 3.3%, that's 10% in 3 years.
That's not bad at all then, but it still assumes the yield stays flat, not going up iiuc.
Yes. Or down, which would shorten the time.

And if you really want/need certainty about the nominal value in 3 years, you can sell the fund and buy a 3 year brokered CD at 3.35%.
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Re: Do bond funds ever recover from losses? - part 2

Post by dbr »

billaster wrote: Sun Jun 26, 2022 3:11 pm
delamer wrote: Sun Jun 26, 2022 2:55 pm
Marseille07 wrote: Sun Jun 26, 2022 12:17 pm
toddthebod wrote: Sun Jun 26, 2022 10:43 am I agree. I can't believe the amount of handwringing going on over short-term losses for any asset class.
Because it's not so short-term when BND mathematically takes 7 years to recover.
What do you mean by mathematically in this context?
Good question. Mathematically makes no sense. You do not know how long a bond fund will take to recover because no mathematical equation will tell you what interest rates will be in the future. Could be more than 7 years and could be less than 7 years. Could even be one year or less.
This is correct. Interest rates could go down enough tomorrow to take one day to get back.

The math examples are both helpful and not helpful. One example is that if the interest rate has been unchanged and then increases in a single step and does not change again it takes duration in years to break even. If the interest rate increases at a steady linear rate it takes 2D-1 to break even. If the interest rate goes up and comes back down it could take very little time. If interest rates are noisy then the bond values will be noisy.

You can think of the effect of duration as a response function that converts interest rate time dependence, both past and future, into the time dependence of bond fund value in a complicated way. But to predict anything you have to predict the future course of interest rates.
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Re: Do bond funds ever recover from losses? - part 2

Post by Marseille07 »

dbr wrote: Sun Jun 26, 2022 9:48 pm If the interest rate increases at a steady linear rate it takes 2D-1 to break even. If the interest rate goes up and comes back down it could take very little time. If interest rates are noisy then the bond values will be noisy.
What's 2D-1? I was hearing earlier another poster saying BND (6.9 year duration) only takes 3~4 years to recover if the rate stays.
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Re: Do bond funds ever recover from losses? - part 2

Post by dbr »

Marseille07 wrote: Sun Jun 26, 2022 10:09 pm
dbr wrote: Sun Jun 26, 2022 9:48 pm If the interest rate increases at a steady linear rate it takes 2D-1 to break even. If the interest rate goes up and comes back down it could take very little time. If interest rates are noisy then the bond values will be noisy.
What's 2D-1? I was hearing earlier another poster saying BND (6.9 year duration) only takes 3~4 years to recover if the rate stays.
D is duration.

The definition of recover in this context is break even, meaning that the fund reaches the value it would have reached with dividends reinvested if the interest rate had not changed. It is good you mention the 3-4 years because the time to reach the initial value with no increase at all would be less than the duration for the case of the step increase in interest rates.

Poster Kevin laid out a lot of examples of this in another thread, but I don't have the link handy.
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Re: Do bond funds ever recover from losses? - part 2

Post by Marseille07 »

dbr wrote: Sun Jun 26, 2022 10:23 pm D is duration.

The definition of recover in this context is break even, meaning that the fund reaches the value it would have reached with dividends reinvested if the interest rate had not changed. It is good you mention the 3-4 years because the time to reach the initial value with no increase at all would be less than the duration for the case of the step increase in interest rates.

Poster Kevin laid out a lot of examples of this in another thread, but I don't have the link handy.
Thank you, this makes sense. If you mean "Kevin M," that poster sure is an expert on this subject.
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Re: Do bond funds ever recover from losses? - part 2

Post by dbr »

Marseille07 wrote: Sun Jun 26, 2022 10:28 pm
dbr wrote: Sun Jun 26, 2022 10:23 pm D is duration.

The definition of recover in this context is break even, meaning that the fund reaches the value it would have reached with dividends reinvested if the interest rate had not changed. It is good you mention the 3-4 years because the time to reach the initial value with no increase at all would be less than the duration for the case of the step increase in interest rates.

Poster Kevin laid out a lot of examples of this in another thread, but I don't have the link handy.
Thank you, this makes sense. If you mean "Kevin M," that poster sure is an expert on this subject.
Right Kevin M
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Re: Do bond funds ever recover from losses? - part 2

Post by AnnetteLouisan »

Charles Joseph wrote: Sun Jun 26, 2022 3:52 pm Inflation will come down. Interest rates will fall. Bond prices will rise. Stocks will become more attractive. Equity valuations will increase.

And on it goes, this thing of ours.
Brilliant! 😁
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Re: Do bond funds ever recover from losses? - part 2

Post by IDpilot »

jeffyscott wrote: Sun Jun 26, 2022 10:23 am
IDpilot wrote: Sun Jun 26, 2022 8:45 am
jeffyscott wrote: Sun Jun 26, 2022 6:58 am ^The chart is total stock

I'm pretty sure total bond is not ahead of inflation, certainly not by nearly 8%.

edit:
Total bond 4 year real return is actually -2.16%.
And an inflation adjusted investment of $10,000 on Dec. 31 2018 has lost about 12% in real terms and so it would take a bit over a 13% increase in order to make that a 0% real return for the 4 year period of 2019-2022.
You appear to only be considering the change in price per share and ignoring the distributions.
Nope, unless that's what portfolio visualizer is doing:
Image
I missed a key word ... "real" :oops:
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Re: Do bond funds ever recover from losses? - part 2

Post by barnaby444 »

dbr wrote: Sun Jun 26, 2022 10:23 pm
Marseille07 wrote: Sun Jun 26, 2022 10:09 pm
dbr wrote: Sun Jun 26, 2022 9:48 pm If the interest rate increases at a steady linear rate it takes 2D-1 to break even. If the interest rate goes up and comes back down it could take very little time. If interest rates are noisy then the bond values will be noisy.
What's 2D-1? I was hearing earlier another poster saying BND (6.9 year duration) only takes 3~4 years to recover if the rate stays.
D is duration.

The definition of recover in this context is break even, meaning that the fund reaches the value it would have reached with dividends reinvested if the interest rate had not changed. It is good you mention the 3-4 years because the time to reach the initial value with no increase at all would be less than the duration for the case of the step increase in interest rates.

Poster Kevin laid out a lot of examples of this in another thread, but I don't have the link handy.
Does anyone else know which thread this was in? Would be interested to read it.
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Re: Do bond funds ever recover from losses? - part 2

Post by Tom_T »

Marseille07 wrote: Sun Jun 26, 2022 3:12 pm
delamer wrote: Sun Jun 26, 2022 2:55 pm What do you mean by mathematically in this context?
If the yield stays the same, it takes the duration (6.9 years or something for BND) to make back the NAV loss is what I understand.
But that is not what happens in practice with BND which contains a multitude of bonds with different durations. The fund manager is constantly adjusting the mix, selling old bonds, buying new bonds, at different times. There are many examples in the past decades of years when rates went up but Total Bond did not lose value. And people forget that interest rates don't move in a straight line. A fund manager who bought a 10-year Treasury at 3.4% just a couple of weeks ago is in the black on that purchase, not the red. The yield curve sometimes inverts. That all goes into the NAV, right?

But right now we have some posters asking questions who have been led to believe that if they purchase Total Bond today, they are doomed if rates go up a point, based on the hypothetical example of a single bond. Nothing could be further from the truth.
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

barnaby444 wrote: Mon Jun 27, 2022 7:35 am
dbr wrote: Sun Jun 26, 2022 10:23 pm
Marseille07 wrote: Sun Jun 26, 2022 10:09 pm
dbr wrote: Sun Jun 26, 2022 9:48 pm If the interest rate increases at a steady linear rate it takes 2D-1 to break even. If the interest rate goes up and comes back down it could take very little time. If interest rates are noisy then the bond values will be noisy.
What's 2D-1? I was hearing earlier another poster saying BND (6.9 year duration) only takes 3~4 years to recover if the rate stays.
D is duration.

The definition of recover in this context is break even, meaning that the fund reaches the value it would have reached with dividends reinvested if the interest rate had not changed. It is good you mention the 3-4 years because the time to reach the initial value with no increase at all would be less than the duration for the case of the step increase in interest rates.

Poster Kevin laid out a lot of examples of this in another thread, but I don't have the link handy.
Does anyone else know which thread this was in? Would be interested to read it.
Maybe this one (found by searching Kevin's posts for "2d-1"): viewtopic.php?t=373194

A search of the entire forum for "2D-1", will find other discussions that may be of interest.
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Re: Do bond funds ever recover from losses? - part 2

Post by dbr »

jeffyscott wrote: Mon Jun 27, 2022 7:49 am
barnaby444 wrote: Mon Jun 27, 2022 7:35 am
dbr wrote: Sun Jun 26, 2022 10:23 pm
Marseille07 wrote: Sun Jun 26, 2022 10:09 pm
dbr wrote: Sun Jun 26, 2022 9:48 pm If the interest rate increases at a steady linear rate it takes 2D-1 to break even. If the interest rate goes up and comes back down it could take very little time. If interest rates are noisy then the bond values will be noisy.
What's 2D-1? I was hearing earlier another poster saying BND (6.9 year duration) only takes 3~4 years to recover if the rate stays.
D is duration.

The definition of recover in this context is break even, meaning that the fund reaches the value it would have reached with dividends reinvested if the interest rate had not changed. It is good you mention the 3-4 years because the time to reach the initial value with no increase at all would be less than the duration for the case of the step increase in interest rates.

Poster Kevin laid out a lot of examples of this in another thread, but I don't have the link handy.
Does anyone else know which thread this was in? Would be interested to read it.
Maybe this one (found by searching Kevin's posts for "2d-1"): viewtopic.php?t=373194

A search of the entire forum for "2D-1", will find other discussions that may be of interest.
Yes, those are the examples.

But the key point is that input to the example is a hypothetical future time dependence of interest rates. Unless you know what interest rates will be for the next couple of durations (20 years maybe) you can't predict what the holding values will be over that period. One of the interesting examples uses actual interest rates which also went down a little along the way to going up.

The result for bond holding could also be presented as a mechanism by which volatility in interest rates is processed into volatility in bond returns. A point is that interest rates never stop changing. If you want your bond returns not to be volatile then invest at shorter durations or find a way to stop interest rates from changing.

Another really important point is that when interest rates are increasing the eventual effect is higher returns and greater wealth. A person needs to be aware of the time dependence of their objectives before the wailing and gnashing of teeth starts.
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Re: Do bond funds ever recover from losses? - part 2

Post by jeffyscott »

Tom_T wrote: Mon Jun 27, 2022 7:39 am
Marseille07 wrote: Sun Jun 26, 2022 3:12 pm
delamer wrote: Sun Jun 26, 2022 2:55 pm What do you mean by mathematically in this context?
If the yield stays the same, it takes the duration (6.9 years or something for BND) to make back the NAV loss is what I understand.
But that is not what happens in practice with BND which contains a multitude of bonds with different durations. The fund manager is constantly adjusting the mix, selling old bonds, buying new bonds, at different times. There are many examples in the past decades of years when rates went up but Total Bond did not lose value. And people forget that interest rates don't move in a straight line. A fund manager who bought a 10-year Treasury at 3.4% just a couple of weeks ago is in the black on that purchase, not the red. The yield curve sometimes inverts. That all goes into the NAV, right?

But right now we have some posters asking questions who have been led to believe that if they purchase Total Bond today, they are doomed if rates go up a point, based on the hypothetical example of a single bond. Nothing could be further from the truth.
It also depends on what is meant by "rates go up a point". What "rates" are these?

If this means the Fed Funds rate, the expectation of that rate going up by a point over the next few months is already baked in to current prices/yields of bonds.

"Rates" do not move up and down uniformly across the yield curve, short term rates may go up, while longer term rates go down or short term rates may go up a point while long term go up 0.25%, or visa-versa. It all depends on the prices at which investors are trading bonds, based on their expectations of future inflation, Fed action, etc.

Still, even though none of the simplistic scenarios are actually going to happen, these models of what may happen under various circumstances is all we really have. My own interpretation of 2D-1 as the worst case point of indifference and D as the traditional point of indifference is to split the difference and figure that if I don't need the money for at least about 10 years (1.5D), then an intermediate term bond fund is a safe choice. (In addition, a TIPS fund is the safer choice, since it eliminates one major variable, inflation.)
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Re: Do bond funds ever recover from losses? - part 2

Post by dbr »

jeffyscott wrote: Mon Jun 27, 2022 8:10 am
Tom_T wrote: Mon Jun 27, 2022 7:39 am
Marseille07 wrote: Sun Jun 26, 2022 3:12 pm
delamer wrote: Sun Jun 26, 2022 2:55 pm What do you mean by mathematically in this context?
If the yield stays the same, it takes the duration (6.9 years or something for BND) to make back the NAV loss is what I understand.
But that is not what happens in practice with BND which contains a multitude of bonds with different durations. The fund manager is constantly adjusting the mix, selling old bonds, buying new bonds, at different times. There are many examples in the past decades of years when rates went up but Total Bond did not lose value. And people forget that interest rates don't move in a straight line. A fund manager who bought a 10-year Treasury at 3.4% just a couple of weeks ago is in the black on that purchase, not the red. The yield curve sometimes inverts. That all goes into the NAV, right?

But right now we have some posters asking questions who have been led to believe that if they purchase Total Bond today, they are doomed if rates go up a point, based on the hypothetical example of a single bond. Nothing could be further from the truth.
It also depends on what is meant by "rates go up a point". What "rates" are these?

If this means the Fed Funds rate, the expectation of that rate going up by a point over the next few months is already baked in to current prices/yields of bonds.

"Rates" do not move up and down uniformly across the yield curve, short term rates may go up, while longer term rates go down or short term rates may go up a point while long term go up 0.25%, or visa-versa. It all depends on the prices at which investors are trading bonds, based on their expectations of future inflation, Fed action, etc.

Still, even though none of the simplistic scenarios are actually going to happen, these models of what may happen under various circumstances is all we really have. My own interpretation of 2D-1 as the worst case point of indifference and D as the traditional point of indifference is to split the difference and figure that if I don't need the money for at least about 10 years (1.5D), then an intermediate term bond fund is a safe choice. (In addition, a TIPS fund is the safer choice, since it eliminates one major variable, inflation.)
Regarding "when I need the money" investors need to examine that. For a retiree withdrawing from a portfolio the money is needed in tiny increments spread over a very long time. The image of holding a bond fund and taking out the entirety at a point in time does not apply. It could be that what is happening there is that the investor is looking at the balance in his bond fund and doesn't like seeing it go down and wants to know when he can be happy again even though he does not need that money. A person in accumulation might be worrying that his wealth is not growing as he would like, but he doesn't need the money either.

That is why I suggest looking at this whole phenomenon as resulting in volatility of return and deciding how volatile one wants the bonds as part of a portfolio of stocks and bonds.

An additional technical point is that for bonds from which withdrawals might be taken over time the idea of matching bond duration to duration of liabilities could make sense and does not suggest a problem in holding bond funds with 5-10 year durations.

A person saving to buy a house or someone bridging a few years to SS from a bond holding would not put that money in intermediate duration bond funds.

What all the situations I am referring do would want is high enough real interest rates to accumulate wealth over time and to support withdrawals in retirement. Even then the most powerful handle on the result is stock/bond allocation and not specifically the return on bonds alone.

It is also true that an important consideration in bonds is inflation indexing rather than being at inflation risk in fixed income.
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Re: Do bond funds ever recover from losses? - part 2

Post by PicassoSparks »

nisiprius wrote: Sun Jun 26, 2022 6:47 am Since the duration of the Vanguard Total Bond Fund is 6.7 years, and since Vanguard literally says that funds in that risk category "may be appropriate for investors with medium-term investment horizons (4 to 10 years)," it is not reasonable to look at single years.
But that’s what Taylor was doing.

There’s a lot of posters in this thread saying things like what you wrote here. “The bonds are doing what they are meant to do, this was always to be expected,” and so on. But Taylor’s often quoted post—disclaimered with the classic “Past performance does not forecast future performance.”—uses the eye catching idea that bond losses are never that bad, as a kind of evidence. It exactly peddles the idea that bonds don’t crash the way stocks do.

It’s a fable. It was meant to reassure investors and help us stay the course. It was always kind of misleading (the chart should show real annual returns, not nominal) and it is turning out that it might have been fragile. This highlights the danger of using sayings and fables to help people weather a storm, when the fable diverges from the behavior of reality, we come to learn at terrifying moments that we didn’t really understand what was going on at all.
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Re: Do bond funds ever recover from losses? - part 2

Post by dknightd »

I hope so.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Do bond funds ever recover from losses? - part 2

Post by restingonmylaurels »

delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
Taylor's quote was in part 1 of this same thread, so I kept the title, although that is not what this thread is about.

To your last point, actually not, without all the assumptions people always bake in, as I will demonstrate somewhere downthread.
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Re: Do bond funds ever recover from losses? - part 2

Post by restingonmylaurels »

barnaby444 wrote: Sun Jun 26, 2022 1:25 pm
delamer wrote: Sun Jun 26, 2022 9:03 am I’m havng trouble following this discussion, based on the thread title.

Is the real issue whether bond funds ever take more than one year (12 months) to return to their previous nominal value (including price recovery and reinvested interest)?

The answer to the stated title is so obvious that I can’t figure out why anyone would ask the question.
The title seems to be a callback to a recent thread with the same title (sans "part 2") where the question was whether bond funds that decline in value due to a rise in interest rates effectively make those losses "permanent" when they sell bonds that are in a loss position. Many people pointed out that the increase in yield should offset the one-time decline in NAV within the fund's duration (or much more quickly if the sold bonds were already close to maturity). Nevertheless I think the OP left with their notion unchanged that the losses are indeed somehow "permanent."

I interpret this new question as, I guess, more generally whether bond funds are still good investments even if they sometimes don't out-earn NAV declines within a year? To that I would say that the numbers in the table, even if we add 2022 (and assume it ends today), are pretty good evidence that the answer is "yes."

EDIT: I mistakenly said the two threads had different OPs.
As the OP of the threads, the reason that the losses are permanent in the case of funds having to realize the loss in value are two-fold:
1. Earning back the value loss with the higher interest rate of the new bond depends on reinvestment of the dividends. If you are retired and living off the dividends instead of reinvesting them, this does not occur.
2. Earning back the value loss with the higher interest rate of the new bond makes those dividends payments subject to your marginal tax rate. You cannot offset this against the capital loss from the sale of the bond in the fund.

Every example I have seen uses either a zero coupon bond or uses dividend reinvestment plus tax-free accounts. If you remove those two props, then the realization of the bond loss due to the unexpected change in interest rates is never made up within the bond's lifetime.

Happy to have someone demonstrate mathematically that this is wrong from the perspective of the retiree fund owner, under the scenario described.
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