Author Topic: Would you have a junk bond fund in your IRA?  (Read 1392 times)

Chesleygirl

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Would you have a junk bond fund in your IRA?
« on: August 12, 2017, 10:22:21 PM »
I have been doing trades in my Fidelity IRA to get rid of things my EJ adviser put me in, that I no longer want. I've converted most everything to index funds now.

One thing left is a fund with 80% low grade junk bonds. Now, I should probably get rid of it, but it's performing quite well (for the moment). It is a John Hancock high yield bond fund.

Should I sell it and put the money into Fidelity's investment grade bond fund?

LAGuy

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Re: Would you have a junk bond fund in your IRA?
« Reply #1 on: August 12, 2017, 10:43:15 PM »
I used to have a small amount of a junk bond fund. If you're going to hold it, your IRA is the place because of the tax treatment of the distributions.

That said, I dumped mine. There's no real point to it I figure, junk bonds returns are highly correlated to stocks...but return less. So, better to just own the stocks I figure. On the other hand, if you're looking for safety then a typical bond fund is more appropriate than junk bonds, since there's no safety to be had in them (well, no safety from stock market downturns that is). If  you're going to own junk bonds, I'd consider it part of your stock allocation.

Financial.Velociraptor

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Re: Would you have a junk bond fund in your IRA?
« Reply #2 on: August 13, 2017, 08:44:08 AM »
I think high yield debt is in bubble territory.  The premium to 10 year treasury yield is at a historical low.  That has to end badly.
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Chesleygirl

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Re: Would you have a junk bond fund in your IRA?
« Reply #3 on: August 13, 2017, 06:00:17 PM »
Look at the SEC yield on the fund, subtract the fund fee (probably 1/2 of 1%) and compare it to a stock fund. I did this the other day comparing Vanguard High Yield Bond fund (4.87%) to Vanguard S&P 500 (dividend yield 1.97%). For 3% difference I'm choosing the stock fund.

The expense ratio of this junk bond fund is .7%  Kinda high. I'll do the math  on it. Thanks.

L.A.S.

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Re: Would you have a junk bond fund in your IRA?
« Reply #4 on: August 13, 2017, 08:31:48 PM »
High yield bonds are bonds for sure.  But, a high yield bond fund is usually more correlated with equities than with investment grade bonds.  When times are good the high yield bonds are flying high and richly valued.  But, when the economy slows down corporations with lower credit quality will be the first ones to default, and this causes the prices on junk bonds to plummet.  So, they usually end up rising and falling along with equities in the business cycle.  They don't provide much of the shock-absorbing effect to equities that investment grade bonds will provide.  If you do keep them, it might be better to consider them part of your "stocks" allocation as opposed to "bonds" in your AA

Chesleygirl

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Re: Would you have a junk bond fund in your IRA?
« Reply #5 on: August 14, 2017, 11:48:25 PM »
High yield bonds are bonds for sure.  But, a high yield bond fund is usually more correlated with equities than with investment grade bonds.  When times are good the high yield bonds are flying high and richly valued.  But, when the economy slows down corporations with lower credit quality will be the first ones to default, and this causes the prices on junk bonds to plummet.  So, they usually end up rising and falling along with equities in the business cycle.  They don't provide much of the shock-absorbing effect to equities that investment grade bonds will provide.  If you do keep them, it might be better to consider them part of your "stocks" allocation as opposed to "bonds" in your AA

Yes. Since I'm already invested 75% in stocks, I decided I don't need junk bonds. So today, I sold my junk bond fund to get into a bond index fund with more investment grade bonds in it. The expense ratio was the same. But I feel this bond fund is better quality for the same price.

ChpBstrd

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Re: Would you have a junk bond fund in your IRA?
« Reply #6 on: August 15, 2017, 12:12:43 PM »
The reason to own bonds is their lower correlation with the rest of your portfolio. The reason not to own bonds is that if inflation and/or interest rates rise even a little bit, holders of long-duration bonds will be wiped out, on paper at least. Find a good bond calculator and see what happens if treasuries go 1% higher. It's scary.

I think REITs offer a good compromise. They often yield higher than bonds and have low betas. Any risk-weighted investment with these characteristics would fit the bill too. REITs are sensitive to interest rates, but not like a 30y treasury. However, I would NOT own retail or office REITs.

Indexer

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Re: Would you have a junk bond fund in your IRA?
« Reply #7 on: August 15, 2017, 04:53:39 PM »
High yield bonds are bonds for sure.  But, a high yield bond fund is usually more correlated with equities than with investment grade bonds.  When times are good the high yield bonds are flying high and richly valued.  But, when the economy slows down corporations with lower credit quality will be the first ones to default, and this causes the prices on junk bonds to plummet.  So, they usually end up rising and falling along with equities in the business cycle.  They don't provide much of the shock-absorbing effect to equities that investment grade bonds will provide.  If you do keep them, it might be better to consider them part of your "stocks" allocation as opposed to "bonds" in your AA

Yes. Since I'm already invested 75% in stocks, I decided I don't need junk bonds. So today, I sold my junk bond fund to get into a bond index fund with more investment grade bonds in it. The expense ratio was the same. But I feel this bond fund is better quality for the same price.

Sounds like you made a decision that matches your goals and AA. Good move! However, is there a reason you are sticking with an expensive bond fund? A high expense ratio can be felt more in a quality bond fund than in a junk bond fund or a stock fund. The reason is that 0.7% is a much bigger chunk of a 2.5% return than it is a 5% or 10% return. There are bond index funds that cost less than 0.07%. Personally, I would find one of those.

Some options:
VBTLX or the ETF equivalent, BND, only cost 0.05%. That is a mix of Government and Investment grade corporate bonds.

If you want just investment grade corporate you can also look at VICSX(ETF version=VCIT) and VSCSX(EFT version= VCSH). Cost = 0.07%.


Look at the SEC yield on the fund, subtract the fund fee (probably 1/2 of 1%) and compare it to a stock fund. I did this the other day comparing Vanguard High Yield Bond fund (4.87%) to Vanguard S&P 500 (dividend yield 1.97%). For 3% difference I'm choosing the stock fund.

Side note= SEC yield is normally reported 'after' fees. Example= for years Vanguard's prime money market was only paying 0.01% but had an ER of 0.17%. Using your logic it would return -0.16% per year, but it actually returned 0.01%. Now it is paying over 1%, but that's another conversation.