Dumped the Bond Fund

[Gina23]

I have a certain amount of money that I get to "play" with and I try to see if I can make a bit off of it. In no way is this an emergency fund as that is fully funded for 8 months of living expenses. I am maxed out with 401K, Roth, as well as another pension fund. With that being said, I had about 14k wrapped up into a bond fund to see if I could make anything off of it. In the past four months it was worth $113 which isn't great, but it's better than sitting in a money market account I figure. I sold it this morning and put it in a stock fund instead. Although I was ahead $113, I actually lost money on it after dividends were reinvested. While I realize I am taking on more risk, I feel the market for bond funds is going to drop out soon.

Have any of you made any moves away from Bonds or Bond Funds recently? If so, would you share your reasoning?

[feh]

Bill Gross says it's time for investors to plan a "Great Escape" - The Term Sheet: Fortune's deals blog Term Sheet

I'm not saying I agree with him. Just posting this because it seemed relevant.

I'm pretty bullish on 2012. Past that, I don't know.

[rj.phila]

there was nothing i read in that article that suggested getting out of bond or bond funds. it mentioned "expect lower returns", and that gross "still likes bonds over stocks". i didnt read anything in that indicating an actual LOSS.

[feh]

there was nothing i read in that article that suggested getting out of bond or bond funds. it mentioned "expect lower returns", and that gross "still likes bonds over stocks". i didnt read anything in that indicating an actual LOSS.

True. I just posted it because he likes bonds going forward more than stocks.

[kv968]

True. I just posted it because he likes bonds going forward more than stocks.

That opinion wouldn't be tainted due to the fact that he owns the biggest bond fund family in the world would it?

[Gina23]

I realized my original post was a bit confusing... I meant to say that when I sold it, the total amount was 14,113.xx, after reinvesting dividends, I was actually at a loss (cost-basis) from when I originally bought the fund. I'm just trying to beat a money market fund return. I was planning on holding it through 2012 due to the reports and articles like the ones you quoted (thank you for that), but for some reason I just got a weird feeling. Yeah, I know, investing because of a weird feeling is never good However, just wondering if anyone else has any opinions about the bond market going forward.

G

[disneysteve]

Have any of you made any moves away from Bonds or Bond Funds recently? If so, would you share your reasoning?

We invest in Vanguard's Total Bond Market Index fund. It has a 1-year return (as of 2/29/12) of 8.31%. I'm certainly not complaining about that. What fund did you have that lost money during that period? Perhaps the problem isn't bonds but rather the specific fund you chose.

[thekid]

I think there is alot of misunderstand of bond fund pricing in the general public (and even some advisors). You don't lose capital in bond funds as long as you hold for the bond fund's weighted average duration from time of purchase. In an environment of rising rates, your capital will fall but your yield will rise so that at duration (from time of purchase) you will have recouped your capital and realized the yield to maturity from time of purchase. To take an example, if you purchase a short term bond fund today with a weighted average duration of 2.5 years and a yield to maturity of 1.5%....regardless of pricing movements, in 2.5 years you will have a return equal to your capital+1.5%. Bond funds held for a period shorter than their duration are a speculation on interest rates. Held past maturity, it is exactly like lattered individual bonds/CDs.

[Gina23]

To further explain... I have plenty of of bond funds in my retirment IRA's that I have no intention of dumping until I am 59 1/2. The bond fund in question that I held was to try to earn more money than a money market fund for excess cash reserves. The bond fund was for short term gain and is a short term bond fund (Vanguard), but all of the sudden I had felt it wasn't doing so hot. My question is not posed to long term investing, rather than a short term option for excess cash.

[kv968]

To further explain... I have plenty of of bond funds in my retirment IRA's that I have no intention of dumping until I am 59 1/2. The bond fund in question that I held was to try to earn more money than a money market fund for excess cash reserves. The bond fund was for short term gain and is a short term bond fund (Vanguard), but all of the sudden I had felt it wasn't doing so hot. My question is not posed to long term investing, rather than a short term option for excess cash.

Which bond fund was it?

[thekid]

To further explain... I have plenty of of bond funds in my retirment IRA's that I have no intention of dumping until I am 59 1/2. The bond fund in question that I held was to try to earn more money than a money market fund for excess cash reserves. The bond fund was for short term gain and is a short term bond fund (Vanguard), but all of the sudden I had felt it wasn't doing so hot. My question is not posed to long term investing, rather than a short term option for excess cash.

If your investment horizon was shorter than the weighted average duration, you were exposed to interest risk (ie. loss of capital in a rising rates environment, gain if rates fall). When you look at buying a bond fund, look at two things (1) it's "weighted average duration" and (2) "yield to maturity". Think of it as buying an individual bond with the weighted average duration being the term and the yield to maturity being the interest.

If you hold your individual bond to maturity you will get capital+interest regardless of interest rate environment. If you wish to sell your individual bond prior to maturity to a thrid person, yo will either make a capital gain or loss depending on rates available at time of sale (ie. if your bond earns 2% interest and the buyer can get 3% of the same duration, your bond will be discounted by the difference of rates til maturaty).

Think of bond funds in the same manner. When you buy a bond fund and wish to sell prior to the weighted average maturity, you may have capital gains/losses depending on market rates at time of sale. If you sell your bond fund exactly after the weighted average duration from time of purchase, you will have realized your capital plus the yield to maturity at time of purchase. If you hold your bond fund past the weighted average duration from time of purchase, it's exactly like an individual bond latter.

Buying a bond fund with the intention of selling prior to the weighted average duration is a bet that interest rates will fall (that is how you would realize a higher overall yield than the yield to maturity from time of purchase).