If she puts her money into cash it may not have a market drop, but this 7.5% inflation rate will eat away at it.
I recommend posting your question in the Bogleheads forum. You’ll get some expert advice there. 
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@patsmom I did post it, and honestly, I’m even more confused! I think I don’t understand bond funds. At all. My sister says that her Vanguard advisor said he’s constantly reassuring people about the bond funds, saying that they have to show the daily rate, but if they hold onto them until maturity, it won’t be a loss. I need to research this, for sure.
Does she have any target funds available in her retirement account? I know Vanguard has those. That way she can have a combo of stocks and bonds that will be managed automatically in the fund.
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She does. But the Vanguard personal advisor manages it for her. I think I need to read up and understand bond funds, to figure out the right questions.
I’d be curious to know how that works too. I don’t see how a bond mutual fund would come to maturity.
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iBonds seem to be the popular choice this quarter on BH and other forums due to the inflation factor
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Many bond funds rotate their bonds so that the ones they hold are in the desired remaining term range (short term, intermediate term, long term, a mix of term ranges, etc.). Therefore, they do not come to maturity, and the sales for rotating their bonds could result in capital gains or losses.
However, there are target date bond funds that aim to hold bonds maturing in a specific year, often with the provision that the fund becomes or merges into a money market fund after that year when all of the bonds mature.
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I definitely need to research these bond funds, so at least I have a remote idea of that they do. iBonds sound very attractive, we will likely get some, but you can only buy 10K per year, so not much help for my mom there.
I don’t see any of that type at Vanguard. Most are short, intermediate, or long term bond index funds.
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Hmmm, just looked up target date bond funds and found that most seem to be ETFs now, and that they are now rare among “regular” (open-end) mutual funds.
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Yes, I think that’s what they are. My mom should be getting the name of them to me today. I have definitely realized I don’t understand these funds at all, so I am very hesitant to give her any advice whatsoever. But her thoughts about switching all of them to the total stock market index, I don’t know what to say. Hoping her advisor says something that makes sense.
With 30% of her funds in cash equivalents you have a massive amount there that will be losing value with high inflation. I think I would seriously consider where a large portion of that could be put to take advantage of the inflation. Obviously she should have cash on hand but there’s got to be a better investment for most of that money.
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I know, for sure. Any suggestions?
The Advisor is stretching things or perhaps your mom mis-heard him. Individual bonds will not decline if you hold them to maturity. In other words, you get 100% of your principal back + all of the coupon interest as stated on the face of the bond.
Bond funds just hold a bunch of individual bonds, at various maturity dates. If the fund has a lot of redemptions, the Fund Manager will have to sell some of the bonds in the portfolio to pay off the selling investors. If interest rates have risen the Fund will take a loss on those bonds that the Manager sells to meet the selling request. That loss is apportioned prorata to all of those in the Fund. (Now, if a Fund had no redemption requests, in theory, it would not lose any money. Plus, Vanguard and other Fund Managers are really good about trying to sell gains to offset losses.) But also note, when a bond in the fund does mature, the Manager will purchase a new bond at the then current interest rates. So, over time, the bond interest in your fund will increase.
And then there’s Bond maturity. There are Ultra-Short Term Funds, Short-Term Funds, Medium Term funds (such as Vanguard’s Total Bond), and Long-Term Funds. When rates rise, the latter takes the biggest hit, with the former barely moving. (full disclosure, I have my Emergency cash in the Ultra-Short Bond Fund).
There’s a bunch of articles about bond funds and interest rates rising. Here’s one.
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@busdriver11 Maybe have her keep 2-4 years expenses in cash (depending on her comfort level) and then put the rest of the cash into equities. That would allow you to increase her equity holdings without divesting her bond position which actually sounds fairly reasonable.
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That’s what my sister said her advisor said, and since none of us understand this, who knows what he really said! Thank you for the information.
From my perspective, its pretty simple math:
- If cost of buying is within 20% of cost of renting, then you buy since it freezes your tax exposure (CA), protects against rent gouging, and gives equity upside as well as reduce federal taxes
- If its far beyond the 20% number then I would rent, and try to buy a place in a city where the rent vs. buy differential is as small as possible
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can you add a few details? Are you suggesting rent vs PITI, or rent vs. PITI + sinking fund for large maintenance items (HVAC, dw, etc)? Or something more complicated? Just trying to understand a different perspective.
Thanks.
Mine is a pretty unsophisticated approach. It’s PITI + opportunity cost of 20% down vs Rent + rent trend. Where i live now, rent is $5k for a 3BR-2BA but PITI is 10k+ after the 20% down in the range of $400k. I tell my friends to rent rather than own.
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good rule of thumb, thank you.