Bond vs Bond funds
I’m a newbie conservative investor and planning to follow 3 fund portfolio, with 40% investment on secure investment vehicles. I’m trying to achieve 5% real return (post tax). I’m learning about Bonds for one of the secure investment options. Should I go with individual bonds (US Treasury, TIPS, Municipal, or dependable big corporations) OR Bond index funds such as VBLTX? Individual bonds guarantees principal with semi annual interests isn’t (of course baring defaults). Will Bond funds too provide semi annual interests or similar coupons? The price of VBLTX hasn’t changed much in the last 15 years so unless it offers continuous income, it is as good as keeping the money in ordinary bank account isn’t?
Are you saying that the dividends contribute to 2% after tax return with or without state taxes considered? I’m from Texas, doesn’t have state tax.
I started looking into municipal bond funds,especially CA based. They have yields around 4.6-4.9% ,which turns out around 8-9% tax adjusted depending on your tax bracket. E.g NAC,PCQ,PZC Plus these are paid monthly.I’m planning to move some of my ally money here
That’s good to year. But aren’t municipalities are prone to default unlike US Treasury bonds? Since it’s CA municipal and assuming you are from CA, it exempts you in both federal and state taxes?
Unless you’re 50+, this makes no sense You have time and risk on your side. Use them.
I calculated how much I need eventually when I return based on my current assets and life style. I also exaggerated future expenses. Final returns that I ought to achieve is around 4.5% to 5% real returns. I live in Texas with no state tax and thus, ought to get around 6.5% annual returns for the next 25 years until my retirement.
My point is, your portfolio is smaller at the start of your career so that’s when you should take the most risk to grow it. As you get older and the size increases and the horizon to retire shortens then you move to bonds because you want less volatility and more stable growth. I’m retired and I’m only 10-15% bonds. That’s an anomaly though because I’m just 45. The additional 1-3% that a stock portfolio would give you now will make a massive difference 10, 15, 25 years compounded later. That’s my view, but you are the best steward of your financial destiny. Cheers. Edit: To your original question, these funds pay out dividends so the price may not move much. Edit 2: Also look at Leveraged Bond Funds to consider if that suits your risk appetite. All in all, you’re asking the right questions.
Straight answer - your ability to diversify and improve returns is significantly better in a fund than in individual bonds. Unless you are very very wealthy abc trade in blocks of 1 mm it better, Bond funds get preferential pricing and access to debt.
Since you're new and conservative: you can just buy a target 2060 fund which will take care of the allocation and adjust for you. You can blindly just buy those funds. If you want more aggressive just buy 2070. Less aggressive buy 2050
Have you looked at the cost of those?..
Yeah? Low expense ratio.