Concerns with the future of bonds

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Concerns with the future of bonds

Postby ghaynes » Fri Jan 04, 2013 8:43 pm

I opened a Betterment account this month since I wanted a service where I could set and forget it. This account is not long term and will be strictly used for a car replacement which I plan to use in the next 3-4 years.

Since this is short term I want to be conservative so my allocation is 70% bonds / 30% stocks. I opened the account with an initial investment of $10000 (to get there lower fee) and will deposit $500 per month to it.

My concern is the future of bonds and the possibility of the "bond bubble" since rates are at an all time low and will likely rise making bonds lose value. So now I'm thinking my conservative allocation doesn't appear conservative.

Should I be concerned?

My account looks like this as of today:

$3500 - iShares TIPS Bond ETF
$3500 - iShares 1-3 Year Treasury Bond ETF
$3000 - Mix of VTI: Vanguard Total US Stock Market, IVE: iShares S&P 500 Value Stocks, VEA: Vanguard MSCI EAFE Stocks
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Re: Concerns with the future of bonds

Postby Johm221122 » Fri Jan 04, 2013 10:42 pm

You should probably use municipal bond fund or I bonds for this time frame. Stocks are risky in this time frame and your bonds are not tax efficient. Vanguard municipal bond funds charge no fees to open.I bonds can be bought directly from treasury and have no interest rate risk
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Re: Concerns with the future of bonds

Postby Elbowman » Fri Jan 04, 2013 10:56 pm

Here are the guidelines I've seen around here based on how soon you need the money:
0-5 years - FDIC insured savings account or CD.
5-10 years - short to intermediate term bonds.
10+ years - stocks.
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Re: Concerns with the future of bonds

Postby dad2000 » Fri Jan 04, 2013 11:01 pm

With a 3 year time horizon, I wouldn't be in bond or equity funds.

Find the best CD rates (Ally or Pen Fed right now?), or possibly I-bonds.
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Re: Concerns with the future of bonds

Postby john94549 » Fri Jan 04, 2013 11:24 pm

PenFed offers a 3-year CD at 1.85%. FWIW, my car fund is in a garden-variety savings account, as I drive a 1994 Buick. But, it keeps passing smog, and it gets me to the store and back. Had I known three years ago the Buick would still be motoring along, I would have made an extra 1%/annum on my car fund. Or more.

That 3-year CD is quite tasty. Puts my current 4-year Alliant CD at 1.65% (with 3 1/2 years to run) to shame. Stuff happens when interest rates turn, as we knew they would. Good news is I'm laddered.

Oh, well.
Last edited by john94549 on Fri Jan 04, 2013 11:45 pm, edited 2 times in total.
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Re: Concerns with the future of bonds

Postby 555 » Fri Jan 04, 2013 11:35 pm

You don't need a "service" to save up for a car.
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Re: Concerns with the future of bonds

Postby Browser » Sat Jan 05, 2013 10:17 am

john94549 wrote:PenFed offers a 3-year CD at 1.85%. FWIW, my car fund is in a garden-variety savings account, as I drive a 1994 Buick. But, it keeps passing smog, and it gets me to the store and back. Had I known three years ago the Buick would still be motoring along, I would have made an extra 1%/annum on my car fund. Or more.

That 3-year CD is quite tasty. Puts my current 4-year Alliant CD at 1.65% (with 3 1/2 years to run) to shame. Stuff happens when interest rates turn, as we knew they would. Good news is I'm laddered.

Oh, well.

I can get 2.5% on a 4-year at my local credit union, 100K minimum. 2.3% for less. Maybe you should look in your backyard for a better deal.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Concerns with the future of bonds

Postby AustenNut » Sat Feb 02, 2013 9:54 am

Not to hijack the thread, but is it people's recommendations that money for a car fund should be placed in CDs and other FDIC-type accounts and not in bonds at this time? At the moment I'm in limited-term exempt bonds.
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Re: Concerns with the future of bonds

Postby crowd79 » Sat Feb 02, 2013 9:59 am

While bond prices may fall, the monthly dividends paid could easily make up for it over time.
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Re: Concerns with the future of bonds

Postby dbr » Sat Feb 02, 2013 10:22 am

AustenNut wrote:Not to hijack the thread, but is it people's recommendations that money for a car fund should be placed in CDs and other FDIC-type accounts and not in bonds at this time? At the moment I'm in limited-term exempt bonds.


There is no recommendation except to understand that CD's maintain a cash face value obtainable at the end of the term, or before then if the bank allows, and that bond funds can gain or lose money over a time period, and with that understanding you make your own decision.
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Re: Concerns with the future of bonds

Postby z3r0c00l » Sat Feb 02, 2013 11:15 am

AustenNut wrote:Not to hijack the thread, but is it people's recommendations that money for a car fund should be placed in CDs and other FDIC-type accounts and not in bonds at this time? At the moment I'm in limited-term exempt bonds.


Car fund says nothing about the timeframe. If you are buying a new car in 5 - 7 years, limited term exempt bonds, as vangaurd calls them at about 2.5 years duration, are quite safe imho. But a new car in 3 years? That sounds perfect for a 3 year CD. Personally, I would not really worry about a car fund at all. Instead, I would have that kind of buffer in my E fund at all times and invest everything else with a 20+ year horizon.
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Re: Concerns with the future of bonds

Postby AustenNut » Sun Feb 03, 2013 8:01 pm

There is no timeline on the purchase of the new car as I intend to drive my car until it no longer runs (or is in the shop often enough to make me think that it's time to give up the ghost). It's a 2004 Toyota Corolla that has about 75,000 miles, and I only put about 5000 miles on it a year, and it gives me no problems. I'm hoping it will last for at least 6 or 7 more years, but who knows?

I don't mind a slight loss on the car fund when I happen to redeem it, but I'd be unhappy if it had gone down 10% (or more). From what I remember looking at charts on bond funds historically, even during their "crashes" they didn't go down more than 7-10%. And the cds around here are about 1.5%, which isn't that much better than the 1% we're earning on our checking account. So I guess I'm wondering if I should keep it in the limited-term bonds or just pull it out and put it in a regular account. (I have a separate emergency fund which I'd only like to touch in a true emergency like losing a job...getting a replacement car is not an emergency as it's definitely a foreseeable expense.)
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Re: Concerns with the future of bonds

Postby z3r0c00l » Sun Feb 03, 2013 9:40 pm

Totally going 90 degrees on you here, but this choice pales in comparison to your strategy for getting the best deal on a used car... you could save a few thousand by buying the right car from the right source. The fact that you are driving a corolla shows me you are smart when it comes to car value.
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Re: Concerns with the future of bonds

Postby AustenNut » Mon Feb 04, 2013 1:40 pm

Thanks for the kudos, but I bought my Corolla new. Reliability is my #1 priority when getting a car, and the Corolla definitely fits that bill. So I take it I should just keep the car fund in the bonds until my car gives out?
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