Looking for perspective about Bond Fund NAV losses

[mikes425]

My moderate-conservative AA employs short to ultra-short term bond funds as a sizable percentage of the roughly 55% fixed income portion of my portfolio.  I've felt a lot of frustration this year in watching these funds continue to decline in NAV, after their historic and substantial plummet last year --which far exceeded losses in equities. I've tried to reconcile this long term hold by recognizing that they are in fact generating higher dividend income but in terms of getting back to even and beyond,  it's depressing to see virtually no recovery YTD relative to their NAV losses.   
Obviously I'm not a market-timer and look at the longer term view... I'm 65, I'm basically retired, I'm generating about 89k/year in div income with my existing PF, and I'm not unappreciative about roughly 2.62m in invested assets with no debt and low COLA and modest spending habits. Preservation is rather important at this point.  Am I alone in this boat, as far as the typical Moderate-Conservative fund-based PF AA for retirement, or is this a rather common scenario this year?  The flat to negative returns on bond funds continues to confound and annoy me.  I welcome any perspective on if/when this trend might ultimately, realistically, begin to turn around.

[yakers]

I think a lot of people, espically Boglehead buy & Hold folks are in the same boat. Last year was terrible for most bond funds espically index funds like BND. Not happy to see that. I was not as effected as most of my fixed income is in the Federal G Fund and I have balanced funds like VG Wellsley & Wellington and Global Wellington. Also had some ibonds and a few TIPS, sold them as I needed cash for many activities this year.
Not exactly crystal ball but some folks did see to bail out of bond funds early and ladder Treasuries & CDs. I didn't and its a bit late now. I expect over time the bond funds will be OK just not as good as they were with falling interest rates. My challenge these days is the fixed income but fortunately I will be OK (COLAd pension). No particular changes to suggest at this time, if you have an AA you like keep holding,
Now if you want to trade a lot folks here will have some suggestions.

[FD1000]

Not enough info but several generic comments.
1) Since early 2022 markets are tougher. Bonds had one of their worse years in 2022. Many generic, typical, higher-rate bond funds are not doing well in 2023.
2) Generally, stocks are easier, the SP500 has been a solid investment for years.
3) You need a lot more knowledge in bonds, and the more you own, the more important it is. Sometimes, it's "simple", when MM pays over 5% why invest in ST bonds? 
As long as the Fed didn't ring the bell of "maybe it's enough of raising" MM looks good. It's better to be a bit late than holding bonds that don't do well + have high volatility. MM, is the guarantee bird in the hand. 
4) I have been saying for years that it's a good idea to separate a % of your portfolio to stock funds + bond funds. There are always exception, PRWCX is one of them. See a chart(schrts.co/FhPmbjjr) since 1-1-2022 of VWIAX,VWENX,PRWCX,FBALX,DODIX.  Only PRWCX is down just 1.6%, the others are down 7.7 to 9.3%.
5) Bond funds: most times there are funds that work. BL(Bank loans) are usually one of the best category in rising rates, not only they do better, they also have lower volatility, while the "safer" higher-rated bond make a lot less with higher volatility. See chart(schrts.co/iSmIRhKE)
6) The above is not easy. It means trading and reading markets well.
7) And then there is the income thing. PRWCX paid zero income in 2023, PDI paid 10-11%(maybe more).  Which was a better choice? PRWCX easily wins with almost twice the performance. YTD...PRWCX=11.8%...PDI=6.4%

The above isn't a recommendation, by now you can find articles that discuss BL. When most realize what had done well, it's not a good idea for long.

BTW, which fund do you own?

[catdog]

Mikes425

Take just a moment and pat yourself on the back. You have just proven that your portfolio can withstand the worst that the market can throw at it.

I think that once you have "won the game" it is harder to get increased satisfaction. I worked in a factory for 25 years saving frugally in my 401K hoping to have enough for a comfy retirement. Along comes my wife (I didn't get married until I was 44) who is a real estate wheeler and dealer, and brings well over a million dollars into our retirement accounts. It is now hard to get excited about my rollover IRA that I worked so hard for. My wife is the most conservative investor of all time, she has $860,000 in a money market fund. I can't even get her to buy 1 month CD's.

I just bought a 1 month CD paying 5.5%. If we can believe the FED money markets will be a good bet for another year anyway.

Catdog

[Mustang]

I own two moderate-allocation funds and while I was disappointed in their 2022 performance neither one lost as much as the S&P 500. SPY lost 18.2%. ABALX lost 12.1% (only 2/3 of SPY) And, VWENX lost 14.3% (only 3/4 of SPY). This was disappointing because I would have expected VWENX's loss to be somewhere around 11%.

The downside protection was there but in the past my balanced funds provided much better downside protection. A quick look at 2008 shows why I invest in balance funds. SPY down 36.9%. ABALX down 25.7% (2/3 of SPY) and VWENX down 22.2% (6/10 of SPY). An investor should expect a fund that is 65% equity to have only 65% of equity's losses. (Note: VWENX runs closer to 60% equity).

The difference was multiple interest rate hikes on bond values. Today, the value of bonds are already discounted to current rates. New issues are at current rates. What happens next depends on the Fed.

A lot of people think rate increases are a thing of the past. I'm skeptical. Workers are starting to demand higher wages in pretty much all segments of our economy. If spiraling inflation takes off (and that is a big if) then rates will go higher causing bond values to continue go down. If the optimists are correct then bond values will stabilize or even go up.

The long term view is knowing someday the Fed will lower rates and bond values will go back up. Traders in the meantime will buy whatever is doing best then switch when they think the time is right. But, I haven't read any research showing traders do better in the long term than buy and hold investors. Actually, the articles I've read say the opposite.

Young investors can ride out the volatility of equity portfolios. Down turns are opportunities to buy. But retirees, withdrawing from portfolios, cannot look at investments the same way. Withdrawing to buy food when the market is down 36.8% locks in huge losses and devastates portfolios. Retirees need downside protection.

Don't let short term events overshadow your long term goals.

[retiredat48]

mikes425 ,...Hi again Mike.

Remember the bond rule-of-thumb, which applies well to treasury bonds yielding let's say 4.25%. The rule is:

Hold such a bond (or bond fund) for the DURATION of the investment (related to maturity) and your total return (annual CAGR) will very closely approximate the starting yield when you bought the investment, REGARDLESS OF THE DIRECTION OF INTEREST RATES. But be aware there was a problem called "convexity" re performance as bonds went to zero rates; we are now out of that distortion zone.

This means a five year treasury bond bought with a rate of 4.3%, will yield 4.3% annual return if held for duration, five years...assumes dividends reinvested.

Importantly to you, this means you can closely approximate your annual return, and whether or not to "lock in", now, some longer term yields...corporates or treasury. You will get that return regardless of direction of interest rates.

From my experience with your portfolio (more than 50% fixed income), I think you would benefit by establishing "bond ladders"...get a bond professional to help set this up and show you the methods to use. That way, you rollover each year some maturing bond assets into the new rates available, what ever they are.

Key is rates now are offering REAL RETURNS now, meaning after inflation, you have a real return in purchasing power. Stay with it.

R48

[fishingrod]

mikes425,
I agree with retiredat48, with the size of your portfolio you could really benefit from individual bonds in a bond ladder held to maturity. I don't know if a bond professional is needed, may be. You may be able to set up your own ladder of high investment grade bonds and perhaps a ladder of individual municipal bonds in your taxable acct. Some people can learn the workings of individual bonds.

If you go with a bond "professional" make sure they are working as a fiduciary. Bonds can be complex and people can get taken advantage of. Fidelity has some good info and classrooms on investing.

www.fidelity.com/viewpoints/investing-ideas/bond-ladder-strategy

[retiredat48]

fishingrod ,...I agree. Mike does not need to "pay an advisor an annual fee." But if he needs to be shown how to "ladder", there are one-time-advisors who could be paid, once, to set up the first tranche. Or Mike simply learns how to do it himself. It is not rocket science.

(I can't help with details because I need to leverage my time over hundreds of investors seeking help ).

R48

[yogibearbull]

Treasury ladders aren't difficult to set up. One could do that by making initial purchases in the secondary market and then roll at Treasury Auctions as they mature or continue secondary market purchases. But they will also have mark-to-market (MTM) fluctuations similar to bond funds with similar duration. However, as you are rolling each at par at maturity, those MTM fluctuations won't matter.

Non-Treasury bond ladder (with individual corporates or munis) may require professional help for research and selection.

[mikes425]

Sept 21, 2023 16:52:08 GMT catdog said:

Mikes425

Take just a moment and pat yourself on the back. You have just proven that your portfolio can withstand the worst that the market can throw at it.

I think that once you have "won the game" it is harder to get increased satisfaction. I worked in a factory for 25 years saving frugally in my 401K hoping to have enough for a comfy retirement. Along comes my wife (I didn't get married until I was 44) who is a real estate wheeler and dealer, and brings well over a million dollars into our retirement accounts. It is now hard to get excited about my rollover IRA that I worked so hard for. My wife is the most conservative investor of all time, she has $860,000 in a money market fund. I can't even get her to buy 1 month CD's.

I just bought a 1 month CD paying 5.5%. If we can believe the FED money markets will be a good bet for another year anyway.

Catdog

I appreciate the positive perspective.  Very valid point!  Thanks

[mikes425]

Sept 21, 2023 17:12:52 GMT Mustang said:

The long term view is knowing someday the Fed will lower rates and bond values will go back up. Traders in the meantime will buy whatever is doing best then switch when they think the time is right. But, I haven't read any research showing traders do better in the long term than buy and hold investors. Actually, the articles I've read say the opposite.

Young investors can ride out the volatility of equity portfolios. Down turns are opportunities to buy. But retirees, withdrawing from portfolios, cannot look at investments the same way. Withdrawing to buy food when the market is down 36.8% locks in huge losses and devastates portfolios. Retirees need downside protection.

Don't let short term events overshadow your long term goals. 

And on a day where my YTD return has just dipped from 5 to 4%... with of course, bond funds falling in tandem with equities yet again --this is good perspective to keep in mind... Such are days where my 'emotional' instinct is to say...well, there we are...another shining example of what I've come to call my "Going Nowhere" Portfolio.   Thanks for the encouragement to stay focused on the long term goals

[mikes425]

Sept 21, 2023 19:18:22 GMT retiredat48 said:

mikes425 ,...Hi again Mike.

Remember the bond rule-of-thumb, which applies well to treasury bonds yielding let's say 4.25%. The rule is:

From my experience with your portfolio (more than 50% fixed income), I think you would benefit by establishing "bond ladders"...get a bond professional to help set this up and show you the methods to use. That way, you rollover each year some maturing bond assets into the new rates available, what ever they are.

Key is rates now are offering REAL RETURNS now, meaning after inflation, you have a real return in purchasing power. Stay with it.

R48


Hi Bob!  I recite that mantra often these days...the bond rule-of-thumb... on days like this..and pretty much 'years' like this at this point....that is kind of my salvation to bear in mind and avoid descending into remorse about missing the bail out of bond funds before the start of 2022...  That said yes, I do think it's time to ask 'occasional advisor' about assisting with a well-coordinated laddered approach vs the variety of short term bond ETFs that populate much of my FI PF allocation.  Thanks as always!    

[mikes425]

Sept 21, 2023 19:35:16 GMT fishingrod said:

I agree with retiredat48 , with the size of your portfolio you could really benefit from individual bonds in a bond ladder held to maturity. I don't know if a bond professional is needed, may be. You may be able to set up your own ladder of high investment grade bonds and perhaps a ladder of individual municipal bonds in your taxable acct. Some people can learn the workings of individual bonds.

If you go with a bond "professional" make sure they are working as a fiduciary. Bonds can be complex and people can get taken advantage of. Fidelity has some good info and classrooms on investing.

www.fidelity.com/viewpoints/investing-ideas/bond-ladder-strategy 

Agreed as well...and this will be foremost on my list when I check in with my occasional/hourly FA to assess the rationale for maintaining the ETF approach vs laddering individual bonds.  I look forward to the discussion and I'll be happy to post his 'pros/cons' here.  Getting around to time to discuss tax loss harvesting -- we only meet a couple of times a year or 'as needed' and major changes (obviously I suppose) are seldom suggested but I will credit him for keeping me from making foolish impulsive decisions based on short-term events/conditions and staying focused on a value oriented long-range goal.  He has essentially kept in line with our agreed 'risk tolerance' and as an hourly guy, I can't fault him for having helped me roughly double total assets over 10-12 years with a moderate-conservative profile.   Thanks again for the input.

[fishingrod]

Sept 21, 2023 20:42:32 GMT mikes425 said:

Sept 21, 2023 19:35:16 GMT fishingrod said:

I agree with retiredat48 , with the size of your portfolio you could really benefit from individual bonds in a bond ladder held to maturity. I don't know if a bond professional is needed, may be. You may be able to set up your own ladder of high investment grade bonds and perhaps a ladder of individual municipal bonds in your taxable acct. Some people can learn the workings of individual bonds.

If you go with a bond "professional" make sure they are working as a fiduciary. Bonds can be complex and people can get taken advantage of. Fidelity has some good info and classrooms on investing.

www.fidelity.com/viewpoints/investing-ideas/bond-ladder-strategy 

Agreed as well...and this will be foremost on my list when I check in with my occasional/hourly FA to assess the rationale for maintaining the ETF approach vs laddering individual bonds.  I look forward to the discussion and I'll be happy to post his 'pros/cons' here.  Getting around to time to discuss tax loss harvesting -- we only meet a couple of times a year or 'as needed' and major changes (obviously I suppose) are seldom suggested but I will credit him for keeping me from making foolish impulsive decisions based on short-term events/conditions and staying focused on a value oriented long-range goal.  He has essentially kept in line with our agreed 'risk tolerance' and as an hourly guy, I can't fault him for having helped me roughly double total assets over 10-12 years with a moderate-conservative profile.   Thanks again for the input.

mikes425 , 

Unless your financial advisor is a bond professional, in the true meaning of the phrase, then they may not understand the workings of individual bonds enough to feel confident in this approach. His forte is probably maintaining an asset allocation by utilizing ETFs. Most advisors these days use ETFs because they don't know how to use individual bonds, and it is so much easier for THEM to just recommend ETFs for you to get exposure. 

It is also easier for you to get exposure with ETFs, but it may not be the best approach for you. If you have an account at Fidelity or another highly trusted outfit, Not Edward Jones then you could employ their expertise to establish a ladder and get you going while you learn. they would charge a fee but it would be reasonable I believe. You would first need to educate yourself enough for you to know what you want.

  

[retiredat48]

Sept 21, 2023 21:07:24 GMT fishingrod said:

Sept 21, 2023 20:42:32 GMT mikes425 said:

mikes425 , 

Unless your financial advisor is a bond professional, in the true meaning of the phrase, then they may not understand the workings of individual bonds enough to feel confident in this approach. His forte is probably maintaining an asset allocation by utilizing ETFs. Most advisors these days use ETFs because they don't know how to use individual bonds, and it is so much easier for THEM to just recommend ETFs for you to get exposure.  

I inadvertently clicked on "like" above, although I am OK with the post.

My vote is use direct individual bond purchases for Treasury bond ladders; stay with Funds/ETFs for other ladders versus buying individual corporate bonds.  Alternative:  Use only Treasuries for ladders; don't need to ladder everything.

R48

[fishingrod]

Sept 21, 2023 21:59:42 GMT retiredat48 said:

Sept 21, 2023 21:07:24 GMT fishingrod said:

mikes425 , 

Unless your financial advisor is a bond professional, in the true meaning of the phrase, then they may not understand the workings of individual bonds enough to feel confident in this approach. His forte is probably maintaining an asset allocation by utilizing ETFs. Most advisors these days use ETFs because they don't know how to use individual bonds, and it is so much easier for THEM to just recommend ETFs for you to get exposure.  

I inadvertently clicked on "like" above, although I am OK with the post.

My vote is use direct individual bond purchases for Treasury bond ladders; stay with Funds/ETFs for other ladders versus buying individual corporate bonds.  Alternative:  Use only Treasuries for ladders; don't need to ladder everything.

R48

mikes425,

To expand on retiredat48,

I agree on individual treasury bond ladders. Also I believe you could benefit from individual municipal bonds in a ladder, perhaps from your state. Corporate bonds I agree should be in a fund, be it active or passive.

[Chahta]

99.9 % of investors (and managers as well) are incapable of trading in and out to get the "best" return possible. So what if bonds have tanked? They will recover as equities do. Stocks have tanked many times and have always recovered. Doesn't scare most into shunning stocks. Is it possible that bond investors will shun bonds next year or the years after when rates are lower, hopefully? People will scramble to buy high yield when rates turn and those that bought low will reap the rewards. Yield is what most people live on, not the avoidance of losses. Sure we are all mentally programmed to want to see a bigger and bigger portfolio.

As long as treasuries are paying good interest they are very easy to buy from brokers and worth it. If they eventually become less desirable then investors may need to learn a little and buy individual corp. or muni. bonds to avoid capital loss from rate changes. But my bet is those same folks would be the ones to sell individual bonds out of panic because they own just a few bonds where one could go bad.

More power to the people that are successful at actively managing their portfolios for nothing but growth. That is not most of us.

I have learned that buying bonds funds at the top, or at high prices, is not fun either. Prices are low and yields high right now. A good place to start.

mikes425 , you did not refer to other than "ST/UST" bond funds. Many ST HY funds have done well this year. Vanilla ST funds not so much. Some ST HY bonds are worth buying still.