How NOT to Invest in Bonds
Many people invest in fixed income through Vanguard bond funds or BlackRock iShares bond ETFs. Unfortunately, bond fund returns are often weak, and these investments lack the many advantages of individual bonds. Many investors compound this problem by investing in bond funds through their financial advisors who charge 1% of client assets for the ‘service’ of placing clients into underperforming bond funds. Here’s how this works to benefit the financial advisor and Vanguard, but not the end investor:
Biggest Investment Mistake #1:
Investor invests $100k fixed income portfolio through a financial advisor not 'savvy' in bonds.
Biggest Investment Mistake #2:
Financial advisor, lacking any bond investing expertise, takes 1% annual fee and places $100k into a mega Vanguard bond fund, which, in turn, charges more fees.
An investor return lower than inflation
Due to the low Vanguard bond fund returns and the 1% annual financial advisor fees, the investor earns less return on his $100k investment than his advisor makes on annual fees.
Biggest Investment Mistake #3:
The $200+ billion Vanguard Total Bond Market Index Fund, which includes the Admiral Shares class (VBTLX), the BND ETF, and other share classes, is so big that it owns over 8,000 bonds and is not a discerning investor. It owns what the index tells it to own. The bond fund averages a weak 1.63% annual return from 2015-2018.
After financial advisor fees and Vanguard mutual fund management fees, the investor averaged an annual return of 0.63%, as the financial advisor earned 1.0% on the client’s assets. From 2015-2018, the financial advisor who prescribed investing in Vanguard Total Bond Market Index Fund made $4,040 compared to the client’s $2,509 return on investment. This is a poor investor outcome no matter how you cut it, and we call it the Vanguard Bond Fund Road to Nowhere. It shows how important it is for individual investors to reduce costs and increase bond investment returns by making direct investments in individual corporate bonds.
