Bought into Vanguard Global Bond Index Fund December 2020 - now what!?

dllive

Yes, Ill provide some further detail to clarify:

Im 45, so have an investment horizon of ~25 years.

Ive only ever held equities, either in actively managed funds or direct company shares. Ive slowly been moving over to passive funds (mostly Vanguards Life Strategy 100). Id always heard that holding bonds was a good idea, but I thought it would be a drag on my return. However, in 2020 I decided to fill my boots on some bonds, and they literally dropped the day after - and have continued to drop - ever since.

As it stands, my current portfolio is: 40% company shares/50% passive funds/10% bonds.

So perhaps I should buy more bonds now the price has gone down? Because I hold bonds in a fund rather than direct fixed gilts (for example) - are new bonds bought and old bonds sold within the fund? So the new bonds are bought cheaper, which offsets the capital loss? 

Im comfortable with how shares/index funds work: they go up and down over time - and hopefully over time there will be more ups than downs. But bonds are another beast, their value fluctuates, and so does the yield, and theres a churn in bonds which are held in funds.

Type_45

dllive said:

Yes, Ill provide some further detail to clarify:

Im 45, so have an investment horizon of ~25 years.

Ive only ever held equities, either in actively managed funds or direct company shares. Ive slowly been moving over to passive funds (mostly Vanguards Life Strategy 100). Id always heard that holding bonds was a good idea, but I thought it would be a drag on my return. However, in 2020 I decided to fill my boots on some bonds, and they literally dropped the day after - and have continued to drop - ever since.

As it stands, my current portfolio is: 40% company shares/50% passive funds/10% bonds.

So perhaps I should buy more bonds now the price has gone down? Because I hold bonds in a fund rather than direct fixed gilts (for example) - are new bonds bought and old bonds sold within the fund? So the new bonds are bought cheaper, which offsets the capital loss? 

Im comfortable with how shares/index funds work: they go up and down over time - and hopefully over time there will be more ups than downs. But bonds are another beast, their value fluctuates, and so does the yield, and theres a churn in bonds which are held in funds.

Have you considered gold as oppose to bonds?

JohnWinder

Your perspective seems to be different from that of some of your respondents.

‘Or should I buy more bonds now the prices are depressed?…..As it stands, my current portfolio is: 40% company shares……’

You seem to be thinking you can beat the market by timing which asset classes to hold (more or less of). I think it’s called ‘tactical asset allocation’. This is perhaps consistent with the thinking of someone who choses individual shares over ‘owning the whole market’. Your respondents on the other hand are thinking ‘one owns bonds, and how much of them, depending on how your portfolio should be made up, unrelated to what asset prices are just now’. I quote:

‘Tactical asset allocation was very popular during the 1980s and 1990; many (pension) funds offered them as choices, and the Vanguard LifeStrategy funds began as tactical asset allocation funds. They failed conspicuously enough that they are almost forgotten now. Vanguard's LifeStrategy funds still exist, but Vanguard froze their allocations at fixed values (20/80, 40/60, 60/40, and 80/20). Vanguard gave up on tactical asset allocation.

Tactical asset allocation was advocated by Mebane Faber in a book entitled Global Tactical Asset Allocation, as well as some papers and articles, and eventually he launched an ETF based on it. Here is how it performed (red) compared to a in time to reflect on tactical asset allocation. simple non-tactical fund with a similar stock-bond allocation, Vanguard LifeStrategy Moderate:’

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=383012&newpost=6925407 

You say you’re moving away from choosing individual individual shares to owning the market; time to reflect on tactical asset allocation.

JohnWinder

‘Because I hold bonds in a fund rather than direct fixed gilts (for example) - are new bonds bought and old bonds sold within the fund? So the new bonds are bought cheaper, which offsets the capital loss? ’

Yes to Q1, or the old bonds may be held to maturity, either way the fund manager will be trying to maximise returns within the bounds she is set. For Q2, the new bonds, not necessarily cheaper or more expensive, will have a higher yield than the old bonds had when they were bought (since interest rates have risen). This higher yield will eventually offset the capital loss. It takes about as many years after the last rate rise, as the fund’s duration is, to get the returns you would have had without the interest rate rise (or fall had it occurred), and a bit less time than that to get the fund’s value back to where it was when it started its fall.

dllive

JohnWinder said:

........It takes about as many years after the last rate rise, as the fund’s duration is, to get the returns you would have had without the interest rate rise (or fall had it occurred), and a bit less time than that to get the fund’s value back to where it was when it started its fall.

Sorry @JohnWinder , Ive read and re-read that sentence 10 times and its broken my brain. Could you expand on this? (dumb it down for me!). Perhaps I need my morning coffee and then come back to this.

JohnWinder

Indeed it’s not really basic stuff. Do you know what ‘duration’ is?

dllive

JohnWinder said:

Indeed it’s not really basic stuff. Do you know what ‘duration’ is?

Yes, the fund info says "... The Index includes investment-grade and government bonds from around the world with maturities greater than one year." . Whether than means 2 years, 3 years, 10 years Im not sure. 

JohnWinder

But what is the meaning of the term ‘duration’?

MX5huggy

I presume it’s this fund I have it https://www.vanguardinvestor.co.uk/investments/vanguard-global-bond-index-fund-gbp-hedged-acc/portfolio-data

I think we can get bogged down in bond details.  Duration, yield, etc it’s a massive fund with 15000 plus bonds there’s no one deciding to buy and sell the bonds it’s tracking an index. 

I hold it as diversification away from global equity. Along with VG Global all cap. Because I don’t want the UK over weight of LS80. 

JohnWinder

But we’re churning through the bog of bonds’ nature to comfort someone whose fund has nose dived and it’s spooked the horses.

Assume interest rates don’t change, then a bond fund with coupons reinvested will progressively increase in value. Now assume rates rise in one step, the fund’s value will fall (more if the duration is long), but maturing bonds (bought when interest rates were lower) are replaced by higher paying bonds. As time passes the newer higher paying bonds (if reinvested) will cause the value of the bond fund to increase (just as reinvested coupons did with no interest rate change). But the increase in fund value will be quicker than when interest rates and coupons were lower, and at some point the fallen value of the fund will get back to what it was when interest rates rose in one step. How long this takes is less than the duration (varies with the size of the interest rate change). The duration is about how long it takes for the fund’s value to rise even further, to the level the fund would have reached if rates didn’t change; remember, when interest rates weren’t rising, the fund still kept rising in value. Example: you have a bond fund which under current conditions will increase in value by 10% in 7 years, if the duration of the fund is 7 years then any interest rate rise will drop the value of the fund but it will rise to 10% above ‘base level’ after about 7 years.

Here are the graphs: https://www.bogleheads.org/forum/viewtopic.php?t=360575

Now, what about when interest rates just keep on rising? They won’t do it forever, but anyway….

Each time the interest rates rise the fund get knocked back again even though it’s trying to increase in value faster than before since interest rates are higher. Some modelling shows it takes longer for the fund value to get up to the level it would have reached if rates had not started rising, and the time it takes is roughly twice the duration minus 1 year. 

When any rate rises stop, every bond in every fund you hold will then be earning interest at the new higher interest rates no matter how old or punished they’ve been.

A take-home message is that volatility (which we’ve seen recently) isn’t the scourge you need worry about if you have the right duration, it’s low interest rates that hurt investors. Bring on the rises!