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When To Buy Bond Funds Timing

Perhaps the most important thing to understand about bonds is that when interest rates go down, the value of a bond goes up. The reason why is that your bond that pays interest at that higher rate is now more valuable than a bond that can be purchased today that pays interest at a lower rate. How much more is your bond worth? Precisely the amount that equalizes the yields on the two bonds with different interest rates.

when to buy bond funds timing


Naturally, when interest rates go up, the value of bonds goes down for exactly the opposite reason. Who wants that old crappy bond paying 2% when I can get a shiny new one paying 4%? I'm not buying your old one unless you sell it to me at a discount.

However, a bond fund is not exactly the same thing as owning an individual bond. When you own a high-quality bond, such as a treasury bond, there is a guarantee in place. You are guaranteed to get all of your principal back eventually, plus interest along the way. With a normal treasury bond, your nominal principal is guaranteed. With a TIPS, your real principal is guaranteed. That guarantee doesn't exist with a bond fund. Because a bond fund is a continually replenished group of bonds, it is possible to lose principal in a bond fund. However, in the long run, this really isn't a particularly significant risk. Besides, what do you think you're doing when you are building a portfolio of individual bonds? That's right, you're running a bond fund. Your only real advantage there is that you're not subject to the tax consequences of the actions of the other investors in the fund.

What do you think? Do you try to time the market when buying bonds, or do you just keep buying? Has increasing interest rates affected your decision to buy individual bonds or bond funds? Comment below!

awesome post Jim as always! hypothetical question- if I was in retirement during this current market and was 60/40 and bonds are acting as ballast to my equities, and I need to sell some of my portfolio to live off of, do you think you should maintain the 60/40 asset allocation when drawing down? or, seeing as both equities and bonds are down, but knowing equities have a the potential to recover to even greater heights, should I draw off just the bonds and tilt my asset allocation to maybe more 70/30, 80/20, or even drain all the bonds as long as equities are in a bear market? It seems to me when both stocks and bonds are in a bear market, the least detrimental thing to do for your portfolio to survive retirement would be to just draw off bonds and forget your chosen asset allocation and have a rising equity glidepath, at least until the bear market is over. has anybody done research on this type of drawdown strategy during an environment like we are in now?

After all, if individual investors and advisors had allocations to municipals with yields barely over 1% at the beginning of 2022, then they should now salivate at the prospect of yields exceeding 3% (before adjusting for tax benefits). With tax-loss harvesting opportunities ending, we expect that high-earning investors will be motivated to increase their tax-exempt holdings over time. Higher yields not only mean greater income but also greater portfolio stability if a deeper recession transpires.The tax-exempt primary bond market was busy at the start of 2022, but higher rates stunted the pace of issuance later on, consistent with our forecast. The supply picture going forward is uncertain, as usual, yet future issuance will likely remain subdued as the cost of borrowing is higher and municipal balance sheets are still flush with cash from pandemic-era stimulus.Both inflows and lower supply should support municipal valuations in 2023. The quick 4.1% rally in the fourth quarter indicated that these effects are underway. The rebound may lure more investors back with attractive yields and reduce the possibility of negative returns this year. With tax-equivalent yields of 6.0% (or meaningfully higher for residents in high-tax states who invest in corresponding state funds), municipals offer great value compared with other fixed income sectors and potentially even equities, especially with the odds of a recession increasing.

Mr. Alwine was previously head of Vanguard's Municipal Group. There, he led a team of 30 investment professionals who managed over $90 billion in client assets across 12 municipal bond funds. He has served in multiple roles throughout his career in the Fixed Income Group. His experience includes trading, portfolio management, and credit research. Mr. Alwine's portfolio management experience spans both taxable and municipal markets, as well as active and index funds. He is also a member of the investment committee at Vanguard that is responsible for developing macro strategies for the funds.

Bond mutual funds usually hold a large number of bonds with a variety of maturity dates, coupon rates and credit ratings. Unlike individual bonds, which usually make semiannual interest payments, bond funds usually make monthly distributions that can be paid directly to the investor or reinvested into the fund to compound returns. One key difference between individual bonds and bond funds is that with bond funds, there's no guarantee that you'll recover your principal at a specific time, particularly in a rising-rate environment.

All of the pros and cons for individual bonds and bond funds need to be placed into the context of your preferences and circumstances. What works well for you might not work well for others, and vice versa. The table above is a good starting point for deciding what is best for you. There are three important considerations when determining whether an individual bond or bond fund is best for you: the amount you have to invest, your financial goals and your behavioral preferences.

The amount of assets you have to invest in your bond portfolio is a key consideration when determining whether to invest in individual bonds or bond funds. Individual bonds have denominations that can be cost-prohibitive for some investors. Add in how many individual bonds an investor needs for sufficient diversification, and the dollar amount continues to rise. For some, it might make sense to use a more accessible bond fund, or a combination of bond funds with individual bonds.

Financial goals are another important factor to consider. If you are looking for predictable value and certainty for your financial goals, then individual bonds may be a better fit. Meanwhile, if you are looking for professional management and want greater diversification for your financial goals, then bond funds may be a better fit.

Behavioral preference is another important consideration. If seeing the NAV of your fund fluctuate and having no control over certain tax consequences makes you uncomfortable, then bond funds might not be the best solution for you. It is important to realize that while you cannot eliminate the emotions involved in investing, you can recognize how a certain investment might make you feel and adapt your investment choices accordingly.

Holding individual bonds generally requires more time and effort by the investor, but a Schwab Fixed Income Specialist can help get you started. For bond funds, knowing your risk tolerance and investment time horizon makes selecting bond funds much easier. The Schwab Mutual Fund OneSource Select List can help streamline the process even further, enabling you to screen a high-quality group of funds based on these criteria.

1 When owning individual bonds, the Schwab Center for Financial Research generally recommends holding at least 10 individual issues. For non-government guaranteed bonds like municipal or corporate bonds, we recommend holding at least 10 different issuers as well, to boost the diversification benefit and reduce the impact if any of the issuers were to default. Since bond mutual funds and ETFs own many securities, the impact of one bond default would likely be less than for an individual investor owning individual bonds. While some bond investments may be made in denominations as low as $1,000 per bond, the appropriate amount to invest is best determined by an individual's investing goals and objectives.

Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax-exempt status (federal and in-state) is obtained from third-parties and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

That company or government is agreeing to pay you back your principal (the amount of money they're borrowing from you) when the bond matures on a specific date, as well as regular interest payments (called the coupon). For example, if you buy a bond for $1,000 that matures in 10 years and pays a 4% interest payment annually, you'll receive $40 annually until the 10 years are up, at which time you'd also get back your $1,000. The yield is the overall return you get on a bond.

But when bond prices move down, bond yields move up. The reasoning comes down to supply and demand within the bond market. When there is less demand for bonds, new bond issuers have to offer higher yields to attract buyers. Meanwhile, bonds with lower yields that are already on the market become less valuable by comparison.

Typically when you're young, financial advisors tend to say you shouldn't have a lot of money invested in fixed income. Instead, you may want to establish an emergency fund first, and then invest money you won't need in the near future in stocks. But as you get closer to retirement, you likely want to invest in bonds because they allow you to preserve capital and have more predictability.

You can also buy bond funds, which invest in many different securities as opposed to just one, which can help limit risk. Morningstar has a ranking of what it considers the best bond exchange-traded funds (ETFs). 041b061a72


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