Author Topic: Dumb Bond Question  (Read 1042 times)

ericbonabike

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Dumb Bond Question
« on: May 01, 2019, 12:24:30 PM »
Hey all,
please help me out as I'm a dumb-dumb on bonds.   I recently read John Bogle's Book "Common sense on Mutual Funds", and I learned I should be able to expect a ~5% long term gain on bonds if averaged over periods exceeding ~10 years.  Kinda like how long term inflation adjusted total market returns will be ~7%. 

So, I'm 43 and I want to start moving money from an stock market into bonds.  My target allocation is 90/10. 
20% of my money is tied up in company ESOP stock.
40% of my money is tied up in company 401k.

The other 40% is at fidelity, in a blend of rollover IRA, roth IRA, brokerage accounts, etc. 

Total net work is 1.2 million.  So I moved 120,000 into the cheapest bond index fund I could find.  I did this in my rollover IRA and I bought FXNAX. 

The dividend is $.027755 and I own 10,471.430 shares.  Which gave me a dividend this month of:  $290.  On a $120,000 investment. 


I also have $8500 in a money market fund which I use for my checking account. 
The 7 day yield is 2.23%.  My 8500 threw of interest of ~$75. 

If I had put my $120,000 into SPRXX (money market), I would guess that would have thrown off interest this month of: $1125.  ish.


So, why the hell would I put money into a bond fund?  $1125 a month = $12k a year. 

That's 25% of my annual spend rate.  I could put $400,000 into a money market and make ~48k a year? 

dandarc

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Re: Dumb Bond Question
« Reply #1 on: May 01, 2019, 12:42:02 PM »
So the book you read says what to expect over a period exceeding 10 years and you're worried about 1 month returns. Bond yields are low now and have been for years. FED did start raising interest rates a little while ago, but interest rates are still low.

Your bond fund yielded about 2.9% per year. On $120,000 invested, you've got ($120,000 * .029) / 12 = $290.

There is no way a money market account is paying 12% per year - I don't believe you on that being monthly interest. Maybe it is paid every 6 months or something along those line. What specific money market fund are you using? SPRXX is yielding 2.2% - your $8500 would have got $15.50 interest in April. That's a far cry from $75.

appleshampooid

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Re: Dumb Bond Question
« Reply #2 on: May 01, 2019, 12:49:13 PM »
Agreed with dandarc that there is a mistake in your math somewhere.

Presently, based on the options available to me, money market accounts are returning about the same interest as bond yields. Bonds have the potential for the principal to go up, though (or down). The principal in a MM account will always stay the same, barring another "breaking the buck" event like we had with a very small number of money markets in the 2008 timeframe. That is very rare.

ericbonabike

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Re: Dumb Bond Question
« Reply #3 on: May 01, 2019, 12:57:26 PM »
ah, I misread the statement for money market. 
total interest for the money market was closer to $6.  Probably because I didn't carry that high balance the entire month.



So, we are in historically low bond yield territory.  I shouldn't expect 4-5% right now.  Interest rates might go up.
If you are currently retired, and are running a 60/40 stock/bond ratio...
what is your current monthly dividend for the 40%? 
If I had 40% in bonds, that would currently pay out: 1200 a month.
Which isn't bad I guess, and would completely pay my mortgage. 



dandarc

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Re: Dumb Bond Question
« Reply #4 on: May 01, 2019, 01:11:54 PM »
SWAGX (Schwab Total US Bond Market) last paid me $114 on a ~$45K balance - just about 3%. That was posted April 1st - I have my soloK at eTrade and they take a couple of days to post dividends so I don't have the 5/1 numbers yet. I'm guessing that will work out to about 2.9%.

VBTLX - Vanguard Total US Bond Market - paid $33.30 on a $13,885 balance - right about 2.9%.

All of these funds - including the one you're in - hold more or less the same mix of bonds, so they all return about the same in a given month.

nereo

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Re: Dumb Bond Question
« Reply #5 on: May 01, 2019, 06:20:50 PM »
ah, I misread the statement for money market. 
total interest for the money market was closer to $6.  Probably because I didn't carry that high balance the entire month.



So, we are in historically low bond yield territory.  I shouldn't expect 4-5% right now.  Interest rates might go up.
If you are currently retired, and are running a 60/40 stock/bond ratio...
what is your current monthly dividend for the 40%? 
If I had 40% in bonds, that would currently pay out: 1200 a month.
Which isn't bad I guess, and would completely pay my mortgage.

Perhaps you were just saying the above to illustrate a point, but...
It's worth noting that in the drawdown phase (i.e. "retirement") one typically draws from both the equities and bonds in their portfolio in order to keep their asset allocation constant (or, occasionally, to push their AA in a particular direction).  If you are 60/40 and your financial plan is to remain 60/40 you will draw 60% from equities and 40% form bonds.  Periodic rebalancing to maintain your AA.

ericbonabike

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Re: Dumb Bond Question
« Reply #6 on: May 02, 2019, 08:35:46 AM »
ah, I misread the statement for money market. 
total interest for the money market was closer to $6.  Probably because I didn't carry that high balance the entire month.



So, we are in historically low bond yield territory.  I shouldn't expect 4-5% right now.  Interest rates might go up.
If you are currently retired, and are running a 60/40 stock/bond ratio...
what is your current monthly dividend for the 40%? 
If I had 40% in bonds, that would currently pay out: 1200 a month.
Which isn't bad I guess, and would completely pay my mortgage.

Perhaps you were just saying the above to illustrate a point, but...
It's worth noting that in the drawdown phase (i.e. "retirement") one typically draws from both the equities and bonds in their portfolio in order to keep their asset allocation constant (or, occasionally, to push their AA in a particular direction).  If you are 60/40 and your financial plan is to remain 60/40 you will draw 60% from equities and 40% form bonds.  Periodic rebalancing to maintain your AA.

But if annual expenses is $40,000.  And if i've got 40% of money in bonds (~500k), throwing off 2.9% dividends yields 14,500. 

So, I would spend that 14500 first, and follow the strategy you outline on the remainder of my 25,500 expenses.

MustacheAndaHalf

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Re: Dumb Bond Question
« Reply #7 on: May 02, 2019, 09:11:39 AM »
I suspect you swapped "monthly yield" with "annual yield", and then tried to compare them...

But more important is a strategy for deciding on bond funds.  I'd suggest using "SEC yield".  It's regulated by the SEC, and means the same thing in every bond fund (or they have an unpleasant visit from government in their future).  I like to use morningstar to view the funds of other companies - a third-party website doesn't favor any particular fund company.  Plus, "SEC yield" is often on the first page.  For example: search for "BND morningstar" (BND is Vanguard's Total Bond Market ETF).

It might also be worth comparing bonds that are tax-exempt.  If you live in a high tax state (esp CA or NY), there's various state-specific tax-exempt bond funds.  They invest in municipal bonds from one state, and all their income is tax-exempt (at Federal and State level).