Why are my bond funds doing so bad?

General
1

I have an IRA with three index funds doing great and three bond funds that are disappointing. VTABX is down nearly 12% over five years, VBTLX is down 14%, and VWEAX is only up 0.4% this year but still down 9% over five years. I’ve held onto them thinking diversification is smart for the long term, but now I’m wondering if I should move this money into something like VOO, QQQ, or even individual stocks like Apple or Nvidia.

For context, I’m in my early 40s, have a healthy 401k with $150k, and I’m comfortable with some risk to grow my IRA. The bond funds are about 15% of my IRA, around $8k out of $50k. Any advice?

2

You’re only looking at share price, which doesn’t tell the full story for bond funds. Total return matters, which includes dividends. VTABX has had a small positive return (0.12% annualized) over five years, and VBTLX is also slightly positive. Still, returns have been low because bonds have had a rough few years.

3

@Linden
Thanks for clarifying. I didn’t realize how much dividends factor in.

4

Drew said:
@Linden
Thanks for clarifying. I didn’t realize how much dividends factor in.

Morningstar is a good tool to see total returns. Bonds have had a tough run lately, but I’m sticking with them for now even though cash alternatives look tempting.

5

@River
Thanks for the tip about Morningstar. Are there other sites that show total return?

6

Bonds lose value when interest rates rise because new bonds offer higher yields. With inflation high, rates have been climbing, so bond funds have struggled. If this is part of your IRA, it might be worth focusing on growth-oriented assets since you’re still relatively young.

7

@Tennyson
I’m early 40s. It’s a small portion of my IRA, so I’m wondering if I should just take a risk with it.

8

@Tennyson
What about shifting to something boring but stable, like cash at 5%? That might beat bonds for now.

9

River said:
@Tennyson
What about shifting to something boring but stable, like cash at 5%? That might beat bonds for now.

Like a high-yield savings account?

10

Your bond funds are down because interest rates were much lower when you bought them. As rates rise, bond prices fall. Shorter-term bonds are less affected than long-term ones.

11

Gael said:
Your bond funds are down because interest rates were much lower when you bought them. As rates rise, bond prices fall. Shorter-term bonds are less affected than long-term ones.

Should I just sell and cut my losses?

12

@Drew
It depends. You’ll still collect dividends, and the losses aren’t as bad as some long-term bond funds. Rates may continue to rise short term, but they’ll likely come down eventually.

13

Inflation eats into the real yield of bonds, and rising rates make older bonds less attractive. If you’re holding for yield, it might take a long time to break even.

14

Harley said:
Inflation eats into the real yield of bonds, and rising rates make older bonds less attractive. If you’re holding for yield, it might take a long time to break even.

Would cutting my losses now make more sense?

15

@Drew
That depends. Bonds are in a tough spot, and some argue they won’t keep up with inflation. Alternatives like gold or high-yield bonds might offer better options, but they come with risks too.

16

Are you reinvesting the distributions from the bond funds? Most of their growth comes from those dividends, not share price changes.

17

Hayden said:
Are you reinvesting the distributions from the bond funds? Most of their growth comes from those dividends, not share price changes.

Yes, I reinvest all the dividends.

18

Drew said:

Hayden said:
Are you reinvesting the distributions from the bond funds? Most of their growth comes from those dividends, not share price changes.

Yes, I reinvest all the dividends.

Make sure you’re including those in your calculations. Reinvested dividends can make a big difference, especially for bond funds.

19

At your age, bonds might not be necessary unless you’re close to retirement. Bonds tend to reduce volatility, but if you can stomach the swings, you might not need them yet.

20

Rene said:
At your age, bonds might not be necessary unless you’re close to retirement. Bonds tend to reduce volatility, but if you can stomach the swings, you might not need them yet.

I’m about 20 years from retirement. I get the preservation idea, but it’s hard seeing them underperform.