How to prove that I am not losing money with bond funds? (2024)

I read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

If you haven't read it, may want to check out https://www.bogleheads.org/wiki/Individ ... _bond_fund

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

Is this a trick question?

From what date do you measure the applicable holding period? Retrospectively, from the date of each purchase into the fund? Or prospectively, from today’s date?

And given that the average maturity likely isn’t constant, but rather fluctuates a bit over a period of time—even during the fund’s original average maturity period—what number should you use?

Isn’t a bond fund (like an intermediate term one) constantly rolling, such that there is no real maturity of the fund or it’s holdings, as they get sold off when they age out of the fund’s preferred holding term period?

Random Poster wrote: ↑Thu Jan 18, 2024 12:01 am

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

Is this a trick question?

From what date do you measure the applicable holding period? Retrospectively, from the date of each purchase into the fund? Or prospectively, from today’s date?

And given that the average maturity likely isn’t constant, but rather fluctuates a bit over a period of time—even during the fund’s original average maturity period—what number should you use?

Isn’t a bond fund (like an intermediate term one) constantly rolling, such that there is no real maturity of the fund or it’s holdings, as they get sold off when they age out of the fund’s preferred holding term period?

Just buy and hold individual bonds. If you're at the point where you're ready to start retroactively measuring the elapsed time from each purchase date you are probably spending too much time thinking about this. A bond fund holds individual bonds. It's performance will be tightly linked to the performance of the individual bonds, and in the longterm and in the aggregate it will have characteristics that closely resemble those bonds. If you can't accept that a bond fund will behave like the bonds it holds you are probably better off just buying the individual bonds

Use Porttfolio Visualizer. Choose your fund and choose a time period that matches the average maturity. Make sure it is set to reinvest dividends.

https://www.portfoliovisualizer.com/bac ... RXDnGOU4ZJ

It calculates nominal returns only, not real.

Random Poster wrote: ↑Thu Jan 18, 2024 12:01 am

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

Is this a trick question?

From what date do you measure the applicable holding period? Retrospectively, from the date of each purchase into the fund? Or prospectively, from today’s date?

And given that the average maturity likely isn’t constant, but rather fluctuates a bit over a period of time—even during the fund’s original average maturity period—what number should you use?

Isn’t a bond fund (like an intermediate term one) constantly rolling, such that there is no real maturity of the fund or it’s holdings, as they get sold off when they age out of the fund’s preferred holding term period?

I thought Beensabu was asking whether a bond fund with a duration of X has ever lost capital in nominal terms over a time period of X.

A lot of people have been freaking about BND recently, but I'll bet a lot of money it will be positive (in nominal terms at least) 6-7 years from now.

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

You can't prove it because it is not guaranteed. Suppose rates rise steadily over the period of time corresponding to duration.

km91 wrote: ↑Thu Jan 18, 2024 12:20 am

Random Poster wrote: ↑Thu Jan 18, 2024 12:01 am

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

Is this a trick question?

From what date do you measure the applicable holding period? Retrospectively, from the date of each purchase into the fund? Or prospectively, from today’s date?

And given that the average maturity likely isn’t constant, but rather fluctuates a bit over a period of time—even during the fund’s original average maturity period—what number should you use?

Isn’t a bond fund (like an intermediate term one) constantly rolling, such that there is no real maturity of the fund or it’s holdings, as they get sold off when they age out of the fund’s preferred holding term period?

Just buy and hold individual bonds. If you're at the point where you're ready to start retroactively measuring the elapsed time from each purchase date you are probably spending too much time thinking about this. A bond fund holds individual bonds. It's performance will be tightly linked to the performance of the individual bonds, and in the longterm and in the aggregate it will have characteristics that closely resemble those bonds. If you can't accept that a bond fund will behave like the bonds it holds you are probably better off just buying the individual bonds

I'll counter...

To me this would be akin to saying that if you can't accept that a Total Stock Market will behave like the stocks it holds, you should just buy individual stocks?

Sorry, not buying that argument... That ignores the inherent benefits of diversification, duration alignment, liquidity, etc. And ignores the added risk/complexity of buying individual bonds.

Now, if you want to qualify the "buy individual bonds" to government issued bonds (Savings Bonds, TIPS, Treasuries) - there I'm not as opposed. They are one of the "safest" assets available (given they are backed by the government), and have a highly liquid market to buy/sell if/as needed (and obviously the open auction process).

But this still leaves exposure/risk related to duration. If one is lucky enough to know they'll need $X/year in bonds and the timing lines up with the maturity options (for example TIPS are available in 5-, 10-, or 30-year maturities at auction) - they can buy - and ultimately get - exactly what they expect by creating a "ladder" of those funds. If the timing doesn't line up, things get more complicated - do they setup a "rolling" ladder, use different maturities to hit their average, etc.

Or to state things differently, bonds (and bond funds) have the least risk when aligned with ones needs/duration. If the duration is too short, you have risk of the future interest rate being less when you need to reinvest to reach your target duration. When the duration is too long, you have the risk that rising rates will see your "value" go down - or in the case of individual bonds you'll earn far less than you could have - had your duration been properly aligned.

Having said all that, I think the best default recommendation is "keep it simple" and just use an "intermediate total bond fund" - as it's likely all one needs [for their bond allocation]. This is the basis of the much recommended "three fund" portfolio here. I've forgotten who stated this, but I'm fond of the summary of a "three fund" portfolio being something to the effect of "it might not be the best portfolio, but it's vastly better than an infinite number of other alternatives".

lazynovice wrote: ↑Thu Jan 18, 2024 12:25 amUse Porttfolio Visualizer. Choose your fund and choose a time period that matches the average maturity. Make sure it is set to reinvest dividends.

https://www.portfoliovisualizer.com/bac ... RXDnGOU4ZJ

It calculates nominal returns only, not real.

Click on the "i" in Performance Summary next to Final Balance or CAGR, or check the "Inflation Adjusted" box under the graph.

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

It's tough to model because there are so many variables.

Every time the interest rate rises (or the market expects it), the time to recovery is reset.

But that assumes that interest rates don't wind up falling during that period. If interest rates fell as quickly as they rose, you'd get back to when after 18 months (in this cycle.)

Some people like individual bonds because they can ignore the mark-to-market value. And that's fine if you can hold to maturity. Most people can't predict their expenses so finely that they have bonds maturing just in time.

Maybe that's easier in retirement. But in the accumulation stage, I'd just pick an investment-grade intermediate bond fund and ignore the value.

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

You can't because it isn't true. This forum is guilty of spreading way too much misinformation in the form of oversimplified and wrong statements about bonds.

The offset and solution to the problem is that there is massive correct discussion of these things here on the forum if you read enough and separate what is accurate from what is misguided. Put another way, one has to ferret out the things that are a correct description of the behavior of bonds and what things are not.

As to the math there are two parts. The first is the math for pricing bonds as the net present value of the bond income streams and associated with that the definitions of duration. A specific definition of duration that is relevant is the definition of modified duration as the log derivative of bond price with respect to yield and the consequent ability to approximate a new bond price from the old bond price when there is a small change in yield.

The other part, which has been presented in some threads here and possibly also discussed in various sources is a computation of what happens to the value of a bond fund holding when interest rates are changing but one holds and reinvests dividends over time. Two results have often been quoted. One is that if yield takes a step change then after a time equal to the duration the holding will arrive at a value equal to the value you would have accumulated if yield had not changed. In the meantime your holding would be greater or less than you would otherwise have had depending on whether the yield change was down or up. After the point of indifference your asset value continues to rise above or fall below what you would have had depending on whether yield is up or down.

A second scenario people have sometimes presented is to sit down and calculate step by step (year by year, month by month, or day by day if needed) how the value of the holding would evolve over time if yields increase or decrease linearly over time. In that case the point of indifference is reached in a time of twice the duration less one year, assuming the duration itself does not change. In reality duration is also a variable function of the yield.

A third computation you can do is similar to the above but entering some arbitrary data set for the yield as a function of time. That would be a model for what actually happened in world at some time but is only useful as a prediction if you can forecast future interest rates. In short the whole math amounts to kicking the can down the road from doing bond math to somehow knowing what future interest rates will be. Note that instant losses in a bond fund due to a rise in yield can be instantly recovered by a fall in yield. Note also that over long time relative to the duration a person accumulates more wealth from interest rates rising than from rates not rising, especially if the prevailing rate is low.

Is there some cut and dried advice for what the timing should be? Probably not. In my mind I think an intermediate fund with a duration around six years might be a good candidate for holding permanently in a portfolio over 15 years and more. That would be someone accumulating money over a working career of maybe 30 years and a retirement of maybe 30 years. If a person has a target date to recover the wealth in five, ten, or fifteen years then maybe assets other than an intermediate bond fund would be a better choice. That includes the fact that bond funds maintaining a constant duration are not a good match for a target date the time to which is constantly decreasing. But that is just my offhand thought process. Having never had to place money for any purpose than the long term accumulation of wealth followed by the long term recovery of wealth and holding the whole in portfolio of stocks and bonds, the issue of asset placement for short term needs has never occurred for me and consequently except for short term cash flow management my fixed income assets are just in intermediate bond funds.

Tamalak wrote: ↑Wed Jan 17, 2024 10:24 pmIt's technically possible for interest rates hikes to cause bond funds to lose money indefinitely, but the hikes would have to accelerate exponentially to keep ahead of the yield return.

Yes, one calculation that can be modeled is the prediction of interest rates increasing with an exponential time dependence to add to the catalogue of the step change, the linear increase, and the change curve extracted from some historical period or another if one wants.

There is no maturity date for a normal bond fund. BND has an average maturity date of about 6 years. But in 6 years, it will still have an average maturity date of 6 years. Each year a fraction of the bonds in the fund mature and get replaced again with new bonds.

A bond fund has the returns of a rolling bond ladder, it can't be compared to an individual bond. When an individual bond nears maturity, it returns to par value. But a bond fund has no maturity date, so this does not apply.

If you had build a 12 year bond ladder 12 years ago, and you had been diligently buying a new 12 year bond as each bond ladder rung matures, you'd be about on par with BND. You'd have a lot of 1% rungs left, but you'd have a few 3-4% rungs now.

SnowBog wrote: ↑Thu Jan 18, 2024 12:54 am

km91 wrote: ↑Thu Jan 18, 2024 12:20 am

Random Poster wrote: ↑Thu Jan 18, 2024 12:01 am

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

Is this a trick question?

From what date do you measure the applicable holding period? Retrospectively, from the date of each purchase into the fund? Or prospectively, from today’s date?

And given that the average maturity likely isn’t constant, but rather fluctuates a bit over a period of time—even during the fund’s original average maturity period—what number should you use?

Isn’t a bond fund (like an intermediate term one) constantly rolling, such that there is no real maturity of the fund or it’s holdings, as they get sold off when they age out of the fund’s preferred holding term period?

Just buy and hold individual bonds. If you're at the point where you're ready to start retroactively measuring the elapsed time from each purchase date you are probably spending too much time thinking about this. A bond fund holds individual bonds. It's performance will be tightly linked to the performance of the individual bonds, and in the longterm and in the aggregate it will have characteristics that closely resemble those bonds. If you can't accept that a bond fund will behave like the bonds it holds you are probably better off just buying the individual bonds

I'll counter...

To me this would be akin to saying that if you can't accept that a Total Stock Market will behave like the stocks it holds, you should just buy individual stocks?

Sorry, not buying that argument... That ignores the inherent benefits of diversification, duration alignment, liquidity, etc. And ignores the added risk/complexity of buying individual bonds.

I don't disagree. Personally I think holding a bond fund and investing in the individual bonds are effectively the same thing, and the bond fund is more convenient and diversified. But OP is driving themselves crazy trying to prove something that doesn't need to be proved. A bond fund is a rolling bond ladder. An investor in individual bonds who makes regular contributions, reblances, and rolls maturing principal into new bonds has a bond allocation that looks very much like a rolling bond ladder. If OP can't get comfortable with this and absolutely needs to see their bonds mature at par to be sure they aren't losing money, they should probably just hold individual bonds and not waste time calculating interest rate scenarios

JonFund wrote: ↑Thu Jan 18, 2024 9:59 amNot to be facetious, but my answer would be to not own bond funds in the first place. My own personal experience has been that once I owned individual bonds, I never went back to bond funds. What I like about individual bonds is that they provide transparency; if held to maturity you know exactly how much you're going to earn, and when it will be paid out. With bond funds, you get neither.

I can definitely see the appeal in that. You also have a way to cleanly exit a bond ladder by just letting them all mature over time. There's no way to do that with a bond fund.

But for long term holdings, a bond fund is simple and will have similar returns. You also probably don't want to do things like add some corporate or HY bonds in your individual bond portfolio, but that's easy in a bond fund.

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

That statement comes from Jack Bogle, but the data he used was historical data. There's no mathematical reason it's true. It was just an observation and prediction by him.

The math your looking for is that for a rolling bond ladder the time you are indifferent about constantly rising rates is 2(n-1). Sorry, but I don't have the link to the thread handy.

I previously posted this Money for the Rest of Us podcast link in another bond thread... https://www.podbean.com/media/share/dir ... ce=w_share

The host, David Stein, explains why a bond fund's Starting Yield to Maturity is a reliable predictor of it's expected return when held for it's average duration. I believe he mentions this JP Morgan paper which illustrates that... https://am.jpmorgan.com/us/en/asset-man ... out-yield/

sleepysurf wrote: ↑Thu Jan 18, 2024 11:14 amI previously posted this Money for the Rest of Us podcast link in another bond thread... https://www.podbean.com/media/share/dir ... ce=w_share

The host, David Stein, explains why a bond fund's Starting Yield to Maturity is a reliable predictor of it's expected return when held for it's average duration. I believe he mentions this JP Morgan paper which illustrates that... https://am.jpmorgan.com/us/en/asset-man ... out-yield/

The paper says it's a more accurate predictor, but how accurate is it?

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

None of that is true, I have no idea why people are continuously confused. The only safe/stable thing about bonds are the cash-flow they generate. If you buy a bond(or fund) paying 5%, then you will get that 5% cash flow for the duration promised. That's the only promise made. Everything else is negotiable. If it's a Bond or a Fund makes no difference.

TIPS just add CPI to that number, giving you inflation protection. Otherwise it's not really special. Generally speaking a Nominal Treasury and a TIPS of the same duration should return about the same amount when you look back after they matured. Sometimes one will win over the other, but that's only when the markets screw up and don't calculate inflation correctly(which is what happened the last few years).

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

That’s right, because bond funds don’t have a duration, rather they have an average duration of the bonds held in the fund, and those continually rotate.

Some bond funds that hold a very few large principle bonds might be viewed as closer to having a duration per se.

Lee_WSP wrote: ↑Thu Jan 18, 2024 10:51 am

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

That statement comes from Jack Bogle, but the data he used was historical data. There's no mathematical reason it's true. It was just an observation and prediction by him.

It is a heuristic or rule of thumb that is widely referenced in the investment community. It is possible that Mr. Bogle was the first to articulate it, but I'm skeptical of that.

Northern Flicker wrote: ↑Thu Jan 18, 2024 1:09 pm

Lee_WSP wrote: ↑Thu Jan 18, 2024 10:51 am

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

That statement comes from Jack Bogle, but the data he used was historical data. There's no mathematical reason it's true. It was just an observation and prediction by him.

It is a heuristic or rule of thumb that is widely referenced in the investment community. It is possible that Mr. Bogle was the first to articulate it, but I'm skeptical of that.

Yes, I'm not sure if he coined it, but I'm pretty darned sure that's why it gets so much traction on this forum.

I think the simplest way is to remember that a bond fund is a collection of individual bonds. Assume you own a bond and you do not reinvest the interest. If interest rates rise the bond will lose value on the open market. But as the bond approaches maturity the market value of the bond will rise. On the day the bond reaches maturity it will be redeemed for face value. So in that sense you can not lose money.

Bond fund managers are constantly buying and selling bonds in an attempt to make money for the shareholders in the fund, but except for default a bond will always be redeemed for par value at maturity and someone is going to own that bond at that time.

The average stated duration of the fund tells you how long the average of all bonds in the fund have to reach maturity. Even without reinvesting the dividends you will eventually get your money back although with a fund it's impossible to know exactly when. The bond fund duration is useful information but it's not a guarantee and there is no precise date you can count on.

The fact that the fund managers are constantly trading doesn't really have much effect on the value of the shares in the fund; it's mostly tinkering around the edges. Every bond in the fund will be worth par value eventually, it just may not be right now.

Florida Orange wrote: ↑Thu Jan 18, 2024 3:57 pmI think the simplest way is to remember that a bond fund is a collection of individual bonds. Assume you own a bond and you do not reinvest the interest. If interest rates rise the bond will lose value on the open market. But as the bond approaches maturity the market value of the bond will rise. On the day the bond reaches maturity it will be redeemed for face value. So in that sense you can not lose money.

Bond fund managers are constantly buying and selling bonds in an attempt to make money for the shareholders in the fund, but except for default a bond will always be redeemed for par value at maturity and someone is going to own that bond at that time.

The average stated duration of the fund tells you how long the average of all bonds in the fund have to reach maturity. Even without reinvesting the dividends you will eventually get your money back although with a fund it's impossible to know exactly when. The bond fund duration is useful information but it's not a guarantee and there is no precise date you can count on.

The fact that the fund managers are constantly trading doesn't really have much effect on the value of the shares in the fund; it's mostly tinkering around the edges. Every bond in the fund will be worth par value eventually, it just may not be right now.

This is only true for some bond funds, certainly most bond funds work this way, but not all. Bond Fund ladders(also called Target Maturity Date Bond Funds) work differently and have a fixed duration, at which time they close up shop and pay out whatever is left.

Also, just because you get the face value of the bond doesn't mean you won't lose money, you can lose money in real terms, depending on inflation at the time.

This is why the only static/safe part of a bond fund is the yield, i.e. the cash they pay out and put in your pocket. Everything else is negotiable.

JonFund wrote: ↑Thu Jan 18, 2024 9:59 amNot to be facetious, but my answer would be to not own bond funds in the first place. My own personal experience has been that once I owned individual bonds, I never went back to bond funds. What I like about individual bonds is that they provide transparency; if held to maturity you know exactly how much you're going to earn, and when it will be paid out. With bond funds, you get neither.

But when your bond matures, you don’t know what the next bond will pay. And, if you have to sell before maturity for an unexpected purchase or an emergency, you don’t know what you will get for the bond. And, you don’t know if the current bond you are buying will be competitive with a bond purchased next month or next year, perhaps locking in a low rate for years.

So, there is uncertainty with individual bonds too. If you buy a bunch of bonds to alleviate some of the above risk, your bond portfolio starts to look like a bond fund.

zie wrote: ↑Thu Jan 18, 2024 4:17 pmAlso, just because you get the face value of the bond doesn't mean you won't lose money, you can lose money in real terms, depending on inflation at the time.

This is why the only static/safe part of a bond fund is the yield, i.e. the cash they pay out and put in your pocket. Everything else is negotiable.

That's true. I was talking about money in nominal terms only. In fact, inflation is the biggest risk for bondholders. Since bond prices and interest rates move in opposite directions, in theory it shouldn't make any difference. Would you rather get more interest or sell your bonds for a higher price? The only time it should matter is if prices drop and you have to sell your bonds before you can collect the interest. That's why duration matching is so important.

Northern Flicker wrote: ↑Thu Jan 18, 2024 12:48 am

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

You can't prove it because it is not guaranteed. Suppose rates rise steadily over the period of time corresponding to duration.

point of indifference:
viewtopic.php?t=248840
viewtopic.php?t=373194

Probably not right, but I tested my bond fund since I started buying it in 2018. If I sold it in October of 2022 or 2023, it would have lost capital. Any other time, it was slightly above basis. I don't know if that's what OP is asking. https://www.portfoliovisualizer.com/bac ... V5u3tkOqI9 It also matters if you look at it inflation adjusted or not. Inflation adjusted it's below basis for the last 24-months.

For the amateur 3-fund portfolio W2-only accumulator, bond fund damps the swings of the market (good) but damps returns (bad). I personally look at the bond fund as a poorly performing stock fund that I include in my portfolio because "the book" suggested it. I haven't experienced a market where holding a bond fund is exciting or makes me wonder if I'm losing capital. I just keep rebalancing into it from stocks because "the book" said that's what you do. For the amateur W2-only accumulator nearing retirement, the bond fund acclimates one to moderate, boring returns that are good in the decumulation phase. I think that's what "the book" said.

It doesn't matter how many times I read about bonds in the wiki or "the book"; I still don't understand it. I'm guilty of not knowing what I'm buying, but I did go with the almost free advice, so...

ApeAttack wrote: ↑Thu Jan 18, 2024 12:44 am

Random Poster wrote: ↑Thu Jan 18, 2024 12:01 am

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

Is this a trick question?

I thought Beensabu was asking whether a bond fund with a duration of X has ever lost capital in nominal terms over a time period of X.

Yup. More like asking whether that's ever happened to the OP, though.

I'm sure it's happened before. It's probably more likely to happen with shorter duration bond funds just because it's more likely for interest rates to increase for the entire duration of a short-term bond fund than it is for funds with longer durations.

A lot of people have been freaking about BND recently, but I'll bet a lot of money it will be positive (in nominal terms at least) 6-7 years from now.

Those people should take a look at the behavior of short-term bond funds over this most recent period of rapidly rising rates.

https://www.portfoliovisualizer.com/bac ... bcNeTeKWdW

What happened?

Short-term rates rose steadily for the entire year of 2022. What happened to the value of an initial investment as of 2022 in a short-term bond fund? It decreased for that entire year of 2022.

Then short-term rates stabilized and went up a little more for almost another year. The value of the short-term bond fund investment increased as rates stabilized, even though they still went up a little more because of the higher yield from newly acquired bond holdings, which meant higher monthly distributions that were reinvested at a lower and lower NAV price.

Then short-term rates went down a little, and the value of the short-term bond fund investment went up sharply due to that small drop in rates.

If you look at a NAV chart of VFISX (Vanguard Short-Term Treasury Fund), it's a downtrend the whole way from 2022 - just like with intermediate and long-term bond funds, just of lesser magnitude. And yet, if you look at total return over the period, the drawdown is almost over.

The same thing will happen to intermediate-term bond funds like BND, just on a longer time scale. But not that much longer - only a few extra years. BND is already almost halfway through drawdown recovery. Have a little patience.

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

BND has done it a few times for 5 & 7 year periods. And in nominal returns too.

Check out the rolling returns.
https://www.portfoliovisualizer.com/bac ... sisResults

rkhusky wrote: ↑Thu Jan 18, 2024 4:29 pm

JonFund wrote: ↑Thu Jan 18, 2024 9:59 amNot to be facetious, but my answer would be to not own bond funds in the first place. My own personal experience has been that once I owned individual bonds, I never went back to bond funds. What I like about individual bonds is that they provide transparency; if held to maturity you know exactly how much you're going to earn, and when it will be paid out. With bond funds, you get neither.

But when your bond matures, you don’t know what the next bond will pay. And, if you have to sell before maturity for an unexpected purchase or an emergency, you don’t know what you will get for the bond. And, you don’t know if the current bond you are buying will be competitive with a bond purchased next month or next year, perhaps locking in a low rate for years.

So, there is uncertainty with individual bonds too. If you buy a bunch of bonds to alleviate some of the above risk, your bond portfolio starts to look like a bond fund.

I would also add that if one needs to rebalance into stocks in a downturn then the only choice would be sell individual bonds that haven’t matured yet.

Lee_WSP wrote: ↑Thu Jan 18, 2024 9:26 pm

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

BND has done it a few times for 5 & 7 year periods. And in nominal returns too.

Check out the rolling returns.
https://www.portfoliovisualizer.com/bac ... sisResults

Is this what you're referring to?

5 years-0.65%
7 years-0.31%

When I look at "Annualized Rolling Return - 5 Years" for TBM, I'm seeing it dip below zero Sept-Dec 2022 and then again for Oct 2023. Is that what you mean?

dbr wrote: ↑Thu Jan 18, 2024 9:00 amIs there some cut and dried advice for what the timing should be? Probably not. In my mind I think an intermediate fund with a duration around six years might be a good candidate for holding permanently in a portfolio over 15 years and more. That would be someone accumulating money over a working career of maybe 30 years and a retirement of maybe 30 years. If a person has a target date to recover the wealth in five, ten, or fifteen years then maybe assets other than an intermediate bond fund would be a better choice. That includes the fact that bond funds maintaining a constant duration are not a good match for a target date the time to which is constantly decreasing. But that is just my offhand thought process. Having never had to place money for any purpose than the long term accumulation of wealth followed by the long term recovery of wealth and holding the whole in portfolio of stocks and bonds, the issue of asset placement for short term needs has never occurred for me and consequently except for short term cash flow management my fixed income assets are just in intermediate bond funds.

That’s where the duration matching threads come into focus.

I agree bonds no matter how you choose to hold them, they have their place in a well diversified portfolio because of their unique characteristics different from stocks, etc. I view them as an income generating component not a capital appreciation one. If I get cap. appreciation then fine.

Beensabu wrote: ↑Thu Jan 18, 2024 10:45 pm

Lee_WSP wrote: ↑Thu Jan 18, 2024 9:26 pm

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

BND has done it a few times for 5 & 7 year periods. And in nominal returns too.

Check out the rolling returns.
https://www.portfoliovisualizer.com/bac ... sisResults

Is this what you're referring to?

5 years-0.65%
7 years-0.31%

When I look at "Annualized Rolling Return - 5 Years" for TBM, I'm seeing it dip below zero Sept-Dec 2022 and then again for Oct 2023. Is that what you mean?

You asked for proof and I found it. But yes. It's happened historically. You can clearly lose nominal dollars even if you hold to the average maturity. But even if you break even, you lost. Bond funds do not do what people think they do. They're rolling ladders you have no control over.

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

Well, it appears that no one has lost money in Vanguard total bond in the last 30+ years. Hopefully you can see that in this chart?

If you're looking at losses in total bond in 2022, just look at the massive gains in 2019 to late 2020. Then you will understand the losses(maybe) .

Long term expectations for total bond funds are 3.5%. That, you can count on, 5+% shown in the chart, probably not.

retireIn2020 wrote: ↑Fri Jan 19, 2024 12:49 am

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

Well, it appears that no one has lost money in Vanguard total bond in the last 30+ years. Hopefully you can see that in this chart?

If you're looking at losses in total bond in 2022, just look at the massive gains in 2019 to late 2020. Then you will understand the losses(maybe) .

Long term expectations for total bond funds are 3.5%. That, you can count on, 5+% shown in the chart, probably not.

Well, when you hold a fund for 2x average duration, let alone 3x, it's nearly impossible to lose money. It may even be mathematically impossible.

rossington wrote: ↑Thu Jan 18, 2024 10:47 pm

dbr wrote: ↑Thu Jan 18, 2024 9:00 amHaving never had to place money for any purpose than the long term accumulation of wealth followed by the long term recovery of wealth and holding the whole in portfolio of stocks and bonds, the issue of asset placement for short term needs has never occurred for me and consequently except for short term cash flow management my fixed income assets are just in intermediate bond funds.

That’s where the duration matching threads come into focus.

Other practical ways to deal with near-term planned usage might also include items like exchanging a bond fund for one or more individual Treasury bonds of a similar duration, or exchanging a risk portfolio for cash-equivalents to meet planned usage across time, for example in Unconventional Success David Swensen gave his opinion about moving portions of planned usage out of a risk portfolio into cash every couple years to supply cash for expected expenses.

alluringreality wrote: ↑Fri Jan 19, 2024 9:25 am

rossington wrote: ↑Thu Jan 18, 2024 10:47 pm

dbr wrote: ↑Thu Jan 18, 2024 9:00 amHaving never had to place money for any purpose than the long term accumulation of wealth followed by the long term recovery of wealth and holding the whole in portfolio of stocks and bonds, the issue of asset placement for short term needs has never occurred for me and consequently except for short term cash flow management my fixed income assets are just in intermediate bond funds.

That’s where the duration matching threads come into focus.

Other practical ways to deal with near-term planned usage might also include items like exchanging a bond fund for one or more individual Treasury bonds of a similar duration, or exchanging a risk portfolio for cash-equivalents to meet planned usage across time, for example in Unconventional Success David Swensen gave his opinion on moving portions of planned usage out of a risk portfolio into cash every couple years.

The option to simply cash some shares from stock and bond funds to make periodic small withdrawals over long times is not necessarily inferior to schemes that involve constant shifting to shorter duration or cash holdings. Consider a person who is perhaps taking 3% of his portfolio every year for 20 or 30 years. It takes a lot of proving to show that such a person should always maintain a few years of those withdrawals in cash. Far and away the most likely result over probable outcomes of such analysis is that there is no preference for either scheme over the other. People may find some sort of strange assurance in the concept that money they are going to spend next year is already "safely" in cash this year.

dbr wrote: ↑Fri Jan 19, 2024 9:33 amPeople may find some sort of strange assurance in the concept that money they are going to spend next year is already "safely" in cash this year.

My take is that seems relevant to the original post.

RandomPointer wrote: ↑Wed Jan 17, 2024 8:51 pmI read so many times that as long as I keep a bond fund to the duration of the bond fund maturity, I will not lose my capital. Same thing with a TIPS funds. I will not lose my capital, and get an inflation protection , if I keep it as long as its maturity.

I do not know how to prove it mathematically. Bond fund is always subject to interest rate risk, as it never matures. How can I prove that I will not lose my capital?

Prove to who and why? if you understand bond math then you buy it based on current yields and current inflation levels, then you know what you are expected to get in future, it's not perfect, only an approximation, but more or less accurate. Surprises can happen although rarely as market is good at pricing in everything. Even in 2021, you know you are getting negative real, as current yields then were about 1% on a 5 year Treasury and inflation were running into 6% range, so you knew from then to next 5 years you get negative, had inflation stayed up, it didn't, fast forward to now you get 4.5% on same 5 year with inflation running 3% range, so you get positive real of about 2%-2.5% range on a 5 year. These are good estimates.

Other than that amateurs on this forum and elsewhere will keep speculating, mainly their fears and emotions on what will happen in future, it has no meaning, because that's all already in the market pricing.

I've been investing a portion in bonds for last 25 years or so, and have kept good records since at least 2003. I have every transaction in Quicken and it generates reports for me in various ways. As I mentioned on another thread my 20 year bond returns were 3.46% nominal, inflation ran 2% range for past two decades, so positive real returns over two decades. Back then bonds were yielding 3% range, right now they are 4.5%, they are a better deal or as good as any point in last 20 years. It seems people have it backwards, they had no problem buying & holding bonds at 3% or even at 2% throughout last two decades, but folks are trying to run away when they are giving 4.5% with inflation trending lower. That's how you don't make money from bonds.

alluringreality wrote: ↑Fri Jan 19, 2024 9:36 am

dbr wrote: ↑Fri Jan 19, 2024 9:33 amPeople may find some sort of strange assurance in the concept that money they are going to spend next year is already "safely" in cash this year.

My take is that seems relevant to the original post.

I think in such cases a person might do well to set aside some assets and buy an SPIA. Then there is predictable guaranteed income every year. If inflation is an issue a person can periodically add an additional policy. When the nature of the beast is that stocks, bonds, and cash don't address an issue a person wants to deal with then possibly something other than stocks, bonds, and cash is a better answer.

Lee_WSP wrote: ↑Thu Jan 18, 2024 11:01 pm

Beensabu wrote: ↑Thu Jan 18, 2024 10:45 pm

Lee_WSP wrote: ↑Thu Jan 18, 2024 9:26 pm

Beensabu wrote: ↑Wed Jan 17, 2024 10:15 pmHave you held a bond fund for its stated average maturity and lost capital yet?

BND has done it a few times for 5 & 7 year periods. And in nominal returns too.

Check out the rolling returns.
https://www.portfoliovisualizer.com/bac ... sisResults

Is this what you're referring to?

5 years-0.65%
7 years-0.31%

When I look at "Annualized Rolling Return - 5 Years" for TBM, I'm seeing it dip below zero Sept-Dec 2022 and then again for Oct 2023. Is that what you mean?

You asked for proof and I found it. But yes. It's happened historically. You can clearly lose nominal dollars even if you hold to the average maturity. But even if you break even, you lost. Bond funds do not do what people think they do. They're rolling ladders you have no control over.

Actually, the OP asked for proof, but you did find what you found and I thank you.

What you found reinforces what I have been thinking for awhile now - that selecting a bond fund with a stated effective maturity that is a little less than your need for the money (a buffer of sorts) is good enough. At least in nominal terms.

The real danger with bond funds is in rates rising near the end of your intended holding period. But if you're in an intermediate-term bond fund and are going to need some of the money in 3 years, just move that money into an appropriate shorter duration investment to match when you'll need it.