If these "experts" are saying that exceptional means you can ignore 2022 and it won't happen again in your lifetime, I'd ignore those experts. I know that bonds funds are not safe and/or ballast (i.e., can the NAV can go down), but in exchange for the higher risk of NAV fluctuations (that are much lower than stock fluctuations), I expect a higher return in the long run than using cash (e.g., 3m T-Bills).I hear you, but I also hear "experts" claim that 2022 was an exceptional year and that bonds are still relevant. Having said that I am definitely not willing to take a lot of risk on the stable value / fixed income portion of my portfolio.
Average and ± standard deviation for the three asset classes from the NYU Data Set 1928-2017.
Stocks: 11.5% ± 19.5% <-- Highest risk/reward (volatile, best to outpace inflation)
Bonds (10y T-Notes): 5.2% ± 7.7% <-- In between risk/reward
Cash (3mo T-Bills): 3.4% ± 3.0% <-- Lowest risk/reward (safe but will lose value against inflation)
Stocks and bonds are uncorrelated (not negatively correlated). They move independently (not inversely) and can, by chance, move the same direction. Stocks & bonds both had negative returns in 1931, 1941, 1969, 2018, and 2022. They will likely both have negative returns in the same year at some point in the future.
There is no free lunch, so managing your own ladder of individual T-Bills and/or T-Notes bears the same re-investment risk that a professionally managed bond fund faces. If rates spike up, then the price for a new bonds will go down as your old bonds mature and you need to replace them with new bonds. If you had to mark your individual ladder to market value daily, you'd see the same fluctuations that a bond fund sees. You'd ignore those fluctuations "because I'm holding to maturity," but that means giving up some liquidity in exchange for guaranteeing the principle value. That may be fine in the accumulation phase, but it might be an undesirable constraint in the withdrawal phase. Especially if there's a steep decline that lasts more than a year and you need to rebalance, but selling bonds to buy stocks and bring the portfolio back on target is difficult if you can't sell bonds "because I'm holding to maturity!"So I might just look into buying T-bills and stuff (I have no idea how they work, I believe you need to buy them direct from Trasurydirect website ?). As of right now I am pretty happy with my 5% HYSA with Betterment - if / when the rates drop I might need to rethink the fixed income part of the portfolio.
I'm of the opinion that an individual ladder is fantastic if you have a specific date to spend the money, then all the Notes (or Bills) in your ladder are duration-matched to that spend date. For an open-ended retirement accumulation and withdrawal, I can't be bothered finding the value in managing a ladder over holding a fund (both for multiple decades). However, knowing that their principal is protected against loss with a ladder that is held to maturity is a great psychological relief to some investors, and that's also a perfectly reasonable justification to use one. You have to do what's best for you.
Some articles & discussion on Bond Funds vs Ladders...
Bonds—Ladder or Fund? TIPS or Nah? - Barron's Streetwise Barron's Podcasts
The Dilemma That Isn’t: Bonds versus Bond Funds - Articles - Advisor Perspectives
The Pros and Cons of Bond Laddering | Morningstar
Rolling ladders versus bond funds - Bogleheads
Vanguards Note to Advisors on Bonds vs Laders
In the Vanguard discussion the paragraph on the Principal-at-Maturity Myth is specifically worth a read, even if you ignore all the other discussion links.
Statistics: Posted by bonesly — Wed Nov 06, 2024 12:31 am — Replies 15 — Views 401