Bonds v bond funds

goodValue

Over the years I've picked up little bits of information about bonds, but they still remain a mystery to me.

This now seems to be a problem as the advice is to transition from stocks to bonds as you get older, and I wouldn't know where to start in buying bonds.

Buying bond funds seems to be a way of getting around this, though I have heard that bond funds behave quite differently to bonds.

So would buying a bond fund give you the same peace of mind that you get when buying a stock mutual fund.

If not, where is a good place for finding out more information?

InvesterJones

goodValue said:

So would buying a bond fund give you the same peace of mind that you get when buying a stock mutual fund.

Nope.

https://www.youtube.com/watch?v=DiEiQhHYzI8

goodValue

From this video I got the message that bond funds are even more dangerous than single bonds, for investors that don't have a good understanding of them.
After that, I'm afraid my eyes began to glaze over - there were too many issues I know very little about.

So do you have to become an expert in bonds if you want to follow the advice of partially transitioning to bonds, or is there a simpler way?

Did I understand correctly that a money market mutual fund (mmmf) is a type of low risk bond fund?
I thought it was a collection of items that were almost cash equivalents?

Beddie

goodValue said:

So do you have to become an expert in bonds if you want to follow the advice of partially transitioning to bonds, or is there a simpler way?

A simpler way is to buy a multi-asset fund, such as Vanguard Lifestrategy 60 (60% shares 40% bonds) or one of many other managed funds that work in a similar way.

InvesterJones

goodValue said:

From this video I got the message that bond funds are even more dangerous than single bonds, for investors that don't have a good understanding of them.
After that, I'm afraid my eyes began to glaze over - there were too many issues I know very little about.

So do you have to become an expert in bonds if you want to follow the advice of partially transitioning to bonds, or is there a simpler way?

Did I understand correctly that a money market mutual fund (mmmf) is a type of low risk bond fund?
I thought it was a collection of items that were almost cash equivalents?

Like any investment, it should be understood before putting money in. That's certainly the case if you're following advice - do you understand the reason for the advice and how the recommendation meets it?

Bond funds are too wide a category to singularly state if they're more volatile/risky than a given single bond (again, of which a variety exist). If I had to order them on risk I'd go something like (from least to most): Single trusted govt bonds, money market funds, short duration govt bond funds, single less trusted govt. bonds,  mixed duration govt bond funds, short duration trusted corp bond funds, long duration govt bond funds, mixed corp bond funds, single corporate bonds of trusted companies, junk/high yield bond funds, single junk/high yield bonds. The 'trusted' is handily already measured via credit rating.

Money market funds are a combination of cash and very short duration bonds. You can see the breakdown on their information pages usually. There's another pensioncraft video on them and cash, recorded quite recently.

If your understanding only goes as far as 'diversification is good' then that's already a good start, and a simple multi-asset fund like Vanguard lifestrategy or HSBC global strategy is not a bad set-and-forget option.

They can even be used to 'partially transition' to bonds, but the question is still whether you understand the reason you are wanting to partially transition to bonds. So, what is that reason?

Linton

goodValue said:

From this video I got the message that bond funds are even more dangerous than single bonds, for investors that don't have a good understanding of them.
After that, I'm afraid my eyes began to glaze over - there were too many issues I know very little about.

So do you have to become an expert in bonds if you want to follow the advice of partially transitioning to bonds, or is there a simpler way?

Did I understand correctly that a money market mutual fund (mmmf) is a type of low risk bond fund?
I thought it was a collection of items that were almost cash equivalents?

I agree that bond funds are much more dangerous than single bonds, especially longer dated ones.  The crucial difference is that if you buy a single bond maturing in say10 years time you will get £100 back at maturity despite potential volatility in the meantime..  A 10-year bond fund is a mixture of various maturities averaging 10 years and will continue to be one in 10 years time and beyond so never get the benefit of guaranteed maturity value.

The first step towards enlightenment is to understand what a bond is and why you might want to buy bonds.  Dont simply buy them becauuse some guru says they are a good idea.  That gives you a basis to decide what type of bond investments would meet your objectives. 

Yes an mmf fund is similar to a 1 year bond fund but differs in that it may hold other things than bonds.  The key point is that both mmf funds and 1 year bond funds hold investments that mature in 1 year. Clearly is guaranteed to be worth £100 in 1 year or less there is not very much room for volatility in the meantime.  No one is going to buy or sell the bond for a very different price.

goodValue

A simpler way is to buy a multi-asset fund, such as Vanguard Lifestrategy 60 (60% shares 40% bonds) or one of many other managed funds that work in a similar way.

I do want a very simple strategy to follow, but this may be too simple as it does not allow you to change your percentage of bonds.
That said, this may be the option that I eventually choose.

goodValue

They can even be used to 'partially transition' to bonds, but the question is still whether you understand the reason you are wanting to partially transition to bonds. So, what is that reason?

My understanding is that bonds are less volatile than stocks, so in your retirement years you will not be affected so much by a change in the market.
Also, bonds move in opposition to stocks ( though I have heard that this may not be so pronounced now).

Bonds appear to have a complexity that means that I couldn't predict the outcome of investing in them.
It appears that bond funds have characteristics that make them even more unpredictable for the unwary.

There is a current thread (Bonds and Misery?) that I have noticed.
It is for an audience more experienced than myself.
I did take another look at it though, and saw some interesting points.
One was that other posters  think that the strategy of holding certain %s in stocks, bonds, and cash, no longer holds true.
If I understood correctly, some are just using stocks and money market funds/cash.
So that is something I could think about.

I was not aware of the PensionCraft (or other videos) about investing, and so I should take some time in looking at these.

goodValue

Yes an mmf fund is similar to a 1 year bond fund but differs in that it may hold other things than bonds.  The key point is that both mmf funds and 1 year bond funds hold investments that mature in 1 year. Clearly is guaranteed to be worth £100 in 1 year or less there is not very much room for volatility in the meantime.  No one is going to buy or sell the bond for a very different price.

So the money market funds are less risky than bonds, suggesting that they will not give as big a return as bonds do??

Is it also true that the money market funds give a greater return than a banks savings account, and for this reason they will have a small amount of risk associated with them?

MK62

If you want simple, but with the capability to change bond percentage, a couple of options from the same stable might be either buy two Lifestrategy funds, say VLS40 and VLS80, and rebalance between them to alter the bond percentage.....or buy VLS100 and Vanguard Global Bond Index and do the same.........

Personally, if I wanted a very simple solution though, I'd probably be looking at one of the volatility managed funds, such as HSBC Global Strategy Balanced, and leave it all to the fund manager.

InvesterJones

goodValue said:

Yes an mmf fund is similar to a 1 year bond fund but differs in that it may hold other things than bonds.  The key point is that both mmf funds and 1 year bond funds hold investments that mature in 1 year. Clearly is guaranteed to be worth £100 in 1 year or less there is not very much room for volatility in the meantime.  No one is going to buy or sell the bond for a very different price.

So the money market funds are less risky than bonds, suggesting that they will not give as big a return as bonds do??

Is it also true that the money market funds give a greater return than a banks savings account, and for this reason they will have a small amount of risk associated with them?

No to both of those. It's impossible to predict the future so we don't know how the returns of variable rate assets will ultimately play out. Currently money market funds and savings accounts both have similar returns. As I mentioned before, 'bonds' covers a vast range of very different things so it's not possible to say as a whole they return more or less than MMF/savings accounts, however if you were comparing very safe bonds then they currently yield less than MMF/savings accounts. The difference is bonds lock in the yield over a long time, while MMFs will vary as soon as the BoE rate changes. Savings accounts can either be fixed or variable, but long term fixes tend more towards the bond-like return than MMF-like.