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Probably none. That's why my link is to a high yield municipal bond fund with low fees. I roll over my monthly distributions and buy more shares. I've never sol

by every 6y ago

Probably none. That's why my link is to a high yield municipal bond fund with low fees. I roll over my monthly distributions and buy more shares. I've never sold or traded a single share. I took Warren Buffett's advice to heart: "Wall Street makes its money on activity. You make your money on inactivity."

bradleyjg 6y ago
If you look at the price (not total return) history of your selected fund it has significant growth, about 20%, over the last ten years. Bond prices increase when the risk free rate (i.e. treasuries) decreases. Over the last forty years treasury rates have been more or less steadily decreasing. The ten year treasury was paying over 15% in 1981 and now it’s paying a little over 1.5%. What this means is that bond investors over that 40 year period have gotten juiced returns—-they got whatever the bonds were yielding plus price appreciation from falling interest rates. This dynamic was in place for the adult lives of everyone under the age of 60 today. Our intuitions, rules of thumb, and understandings of how bonds contribute to a portfolio we’re all developed in the shadow of this phenomenon. But now interest rates have nowhere left to fall. The zero bound forces an end to this dynamic.+ From now on not only will bond returns not be juiced they could well be reduced by the opposite effect. From 80 to 40 years ago interest rates more or less steadily increased over that period, causing bond prices to constantly be falling. + Negative nominal rates could extend it a few more years but the cash cost of carry is a hard bottom.
- tomatocracy 6y ago
  "Juiced returns" is a consequence of some investment strategies, but not all. For example, if you aimed to hold a constant-maturity bond portfolio then that involves a degree of enforced trading - you need to sell shorter maturities and buy longer ones as time passes so that you don't end up with a year less maturity for each year the passes (or worse if defaults or other events lead to early calls or early payments without make-whole compensation). Likely you'd have got better than expected returns doing this (but then it was always a bet on falling rates). But if you'd just bought a portfolio of bonds to give you a fixed bucket of maturities (which is what by far the larger part of the market has usually tended to do) and only reinvested cashflows as you received them from the issuers, you'd have likely underperformed your initial expectations because you faced reinvestment risk. That lower return probably would have been compensated by inflation also falling for some of that time. But real yields have now been negative for quite a while, so to maintain returns you'd have been forced to accept more risk.
  - bradleyjg 6y ago
    I’d guess that holding bonds until maturity in the form of a bond ladder was more common from 1980-2000, but since then bond funds have become more common.
    - tomatocracy 6y ago
      I think large institutional investors buying credit (as opposed to treasuries - not sure what really happens there now) are still mostly following a buy and hold strategy. But yes, I'd agree that's likely the case for individuals (including through retirement accounts).

by every 6y ago

bradleyjg 6y ago

If you look at the price (not total return) history of your selected fund it has significant growth, about 20%, over the last ten years. Bond prices increase when the risk free rate (i.e. treasuries) decreases. Over the last forty years treasury rates have been more or less steadily decreasing. The ten year treasury was paying over 15% in 1981 and now it’s paying a little over 1.5%. What this means is that bond investors over that 40 year period have gotten juiced returns—-they got whatever the bonds were yielding plus price appreciation from falling interest rates. This dynamic was in place for the adult lives of everyone under the age of 60 today. Our intuitions, rules of thumb, and understandings of how bonds contribute to a portfolio we’re all developed in the shadow of this phenomenon. But now interest rates have nowhere left to fall. The zero bound forces an end to this dynamic.+ From now on not only will bond returns not be juiced they could well be reduced by the opposite effect. From 80 to 40 years ago interest rates more or less steadily increased over that period, causing bond prices to constantly be falling. + Negative nominal rates could extend it a few more years but the cash cost of carry is a hard bottom.

tomatocracy 6y ago
"Juiced returns" is a consequence of some investment strategies, but not all. For example, if you aimed to hold a constant-maturity bond portfolio then that involves a degree of enforced trading - you need to sell shorter maturities and buy longer ones as time passes so that you don't end up with a year less maturity for each year the passes (or worse if defaults or other events lead to early calls or early payments without make-whole compensation). Likely you'd have got better than expected returns doing this (but then it was always a bet on falling rates). But if you'd just bought a portfolio of bonds to give you a fixed bucket of maturities (which is what by far the larger part of the market has usually tended to do) and only reinvested cashflows as you received them from the issuers, you'd have likely underperformed your initial expectations because you faced reinvestment risk. That lower return probably would have been compensated by inflation also falling for some of that time. But real yields have now been negative for quite a while, so to maintain returns you'd have been forced to accept more risk.
- bradleyjg 6y ago
  I’d guess that holding bonds until maturity in the form of a bond ladder was more common from 1980-2000, but since then bond funds have become more common.
  - tomatocracy 6y ago
    I think large institutional investors buying credit (as opposed to treasuries - not sure what really happens there now) are still mostly following a buy and hold strategy. But yes, I'd agree that's likely the case for individuals (including through retirement accounts).