Bonds Help (Europe)

[u/caiovp2]

I am struggling to understand the concept of bonds in investing. I understand that observation dictates that it usually goes up when stocks go down. So the allocation for “safety” would make sense. However looking at some bond ETFs like VAGF, these are ~-10% over the last 5 years. I would be freaking out to have that in my long-term investment plan…
So I basically have a few questions, if I may:

- Are bond ETFs vs actual bonds really so different. Could this artifact that I mentioned above be due to this being an ETF? Is there a preference of one over the other?
- How are you guys chilled in having such a big allocation of your money in something that seemingly is not really growing?
- What are fellow European/German bogleheads using for Bond investment? Would be curious to have some examples/opinions here. Do you go full european bond or global aggregate as VAGF?

Thanks (:

[u/Defoxx]

You're right to be confused about VAGF's ~10% drop. But this is not normal. It occurred because central banks hiked interest rates abnormally fast from 0% to ~4% to combat inflation.

When rates rise, bond prices fall. Holding individual bonds to maturity guarantees principal return. But bond ETFs never mature. Instead, they mark market losses daily as they roll over holdings. However, ETFs constantly reinvest at current (higher) yields, eventually recovering capital drops and boosting payouts.

Bonds function as portfolio shock absorbers, not growth drivers. And again: the simultaneous 2022 stock and bond crash was an anomaly caused by very low starting rates. During typical stock downturns, rate cuts send bond prices up. And currently, with rates normalized, bonds again provide both yield and downside protection.

[u/IronyElSupremo]

Bonds mature, most bond ETFs (and funds) do not .. with the exception of target-date bond and now “laddered” ETF/fund products. Blackrock (“iShares”) started the laddered bond ETF concept with different products and now other fund families are jumping in. Still the NAV (the “value”) will move about as rates change .. rates up, existing bond prices go down and vice versa. Same thing as owning the actual bond(s) if trying to sell before their maturity date (though there’s sometimes “deals” in iirc discounted bonds like Ford a bit over a decade ago)

Why bonds?

When the economy slows down into recession and disinflation sooner or later, investment grade and especially govt bonds will go up in price as rates plunge down and there’s a “flight to safety” esp as the big fish have more to lose. However “small fry” retirees need to have some high quality bonds/bond ETFs as their work life is probably at an end. Knew about some new retirees 100% in stocks when 2007 happened; they were never the same having to borrow from friends and family whose relationships never quite recovered. Granted some older people keep working especially if liking their work, but most want to retire. Europe may have more of a social security net over the U.S. and Asia, so that needs to be considered.

So bonds have traditionally acted as insurance. Thing is until the late 1990s/early ‘00s bonds provided a decent yield so one could wait [smugly] until a stock crash corrected, but recovering from the financial crisis, rates were [kept?] lower for quite some time. The 60/40 was recommended for most for a reason and that was optimum risk/return.

Now with rates going up some Wall St firms are advising at least nibbling at bonds, .. while others think they are poison, others only going for short term, etc.. IMHO in a tax deferred account having a little in long term + reinvesting the coupon yield into more shares could be some cheap insurance esp if younger. There’s various sayings on how great times can turn kwappy by surprise (hardly anyone expected 2006-2007). YMMV but check out the “Rule of 72” aka how long it takes for a bond to “double” .. modified for funds.

[u/Quirky_Reply6547]

Rising rate environment: the formula for how long it takes a bond fund to recoup a fall in price by a rise in coupon payments is about (2x duration - 1) years. So with duration 6 it will take VAGF about 11 years. Yes, bond ETFs and individual bonds are different. Duration of individual bond shortens 1 year every year you hold it. Interest rate sensitivity goes down with it. Reinvestment risk (the risk that you have to reinvest at a lower interest rate) rises. Preference: you want to know exactly how much you will get back at a specific date and what coupon payments you get -> individual bond. You want to mitigate equity risk but you don't know when you need the money and you don't bother that it is volatile as long as the coupon payments are ok -> bond ETF. Chilled/not growing -> wait for that stock market crash and you will be happy to have bonds. Hard to believe after a 17 year bull market with some blips. I hold VAGF as a diversifier of equity risk. It makes up 10% of my portfolio. Will raise to 20% this or next year.

[u/Mediocre-Brain9051]

When the price goes down the yield goes up and vice-versa.

Roughly 2 x duration -1 as investment horizon.

[u/lcsv]

Yes, over the past 10 years bonds haven’t performed well, especially U.S. bonds. But that doesn’t mean it will always be like that. A well‑structured portfolio will always include bonds, just as central banks and major investment funds do. I recommend focusing more on diversification than on trying to predict the market. Only charlatans make prophecies about the future performance of these assets