Hi - I could use some help with some pointers to simple and easy Bond 101 type of books / information. To start, would like to better understand the different types of bond funds (government, high yield, investment grade, etc), associated pros/cons, and what modulates their ROI. Particularly in the context of retirement funds.

Financial planner is suggesting I move more of my retirements to bonds or something a little more conservative than equity funds as I approach retirement (which unfortunately may be as abrupt as January).

Appreciate and looking for a quick primer on how to select a bond fund appropriate for retirement account at retirement.

Once selected, I'll monitor and adjust based on the WSJ subscription I plan to get.

Vanguard and Fidelity have lots of good info like that on their websites.
Also look at the info on the funds they sell as retirement age appropriate and you'll get a good idea the type of investments that the "experts" consider to be best.

I'm probably in that age group and it's a tricky time to say the least. I think inflation is the biggest challenge right now but potential market unrest, at some point, complicates things too.

Thanks. I'll poke around there.

have you considered the various Target Date Funds? 2025 Fund, 2035 Fund, etc ...

they are basically 'all in one portfolios' that automatically re-balance to 'less risky' over time based on your age

they are made up of a certain percentage stock / certain percentage bond

you're essentially letting the fund company do the balancing... Fidelity / Vanguard / T. Rowe Price etc

they can be a good option for a lot of people

for instance:

https://investor.vanguard.com/...-funds/profile/VTTVX


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You can't go much wrong with either Vanguard's or Fidelity's Total Bond Fund.

You might want to consider Tax Free Municipal Bonds also.

https://money.usnews.com/inves...municipal-bond-funds

These muni bond funds offer tax-exempt income.

Municipal bonds, sometimes referred to as munis, are issued by various government entities such as states, counties and municipalities. The income from these bond funds is typically exempt from federal taxes and, if issued within your state, the interest will also be free of state income taxes. This means that municipal bond investors don't need to pay tax on the income from these funds. Frequently, these tax-free bond funds pay higher relative interest payments than comparable corporate and government bonds. To check the tax equivalent yield of a corporate or government bond versus a muni bond, you can use a tax-equivalent yield calculator. An investor in the 24% federal tax bracket would need a nearly 4% yield in a normally taxed bond to get the same take-home yield as a 3% municipal bond. Here are seven municipal bond funds to help you thwart taxes and increase income.

Bonds provide way less upside than equities, and in an environment with historically low interest rates and the specter of renewed inflation staring us in the face, I'm surprised at the recommendation to get into bonds at this time.

I'm not a fan at the best of times, but if you don't know the difference between a bank/money market account and a bond, your instinct will surely misguide you.

Do a lot of research before moving a dime. Be sure you're ready for the risks... and understand viscerally that bonds, and bond funds, lose value as interest rates increase.

One man's opinion.

Many here will poo poo bonds funds no matter what. It is a really head scratcher for those that are either nearing or are in retirement. I realize everyone is in a different place. So maybe some know what they are doing. I don't know.

But in general I think you are getting some wise advise. Of course it depends on exactly what they are telling you.

But bonds can reduce your overall exposure to a big correction in the market and put you in a more of a "preserve your retirement balance" position as you get to retirement.

That's the high level basis, I think. Perception is that we're at an all time equity high. May continue to go up. But may come down considerably as well as domestic and global socio-economic trends shift.

Sharp reductions will hurt me more than lost opportunity hence the recommendation for bond funds.

The reason bond funds came up was because the OP asked specifically about them but as I said in my post, very high inflation and the uncertainty that may soon come makes this a hard call.
Parking money into an account that is low risk and low return in Jimmy Carter era inflation of 20% loses $20 grand a year in buying power for each $100,000 invested and even then you may have to pay taxes of the (fake) gain you earn. That's adding insult to injury.
The only way to really protect against or benefit from that is to own hard assets that will rise with inflation but most of those gains, except your residence, will get taxed too. There's also a risk they could drop too.
Like I said, it's a crap shoot right now for those of use that don't have 20-30 years or more to recover if we guess wrong.

Remember that when rates go up, and let’s work on the premise that rates are going up before they go down, bond prices (values) go down. The downside of a bond mutual fund is that you have zero control of when they buy and sell a bond within that fund. If you buy a bond today and it’s quality you know that even if the value goes down in the interim, at maturity you will get all your original principal money bank.

Depends on the amount of money we are talking about but if I was forced to buy bonds today I’d be more likely to buy a portfolio of individual short term to medium term bonds. I would not buy long bonds today at today’s rates. If those individual bonds mature in the next -3-5 years you can roll them over into bonds again at (assumed) higher rates to earn better yields in the future.

IF you don’t mind the likelihood that your principal will go down but your will get a stable amount of cash distributions each month then buy the mutual fund.

He might even want to think about Bond mutual funds.

Not necessarily this one, this is just a brief example and no, I don't have anything from Vanguard.

https://investor.vanguard.com/mutual-funds/bond

Find income and stability with bond funds
Get higher potential for income
Bond mutual funds give your portfolio the opportunity to earn income, unlike money market funds (which focus on maintaining your cash) and stock funds (which aim for long-term growth).

Add stability to your portfolio
When included in a well-balanced portfolio, bond funds can help balance the risks associated with stock funds. Bond funds can also help you keep pace with inflation through inflation-protected bond funds. These funds, which invest in government bonds, are routinely adjusted for inflation.

Spread out your exposure to risk
By potentially holding hundreds—sometimes thousands—of bonds in a single fund, you get more diversification than you would buying individual bonds.

Seems like physical gold would be a safer hedge

The federal funds rate is 0% right now. Inflation running 5 to 7% easily. What’s wrong with this picture?


Bond prices are inversely proportional to the interest rate. Which way do you think rates are going to go?

Thanks guys.

I'm not an expert, obviously. I'm seeking education. But I think the premise is along these lines: Bond and Equity funds may both go down in the short term. But bond funds may go down less; Equity funds experience higher gains and losses.

If I want to preserve equity for now, bonds seemed to be the conservative path. But still, the question would be what time and when (time based? some sort of trigger?).

Much to learn.....

Konata88,

Great idea to educate yourself before making a decision. The challenge you face in a forum or researching on the internet is lots of opinions that are not generally wrong, but could be wrong for you.

Example - Target date funds are great for early investors, low dollar amounts, and people not needing to take income from the investment. If you have a planner, I assume you do not fit in this category.

ElToro provided the best general advice thus far.

If you would like to discuss this in more depth I would be happy to provide a little free advice, email me. I have been in the business for a couple decades and can provide some clarity on the recommendation you are receiving and why it might be right or wrong for you.

Take a look here.

https://www.bogleheads.org/wik...ndations_and_reviews

The Cohen book may be what you are looking for.


--K

couple of great articles from Morningstar.

you can sign up for a 'free' level subscription... some of the charts did not copy.

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Which Bonds Provide the Biggest Diversification Benefits?

https://www.morningstar.com/ar...rsification-benefits

Investors rely on bonds as ballast for their stock allocations, but their levels of effectiveness can vary greatly.

Christine Benz Apr 13, 2021

Most investors building portfolios take it as an article of faith that holding bonds helps diversify their stocks. But which bonds, specifically, provide the biggest diversification benefits?

In our recent examination of asset-class correlations, the "2021 Diversification Landscape," Treasury bonds exhibited a consistently negative correlation with stocks--the best of any asset class. Meanwhile, other bond types proved less effective as diversifiers. While many investors have long understood that low-quality bonds tend to move in sympathy with stocks, categories like Treasury Inflation-Protected Securities, high-quality corporate bonds, and even municipal bonds also had a meaningfully higher correlation with the equity market than did nominal Treasuries. Moreover, intermediate-term core-plus bond funds, which investors often use as their core fixed-income holdings, were also much less effective diversifiers for equities than were Treasuries.

Those findings suggest that investors who are seeking ballast for the stock allocations in their portfolios should take care to include Treasury bond exposure, too. At the same time, it's worth noting that patterns of diversification benefits aren't static. Cash has recently looked nearly as effective as a diversifier as Treasuries, possibly because Treasury and cash yields are both so low. Whether the correlation patterns that held during a multidecade period of declining interest rates will hold true in a rising-yield environment is an open question.

We examined fixed-income correlations relative to equity over a range of time periods. We homed in on 2020 because it featured a short-lived bear market for stocks, but we also examined the diversification benefits of various fixed-income categories over longer time frames. Here's a closer look at our findings among various taxable-bond and municipal-bond fund types, as well as takeaways for portfolio construction.

2020 Market Correlations

The first quarter of 2020 provided a major stress test for high-quality bonds' reputation as a portfolio diversifier for equities. As the pandemic came into view, stocks experienced a short but extreme sell-off, falling sharply from late February through late March. While high-quality bonds certainly held their value better than stocks, there was a high degree of variation among fixed-income types.

Treasury bonds benefited during that period's flight to quality and liquidity, with short-term Treasuries exhibiting the lowest U.S. market correlation. The next best diversifier for equities was cash, which exhibited a solid negative correlation with stocks during the period.

Most of the other fixed-income types, however, were weak to very weak diversifiers for equities. By extension, they were similarly correlated with one another and showed very little correlation with government bonds and cash during the period. Treasury Inflation-Protected Securities were among the worst fixed-income diversifiers for equities during the period. That might seem counterintuitive, in that these issues are backed by the full faith and credit of the U.S. government. But demand for such bonds tends to grow in periods when investors are concerned about inflation and slack off when they are not. Because inflation worries were close to nonexistent in the first quarter, TIPS didn't gain as much as nominal Treasury bonds during the period.

Why Portfolio Diversification Still Works

High-yield bonds, bank loans, and emerging-markets bonds are often aptly described as equitylike, so it is probably not surprising that their performance in the first quarter of 2020 was aligned with equities. Perhaps more surprising, however, was that the Morningstar US Core Bond Index and especially the intermediate core-plus bond Morningstar Category were lackluster diversifiers for equities. While their losses were smaller, their performance was much more in line with corporate bonds, high-yield bonds, and bank loans during the quarter than with Treasury bonds and cash. During the worst of the market swoon, both the Morningstar US Core Bond Index and the intermediate core-plus category posted losses, whereas Treasuries and cash ended up in the black.

Although stocks recovered starting in late March 2020, the correlation patterns of the first quarter persisted throughout the year. Treasury bonds across the duration spectrum also showed reasonably well from the standpoint of correlations with equities. Cash was a better diversifier than any of the bond indexes during the full-year period, however.

Compared with Treasury bonds, municipal bonds looked surprisingly unimpressive as diversifiers in 2020. In the flight to quality that characterized the short bear market at the outset of the pandemic, municipal bonds were notably less effective diversifiers for equities than U.S. Treasury bonds. Whereas Treasury and other U.S. government bonds exhibited a negative correlation with equities, munis' equity market correlation was strongly positive.

Across muni-bond groups, correlations with equities were about the same as the Morningstar US Core Bond Index--about 0.85 during the first quarter of 2020. High-yield municipal bonds--those issued by states and municipalities with lower credit ratings--had the lowest correlation with equities during the first-quarter equity weakness of any of the muni groups in our sample. That was surprising in that lower-rated taxable bonds were notably weak diversifiers for equities during the period. Moreover, state and municipal finances have come under pressure during the pandemic owing to both declining tax receipts as well as pandemic-related outlays.

However, high-yield munis may have benefited from their higher absolute yields, which provide a cushion against losses.

For the whole of 2020, municipal bonds' correlations with equities declined from first-quarter levels but remained higher than those of Treasuries and the Morningstar US Core Bond Index. The municipal market benefited from the Federal Reserve instituting a backstop via its municipal liquidity facility in the second quarter of 2020, giving a particular boost to lower-quality munis. Intermediate- and longer-term munis had a lower correlation with equities than did short-term munis during the year. It is also worth noting that in the first quarter and in the whole of the year, municipal bonds had a negative correlation with Treasuries.

Longer-Term Trends in Diversification Benefits

Over the past two decades, Treasury bonds have provided the best diversification benefit of any bond type--and indeed of any asset class--for investors with equity exposure in their portfolios. The correlation benefit was similar for Treasuries across the duration spectrum. Cash has been the next most attractive diversifier for stocks. The Morningstar US Core Bond Index, which is dominated by high-quality U.S. bonds, has also delivered a negative equity market correlation, though correlations have recently increased.

Meanwhile, intermediate core-plus bond funds, which many investors use as their core fixed-income holdings, have provided less of a diversification benefit for equities. That is because these funds' portfolios are often heavy on corporate and asset-backed bonds and may also include a dash of lower-quality bond exposure. High-yield bond funds have proved to be the least effective equity diversifiers over the past two decades, followed by bank loans and emerging-markets bonds.

Over the past 20 years, municipal bonds have usually had a slightly negative correlation with equities. However, correlations with equities often jumped at inopportune times—during the global financial crisis of 2007-09 and again in the first quarter of 2020. In addition, all muni categories had a higher correlation with equities than did the Morningstar US Treasury & Government Index and the Morningstar US Core Bond Index. In short, high-quality taxable-bond exposure has been a better portfolio diversifier than municipal-bond exposure.

Munis' correlation with equities has also risen a bit over the past decade. Whereas correlations with equities were mostly negative in the 20-year period from 2001-20, they nudged into positive territory from 2011-20. Across all longer-term time frames, high-yield municipal-bond funds were the least effective diversifiers for equities of any municipal-bond-fund group. That is similar to the trend for high-yield taxable bonds; they are much less defensive and more sensitive to economic stress than high-quality bonds.


Meanwhile, intermediate core-plus bond funds, which many investors use as their core fixed-income holdings, have provided less of a diversification benefit for equities. That is because these funds' portfolios are often heavy on corporate and asset-backed bonds and may also include a dash of lower-quality bond exposure. High-yield bond funds have proved to be the least effective equity diversifiers over the past two decades, followed by bank loans and emerging-markets bonds.

Over the past 20 years, municipal bonds have usually had a slightly negative correlation with equities. However, correlations with equities often jumped at inopportune times—during the global financial crisis of 2007-09 and again in the first quarter of 2020. In addition, all muni categories had a higher correlation with equities than did the Morningstar US Treasury & Government Index and the Morningstar US Core Bond Index. In short, high-quality taxable-bond exposure has been a better portfolio diversifier than municipal-bond exposure.

Munis' correlation with equities has also risen a bit over the past decade. Whereas correlations with equities were mostly negative in the 20-year period from 2001-20, they nudged into positive territory from 2011-20. Across all longer-term time frames, high-yield municipal-bond funds were the least effective diversifiers for equities of any municipal-bond-fund group. That is similar to the trend for high-yield taxable bonds; they are much less defensive and more sensitive to economic stress than high-quality bonds.

Portfolio Implications of Market Correlations

While Treasury bonds have been among the best diversifiers for equity exposure over the past two decades, whether that will hold true going forward is an open question. In particular, one scenario that has rarely been on display over the past three-plus decades is a rising-interest-rate environment. If yields were to jump up, that could hurt equity prices and would almost certainly punish Treasuries, which, because of their highest credit rating, tend to be extremely sensitive to interest-rate changes. In other words, if stocks suffered losses because of spiking interest rates, Treasuries may be less effective diversifiers. For example, as Treasury-bond yields rose sharply in the 15-year period from 1967 to 1981, Treasuries exhibited a modest positive correlation with stocks.

Another issue is that bond yields, especially Treasury yields, are still near multidecade lows even after an uptick in early 2021. Thus, while demand for Treasuries may be elevated in an equity market shock, Treasury-bond owners will not be able to rely on their yields to provide much of a cushion in volatile environments. That stands in contrast to the 1970s and early 1980s, when bonds' high absolute yields served as a shock absorber to offset their price declines. Today, investors in high-quality fixed-income investments have a limited yield buffer.

In a related vein, it is notable that cash has recently looked a bit better than Treasuries from the standpoint of diversification benefits. That may owe to the fact that as yields have declined across the board for several decades, high-quality bond yields have edged toward zero, so bond prices simply don't have a lot of room to move up. It may also be that, with yields on cash and Treasuries so tightly aligned, investors do not view bonds as worth their risks in a flight to quality. As always, matching a bond fund's duration to your anticipated holding period can help home in on the right types of bond funds to own.

It is also notable that TIPS have exhibited much weaker diversifying abilities than have nominal Treasuries over the past few decades. While their correlation coefficient with equities is lower than that of low-quality bonds, it is still positive and much higher than nominal Treasuries. That pattern makes intuitive sense, in that demand for TIPS' inflation protection is likely to stall out when worries about the economy are running high and equities are dropping. TIPS are also much less liquid than nominal Treasuries. In short, while TIPS play a role for inflation protection, investors have not been able to rely on TIPS to diversify their equity exposure. On the other hand, inflation has kept a low profile for the past decade. If a resurgence in inflation led to weaker stock returns, TIPS may confer a greater diversification benefit.

Meanwhile, all manner of lower-quality bond types are exceptionally poor diversifiers for stocks. That demonstrates that they are best used as supplemental holdings alongside high-quality fixed-income investments or, perhaps better yet, as equity alternatives. Funds in the intermediate core-plus bond category are a prime example. While these funds have better yields and better long-term returns than Treasuries and the Morningstar US Core Bond Index, the trade-off is more sensitivity to what is going on in investors' equity portfolios.

Municipal bonds have provided a decent, although certainly not perfect, diversifier for equities. Over longer time periods, munis have exhibited a higher correlation with equity markets than high-quality taxable-bond indexes and especially Treasury bonds. One of the key reasons may be that the muni market is less liquid than that of Treasuries, and it has often seized up in periods of equity market stress. That suggests that even investors who put a high value on the tax-saving features of municipal bonds should consider augmenting them with U.S. government bonds for diversification and ballast during equity market shocks. It also underscores the importance of not using a muni-bond fund as a source of liquid reserves, in that the muni market's bouts of illiquidity are an inopportune time to sell.

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another one here:

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Are Bond Funds 'Broken' as Diversifiers?

https://www.morningstar.com/ar...oken-as-diversifiers

The recent tumult illustrates the importance of using your time horizon to guide what kinds of bond funds to hold--or whether to hold them at all.

Christine Benz Apr 2, 2020


In the early days of the coronavirus-driven market pandemonium, most high-quality bond funds performed exactly as one would have hoped: On down days for stocks, they gained a bit of value or at least held steady.

But as the market sell-off ground on, a disconcerting phenomenon unfolded. Despite a few days of head-scratching downdrafts, Treasury bonds stayed aloft amid a flight to quality, as previous examinations of asset-class correlations suggested would be the case. But high-quality corporate bonds fell in value, taking many bond funds down with them. Municipal bonds also dropped. And it almost goes without saying that lower-quality bond types--junk bonds and bank loans, for example--also plummeted, thanks to their economic and equity-market sensitivity.

Meanwhile, a related drama was unfolding among bond exchange-traded funds: Their prices began dropping below their net asset values. On March 12, 2020, for example, large bond ETFs like Vanguard Total Bond Market Index (BND), iShares Core U.S. Aggregate Bond ETF (AGG), and Schwab U.S. Aggregate Bond ETF (SCHZ) traded at discounts of 6.2%, 4.4%, and 6.3% to NAV, respectively. (Those discounts have since closed.)

All of that volatility had some market watchers questioning the worthiness of bond funds in investors’ portfolios, especially for retirees who are actively drawing upon their portfolios for living expenses. Some bond-fund critics took the short-term losses as a cue to assert that investors shouldn't hold bond funds at all, but rather stick with individual bonds if they really want safety. While an investor who buys and holds an individual bond to maturity will be made whole, assuming the issuer is creditworthy, that's not necessarily the case for bond-fund investors.

Time Horizon Is Key

But most high-quality bond funds did largely deliver during the recent turbulence, provided investors weren't using them as cash substitutes.

True, some bond funds did lose money recently, and some funds with low-quality credits lost quite a bit. But there's a big difference between losing 4%--the average one-month loss for intermediate-term core-plus bond funds through March 31--and the 14% loss of the typical large-cap blend equity fund over that stretch. When it comes to diversification, whether an investment has a gain or a loss during a given period matters, but so does the magnitude of that gain or loss.

Moreover, the recent market action underscores the importance of time horizon and anticipated holding period when deciding which bond funds to invest in, or whether to hold them at all if your time horizon is too short and you need certainty.

For near-term cash outlays--money for your bills during retirement over the next year or two, next semester's tuition payment, or a new roof you may need tomorrow--there's only one asset class that reliably stays positive: cash. That's why my bucket portfolios include a persistent allocation to cash, even though it's a drag on returns in upward-trending markets. It's not often that bonds lose money at the same time stocks do, but cash is there in case they do.

Meanwhile, past performance would absolutely suggest that investors in bond funds should be prepared for periodic bobbles in their principal values. But that's OK, provided the investor's expected holding period is reasonable given the expected frequency, depth, and duration of those dips. For the safest bond funds, like short- and intermediate-term government-bond funds, losses have usually been brief and quickly recovered. For riskier bond types, losses have been deeper and it has taken longer to recover from them.

Digging Into the Data

To help assess whether a given bond-fund type is a good fit given your holding period and proximity to tapping your capital, rolling-period returns and maximum drawdowns provide a useful lens. (Three-year maximum drawdowns are available on the Risk tab for funds on Morningstar.com, while rolling-period returns are available on the Morningstar Direct software. The shorter the time period until you'll need to begin drawing on your money, the less you'll want to hold those funds in bond funds that have a history of experiencing frequent losses over a similarly short time period, especially if those losses have been sharp and sustained.

For example, short-term bond funds have posted losses in about 6% of rolling 12-month periods since the early 1970s. The worst drawdown for short-term bond funds over the past 20 years came during the financial crisis, when the typical fund in the Morningstar Category lost a cumulative 7%, and investors weren't back to break-even for another 15 months.

Short-term government-bond funds were generally safer. Interestingly, their losses over 12-month periods were somewhat more frequent than short-term bond funds; they landed in the red in about 7.5% of rolling one-year periods. But their worst drawdown, 1.6%, in April/May 2004, was much lower, too, and they recovered fully six months later.

Taken together, those data suggest that short-term bond funds (whether broadly diversified funds or government-focused options) aren't a cash substitute, and that investors should be prepared for drops in value that last for six months to more than a year. But such losses haven't been terribly frequent or deep, and the funds have readily recovered from them. In my model bucket portfolios, I use short-term bond funds as next-line reserves in case the cash cushion becomes depleted and a retiree has additional cash flow needs.

Meanwhile, intermediate-term core bond funds have experienced deeper troughs and a higher percentage of one-year rolling periods when their returns were in the red. That suggests, not surprisingly, that prospective investors hold them with an even longer time horizon in mind than short-term vehicles. Intermediate-term core bond funds have posted losses in 19% of rolling one-year periods since the 1950s; for core-plus bond funds, it was 20%. And the worst drawdowns for both categories were more painful than the short-term categories. In their worst drawdowns in Morningstar's database, intermediate core and core-plus bond funds experienced losses of 9% and 10%, respectively, during the financial crisis. Investors weren't back to break-even until the summer of 2009, 17 months after they started to fall. Meanwhile, the maximum drawdown for intermediate-term government bond-funds was much more shallow, about 3.6% between May 2013 and August 2014.

Further out on the risk spectrum, data about high-yield bond performance illustrate why it makes sense to think of them as an alternative to stocks, not bonds, and maintain an accordingly long time horizon. (I hold them in bucket 3 in my model portfolios, meaning that a retiree would have at least a 10-year horizon before needing to sell them for living expenses.) The typical high-yield bond fund lost about a third of its value during the financial crisis. The drawdown was also prolonged: High-yield bonds began to slide in June 2007 and investors weren't back to break-even until December 2009--roughly 2.5 years. In rolling three-year periods, high-yield bond funds posted losses about 12% of the time; funds in the group had losses in 7% of rolling five-year periods.

The Limitations of Past Returns

Of course, past performance isn't necessarily prologue; for one thing, today's very low starting yields mean that bond funds have much less of a cushion against price drops than was the case during the financial crisis. But observing the frequency of magnitude of losses of various bond funds over history--and during the recent market shock, too--can help you determine where to slot them in your funding queue--or whether they're a fit at all.


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WOW!

Awesome guys! Thanks! Good reading. And I've added some books to my cart. Got some reading to do next week.

Thanks again!