I recently attempted to own a couple bond funds. I don't view this attempt as having been successful, and, about a year on, I've decided that that was most likely attributable less to these instruments not doing what they could be expected to do, and more to my not understanding what it is that they actually do.
In an attempt to figure it all out, I've arrived at two complementary, hopefully valid, ways to view a bond fund:
-- as a means for generating income. Distributions are not reinvested. From this point of view, the price of the fund needn't trouble us too much, as long as we can assume that distributions will continue -- hopefully at a level that doesn't fall too much.
-- as a prelude to generating income. Distributions are reinvested. Perhaps we add to our holdings over time by purchasing additional shares. All this leads to a day, some time in the future, when we uncheck the "reinvest dividends" box, thereby adopting the perspective described first. From this "prelude" point of view, we can -- I guess? -- not worry ourselves about the price of the fund, as long as we can assume 1) that it will continue to exist for years to come and 2) that more shares will translate roughly to more distributions.
The reader may have noticed how eager I am to wave away the price (NAV?) of the fund. At the beginning of 2022, not long before turning 40, I made my first purposeful foray into bonds, buying $3,000 each of VBTLX and VIPSX for my IRA. By October 2023, each of these was worth about $2,600; this was after all distributions had been reinvested. I was annoyed. I sold the funds. With the proceeds, I bought a Treasury note and a TIPS, both of which mature in 2028. That the (secondary-market) values have risen since then has no bearing on my satisfaction with these bonds: Since I will have no need for (or, indeed, unpenalized access to) any of this money for years to come, the day-to-day changes in the secondary-market value are, to me, of no concern. Rather, barring some much worse disaster, I know I'll get the money back four years from now, and I know what benefit I'll get along the way. In buying bonds, I'm seeking to trade a bit of upside for predictability and stability; these individual bonds have helped me do that in a way that it seems that VBTLX and VIPSX did not. (I should add, though, that I *think* I understand why they can't, at least not in the same way: Since these bond funds never mature, the secondary-market values of the individual bonds comprising the fund cannot be disregarded in the way I would like to.)
Buying individuals bonds as opposed to bond funds, however, makes it difficult to diversify, to say nothing of keeping one's list of holdings tidy. Moreover, surely the existence of bond funds suggests a market for them, and presumably some of the people in that market know what they're doing :).
Thus my attempt to figure out how my frustration with VBTLX and VIPSX -- and subsequent suspicion of bond funds in general -- was perhaps unfounded. But I figured I should run my ideas by some people who know more than I. So: Are these perspectives reasonable/responsible? Are there other ways to make sense of what happens when one invests in a bond fund? I've mentioned two funds in particular -- two funds with their own characteristics -- but are the above valid perspectives more generally? Are they valid for taxable accounts as well as tax-advantaged? -- if one had a bond fund that made sense in a taxable account.
Thank you for reading :).
(Hopefully this is the correct subforum!)
In an attempt to figure it all out, I've arrived at two complementary, hopefully valid, ways to view a bond fund:
-- as a means for generating income. Distributions are not reinvested. From this point of view, the price of the fund needn't trouble us too much, as long as we can assume that distributions will continue -- hopefully at a level that doesn't fall too much.
-- as a prelude to generating income. Distributions are reinvested. Perhaps we add to our holdings over time by purchasing additional shares. All this leads to a day, some time in the future, when we uncheck the "reinvest dividends" box, thereby adopting the perspective described first. From this "prelude" point of view, we can -- I guess? -- not worry ourselves about the price of the fund, as long as we can assume 1) that it will continue to exist for years to come and 2) that more shares will translate roughly to more distributions.
The reader may have noticed how eager I am to wave away the price (NAV?) of the fund. At the beginning of 2022, not long before turning 40, I made my first purposeful foray into bonds, buying $3,000 each of VBTLX and VIPSX for my IRA. By October 2023, each of these was worth about $2,600; this was after all distributions had been reinvested. I was annoyed. I sold the funds. With the proceeds, I bought a Treasury note and a TIPS, both of which mature in 2028. That the (secondary-market) values have risen since then has no bearing on my satisfaction with these bonds: Since I will have no need for (or, indeed, unpenalized access to) any of this money for years to come, the day-to-day changes in the secondary-market value are, to me, of no concern. Rather, barring some much worse disaster, I know I'll get the money back four years from now, and I know what benefit I'll get along the way. In buying bonds, I'm seeking to trade a bit of upside for predictability and stability; these individual bonds have helped me do that in a way that it seems that VBTLX and VIPSX did not. (I should add, though, that I *think* I understand why they can't, at least not in the same way: Since these bond funds never mature, the secondary-market values of the individual bonds comprising the fund cannot be disregarded in the way I would like to.)
Buying individuals bonds as opposed to bond funds, however, makes it difficult to diversify, to say nothing of keeping one's list of holdings tidy. Moreover, surely the existence of bond funds suggests a market for them, and presumably some of the people in that market know what they're doing :).
Thus my attempt to figure out how my frustration with VBTLX and VIPSX -- and subsequent suspicion of bond funds in general -- was perhaps unfounded. But I figured I should run my ideas by some people who know more than I. So: Are these perspectives reasonable/responsible? Are there other ways to make sense of what happens when one invests in a bond fund? I've mentioned two funds in particular -- two funds with their own characteristics -- but are the above valid perspectives more generally? Are they valid for taxable accounts as well as tax-advantaged? -- if one had a bond fund that made sense in a taxable account.
Thank you for reading :).
(Hopefully this is the correct subforum!)
Statistics: Posted by gusthemynahbird — Thu Aug 22, 2024 10:28 am — Replies 6 — Views 333