51–60 of 109 posts
The Treasury lets you buy Treasuries directly [1]. No broker, no markup, no account fees. [1] https://www.treasurydirect.gov
Although you'll have to interact with TreasuryDirect, one of the worst, 90's era security decision websites. Their idea of secure password entry is (mandatory) clicking buttons on an on-screen keyboard.
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I am not sure if that's true for non-fixed-maturity funds because the fund manager will keep the ladder rolling after 5-7 years, ie. the fund won't just pay out at maturity - they will keep reinvesting further and further into the future. There are some bond funds called fixed-maturity funds that actually mature on a date and pay back the principal. Ie. they let all the bonds inside mature without reinvesting them. i…
I think you should read https://personal.vanguard.com/pdf/ICRIBI.pdf You generally seem to be conflating face (static) value with market (dynamic) value. You're not wrong but your article makes a number of statements implying a ladder is better/safer simply because you refuse to recognize that the current value will deviate from par.
I added: Some readers have pointed out that over the long term there isn't a difference between building a ladder and using a similar bond fund. This strategy assumes that eventually you'll want to move your principle out of bonds and into something else like a down payment (while rates are still rising), but you don't have a well-defined timeline. If you are planning on keeping your principle invested in bonds into perpetuity then a bond fund might be a more suitable investment.
Thoughts?
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In theory that's true if you hold the fund forever but take the example of VGSH from another comment thread. If you bought that fund exactly 1 year ago and sold today you would have realized a return of less than 2% because while the yield is currently about 2.5% the price decrease over that time was about 1.5%. Your return would have been less than buying a single treasury yielding 2% a year ago and letting it matur…
I don't think this has anything to do with how long you hold the fund. In essence, the original comment was using bond ladders as a proxy for holding bonds till expiration and using bond funds as a proxy for always liquidating your bonds and reinvesting at the new rate on any rate change. The question is really about holding vs liquidating bonds, not funds vs ladders (which theoretically could hold or liquidate, depe…
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No, bond ladders are not strictly better than a bond fund. In theory, they are equivalent. In a bond fund, you simply see your loss on rising interest rates more directly. Scenario 1 (holding bonds to maturity, i.e. bond ladder): Let's imagine you invest in a $100 1yr bond at a 2% rate. You will be paid $102 in a year's time. Immediately after you buy the bond, the rate goes to 3%. You are locked into the bond, so yo…
VFITX is down ~2% since January. If I had bought shares of it in January, I would have less money than I started with. If I had bought individual treasury bonds in January, I would have more money than I started with. That seems like a significant difference between bonds and bond funds.
This doesn't fully explain the underperformance of VFITX compared to a 3 year bond (which should have made 8 mo/12 mo * 2% = 1.3% in interest and lost around 0.7% on rising interest rates), a net gain of 0.6%.
So VFITX underperformed a three year bond by 1.2%. 0.13% of this is their management fee (0.2% * 8 mo/12 mo). I'm not able to explain the last 1% of difference.
However, in theory, a bond fund loses just as much value on an interest rate rise as the bonds it is holding lose. In my example above, the bond is worth ~$99 after the increase to a 3% rate, just like the fund. The only difference between the bond and the fund is the choice of when to liquidate or roll.
It's possible that VFITX got unlucky on the timing of their bond rolling (see cousin comment).
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No, bond ladders are not strictly better than a bond fund. In theory, they are equivalent. In a bond fund, you simply see your loss on rising interest rates more directly. Scenario 1 (holding bonds to maturity, i.e. bond ladder): Let's imagine you invest in a $100 1yr bond at a 2% rate. You will be paid $102 in a year's time. Immediately after you buy the bond, the rate goes to 3%. You are locked into the bond, so yo…
VFITX is down ~2% since January. If I had bought shares of it in January, I would have less money than I started with. If I had bought individual treasury bonds in January, I would have more money than I started with. That seems like a significant difference between bonds and bond funds.
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VFITX is down ~2% since January. If I had bought shares of it in January, I would have less money than I started with. If I had bought individual treasury bonds in January, I would have more money than I started with. That seems like a significant difference between bonds and bond funds.
I looked up VFITX. It looks like they pay distributions (i.e. dividends) that are roughly proportional to the expectation of the interest rate over the average maturity of their holdings, so you need to take this into account when considering "what-if". They have paid approximately 1.4% in dividends during 2018. That makes their total losses around 0.6%. This doesn't fully explain the underperformance of VFITX compar…
Responding in general to the meme of "but what is your time worth?" people often underestimate their ability to change their own utility functions. If you're watching 4 hours of TV every night (or reading or w/e other "mental recharge" activity) simply change your utility function to let financial planning "recharge you." The ultimate arb is changing your own utility function. Obviously this may be harder or easier f…
Don't do wireheading, kids.
In today's market, it's easy to think of holding a bond until maturity under adverse interest rate movements as "not losing money". This is a false model. For example, a ten year treasury purchased at issue in mid-2016 is paying less than the current rate of inflation. When interest rates increase, bond holders lose money. Holding the bond just changes the accounting (and exposure to future swings).
Diversification of bond duration is important in terms of risk management and not just cash flow concerns. Prudent portfolios include equities as well as debt.
While I'm currently in tech, I worked on Wall Street for years (both the trading business and IT).
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VFITX is down ~2% since January. If I had bought shares of it in January, I would have less money than I started with. If I had bought individual treasury bonds in January, I would have more money than I started with. That seems like a significant difference between bonds and bond funds.
You're simply not marking your losses to market - not having a loss here is an accounting fiction, not a real financial difference. In both situations, you have less money than if you'd bought the bonds at a later time instead.
But this is not the situation I described. My point is that buying the bonds in January would have been better than buying the bond fund in January.
If you look at mvilim's response to my comment you will see that the fund underperformed bonds between January and today.