Rick...Make Sense To You?

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Rick...Make Sense To You?

Postby OverTheHill » Wed May 08, 2013 7:43 am

https://personal.vanguard.com/us/insigh ... ion_052013

This is what Vangaurd had to say about keeping investment grade bonds even with the near certainty of higher interest rates in the future. I'm curious what you think about their analysis and conclusions. Also, they seem to take a shot at HY, which seems a little at odds with the general proposition behind their conclusions. Thoughts?
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Re: Rick...Make Sense To You?

Postby Rick Ferri » Wed May 08, 2013 8:07 am

The report said there is a likelihood of higher rates. That's quite different than a near certainty of higher rates. I believe rates are going to stay low for several years, although there will be bumps in the road.There's too much slack in the global economy for inflation to rise.

I agree with the report that a balanced portfolio will cushion a 20% downturn in the stock market whether bonds are yielding 5% or 2%. Lower interest means less cushion, but not much less.

The article is trying to stop people from taking on more risk than they can handle. Now that the stock market is hitting new highs daily, people forget how they felt and acted during the 2007-2008 bear market.

High yield was not mentioned in the article.

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Re: Rick...Make Sense To You?

Postby OverTheHill » Wed May 08, 2013 8:59 am

Rick Ferri wrote:The report said there is a likelihood of higher rates. That's quite different than a near certainty of higher rates. I believe rates are going to stay low for several years, although there will be bumps in the road.There's too much slack in the global economy for inflation to rise.

I agree with the report that a balanced portfolio will cushion a 20% downturn in the stock market whether bonds are yielding 5% or 2%. Lower interest means less cushion, but not much less.

The article is trying to stop people from taking on more risk than they can handle. Now that the stock market is hitting new highs daily, people forget how they felt and acted during the 2007-2008 bear market.

High yield was not mentioned in the article.

Rick Ferri

Thanks, Rick. I mentioned HY because it seemed that the authors were suggesting that their conclusion to hold onto bonds might not apply if you strayed outside investment grade or bonds of greater safety. I probably was reading too much into it. I was mostly interested in the idea that running away from bonds doesn't make sense for retirees, even if interest rates are known to be going up in the future.
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Re: Rick...Make Sense To You?

Postby TO39 » Wed May 08, 2013 9:14 am

from the article


Given the low expected returns for investment-grade bonds, it's not surprising that some investors see greener pastures in alternatives such as high-yield bonds, high-dividend-paying stocks, or emerging market bonds.

A smart switch? Not necessarily.
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Re: Rick...Make Sense To You?

Postby Rick Ferri » Wed May 08, 2013 10:39 am

OK, thanks for pointing it out. The article is referring to people who are replacing investment grade with higher yielding securities that have more risk. That's not a good idea. Higher yielding / higher risk fixed income investments could compliment investment grade bonds, not replace them.

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Re: Rick...Make Sense To You?

Postby nedsaid » Wed May 08, 2013 10:56 pm

I think if people got too concerned about the low yield and future returns of bonds that they could sell some bonds to purchase a CD ladder. It would take away the risk of losing principal. Of course if rates fell any further, one would miss further appreciation.

If I were 63 instead of 53, I think I would go this route. A CD ladder of one, two, three, four, and five year CD's makes a lot of sense. The yield would be awfully low. If rates rose, the ladder would benefit as each year the maturing CD would purchase a new five year CD.

I agree with the article. I would not sell bonds and put the proceeds into higher risk investments. Chasing yield is a prescription for heartache and disappointment.
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Re: Rick...Make Sense To You?

Postby Munir » Thu May 09, 2013 5:54 pm

What do the authors mean by "investment grade bonds"? Am I right to assume they mean treasuries, and investment grade corporate bonds? How about MBS or other government-backed instruments?
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Re: Rick...Make Sense To You?

Postby Rick Ferri » Thu May 09, 2013 6:42 pm

They mean everything in the Vanguard Total Bond Index fund; Treasuries, motrgages, corporates, assert backed securities, Yankee bonds. Fixed income that has a rating of Baa or higher.

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