Is it this easy: Stocks are safe, bonds are risky?

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RooseveltG
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Is it this easy: Stocks are safe, bonds are risky?

Post by RooseveltG »

The future is unknowable but we seem to have entered an era where the consensus is that stocks will generate positive real returns and bonds will not. Stocks are now "safe" and bonds are risky.

Is this a consequence of the interest rate cycle (and the Fed) or has the paradigm actually changed?

Roosevelt.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by billyt »

I can't tell if you are joking or just trying to bait us, but I'll bite.

1) Safety is defined by volatility. Bonds are, and always will be, a less volatile and safer asset class than stocks. Bonds are a promise to return principle plus interest. Very safe. Stocks not so.

2) Yes, you can (temporarily) lose money in bonds. That does not negate point (1).

3) Bonds are currently offering positive real returns for intermediate and above durations, because inflation is very low. If you think inflation will rise, buy TIPS.

It is that simple.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Jfet »

I do have some issue with saying the money lost in bonds is temporary. I assume we are talking about a bond index, because there have certainly been defaults on bonds.

I do not know of one stock index which has lost money forever, so the money lost in stocks is also temporary.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by RNJ »

Aren't bonds less risky now than they were a few months back, when they were more expensive?
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by gvsucavie03 »

nope. That was easy!
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by cflannagan »

RooseveltG wrote:The future is unknowable...
And in the very same sentence,
RooseveltG wrote: ... but we seem to have entered an era where the consensus is that stocks will generate positive real returns
A very dangerous and irresponsible thing for one to post.

And where exactly was that consensus reached? Certainly not at Bogleheads.. I would imagine.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by RooseveltG »

I was not joking or baiting. I talk to many professionals and close to 100% are complacent about stocks and convinced interest rates will rise and bonds will fall. Even unsophisticated investors share that outlook. Aside from this forum, I have never seen this degree of consensus. It seems to be a mathematical certainty that stocks will greatly outperform bonds.

How can one argue with that?

Roosevelt.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by cflannagan »

RooseveltG wrote:I was not joking or baiting. I talk to many professionals and close to 100% are complacent about stocks and convinced interest rates will rise and bonds will fall. Even unsophisticated investors share that outlook. Aside from this forum, I have never seen this degree of consensus. It seems to be a mathematical certainty that stocks will greatly outperform bonds.

How can one argue with that?

Roosevelt.
I'm now semi-convinced you're just baiting.

Mathematical certainty that stocks will greatly outperform bonds?

I guess what you're really trying to say is bonds will probably have mediocre returns until our interest rates are higher (assuming we give them adequate time to go through duration without yet another rising interest rate), which I agree to some degree.

But stocks going up is no certainty. When stocks goes down, they are not "greatly outperforming" bonds.

Over what time frame are you talking about that you claim stocks would "greatly outperform" bonds?

We have some "ideas" of where stocks and bonds will go moving forward (for example, feds rising interest rates, causing somewhat predictable movements in the stocks and bonds categories), but it's also dangerous and irresponsible to be using terms like "mathematical certainty".

Who are the "professionals" that you talked to? If they are so certain about bonds and stocks movements in general, how come they're still working?
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by stevewolfe »

RooseveltG wrote:I was not joking or baiting. I talk to many professionals and close to 100% are complacent about stocks and convinced interest rates will rise and bonds will fall. Even unsophisticated investors share that outlook. Aside from this forum, I have never seen this degree of consensus. It seems to be a mathematical certainty that stocks will greatly outperform bonds.

How can one argue with that?

Roosevelt.
By being a contrarian. Just because it's a widely held belief doesn't mean it will come to pass.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by billyt »

Roosevelt,

You are confusing risk with return. It may well be we are in for a period of poor bond fund performance and reasonably good stock returns. I don't know and neither does anyone else.

Stock fund values are, and always will be, more volatile than bond fund values. Stocks are therefore unequivocally more risky.

As an aside, it is essential to remember that rising rates will temporarily impact the value of bond funds, but simultaneously increase the total return over the long haul. Rising rates are good for bonds. You should only care about NAV fluctuations if you are a bond trader or a market timer, which explains the obsession of the financial press that is geared to short term trading. If you buy, hold, and rebalance a diversified portfolio, you should ignore the noise.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Harold »

RooseveltG wrote:It seems to be a mathematical certainty that stocks will greatly outperform bonds.
Two obvious reasons why it's not a mathematical certainty:

First, the marketplace forms a much more comprehensive consensus than your group of professional friends. An efficient market has priced in all certainties. Otherwise, sellers are willingly parting with their assets for less than their known value. There may be some fools, but not everyone is a fool.

Second, the value of any investment is discounted future cash flows. Bond cash flows are defined -- stock cash flows are not. Stock returns will depend on whether future cash flows meet or exceed expectations -- a quite uncertain prospect.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by nisiprius »

RooseveltG wrote:...It seems to be a mathematical certainty that stocks will greatly outperform bonds. How can one argue with that?
In two ways. It's not a "mathematical certainty," and even if it were that would not make stocks safe and bonds risky.

Let me take the second part first. Because most ordinary people are risk-averse and because most of what Wall Street makes the most money on is risky, Wall Street has in infinitude of rhetorical tricks for dismissing the risks of the risky, and creating fear about the less risky. One of the threads someone pointed out in the RegisteredRep forum had one rep telling another one how to manipulate prospects, and saying "I find that fear works better than greed."

1) It's important not to confuse short-term "risk" with long-term risk. Everyone wants us to worry about what's going to happen in the next six months, we need to worry about what's going to happen over the next thirty years.

2) It is very important not to confuse risk and return. Something does not become risky just because it has a lower return. A lower return sucks, but it is not risk. You have $100,000. Suppose some scary person, like Chigurh in "No Country for Old Men," gives you a choice and forces you to choose one or the other. But not as scary as Chigurh because it's not your life at stake. He gives you this choice:

a) Give him $500 and keep $99,500.
b) Flip a coin. If it comes up tails, you must give him the whole $100,000. If it comes up tails he gives you $101,000.

Which is riskier? Obviously, choice A results in a loss of $500. Choice B involves a mathematical expectation of a gain of $500. Surely nobody would say "Choice a is riskier." Not even if one had made plans that involved keeping the whole $100,000.

Stocks are riskier than bonds even if you are pretty sure that stocks are going to return more than bonds in the long-term, which I think is true.

Stocks are riskier than bonds even if you are pretty sure that stocks are going to return more than bonds in the short-term, and no, that is not "mathematically certain" and you do not know it. Anyone who says it is "mathematically certain" is posturing.

A stock is participation in the uncertain business prospects of a company. If a company has a lousy year, the stock goes down and you lose a lot even if the company stays in business and pays its bills. If a company has a great year, the stocks goes up and you gain a lot. With a bond, you are only risking the company not paying its bills, and if it has an investment-grade rating that risk is small.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by livesoft »

Very insightful. Or did I mean, Very inciteful.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by YDNAL »

RooseveltG wrote:The future is unknowable but we seem to have entered an era where the consensus is that stocks will generate positive real returns and bonds will not.
1. Oxymoron:
  • a) Future is not known.
    b) Consensus we "know" something about the future.
2. Whether or not "we entered an era where Stocks will generate positive real returns and Bonds will not" is not known... period.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by magician »

RooseveltG wrote:The future is unknowable but we seem to have entered an era where the consensus is that stocks will generate positive real returns and bonds will not. Stocks are now "safe" and bonds are risky.
If we know that bonds will not generate positive real returns, then they're not risky; they're bad.

Risk requires uncertainty.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by magician »

billyt wrote:1) Safety is defined by volatility.
I'm pretty sure that it's not.

We often use volatility (of returns) as a proxy for - or as a means to measure - risk, but that's not remotely the same as a definition.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Quickfoot »

Investing is risky, that's why there's return. Informed people realize not investing is more risky than sensibly investing :). A reasonable investment plan would be to invest in multiple different asset classes including bonds and equities.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by magneto »

billyt wrote:Roosevelt,

You should only care about NAV fluctuations if you are a bond trader or a market timer
Generally agree but would qualify this point if the investor intends to follow a rebalancing policy. Then if bonds are the dry powder for buying stocks on weakness, a bonds NAV fluctuation (downwards) does matter. Such bonds weakness reduces the amount of dry powder available for rebalancing and possibly a rebalancing event might not take place with both bonds and stocks down at the same point in time.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by tadamsmar »

It mathematical certainty that this bait has reeled in 17 posts so far including this one. (Assuming I counted correctly.)
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by cflannagan »

magneto wrote:
billyt wrote:Roosevelt,

You should only care about NAV fluctuations if you are a bond trader or a market timer
Generally agree but would qualify this point if the investor intends to follow a rebalancing policy. Then if bonds are the dry powder for buying stocks on weakness, a bonds NAV fluctuation (downwards) does matter. Such bonds weakness reduces the amount of dry powder available for rebalancing and possibly a rebalancing event might not take place with both bonds and stocks down at the same point in time.
By definition rebalancing means you are moving money from asset classes that outperform the other, whether it be an equity asset class or a bond one. Bonds aren't unique in this case.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by dbr »

magneto wrote: Generally agree but would qualify this point if the investor intends to follow a rebalancing policy. Then if bonds are the dry powder for buying stocks on weakness, a bonds NAV fluctuation (downwards) does matter. Such bonds weakness reduces the amount of dry powder available for rebalancing and possibly a rebalancing event might not take place with both bonds and stocks down at the same point in time.
Bonds are not the dry powder for buying stocks on weakness, at least not in a portfolio theory informed risk controlled strategy of investing as mostly advocated on this board. The stock/bond allocation is set to a target of return distribution (expected return and risk in the correct sense) and rebalancing is done to stay at that target.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by RooseveltG »

My real point is that there seems to be a general complacency about the safety and returns of stocks, especially compared to bonds. That may just be a psychological result of the rebound in the markets since the financial crisis.

Roosevelt.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by cflannagan »

RooseveltG wrote:My real point is that there seems to be a general complacency about the safety and returns of stocks, especially compared to bonds. That may just be a psychological result of the rebound in the markets since the financial crisis.

Roosevelt.
If anything, I'm now worried about some downwards pressure on stocks due to seeing so much appreciation in the markets lately. This, plus some short term uncertainties (how much would Syria cost us, if we were to attack them in one manner or other). And CAPE analysis seem to suggest our US equities are somewhat overvalued.

Best advice I can tell myself is to just stay the course and dismiss all this as short-term noise. I can't be losing sleep over what would amount to be just a blip on my long-term radar.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Phineas J. Whoopee »

Roosevelt - are you just trying to stir up a semantic argument about the definition of the word "safe," and whether it has degrees?

I'm reminded of an old college housemate who used to ride his motorcycle without a helmet. His catchphrase:

Nothing is safe!

He said the same one day when he felt too chilly and turned on the gas oven with its door open to warm the place up.

Carbon monoxide detectors hadn't yet become cheap enough to install in houses. I don't even think we had a smoke alarm.

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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by RNJ »

RooseveltG wrote:My real point is that there seems to be a general complacency about the safety and returns of stocks, especially compared to bonds. That may just be a psychological result of the rebound in the markets since the financial crisis.

Roosevelt.
Then doesn't that make stocks even riskier?

Also - which stocks? Large caps? Small caps? EM stocks? Euro stocks? Asian?
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Christine_NM »

RooseveltG wrote:My real point is that there seems to be a general complacency about the safety and returns of stocks, especially compared to bonds. That may just be a psychological result of the rebound in the markets since the financial crisis.

Roosevelt.
There was a lot of talk in the last year or two about investors being pushed into perceived risk by the Fed's low low rates and QE (quant easing). If this is true, both stocks and bonds have been forced to high prices.

They both are artificially overpriced, or they were last May before starting to sag. Not a big deal, just take whatever gains you have with a big grain of salt.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by CyberBob »

billyt wrote:Safety is defined by volatility.
I believe William Bernstein calls volatility a shallow risk, whereas the deep risk is inflation. Warren Buffett also views inflation as more of a risk than volatility:
Warren Buffett wrote: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.

Investments that are denominated in a given currency, like bonds, are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

I believe that over any extended period of time investment in productive assets, whether businesses, farms, or real estate will prove to be the runaway winning category. More important, it will be by far the safest.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by UliKunkel1953 »

RooseveltG wrote:My real point is that there seems to be a general complacency about the safety and returns of stocks, especially compared to bonds.
Sure, and there were lots of people becoming realtors during the housing bubble. Not sure if a "general consensus" is a good basis for any kind of decision making.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by billyt »

CyberBob: Are you aware of TIPS? They slay the inflation bogeyman.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Random Musings »

As far back as I can remember, neither equities or bonds are risk free assets.

Stick with your investment plan.

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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Electron »

RooseveltG wrote:The future is unknowable but we seem to have entered an era where the consensus is that stocks will generate positive real returns and bonds will not. Stocks are now "safe" and bonds are risky.
Ten year projections for stocks and bonds definitely favor stocks in terms of nominal returns. Bond returns may be on the low side as a result of the current low yields.

If the economy does quite well, stocks may do even better than expected. A strong economy and any increased inflation would be expected to negatively impact bond returns. However, stocks will always be riskier than bonds. A disciplined long term investor does not know the future and invests on that basis. No one knows how the economy will do in the years ahead. A deflationary period might favor bonds over stocks.

Refer to Mr. Bogle's Common Sense on Mutual Funds for information on simple stock and bond projection models.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Jack »

The price of stocks today creates a higher expected return than the price of stocks in 1999. That is about as close to a mathematical certainty you are going to get. However, expected return is not guaranteed return.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by baw703916 »

We don't know what the returns of stocks will be going forward, but we do know that currently the risk free rate gives a negative real yield. So at the moment you have to take some risk to have a chance to get a positive real yield (either duration or credit risk if you stay with bonds, or equity risk).
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Electron »

RooseveltG wrote:Is this a consequence of the interest rate cycle (and the Fed) or has the paradigm actually changed?
The low rates resulting from Fed policy are a major factor. In addition, investors view charts such as the one below and feel that the 30 year decline in interest rates is over and that rates are header higher.

http://research.stlouisfed.org/fred2/se ... YR?cid=115

If rates do rise even moderately, bond returns would be very disappointing compared with investor experience over the last 30 years.

However, there is another factor not always mentioned. Fed policies have also driven up the PE multiple on stocks. This has also lowered future stock returns.

Bond returns for the decade ahead may project to be 2%, but I believe stock returns might only project to something in the range of 5-7% based on dividend yield and earnings growth.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by cflannagan »

Electron wrote:If rates do rise even moderately, bond returns would be very disappointing compared with investor experience over the last 30 years.
Over what time frame?

I was under the impression that when interest rate rise, yes, the NAV falls, but eventually the NAV will return to the original level in the length of time roughly equal to the amount of interest rate risen multiplied by the average bond fund duration.

Over longer time frame, because of higher yields (due to risen interest rate), it will win out in overall total returns over lifetime (for example, 30-35 years is more than sufficient for short or intermediate bond funds to win out on overall total returns).

Maybe I am thinking about the wrong way. Let me know, I'd like to be educated.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by baw703916 »

billyt wrote:CyberBob: Are you aware of TIPS? They slay the inflation bogeyman.

Lately you do have to go out quite a ways on the yield curve before the real return becomes positive. If you hold the TIPS to maturity you're guaranteed a positive real return but the market value could drop in the short run. So it may or may not be risk-free depending on the holding period.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by foxfirev5 »

At 4PM today I'm sure that a large number of buyers and sellers either purchased or sold something at what they consider a fair value. I can't begin to figure out who got the better deal. That's why I have to stick to my AA and look long term. Just shooting to be average. :D
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by steve roy »

RooseveltG wrote:I was not joking or baiting. I talk to many professionals and close to 100% are complacent about stocks and convinced interest rates will rise and bonds will fall. Even unsophisticated investors share that outlook. Aside from this forum, I have never seen this degree of consensus. It seems to be a mathematical certainty that stocks will greatly outperform bonds. ...
I'd be interested in knowing specific sources. "Many professionals" just doesn't do it for me. Many professionals who do what? Train dogs? Study world economies deeply? Who are we talking about, exactly?
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by stemikger »

RooseveltG wrote:The future is unknowable but we seem to have entered an era where the consensus is that stocks will generate positive real returns and bonds will not. Stocks are now "safe" and bonds are risky.

Is this a consequence of the interest rate cycle (and the Fed) or has the paradigm actually changed?

Roosevelt.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by pkcrafter »

Hello, is this the Bogleheads' forum? :shock:

Roosevelt wrote:
I was not joking or baiting. I talk to many professionals and close to 100% are complacent about stocks and convinced interest rates will rise and bonds will fall. Even unsophisticated investors share that outlook. Aside from this forum, I have never seen this degree of consensus.

Actually, if interest rates rise, bond prices will fall. We all know that. Being complacent about stocks--meaning stock risk--is very foolish and dangerous. And if everyone is doing it, you can prepare for a wake-up call. Mother market does not like to be taken for granted. :!:
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by cflannagan »

pkcrafter wrote:Hello, is this the Bogleheads' forum? :shock:
Upon first glance, looks like we're in a bond market timer forum here. :confused
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by nedsaid »

Stocks are never safe. An accurate statement is that the future expected returns of stocks can be reasonably estimated at 7% or so and that the future expected returns of bonds can be reasonably estimated at about 3%. But that is not a statement of which asset is "safe". That is a "safe" asset class having low volatility. A reasonable person could also say that the risk in bonds will be higher in the future as interest rates rise. But I would never argue that bonds are riskier than stocks. I would say that I believe that bonds will be more risky in the future than what most investors believe.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by abuss368 »

How do you know that? Do you have an edge no one is aware? Is your crystal ball better than other investors?

These are some of the questions one must ask themselves.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by nedsaid »

How do any of us know anything? I have invested my own funds and watched the markets for years.

If we throw out assumptions about the relative returns of stocks vs bonds and the amount of volatility that these asset classes show over time, then we should throw out all of our asset allocation models. One might as well be 100% stocks or 100% bonds. Who really knows?

I know that historically that stocks have higher rates of returns than bonds and do so at the price of higher volatility than bonds. I don't know for sure that these relationships will persist in the future but I would say the odds are pretty darned good.

I also know historically that asset classes that had been hot will tend to lag thereafter. What can be hotter than an asset class that experienced a 30 year bull market? That is Bonds. So it is not unreasonable to say that going forward that bonds will have subdued returns compared to what investors have experienced in recent years.

I also go by John Bogle's methods of estimating future returns. Stocks by adding earnings growth and dividend yield. Bonds by looking at the current yield and projecting that as the rate of return on bonds for the next ten years.

So I don't think I am way out in left field on this one.

Also note that I used the phrase "reasonable estimate". I am not claiming the gift of market prophecy, just making an educated estimate of future returns.
Last edited by nedsaid on Fri Aug 30, 2013 9:39 pm, edited 1 time in total.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by abuss368 »

nedsaid wrote:
I also go by John Bogle's methods of estimating future returns. Stocks by adding earnings growth and dividend yield. Bonds by looking at the current yield and projecting that as the rate of return on bonds for the next ten years.
There was a recent interview posted on the forum with Jack Bogle where is addressed this exact topic. Felt very reassuring in light of the current bond market.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by John3754 »

RooseveltG wrote: It seems to be a mathematical certainty that stocks will greatly outperform bonds.

How can one argue with that?
Easily, what if the stock market crashes, what happens to your "mathematical certainty" then?
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by nedsaid »

I am buying bonds now. Buying them with all my 2013 IRA Contributions. Buying them with dividends from my brokerage account. Buying them with 40% of new monies for investment in my workplace savings plan. Also did mild rebalancing to sell a bit of stocks to buy bonds.

Why? If I don't then my asset allocation will get of out whack. I am already fairly stock heavy for my age. And I am doing this with the knowledge that the returns of my bond investments are likely to be subdued for a while. I am a believer in asset allocation.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by abuss368 »

nedsaid wrote:I am buying bonds now. Buying them with all my 2013 IRA Contributions. Buying them with dividends from my brokerage account. Buying them with 40% of new monies for investment in my workplace savings plan. Also did mild rebalancing to sell a bit of stocks to buy bonds.

Why? If I don't then my asset allocation will get of out whack. I am already fairly stock heavy for my age. And I am doing this with the knowledge that the returns of my bond investments are likely to be subdued for a while. I am a believer in asset allocation.

I am doing this same thing. Buying with new funds whatever is on sale and needed to bring our allocations back to where they should be.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Christine_NM »

RooseveltG wrote:I was not joking or baiting. I talk to many professionals and close to 100% are complacent about stocks and convinced interest rates will rise and bonds will fall. Even unsophisticated investors share that outlook. Aside from this forum, I have never seen this degree of consensus. It seems to be a mathematical certainty that stocks will greatly outperform bonds.

How can one argue with that?

Roosevelt.
You may be overestimating the bullish sentiment. The AAII investor sentiment for the week is here:

http://www.aaii.com/sentimentsurvey

Not all that rosy (which means, things are OK). I actually forgot that people keep official track of sentiment as a contrarian indicator. It's something I used to look at before Vanguard and Bogleheads.
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Re: Is it this easy: Stocks are safe, bonds are risky?

Post by Electron »

cflannagan wrote:I was under the impression that when interest rate rise, yes, the NAV falls, but eventually the NAV will return to the original level in the length of time roughly equal to the amount of interest rate risen multiplied by the average bond fund duration.

Over longer time frame, because of higher yields (due to risen interest rate), it will win out in overall total returns over lifetime (for example, 30-35 years is more than sufficient for short or intermediate bond funds to win out on overall total returns).
I was thinking more in terms of a ten year period where rates increase several times. You are correct about a longer time period where higher rates will eventually come through in total return.

See the Wiki topic on Duration and the Point of Indifference. Consider Total Return rather than NAV. The Point of Indifference assumes that income is reinvested in additional shares.

http://www.bogleheads.org/wiki/Bonds:_Advanced_Topics

Following a single increase in rates, one must wait for a period of time equal to the Duration of the fund to see the benefit of the higher rate. That would be in the range of 5.4 years for the bond index today.

Here is a chart that illustrates the Point of Indifference concept in graphical form.

http://www.bogleheads.org/forum/viewtop ... 0&t=120947
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