\u201cI have question about your VT + TIPS choice. Will you maintain that two fund portfolio throughout your life? Was wondering if your choice reflects a personal judgement about holding BND in a portfolio. BND has certainly not been a stellar performer for several years. Makes me wonder if going with TIPS only for the non-stock portion of our portfolio is also the right choice for us. Currently looking at a 50\/50 BND\/TIPS for fixed income as I start retirement next year, but your choice is making me doubt the wisdom of that approach.\u201d<\/p>\n<\/blockquote>\n
Bonds can perform two separate roles in a portfolio. In our household, we\u2019re using them in a way that only individual TIPS held to maturity is really the right fit. But if they are being used as basically \u201cthe thing that\u2019s less volatile than stocks, which will be rebalanced with the stock part of the portfolio\u201d there are tons of options that would be fine. This article has more on that:<\/p>\n
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- What\u2019s the Point of Bonds in a Portfolio? (And Why Individual TIPS, Held to Maturity, Are Unique)<\/a><\/li>\n<\/ul>\n
Personally I have no significant qualms about a \u201ctotal bond market\u201d fund such as BND in that second role. Its performance in recent years is not anything strange or alarming. That\u2019s just what happens when interest rates go up. And they went up, by a lot, from 2021-2022 (especially in 2022). If you find the fund on Vanguard, click to the performance section<\/a>, then click the tab for \u201cannually,\u201d you\u2019ll see the year-by-year returns. It\u2019s really just those two years (especially 2022 with a -13.15% total return by NAV) that makes all of the performance figures look bad \u2014 and it\u2019ll be that way until those years fall out of the various calculations. (Note that the fund\u2019s 3-year performance is much better than 5-year performance for exactly this reason.)<\/p>\n
And again, it\u2019s not as if the fund did anything wrong over the 2021-2022 period. BND has an average duration of 5.8 years. That means that for every percentage point change in interest rates for bonds similar to those in the portfolio, the fund\u2019s price should move in the opposite direction<\/a> by about 5.8%. From the beginning of 2021 to the end of 2022, yields on 7-year Treasury bonds went from 0.64% to 3.96%, an increase of 3.32%. Multiplied by an average duration of 5.8, we\u2019d expect a price decline of about 19% over the period, offset somewhat by the fund collecting some interest over those two years. (Also note that the fund holds corporate bonds as well as government-backed bonds, so the change in yield was a bit different than we see here.)<\/p>\n
Essentially, any intermediate-term bond fund (and\u00a0especially<\/i> long-term bond funds) had a terrible year in 2022. That\u2019s just the math of what happens when yields go up. For instance:<\/p>\n
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- Vanguard Intermediate-Term Treasury ETF was down by 10.67% in 2022.<\/li>\n
- Vanguard Inflation-Protected Securities Fund was down by 11.85%.<\/li>\n
- Vanguard Intermediate-Term Investment-Grade Fund was down by 13.78%.<\/li>\n<\/ul>\n
The flip side of course is that all of those funds look much more<\/i> attractive now, with their higher yields.<\/p>\n
In our specific household, we aren\u2019t using bonds as \u201ca thing to rebalance with stocks.\u201d Rather, we\u2019re just planning to hold the bonds until they mature, then spend the money. So we want individual TIPS for that. And with long-term TIPS yields well over 2%<\/a> (very close to 3% in fact), we\u2019re very happy to have the bond part of our portfolio earn inflation plus 2.X% for the next 20-30 years \u2014 especially given that for most of our careers, TIPS yields were practically zero and at some times even negative.<\/p>\n
What is the Best Age to Claim Social Security?<\/h3>\n
Read the answers to this question and several other Social Security questions in my latest book:<\/p>\n
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<\/a><\/td>\nSocial Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less<\/strong><\/em>\n