Coming Bond Market Crash

[am]

Would it be wise to increase stock allocation to say 70-75 from 60 percent given the poor bond outlook for someone still early in accumulation? Anything else we can use instead of bonds, precious metals?

[dad2000]

Would it be wise to increase stock allocation to say 70-75 from 60 percent given the poor bond outlook for someone still early in accumulation? Anything else we can use instead of bonds, precious metals?

You shouldn't change allocation based on outlook in the early accumulation stage.

Some bond fund substitutes:
Do you buy your $10K in I-bonds annually?
Then probably short-term PenFed CDs unless you're in a high marginal tax bracket.

[hoops777]

This is so interesting.I just skimmed thru a book by the Richelson's who are highly regarded bond experts and recommend an all bond portfolio.They say stocks are too risky no matter how long you hold them because there can always be a 2008 at any time along with a lot of other reasons.They have all kinds of documentation on historical returns of stocks vs bonds.In a nutshell the only safe investment is a bond ladder of individual very high quality bonds ,period.The main deal is cash flow and you always hold the bonds to maturity and you always know exactly what you are going to get.They are not big on bond funds because there is no certainty and you can lose money for an extended period of time in a long period of inflation/interest hikes.
If I invest a million dollars in the total bond index I have no way of knowing what I will have in 10 years.If I invest it in high quality bonds in a ladder and am able to buy new bonds at higher rates when the oldest ones mature,I am going to make money and have a stable cash flow.It of course is a helluva lot more work than buying funds,but I do not think one can argue much with there philosophy.Of course the key is investing only in very high quality bonds that have a historical default rate of almost zero.Mostly muni's and treasuries of different types.
The more I read the posts here the more I am thinking of going that way.The funds are really not letting me sleep well anymore.

[am]

I feel like the total bond fund is at the same level as large cap stocks were in 99' when the P/E was greater than 40.

But I also want to stay the course. What am I going to do if the P/E of stocks goes over 30 and stays there for 10 years, get out of stocks? Not sure what the right thing to do is with regards to bonds?

[hoops777]

I am really starting to get amused at the number of times I am reading a comment about holding stocks as insurance vs inflation.Your 67 and retiring and have half your money in bonds paying very little and half in stocks for "insurance" vs inflation.I do not want an insurance policy that might lose half of its value when I need every cent I have to make ends meet.Stocks viewed as insurance is not wise and I do not care how many PHD's someone has that says it.
You need stocks so that you will not run out of money,yet stocks are the one asset that are most likely to lose a large pct of their value.They might not.I emphasize the might.Great peace of mind for people who are not wealthy and cannot live off of muni's and treasuries.

[Rodc]

They have all kinds of documentation on historical returns of stocks vs bonds.In a nutshell the only safe investment is a bond ladder of individual very high quality bonds ,period.The main deal is cash flow and you always hold the bonds to maturity and you always know exactly what you are going to get.

Certainly false for high quality nominal bonds if you have rising inflation and yields, see 1950-1980. This is simply historical reality. Unfortunately it was not a good time for stocks either.

TIPS might be far better, not a lot of data yet, and recently with very low to negative real yields, they are not a great deal either unless you already have more money than you need.

Some investments are safer than others of course, not trying to say bond and stock risk are equal.

You might argue bonds are safer than stocks, I think that is true, but not necessarily "safe" in an absolute sense. The vast majority of people will need some decent level of real return or they will be in trouble. Simply standing still or slowly losing ground to inflation is not safe.

[Call_Me_Op]

This is so interesting.I just skimmed thru a book by the Richelson's who are highly regarded bond experts and recommend an all bond portfolio.

Guess what an insurance salesman recommends you should buy?

[livesoft]

Great peace of mind for people who are not wealthy and cannot live off of muni's and treasuries.

Those folks are supposed to live off of single premium immediate annuities or go back to work.

[Rodc]

Would it be wise to increase stock allocation to say 70-75 from 60 percent given the poor bond outlook for someone still early in accumulation? Anything else we can use instead of bonds, precious metals?

Early in accumulation asset allocation has little bearing on ending results: it applies to too little funds. The key driver for now is how much you can put in week by week or month by month. I think in general either of your suggested allocations is likely fine (without knowing details).

[hoops777]

Livesoft...My point is that there is one world for the wealthy who are fortunate to have 2 million or more and can afford to live on a small safe return and the majority of middle class people who worked hard all of their life and have nothing even close to that amount.A 500k portfolio will give you a whopping 10 k a year at a 2% return.Yes,you can buy an immed annuity and in turn give up access to your money.
I just am tired of hearing buy stocks as insurance against inflation.Take that 500 K and invest it 50-50 in stocks and bonds and we all know what can happen to that "insurance".This is why so many people are so frustrated and fearful.So the two main points I took from the book by the Richelsons are that stocks are very risky and can at any time take a huge loss and the bond ladder of high quality bonds is the only way to really know what your investments will return.Great for wealthy people and really ,really difficult for 95 % of people.
I am 61 and still working with a decent amount of money and would like to just take it easy and put most of it in total bond and tips but I have know way of knowing what the result of that will be in about 10 years when I retire.I would hope it would be a positive.Even 3% compounded would be great for my situation.Maybe I am overreacting to the threat of inflation/interest rates but nobody has a great answer.

[Phineas J. Whoopee]

Would it be wise to increase stock allocation to say 70-75 from 60 percent given the poor bond outlook for someone still early in accumulation? Anything else we can use instead of bonds, precious metals?

Early in accumulation asset allocation has little bearing on ending results: it applies to too little funds. The key driver for now is how much you can put in week by week or month by month. I think in general either of your suggested allocations is likely fine (without knowing details).

Hi am,

I agree with Rodc.

In addition, early in accumulation you should want assets to become less expensive, so your periodic purchases will buy more of them. I see no reason for you to change your asset allocation. In fact, I would suggest you look for opportunities to rebalance into asset classes which have dropped.

For the record, while interest rates certainly will continue their long term pattern of fluctuation in both directions, nobody can see into the future and tell you when they will rise and by how much. Plenty of people are making predictions, so much so that a few of them will turn out to have been right, but even those people find out what the future holds the same way the rest of us do.

PJW

[Munir]

Great peace of mind for people who are not wealthy and cannot live off of muni's and treasuries.

Those folks are supposed to live off of single premium immediate annuities or go back to work.

SPIAs have a very low payout in this environment-just like most other assets. You need a huge sum to invest in them in order to get a living wage-type income to live on.

As to preaching to others to go back to work, I wonder how old you are and how familiar you are with the infirmities and disabilites that older people have to go thru- in addition to the usual decline in physical and mental abilitites that occurs with aging. You sound like Marie Antoinette telling the hungry poor to eat cake . I say this in good humor because I'm familiar with your history of "vivid" remarks on this forum.

[denismurf]

hoops777 says 61 years old.

[livesoft]

At least I didn't say "You are supposed to eat cat food."

Many authors, such as Otar, have stated that the SPIA is the solution for folks who do not have enough invested. I think Milevsky might fall into that camp, too.

I am not far from hoops777's age. And from my work in a hospital I am extremely familiar with the infirmities and disabilities of old age. Extremely.

[Munir]

At least I didn't say "You are supposed to eat cat food."

Many authors, such as Otar, have stated that the SPIA is the solution for folks who do not have enough invested. I think Milevsky might fall into that camp, too.

I am not far from hoops777's age. And from my work in a hospital I am extremely familiar with the infirmities and disabilities of old age. Extremely.

Thanks for the response, livesoft. My question was addressed to you and not to hoops777. I am 75 and feeling older by the minute!
BTW, I own a couple of SPIAs and think they are a worthwhile purchase but maybe not in the current rate environment.

[Joe S.]

It is reassuring to know that the worst year for Vanguard's Total Bond Market Index Fund since its inception in 1986 was -2.66% in 1994 (it gained +16.0% in 1995).

I agree it is reassuring, but what does it say about future worst years?
Also, if you consider Real performance, the worst year was -6.91% (1979). The worst four-year performance was also about -25% (1977-1980). Not as bad as stocks, but -25% Real over four years certainly paints a different picture than -2.66% Nominal over one year, doesn't it?

Athrone, you raise an important point about the performance of bonds from 1977-1980, before the Vanguard Total Bond Market existed. However, you don't say what your source is, which makes evaluation difficult. You also don't say if you are talking about long bonds, The Barclay Aggregate Index, or something else, and this can make a big difference. People on this site frequently quote the wrong index, and I can't rely on your data without more information.

[john94549]

For folks pushing (or over) 60 who want some stability, and predictability, in their fixed-income allocation, I would suggest building a 5-year ladder of 5-year CDs. I've noted in other threads one approach to building such a ladder from existing bond funds. For those merely looking to swap a short-term bond fund for a CD, I would suggest the PenFed 3-yr 1.85% APY CD. For those over 59 1/2, the IRA CD allows partial withdrawals without any EWP. The normal EWP is 6 months. Always keep enough in bond funds for re-balancing, however, as re-balancing from a CD ladder can be cumbersome.

It's not that hard to find retail CDs which at least allow you to "tread water" with respect to inflation. For example, a 5-yr CD yielding 2% offers a current modest real rate of return, if you believe last year's S/S COLA. In a CD ladder, as rungs mature, you should benefit from rising rates.

CD ladders do require a certain amount of management, although I think the "PITA" factor is over-blown.

[Average]

hoops777 » Wed Jan 09, 2013 10:41 pm

They have all kinds of documentation on historical returns of stocks vs bonds.In a nutshell the only safe investment is a bond ladder of individual very high quality bonds ,period.

For an early accumulator is it better to know (accept) that you'll have to save half or more of your earnings throughout your long, long, long working life – having less children, smaller house, fewer vacations, second job, and more – due to the low expected returns on those “safe” individual bonds you must accumulate in great quantity? That is a guaranteed permanently lower quality of life that you cannot get back if you have second thoughts when you are retiring at 75 or 80. Alternatively accept an allocation to stock is needed for most, even say 30 or 40 percent, save a lesser portion of HH income, live a better quality of life along the way and stand a very good chance of retiring at an equal to or better standard of living, and maybe earlier too?

[athrone]

You raise an important point about the performance of bonds from 1977-1980, before the Vanguard Total Bond Market existed. However, you don't say what your source is, which makes evaluation difficult. You also don't say if you are talking about long bonds, The Barclay Aggregate Index, or something else, and this can make a big difference. People on this site frequently quote the wrong index, and I can't rely on your data without more information.

I'm talking about "Total Bond Market," the same index tracked by the Vanguard fund Taylor referenced. The data source is from Simba's spreadsheet, from this forum:

Total Bond Market (Intermediate Bonds)
1970-1972 Ibbotson
1973-1986 Lehman Brothers
1987-Forward Vanguards Total Bond Index Fund

[Joe S.]

You raise an important point about the performance of bonds from 1977-1980, before the Vanguard Total Bond Market existed. However, you don't say what your source is, which makes evaluation difficult. You also don't say if you are talking about long bonds, The Barclay Aggregate Index, or something else, and this can make a big difference. People on this site frequently quote the wrong index, and I can't rely on your data without more information.

I'm talking about "Total Bond Market," the same index tracked by the Vanguard fund Taylor referenced. The data source is from Simba's spreadsheet, from this forum:

Total Bond Market (Intermediate Bonds)
1970-1972 Ibbotson
1973-1986 Lehman Brothers
1987-Forward Vanguards Total Bond Index Fund

I'm still having trouble getting Simba's spreadsheet to work.
This is the data for the Total Bond Market from my information
Year/Nominal Return /Inflation
1976 +11.7 5.8
1977 +3.0 6.5
1978 +2.2 7.6
1979 +6.6 11.2
1980 +6.6 13.6
This would suggest only an ~ 20% drop
http://www.assetplay.net/article/index/ ... turns.html
http://inflationdata.com/inflation/Infl ... ation.aspx

[athrone]

The exact number is -22% for cumulative return if you calculate it out, I was just estimating by looking at the returns of the four years when I said 25%.

Either way the point stands I think -- that looking at the nominal return for one year (-2.66%) is misleading, and that the real return over four down years (-22%) paints a different picture.

[am]

Did stocks or other investments do better on a real basis during that time?

[athrone]

The environment today is different from the 70s. There is much more debt and interest rates are much lower. It may also not even be possible to raise rates to 10% as Volker did. If we assume the continuation of ZIRP, then we have ~0% yields for cash/tbills. Assuming a repeat of the high-inflation of the 70s:

Historical Inflation rate (CPI-U)
1977: 7.70%
1978: 9.02%
1979: 13.29%
1980: 12.52%

If you are holding cash, and the economy is stuck in ZIRP, this would result in a -46% Real loss over four years.

[athrone]

Did stocks or other investments do better on a real basis during that time?

Gold and International did well, US stocks were mostly flat.

CAGR (Real) 1977-1980
Gold: +33.78%
Total Stock Market (US): +3.3%
Total International: +10.38%

[Nicho_1978]

How does today"s fed meeting comment to continue its bond buying program until unemployment is 6.5 change the to bond market outlook in the short term, especially in light of the recent negative chatter?

[wesleymouch]

During the 1970s when interest rates climbed (I think from 5% to 15% on the ten year) intermediate bond funds did not suffer NOMINAL losses but did suffer REAL (purchasing power) losses. The one asset that did well was gold which in a portfolio preserved purchasing power during that decade. This is well explained at the crawlingroad.com website

[wesleymouch]

Again looking at the 1970s the other asset that did fairly well was cash which suffered only mild loss of purchasing power.

[papito23]

This is so interesting.I just skimmed thru a book by the Richelson's who are highly regarded bond experts and recommend an all bond portfolio.They say stocks are too risky no matter how long you hold them because there can always be a 2008 at any time along with a lot of other reasons....
The more I read the posts here the more I am thinking of going that way.The funds are really not letting me sleep well anymore.

I and millions of people of moderate means (esp. single-income families) might see it differently. Risk (for me) is not fluctuating valuations between now and retirement 35 years distant. (As Buffet has noted, you don't calculate your home's value day-by-day, so why would you with long-term investments like stocks?) Risk for me is not getting enough return to meet my needs in the future. An all-bond portfolio would require an income level and savings rate not possible for a very large chunk of the population. That is much riskier to me at 28 years old than 100% stocks (currently). I invest in stocks with a certain faith in the "system" ... the U.S. economy/culture/political system. I don't plan on moving, so my fate is tied up with everyone else here. I'm "all in."

EDIT: No judgment on Hoops777's decision on whatever (s)he decides for his/her personal needs. Just pointing out the futility of an all-bond portfolio for a 3-6 decade investing timeline.

[Phineas J. Whoopee]

How does today"s fed meeting comment to continue its bond buying program until unemployment is 6.5 change the to bond market outlook in the short term, especially in light of the recent negative chatter?

Hi Nicho,

Maybe I don't understand your question, but the Fed's Open Market Committee did what many market participants expected by leaving monetary policy the same. Why would it change the short term bond market outlook?

If you don't mind my asking, why is the short term bond market outlook important for a long term buy-hold-and-rebalance investor?

PJW

[Nicho_1978]

Hi Nicho,

Maybe I don't understand your question, but the Fed's Open Market Committee did what many market participants expected by leaving monetary policy the same. Why would it change the short term bond market outlook?

If you don't mind my asking, why is the short term bond market outlook important for a long term buy-hold-and-rebalance investor?

PJW

It's not i was just making a point about all the negative talk we've been hearing about interest rate rising and it's supposedly impact on the bond market.

[Phineas J. Whoopee]

Hi Nicho,

Maybe I don't understand your question, but the Fed's Open Market Committee did what many market participants expected by leaving monetary policy the same. Why would it change the short term bond market outlook?

If you don't mind my asking, why is the short term bond market outlook important for a long term buy-hold-and-rebalance investor?

PJW

It's not i was just making a point about all the negative talk we've been hearing about interest rate rising and it's supposedly impact on the bond market.

[I originally made a statement about editing the XML but Nicho seems to have fixed it, so never mind this part in square brackets.]

Thanks Nicho for the clarification and I'm happy to hear you say that.

The talkers talk. Their motivations are varied and numerous. For ever so many of them it's to deliver viewers, listeners, and readers to their advertisers. Saying everything is the same, or everything is getting better, doesn't achieve that end very well.

The participants in the bond market buy and sell.

I know whose opinion I pay attention to.

PJW