Mungofitch (Jim) had an interesting comment yesterday:
https://discussion.fool.com/if-you-are-doing-periodic-sales-over…
If you’re owning the S&P 500 at current prices, you’re sensibly expecting no real total return for
the next 5 years so I would hope you’re not withdrawing more than (say) 2%/year of today’s value.
Better to discuss there so Jim can chime in if he wants?
This is the reason that TMF advises creation of a laddered maturity bond portfolio with 5 years of living expenses.
When markets are down this gives you a buffer to live off of until markets recover.
Being forced to sell stocks in a down market is one of the situations to avoid. Plan ahead.
Mutual funds? Or actual bonds (government?)?
Not much of a bond guy. I know what they are, and how they work. I even had a bond fund for a while (TRP Spectrum).
1poorlady had some laddered CDs, but I think she didn’t renew them, so I’m not sure if there’s much of a ladder now. Just cash in her account.
Mutual funds? Or actual bonds (government?)? - 1PG
Individual bonds - hold til maturity (or call if callable) and yo get your principal back as long as issues does not default.
Bond Funds - Interest rates rise, NAV falls. With no maturity date to wait out, your loss of capital is more or less permanent.
Thanks, Mike. Yeah, that was my experience with TRP’s fund.
I read a while back that individual bonds are so efficiently priced that you can’t get much profit. But maybe the point of the ladder is just to counter inflation, not to make money.
1poorguy
Individual bonds - hold til maturity (or call if callable) and yo get your principal back …
Your principal, but not your purchase power.
Bond Funds - Interest rates rise, NAV falls. With no maturity date to wait out, your loss of capital is more or less permanent.
The loss is the loss, no matter how you gloss it over. A thing is worth what it is worth. Whether your money is in a bond fund or individual bonds, there is no difference.
There is no magic in bonds depending on how you hold them.
And…if you hold a number of different individual bonds, how is that different from a bond fund? Closet indexing applies for bonds same as it applies for stocks.
And…if you hold a number of different individual bonds, how is that different from a bond fund? Closet indexing applies for bonds same as it applies for stocks.
+1
This is one of those financial concepts that find so many can’t get, even if they are financially literate.
1poorguy: “I read a while back that individual bonds are so efficiently priced that you can’t get much profit. But maybe the point of the ladder is just to counter inflation, not to make money.”
I thought the point of holding bonds (or a bond fund) was to won something uncorrelated to the market to dampen the volatility of owning only stocks (or the index). The point of laddering was to take advantage of “better” rates for “longer” terms when one was unlikely to need all the money on bonds/bond funds at the same time and to have some portion of the funds available without needing to sell any bonds (because something was always relatively near to maturity).
Regards, JAFO
I thought the point of holding bonds (or a bond fund) was to won something uncorrelated to the market to dampen the volatility of owning only stocks (or the index). The point of laddering was to take advantage of “better” rates for “longer” terms when one was unlikely to need all the money on bonds/bond funds at the same time and to have some portion of the funds available without needing to sell any bonds (because something was always relatively near to maturity).
I used to maintain a laddered portfolio of muni bonds. It was a part time job. Most of the better bonds (peak of the yield curve) end up getting taken by the professionals. I finally decided I was better off in an intermediate term Vanguard muni fund. I let those higher yielding bonds from another era mature and get called, went all with the fund, and never looked back. It’s a fool’s errand to believe that you don’t get hurt when rates rise because your individual bond will mature at par. True, but you’ve lost higher market interest along the way.
This is the reason that TMF advises creation of a laddered maturity bond portfolio with 5 years of living expenses.
I believe the purpose of the laddered bond portfolio is risk management, not capital appreciation or cash flow. Thus not losing too much to inflation is a good outcome.
To keep up with inflation most are best off to invest in stocks. Yes some own bonds to stabilize their portfolios.
The TMF way is to keep as much in stocks as you can. Down markets do happen. Selling during a down turn is costly. The five year laddered maturity bond portfolio provides a buffer that protects from that problem.
Bond funds have the problem that as navs fall (with rising interest rates) people sell. That forces the bond fund to sell its bonds to fund redemptions. And that happens at the worst time.
Owning the bonds themselves and holding to maturity gets you full face value (assuming its an investment grade bond). Yes, market value of your bonds will decrease with rising interest rates, but that only matters if you sell them. You still get full face value at maturity.
"Owning the bonds themselves and holding to maturity gets you full face value (assuming its an investment grade bond). Yes, market value of your bonds will decrease with rising interest rates, but that only matters if you sell them. You still get full face value at maturity. "
Not if you owned GM bonds during the 2009 bankruptcy.
Howie52
Somehow that “bond risk” is never fully explained to bond purchasers.