Disappointed in Bonds...

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Alex GR
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Disappointed in Bonds...

Post by Alex GR »

Hi everyone,
To date, I've paid $290k into BIV (my cost) and market value is $245k, so "loss" of about $45k. :annoyed
Of course I do realize it's not a real loss until I sell, and I do get ~$560 a month in dividends from it.
I chose BIV initially when I formed my portfolio to balance against stocks. (alloc. is ~60/40 stocks/bonds right now).
Having said that, I have two questions:
- I don't really understand why there is a loss,i.e. why it has gone down so much. I thought bonds are pretty stable as in they don't fluctuate much. Perhaps if I understand why it has fallen so much I can decide if I keep doing what I am doing or look at something else.
- I have DRIP turned on on BIV. Should I at least turn off DRIP and start placing dividends in something else? By 'something else' I mean NOT stocks so it would have to be something like a REIT or TLT?
Thanks!
beezlebub
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Re: Disappointed in Bonds...

Post by beezlebub »

Alex GR wrote: Tue Mar 07, 2023 6:34 am Hi everyone,
To date, I've paid $290k into BIV (my cost) and market value is $245k, so "loss" of about $45k. :annoyed
Of course I do realize it's not a real loss until I sell, and I do get ~$560 a month in dividends from it.
I chose BIV initially when I formed my portfolio to balance against stocks. (alloc. is ~60/40 stocks/bonds right now).
Having said that, I have two questions:
- I don't really understand why there is a loss,i.e. why it has gone down so much. I thought bonds are pretty stable as in they don't fluctuate much. Perhaps if I understand why it has fallen so much I can decide if I keep doing what I am doing or look at something else.
- I have DRIP turned on on BIV. Should I at least turn off DRIP and start placing dividends in something else? By 'something else' I mean NOT stocks so it would have to be something like a REIT or TLT?
Thanks!
Rates go up, bond fund values go down.

If you want stability without the volatility, perhaps look at a fund with shorter duration. SGOV is about as stable as you can get with an average duration of 9 months, and it currently yields 4.45% compared to BIV's 4.56%. The difference being you would not have lost a dollar of principle with SGOV during this turbulent time that started in 2022: https://www.portfoliovisualizer.com/bac ... ion2_2=100

Also, BIV is about 50% corporate bonds. Corporate bonds are more correlated with stocks; they may have higher yield but they are higher risk. I prefer to take my risk on the equity side. SGOV is all US treasuries. Or, if you do want intermediate treasuries, VGIT would be a good replacement for BIV.
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Re: Disappointed in Bonds...

Post by Outer Marker »

You lost money because interest rates have risen.

If you pay $100 for a bond yielding 2% and interest rates increase to 4%, then, if you go to sell it to the next guy, he's not willing to pay you $100 for the bond because he can get a new issue one at 4% for his $100, so you'd have to sell at a discount. If you hold the bond to maturity, you'll eventually get your face value back. Bond net asset value falls at a rate of about 1% per year of average duration. So, with an intermediate bond duration of about 6 years, a 2% rise in rates means a 12% loss in net asset value. However, you're still collecting the interest every month, so the total return is not as bad as the loss in principle, and you're earning more.

If you don't want interest rate risk, buy shorter term (but generally lower yielding bonds). You might look at 2 year treasuries paying around 4.9%. Keep in mind, though, that you've already suffered the loss in NAV, so you'd be "selling low." At this point, I would stay the course.
student
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Re: Disappointed in Bonds...

Post by student »

Alex GR wrote: Tue Mar 07, 2023 6:34 am Hi everyone,
To date, I've paid $290k into BIV (my cost) and market value is $245k, so "loss" of about $45k. :annoyed
Of course I do realize it's not a real loss until I sell, and I do get ~$560 a month in dividends from it.
I chose BIV initially when I formed my portfolio to balance against stocks. (alloc. is ~60/40 stocks/bonds right now).
Having said that, I have two questions:
- I don't really understand why there is a loss,i.e. why it has gone down so much. I thought bonds are pretty stable as in they don't fluctuate much. Perhaps if I understand why it has fallen so much I can decide if I keep doing what I am doing or look at something else.
- I have DRIP turned on on BIV. Should I at least turn off DRIP and start placing dividends in something else? By 'something else' I mean NOT stocks so it would have to be something like a REIT or TLT?
Thanks!
Bonds in general is more stable than stock but it still goes up and down. See https://www.nuveen.com/en-us/insights/m ... g-duration and https://www.sunlifeglobalinvestments.co ... eneration/ For example, if you bought a $100 bond that pays 2% per annum in the morning and now rate has gone up and they are issuing new bonds that pay 20% per annum. If you want to sell your bond, no one will pay $100 for it as they can buy the new issue with a better return. If you own individual bonds and you hold them to maturity, then you do not lose money (in nominal terms).

If stability is important to you, then consider CD, T-bills (hold to maturity) and stable value funds. Personally stability is important, and I use mostly stable value. However, this does not come without cost. I expect in the long term, its return will be less than total bond.
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Re: Disappointed in Bonds...

Post by rich126 »

People have gotten spoiled with low/decreasing rates for about 20 years. If you are young I don't see any need for bonds, once you get closer to retirement I would prefer just buying treasuries, especially right now. It is similar to a comment on another thread where someone was saying mortgage rates are high now. Historically they are about average but too many people got used to very low, abnormally low rates for about 20 years.
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student
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Re: Disappointed in Bonds...

Post by student »

rich126 wrote: Tue Mar 07, 2023 6:59 am People have gotten spoiled with low/decreasing rates for about 20 years. If you are young I don't see any need for bonds, once you get closer to retirement I would prefer just buying treasuries, especially right now. It is similar to a comment on another thread where someone was saying mortgage rates are high now. Historically they are about average but too many people got used to very low, abnormally low rates for about 20 years.
Exactly right on mortgage rate. Sometimes I get annoyed by TV news. Right now they are doing news segments on mortgage rate and complains about people cannot afford houses. When interest rate was low, I vaguely recall they doing segments on retirees and complained about it as people are on fixed income.
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Re: Disappointed in Bonds...

Post by arcticpineapplecorp. »

Alex GR wrote: Tue Mar 07, 2023 6:34 am Hi everyone,
To date, I've paid $290k into BIV (my cost) and market value is $245k, so "loss" of about $45k. :annoyed
Of course I do realize it's not a real loss until I sell, and I do get ~$560 a month in dividends from it.
So if nothing else changed you'd make back your $45k loss in 6.69 years (you're getting $560 a month now which is $6720 a year. 6720 x 6.69 = $44,956. Sounds like the average duration of an intermediate term bond. Yep, 6.3 years (source: https://investor.vanguard.com/investmen ... omposition)
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Re: Disappointed in Bonds...

Post by nisiprius »

Bonds are relatively stable compared to stocks. And, when the market value of stocks or bonds goes down, there is a reasonable, hopeful expectation of recovery, but the recovery for bonds is much more certain, and the time frame much more predictable, than for stocks. But there is risk in both, and it's a matter of degree.

There are three broad categories of assets: stocks, bonds, and "cash" (in something that earns interest, of course). "Cash" (including bank accounts, money market mutual funds, Treasury bills, savings bonds) is "safe" in terms of not losing money over even the shortest periods of time; put your money in a money market fund and it will not go down at all.

Bonds and typical "core" bond funds including BIV definitely do fluctuate. Here's the history of the Vanguard Intermediate-Term Bond Index Fund. I'm actually using the mutual fund to get a longer history, but it's the same thing. If you click on the link and go to the live chart, you can run your mouse back and forth along the curve and read out dollar values. This is how an intermediate-term bond fund behaves. You will see many places where it would have lost money over periods of time of years. It's not a bank account.

Source

Image

For comparison, I will add stock market fund to the same chart:

Image

Notice a couple of things. The bond fund (blue) has its fluctuations, but even the recent one--the largest in the history of the fund--was nothing at all compared to what has happened with stock funds.

There is a reason why bonds and bond funds tend to recover on a predictable schedule. But please notice that I did hedge that statement, I said "tend to." The reason is that a typical bond pays back its face value at maturity. So if it matures in (say) 7 years, you know that it will be worth $1,000 in 7 years. No matter what happens to it in between, the issuer promises it will have a known value on a known day. If it's an investment-grade bond--and BIV holds only investment-grade bonds--the ratings agencies have reviewed the issuer's finances and have judged that it is almost certain to keep that promise.

In a bond fund, the time frame in which this happens is called the "duration," and you can and should look it up. It may not be right at the top, but it's sure to be on the fund's web page or other descriptive material.

Image

For BIV, it's 6.3 years. The duration tells you how long fluctuations last. Roughly. And it therefore tells you about how long you need to hold the fund for those fluctuations to average out. Over that time period, it's very unlikely that you will lose money.

Why 6.3 years? Well, this ETF, again according to the web page, indexes "U.S. investment-grade bonds with maturities from five to ten years." That means that for any individual bond within the fund, you might need to wait five to ten years for it to recover after a fall in market value.

Vanguard's own explanation of the risks is on that page:

Image

And, again, Vanguard is saying funds like BIV are appropriate for investment horizons of 4 to 10 years. Not for money you need tomorrow, or at the end of the year.

Notice that you can't make any statement like that for stocks, because a stock doesn't have a guaranteed maturity date. Based solely on what's been seen in the past, though, if you want almost no chance of losing money in stocks, the appropriate holding period would be more like 20 to 30 years.

Finally, why does the price fluctuate? The answer is "interest rates." If you don't hold a bond until maturity, you need to sell it on the market. It's competing against other bonds. Let's say you buy a 10-year bond for $1,000 that pays 2% per year. Let's say you need the money before the time is up, so you decide to sell it on the market, say five years before maturity. The person who buys it is going to compare it to what else is available with a five-year maturity. If newly-issued five-year bonds are paying 2%, then buying your bond from you is just the same as buying a new five-year bond, and your bond is worth $1,000. However, if newly-issued five-year bonds are paying 5%, then nobody is going to pay you $1,000 when they can get a higher-interest bond for the same money.

We can make a very rough back-of-the-envelope calculation just to understand the principle. Your bond, with five years left to run, is going to pay out $20 every year, and also pay $1,000 back at the end of five years, for a total of $1,100. The new five-year 5% bond is going to pay out $50 every year and $1,000 back at the end, for a total of $1,250. If someone wants to get that amount of money paid out that way, they can buy a new bond for $1,000. Yours is only going to pay out $1,100 or 12% less, so it is worth 12% less, or $880.

But five years later, both bonds will mature and pay back their $1,000* The day before maturity, everybody knows that both bonds are going to pay out $1,000. What are they worth today? $1,000 minus a day's interest, which is nothing. How about a month? $1,000 minus a month's interest, still almost nothing. Five years before maturity, the new bond was worth $1,000 and yours was only worth $880. But close to maturity, the new bond will be worth very close to $1,000 and so will yours. With an individual bond, as long as the issuer doesn't default, what goes down must come up.

I don't want to make predictions, because honestly the fall in BIV and similar funds is more than I expected ever to see. But as you're aware interest rates have risen quickly and by an unusual amount, as the Fed attempts to choke of inflation. However, I personally am staying the course in intermediate-term bond funds that are similar to BIV. (In my case, intermediate-term TIPS and in Total Bond). We're in retirement, risk-averse, and bond-heavy so we have a lot riding on it. It is always possible that six years from now I might say "darn, some other choice would have been better," but I am not worried that we are going to ruin our retirement savings or anything like that.

*Conceptually. The last interest payment might coincide with the maturity date, which complicates things.
Last edited by nisiprius on Tue Mar 07, 2023 9:04 am, edited 3 times in total.
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dbr
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Re: Disappointed in Bonds...

Post by dbr »

Thanks, Nisi, for coming to the rescue again. The teaching above is what any investor is supposed to understand at a minimum if holding a stock and bond portfolio.
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Re: Disappointed in Bonds...

Post by muffins14 »

If I had bonds, I’d want nice fat payments every month

If interest rates are going up, your payments are getting bigger, giving you more income every month. You enjoy that, right?

The price is directly related to interest rates through duration. Interest rates up 1%? Your bond is down duration% in price.

You should have hoped when you bought your bond fund yielding 1% that one day it would be yielding 3%. The downside is that in the SHORT TERM, your bond prices have fallen by 2*duration, or about 10-12% in your case.

Who cares? Rebalance. Buy more bonds, which are now paying a lot fatter coupon payments to you each month. assuming you aren’t in retirement and doing like a 5-6-7% withdrawal rate right now, this is good for you long-term.
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Re: Disappointed in Bonds...

Post by alex_686 »

Alex GR wrote: Tue Mar 07, 2023 6:34 am Of course I do realize it's not a real loss until I sell ...
I will point out that a unrealized loss is the same as a realized loss if we ignore cognitive errors (behavioral economics) and taxes.

As others have pointed out bonds tend to be safer than equities. Further, a equity/bond portfolio tends to be more efficient than a equity only or bond only portfolio. That being said, the last year has been a very rough year for both.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Disappointed in Bonds...

Post by novolog »

never owned a bond

financial repression is brutal
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dbr
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Re: Disappointed in Bonds...

Post by dbr »

alex_686 wrote: Tue Mar 07, 2023 8:21 am
Alex GR wrote: Tue Mar 07, 2023 6:34 am Of course I do realize it's not a real loss until I sell ...
I will point out that a unrealized loss is the same as a realized loss if we ignore cognitive errors (behavioral economics) and taxes.

As others have pointed out bonds tend to be safer than equities. Further, a equity/bond portfolio tends to be more efficient than a equity only or bond only portfolio. That being said, the last year has been a very rough year for both.
Yes, the difference between the two is what the investor does next. One investor continues to hold the original investment and the other one holds something else from then on, or spends the money.
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Re: Disappointed in Bonds...

Post by sschullo »

dbr wrote: Tue Mar 07, 2023 7:23 am Thanks, Nisi, for coming to the rescue again. The teaching above is what any investor is supposed to understand at a minimum if holding a stock and bond portfolio.
I agree.
Staying the course with a balanced stock and bond portfolio. What I did five years ago was to transfer some of my IRA money into the TIAA Traditional annuity, which has paid 3.0%. I was anticipating interest rate increases years ago. I take my RMDs from TIAA and let my total bond alone until most of the low-yielding bonds and sold and redeemed for the current higher-yielding bonds.
Everybody says how horrible their bonds are. But, if you look at the price of the VG total bond, it decreased from about $11.55 a share to $9.46, that's it! As a retiree, I can live with that, and besides, I am not taking RMDs out of the Total Bond market now, but I did when it was over 11.00 a share. I want higher yields.

Has anybody done a study of how much money was lost to "lost opportunity" to low yields in the last decade?
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Re: Disappointed in Bonds...

Post by HeelaMonster »

dbr wrote: Tue Mar 07, 2023 7:23 am Thanks, Nisi, for coming to the rescue again. The teaching above is what any investor is supposed to understand at a minimum if holding a stock and bond portfolio.
Agreed, that was an excellent bit of teaching. Thanks to nisiprius! :beer
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Re: Disappointed in Bonds...

Post by Kenkat »

nisiprius wrote: Tue Mar 07, 2023 7:20 am For comparison, I will add stock market fund to the same chart:

Image
No one was complaining about bonds in 2009 when the 15 year return of bonds exceeded equities. That’s 15 years. Since 1994.

I just point this out because there is so much angst about bonds and bond funds right now. I know it’s hard to see an investment lose value, especially one that has not typically done so for many years. But all these components of an investment plan have a purpose and you must take the long term view on things. Stay the course. Easy to say, hard to do.

Patience grasshopper. There is a season turn, turn, turn and all that daggone stuff.
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Re: Disappointed in Bonds...

Post by Flashes1 »

In hindsight, I was foolish to have invested in bonds when interest rates were near 0%. There was no way for them to increase in value and were 100% guaranteed to lose money because it was a given rates would one day increase (just didn't know when).

Now that we've hopefully gotten closer to the end of further rate increases (hopefully less than 100 bps to go), bonds have become attractive again. With higher rates the Fed once again has the ability to lower them as we enter a recession thus increasing bond values.
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Alex GR
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Re: Disappointed in Bonds...

Post by Alex GR »

Everyone, thanks for so many useful responses.
I will study them and post some follow-up thoughts later if that's ok.

My initial understanding was quite different, so I am surprised at the result. When I first formed a portfolio ~6 years ago (sold a property so it was a lump sum initially) everyone (both online and offline) said bonds were "safe" but warned me that stocks are highly risky. However, after 6 years, the stock portion of the portfolio is up like $150k (even after the recent drop from ~4800 to ~4000) and bonds are down $45k. Although that may partially be because the initial stock allocation was around 70%, I gradually changed to 60% mostly by adding new funds, so what happened is, I kept buying bonds and they kept going down :oops:

I now understand that bond prices go back to face value when they're about to mature so if I don't sell, I can expect to get whatever is the interest rate of underlying securities.
I stayed the course (on stocks) in Dec 2018 and Mar 2020, so I can definitely stay the course here, my question was prompted by the fact that I didn't really understand the economics of it, which so many people took time to explain. I also posted because I am wondering if I should keep going with BIV or turn off DRIP on BIV and put that (and any new money) towards something like TLT(?)
Thank you!
Topic Author
Alex GR
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Re: Disappointed in Bonds...

Post by Alex GR »

nisiprius wrote: Tue Mar 07, 2023 7:20 am Bonds are relatively stable compared to stocks. And, when the market value of stocks or bonds goes down, there is a reasonable, hopeful expectation of recovery, but the recovery for bonds is much more certain, and the time frame much more predictable, than for stocks. But there is risk in both, and it's a matter of degree.

There are three broad categories of assets: stocks, bonds, and "cash" (in something that earns interest, of course). "Cash" (including bank accounts, money market mutual funds, Treasury bills, savings bonds) is "safe" in terms of not losing money over even the shortest periods of time; put your money in a money market fund and it will not go down at all.

Bonds and typical "core" bond funds including BIV definitely do fluctuate. Here's the history of the Vanguard Intermediate-Term Bond Index Fund. I'm actually using the mutual fund to get a longer history, but it's the same thing. If you click on the link and go to the live chart, you can run your mouse back and forth along the curve and read out dollar values. This is how an intermediate-term bond fund behaves. You will see many places where it would have lost money over periods of time of years. It's not a bank account.

Source

Image

For comparison, I will add stock market fund to the same chart:

Image

Notice a couple of things. The bond fund (blue) has its fluctuations, but even the recent one--the largest in the history of the fund--was nothing at all compared to what has happened with stock funds.

There is a reason why bonds and bond funds tend to recover on a predictable schedule. But please notice that I did hedge that statement, I said "tend to." The reason is that a typical bond pays back its face value at maturity. So if it matures in (say) 7 years, you know that it will be worth $1,000 in 7 years. No matter what happens to it in between, the issuer promises it will have a known value on a known day. If it's an investment-grade bond--and BIV holds only investment-grade bonds--the ratings agencies have reviewed the issuer's finances and have judged that it is almost certain to keep that promise.

In a bond fund, the time frame in which this happens is called the "duration," and you can and should look it up. It may not be right at the top, but it's sure to be on the fund's web page or other descriptive material.

Image

For BIV, it's 6.3 years. The duration tells you how long fluctuations last. Roughly. And it therefore tells you about how long you need to hold the fund for those fluctuations to average out. Over that time period, it's very unlikely that you will lose money.

Why 6.3 years? Well, this ETF, again according to the web page, indexes "U.S. investment-grade bonds with maturities from five to ten years." That means that for any individual bond within the fund, you might need to wait five to ten years for it to recover after a fall in market value.

Vanguard's own explanation of the risks is on that page:

Image

And, again, Vanguard is saying funds like BIV are appropriate for investment horizons of 4 to 10 years. Not for money you need tomorrow, or at the end of the year.

Notice that you can't make any statement like that for stocks, because a stock doesn't have a guaranteed maturity date. Based solely on what's been seen in the past, though, if you want almost no chance of losing money in stocks, the appropriate holding period would be more like 20 to 30 years.

Finally, why does the price fluctuate? The answer is "interest rates." If you don't hold a bond until maturity, you need to sell it on the market. It's competing against other bonds. Let's say you buy a 10-year bond for $1,000 that pays 2% per year. Let's say you need the money before the time is up, so you decide to sell it on the market, say five years before maturity. The person who buys it is going to compare it to what else is available with a five-year maturity. If newly-issued five-year bonds are paying 2%, then buying your bond from you is just the same as buying a new five-year bond, and your bond is worth $1,000. However, if newly-issued five-year bonds are paying 5%, then nobody is going to pay you $1,000 when they can get a higher-interest bond for the same money.

We can make a very rough back-of-the-envelope calculation just to understand the principle. Your bond, with five years left to run, is going to pay out $20 every year, and also pay $1,000 back at the end of five years, for a total of $1,100. The new five-year 5% bond is going to pay out $50 every year and $1,000 back at the end, for a total of $1,250. If someone wants to get that amount of money paid out that way, they can buy a new bond for $1,000. Yours is only going to pay out $1,100 or 12% less, so it is worth 12% less, or $880.

But five years later, both bonds will mature and pay back their $1,000* The day before maturity, everybody knows that both bonds are going to pay out $1,000. What are they worth today? $1,000 minus a day's interest, which is nothing. How about a month? $1,000 minus a month's interest, still almost nothing. Five years before maturity, the new bond was worth $1,000 and yours was only worth $880. But close to maturity, the new bond will be worth very close to $1,000 and so will yours. With an individual bond, as long as the issuer doesn't default, what goes down must come up.

I don't want to make predictions, because honestly the fall in BIV and similar funds is more than I expected ever to see. But as you're aware interest rates have risen quickly and by an unusual amount, as the Fed attempts to choke of inflation. However, I personally am staying the course in intermediate-term bond funds that are similar to BIV. (In my case, intermediate-term TIPS and in Total Bond). We're in retirement, risk-averse, and bond-heavy so we have a lot riding on it. It is always possible that six years from now I might say "darn, some other choice would have been better," but I am not worried that we are going to ruin our retirement savings or anything like that.

*Conceptually. The last interest payment might coincide with the maturity date, which complicates things.
Nisiprius,
Thank you very much for this post, although to me it's not just a post but rather a whole lesson in economics. I almost feel like I've attended a live lecture in college where you explained everything I needed to know. Thank you!!! :beer
artking99
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Re: Disappointed in Bonds...

Post by artking99 »

Before it is all done, the interest rate will keep going up.
Big move on the Treasury yield today!
https://www.cnbc.com/bonds/
Marseille07
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Re: Disappointed in Bonds...

Post by Marseille07 »

Alex GR wrote: Tue Mar 07, 2023 10:01 am Everyone, thanks for so many useful responses.
I will study them and post some follow-up thoughts later if that's ok.

My initial understanding was quite different, so I am surprised at the result. When I first formed a portfolio ~6 years ago (sold a property so it was a lump sum initially) everyone (both online and offline) said bonds were "safe" but warned me that stocks are highly risky. However, after 6 years, the stock portion of the portfolio is up like $150k (even after the recent drop from ~4800 to ~4000) and bonds are down $45k. Although that may partially be because the initial stock allocation was around 70%, I gradually changed to 60% mostly by adding new funds, so what happened is, I kept buying bonds and they kept going down :oops:

I now understand that bond prices go back to face value when they're about to mature so if I don't sell, I can expect to get whatever is the interest rate of underlying securities.
I stayed the course (on stocks) in Dec 2018 and Mar 2020, so I can definitely stay the course here, my question was prompted by the fact that I didn't really understand the economics of it, which so many people took time to explain. I also posted because I am wondering if I should keep going with BIV or turn off DRIP on BIV and put that (and any new money) towards something like TLT(?)
Thank you!
TLT??? That's even more volatile than BIV. If you are bothered by BIV losing the NAV, TLT is out of the question.
delamer
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Re: Disappointed in Bonds...

Post by delamer »

If your primary reason for investing in bonds is price stability, then short-term treasuries are the way to go.

Their yields will be lower than longer-term bonds, but their prices will fluctuate the least.

You can buy individual short-term treasuries or short-term treasury funds.
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Re: Disappointed in Bonds...

Post by tibbitts »

muffins14 wrote: Tue Mar 07, 2023 7:37 am Who cares? Rebalance. Buy more bonds, which are now paying a lot fatter coupon payments to you each month. assuming you aren’t in retirement and doing like a 5-6-7% withdrawal rate right now, this is good for you long-term.
It doesn't help to rebalance when your equities, bonds, and real estate are all down. Whether higher bond yields help depends on whether they turn out to be higher real bond yields, not just nominal bond yields.
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Re: Disappointed in Bonds...

Post by muffins14 »

tibbitts wrote: Tue Mar 07, 2023 11:03 am
muffins14 wrote: Tue Mar 07, 2023 7:37 am Who cares? Rebalance. Buy more bonds, which are now paying a lot fatter coupon payments to you each month. assuming you aren’t in retirement and doing like a 5-6-7% withdrawal rate right now, this is good for you long-term.
It doesn't help to rebalance when your equities, bonds, and real estate are all down. Whether higher bond yields help depends on whether they turn out to be higher real bond yields, not just nominal bond yields.
You can't control inflation though, so I'd rather have higher nominal yields rather than lower nominal yields.
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Beensabu
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Re: Disappointed in Bonds...

Post by Beensabu »

Alex GR wrote: Tue Mar 07, 2023 10:01 am I am wondering if I should keep going with BIV or turn off DRIP on BIV and put that (and any new money) towards something like TLT(?)
Unless you need to spend the dividends, don't turn off DRIP. Reinvesting the dividends (which you'll notice are higher now than they were before, because the yields of recently issued bonds being brought into the fund are higher than they were before) is part of what will see the value recover over time.
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Re: Disappointed in Bonds...

Post by WillRetire »

Our plan: Stay the course with AA, which means periodically rebalancing into and out of bonds (FTBFX in our case).

2022 was indeed a bad year for bonds, but even at that, FTBFX faired better than stock funds. Faint praise indeed.

Our AA includes a % in riskless, which serves as a floor and also as a source of cash to buy stocks and bonds. With our 401K's "stable" fund returning < 3%, we are gradually shifting from that into more FTBFX while buying I-Bonds & T-Bills in taxable brokerage accounts. We also use an HYSA for immediate access funds.

We track our target AA as:
%Equities
%Bonds with risk
%Riskless = cash & securities that cannot go down in value.

2008-2009 also saw a big decline in bond funds, though not as dramatic as 2022. It was a very scary time. Lots of layoffs and fears of a depression-era type of financial system collapse.

Stay the course! A recession and falling interest rates might be just around the corner!

Seriously, just stay the course. It will work itself out.
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Re: Disappointed in Bonds...

Post by arcticpineapplecorp. »

Alex GR wrote: Tue Mar 07, 2023 10:01 am Everyone, thanks for so many useful responses.
I will study them and post some follow-up thoughts later if that's ok.

My initial understanding was quite different, so I am surprised at the result. When I first formed a portfolio ~6 years ago (sold a property so it was a lump sum initially) everyone (both online and offline) said bonds were "safe" but warned me that stocks are highly risky.
well i for one haven't said that, so it wasn't (literally) "everyone".

I've said often bonds are safe(r), rather than safe. In years past I may have said bonds are for safety and stocks are for risk, but I've never said bonds didn't contain ANY risk. They're (and by this I mean short to intermediate, high quality bonds, as opposed to below investment grade and/or long term bonds) less risky than stocks and last year this was true too. Worst drawdowns were worse for stocks (think like -24.81%) than for BIV (which was -15.53%). Source: https://www.portfoliovisualizer.com/bac ... ion2_2=100

What I've often said is: Every investment carries risk. Different amounts of risk. Different types of risk. But risk in everything. Even supposed safe assets like savings accounts will lose to inflation over time. That's a risk, inflation risk. You can say ibonds don't have this risk, but you're limited in space there. You can't put all your money there, so you have to deal with the amounts and types of risk you put the rest of your money into other than ibonds. Understanding the types of risk you take and the amounts is key.
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Re: Disappointed in Bonds...

Post by miket29 »

Alex GR wrote: Tue Mar 07, 2023 10:01 amI now understand that bond prices go back to face value when they're about to mature so if I don't sell, I can expect to get whatever is the interest rate of underlying securities.
You don't own bonds, you own a bond fund. Different but related creatures. If you had bought actual bonds they would mature and you'd get back your principal at that time. However you own a fund that is regularly buying and selling bonds to keep it's average duration the same. The fund duration of BIV was about 6 years when you invested, it is 6 years now, and 6 years from now it will still have a duration of 6 years. BIV will never "mature". And as such any interest rate change nearer to the time you sell will affect the return (can be either good or bad depending which way interests rates move).

Duration can be used as a rule-of-thumb to estimate how long it takes to earn back thru higher interest a drop in value. It also can be used as an estimate of the drop. With a duration of 6 years BIV will drop roughly 6% if interest rates rise 1%, and then by earning 1% more annually in 6 years the value of a holding in BIV will be back to its initial point in about 6 years.

As of today the SEC yield of BIV is about 4.5% so the best estimate of the interest you're earning right now is that number
Last edited by miket29 on Tue Mar 07, 2023 4:19 pm, edited 2 times in total.
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Beensabu
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Re: Disappointed in Bonds...

Post by Beensabu »

Don't let that ^ freak you out.

According to M*, the "weighted price" of BIV is 91.69 as of Jan 31st.

https://www.morningstar.com/etfs/arcx/biv/portfolio

That's the current value of fund assets vs. par/face value -- present value is ~92% of par/face value.

Keep an eye on that "weighted price" and see how it changes over the next year or two.
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Re: Disappointed in Bonds...

Post by CookieDough »

Alex GR wrote: Tue Mar 07, 2023 10:01 am My initial understanding was quite different, so I am surprised at the result. When I first formed a portfolio ~6 years ago (sold a property so it was a lump sum initially) everyone (both online and offline) said bonds were "safe" but warned me that stocks are highly risky. However, after 6 years, the stock portion of the portfolio is up like $150k (even after the recent drop from ~4800 to ~4000) and bonds are down $45k. Although that may partially be because the initial stock allocation was around 70%, I gradually changed to 60% mostly by adding new funds, so what happened is, I kept buying bonds and they kept going down :oops:

I now understand that bond prices go back to face value when they're about to mature so if I don't sell, I can expect to get whatever is the interest rate of underlying securities.
I went through the same experience, and started investing around the same time. I had it in my head that bonds were "safe," meaning would never lose value. I also thought that if stocks went down, bonds must go up. So last year was very educational for me. :happy

What I'm doing is still following my AA, but diversifying the bond side a bit with iBonds. Now I look at bonds not as a way to increase my portfolio, but as a way to mitigate heavy (temporary) stock losses by giving me something else I can sell while stocks recover. Even with recent losses, having some bonds helps me sleep better at night than 100% stocks would. (I think.)

I'm trying to look at my portfolio as a whole. So it's not that stocks earned X and bonds lost Y, but that my portfolio is up X - Y. If the overall growth is on target, I'm satisfied. (Again, I think. For now at least.)
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Re: Disappointed in Bonds...

Post by stocknoob4111 »

You lost a whole lot more.. you're forgetting to add in inflation. I would not be surprised if it takes 20+ years for bonds to recover in real terms
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Re: Disappointed in Bonds...

Post by howard71 »

If you use an all weather portfolio, as I do, there will always be at least one asset that is disappointing. Comes with the territory. Overall, I'd have to say that Bonds have a track record of being the most disappointing over time but I have seen periods in which they outperformed the others and kept the portfolio in the black. Not gonna happen while interest rates are rising, of course, but what goes up must come down.
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Re: Disappointed in Bonds...

Post by White Coat Investor »

Alex GR wrote: Tue Mar 07, 2023 6:34 am Hi everyone,
To date, I've paid $290k into BIV (my cost) and market value is $245k, so "loss" of about $45k. :annoyed
Of course I do realize it's not a real loss until I sell, and I do get ~$560 a month in dividends from it.
I chose BIV initially when I formed my portfolio to balance against stocks. (alloc. is ~60/40 stocks/bonds right now).
Having said that, I have two questions:
- I don't really understand why there is a loss,i.e. why it has gone down so much. I thought bonds are pretty stable as in they don't fluctuate much. Perhaps if I understand why it has fallen so much I can decide if I keep doing what I am doing or look at something else.
- I have DRIP turned on on BIV. Should I at least turn off DRIP and start placing dividends in something else? By 'something else' I mean NOT stocks so it would have to be something like a REIT or TLT?
Thanks!
It went down in value because rates went up. A lot. Very quickly. 2022 was the worst year ever for bonds. The good news is that they're now much better investments than they have been in a long time.

It's important to understand what you own and what affects it. If you want an investment that does not fall in value when rates go up, consider money market funds and CDs. Be aware that will also mean you will lose that "kicker" that occurs when rates fall and your bonds go up in value.

REITs are not bonds. Far riskier. Yes, you lose 13% in bonds last year during the worst bond year ever. But REITS lost 78% in the 2008 bear market. Not the same thing.
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Re: Disappointed in Bonds...

Post by cbs2002 »

Kenkat wrote: Tue Mar 07, 2023 8:45 am
nisiprius wrote: Tue Mar 07, 2023 7:20 am For comparison, I will add stock market fund to the same chart:

Image
No one was complaining about bonds in 2009 when the 15 year return of bonds exceeded equities. That’s 15 years. Since 1994.
Love this post. Lesson - in the long run, you will make money, you just don't know which account will be up most when it's time to sell.

Like others, I started shifting my allocation to include bonds in the last five years from 100% equities and here we are, for better or worse. Fortunately I won't be touching those bonds for another 10 years. Meanwhile, have been buying equity index funds several times a month while the bonds do their thing. It will all work out in the end.
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Re: Disappointed in Bonds...

Post by stocknoob4111 »

Flashes1 wrote: Tue Mar 07, 2023 8:54 am In hindsight, I was foolish to have invested in bonds when interest rates were near 0%. There was no way for them to increase in value and were 100% guaranteed to lose money because it was a given rates would one day increase (just didn't know when).
I made a big mistake by not selling my position when intermediate rates went to 0.5%, I should've known that it was the bottom and there was nowhere else to go but UP. Unfortunately I was rather inexperienced with how bonds work back then and bought into the "bonds are safe" mantra that is being regurgitated. I know now that Bonds are NOT safe, thanks to the current carnage.
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Re: Disappointed in Bonds...

Post by HomerJ »

arcticpineapplecorp. wrote: Tue Mar 07, 2023 7:20 am
Alex GR wrote: Tue Mar 07, 2023 6:34 am Hi everyone,
To date, I've paid $290k into BIV (my cost) and market value is $245k, so "loss" of about $45k. :annoyed
Of course I do realize it's not a real loss until I sell, and I do get ~$560 a month in dividends from it.
So if nothing else changed you'd make back your $45k loss in 6.69 years (you're getting $560 a month now which is $6720 a year. 6720 x 6.69 = $44,956. Sounds like the average duration of an intermediate term bond. Yep, 6.3 years (source: https://investor.vanguard.com/investmen ... omposition)
He'll be getting nearly twice that much soon... 4.5% of $245,000 is $11,000 a year... And that interest rate will probably keep going up, as older bonds are replaced with newer bonds.

I'm quite happy with the rising rates. Loving the dividends. I'll break even in a few years, and be sitting pretty with higher dividends going forward.
Last edited by HomerJ on Tue Mar 07, 2023 3:46 pm, edited 2 times in total.
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Re: Disappointed in Bonds...

Post by HomerJ »

Bond funds automatically correct themselves.

They are safe, but only over the average duration of the fund.

If interest rates go up, bond funds do lose value, but they start paying more as the replace the older bonds paying low interest with newer bonds paying higher interest.

Total Bond has about a 6-year duration, so it may take a few years for fund to recover its losses. But it will recover it's losses, and you'll be sitting in a better spot than if interest rates had just stayed low the entire time.

If you need the money fairly soon, a medium-term bond fund like Total Bond is not the right choice.

This is something I already knew, but this past year definitely made it much more clear to me. I had money in money-markets and short-term treasury funds for short-term needs, and Total Bond for longer-term needs.

If you want absolutely safe, with no chance to lose money any year ever, not even to inflation, you can buy I bonds... But they won't gain hardly anything either.

So the big take-away for me is that the bond side may actually need to be more diversified than the stock side.
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Re: Disappointed in Bonds...

Post by Lastrun »

HomerJ wrote: Tue Mar 07, 2023 3:45 pm Bond funds automatically correct themselves.
Do they?? We'll see.

Here is a real life example. In very late December and very early January 2020/2021 I purchased $26,831 of BSV (the Vanguard Short-Term Bond ETF). I had some extra money laying around after Roths, I Bonds, etc. so that is just where I put it. All dividends have been reinvested. As of today, the value is $24,239. A current loss position of ($2,592). Call it down 10%.

Per Vanguard the BSV's average duration is 2.6 years. Let's assume that this has been constant during the roughly 2.2 years I have held this fund. So the question is---will I be up $2,500 by August. I doubt it. Now Nisi says
Why 6.3 years? Well, this ETF, again according to the web page, indexes "U.S. investment-grade bonds with maturities from five to ten years." That means that for any individual bond within the fund, you might need to wait five to ten years for it to recover after a fall in market value.
OK, so back to BSV, Vanguard says: "Seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of 1 to 5 years."

Right, so the question is re-framed will I be up $2,500 in five years, probably.

My point is that many posters here surmise that a bond fund of similar duration to a nominal bond with a fixed maturity should end up about right.

Now lets suppose in December of 2020 I had a nominal liability in August of 2023 of say $27,000. And instead of buying an August 2023 maturity bond in Jan of 2021, I just put $26,831 in ole BSV with a duration of 2.6 years and called it a day. At least at 2.2 years in as of today, I would feel a whole lot better of coming up with the $27K in August with the bond versus the ETF.

I think my take from the past couple of years is that bond funds are great to replace rolling ladders but not as effective for true nominal liabilities. This leaves me wondering about my use of TIPS funds versus actual TIPS.
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Re: Disappointed in Bonds...

Post by Rajsx »

stocknoob4111 wrote: Tue Mar 07, 2023 2:10 pm
Flashes1 wrote: Tue Mar 07, 2023 8:54 am In hindsight, I was foolish to have invested in bonds when interest rates were near 0%. There was no way for them to increase in value and were 100% guaranteed to lose money because it was a given rates would one day increase (just didn't know when).
I made a big mistake by not selling my position when intermediate rates went to 0.5%, I should've known that it was the bottom and there was nowhere else to go but UP. Unfortunately I was rather inexperienced with how bonds work back then and bought into the "bonds are safe" mantra that is being regurgitated. I know now that Bonds are NOT safe, thanks to the current carnage.
I share the sentiment,
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Re: Disappointed in Bonds...

Post by ruralavalon »

Alex GR wrote: Tue Mar 07, 2023 10:01 am . . . . so what happened is, I kept buying bonds and they kept going down :oops:
That is good, isn't it? Buying more of something on sale.
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Re: Disappointed in Bonds...

Post by alex_686 »

ruralavalon wrote: Tue Mar 07, 2023 4:56 pm
Alex GR wrote: Tue Mar 07, 2023 10:01 am . . . . so what happened is, I kept buying bonds and they kept going down :oops:
That is good, isn't it? Buying more of something on sale.
Why do you think that bonds are on sale? Just because something has fallen in value doesn't mean it is undervalued. There still is plenty of room at the bottom.
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Re: Disappointed in Bonds...

Post by tibbitts »

stocknoob4111 wrote: Tue Mar 07, 2023 2:10 pm
Flashes1 wrote: Tue Mar 07, 2023 8:54 am In hindsight, I was foolish to have invested in bonds when interest rates were near 0%. There was no way for them to increase in value and were 100% guaranteed to lose money because it was a given rates would one day increase (just didn't know when).
I made a big mistake by not selling my position when intermediate rates went to 0.5%, I should've known that it was the bottom and there was nowhere else to go but UP. Unfortunately I was rather inexperienced with how bonds work back then and bought into the "bonds are safe" mantra that is being regurgitated. I know now that Bonds are NOT safe, thanks to the current carnage.
Except that there were hundreds of other times when we all thought it was the bottom and rates had nowhere to go but up, yet it actually wasn't and they didn't.
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Re: Disappointed in Bonds...

Post by dbr »

stocknoob4111 wrote: Tue Mar 07, 2023 2:10 pm
Flashes1 wrote: Tue Mar 07, 2023 8:54 am In hindsight, I was foolish to have invested in bonds when interest rates were near 0%. There was no way for them to increase in value and were 100% guaranteed to lose money because it was a given rates would one day increase (just didn't know when).
I made a big mistake by not selling my position when intermediate rates went to 0.5%, I should've known that it was the bottom and there was nowhere else to go but UP. Unfortunately I was rather inexperienced with how bonds work back then and bought into the "bonds are safe" mantra that is being regurgitated. I know now that Bonds are NOT safe, thanks to the current carnage.
That bonds are not safe is not a reason not to own bonds. All hazards have different flavors and matters of degree. In reality no investments are safe.

A lot of people would dispute that things were at a bottom and had to go up, at least it would be disputed as to when, how far, and how fast interest rates would go up and it would also be disputed that what has happened is even a problem. Expressions such as "carnage" attach emotional context that is not helpful to clear thinking,
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Re: Disappointed in Bonds...

Post by Flashes1 »

stocknoob4111 wrote: Tue Mar 07, 2023 2:10 pm
Flashes1 wrote: Tue Mar 07, 2023 8:54 am In hindsight, I was foolish to have invested in bonds when interest rates were near 0%. There was no way for them to increase in value and were 100% guaranteed to lose money because it was a given rates would one day increase (just didn't know when).
I made a big mistake by not selling my position when intermediate rates went to 0.5%, I should've known that it was the bottom and there was nowhere else to go but UP. Unfortunately I was rather inexperienced with how bonds work back then and bought into the "bonds are safe" mantra that is being regurgitated. I know now that Bonds are NOT safe, thanks to the current carnage.
Right and I think it's important to note that the near 0% interest rates were a black swan that we will <hopefully> never see again. It took trillions of our money $ for the Fed to get them there. I think a lot of folks anticipated rates going back up (my bank forecasted at the beginning of 2022 that they would increase approx, 25-bps/quarter starting in 2023) but I don't think many folks thought inflation / interest rates would increase so much, so fast.

I don't think we'll see anything quite like that again until market participants realize that the interest on the national debt is becoming challenging for the Feds to service......but I digress (and I pray I am dust when that happens).
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Re: Disappointed in Bonds...

Post by TheHiker »

European countries were issuing negative interest bonds at the time and people were speculating that US will do the same so they could go lower, but didn't.
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Re: Disappointed in Bonds...

Post by arcticpineapplecorp. »

Alex GR wrote: Tue Mar 07, 2023 10:01 am Everyone, thanks for so many useful responses.
I will study them and post some follow-up thoughts later if that's ok.

My initial understanding was quite different, so I am surprised at the result. When I first formed a portfolio ~6 years ago (sold a property so it was a lump sum initially) everyone (both online and offline) said bonds were "safe" but warned me that stocks are highly risky. However, after 6 years, the stock portion of the portfolio is up like $150k (even after the recent drop from ~4800 to ~4000) and bonds are down $45k. Although that may partially be because the initial stock allocation was around 70%, I gradually changed to 60% mostly by adding new funds, so what happened is, I kept buying bonds and they kept going down :oops:
Thank you!
are you sure you lost money over this time period (6 years ago)?

reason I'm asking is from 2017 to present you had a CAGR of 1.1%.

Image

source:
https://www.portfoliovisualizer.com/bac ... ion1_1=100

you can see the value of biv went up from 2019-2021 before it went down in 2022.

now part of this could be:
1. you're not reinvesting dividends, so you're looking at the impact of nav changes solely, not total return
2. you sold (70% to 60%) rather than bought and held the entire 6 year period
3. maybe you didn't buy biv in jan 2017 but some other date
4. something else entirely?

it's true that biv lost value last year, but it went up over the prior 5 years so i'm wondering what's going on here and also it's fairly common for people to complain about recent past bad returns without looking at the positive long term returns they may have actually received.
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Re: Disappointed in Bonds...

Post by Hyperchicken »

There's a lot of hindsight reasoning now that of course it was foolish to invest in bonds during the period of near-zero interest rates.

But that is only ever clear in hindsight. There was a lot of compelling arguments that rates can go yet lower, or stay low, etc.

Bonds (like everything else) are priced by the market, including future expectations based on what is known at the moment.

It is not any easier to time bonds market than it is to time stock market.

---

The actionable part: OP can now harvest $45k worth of losses!
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arcticpineapplecorp.
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Re: Disappointed in Bonds...

Post by arcticpineapplecorp. »

Hyperchicken wrote: Tue Mar 07, 2023 6:53 pm The actionable part: OP can now harvest $45k worth of losses!
only if it's in a taxable account.

is it?

the OP never said that. (though he did say he lump summed, which we might assume means taxable rather than tax advantaged, but still, the OP didn't specify so we don't really know)

In fact, the OP is wanting to replace biv with REIT.

Is REIT suitable for a taxable account?

If it's a taxable account is the OP aware of how to optimize investments in taxable?
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Re: Disappointed in Bonds...

Post by Florida Orange »

HomerJ wrote: Tue Mar 07, 2023 3:45 pm So the big take-away for me is that the bond side may actually need to be more diversified than the stock side.
That's an excellent point. So many people just put everything into an intermediate term bond fund when short term and long terms funds are often better if you tailor them to your spending needs.
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Re: Disappointed in Bonds...

Post by tibbitts »

Florida Orange wrote: Tue Mar 07, 2023 7:16 pm
HomerJ wrote: Tue Mar 07, 2023 3:45 pm So the big take-away for me is that the bond side may actually need to be more diversified than the stock side.
That's an excellent point. So many people just put everything into an intermediate term bond fund when short term and long terms funds are often better if you tailor them to your spending needs.
Well, one bond fund has been the Boglehead recommendation for the most part, so it's not exactly surprising that people have done one fund (or even just one target-date fund in deferred, particularly.)
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