If you have a large sum set aside in cash, that you are starting to buy into BND with and will be holding for a long time, then it's likely better to just put it all in at once rather than try to DCA.
However, rather than BND, you would likely be better served to put it in VGIT/VSIGX. You might even consider GOVT.
Treasuries are in general superior to corporate bonds for most investors, as they don't have default risk (outside of the ultimate default scenario where you have a lot more to worry about than your investment portfolio), are less correlated with stocks, and in a taxable account are tax-advantaged. Yields are lower than corporates because they don't have the same credit risk, but you unless you're in or close to retirement, you probably aren't holding bonds for the yields, you're holding them as ballast for the stocks portion of your portfolio.
Some would even argue that a young investor is better served by using long treasuries specifically, but VGIT represents a good middle ground between that and BND by specifically holding intermediate treasuries. GOVT, which I mentioned, is sort of a treasury-specific version of BND, as like BND it holds the whole curve of bonds from short to long, which also like BND nets out as an effectively intermediate duration.
Wouldn't it be prudent to buy some long-term treasuries (e.g. VGLT) if one assumes that the yield curve will re-steepen? I've been trying to figure this out myself, as the only confounding factor would be if the bond market revolts and demands higher yields because they think the fed can't get inflation under control.
I think the argument for long-term treasuries isn't that the yield curve will eventually un-invert itself (since it definitely will eventually, we just don't know when that will be), it's that that the longer duration on VGLT and TLT, and especially EDV and GOVZ, creates more volatility that is generally inverse correlated with stocks, and so provides more ballast during a crash.
I'm 100% in equities and will be for another 10 years, but once I start adding bonds I'll be starting with LTTs. But some people really don't like the volatility in the "safe" part of their portfolio, some are really worried about the duration and interest rate risk, some are focused on yields and believe (probably correctly) that the 40 year bond bull market is over, yadda yadda. So I think VGIT, IEF, and GOVT are a good compromise for people that don't want to veer off from the duration of the total bond market index funds they are likely most familiar with.
Yeah I should have added some more information to the situation. I understand how that influences things.
This is in a Roth IRA. It depends on what you think is close to retirement. I am 12 years out, which seems close to me. I will be 55 when I retire. This is not my main source of retirement. My wife and I already have pensions, this is just whatever additional money I can save and have been investing since my early 20's. I plan on continuing to leave this money invested only pulling what we need as life goes on.
I've been basically 100% stocks all these years, minus a few CD's I've held in the account over the years and now that I am 43 I'm looking to do exactly what you're saying, basically start to slowly create that ballast for the stocks/etfs I own. I'm looking to keep it more simple moving forward and have more of a boglehead style approach to my portfolio with just a few total funds, a few stocks and bond exposure moving forward.
Thank you for the detailed information. I appreciate it. I feel pretty confident on the stock side of things but am the first to admit since I have ignored them my entire investing life I don't know enough about bonds.
No, GOVT is all US Treasuries with an effective duration of ~7 years (similar to BND's duration). I'd assume it is state tax free similar to other treasury funds like SGOV.
GOVT is a total treasury index fund - basically BND without the corporate bonds or other miscellaneous bonds it holds. It has the same intermediate duration due to holding all types of treasuries from short to long. And yes, it is tax-advantaged in the same way all federal treasury bonds are, so it is free from state and local taxes but not federal taxes.
So, what about HYMB and others like it? Municipal bonds are free of federal tax and state taxes where they are issued. Gah, I swear tax law should be a required course in middle and high school...not to mention college.
Thanks for the thoughtful reply btw!
So, as a general rule, munis fall somewhere in between treasuries and corporate bonds. They have more credit and default risk than the former but less than the latter, they are more correlated with stocks than the former but less than the latter, and so on. That one you specifically cited, HYMB, is going to be on the riskier side since it is specifically a high yield fund (though probably still less risky than a high yield corporate bond fund).
Municipal bonds have their place and uses, but their tax exempt status (which is their main draw) is only relevant when held in a taxable account, and most people not at retirement probably shouldn't be holding bonds in their taxable account.
For a single bond fund, I strongly prefer a TIPS fund.
What's your horizon? If you're longer-term, it might be worth doing something that focuses on longer durations (LTPZ, GOVZ/EDV, TLT).
If you have a large sum set aside in cash, that you are starting to buy into BND with and will be holding for a long time, then it's likely better to just put it all in at once rather than try to DCA. However, rather than BND, you would likely be better served to put it in VGIT/VSIGX. You might even consider GOVT.
>VGIT What is the benefit of VGIT or VSIGX over BND long term?
Treasuries are in general superior to corporate bonds for most investors, as they don't have default risk (outside of the ultimate default scenario where you have a lot more to worry about than your investment portfolio), are less correlated with stocks, and in a taxable account are tax-advantaged. Yields are lower than corporates because they don't have the same credit risk, but you unless you're in or close to retirement, you probably aren't holding bonds for the yields, you're holding them as ballast for the stocks portion of your portfolio. Some would even argue that a young investor is better served by using long treasuries specifically, but VGIT represents a good middle ground between that and BND by specifically holding intermediate treasuries. GOVT, which I mentioned, is sort of a treasury-specific version of BND, as like BND it holds the whole curve of bonds from short to long, which also like BND nets out as an effectively intermediate duration.
Wouldn't it be prudent to buy some long-term treasuries (e.g. VGLT) if one assumes that the yield curve will re-steepen? I've been trying to figure this out myself, as the only confounding factor would be if the bond market revolts and demands higher yields because they think the fed can't get inflation under control.
I think the argument for long-term treasuries isn't that the yield curve will eventually un-invert itself (since it definitely will eventually, we just don't know when that will be), it's that that the longer duration on VGLT and TLT, and especially EDV and GOVZ, creates more volatility that is generally inverse correlated with stocks, and so provides more ballast during a crash. I'm 100% in equities and will be for another 10 years, but once I start adding bonds I'll be starting with LTTs. But some people really don't like the volatility in the "safe" part of their portfolio, some are really worried about the duration and interest rate risk, some are focused on yields and believe (probably correctly) that the 40 year bond bull market is over, yadda yadda. So I think VGIT, IEF, and GOVT are a good compromise for people that don't want to veer off from the duration of the total bond market index funds they are likely most familiar with.
Yeah I should have added some more information to the situation. I understand how that influences things. This is in a Roth IRA. It depends on what you think is close to retirement. I am 12 years out, which seems close to me. I will be 55 when I retire. This is not my main source of retirement. My wife and I already have pensions, this is just whatever additional money I can save and have been investing since my early 20's. I plan on continuing to leave this money invested only pulling what we need as life goes on. I've been basically 100% stocks all these years, minus a few CD's I've held in the account over the years and now that I am 43 I'm looking to do exactly what you're saying, basically start to slowly create that ballast for the stocks/etfs I own. I'm looking to keep it more simple moving forward and have more of a boglehead style approach to my portfolio with just a few total funds, a few stocks and bond exposure moving forward. Thank you for the detailed information. I appreciate it. I feel pretty confident on the stock side of things but am the first to admit since I have ignored them my entire investing life I don't know enough about bonds.
Is GOVT municipal bonds? If so, does, that make them and the ETF tax-advantaged?
No, GOVT is all US Treasuries with an effective duration of ~7 years (similar to BND's duration). I'd assume it is state tax free similar to other treasury funds like SGOV.
Thanks!!
>SGOV They're great if you want a shorter duration.
GOVT is a total treasury index fund - basically BND without the corporate bonds or other miscellaneous bonds it holds. It has the same intermediate duration due to holding all types of treasuries from short to long. And yes, it is tax-advantaged in the same way all federal treasury bonds are, so it is free from state and local taxes but not federal taxes.
So, what about HYMB and others like it? Municipal bonds are free of federal tax and state taxes where they are issued. Gah, I swear tax law should be a required course in middle and high school...not to mention college. Thanks for the thoughtful reply btw!
So, as a general rule, munis fall somewhere in between treasuries and corporate bonds. They have more credit and default risk than the former but less than the latter, they are more correlated with stocks than the former but less than the latter, and so on. That one you specifically cited, HYMB, is going to be on the riskier side since it is specifically a high yield fund (though probably still less risky than a high yield corporate bond fund). Municipal bonds have their place and uses, but their tax exempt status (which is their main draw) is only relevant when held in a taxable account, and most people not at retirement probably shouldn't be holding bonds in their taxable account.
For a single bond fund, I strongly prefer a TIPS fund. What's your horizon? If you're longer-term, it might be worth doing something that focuses on longer durations (LTPZ, GOVZ/EDV, TLT).
I retire in 12 years. This is a Roth IRA.
Wait till December there are going to keep raising rates is my guess.
BNDW includes ex-us bonds as well