[Robbb]

I was just looking at returns over the past 15 years, If you invested $1,000 in Vanguard Total Bond fund it would be worth app $931, today, after all interest was reinvested. If you invested that same $1,000 in Vanguard VTI, Total market fund, it would be worth $2,090 today.

As pretty much a Boglehead in investing I'm really starting to question the wisdom of investing in any bond fund.

[collie1228]

I have never understood bond funds. If I buy the bond and keep it to maturity, I get 100% the interest and all of my principal back at the back end (although rarely there could be a default). Bond funds don't do that.

[Caymus]

Originally Posted by Robbb

I was just looking at returns over the past 15 years, If you invested $1,000 in Vanguard Total Bond fund it would be worth app $931, today, after all interest was reinvested. If you invested that same $1,000 in Vanguard VTI, Total market fund, it would be worth $2,090 today.

As pretty much a Boglehead in investing I'm really starting to question the wisdom of investing in any bond fund.

Do the Bond Fund results assume that the interest is reinvested?

[Caymus]

Originally Posted by collie1228

I have never understood bond funds. If I buy the bond and keep it to maturity, I get 100% the interest and all of my principal back at the back end (although rarely there could be a default). Bond funds don't do that.

Keep in mind that the returned principal would effectively be worth less if you bought the bond at 1% and it matures when rates are 5%.

[Robbb]

Originally Posted by Caymus

Do the Bond Fund results assume that the interest is reinvested?

Yes bond fund returns are calculated based on all interest, and dividends if there are any, are reinvested and not withdrawn.

[Topspinmo]

It’s all scheme.

[tophcfa]

Originally Posted by Robbb

I was just looking at returns over the past 15 years, If you invested $1,000 in Vanguard Total Bond fund it would be worth app $931, today, after all interest was reinvested. If you invested that same $1,000 in Vanguard VTI, Total market fund, it would be worth $2,090 today.

As pretty much a Boglehead in investing I'm really starting to question the wisdom of investing in any bond fund.

Hindsight is always 20/20. With any asset class you can find a historical time period that looks unusually good or bad. The last 15 years has been horrendous for bonds. The housing market crash of 2007/8, driven primarily by subprime mortgages, resulted in interest rates close to zero, and the Federal Reserve irresponsibly choose to keep rates artificially low for many years beyond the crisis. That was followed by a rapid increase in rates the last couple of years driven by hyperinflation. A perfect storm for bonds. A bonds return is driven by its yield as well as price changes. When interest rates go up, a bonds price declines and vice versa. When rates are close to zero, a bonds yield leaves little cushion to absorb losses due to price changes. Furthermore, when rates are close to zero, interest rates have little room to decline but lots of room to increase.

The difference between a bond fund and owning a single bond and holding it until maturity are very different. When you buy and hold a bond (assuming it doesn’t default or get called) your return is locked in, you earn the interest for the life of the bond and get your principal back at maturity. A bond fund’s return is very different, the fund never matures. Instead the fund is managed to constantly have a duration (for simplicity, duration is similar to maturity) within a tight range as outlined in the funds prospectus. The fund’s return is measured by total return, which changes daily. The main components of total return are both the funds yield and the underlying price of every bond held by the fund. Every day the funds holdings are “marked to market” based on changes in interest rates and perceived risk (credit and call risk) of the fund’s holdings. In general (credit and call risk aside), a bond fund’s expectation is not good when interest rates are unusually low, and are very good when rates are unusually high.

Lastly, no asset class should be looked at in a vacuum. Every asset class should be viewed in the context of a component of a diversified portfolio. Portfolios should be constructed with both returns and risk considerations. That requires looking at the correlations between various asset classes and the goals and objectives of the portfolio. In that context, bonds can be a valuable addition to a portfolio in the correct circumstances.

[retiredguy123]

Originally Posted by Robbb

I was just looking at returns over the past 15 years, If you invested $1,000 in Vanguard Total Bond fund it would be worth app $931, today, after all interest was reinvested. If you invested that same $1,000 in Vanguard VTI, Total market fund, it would be worth $2,090 today.

As pretty much a Boglehead in investing I'm really starting to question the wisdom of investing in any bond fund.

Your numbers are not correct. My traditional IRA has been totally invested in two bond funds, The Vanguard Total Bond Market Index Fund and the Vanguard Short Term Bond Index Fund. I retired in 2007, and I have not touched (added money or withdrew money) my IRA until last year when I started taking my RMD. From January 1, 2010 to January 1, 2022, my IRA has increased in value by 43 percent. I think you need to recalculate your numbers. Yes, the stock market will usually produce higher returns, but I already have 40 percent of my investments in the Vanguard S&P 500 Stock Index Fund. I believe in having a diversified portfolio.

[Robbb]

Originally Posted by retiredguy123

Your numbers are not correct. My traditional IRA has been totally invested in two bond funds, The Vanguard Total Bond Market Index Fund and the Vanguard Short Term Bond Index Fund. I retired in 2007, and I have not touched (added money or withdrew money) my IRA until last year when I started taking my RMD. From January 1, 2010 to January 1, 2022, my IRA has increased in value by 43 percent. I think you need to recalculate your numbers. Yes, the stock market will usually produce higher returns, but I already have 40 percent of my investments in the Vanguard S&P 500 Stock Index Fund. I believe in having a diversified portfolio.

On May 1st 2007 BND closed at $74.77, on November 10th 2023 BND closed at $69.68

[Robbb]

Originally Posted by tophcfa

Hindsight is always 20/20. With any asset class you can find a historical time period that looks unusually good or bad. The last 15 years has been horrendous for bonds. The housing market crash of 2007/8, driven primarily by subprime mortgages, resulted in interest rates close to zero, and the Federal Reserve irresponsibly choose to keep rates artificially low for many years beyond the crisis. That was followed by a rapid increase in rates the last couple of years driven by hyperinflation. A perfect storm for bonds. A bonds return is driven by its yield as well as price changes. When interest rates go up, a bonds price declines and vice versa. When rates are close to zero, a bonds yield leaves little cushion to absorb losses due to price changes. Furthermore, when rates are close to zero, interest rates have little room to decline but lots of room to increase.

The difference between a bond fund and owning a single bond and holding it until maturity are very different. When you buy and hold a bond (assuming it doesn’t default or get called) your return is locked in, you earn the interest for the life of the bond and get your principal back at maturity. A bond fund’s return is very different, the fund never matures. Instead the fund is managed to constantly have a duration (for simplicity, duration is similar to maturity) within a tight range as outlined in the funds prospectus. The fund’s return is measured by total return, which changes daily. The main components of total return are both the funds yield and the underlying price of every bond held by the fund. Every day the funds holdings are “marked to market” based on changes in interest rates and perceived risk (credit and call risk) of the fund’s holdings. In general (credit and call risk aside), a bond fund’s expectation is not good when interest rates are unusually low, and are very good when rates are unusually high.

Lastly, no asset class should be looked at in a vacuum. Every asset class should be viewed in the context of a component of a diversified portfolio. Portfolios should be constructed with both returns and risk considerations. That requires looking at the correlations between various asset classes and the goals and objectives of the portfolio. In that context, bonds can be a valuable addition to a portfolio in the correct circumstances.

What are the correct circumstances to hold an investment which provides a negative yield over the last 15 years?

[retiredguy123]

Originally Posted by Robbb

On May 1st 2007 BND closed at $74.77, on November 10th 2023 BND closed at $69.68

Those numbers are the net asset value for a one share in the fund. But, if you reinvest the interest earned, you will automatically purchase more shares, so you will have a lot more shares over time. There may also be capital gains distributions that will increase the number of shares. The total return is calculated by the increase in your fund balance over time, assuming that you reinvest the income.

[manaboutown]

A guy I know sold his parent's business back in the early 1980s and loaded up on municipal bonds as interest rates were at all time highs and eventually would likely revert to normal. He made a ton of money on the LTCGs as well as the tax-free interest. Why munis? He lived in a state having an income tax (still does). On the other hand last I read Schwab has unrealized losses of $1.94B on long term treasury bonds it bought while interest rates during recent years were maintained at all time lows.

[Caymus]

Originally Posted by Robbb

Yes bond fund returns are calculated based on all interest, and dividends if there are any, are reinvested and not withdrawn.

I think you may have been looking at a chart that does not adjust for interest payments.
Vanguards webpage indicates a cumulative 51.39 % return for the life of the fund.

Vanguard Mutual Fund Profile | Vanguard

[spinner1001]

Originally Posted by collie1228

I have never understood bond funds. If I buy the bond and keep it to maturity, I get 100% the interest and all of my principal back at the back end (although rarely there could be a default). Bond funds don't do that.

The amount of capital in bond funds and bond ETFs is huge. A lot of money — including smart money — finds value in fixed income investing in funds and ETFs rather than investing in individual bond issues.

Most fixed income investors do not have the skill, time, or motivation to make good decisions to pick bond issues. Managers of bond funds and bond ETFs do. Moreover, most fixed income investors do not have the capital to invest in too many bond issues and, thus, are exposed to much higher default risk compared to investing in funds and ETFs holding hundreds or thousands of bonds. If a bond investor buys one bond and its defaults, they can loose a lot of their wealth. With bond funds, one bond default is insignificant.

Also, if you buy a bond with a lower coupon rate as we have had in the recent past and inflation grows to, say, two times your coupon rate, you suffer greatly from high inflation by holding your bond to maturity, years in the future. In technical terms, you are exposed greatly to ‘interest rate risk’ even when holding to maturity by owning a single bond with long bond duration. The bond principal you get years in the future will not be worth nearly as much in times of higher inflation, which a low coupon rate won’t compensate you adequately.

If lots of capital is in a particular kind of investment structure, it serves a positive purpose to a large group of investors. Overall, money is not dumb money.

[spinner1001]

Originally Posted by Robbb

I was just looking at returns over the past 15 years, If you invested $1,000 in Vanguard Total Bond fund it would be worth app $931, today, after all interest was reinvested. If you invested that same $1,000 in Vanguard VTI, Total market fund, it would be worth $2,090 today.

As pretty much a Boglehead in investing I'm really starting to question the wisdom of investing in any bond fund.

The future may not resemble the past.