Bad investment advice, please

[Stache In Training]

Hello All,

I'm hoping for your advice on a bad investment decision.  I invested around 10,000 in a municipal bond fund via Oppenheimer Funds.  The ticker is OPITX (Here's the link for morningstar, so you can see how it has performed: http://quotes.morningstar.com/fund/opitx/f?t=OPITX) Expense ratio is .72%

So I invested before I learned all about the wonderful investing world of index funds and low expenses of vanguard.  I have already moved all of my retirement funds to vanguard, and am planning any future investments via them.  The problem is that since this was before my "enlightenment," there was this lovely up-front load (sales charge) that I just thought was what I would have to pay no matter where I invested.  At first it was no problem, because the fund was gaining, and the dividend yield on this is nice, at about 3%.  So I'm consistently re-investing about $30 a month.

However, in the past 4 months, the fund has just started tanking.  So much so, that my rolling 12 months is at -7.38%.  Now, I know not to freak out when the accounts drop, because investing is "in the long run."  And the fact still remains that the dividend amount hasn't dropped.  I'm still getting $30 a month.  However since I want to eventually get everything to vanguard, what are my options?

Since everything will eventually rise (though because these are bonds, I assume it'll take longer in the current economy, as stocks are currently what's rising), do I just wait it out and let the dividends re-invest, so that when the rise happens, I have more shares?
Or should I just cut my losses, chuck it up to a valuable lesson learned, and take what's left and invest at vanguard?

I know the last option is buying high and selling low, which is the opposite that I should do.  But is it better to just realize a bad investment before the annual expenses kick in and I lose even more money?

FYI, it has no redemption fee.

Thank you in advance!

[Frankies Girl]

I am by no means an expert on investing (still in the noob stage), but I kind of was in the same position the last couple of months.
I had investments in my 401K that had high fees, and once I started looking at everything and understanding a little more, I went ahead and got rid of the crap and got better funds. I didn't try to time the market, other than noticing that it was high for the day I put in the sell order.

My take on this is that I wasn't panicking and doing the sell low and buy high scenario; I was rebalancing my portfolio. I am perfectly fine with dumping a losing fund to reallocate to something with low-cost and better overall performance. My take was, as long as I hadn't lost my original investment amount, at least the only thing I lost was time to make a better return, and moving the money now was a "better late than never" move.

But again, that's just me and I'm sure there are some better ideas from the more learned members on here.

[fiveoclockshadow]

It is doing what nearly every other bond fund is doing right now - going down.  With interest rates on the rise rather quickly in the past few months all bond funds are seeing losses (remember for bonds interest rates move in the opposite direction of prices).

Since there is no redemption fee there is no reason you should feel you need to "hold on" to this particular investment.  What you should do is determine what your overall stock/bond allocation target is.  If you are already there then what you will likely be doing is selling this fund for a different bond fund.  In that case the other bond fund will have dropped recently as well and you really will just be exchanging different types of funds for one another at roughly the same price.  No selling low in that case.  If you instead need to be buying more equities because that's what your asset allocation plan says to do then in fact you might have a little buy high/sell low going on but that is just the breaks when it comes to getting your finances in order.  Like you say, better to be on the right path sooner rather than later.

What kind of account is this investment in?  IRA? 401k? A regular taxable account?  If it is in a taxable account you need to consider any capital gains/losses that you might have from the sale and you really don't want bond funds in a taxable account to begin with.  So if this is in a taxable account let us know and we can give you better advice.  If in 401k/IRA just switch to a more desirable fund as soon as practical.

[GreenGuava]

First, turn off automatic re-investment if you don't want to be in the fund in taxable;  put the distributions into your bank account.  If you want to "reinvest" the funds, take the distributions (along with any "new" money you intend to contribute) and put them into the fund you'd prefer.

Second, consider that if the fund is currently at a loss, you can do a tax-loss harvest.  However, look into the rules for which similar fund(s) you can buy and how soon - I've yet to actually do a TLH, so I'm no help there.

Lastly, FWIW, I'm always in favor of taking distributions in taxable as money, if you have 2+ taxable funds with no transaction costs.  I then suggest using the distributions to re-balance the funds (and/or contribute to tax-advantaged accounts to max those out earlier before moving into taxable investing later in the year).

[Stache In Training]

Good advice, and you brought up some good points I forgot to mention. 

Yeah, I realize that every bond fund is going down, which is why I'm not really freaking out, as I know the next downturn in stocks, this will come right back up, as stated.  However, right now, I really don't need the bonds in this allocation, as I'm 26 years old. (there are bonds in my retirement portfolio, but this is just for pre-retirement/FIRE investing)   It's just something the FA talked me into since there's a tax advantage, and the dividend payout is nice.

Yes, this is in a taxable account, but it's a municipal bond fund, which means that it is slightly tax advantaged.  (The interest generated is federal tax-free) Although I (luckily) live in a state with no state income tax.

Due to the huge up-front sales charge, I have gone down from my initial investment, by about 700.

Green guava, I had thought about stopping the re-investing, but I figured that I was hopefully buying more shares at a lower price...though it will be a long time probably until I see the rebound.  I do see that it may just be helpful to use that money in the places I want to be.  Maybe it would be best to just hold on to this until it comes back up (or breaks even), and use the dividends to invest with, since they aren't going down, and are tax-free.  Am I right?

So does any of the above information change any of the thoughts?

[superannuationfreak]

If you check Vanguard muni funds they've also dropped.
See here for reasons: http://www.bogleheads.org/wiki/Bond_basics#Bonds_on_the_secondary_market

Don't worry about the load: many of us have also learnt that lesson the hard way, it's paid and nothing can be done.

The ongoing higher fees probably aren't adding value though, so if you're happy with the underlying asset class you could sell this fund low and buy a similar vanguard fund low too.

The impression I'm getting, though, is you're not happy with the asset class. If short-term volatility with these funds will bother you then you may be better off with shorter term bonds or CDs. Over the next few years long term interest rates will most likely rise, so bond prices will fall. But your best bet is to read a book by William Bernstein and learn to see all your investments as one portfolio. Then use products to fill a role in that portfolio, rather than seeing them as an individual investment.

Just keep in mind bonds are not like stocks where there's relative symmetry in the upside and downside. Interest Rates can only fall so far - what you're seeing is the beginning of reversion to the mean.

Good luck!

Additional Note: A suitable book by William Bernstein:
The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between http://www.amazon.com/Investors-Manifesto-Prosperity-Armageddon-ebook/dp/B002U3CBY8/
If you're somewhat statistically inclined, I particularly like "The Four Pillars of Investing: Lessons for Building a Winning Portfolio" but both books tell a similar story

[Stache In Training]

This is a limited-term bond fund, so it is shorter fund. Just FYI.

It's not that I'm really unhappy with the asset class, as I like the fact that the dividends are tax-free, and still pay out at a high rate, even though the overall value is dropping.  So maybe I do just need to find a similar muni bond fund in vanguard, and switch over.  any ideas?

I guess I was having my FIRE investments as one portfolio, and my retirement age funds as another portfolio.  In which case, since I'm 27, do I even need bonds in a fire portfolio?

Just keep in mind bonds are not like stocks where there's relative symmetry in the upside and downside. Interest Rates can only fall so far - what you're seeing is the beginning of reversion to the mean.

So what you're saying is, I basically bought in on bonds at the highest share price they have been in my life-time.   ...Great!

[superannuationfreak]

This is a limited-term bond fund, so it is shorter fund. Just FYI.

It's not that I'm really unhappy with the asset class, as I like the fact that the dividends are tax-free, and still pay out at a high rate, even though the overall value is dropping.  So maybe I do just need to find a similar muni bond fund in vanguard, and switch over.  any ideas?

I guess I was having my FIRE investments as one portfolio, and my retirement age funds as another portfolio.  In which case, since I'm 27, do I even need bonds in a fire portfolio?

Just keep in mind bonds are not like stocks where there's relative symmetry in the upside and downside. Interest Rates can only fall so far - what you're seeing is the beginning of reversion to the mean.

So what you're saying is, I basically bought in on bonds at the highest share price they have been in my life-time.   ...Great!

Vanguard definitely have muni funds but their site is currently down for me (and I'm in Australia so not exactly the expert on US Municipal Bonds :-) ).  Perhaps someone with more local knowledge will chime in.

Note that the fund still has an average effective duration of 5 years: http://portfolios.morningstar.com/fund/summary?t=OPITX
So I'd call it 'intermediate term'

Whether you need (much in) bonds is really down to your risk appetite.  Some will only be comfortable with 40% stocks, some with 80% or more.  Bogleheads has a lot of free resources, e.g.: http://www.bogleheads.org/wiki/Asset_allocation
I still think the best investment you could make is your own investment education (e.g. one of the William Bernstein books above and a few hours of reading, or the many resources on the internet with a discerning eye, such as these: http://jlcollinsnh.com/category/stock-investing-series/).  That way you can better work out what will best suit your goals while still letting you sleep well at night.

In terms of thinking about the portfolio, it's reasonable to segment it a bit by timeframe (e.g. if you want to buy a house in 2 years having the deposit in cash/CDs) but for longer-term goals it's best to put assets in their most efficient location (I'm not an expert for the US by any means but the books I read typically say stocks in taxable accounts and bonds in IRA/401k).  And when you need to rebalance your portfolio or are starting to draw down funds for your early retirement you can always, for example, sell stocks in your taxable account and buy them in your IRA if needed.

And congratulations on buying Bonds when they're expensive and with a front-end load.  Seriously!  It's great to have such an experience when you're young and only lose a few hundred bucks as experience can a great teacher in this instance.  I lost something like $1,000 on a tech fund with a 2% load in the early 2000s.  Now I know a) not to chase 'hot' asset classes, and b) that I can get better expected results (after fees) with low-cost/index funds.  Imagine if that had been $100,000 for my retirement!  So I'm lucky to have had some lessons in my 20s too.

[superannuationfreak]

Incidentally, as I wasn't clear about this, I don't think investing in an intermediate-term municipal bond fund is something dumb or crazy.  It should just be part of an overall strategy.
And I wouldn't have expected a -7% return from this asset class either!

Municipal bonds do seem to have been harder hit, googling suggests due to lower liquidity than Treasury bonds (and perhaps the scare of the Detroit default).  So there is some potential for recovery if the 'scare factor' eases (but that may also be balanced out by interest rate rises if correlated with recovery in general).

[Stache In Training]

Haha, thanks for commiserating with me, superannuationfreak, on our expensive lessons learned!

So I think I'm between 3 options.
1. Keep the money there, and just use the dividends to invest elsewhere. (in vanguard, probably VFINX)
2. Sell this, and buy in a municipal bond fund in vanguard. (VWAHX seems to be very similarly performing, but lower fees, and just slightly more yield)Or something else that is tax-managed, like VTGLX?
3. Sell it and invest in the 500 index fund, VFINX, as I am going to be investing in that soon anyway.

Thoughts?

[Argyle]

What to do next is going to be a matter of opinion with a bit of gambling.

Here's what I'd do.  The front loading is already over and done, so let's call that "tuition."  But ultimately I understand you want to be in a Vanguard fund, which would be my choice too.  So I'd take the dividends which are reinvesting and instead invest that money in a Vanguard fund.  That way you're also buying low, but you're gradually making the move to Vanguard.

Then I personally would let the money sit where it is, providing the track record for this kind of fund at Oppenheimer is not worrisome.  Remember the loss is not real until you sell.  In some ways that's playing a thinking game with yourself, but in some ways that's the true.  It will go back up, so I'd let it.  I had a fund much like this -- I invested just before 9/11, and right away saw the value plummet.  I held on and just sold it to use for another purpose, twelve years later, at a tidy profit. 

That's what I'd do, but there are many reasonable choices.

[Stache In Training]

While the fees are only slightly higher than vanguard's equivalent, it hasn't lost as much in value, and the dividends are about the same.  So unless someone else has another great idea or other strong opinions on what to do, I think I'm going to keep it with Oppenheimer (and just hold it until the value comes back up), and just re-invest the dividends in vanguard.

Any glaring reasons why not?

[kyleaaa]

While the fees are only slightly higher than vanguard's equivalent, it hasn't lost as much in value, and the dividends are about the same.  So unless someone else has another great idea or other strong opinions on what to do, I think I'm going to keep it with Oppenheimer (and just hold it until the value comes back up), and just re-invest the dividends in vanguard.

Any glaring reasons why not?

I'm showing a 0.72% expense ratio for the Oppenheimer fund, which is considerably more than just "slightly" higher than Vanguard's 0.20%. Your comparison to the Vanguard fund is flawed because, despite the fact that the Oppenheimer fund has "Limited Term" in the name, it is NOT a limited term muni fund. It is an intermediate term muni fund with an average effective duration of 5.17 years and average credit quality of BBB, which is on the lower end of investment grade. The Vanguard fund that most closely mirrors this Oppenheimer fund would be the Vangurd Intermediate Term Tax Exempt fund (VWITX): similar yields, although the Vanguard fund generally holds significantly higher-quality bonds and is much cheaper.

I would switch immediately. The Vanguard fund is clearly superior. Do not wait for the fund to go back up before you sell it. That's irrational and will cost you a valuable tax deduction this year. Sell for a loss, take the deduction, and move to Vanguard.

You really shouldn't have separate FIRE and regular retirement portfolios, though. It's more efficient to treat everything as if it were one big pot of money, because it is. If you don't NEED bonds in a taxable account, don't invest in bonds in a taxable account.

[Le Dérisoire]

While the fees are only slightly higher than vanguard's equivalent, it hasn't lost as much in value, and the dividends are about the same.  So unless someone else has another great idea or other strong opinions on what to do, I think I'm going to keep it with Oppenheimer (and just hold it until the value comes back up), and just re-invest the dividends in vanguard.

Any glaring reasons why not?

No, don't do that. Waiting to "sell in the green" is a psychological bias.

This fund is either good or bad for you, and you either want to keep it or sell it right now. The price at which you bought it is irrevelant, except for tax purposes.

Think about it this way: If, instead of having this fund, you had its value in cash, would you buy this fund today? If not, sell the fund.

Or ask yourself: Do I need an intermediate duration bond fund in my asset allocation and if yes, is this fund appropriate for that role?

[Stache In Training]

Think about it this way: If, instead of having this fund, you had its value in cash, would you buy this fund today? If not, sell the fund.

Or ask yourself: Do I need an intermediate duration bond fund in my asset allocation and if yes, is this fund appropriate for that role?

This hit me.  The answers are no.  No to I wouldn't buy it, and no, I don't really think I need an intermediate duration bond fund.  I only liked it due to the tax free dividends.  But the tax benefits of selling it will make this a nice time to get to where I want to be. 

Thanks!