"Kick Me" sign on the back of my 401k bond fund

[RandyAdams1978]

I'm 50 yrs old. My 401k is at Fidelity. The AA is 60/40, stocks/bonds. 25% of the whole pie is in one bond fund --- Fidelity Spartan US Bond Index Fund (FXSTX). Average duration of this fund is posted as 4.8 years.

I feel like that quarter of the pie (25% of my retirement money) is just sitting there with a big "Kick Me" sign on its back. 25 years ago --- heck, even 10 years ago --- bonds were the "riskless" investment; the "safe" part of your portfolio. The anchor of a portfoilio. Now? In this environment?... not so much.

With interest rates almost certain to rise in the future, bond funds will almost certainly take a hit. How hard and fast they fall is unknown, but I don't see how anyone could argue that they will have positive returns of say, a measly 2-4% over the next several years. It is much, much more likely they will fall by some amount.

I know "stay the course" is a popular mantra here, but if I believe my bond fund is going to take a hit soon, why would I sit back and just watch its value dwindle? I know "market timing" and its cousin, "tactical asset allocation", are dirty words here, but it seems staying the course right now will only lead to a certain drop in value for that portion of my portfoilio.

Am I alone in feeling this way?

I'm not thinking of COMPLETELY getting out of this fund, but I am considering dropping it's allocation to about 15% of my total pot. I'm just not sure where I would move the money --- maybe a money market fund? Maybe a Target Allocation fund that has a small bond holding? The other bond/balanced fund choices within the 401k are:

Intermediate Government Income Fund Symbol: FSTGX (12% of 401k is currently here)
Vanguard Inflation-Protected Securities Fund Symbol: VIPIX (3% of 401k is currently here)
Fidelity Freedom K® Income Fund Symbol: FFKAX (0% Currently)
Fidelity Institutional Money Market - Money Market Portfolio - Class I Symbol: FMPXX (0% Currently)
and then half a dozen or so Target Funds (NOT index target funds) (0% Currently)


Thoughts?

[wesleymouch]

I own the same fund. I have decreased the overall duration of the fixed income of my portfolio to about 2 yrs by putting other money in CDs and short term treasury funds. There is no right answer. We may have a prolonged bout of deflation like Japan where the yield on your bond fund beats the stock returns or we may have inflation where ST bond funds do better.

[BBL]

Am I alone in feeling this way?

Not at all.

Thoughts?

Try not to talk yourself into strategy changes based on seemingly limited or undesirable options.

If you move 10% to a MM or whatever it probably won't make a material difference but the precedent that you can deftly maneuver in front of major market shifts is disconcerting. It's a slippery slope.

[Boglenaut]

\Am I alone in feeling this way?

No. I would not be surprised if the majority of the people on this board feel that way. I sure do.

But I still am keeping 25% of my pie in bonds as well. If one believes market efficiency, then this risk is known and accounted for in the price.

But I do sometimes feel we have gone to the Bizzarro Alternate Reality.

I am keeping my pie at the planned 25%. If stocks crash we'll be glad we did.

[Boglenaut]

I do notice one thing when I do my mental back-of-the-envelope calculations (this is say I am taking a walk and just getting a rough estimate in my mind, not some more precise FireCalc estiate):

I always used to assume 7% return and multiply it by my portflio size to get a estimate of returns for the next year. Now mentally, and not even on purpose, I find myself taking the 7% and multiplying it only by equities. For planning, it's like bonds don't even exist anymore.

[Boglenaut]

I thought about this some more.

For my 401K, I can do Roth or Traditional. Also, I usually do Roth in my IRA. I notice that I have a bias in that I tend to add to the 401K bonds more with traditional funds and more to stocks when it is Roth money. I guess subconsciouly I was doing market timing trying to get the IRS to share the bond risk with me.

[nisiprius]

Randy, because we seem to have been getting a lot of postings like this just recently, I'd like you to do me a favor. Can you try to think of what has impelled you to worry about this and post this now, rather than in 2012, 2011, 2010, or 2009? What's suddenly brought it to the forefront? Because people have been saying this since 2009.

Please see my posting here.

You are about to take action based on sound-bite slogans that oversimplify a fairly complicated situation. As my posting shows, back in 2009, a poster was saying "interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit. So isn't it wise to go short in this environment where rates can only go up?" And as I show, if I'd taken that advice, I'd have lost out on a lot of growth in my Vanguard Total Bond fund--virtually identical to your Fidelity Spartan U. S. Bond Index. Oh, heck, here's the chart. Blue is like your Spartan fund. Orange, a short-term bond fund. Green, money market.

I'm trotting down the blue line with a "Kick Me" sign on my back and when someone does kick me, I'll stumble, fall, loss some time, pick myself up, dust myself, and start trotting again, and I think I'll still be ahead of the green line.



As I say it's a complex situation, and if, after reading my posting, and reading Mike Piper's blog posting on What happens to bond funds when rates go up,, you still feel nervous, then do what you need to do to sleep well.

Some Bogleheads make a good case for replacing a bond fund with the best available FDIC-insured bank CDs, believing it is a no-lose situation. If you like this idea, since you (probably) can't hold a bank CD in your 401(k) you have to make do with what you have. If you have e.g. a Roth IRA with stock funds in it, you might do a tricky shuffle in which you exchange bonds for stocks in your 401(k), and fund a Roth IRA bank CD at a bank by selling stocks in your Roth.

Beware of what I call "competitive smartypants" who are shouting "And when that happens, your bonds will go DOWN!" So? How much, how far, for how long, and what are the alternatives? Be particularly wary of smartypants who are saying this because they see it as an opportunity to lodge buy-and-hold investors out of their torpor and get them to buy something they're selling, like dividend stocks.

I worry about the possibility of something vaporizing a lot of my savings. I don't worry much about the possibility of "kick-me" humiliation, like perhaps having to face the fact that Bogleheads who switched to CDs made out better than I did blindly staying in total bond. There are always going to be investors doing better than me.

[telemark]

We see enough threads on this subject that you are certainly not alone. My opinion is that they all share the same two mistakes. First, reasoning from a false premise: interest rates are not certain to go up soon. They could continue to drop, or stay in the same narrow range for another ten years. Second, looking at returns in isolation instead looking at the portfolio as a whole. If, and that's an if and not a when, interest rates do go up, how would you expect the rest of your portfolio to be doing?

[stemikger]

Or you can do what Warren Buffett and Dave Ramsey suggests. 100% equities.

P.S. I really hated putting Warren in the same sentence as DR, but he is the only other person I know that suggests 100% in stocks.

I'm 48 and have the same allocation as you, and I was starting to think of timing the market and other non-Bogelhead things so I watched a DVD entitled an Evening with John Bogle and as always I felt better.

[SpringMan]

Friday, 1/25, was a tough day for bond funds. We have about 2/3 of our portfolio in bond funds. Stocks were up and our portfolio was just flat for the day. I don't forget how I felt in 2008 and 2009 and that thought keeps me happy with a high allocation to bonds. Retired with no more earned income. Looking at RMDs that will be necessary at age 70.5, I don't care if the bond funds in the tIRA do not grow much. The taxman will love it either way.

[RandyAdams1978]

Thanks all. I promise to read the links and think long and hard before acting. I can't right now, though. My Boy Scout son went camping last night with his troop. Mister "Be Prepared" forgot his glasses and dad has to deliver.

[livesoft]

I am curious about what sign you have on the back of your stock index funds?

[Austintatious]

Friday, 1/25, was a tough day for bond funds. We have about 2/3 of our portfolio in bond funds. Stocks were up and our portfolio was just flat for the day. I don't forget how I felt in 2008 and 2009 and that thought keeps me happy with a high allocation to bonds. Retired with no more earned income. Looking at RMDs that will be necessary at age 70.5, I don't care if the bond funds in the tIRA do not grow much. The taxman will love it either way.

SpringMan, only because you mentioned the tax man at the end of your post, I thought that you might get some benefit, if only a little peace of mind, from the recent article put up by Darrow Kirkpatrick on his blog http://www.caniretireyet.com, entitled Why I Don't Fret About Taxes. I read it just yesterday and I'm feeling a bit better today about taxes in retirement, because of it. I suspect that your comment was more rhetorical than reflective of an overwhelming concern about taxes but, either way, reading this article is worth the trouble.

[SpringMan]

I realize paying taxes because of more income is better than not paying taxes and having less income. I am a bit sensitive because my state (MI) changed its tax laws for the worse last year as far a seniors go. Those born before 1946 were grandfathered in to the old laws. Being born in 1947, I am not so lucky. Formerly IRAs and pensions were not taxed by Michigan, now they are at 4.35%. Vanguard for some reason will not withhold state withholding for Michigan, though they will for some states. That will result in me having a quarterly estimated tax requirement for Michigan. I will get over it .

edit: Apparently contrary to what I read on this forum, Vanguard will withhold Michigan withholding from IRA distributions, I called Vanguard on this. Michigan is not one of the states that requires them to do so, but it is optionally allowed. Sort of good news for those that don't like quarterly estimated payments.

[Firewood42]

How would you like to be retired, subject to RMD, need all the income you can get from your IRA, so you are totally in bond and Gnma funds with a small amount in a CD. Then are faced with such low interest rates and the possibility of Bond funds crashing when rates do go up. For the first time in my investing life, I don't know what to do. I would like to be in all cd's but they won't produce enough income. So do I keep my bond funds, or go to money market funds in case interest rates suddenly rise. I don't have the biggest portfolio so investing back in stocks or even income stocks would be very scary in case of a market downturn.

[Austintatious]

I realize paying taxes because of more income is better than not paying taxes and having less income. I am a bit sensitive because my state (MI) changed its tax laws for the worse last year as far a seniors go. Those born before 1946 were grandfathered in to the old laws. Being born in 1947, I am not so lucky. Formerly IRAs and pensions were not taxed by Michigan, now they are at 4.35%. Vanguard for some reason will not withhold state withholding for Michigan, though they will for some states. That will result in me having a quarterly estimated tax requirement for Michigan. I will get over it .

edit: Apparently contrary to what I read on this forum, Vanguard will withhold Michigan withholding from IRA distributions, I called Vanguard on this. Michigan is not one of the states that requires them to do so, but it is optionally allowed. Sort of good news for those that don't like quarterly estimated payments.

Having to paying state income taxes is not a concern for residents of Texas, though that "silver lining" is not without its drawbacks. Texans have far fewer of the services such taxes will or, at least, should pay for, and it's an ever increasing and meaningful problem for this state. Best of luck.

[retiredjg]

Thoughts?

It is true that bonds will lose some value when/if interest rates rise. But they will also start paying more. Don't forget that part.

The fact that bonds are in a dark hole doesn't change the fact that you must have some fixed income assets. If you prefer, find some CDs for some of the money.

By the way, if interest rates go up 1%, your portfolio might drop 1.25% from that one fund....until it starts paying more and then part of that will be recovered. Do you have this same type of concern over your 60% in stocks?

[livesoft]

How would you like to be retired, subject to RMD, need all the income you can get from your IRA, so you are totally in bond and Gnma funds with a small amount in a CD. Then are faced with such low interest rates and the possibility of Bond funds crashing when rates do go up. For the first time in my investing life, I don't know what to do. I would like to be in all cd's but they won't produce enough income. So do I keep my bond funds, or go to money market funds in case interest rates suddenly rise. I don't have the biggest portfolio so investing back in stocks or even income stocks would be very scary in case of a market downturn.

Sounds like SPIAs are something for you to consider.

[dbr]

How would you like to be retired, subject to RMD, need all the income you can get from your IRA, so you are totally in bond and Gnma funds with a small amount in a CD. Then are faced with such low interest rates and the possibility of Bond funds crashing when rates do go up. For the first time in my investing life, I don't know what to do. I would like to be in all cd's but they won't produce enough income. So do I keep my bond funds, or go to money market funds in case interest rates suddenly rise. I don't have the biggest portfolio so investing back in stocks or even income stocks would be very scary in case of a market downturn.

Sounds like SPIAs are something for you to consider.

That would be an option than many professionals in the financial planning industry recognize as recommended.

A perspective on this is that a person strapped for income from a portfolio should not be in the lowest returning investments. Holding all bonds while attempting to withdraw more than minimal income is a known formula for failure.

It would be better to follow a total return model rather than equate income with dividends and interest. It is also possible the portfolio cannot support the desired income. A test of that is whether or not the withdrawals are much more or much less than the infamous 4% rule. Investors struggling at 4% are advised to look at SPIA's, as we come full circle in the discussion.

[Grt2bOutdoors]

I am curious about what sign you have on the back of your stock index funds?

+1 Quote of the day!

[tfb]

Some Bogleheads make a good case for replacing a bond fund with the best available FDIC-insured bank CDs, believing it is a no-lose situation. If you like this idea, since you (probably) can't hold a bank CD in your 401(k) you have to make do with what you have. If you have e.g. a Roth IRA with stock funds in it, you might do a tricky shuffle in which you exchange bonds for stocks in your 401(k), and fund a Roth IRA bank CD at a bank by selling stocks in your Roth.

So why not present this option more often than the green and orange lines as if those two were the only options for people who got out of bonds in 2009? An Internet search shows PenFed was offering 7-year CDs at 4.5% in 2009. If an investor moved from the Total Bond Market Index Fund to PenFed 7-year CDs in July 2009, the starting point of your chart, $10k would grow to about $11.7k in 3-1/2 years. It's not as high as the $12.3k number for the blue line, but the $11.7k is earning 4.5% instead of $12.3k in the bond fund earning a 1.5% yield. In the remaining 3-1/2 years, chances are good those CDs will catch up with the bond fund and surpass it.

[Firewood42]

How would you like to be retired, subject to RMD, need all the income you can get from your IRA, so you are totally in bond and Gnma funds with a small amount in a CD. Then are faced with such low interest rates and the possibility of Bond funds crashing when rates do go up. For the first time in my investing life, I don't know what to do. I would like to be in all cd's but they won't produce enough income. So do I keep my bond funds, or go to money market funds in case interest rates suddenly rise. I don't have the biggest portfolio so investing back in stocks or even income stocks would be very scary in case of a market downturn.

Sounds like SPIAs are something for you to consider.

I have been considering SPIA's but hate to give up control of my money after all these years.

[nisiprius]

So why not present this option more often than the green and orange lines as if those two were the only options for people who got out of bonds in 2009?

I try to make a point of mentioning it. I'm too lazy to copy all the data off the Morningstar charts, enter it in Excel, add CD data, and make a chart including CDs. If I knew a good surrogate for "CDs" that Morningstar would plot for me, I would definitely use it.

To get all defensive and literal, the guy who posted in 2009 was saying "isn't it wise to go short in this environment where rates can only go up?" and my point was that anyone who did that specific thing in 2009 missed out on quite a lot of growth, Qhile the original poster here talked about a "money market fund." The original poster in this thread is talking about a 401(k), and that's another thing--there are often logistical issues involved in substituting CDs for bond funds.

Do you have an essay on your website about substituting CDs for bond funds? If you'll give me a link I'll try to remember to include it.

[Regal 56]

Another thing to consider. When the next bear market mauls us—and who knows when that'll happen—which do you think will fall more: stocks or bonds? Bear in mind that one good reason to have bonds in your allocation is that they normally don't jump off a cliff the way stocks do in a market crash.

[tfb]

Do you have an essay on your website about substituting CDs for bond funds? If you'll give me a link I'll try to remember to include it.

This thread on Bogleheads: 3-fund portfolio: replace bonds with CDs?

[House Blend]

The other bond/balanced fund choices within the 401k are:

Intermediate Government Income Fund Symbol: FSTGX (12% of 401k is currently here)
Vanguard Inflation-Protected Securities Fund Symbol: VIPIX (3% of 401k is currently here)
Fidelity Freedom K® Income Fund Symbol: FFKAX (0% Currently)
Fidelity Institutional Money Market - Money Market Portfolio - Class I Symbol: FMPXX (0% Currently)
and then half a dozen or so Target Funds (NOT index target funds) (0% Currently)

Thoughts?

Suggest that your employer add a stable value fund.

[Dandy]

I don't think diversifying your fixed income portion of your portfolio is necessarily market timing. When things go to the extreme, like interest rates, more diversification may be warranted. Current interest rates are extreme, very little that has been written covers interest rates near zero. So to me even experts are feeling their way throught this situation.

I can't speak to the funds you mentioned but maybe a portion could be put into a short term corporate fund (look at the duration - maybe at 2.5 or so), short term CDs, even more to Inflation protection.

Your fixed income assets will probably drop a bit but maybe you will soften the drop a bit. You are basically using fixed income for stability so taking actions to maintain stability seems to be reasonable.

I don't think it is time to panic but maybe time to tilt or diversify a bit. If you moved most of all of your current bond fund to something else that would be more like market timing.

[Calm Man]

The beat continues. Everybody is shortening up or at least many. Somebody is buying the long bonds that the small investors in mutual funds are selling. Call me cruel, ill advised or sick but I am feeling more comfortable about the intermediate term bond funds that I hold.

[dbr]

I don't think diversifying your fixed income portion of your portfolio is necessarily market timing. When things go to the extreme, like interest rates, more diversification may be warranted. Current interest rates are extreme, very little that has been written covers interest rates near zero. So to me even experts are feeling their way throught this situation.

I don't agree. When you think a situation is extreme enough to indicate a specific advantage in certain investments, you concentrate rather than diversify. The classic example that would apply right now would be to avoid total bond market funds and invest in short term corporates, which concentrates in both term and risk category, the opposite of diversifying. MInd you, I am not saying it is good advice to concentrate in short term corporates, just being clear what it really is.

[nisiprius]

The beat continues. Everybody is shortening up or at least many.

I really would like to understand why the sudden rise in this particular meme, though. Everything that can be said about the supposed certainty that "rates will go UP! and, then, bunky, your bonds are gonna go DOWN" and the supposed wisdom of shortening duration, could have been said any time since 2009. The supposed "bond bubble" has been talked about at least since Siegel and Schwartz's alarmist two-and-a-half years ago. And "this very long bull market in bonds must be somewhere near the end" could have been said any time in the last twenty years--that's a quote from John Templeton said it in 1993.

What has suddenly spooked so many posters? New Years' resolutions? Hangovers from attending too many inaugural balls?

Not saying they're wrong, but why so much talk about it right now?

[Garco]

I am curious about what sign you have on the back of your stock index funds?

+1 Quote of the day!

Yes indeed. And I had a suggestion, from the play "Little Shop of Horrors."

That sign would read "Feed Me, Seymour."

[Dandy]

I don't think diversifying your fixed income portion of your portfolio is necessarily market timing. When things go to the extreme, like interest rates, more diversification may be warranted. Current interest rates are extreme, very little that has been written covers interest rates near zero. So to me even experts are feeling their way throught this situation.

I don't agree. When you think a situation is extreme enough to indicate a specific advantage in certain investments, you concentrate rather than diversify. The classic example that would apply right now would be to avoid total bond market funds and invest in short term corporates, which concentrates in both term and risk category, the opposite of diversifying. MInd you, I am not saying it is good advice to concentrate in short term corporates, just being clear what it really is.

Not to make too fine a point about this. When there is an extreme like today's interest rates I think dumping Total bond and putting it into short term corporates is "market timing" rather than a lesser "sin" of tilting or strategic or tactical changes. Taking some of your intermediate term bond allocation and diversifying into shorter duration bonds or even CDs etc doesn't concentrate risk but diversifies it. My main point is Total bond is not equivalent to the Total Stock Market which covers the entire US Stock Market. Total Bond leaves out a lot of fixed income choices - that may be ok in "normal" times but in the extreme interest rate environment maybe capturing more of the fixed income choices or diversifying your fixed income investment might be better.

[digit8]

25 years ago --- heck, even 10 years ago --- bonds were the "riskless" investment; the "safe" part of your portfolio. The anchor of a portfoilio. Now? In this environment?... not so much.

Whatever the perception- and I don't deny you're correct in stating it this way- bonds were never risk free, and anyone telling themselves otherwise was wrong, albiet in a less drastic or dangerous way then those telling themselves stocks were risk free.
That said, you're not alone, and while I have no doubt in my mind the "bond bubble" panic that seems to have caught on with some posters is overblown in the extreme.
You're not talking about going all-out, though, and I think enough of a case has been made for TIPS that making them a part of a reasonable bond allocation certainly isn't out of left field. A dollop to money market won't hurt at 50. The rest? eh.

[pingo]

Intermediate Government Income Fund Symbol: FSTGX (12% of 401k is currently here)
Vanguard Inflation-Protected Securities Fund Symbol: VIPIX (3% of 401k is currently here)
Fidelity Freedom K® Income Fund Symbol: FFKAX (0% Currently) <-- In theory, Freedom Income fund is 40% Cash, 40% bonds, 20% stock.
Fidelity Institutional Money Market - Money Market Portfolio - Class I Symbol: FMPXX (0% Currently)
and then half a dozen or so Target Funds (NOT index target funds) (0% Currently)

Fidelity and Morningstar.com show very different information, so I don't know who to believe..

Regardless, Fidelity doesn't appear to follow it's Freedom glide path. Either that or the glidepath is very inaccurate.

Cash, at whatever amount it is, is a major component of Fido Freedom Income. Keep it in mind when deciding what income funds to use.

[RandyAdams1978]

I have to say it again ... what a great forum. Thanks to everyone who took th time to respond.

nisiprius: I read your post and external link. The link -- to an article at The Oblivious Investor --- seemed logical and well-reasoned. But I'm trying to learn to take historical charts with a grain of salt. Not because I doubt their accuracy, but because a) I can't help but wonder what other interest-rate-rising time frames might have looked like, and b) I wonder what other factors were influencing the results in the chosen time frame? It's like the old joke, right?: "Statistics don't lie ..."

Firewood42: I feel for you. But it looks like others on the board are already trying to help.

livesoft: Good one! I was thinking this: Stocks don't have signs. Stocks are more like carnival barkers, yelling "Ladies and Gentlemen, step right up and place your bets --- spin the wheel and watch her go 'round and ' round. Mister, ya can't win if ya don't play!"

But the "Feed Me" suggestion from Garco was pretty spot on!

Dandy: That's kind of where I'm at ---- just fine tuning my FI diversification. At 50 yrs old an AA of 60/40 is where I feel comfortable. But maybe some of the 40 could be a little safer? The risk is supposed to be on the equity side, right?

digit8: A good portion of the TIPS fund is LT. I think the average duration in VIPIX is 8.8 years. Doesn't that make it more vulnerable than the intermediate fund I'm currently in? I already have 3% in TIPS. I don't know if I'm comfortable with more.

retiredjg: You're right of course about the risk of the 60% that's already in stocks. I'm not contemplaing moving out of the bond fund entirely, but your hypothetical 1.25% drop may be optimistic. Or it may not. (stream-of-consciousness side note: My father and grandfather liked to tinker in the market. I remember a constant joke they used to pass between each other: One of them would say, "Ginnie Mae". The other would immediatley chime back: "Or she may not" It cracked them up every time.).

Pingo: Thanks for the tip. Looking at the pieces parts that make up FFKAX, it looks like not that much is in cash. It's a "fund of funds". Here's how I read the info (from the Fidelity website):

15% US Stocks
6% Int'l Stocks
21% Inv Gr Bonds
12% TIPS
5% High Yield Corp Bonds
21% MM Fund
18% ST Bond Fund

I haven't broken it down further than that (yet). It may be an option. Thanks for pointing that out.

[wriggly]

What has suddenly spooked so many posters? New Years' resolutions? Hangovers from attending too many inaugural balls?

I suspect it is because stocks (both domestic and international) have stopped being perceived as "in crisis". While stocks were in crisis (even as they rose), people were more focussed on their stock allocations, and were happy to put up with bonds as a safety net, no matter how ugly they got.

Now, as the economy is appearing to pick up, and our portfolios respond just as we hoped, the focus turns to the next worst thing, a looming crisis appears for a different component of the portfolio, and the solution is a "tactical" change.

It shows just how hard it is to "stay the course".

This may be the advantage of the Permanent Portfolio. It is up-front and says "look, at any time, a significant part of your portfolio will make you feel physically sick, but that is the price for decent returns come what may".

The typical Boglehead portfolio is milder with nothing in it to really upset the horses, so people aren't acclimatized to staying the course in the face of a broad consensus that some significant portfolio-wrecking event is about to occur: http://www.telegraph.co.uk/finance/personalfinance/pensions/9826200/How-far-could-bonds-crash.html [EDIT - just to be clear, this article is an example of wrongness: almost every line is factually incorrect or misleading through omission or equivocation]

[Taylor Larimore]

Randy:

Bonds have been expected to "take a hit" for nearly a decade. This is a Vanguard research paper published three years ago which shows what can happen to bonds when interest rates rise. This is part of their conclusion:

As illustrated in Figure 10, the performance of various segments of the bond market over the past several years underscores the benefits of a broadly diversified fixed income portfolio regardless of the future direction of interest rates.

Deficits, the Fed, and rising interest rates: Implications and considerations for bond investors

Best wishes
Taylor

[nisiprius]

a) I can't help but wonder what other interest-rate-rising time frames might have looked like,

The only good one we have to look at was 1940-1980. And I get whipsawed every time I talk about it, no matter how carefully I phrase it. First, you're right about the limited usefulness of past history, and the past history of bond interest rates shows this dramatically. The point is that there are sustained trends that are so long that there isn't enough history to collect meaningful statistical data! How many data points do we have to go on in assessing the size and duration of interest rate cycles? Two! Maybe two-and-a-half.

Now, here's the second point. The rhetorical reason for seeing such certainty that bonds will undergo some serious, wealth-vaporizing crash--to use the words of Siegel and Schwartz in 2010, one that "may have far more serious consequences for investors" than the tech bubble--is the supposed certainty that "interest rates will rise." So, for the moment, let's put on blinkers and ask one limited question, and one alone: what was the effect of the interest rate rise on the accumulating dollar value of an intermediate-term bond investment?

The answer is clear though misleading. You see it in the chart for intermediate-term government bonds in the SBBI Classic Yearbook, you see it in the actual growth chart for some bond mutual funds that go back that far, and you see it in simulations. Because the rise was not instantaneous but was spread out over four decades, the effect was a severe headwind, not a crash. Dollars invested in bonds, with interest reinvested as they matured, grew steadily, just at a much slower rate.

I'm now about to take the blinkers off, but first want to say that's the interest rate story. DIsappointment, not dollar vaporization.

Now comes the problem. 1940-1980 was also a period containing two episodes of severe inflation--the worse one being the earlier of the two--and the real buying-power value over that period of time was roughly halved. That's very serious.

Now of course there are those who think future inflation, even hyperinflation, is absolutely certain, but it is a different issue from interest rates as such. I have a bit of an emotional head of steam about this, because I feel that there are people trying to "talk down" bonds who are using the interest rate argument disingenuously. If they said "don't invest in bonds right now because it is certain that 1980s-style inflation is ahead," you'd say, hmmm, maybe so, maybe not. But when they say "interest rates are zero, so they can only go up, so bonds can only go down" it really does sound like a sure thing.

But every link in the chain is weak! Interest rates are not zero and can go any way they please; when they do, bond prices can "only go down," but try to pin down "how much" instead of just "which way;" we are not talking about a dot-bomb-sized event; as long as we talk numbers of dollars, everything points to disappointment, not disaster.

As for inflation, TIPS do exist.

Here's the big point. Everyone should, of course, consider the possibility that one kind of investment might do better or worse than another kind. But the panic factor, the certainty, the "kick me" sign should be taken out of the equation.