OT: Bond Funds

[JohnS]

Can anyone point me in the right direction? I'm well aware of a good allocation of stock mutual funds e.g. 55% Large, 15% Mid, 15% Small and 15% Int'l, split between Growth and Value, but I've never seen anywhere a good allocation for the various types of bond funds... :confused:

[J.Greene]

Can anyone point me in the right direction? I'm well aware of a good allocation of stock mutual funds e.g. 55% Large, 15% Mid, 15% Small and 15% Int'l, split between Growth and Value, but I've never seen anywhere a good allocation for the various types of bond funds... :confused:


channel the yield curve atmo

JG

[dzen]

Keep expenses as low as possible.

You might benefit from the advice at www.morningstar.com

[Serotta PETE]

Bond allocation (or fixed income) has a lot to do with your age/years tlll retirement. The % mix varies with your agr/years till you need the $$s.

Most major brokerage houses, as well as Fidelity.com have some education material.

Especially these days,,,,be very caution on the bond/funds and the investement quality of the bonds... Such folks as ANEIDARIDE and FLYDHEST have forgotten more about these topics then we will even know.

[CNY rider]

Be certain that you understand the difference between owning a bond and owning a bond fund. It is an absolutely key distinction.
You will lose money in a bond fund if interest rates on those bonds move up while you are holding the fund. Individual bonds work differently.

Having said that, I like the short end of the treasury yield curve right now. Longer term bonds are priced for perfection, with very little risk premium even in junk, and don't strike me as attractive right now.

You can buy govt bonds and notes in a Treasury Direct account without having to go through an intermediary like a broker.

****Full disclosure: I am short the long term gov bonds.

[Serotta PETE]

Very good information (even if I agree 100% and that is usually dangerous)


Be certain that you understand the difference between owning a bond and owning a bond fund. It is an absolutely key distinction.
You will lose money in a bond fund if interest rates on those bonds move up while you are holding the fund. Individual bonds work differently.

Having said that, I like the short end of the treasury yield curve right now. Longer term bonds are priced for perfection, with very little risk premium even in junk, and don't strike me as attractive right now.

You can buy govt bonds and notes in a Treasury Direct account without having to go through an intermediary like a broker.

****Full disclosure: I am short the long term gov bonds.

[CNY rider]

Very good information (even if I agree 100% and that is usually dangerous)


Bring on the red! :beer:

[Serotta PETE]

Bring on the red! :beer:


I will have the red at the OPEN HOUSE>>>>COME ON UP!!! PETE

[keno]

the key to bond asset allocation are two, in my view: taxable vs. tax-exempt, and duration.

Bond, or fixed income, funds are generally in money market, short term, intermediate term, and long term. Vanguard is an excellent source of each and one of, if not, the one lowest cost provider.

Risks associated with term (which is referred to as duration, a somewhat complex financial term meaning average rate of terms, in rough terms) relate to changes in interest rates, assuming no change in issuer repayment abilities. Currently, I view rates to be low, as inflation is low, and consequently I consider long term funds to be very risky, inasmuch as rises in interest rates result, at least, in decreases in the value of bonds. The same is true, but in decreasing degrees for intermediate and short-term funds. Money market funds typically mark to the dollar.

The two biggest problems I see with long and intermediate funds are 1) loss of asset value if rates increase and 2) possible capital gains consequences if a fund is called on by investors to receive distributions of capital causing sales of bonds resulting in gains to be shared by owners of the fund. In the latter case you not only suffer loss of capital but pay taxes for the privilege.

Personally, I prefer, whether stocks or bonds, to own mine individually in order to control tax consequences to a degree higher than mutual funds, whether of stocks or bonds, allow. Otherwise, I would look for the lowest turnover funds, that is, those doing little trading on the sell side, and those with the lowest expense ratio and longest experience.

As to US vs. foreign bonds funds, I have never looked at the possibility for a few reasons. Typically, US bonds are better understood in this country and information is much more available. Also, interest rates here tend to be higher and thus, US or US company bonds are a better investment. If bonds are to be considered a safe haven of a sort, I would eliminate the greatest number of risks that I could.

keno

[1centaur]

As a portfolio manager at an investment firm that specializes in bonds of all sorts and that has an exceptional track record (my firm), I have a few comments to chip in.

On the allocation front: when we're talking stocks, a lot of those allocation schemes end up assuring that the user has a broad diversification of styles, which is fine except that the practical result may be similar to owning an index fund. If all you want out of stocks is exposure to the typically positive long-term returns of risky assets, you can get that more cheaply than by buying 8 different mutual funds: index funds and ETFs make sense. When you want to find a good manager and make a bet that a particular style will work well for a while (and every style has its day), then do plenty of research trying to find genuine talent and make that move.

In bond allocation, there is a tried and true method if it suits the stage in your life, which is maturity laddering. Interest rates moving up (bond price down) or down (some corporate bonds can get called away from you before they go up as much as they would) are the enemy of the investor who just wants a reliable income stream. Buying a series of Treasuries that range from long to short maturities and buying new bonds at the long end of the ladder as the short ones mature is one way of becoming indifferent to interest rates moving your bonds up and down in price. There are a few Treasury ETFs of various maturity buckets if you don't want to gamble on either short or long rates (and either is a gamble) but just want broad exposure to a wide range of yields.

The municipal vs. Treasury vs. corporate (investment grade or high yield) debate is highly informed by your tax bracket and your risk preference. All of those will have their day, and greater risk will usually lead to greater return in the long run, if you can survive that long. Long Treasuries can be far more volatile than high yield bonds, thanks to that "duration" concept (interest rate risk).

Emerging market and other foreign bond funds have definitely come of age in recent years and can be a very good place to play a bet on the dollar falling, which most people generally expect in the intermediate term. I disagree with the notion that higher interest rates make the US market a better investment. Brazil had far higher rates when they had hyperinflation - Switzerland traditionally had low rates because their currency was so stable. What counts is which direction rates go after you invest, what currency risk you want or don't (some foreign bond funds hedge out their currency risk), whether you are chasing yield or stability, etc. In other words, bond funds are a lot like stock funds, but with less variability and less return (much of the time). Manager talent is important at foreign bond funds, but returns can be very good.

In the near term rates are unlikely to rise much, as the US is at the end of an economic cycle. As we head into the next recession, the Fed will cut rates and long bonds may or may not benefit from that (normally they would but some think the short rates will just decline this time). In a world where most asset classes have the same expected return (4-6%), the only bargain is relative safety. There will be better times to stick your neck out in bonds or in stocks. My gut says short to intermediate Treasuries are a good place to hide in 2007.

If I was going to devise an allocation in a tax free retirement account that was designed to get me some extra return but not scare me into making changes when the volatility heated up, it would probably be 1-10 year Treasuries in ETFs for 60%, high yield for 20% and emerging markets/foreign with really talented managers for 20%. Your risk tolerance may differ.

[Climb01742]

somehow munis vs t-bills doesn't quite have the ring of campy vs shimano. :) if only i understood what 1centaur said, maybe i could afford a meivici. and it's clear some folks get their bikes the old fashioned way: they eeearn them. :D

[JohnS]

Thanks, Centaur and Keno. Now I know enough to be dangerous! :D

[J.Greene]

This is good stuff. The best yet atmo and very much close to my own thoughts. Keep in mind though that your bank can ladder cd's with higher yields than can be done with treasuries. Channel the yield curve, eveything one centaur said is right there atmo.

JG


As a portfolio manager at an investment firm that specializes in bonds of all sorts and that has an exceptional track record (my firm), I have a few comments to chip in.

On the allocation front: when we're talking stocks, a lot of those allocation schemes end up assuring that the user has a broad diversification of styles, which is fine except that the practical result may be similar to owning an index fund. If all you want out of stocks is exposure to the typically positive long-term returns of risky assets, you can get that more cheaply than by buying 8 different mutual funds: index funds and ETFs make sense. When you want to find a good manager and make a bet that a particular style will work well for a while (and every style has its day), then do plenty of research trying to find genuine talent and make that move.

In bond allocation, there is a tried and true method if it suits the stage in your life, which is maturity laddering. Interest rates moving up (bond price down) or down (some corporate bonds can get called away from you before they go up as much as they would) are the enemy of the investor who just wants a reliable income stream. Buying a series of Treasuries that range from long to short maturities and buying new bonds at the long end of the ladder as the short ones mature is one way of becoming indifferent to interest rates moving your bonds up and down in price. There are a few Treasury ETFs of various maturity buckets if you don't want to gamble on either short or long rates (and either is a gamble) but just want broad exposure to a wide range of yields.

The municipal vs. Treasury vs. corporate (investment grade or high yield) debate is highly informed by your tax bracket and your risk preference. All of those will have their day, and greater risk will usually lead to greater return in the long run, if you can survive that long. Long Treasuries can be far more volatile than high yield bonds, thanks to that "duration" concept (interest rate risk).

Emerging market and other foreign bond funds have definitely come of age in recent years and can be a very good place to play a bet on the dollar falling, which most people generally expect in the intermediate term. I disagree with the notion that higher interest rates make the US market a better investment. Brazil had far higher rates when they had hyperinflation - Switzerland traditionally had low rates because their currency was so stable. What counts is which direction rates go after you invest, what currency risk you want or don't (some foreign bond funds hedge out their currency risk), whether you are chasing yield or stability, etc. In other words, bond funds are a lot like stock funds, but with less variability and less return (much of the time). Manager talent is important at foreign bond funds, but returns can be very good.

In the near term rates are unlikely to rise much, as the US is at the end of an economic cycle. As we head into the next recession, the Fed will cut rates and long bonds may or may not benefit from that (normally they would but some think the short rates will just decline this time). In a world where most asset classes have the same expected return (4-6%), the only bargain is relative safety. There will be better times to stick your neck out in bonds or in stocks. My gut says short to intermediate Treasuries are a good place to hide in 2007.

If I was going to devise an allocation in a tax free retirement account that was designed to get me some extra return but not scare me into making changes when the volatility heated up, it would probably be 1-10 year Treasuries in ETFs for 60%, high yield for 20% and emerging markets/foreign with really talented managers for 20%. Your risk tolerance may differ.

[stevep]

dont listen to those guys who know something.

i recommend that you put all your cash in steveps special bond allocation fund.
ultra, mega turbo high yield, no risk.
after a year in this fund a guy will bring cash to your door in wheelbarrels.
you will be able to buy plenty of bike shiite then.

the prospectus notes that the fund is right now heavily invested in 55cm bikes and frames. please call for a prospectus.
1-800- moneybyebye

[97CSI]

Channel the yield curve, eveything one centaur said is right there atmo. JGAnd what is this "Channel the yield curve......"? Am not familiar with the term.

[J.Greene]

And what is this "Channel the yield curve......"? Am not familiar with the term.

It's not Investment Jargon like ladder or barbell. It just means print yourself out a copy of the yield curve, sit down with a cup of coffee and ponder what the trillions of dollars invested in treasuries is telling you. There are fundamenta changes in the economy happening that have been discounted in the bond market for months.

JG

[97CSI]

There are fundamenta changes in the economy happening that have been discounted in the bond market for months. JGCouldn't agree more. That is why I keep moving more money to 'international' investments.

[93legendti]

I'm moving out of International...other than Japanese and Canadian.

[keno]

Equity mutual funds chronically underperform the market, and significantly. http://www.fool.com/school/mutualfunds/performance/record.htm

In order to determine if an apparently successful mutual fund manager is statistically tested to be talented requires an analysis of a period on the order of 12 years. On success and styles, take a look at http://www.amazon.com/Fooled-Randomness-Hidden-Chance-Markets/dp/0812975219/ref=pd_bbs_sr_2/002-3307793-3536064?ie=UTF8&s=books&qid=1173876825&sr=8-2.

For the ordinary mortal, the best guide to investing and source of investing wisdom, in my opinion, is http://www.amazon.com/Four-Pillars-Investing-Building-Portfolio/dp/0071385290/ref=pd_bbs_sr_1/002-3307793-3536064?ie=UTF8&s=books&qid=1173876950&sr=1-1.

Equity markets have, over time, significantly out-performed bond markets. My own view is that bonds are a manner in which to conserve assets, not grow them. An extra level of earning, typically quite small, vs. risk is a fool's bet in the fixed income world, in my view. For those interested in contemplating fixed income data, take a look at http://www.bloomberg.com/markets/rates/index.html.

"Investing", according to Benjamin Graham, Warren Buffett's model, is the return of capital with earnings thereon.

Two graduates, of some years back, of Wellesley College met years after graduating. One said to the other, "How are things going?" "Not well, I've taken to selling my body to maintain my lifestyle." "My, you had me worried for a moment. I was concerned that you had invaded capital."

keno

[orbea65]

Everyone stop beating around the bush and just tell me some hot stocks right now!!! :)

[97CSI]

Enron, Worldcom and Compaq. :D

Just got back from a quick run down to the Head-of-the-River and back (30mi) and its hot out there. Felt great to sweat.

[C5 Snowboarder]

Everyone stop beating around the bush and just tell me some hot stocks right now!!! :)

INTC, GE, SSL , EK and CMCSK -- you do not want Hot Stocks right now.. They have already peaked, you want tomorrow's hot stocks so you can take your profits and run to your bike shop. The ones I listed are tomorrows hot stocks.

[Serotta PETE]

Mr. Keno is a source of great knowledge. When you are around him and Mr. Flydhest, one becomes very humble (and listens a great deal)..

Additionally there are usually plentt of refreshments....

PETE


Equity mutual funds chronically underperform the market, and significantly. http://www.fool.com/school/mutualfunds/performance/record.htm

In order to determine if an apparently successful mutual fund manager is statistically tested to be talented requires an analysis of a period on the order of 12 years. On success and styles, take a look at http://www.amazon.com/Fooled-Randomness-Hidden-Chance-Markets/dp/0812975219/ref=pd_bbs_sr_2/002-3307793-3536064?ie=UTF8&s=books&qid=1173876825&sr=8-2.

For the ordinary mortal, the best guide to investing and source of investing wisdom, in my opinion, is http://www.amazon.com/Four-Pillars-Investing-Building-Portfolio/dp/0071385290/ref=pd_bbs_sr_1/002-3307793-3536064?ie=UTF8&s=books&qid=1173876950&sr=1-1.

Equity markets have, over time, significantly out-performed bond markets. My own view is that bonds are a manner in which to conserve assets, not grow them. An extra level of earning, typically quite small, vs. risk is a fool's bet in the fixed income world, in my view. For those interested in contemplating fixed income data, take a look at http://www.bloomberg.com/markets/rates/index.html.

"Investing", according to Benjamin Graham, Warren Buffett's model, is the return of capital with earnings thereon.

Two graduates, of some years back, of Wellesley College met years after graduating. One said to the other, "How are things going?" "Not well, I've taken to selling my body to maintain my lifestyle." "My, you had me worried for a moment. I was concerned that you had invaded capital."

keno