Differences between bond funds and stock funds

thirtythree

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Aug 7, 2001
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Is there a big difference between a bond fund and a stock fund? Take this fund for example. The fund is classified as "Taxable Intermediate-Term Bond" -- does that mean I have to pay taxes even if I use funds from a Roth IRA? Compared to stock funds, the yield is much higher and the market appreciation is much lower -- but does it make a difference to me if the returns come from dividends or market appreciation? I'm a little confused here.
 

altonb1

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Feb 5, 2002
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I am not completely positive, but I'm pretty sure a bond fund has lower risks and therefore lower returns. Stocks can fluctuate greatly, so risks are higher but the returns can be much higher as well.
 

Jadow

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Feb 12, 2003
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uhh, I'm halfway wasted here, but a f'ckin bond fund invests in bonds while a stock fund invests in stocks.
 

Jadow

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Feb 12, 2003
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Originally posted by: Jadow
uhh, I'm halfway wasted here, but a f'ckin bond fund invests in bonds while a stock fund invests in stocks.

Also, if you buy it in a Roth IRA, you never have to pay taxes on anything ever. That being said, unless you're like 50 or older, you shouldn't be buying much in the way of bond funds in a Roth.
 

DaveSimmons

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Aug 12, 2001
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Bond funds (excepting very high risk junk bonds) will over decades grow at less than half the APY of an S&P 500 stock index fund.

An S&P 500 fund is over decades as close to risk-free as stock funds get.
 

PingSpike

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Feb 25, 2004
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What kind of risk/returns do bond funds usually give? Are they almost completely safe? Like a step more dangerous then an FDIC insured savings account?
 

DaveSimmons

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Aug 12, 2001
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Originally posted by: PingSpike
What kind of risk/returns do bond funds usually give? Are they almost completely safe? Like a step more dangerous then an FDIC insured savings account?

The fund the OP links to is a risky near-junk bund fund:

Important information about the Vanguard High-Yield Corporate Fund
Investors should be cautious in evaluating the Vanguard High-Yield Corporate Fund's current yield. This yield, while accurate, includes a risk premium to compensate investors for a potential loss of capital and income. Since the fund invests in lower-grade bonds, it incurs a higher risk of default on its bond holdings than investment-grade bond portfolios.

The safe bond funds don't grow much more than a bank CD.

I'd rather have money in an S&P 500 stock index fund than in junk bonds. Historical growth of the S&P 500 is higher, my uneducated guess is the risk is lower, the expense ratio is lower, and the S&P 500 is a "passive" fund instead of actively managed using "bond pickers" guessing what to buy.

I can't think of any other reasons to avoid that fund.
 

thirtythree

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Aug 7, 2001
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Originally posted by: PingSpike
What kind of risk/returns do bond funds usually give? Are they almost completely safe? Like a step more dangerous then an FDIC insured savings account?
Average annual returns seem to range from 4-9% per year (at least for the Vanguard funds). I believe they are fairly low risk because they don't really go up and down in the same way that stocks do. Instead, the return rates go up and down, so there's really no way to lose your money unless a substantial number of the bonds the fund is invested in are never paid. I don't know how frequent this is, but I think you can get decent returns without risking too much. The fund I linked, for example, invests in "junk bonds" but still has limits as to what percentage of the holdings can be in bonds under a certain quality rating.

But, correct me if I'm wrong about any of this.

EDIT: Oops, didn't see DaveSimmons post before this 'cause I got distracted while replying.
 

dud

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Feb 18, 2001
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Originally posted by: Jadow
Originally posted by: Jadow
uhh, I'm halfway wasted here, but a f'ckin bond fund invests in bonds while a stock fund invests in stocks.

Also, if you buy it in a Roth IRA, you never have to pay taxes on anything ever. That being said, unless you're like 50 or older, you shouldn't be buying much in the way of bond funds in a Roth.

This is not necessarily true:

"Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution. Be very careful NOT to confuse the early withdrawal penalty with the taxes imposed on a non-qualified distribution (discussed in Part III). A non-qualified distribution imposes an ordinary income tax on the distribution, but the early withdrawal penalty will be imposed in addition to that tax."
 

thirtythree

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Aug 7, 2001
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Originally posted by: dud
Originally posted by: Jadow
Originally posted by: Jadow
uhh, I'm halfway wasted here, but a f'ckin bond fund invests in bonds while a stock fund invests in stocks.

Also, if you buy it in a Roth IRA, you never have to pay taxes on anything ever. That being said, unless you're like 50 or older, you shouldn't be buying much in the way of bond funds in a Roth.

This is not necessarily true:

"Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution. Be very careful NOT to confuse the early withdrawal penalty with the taxes imposed on a non-qualified distribution (discussed in Part III). A non-qualified distribution imposes an ordinary income tax on the distribution, but the early withdrawal penalty will be imposed in addition to that tax."
Yeah, but we're talking about taxes on returns, not taxes on withdrawals. Also, I believe you can take all of your Roth IRA contributions out before 59 1/2 without any penalty or taxes.