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PaperclipPerfector  1mo ago (text post)   2912 thread views

Small-Scale Question Sunday for November 16, 2025

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

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Recommending bonds is dubious advice, even for retirees. They've performed badly over the last few decades and I don't see why that would change for the better now. If a safe, low % return is the goal, why not just go for money market funds or HYSA? You'd have to know what you were doing to benefit from bonds in a period of falling yields (bonds becoming more valuable as a result).

An r/bogleheads bigwig says otherwise.

The Cash Trap

The way it might play out if you switch from a total bond fund to a cash equivalent is as follows. The economy goes into a recession, and the Fed signals and then implements significant rate cuts—for example, −1.5% over 2 years. Now you’ll find your HYSA or MMF may be suddenly yielding less than 3% while the total bond fund, thanks to its 5–6 year duration, is still yielding close to 5%. So you think you’ll switch back to the total bond fund after that happens. But what you missed is that, when the Fed cut rates, BND’s holdings became more valuable and the price will have shot up. How much? I can’t say exactly. But, as one indication, at the end of October 2023, the Fed only signaled that they were stopping rate increases—not even a signal of actual cuts—and BND’s value jumped 8% in two months.

Think about it—you are contemplating moving money from BND to an MMF to earn maybe 0.75% more yield over the course of a whole year, and when the Fed signals rate pausing BND increases in value by 8% in just 2 months. The December 12–13 Fed meeting alone caused a +1.6% daily increase in BND’s value. So the decision to chase a little more yield could cost you years’ worth of the spread you were trying to capture. As described in this post:

The cash trap describes the risk of investing in short-term bonds or cash instruments at higher rates that ultimately prove temporary. The Federal Reserve eventually cuts rates, and the high short-term yields disappear. Because the securities have short maturities, falling rates do not lead to material price appreciation. Once the securities mature, the cash flow stream withers and investors are left with a much lower return outlook. However, if investors lock in longer-term rates, unlike the short-term options, the yields do not go away. Not only does the cash flow stream stay steady, but the reduction in market rates also leads to price appreciation. The result historically has been significantly higher returns on longer-term securities, despite the lower starting yield.

The point of bonds is that over the very long run they are not full correlated with equities, and have some positive risk prima above the risk-free rate. This means one can construct a Markowitz hyperbola with a combination of equities and bonds, and you can then construct a tangency portfolio that is superior to equities alone for any given tolerance for variance.

This is all, however, extremely theoretical and not useful to someone who jut wants to get started. Doing anything reasonable suggested here is better than holding cash. VTI, VT, or VOO, 60/40 to 100/0. (All of this not investing advice, on average over the last 50-150 years, past performance is not necessarily predictive of future performance, etc, etc.)

Or if you want the absolute simplest thing you could go for the index card advice and go for the single fund Vanguard Target Retirement 20XX Fund, and they'll do the thinking and rebalancing for you for a 0.08% annual fee. It wouldn't have been the best ex post performer over the last 10 years, but someone who followed the advice would have done fine and much better than cash. I don't know if it will be the best over the next 10 years, but I would be highly suspicious of anyone who says they know better for sure ex anti.

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