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Post by Chahta on Feb 19, 2021 14:52:36 GMT
I have a question for the B and H crowd. How far are you willing to watch interest rate increases erode your bond AA? I never owned any bonds until 4 years ago (64 years of age) before redoing my AA for retirement. 4 years later I do not own any of the funds I started with. I am finding or feel that some form of trading is required to manage bond funds. This is not about performance chasing for me. Is anyone else facing this problem? I read a lot about retirement AA and it seems the norm is to buy an IT core fund and hold on to it. I can look at charts all day long and see that long term (2 years) bond funds grow as equities do. Am I lost in the bond OEF maze and over thinking AA?
edit: first post of my new rank.
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Post by retiredat48 on Feb 19, 2021 16:39:47 GMT
I'll start with a brief reply... (brief for me). I have been posting for a couple years now of why I think standard-issue, vanilla bond funds are very poor risk/reward investment...for a HOST OF REASONS. One of these reasons is the BOND CONVEXITY math feature of bonds when interest rates approach zero. For those not familiar with convexity, suggest studying the charts and explanations here: portfoliocharts.com/2019/05/27/high-profits-at-low-rates-the-benefits-of-bond-convexity/Thus, I find that last year I have sold out of all such funds with intermediate or long term duration....notable example, BCOIX, which I held for decade plus. The fed has been supporting such bonds with QE buying...not sure when that ends; but it will not be good for bonds in the long run. My portfolio is now at highest cash position ever, mostly from the bond fund exit, into shorter term duration funds, including MM funds. R48
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Post by yogibearbull on Feb 19, 2021 17:29:58 GMT
My thinking has changed on core-plus.
Now, core-plus can have up to 35% in noninvestment-grade [vs the old 20% standard] and that is plenty for most people. Not every core-plus is there, so one has to look under the hood. Old history may not be useful on this. They are truly multi-lite now.
So, from near 0 core-plus, I now have more core-plus and only little multisector.
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Post by Karen on Feb 19, 2021 17:35:30 GMT
My thinking has changed on core-plus. Now, core-plus can have up to 35% in noninvestment-grade [vs the old 20% standard] and that is plenty for most people. Not every core-plus is there, so one has to look under the hood. Old history may not be useful on this. They are truly multi-lite now. So, from near 0 core-plus, I now have more core-plus and only little multisector. Do you mind sharing which Core+ OEFs you hold/like?
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Post by yogibearbull on Feb 19, 2021 17:44:27 GMT
My thinking has changed on core-plus. Now, core-plus can have up to 35% in noninvestment-grade [vs the old 20% standard] and that is plenty for most people. Not every core-plus is there, so one has to look under the hood. Old history may not be useful on this. They are truly multi-lite now. So, from near 0 core-plus, I now have more core-plus and only little multisector. Do you mind sharing which Core+ OEFs you hold/like? In Fido funds only a/c, taxable core-plus FTBFX [related active ETF FBND]. Elsewhere, muni core-plus FLTDX, NMBAX [no-load/NTF at Fido & Schwab] I also trade bond CEFs, but not bond OEFs.
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Post by FD1000 on Feb 19, 2021 18:15:57 GMT
I have a question for the B and H crowd. How far are you willing to watch interest rate increases erode your bond AA? I never owned any bonds until 4 years ago (64 years of age) before redoing my AA for retirement. 4 years later I do not own any of the funds I started with. I am finding or feel that some form of trading is required to manage bond funds. This is not about performance chasing for me. Is anyone else facing this problem? I read a lot about retirement AA and it seems the norm is to buy an IT core fund and hold on to it. I can look at charts all day long and see that long term (2 years) bond funds grow as equities do. Am I lost in the bond OEF maze and over thinking AA? edit: first post of my new rank. Well, you can be a B&H investor and HOPE for the best until one day IT core fund will do better. It's a pretty "simple" decision. IT core have a good chance, based on their 30 day sec to make up to 2% in the next several years. I have said it couple of months ago and as you see most/all lost money YTD. You can take part of your money in invest in the 1-3 nontrad funds I mentioned months ago. No guarantee of course. Attachments:
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Post by Chahta on Feb 19, 2021 19:11:44 GMT
R48, I have followed you on the vanilla fund reasoning for quite a while. I agree and sold last year down a small position which will be sold today. But my question which was not stated well, was about other type of funds as too. For instance muni, muni core plus as YBB calls them. Rate increases are hitting them hard as well.
FD1000, I have been back in MS funds I previously owned since last year and opened a HY muni position as well. I also own a lot of ST against my equities. The last few days MBS seems to have held up best.
YBB, looks like you are coming closest to answer my question. Looks like you're holding your AA other than your CEF trades
What are you B&Hers doing now? Is absorbing bond losses now just like absorbing equity losses at times? Just need to weather it until rates level out or drop again? What are your tolerances? How much repositioning do you do?
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Post by nromsted on Feb 19, 2021 19:17:01 GMT
Congrats Captain Chahta,
Over half of my bond allocation is contained within balanced funds. So I expect that each be managed to maintain their target AA. It (overall AA) has never been that big an issue to me.
I don't consider rising interest rates to be a given - just a risk. I think the administration and the fed have priorities that will keep interest rates low. So you can be a B&H investor, or you can churn it for some extra bucks. If you are making changes in a retirement account without current tax consequences, then why not? It can be profitable.
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Post by rhythmmethod on Feb 19, 2021 19:58:25 GMT
Good thread, Captain! All my FI is either in balanced funds as nromsted , above, MS (PIMIX, PTIAX) core + (VWALX, PHMIX) or barbell with BSV (pretty large position) EDV (very small position ~3+%)). Obviously EDV has been getting killed recently. In my BTD style I'm adding very small amounts and will again if it gets under 130. I think long term a vanilla FI in a balanced fund is ok to B&H as the management adds value, IMO. Could I pick better MS? Probably and may explore it but these things seem to move in lock-step mostly. That said, I'm also holding the most cash % in a very long time. I believe for most investors deciding on a FI allocation is more important than the specific funds. I'm def staying away from IT indexes, currently however. edit to add- Curious to see how helmut is dealing with the EDV massacre. He's seen that thing get killed and come back to life a few times.
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Post by Chahta on Feb 19, 2021 20:56:28 GMT
Good thread, Captain! All my FI is either in balanced funds as nromsted , above, MS (PIMIX, PTIAX) core + (VWALX, PHMIX) or barbell with BSV (pretty large position) EDV (very small position ~3+%)). Obviously EDV has been getting killed recently. In my BTD style I'm adding very small amounts and will again if it gets under 130. I think long term a vanilla FI in a balanced fund is ok to B&H as the management adds value, IMO. Could I pick better MS? Probably and may explore it but these things seem to move in lock-step mostly. That said, I'm also holding the most cash % in a very long time. I believe for most investors deciding on a FI allocation is more important than the specific funds. I'm def staying away from IT indexes, currently however. edit to add- Curious to see how helmut is dealing with the EDV massacre. He's seen that thing get killed and come back to life a few times. You describe pretty much where I am. What is your tolerance for losing bond funds? Take it like a man and wait for recovery like you would in equities?
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Post by nromsted on Feb 19, 2021 21:30:25 GMT
What are you B&Hers doing now? Is absorbing bond losses now just like absorbing equity losses at times? Just need to weather it until rates level out or drop again? What are your tolerances? How much repositioning do you do? So I consider myself a B&H investor for the most part. More than half of my portfolio is in balanced funds. I play around on the edges. but not as actively as many here.
Yes, I am prepared to absorb bond losses just like I am prepared to absorb equity losses. And gains too. I have no fixed tolerance levels, but I am more likely to sell equity funds to preserve a gain than I am to sell a bond fund to preserve a gain.
For the last few years, I have been withdrawing funds from my muni fund (USVAX) to pay for expenses, so I try to time my withdrawals at points where the NAV is relatively high. I guess that when I am subject to RMDs, I will do the same with funds in my retirement accounts which today includes one IT Core+ fund (USIBX).
I do have some cash available to take advantage of extreme downside volatility in these bond funds, like occurred last March. But on the whole, I'm happy with these funds and how they are managed. So I see no need to change my FI strategy.
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Post by steadyeddy on Feb 19, 2021 21:47:56 GMT
My two shiny cents: the vanilla bond funds are just fine because they will serve the purpose of absorbing equity shocks. In the near term, it appears the 10 yr US Treasury yield wants to go to 2% (so say the market pundits) and as such the vanilla bonds are being traded down in value... we are at 1.35% at the time of this writing.
I do not necessarily hold vanilla bonds for gains but only as a ballast. Gains here are a bonus but not a requirement.
Having said this, I also own MS bonds and HY bonds which in reality will have more risk in a crisis.
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Post by rhythmmethod on Feb 19, 2021 22:03:49 GMT
Good thread, Captain! All my FI is either in balanced funds as nromsted , above, MS (PIMIX, PTIAX) core + (VWALX, PHMIX) or barbell with BSV (pretty large position) EDV (very small position ~3+%)). Obviously EDV has been getting killed recently. In my BTD style I'm adding very small amounts and will again if it gets under 130. I think long term a vanilla FI in a balanced fund is ok to B&H as the management adds value, IMO. Could I pick better MS? Probably and may explore it but these things seem to move in lock-step mostly. That said, I'm also holding the most cash % in a very long time. I believe for most investors deciding on a FI allocation is more important than the specific funds. I'm def staying away from IT indexes, currently however. edit to add- Curious to see how helmut is dealing with the EDV massacre. He's seen that thing get killed and come back to life a few times. You describe pretty much where I am. What is your tolerance for losing bond funds? Take it like a man and wait for recovery like you would in equities? Sort of. To be very honest I really feel more like steadyeddy , that they (VB) serve a purpose. Also, there is always some "noise for a reason" - interest rate increase - for example that takes everyone's attention. It's the "whatever" that no one is talking about that I am preparing for. if I'm wrong the FI is something of a hedge with cost. If one is reinvesting dividends they are buying more shares cheaper.
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Post by Chahta on Feb 19, 2021 22:42:21 GMT
Excellent answers. What I was looking for.
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Post by retiredat48 on Feb 19, 2021 23:54:30 GMT
My two shiny cents: the vanilla bond funds are just fine because they will serve the purpose of absorbing equity shocks. In the near term, it appears the 10 yr US Treasury yield wants to go to 2% (so say the market pundits) and as such the vanilla bonds are being traded down in value... we are at 1.35% at the time of this writing. I do not necessarily hold vanilla bonds for gains but only as a ballast. Gains here are a bonus but not a requirement. Having said this, I also own MS bonds and HY bonds which in reality will have more risk in a crisis. Why are not things like cash, money market funds and very short term bond funds, BALLAST?? Why rationalize some decline in NAVs due rates rising, for intermediate and LT bond funds...as ballast? Note: Guru Jeff Gundlach says (January) cash and short term is where to find "ballast" today...and expect to see the ten year with a 2 handle on rates. R48
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Post by retiredat48 on Feb 20, 2021 0:07:57 GMT
R48, I have followed you on the vanilla fund reasoning for quite a while. I agree and sold last year down a small position which will be sold today. But my question which was not stated well was about other type of funds as well. For instance muni, muni core plus as YBB calls them. Rate increases are hitting them hard as well. R48 in bold: The only thing I own out on longer duration length, are Closed End Funds, such as PDI, PCI and PDO...and some PFN. I liquidated, except for footholds, my high yield (junk bond) fund holdings.What are you B&Hers doing now? Is absorbing bond losses now just like absorbing equity losses at times? Just need to weather it until rates level out or drop again? What are your tolerances? How much repositioning do you do? NO. Absorbing bond losses is not the same as equity.
Equity is growth...companies that are generally expanding, raising prices etc. the market can way overvalue or undervalue. They can recover...and usually do.
Bonds are contractual instruments. They pay a set rate , for a time, and pay back exactly the principal stated (barring default). Their total return can be estimated very precisely. So if your bond fund has underlying bonds with a price-to-par of lets say 109, this means each bond is selling at a premium to redemption value date. ie a built in loss. So if you own this, you cannot recover in long run due to any return to mean. This is why bonds, in 1966 thru 1970's inflation, all did so poorly in real returns. You can look up "avg weighted price" for your funds on M* info, and see your price-to-par situation. Most bond funds today are way above 100 (par). Of course you will get the stated interest yield return, barring defaults.
R48
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Post by retiredat48 on Feb 20, 2021 0:17:12 GMT
Congrats Captain Chahta, Over half of my bond allocation is contained within balanced funds. So I expect that each be managed to maintain their target AA. It (overall AA) has never been that big an issue to me. I don't consider rising interest rates to be a given - just a risk. I think the administration and the fed have priorities that will keep interest rates low. So you can be a B&H investor, or you can churn it for some extra bucks. If you are making changes in a retirement account without current tax consequences, then why not? It can be profitable. Ahhh, but there is a problem. The interest rate. Sure, you may not have bond price declines, but what is your return...poor...due low rates. Example...my 101 year old Mother in law is in CDs and short term treasuries. She complains she is earning no yield and has to pay her assisted living facility monthly fees, from principal. Yes, this is what is happening with bond holdings--being fleeced due low rates. Old-timers fear paying anything from principal...even though she has enough for twenty more years...but she is an optimist. You will not lose money; but you will likely lose to REAL returns...pricing power after inflation. Norbert has posted charts of bonds, 1966 to 1980, which had a NEGATIVE real return during that time period. I've owned balanced fund VWELX since 1953; but sold some for first time ever last year, due to possible changes by Biden, to cap gain rules, and the poor return outlook for the bond side of the 60/40 theme. R48
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Post by steadyeddy on Feb 20, 2021 0:49:11 GMT
My two shiny cents: the vanilla bond funds are just fine because they will serve the purpose of absorbing equity shocks. In the near term, it appears the 10 yr US Treasury yield wants to go to 2% (so say the market pundits) and as such the vanilla bonds are being traded down in value... we are at 1.35% at the time of this writing. I do not necessarily hold vanilla bonds for gains but only as a ballast. Gains here are a bonus but not a requirement. Having said this, I also own MS bonds and HY bonds which in reality will have more risk in a crisis. Why are not things like cash, money market funds and very short term bond funds, BALLAST?? Why rationalize some decline in NAVs due rates rising, for intermediate and LT bond funds...as ballast? Note: Guru Jeff Gundlach says (January) cash and short term is where to find "ballast" today...and expect to see the ten year with a 2 handle on rates. R48 R48 - The answer is simple (in my mind). Rising rates is a risk not a fact. The governments can NOT afford higher rates since they need to issue new bonds to replace maturing ones, and their cohorts (i.e., central banks) will indefinitely continue financial oppression. Note I said indefinitely. If folks are thinking the 80s style interest rates, foggetaboudit! Glad to engage in a debate. Let me turn the question around to you: Why do you think interest rates will continue to rise? Why do you think the central banks will allow that to happen? Regards.
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Post by chang on Feb 20, 2021 1:02:58 GMT
I have a question for the B and H crowd. How far are you willing to watch interest rate increases erode your bond AA? edit: first post of my new rank. Speaking for myself: not very far. I appreciate the zig and zag, and on the days when VBILX and FXNAX dropped 0.3% my portfolio was usually well in the green due to equities, but nevertheless .... bond NAV drops sting more than equity drops. I'm looking for stability and ballast in bonds; the zig-zag and anticorrelation is secondary. (If I really wanted zig-zag I would own EDV/TLT.) Congrats, Capt.!
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Post by steadyeddy on Feb 20, 2021 1:06:04 GMT
I have a question for the B and H crowd. How far are you willing to watch interest rate increases erode your bond AA? edit: first post of my new rank. Speaking for myself: not very far. I appreciate the zig and zag, and on the days when VBILX and FXNAX dropped 0.3% my portfolio was usually well in the green due to equities, but nevertheless .... bond NAV drops sting more than equity drops. I'm looking for stability and ballast in bonds; the zig-zag and anticorrelation is secondary. (If I really wanted zig-zag I would own EDV/TLT.) Congrats, Capt.! So, chang, have you cleared your vanilla bond holdings if you have any?
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Post by chang on Feb 20, 2021 1:06:36 GMT
Thus, I find that last year I have sold out of all such funds with intermediate or long term duration....notable example, BCOIX, which I held for decade plus. The fed has been supporting such bonds with QE buying...not sure when that ends; but it will not be good for bonds in the long run. My portfolio is now at highest cash position ever, mostly from the bond fund exit, into shorter term duration funds, including MM funds. Credit given where it's due: R48 and I communicated offline about bonds, and subsequently I sold all my BIV and VBILX. No regrets! However, I am still holding long-duration munis .... lots of them .... because the spreads/TEQ yields are attractive, and I think taxes are going up. (I also haven't sold IT funds DODIX and PIGIX.) Question to retiredat48: I know you're a LT holder of Wellington. Are you still keeping that with its LT bonds?
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Post by chang on Feb 20, 2021 1:10:50 GMT
Speaking for myself: not very far. I appreciate the zig and zag, and on the days when VBILX and FXNAX dropped 0.3% my portfolio was usually well in the green due to equities, but nevertheless .... bond NAV drops sting more than equity drops. I'm looking for stability and ballast in bonds; the zig-zag and anticorrelation is secondary. (If I really wanted zig-zag I would own EDV/TLT.) Congrats, Capt.! So, chang , have you cleared your vanilla bond holdings if you have any? Nope. Still holding DODIX and PIGIX. These are much heavier in corporates and lighter in Treasuries than BIV. My main concern with VBILX was that Treasury yields were ridiculously low, and prices had almost nowhere to go but down. DODIX/PIGIX are paying somewhat higher (though not generous) yields and will hopefully return their yields over their duration with dividends reinvested (old thumb-rule). I also have bonds in VGWAX (Global Welling.) and VWINX (Welles.); keeping for the same reasons. On review, I see that PIGIX has a pretty hefty duration of 8 years, and is already down 2% YTD. This one may warrant another look (hold it or let it go).
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Post by nromsted on Feb 20, 2021 1:52:30 GMT
Congrats Captain Chahta, Over half of my bond allocation is contained within balanced funds. So I expect that each be managed to maintain their target AA. It (overall AA) has never been that big an issue to me. I don't consider rising interest rates to be a given - just a risk. I think the administration and the fed have priorities that will keep interest rates low. So you can be a B&H investor, or you can churn it for some extra bucks. If you are making changes in a retirement account without current tax consequences, then why not? It can be profitable. Ahhh, but there is a problem. The interest rate. Sure, you may not have bond price declines, but what is your return...poor...due low rates. Example...my 101 year old Mother in law is in CDs and short term treasuries. She complains she is earning no yield and has to pay her assisted living facility monthly fees, from principal. Yes, this is what is happening with bond holdings--being fleeced due low rates. Old-timers fear paying anything from principal...even though she has enough for twenty more years...but she is an optimist. You will not lose money; but you will likely lose to REAL returns...pricing power after inflation. Norbert has posted charts of bonds, 1966 to 1980, which had a NEGATIVE real return during that time period. I've owned balanced fund VWELX since 1953; but sold some for first time ever last year, due to possible changes by Biden, to cap gain rules, and the poor return outlook for the bond side of the 60/40 theme. R48
Yes R48, you are so right. Low return sucks. It makes me wonder whether it is worthwhile at all having an investment (especially if you are dividend focused like I am). I don't have any quick answers to the real-return question which is so important. Usually I compare it with the return I'd get on cash, which is even more pathetic. So maybe I'm only a little bit more savvy than your MIL, who I admire.
But real return? That is stacked against you, by institutional fees, taxes, inflation, and mortality. Taking from the zerohedge website, "on a long enough timeline, the survival rate for everyone drops to zero." So if you demand real return, take it while you can. Divert profits to something else. And while you can, have fun and challenges in your investing life. At least that's what I'm trying to do.
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Post by steadyeddy on Feb 20, 2021 2:26:31 GMT
The bond scare the market is creating is overblown. My 2 cents, and you get what you pay for...
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Post by anitya on Feb 20, 2021 5:41:01 GMT
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Post by chang on Feb 20, 2021 8:21:46 GMT
retiredat48 : "Why rationalize some decline in NAVs due rates rising, for intermediate and LT bond funds...as ballast?" One reason—the old thumb rule: a bond fund with dividends reinvested will return its (current) yield over its duration. So, while I have gotten completely out of US Treasury-heavy I/T stuff like VBILX/BIV, I am holding onto IT corporates (specific funds mentioned above).
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Post by Norbert on Feb 20, 2021 8:33:00 GMT
Thoughts ...
It's not 1982, when longer Govt bonds yielded close to 20%. Now they lose money in real terms. We're forced to take risks to get decent returns.
And, we have. Equities, RE, and other stuff are now priced to perfection. Wellesley is down slightly YTD.
Yikes! What's to be done?
R48 suggests using cash and short duration bonds as ballast. That works, if you don't mind very low returns. Also, cash doesn't zag when stocks zig; it does nothing. However, it offers excellent optionality.
Many of us are using MS and HY bond funds to make a little money with (maybe) less risk than equities. That usually works, but not if the big one strikes.
SteadyEddy had exposure to long-term government debt, which has got to be the ultimate ballast. Too bad it's incredibly volatile and expensive.
Chang is slowly building a position in gold. Fine. Poor yield, but it should hold its value until Elon Musk figures out how to convert iron into gold.
FD has identified some interesting alternative investments (and has been successfully trading in and out of bond OEFs). They might work. My past experiences with alternatives never worked, but FD is smarter than me.
The reality is there's no easy answer.
A Wellesley investor has to expect diminished returns for a while, though once the 10-year T-Bond yields 2-3%, who knows? It might prove to a relatively good holding.
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Post by steadyeddy on Feb 20, 2021 15:27:07 GMT
anitya, very interesting comparison. My off the top of my head comment is that all 3 funds performed similarly over the 10 years - each has varying levels of equity/bond exposure. It looks like in the end it doesn't matter as long as you hold at least 30%-40% equities.
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Post by Norbert on Feb 20, 2021 16:20:15 GMT
Hi anitya, 1970-80 was an interesting period. It started with stocks being highly priced and a Fed Funds rate around 5%. It ended with stocks looking very cheap and with a Fed Funds rate as high as 20%. Inflation soared. I don't know if that period is a useful model for us today. But, it does show how unpredictable things are. Equity multiples collapsed and Wellesley held its own despite a rising rates situation.
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stats
Lieutenant
Posts: 53
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Post by stats on Feb 20, 2021 17:28:53 GMT
I am surprised that VWELX did not out do the others over such a long time period. we use VWINX ( Wellesley Income) as our ballast, not holding any other bonds. We don’t need bonds as we do own TIAA Traditional, which I think of as a stable value fund earning 4%. Stats
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