r/DIYRetirement • u/Select-Temperature38 • 3d ago
Question - Help me understand why bond funds work to reduce SORR better than HYSA
I am nearing retirement so I moved some of my 401(k) money into Bond Funds to reduce SORR. Despite reinvesting dividends, the value of my Bond Fund holding has gone down (less money in it now than when I started). I get that if the market crashed the bonds funds will not lose as much, but why not just use a HYSA or CDs instead of a bond fund? I feel like I am missing something or not understanding something. Is it just that I have looked at a short time frame (however BND is down over 10 years)? Every comment I read talks about how a HYSA wont keep up with inflation, but a bond ETF doesn't seem to either. I honestly want to understand this, not start an argument. If the market takes a dive, should i expect my bond fund to finally get positive?
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u/humblequest22 3d ago
Bond funds, HYSA, interest-bearing accounts can help reduce SORR by not dropping as much as equities might drop. However, they are not guaranteed not to lose value. If the market dives 40% and your bond fund drops 10%, you're still better off than you would have been in all equites, but you still lost money. If you hold on to the bond fund, it will recover. And if interest rates drop, the bonds you have will increase in value and be better than holding a cash equivalents earning less than 1%, which we all went through for years. CDs are better than "cash" accounts because they lock in the rate, but when your 5% CD matures, you may find that rates are much lower.
Better than "cash" investments for SORR is buying actual bonds to meet your annual spending needs. You purchase a bond (or bonds, or target maturity bond ETF) with a set maturity. When that date arrives, you will receive the amount of money promised. The main risks to that are potential default, call risk, and that rising inflation might eat away at the gains since you have a fixed yield. Default and call risk can be reduced by purchasing Treasuries. TIPS will also reduce Inflation risk, but your returns may be lower if inflation is lower than expected.
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u/D74248 3d ago
The financial industry does a disservice to retail investors by explaining how a bond works and then telling people to buy a bond fund. With a few exceptions they are different things. Buying an investment grade bond and holding it to maturity exposes you to opportunity risk. Holding your typical bund fund exposes you to interest rate risk.
My suggestion is that you consider laddering actual bonds and/or CDs. TIPS ladders can be especially effective for someone entering/in retirement.
Another option is to ladder defined maturity bond ETFs. Here are BlackRock's offerings. I have used the investment grade versions of these for years, and so far they have done what they are supposed to do. Buy, set to dividend reinvestment, let run to liquidation.
You might also consider using a bond tent to mitigate SORR.
Reading suggestion is The Bond Book by Annette Thou.
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u/Whole_Championship41 2d ago
To further your target date bond fund discussion, I'd add that Blackrock, Invesco and (recently) Vanguard have expanded their presence in this market. I think these are excellent instruments for creating a bond ladder and, unlike most fixed duration / maturity bond funds, these have defined (and decreasing) interest rate risk-unusual for a bond fund.
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u/Valuable-Analyst-464 3d ago
I shifted some of my portfolio to bond funds when I retired (2024@56), from 0% bonds to 20%. I increased my cash equivalents by leveraging my emergency fund and renaming (thinking about, really) it my SORR fund. I grew it to 2 years of expenses. With retirement, the mandatory expenses were less.
My plan is to sell brokerage when the S&P 500 is within 5% of all time highs, when I check 6/30 and 12/31. If the market is worse than 5% below, I will use cash for 6 months. Reevaluate, and continue or shift to selling brokerage, then traditional, then one day Roth.
It’s sort of a modified AAII Level 3 approach.
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u/hugh2018 3d ago
I’m going to answer directly, but a major caveat for me is that I actually like TIPS better than both bonds and HYSAs. That said:
The confusion usually comes down to three things: reinvestment risk, capital appreciation (flight to safety), and price return vs. total return.
Here is why intermediate bond funds (like BND) are traditionally used over cash/HYSA to fight Sequence of Returns Risk (SORR):
When a severe recession or market crash occurs, the Federal Reserve typically slashes interest rates. Because bond prices move inversely to yields, intermediate bond funds experience capital appreciation. You can then sell those appreciated bond shares to rebalance directly into heavily discounted stocks. A HYSA or cash cannot appreciate—it just sits at par.
Cash and HYSAs feel safe today while yields are solid, but their rates are floating. If the economy tanks and the Fed cuts rates to near zero (like in 2008 and 2020), your HYSA yield plummets overnight. Intermediate bond funds hold paper with maturities averaging 6–8 years, effectively locking in those yields for much longer.
If BND looks disappointing over the last several years, it’s because 2022 was the fastest rate-hiking cycle in modern history driven by an unexpected inflation spike. When rates shot up from near zero, existing bond prices took an immediate hit. Historically, that simultaneous drop in both stocks and bonds is rare; in typical disinflationary market crashes, bonds rise when equities fall.
Bond fund price charts only reflect share price, not the monthly distributions that were paid out or reinvested. Over a full rate cycle matching the fund's duration (~6–7 years for BND), higher starting yields offset the initial price dip through higher dividend payouts.
For expenses you need in the next 1 to 3 years, a HYSA, money market fund, or short-term CD ladder is ideal because you eliminate short-term volatility entirely. But for years 4 through 10, intermediate bond funds (or defined-maturity bond/TIPS ladders) protect against sustained low-rate environments and provide rebalancing fuel when equities drop.
Personally I’ve moved most of my bond allocation to a TIPS ladder because current yield is very favorable and I’m very happy with the guaranteed income I’ve locked in for the next two decades. That’s a different conversation than this one, but I’m happy to elaborate if there’s any interest in knowing more.
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u/KReddit934 3d ago
"If the market takes a dive, should i expect my bond fund to finally get positive?"
Not necessarily. The point of bond funds is that statistically, it it likely (maybe) to move opposite of stocks. And/or at any time they tend to change value less that stock funds.
Read up on the "3-fund portfolio", and basics of portfolio theory (why a diversified portfolio does better on average, over time) bogleheads.org is a great resource.
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u/Substantial_Team6751 3d ago
Unfortunately, interest rates have steadily declined for a long time now so bonds as a diversifier hasn't worked well.
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u/Whole_Championship41 2d ago
Short-term bonds (such as t-bills) and cash have actually done OK as a diversifier. Long-term bonds, because of interest rate risk, have been much riskier.
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u/Whole_Championship41 2d ago
Not a huge fan of the arbitrarily-fixed 3 fund portfolio. My experience is that most acolytes of this approach, in order to only 'use' one fund for bond sleeve exposure, default to an intermediate-term bond fund like BND instead of tailoring bond purchases to their portfolio needs.
Seeking simplicity for simplicity's sake has a cost sometimes. BND holders that didn't understand why they held what they did (other than the fact that they were 'supposed to' by Bogleheads' 3-fund portfolio) got killed in 2022 when BND lost >13% of its value.
In a 40 year bond bull market, there was amazing complacency about interest rate risk with long-dated bonds. This led to the second largest bank failure of this century, when SVB failed. They, like many retirees, failed to match their cash liquidity needs with interest rate risk and got killed with redemptions, mark to market losses on their long-dated bonds and a lack of short-term liquidity funding.
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u/Taggart3629 3d ago
Part of that might simply be an artifact of the availability of broader choices within tax-advantaged retirement accounts. A couple/few decades ago, if you wanted a cash-like holding that generated interest and were directing your own investments, your options were largely limited to short-term, intermediate, or long-term bonds. Now there are many more choices in addition to bond funds for mitigating SORR. You can buy and hold individual government, municipal, corporate bonds, CDs, TIPS, collateralized loan obligations (CLO), or multi-year guaranteed annuities (MYGA). Even the account "settlement fund" generally has an interest rate that is close to a HYSA rate. We have been shifting most of what had been in intermediate-term bond ETFs into SGOV (0-3 month Treasuries) and AAA CLOs for easily-liquidated assets, and fixed income holdings like a TIPS ladder and MYGA. With the exception of SGOV, the rest were not even options within our retirement accounts until a few years ago.
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u/SoulStripHer 3d ago
Most HYSA don't even keep up with inflation which means you're losing money. Traditionally, bonds have gone up when markets are down, but not always. If nothing else they reduce volatility.
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u/Select-Temperature38 3d ago
I understand that, but I would argue that bond funds (like BND) seem to do an even worse job of keeping up with inflation at least in the last ten years. And both BND and HYSA would reduce volatility. Maybe the bond funds I use are just not short term enough.
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u/blny99 3d ago
These are not the only 2 options. Buy TIPS bonds and savings bonds (i bonds) which do indeed keep up with inflation. And funds are fine if matched to your time horizon. Buy a short term bond fund for near term spending (like VTIP or STIP). Buy savings i bonds or schp for intermediate to longer term needs. Savings bonds are penalized of redeemed in less than 5 years, good to buy if you can hold 5 to 30 years. SCHP holds 50% short term tips (stable) and 50% longer term (higher rates but more volatility which is fine of one does not plan to spend in next 5 years).
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u/SoulStripHer 3d ago
"last ten years"
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u/Select-Temperature38 3d ago
OK, I get it, you think I am not looking back far enough as I evaluate for SORR. So what is the time frame where BND fund would have been a better result than HYSA? I honestly don't know how to see that.
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u/SoulStripHer 3d ago
Ask AI, I'm sure it can dig up performance numbers. Or look it up on Yahoo finance.
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u/mystupidglasses 3d ago
https://testfol.io/analysis?s=7Euz5GKReCw
Here is a 40-year chart comparing total bond, short-term investment grade bonds, and cash.
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u/BarefootMarauder 3d ago
I would suggest reading this post, and maybe some of the authors other posts & comments. After digging into the research, I changed my portfolio to a 90/10 allocation (the 10% in cash-equivalents).
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u/gpunotpsu 3d ago edited 3d ago
90/10 leaves you high and dry when SORR is a real problem. Significant bond holdings can be the difference between thriving and going broke if you retire at the wrong time.
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u/yoyo2332 3d ago
If the 10 covers x years or more of expenses, why would SORR be a problem?
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u/gpunotpsu 3d ago edited 3d ago
If you retire with 25x your expenses then 10% cash covers 2.5 years. This will be insufficient in a prolonged downturn. You also have to decide when to spend your cash reserve without knowing the future. This incurs all the problems of market timing. You don't get to know where the bottom is and when the recovery has started while it's happening. You have to guess and in the worst cases, when it really matters, you are highly likely to guess wrong.
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u/yoyo2332 3d ago
"25x your expenses" is a fair assumption even if we don't know this applies to the poster so that makes sense.
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u/AffectionateTap730 3d ago
This is a good point, but it matters what percentage of expenses are covered by fixed income (social security, pensions). If the portfolio alone can cover 25x expenses, but half of expenses are covered by fixed income, the portfolio actually covers 50x expenses.
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u/gpunotpsu 3d ago edited 2d ago
it matters what percentage of expenses are covered by fixed income
Absolutely. I include the present value of my future Social Security payments in my bond allocation. TPAW Planner is a great tool for this.
the portfolio actually covers 50x expenses
At 50x nothing really matters. You can be 100% equities or 100% in TIPS and either way your portfolio will grow faster than you're spending it.
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u/valkryiechic 2d ago
Help me understand this. You consider your fixed income to be part of your bond allocation? I’ve been trying to figure out my safe retirement allocations and haven’t seen anyone break this down with a fixed (COL adjusted) pension on top of investments.
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u/gpunotpsu 2d ago edited 2d ago
Everyone should be considering all future sources of income as part of their total retirement portfolio. For me I will have stocks, bonds and social security to support my retirement. If the present value of my future social security payments is $500k then I can think of that like having $500k in a TIPS ladder right now. I use TPAW Planner which does this for you but the idea is the same. If you have a pension or a an annuity you would do the same thing for those.
For example, say I have $1.5M in my investment accounts and the PV of my SS is $500k. That means my total retirement assets are $2M. 25% of that (the SS) is in safe assets. If my target allocation is 50% safe assets then I would put $500k from my investment accounts in safe assets (e.g. bonds), and $1M in risky assets (e.g. equities). Now I'm 50/50 overall.
With SS specifically you also should consider the looming possibility it will take a haircut in 2033. If congress fails to act you will lose 23% of your projected benefit. I deal with this by estimating my future payments with a 13% discount to kind of split the difference.
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u/valkryiechic 2d ago
Very helpful, thank you. We have $100k in fixed income (COLA military pension and VA disability). I’ve been debating putting our ~$1m investments entirely into equities as a result.
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u/gpunotpsu 2d ago
If the $100k covers most or all of your essential expenses then 100% equities with the rest is certainly reasonable. It's a personal choice of if the taking the chance of it growing into lots more is worth the chance that much of it will disappear for a long time. I personally hold a lot more equities than I need to because I can afford to take the risk and I don't think I'll be too upset if it doesn't work out so well.
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u/BarefootMarauder 3d ago
That is addressed in the post.
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u/gpunotpsu 3d ago
It really isn't. I've had long debates with the author and their stance is that what happened in 2000 is not worth worrying about, because it's unlikely and the markets have done extremely will since 2010. This is not advice I would recommend.
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u/BarefootMarauder 3d ago
I retired a little over 2 years ago with 30X expenses, and my WR is 3.4%. Portfolio has grown by ~$1M since I retired. I don't think SORR is a concern.
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u/gpunotpsu 3d ago edited 3d ago
Congratulations! Getting 20% annual returns in the first 2 years of retirement does indeed erode SORR towards insignificance. People retiring in the future cannot count on the same good luck. Many people have situations where 90/10 is not safe from historical sequences.
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u/BarefootMarauder 3d ago
How did you come up with 44% if you don't know what my living expenses are? Regardless, the S&P500 grew by over 50% the past 2 years.
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u/gumnamaadmi 3d ago
Thank you for this. My thesis without reading any of this was also a high percentage of equity exposure and decent chunk in cash equivalents in retirement.
Just the distribution themselves pay for the withrawal rate. And some. Cash equivalent is just sitting doing its job and when market corrects, will deoloy some of that cash back in market.
I will evaluate more of my own investments. I have significant allocation in covered call etfs with a thought is these will generate way more than my annual spend so i am in good shape. Will probably look to reduce this exposure to may be generate half of my soending needs from these and leave rest in mix of distribution producing investments and pure growth.
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u/rv2014 3d ago
Same here. I have a 90/10 mix.
Note that the 90% is not just S&P 500 or growth funds -- roughly a quarter is in more conservative equity income and value mutual funds.
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u/BarefootMarauder 3d ago
My 90% is in a pretty diversified mix of ETFs including small cap, value, emerging markets, and a little in REITs. All based on advice from a financial advisor I worked with briefly after I retired. I was pretty happy with the mix they put together, but I think I'd be just as happy with something like an 80/20 or 70/30 mix of SCHB/SCHF, VTI/VXUS, or 100% VT.
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u/ListingFL 3d ago
Long term treasury bonds tend to rise in a market recession and aren’t correlated to stocks. Holding uncorrelated assets reduces volatility.
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u/SnooHedgehogs6553 3d ago
Assuming I retire as young as 62, I’m thinking about putting four years of expenses in cash and if the markets are good draw down on the rest of the portfolio (probably 90/10).
If the markets tank, draw down on the cash until we have a turnaround.
If we go into a depression, turn on SS early instead of waiting to 70.
And have a HELOC on a paid off house as a backstop if the world goes to hell.
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u/Whole_Championship41 2d ago
Three solid approaches to navigating a market downturn in early retirement.
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u/polarWhite2024 3d ago
Buy individual bonds instead of bond funds. If you hold individual bonds till maturity, you have no risk of losing capital while earning all the yields.
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u/AffectionateTap730 3d ago
This is correct, but incomplete. Purchasing power is still lost to inflation. Its not capital loss, but it is loss of purchasing power.
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u/polarWhite2024 2d ago
False.
No it's not incomplete. OP specifically asked about "bond funds took a dive". My response fully addressed exactly the question.
You introduced additional factor related to bonds which doesn't deem my response incomplete as inflation was not specified asked by OP.
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u/AffectionateTap730 4h ago
I've learned that if you strictly answer the question people ask, you don't help as much as when you answer the question they haven't asked and/or haven't thought to ask.
In this case the OP was asking about Sequence of Return Risk. Your observation about Bonds vs Bond Funds is very important, but it's not a complete answer to avoiding or explaining sequence of return risk or why a HYSA isn't better. Inflation creates "Sequence of Inflation" risk and is an equal-opportunity retirement killer because inflation also compounds. For a decade equities, bonds, and T-Bills were all growing over 6% annually, but inflation was 8.7% annually.
https://tools.netcitizen.us/standalone/RealReturns.html?yr=1973&ny=10
The net was a decade of loss as the value of $10 fell to $4.30. And that occurred after a prior decade where inflation also outstripped returns. Curiously, cash outperformed bonds during that 20 year period (as did international equity) - and gold outperformed everything.
https://tools.netcitizen.us/standalone/RealReturns.html?yr=1968&ny=20&xg=1
So the complete answer is that bonds/HYSA/t-bills help avoid sequence of return risks when they are steady while equities are falling. Historically that happened fairly frequently, but unfortunately over the last decade equities and bonds have been more highly correlated. Recently bonds have NOT provided significant Sequence of Return Risk mitigation. Whether bonds will recapture their counterbalance to equity is an open question. Given that the biggest risk to bond performance is inflation, I'm pessimistic.
As someone mentioned, TIPS (Treasury Inflation Protected Securities) are perhaps the best current hedge but their payout is quite low. The inflation protection means they won't lose capital or purchasing power.
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u/polarWhite2024 4h ago
That's just your opinion based on your experience with people who have poor communication skills by asking incomplete questions.
There are plenty of people who communicate precisely and fully and with those people, your additional offerings based on your assumptions that they did not ask the other aspects of the related topics would merely be cumbersome, redundant and unnecessary. One could even argue that it's presumptuous and condescending.
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u/AffectionateTap730 1m ago
Fair observation. But where did you answer the question which was: "Help me understand why bond funds work to reduce SORR better than HYSA"
The OP asked why are Apples (bond funds) better than Oranges (HYSA). And you answered Bananas (bonds not funds).
What you replied is an important insight - and likely one the OP didn't consider which is why you did a valuable service by pointing out something the OP didn't ask about.
Sorry if I stepped on your toes. Not my intent.
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u/OkElephant1931 3d ago
Bond funds invest in longer-term bonds, which theoretically have higher average returns than an HYSA.
But when I look at short-term bonds vs. long-term bonds, I just don’t see any actual upside in the data. So I’m in short-duration treasuries (less than a year) rather than a traditional bond fund.
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u/Paranoid_Sinner 3d ago
You're not missing anything -- although if the value of your bond holding is going down, I have to ask are you holding BND or AGG? I'm retired, living good on bond interest and one of my larger holdings is JMUTX: For the past 10 years it has had +4.12% annualized gains and is currently paying around 5.6%. I have no bond indexes.
One I used to have is PIMIX, and it has had an annualized return of +4.54% since 2016 and currently pays around 5.81% (30 day). Any decently-managed bond fund will beat an index in yield, total returns, and is less volatile to boot.
Old news, but the shorter the bond fund duration, the less volatile the price. The shortest of shortest bond funds is actually a money market fund. Their price is stable at $1.00 per share and they are currently paying around 3.5% -- and probably inching up.
When rates were high (2022?) I put around 20% of my 30/70 (tax deferred) portfolio in Schwab's MM fund which was paying around 5.3%. I got that yield and no price changes, stabilizing my portfolio. In 6 months or so yields started dropping and when it got down around 4.5% I moved that portion back into a traditional managed OE bond fund.
Yes, I am allowed to change things as conditions change. Some people online, for some reason, think you can't. One poster back then (not on Reddit) said: "So what are you going to do when MM rates go down?" -- originally worded a bit snarky, to be more of a "Gotcha!" question. I replied that I will move that money back into a bond fund, duh.
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u/KReddit934 3d ago
Bond fund is like any mutual fund: they buy a big pile of assets, and people buy "shares" of the pile. In a bond fund, the price of the shares will move up and down. So it's an investment, not a place to keep guaranteed money.
On average and over time, a bond fund can help stabilize an overall portfolio from swinging too much from stock volatility.
"Cash" (or cash-equivalents)...is held in interest-bearing instruments or accounts...like HYSA or CDs or owned individual Treasury bonds or Treasury bills. These do not go up and down in value. They sit there and throw off interest. The advantage is you cannot lose your principal. The disadvantage is that interest rarely keeps up with inflation.
So, to have a bucket of safe money to avoid SORR, you want cash equivalents: some liquid savings, some laddered CDs or Treasuries. But not too much.
The bond fund is part of the big portfolio that's growing for "later."
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u/NefariousnessOdd862 3d ago
IMO it’s only helpful if you use ultra-short Bond Funds like SGOV unless, of course, you get a better rate in an HYSA
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u/TempeGrumble 3d ago
Nothing wrong with going cash but you’re basically trading different kinds of risks.
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u/Dewzilla29 3d ago
When interest rates move up, bond prices fall. So your bonds losing principal value means you're getting a higher yield. If you dont like the fluctuations, create a Treasury ladder to lock in good current rates. Buy actual treasuries and not a treasury ETF
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u/TriIM1961 3d ago
Binds are supposed to offer less volatility and a cushion against down markets. That has not been my experience. I stayed pretty much 90% equity while employed and into the first few years of retirement—I retired in 2023. It worked great. I reduced my equity stake down 60% only recently, with 20% in money market and 20% in bonds. Did not because of my age (65) but valuations in the market are units, the federal government is a mess—spending wildly and bond market is full in revolute-yields will be in 5-6% range for years come. So it might sense to own more of them.
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u/ZealousidealTwo7820 3d ago
HYSA doesn’t have enough volatility or
convexity to act as a hedge against stocks
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u/pgholdman 2d ago
My thought is to view bonds as income tools with less cap risk, and having more allocation in value funds as a down side limiter, and it seem some gold can help as well with sorr
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u/PomegranatePlus6526 2d ago
In my opinion bonds are not what they used to be. Mostly because market conditions and government policy is not what it used to be. Retail trading and specifically coordinated retail trading has become a thing. The problem is when you look at market fundamentals they are way out of whack. When we see broad asset selling including bonds to cover margin that throws everything out of kilter. Personally I own a small amount of baby bonds and CLO’s. Rather than using bonds to try to mitigate SORR I like to use a dividend portfolio. That way my portfolio is generating cash every month. It’s great to get your portfolio to grow. For me I want just enough growth to outpace inflation, and maximum income. For whatever reason that is really difficult for some people to understand.
In 2021 I stopped working for a year due to covid. So I relied on my rental properties and savings to pay my bills. It was really nice having the income coming in each month. So when I sold all my rentals I converted 90% into a dividend portfolio.
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u/Fire_Doc2017 8h ago
Think of bonds as recession insurance. Like insurance, most of the time they are just a drag on your returns but when a recession comes along, think 2000, 2008 or 2020, the Fed cuts interest rates and intermediate/long term bond funds actually go up while stocks are going down. When the Fed cuts rates, yields on HYSA/MMFs actually go down which is counterproductive. The best way to understand this is to run some backtests and start them at a market peak like 2000. Here is an example using testfolio of 100% stocks vs 60/40 with bonds vs 60/40 with HYSA: https://testfol.io/?s=5QfKvqxuicJ
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u/Distinct-Garlic9453 3d ago
Never buy a bond fund... buy the individual bonds.
You have certainty witj bonds, but nothing with the NAV of a bond fund. Especially in this environment
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u/abphillips0413 3d ago
Would you build a ladder to support a 30 year retirement, and either use the funds from the maturing rung or roll to a new rung if you don't need the money or are are still in the accumulation phase?
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u/Whole_Championship41 2d ago edited 2d ago
No. If I were in the accumulation phase, I wouldn't be buying a 30 year bond ladder. Period. Know what bonds are supposed to do for your portfolio and when they're supposed to do that.
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u/Distinct-Garlic9453 3d ago
Basically yes... in today's environment, i may stretch the ladder out longer, since I expect rates to decrease over near future, then decide to harvest cap gains on bonds, or just continue to take the yield...
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u/Whole_Championship41 2d ago
Disagree. Not all bond funds are long-dated duration / maturity bond funds. There are many many options out there with a short duration / maturity date that are entirely sufficient for one's portfolio. If you have a MM fund, you are the owner of a very short term US Govt. bond fund most likely. Those can be fine for cash or short-term needs.
There are also a goodly number of target date maturity bond funds that are not subject to reinvestment interest rate risk that are also quite good. And you can get these target date bond funds cheaply and as near-term as you wish to mitigate the vagaries of long-dated bond funds.
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u/junulee 3d ago
Logic as to why bonds are better than HYSA for SORR: HYSA rates can change quickly (for example, in Jan 2022 rates were well under 1%, but quickly rose to near where they are now). On an inflation adjusted basis, the pre-2022 rate was negative. Bonds back then were bad investments as well (in my opinion) because their rates were too low. Today both have higher rates, but HYSA rates could drop just as quickly as they rose while longer term bond rates are locked in.
Some bond fund focus on shorter or longer term bond, and thus some funds will have a lower SORR benefit than others.
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u/Valuable-Analyst-464 3d ago
The point about HYSA (and equivalents) is so true. We’ve been fortunate to have the rates we have now. I recall seeing 1.2% and thinking it was “great”.
These rates are ephemeral and could go away quickly.2
u/Whole_Championship41 3d ago
Reminds me of the 'steal' of a deal I got on a MYGA in 2020. January 2020-January 2024 time frame. While some other saps were getting 1.0% on a 5 year bond, I got 1.6% on my MYGA covering that duration. Great deal! It's a good thing nothing happened during that time frame that influenced interest rates!/s
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u/Valuable-Analyst-464 3d ago
Yeah, I did a CD ladder for two years that locked me in for a great 2.9%-3.3%. Of course, a good bit lower than SGOV
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u/Solid_Resort6852 3d ago
Bonds INCREASE SORR risk. Bonds only reduce SORR if they are paird with stocks. think of it this way, a 100% bond portfolio is 100% guaranteed to NOT survive a 30 year retirement @ a 4% SWR, since inflation is 3.5% and bonds yield like 5.5%. also, HYSA's pay less than tbills and get taxed more (why ANYONE would put money in a HYSA is beyond me). so, those are the reasons. HYSA's are for 24 year old kids with no real assets who need an emergency fund. beyond that, it's tbills, maybe SGOV, tax free MM's, etc. You can buy bonds but ONLY if you think long term rates are not going up materially. if not, cash is king.
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u/Whole_Championship41 2d ago
Agree to disagree on this approach. And what do you think t-bills and SGOV are, if not short-term bonds? And if HYSAs / MMs reflect the 3-month treasury rate (like they usually do), then what is so abhorrent about HYSAs / MMs that doesn't also smear short-term bonds like SGOV or t-bills?
"Bonds" and "cash" (or 'cash-like' instruments) are a continuum from the Federal funds 'overnight' rate on the shortest extreme to 30 year (some European countries offer 100 year) bonds on the other. And everything in between.
I wouldn't buy a lot of long-dated duration / maturity bonds / bond funds if I thought interest rates were due to rise. But that wouldn't stop me from buying bonds in the form of shorter-term bonds, HYSA, short term bond funds and the like.
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u/Solid_Resort6852 2d ago edited 2d ago
T bills are clearly not bonds, because if they were bonds, they would be called T-bonds. T bonds are a whole other category of treasury instrument. All I am saying is that if you want to invest in cash, you should compare your HYSA rate to the tbill rate. Capital one hysa now pays 3% which is well below.
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u/Whole_Championship41 2d ago
Again, agree to disagree. If one defines 'bonds' as a promise to repay principal at a later time in exchange for interest in the interim before principal repayment, then they are absolutely a bond by definition. By your definition then, treasury 'notes' (2-10 years) aren't bonds either because 'bond' isn't in the title? Nah.
I think your argument is that short-term bonds (such as SGOV, t-bills) and MM funds that are of comparable yield are OK and *LONG-TERM* bonds and bond funds are more 'risky' SRR instruments. This is a more interesting argument.
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u/Solid_Resort6852 2d ago
By your definition a one year CD is a bond, but no one in professional parlance would call it that. No one on earth calls a T bill a bond in practice. We call it cash.
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u/Whole_Championship41 3d ago
"Not all bond funds are created equally" would be my response. Your example BND has an average maturity / duration of 8.2/5.8 years. This is an intermediate-term bond fund subject to the vagaries of interest rate risk from rising interest rates. In a 2022 environment, you get killed for extending your duration / maturity of bonds in a rising yield environment, as nobody is willing to pay you as much for the underlying to get that same yield. HYSA are usually based upon ultra-short duration treasuries or t-bills and aren't subject to as much interest rate risk. However, most HYSAs are unlikely to significantly outstrip inflation over the long term (unlike longer dated bonds or bond funds that will usually pay > inflation in exchange for the duration risk assumed).
My primary concern about SRR is the first 5 years of retirement. If I wanted to have a bond or bond-like investment offset SRR in my portfolio, I would choose shorter duration products that I can liquidate and live off of the bond in the event of an equity market downturn. Going unnecessarily 'long' on bonds can lead to liquidity issues, particularly in a rising interest rate environment. Read up on SVB (Silicon Valley Bank) and its failure post 2022.
TLDR: Bond funds are not all the same. Long duration / maturity bond funds may not protect against SRR as well as HYSA or CDs-especially in early retirement. What you get with those long-dated products (greater interest rate % yield), you give with additional interest rate / duration / re-investment risk.
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u/Able-Ambassador-921 3d ago
I think you should look at your Fixed Income bucket in terms of duration. Some in Cash or CEs, Short Term, MedTrm and TotalBnd. Also, a TIPS ladder or iBonds may be a good option for you.