Rising Interest Environment

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Rising Interest Environment

Postby Brantley » Sun Sep 01, 2013 3:36 pm

Can someone help explain to me the hysteria that is occurring in the general populous regarding rising interest rates and bonds? Vanguard Total Bond Market (BND) has an average maturity of 7.4 years. Say interest rates rise for the next 5 years. Unless I am entering the distribution phase of my life in 12.4 (5+7.4) years, wouldn't I welcome higher interest rates? Yes, the interim value of BND will decrease as interest rates rise, and it will take an additional 7.4 years for the newest bonds purchased in the fund to mature, but why do I care about short term fluctuations if the bonds will be held to maturity? As bonds within BND mature during a rising interest rate environment, won't they be replaced by bonds yielding a higher return, thus resulting in increased return over the long run? Am I approaching this correctly?
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Re: Rising Interest Environment

Postby Cut-Throat » Sun Sep 01, 2013 5:04 pm

Yes, you are. As someone that is retired and is 70% Bonds, I am hoping for a rise in interest rates.

Here is the best graph I've seen illustrating this effect.

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Re: Rising Interest Environment

Postby Brantley » Sun Sep 01, 2013 5:15 pm

How far are you from taking distributions? Are you worried that if interest rates do rise over the next few years and you need to take distributions, you will be forced to realize the resulting losses?
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Re: Rising Interest Environment

Postby Brantley » Sun Sep 01, 2013 5:18 pm

Also can you explain this graph? Is this showing what will happen if yields increase 1% every 2 years?
Cut-Throat wrote:Yes, you are. As someone that is retired and is 70% Bonds, I am hoping for a rise in interest rates.

Here is the best graph I've seen illustrating this effect.

Image
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Re: Rising Interest Environment

Postby cflannagan » Sun Sep 01, 2013 5:23 pm

Brantley wrote:Also can you explain this graph? Is this showing what will happen if yields increase 1% every 2 years?
Cut-Throat wrote:Yes, you are. As someone that is retired and is 70% Bonds, I am hoping for a rise in interest rates.

Here is the best graph I've seen illustrating this effect.

Image


Yes. This graph was created by Electron, showing effects on NAV when interest rate rises. This graph illustrates what happens if rate was increased by 1% every 2 years.
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Re: Rising Interest Environment

Postby Cut-Throat » Sun Sep 01, 2013 6:30 pm

Brantley wrote:How far are you from taking distributions? Are you worried that if interest rates do rise over the next few years and you need to take distributions, you will be forced to realize the resulting losses?


I am not sure what you mean by 'distributions'. But, I have a large portfolio that will last about 40 years. Under no scenario would I sell all of my Bond Holdings in the next few years. The market goes up, the market goes down, but I drink good wine every day. :happy
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Re: Rising Interest Environment

Postby Brantley » Sun Sep 01, 2013 6:34 pm

Cut-Throat wrote:
Brantley wrote:How far are you from taking distributions? Are you worried that if interest rates do rise over the next few years and you need to take distributions, you will be forced to realize the resulting losses?


I am not sure what you mean by 'distributions'. But, I have a large portfolio that will last about 40 years. Under no scenario would I sell all of my Bond Holdings in the next few years. The market goes up, the market goes down, but I drink good wine every day. :happy


...RMDs/Withdrawals. You knew what I meant.

Red or white?
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Re: Rising Interest Environment

Postby The Wizard » Sun Sep 01, 2013 7:15 pm

cflannagan wrote:Yes. This graph was created by Electron, showing effects on NAV when interest rate rises. This graph illustrates what happens if rate was increased by 1% every 2 years.

What if interest rates increase by 0.05% every month?
Make a chart for that if you will...
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Re: Rising Interest Environment

Postby Cut-Throat » Sun Sep 01, 2013 7:16 pm

Brantley wrote:...RMDs/Withdrawals. You knew what I meant.

Red or white?


Tonight it's Red........I had no idea what you meant and I'll explain. If you meant RMD, that is still not ALL of your Bond Holdings. Also, since I am in my early 60s and am quite a few years away from RMDs, I am not exactly sure how I would do this. IOW - Uncle Sam is interested in getting his taxes, not necessarily how you invest or spend the proceeds.

As I understand RMDs, it simply means withdrawing your money from an IRA account and moving it to a Taxable Account. If you sell a Mutual Fund that is 70% Bonds in an IRA Account and Promptly Buy the same Mutual Fund in a Taxable Account......You pay the Taxes. I found this on a website that addresses this issue.

What you do with RMDs is generally up to you — you may be able to take distributions in cash or in kind (e.g. as stock) which you can then reinvest or move into a brokerage account. The amount of each year's RMD depends on your age and the account balance at the end of the previous year.

Can you explain how a Rising or Falling Interest rate environment would have any bearing on RMDs?
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Re: Rising Interest Environment

Postby Angst » Sun Sep 01, 2013 7:30 pm

Cut-Throat wrote:Yes, you are. As someone that is retired and is 70% Bonds, I am hoping for a rise in interest rates.

Here is the best graph I've seen illustrating this effect.

Great graph!! This might calm some of the hyperventilating long-term investors out there, if they only saw it. I suggest you re-post it as those threads continute to pop up. Thanks.
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Re: Rising Interest Environment

Postby magneto » Mon Sep 02, 2013 5:37 am

Yes it is a useful graph.

To compare the options available to the investor, would also like to see added to the graph how cash performs, while bonds are facing the capital loss headwind of rising interest rates.
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Re: Rising Interest Environment

Postby billyt » Mon Sep 02, 2013 7:06 am

Magneto:
The blue line on the graph shows how cash would perform at an identical starting rate. Cash does better early on, but loses in the end.
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Re: Rising Interest Environment

Postby Bustoff » Mon Sep 02, 2013 7:40 am

It's my understanding that during a period of rising interest rates, all dividends must be reinvested over the "duration" of the bond fund in order to simply break even. In theory, as the NAV of the bond fund decreases with rising rates the dividend is supposed to increase.

Now that the rate on 10 yr Treasuries are over 2.5%, I checked the dividend distributions of the Vanguard Total Bond Fund.
The dividend distributions show no increase in dividends even though rates have increased by a full percentage point over the past several months. Why aren't the dividends increasing with the rise in interest rates ?
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Re: Rising Interest Environment

Postby billyt » Mon Sep 02, 2013 7:58 am

Bustoff:

First of all, after a fall in NAV due to rising rates, waiting for the duration will get you back to where you would have been if the rate increase had not taken place (look at the graph!). Break even, back to the amount of money you had before the interest rate increase happened, occurs much sooner.

Second, in the calculation of forward returns, you take the NAV hit, and immediately start accruing interest at the new rate. This is to simplify the calculation, but is not what actually happens. In reality, the NAV itself will recover without any further rate increases, because the bonds in the fund will increase in value as they approach maturity, and the distribution will increase very gradually. The distributions will increase quite slowly. You can see this in TMB distributions, which have stopped falling and started rising since the rate increases. The combination of these two effects will produce the total return shown in the graphs.

Even if you don't reinvest the dividends, your NAV will gradually recover on its own, but your total return will naturally be less. Have a look at some NAV histories. You will see that they go up and down over a limited range that is related to the duration. The NAV's will neither continuously increase not continuously decrease.
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Re: Rising Interest Environment

Postby neurosphere » Mon Sep 02, 2013 6:10 pm

The Wizard wrote:
cflannagan wrote:Yes. This graph was created by Electron, showing effects on NAV when interest rate rises. This graph illustrates what happens if rate was increased by 1% every 2 years.

What if interest rates increase by 0.05% every month?
Make a chart for that if you will...


I agree! 0.05% per month for 20 years. That's the graph I want to see. :)
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Re: Rising Interest Environment

Postby Cut-Throat » Mon Sep 02, 2013 6:24 pm

neurosphere wrote:I agree! 0.05% per month for 20 years. That's the graph I want to see. :)


Why?......That is less than 2% for 20 years.....

That would not tell me much....
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Re: Rising Interest Environment

Postby neurosphere » Mon Sep 02, 2013 6:47 pm

Cut-Throat wrote:
neurosphere wrote:I agree! 0.05% per month for 20 years. That's the graph I want to see. :)


Why?......That is less than 2% for 20 years.....

That would not tell me much....


Hmm. 0.05% per month, times 12 months times 20 years = 0.05% x 12 X 20 = 12% rise in rates over those 20 years.

For some, fear of such a scenario prevents them from being in an intermediate or long-term bond fund. But an illustration of a long, sustained rise in interest rates over a prolonged period (followed by perhaps a plateau or decline) might help to assuage fears of interest rate increases for a long-term investor.
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Re: Rising Interest Environment

Postby Cut-Throat » Mon Sep 02, 2013 6:55 pm

neurosphere wrote:
Cut-Throat wrote:
neurosphere wrote:I agree! 0.05% per month for 20 years. That's the graph I want to see. :)


Why?......That is less than 2% for 20 years.....

That would not tell me much....


Hmm. 0.05% per month, times 12 months times 20 years = 0.05% x 12 X 20 = 12% rise in rates over those 20 years.

For some, fear of such a scenario prevents them from being in an intermediate or long-term bond fund. But an illustration of a long, sustained rise in interest rates over a prolonged period (followed by perhaps a plateau or decline) might help to assuage fears of interest rate increases for a long-term investor.


Yup, my math was faulty.... :oops:.......But, you are probably correct with this example.....It would appear to be a 'Dream Scenario' for someone invested in Bonds.
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Re: Rising Interest Environment

Postby Brantley » Mon Sep 02, 2013 10:24 pm

Cut-Throat wrote: As I understand RMDs, it simply means withdrawing your money from an IRA account and moving it to a Taxable Account. If you sell a Mutual Fund that is 70% Bonds in an IRA Account and Promptly Buy the same Mutual Fund in a Taxable Account......You pay the Taxes. I found this on a website that addresses this issue.

Can you explain how a Rising or Falling Interest rate environment would have any bearing on RMDs?


I was assuming you were using your nest egg to fund your retirement spending. As you begin to take distributions, you'd lock in the short term losses of your bond investments. If you're just reinvesting your RMDs/investment distributions then that's a different story. Also, I'm not sure you'd reinvest bond funds in a taxable account due to tax inefficiencies.
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Re: Rising Interest Environment

Postby cflannagan » Mon Sep 02, 2013 10:31 pm

The Wizard wrote:
cflannagan wrote:Yes. This graph was created by Electron, showing effects on NAV when interest rate rises. This graph illustrates what happens if rate was increased by 1% every 2 years.

What if interest rates increase by 0.05% every month?
Make a chart for that if you will...


You'd have to ask Electron. I didn't make the chart.
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Re: Rising Interest Environment

Postby Cut-Throat » Tue Sep 03, 2013 1:25 am

Brantley wrote:I was assuming you were using your nest egg to fund your retirement spending. As you begin to take distributions, you'd lock in the short term losses of your bond investments. If you're just reinvesting your RMDs/investment distributions then that's a different story. Also, I'm not sure you'd reinvest bond funds in a taxable account due to tax inefficiencies.


As I said, All of my Bond Investments would not be redeemed at once. This is no different than investing in the stock market, and then having stocks plunge 50%. Then you'd be 'locking in' your stock losses also when you took distributions.

The only Alternative is to stay 100% in cash, which I'm not going to do.
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Re: Rising Interest Environment

Postby Brantley » Tue Sep 03, 2013 6:24 am

Stable value fund? CDs? Etc? I agree with your standpoint, but I'm just playing devils advocate.
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Re: Rising Interest Environment

Postby longview » Tue Sep 03, 2013 8:30 am

One more graph request... what you really want is a graph to show the different between short, intermediate, and long-term bond funds.

It would be interesting to see the difference between the funds that lose less, and go up more quickly, vs losing more and going up slower (but the short term are starting from a lower spot). I personally struggle with Vanguard Intermediate Tax-Exempt (VWITX) vs Vanguard Limited-Term Tax-Exempt (VMLTX)... in the near term of rising rates.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)
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Re: Rising Interest Environment

Postby Red Rover » Tue Sep 03, 2013 9:25 am

Brantley wrote: Can someone help explain to me the hysteria that is occurring in the general populous regarding rising interest rates and bonds?


I think the hysteria is about the taper that must eventually occur. QE can't last forever and the taper is actually necessary, yet almost every day the media says "stocks fall based on taper uncertainty". I have to believe the market already has the taper effect accounted for and may actually rise once it starts and the world does not come to an end. :D

This article says it's more about the threat of rapid interest rate increases that markets and businesses aren't prepared for, and the effect on the housing market.

It's a theory. If the Fed tapers by cutting bond purchases, while continuing mortgage backed security purchases, we'll know that they think there might be something to the theory. Does it matter? Only time will tell. and like most, I think all will be OK for investors who demonstrate patience and don't panic. Time has fixed every market crash before, and if it happens again, the prudent investor must be prepared to wait it out.

http://www.thereformedbroker.com/2013/09/02/the-number-one-threat-to-the-market/
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Re: Rising Interest Environment

Postby dbr » Tue Sep 03, 2013 9:30 am

Brantley wrote:Can someone help explain to me the hysteria that is occurring in the general populous regarding rising interest rates and bonds?


Hysteria is a normal state of mind in the general population regarding anything that is the sensation du jour. This is enabled by the need of pundits to earn their salaries by sensationalizing something.
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Re: Rising Interest Environment

Postby Jfet » Tue Sep 03, 2013 1:28 pm

Well this is set to be the first year my Pimco total return bond fund in my 401K will yield a negative return. That is fun. If that is what you get from rising rates, then yay?
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Re: Rising Interest Environment

Postby MnD » Tue Sep 03, 2013 1:45 pm

I'll be interested to see if we get negative total numbers for 3 and 5-year total returns 2013-15 and 2013-17.
I'm expecting negative real returns for both, and negative 3-year and zero 5 year nominal and have positioned accordingly.
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Re: Rising Interest Environment

Postby dbr » Tue Sep 03, 2013 2:00 pm

Jfet wrote:Well this is set to be the first year my Pimco total return bond fund in my 401K will yield a negative return. That is fun. If that is what you get from rising rates, then yay?


What you get from rising rates is that eventually your retirement will not be screwed by not being able to get enough return to sustain withdrawals without taking too much risk.
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Re: Rising Interest Environment

Postby cflannagan » Tue Sep 03, 2013 2:04 pm

Being in cash would be even worse, wouldn't it?

Instead of softening the effects of inflation, my "FI" allocation is going to feel the full force of inflation.

I don't really have much choice in my 401k. There's money market, which will make me pennies or high-yield, which is basically taking on risk that equals to the equity risk.
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Re: Rising Interest Environment

Postby Electron » Sun Dec 01, 2013 10:32 pm

The Wizard wrote:
cflannagan wrote:This graph was created by Electron, showing effects on NAV when interest rate rises. This graph illustrates what happens if rate was increased by 1% every 2 years.

What if interest rates increase by 0.05% every month?
Make a chart for that if you will...

I ran across this thread and thought it would be worth illustrating that example.

To make the chart readable, I chose an annual rate increase of 0.60%. The chart assumes starting with the Total Bond Index with an SEC yield of 2% and a duration of 5.5 years. A total of nine rate increases are shown.

A link is also provided for the thread on Point of Indifference.

viewtopic.php?f=10&t=120947

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Re: Rising Interest Environment

Postby garlandwhizzer » Mon Dec 02, 2013 12:23 pm

I find it interesting that many on this forum commenting on bond performance during a rising interest rate environment from the current very low interest rates are comforted that just holding onto their bond funds will in 4 or 7 years will bring them back to even in nominal dollars. It seems to be the opposite with stocks. When they tank, many panic and rush to sell at depressed values as if stocks aren't ever going to stage a come back. People seem to be comfortable with hemorrhaging by a thousand paper cuts over multiple years (bonds) but when there is a sudden collapse in equities, they don't listen to the same reasonable expectations for a recovery in value over time. It seems that emotions are far more important in investment decisions than looking objectively at the situation. Historically, stock collapses in the US have always been followed by bull markets, just as they did this time after 2008-9, and just as bonds always do if you hold them long enough. The mechanics of market declines between stocks and bonds are different in the degree, not kind. Things that go down eventually go back up again if you hold on, or so it has been in this country for the last 140 years.

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Re: Rising Interest Environment

Postby placeholder » Mon Dec 02, 2013 12:45 pm

garlandwhizzer wrote:When they tank, many panic and rush to sell at depressed values as if stocks aren't ever going to stage a come back.

Where do you see large-scale recommendation on THIS SITE for that?
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Re: Rising Interest Environment

Postby billyt » Mon Dec 02, 2013 1:44 pm

Garland Whizzer: As you well know, the fundamental difference between bonds and stocks is that bonds include the promise to repay the initial investment. No such explicit promise from stocks.
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Re: Rising Interest Environment

Postby The Wizard » Mon Dec 02, 2013 1:49 pm

billyt wrote:Garland Whizzer: As you well know, the fundamental difference between bonds and stocks is that bonds include the promise to repay the initial investment. No such explicit promise from stocks.

That is ESPECIALLY true for individual stocks, yes.
For TSM, while there's no Explicit Promise, there may well be a long term uptrend...
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Re: Rising Interest Environment

Postby ogd » Mon Dec 02, 2013 2:14 pm

garlandwhizzer wrote:The mechanics of market declines between stocks and bonds are different in the degree, not kind.

Garland: the degree matters a great deal, wouldn't you say? In the bonds case we're talking about 2-3% declines here and there (rate increase hits dampened by interest). In the stock market case we're talking about 50% declines that have a habit of coinciding with job losses, i.e. needing the money. Not the same thing.

I would argue that there are significant differences in kind as well: bond bear markets are inevitably followed by higher rates, whereas bull markets have a peculiar way of lowering investor returns in the long term. For example, an investor holding bonds since 1980 would have been 3-4 times richer if no bull market had occured at all. Can you imagine saying anything of the kind for stocks?

What really irks me about market timing in bonds vs stocks is the assumption that one can somehow outmaneuver the former even while acknowledging that timing the latter is useless. The bond market has a ridiculously good track record of predicting its own returns, whereas the stock market, as we know, is all over the place. This should hardly be a surprise, as the assets underlying the bond market are essentially pieces of paper with dates and amounts written on them, which usually get paid. As opposed to "the effects of globalization on US manufacturing" or "the migration to the digital office" and other known and unknown unknowns.

I know, you want to talk about inflation -- but note that the title of the thread is not "Rising Inflation Environment", probably because that kind of prediction has become a laughingstock over the last 3-4 years.
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Re: Rising Interest Environment

Postby Steadfast » Mon Dec 02, 2013 2:31 pm

This is an article that I found helpful in understanding how bond funds behave in a rising interest rate environment:

http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/bonds/should_you_worry_about_bond_funds_if_interest_rates_rise.html

I think all of the noise around this is partly due to the fact that many investors today have never dealt with a rising interest rate environment. The take-home message for my age and risk tolerance is to stay the course.
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Re: Rising Interest Environment

Postby billyt » Mon Dec 02, 2013 3:23 pm

It is clear that if you are committed to continue holding bonds funds as a permanent portion of your portfolio, then you want interest rates to rise. Every time that NAV drops, it should put a big smile on your face.
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Re: Rising Interest Environment

Postby garlandwhizzer » Mon Dec 02, 2013 3:40 pm

Clarification: I am not arguing against holding bonds. I always hold 25%+ bonds and cash in my portfolio, the lowest level of "safe" assets that I am ever comfortable with. Nothing diversifies the volatility of equities as well as high quality bonds and they are always liquid. I am merely pointing out that emotions play a considerable role in investor behavior which I don't think is shocking news. We are more willing to stay the course with minor and sustained losses for 5 -7 years than severe short losses in spite of the fact that history demonstrates that both will inevitably recover if dividends (stocks) and interest (bonds) are reinvested over time. I believe the basis for this behavior is largely emotional but that doesn't mean it's not a valid approach to allow you to sleep at night.

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Re: Rising Interest Environment

Postby Cut-Throat » Mon Dec 02, 2013 6:15 pm

garlandwhizzer wrote:Clarification: I am not arguing against holding bonds. I always hold 25%+ bonds and cash in my portfolio, the lowest level of "safe" assets that I am ever comfortable with. Nothing diversifies the volatility of equities as well as high quality bonds and they are always liquid. I am merely pointing out that emotions play a considerable role in investor behavior which I don't think is shocking news. We are more willing to stay the course with minor and sustained losses for 5 -7 years than severe short losses in spite of the fact that history demonstrates that both will inevitably recover if dividends (stocks) and interest (bonds) are reinvested over time. I believe the basis for this behavior is largely emotional but that doesn't mean it's not a valid approach to allow you to sleep at night.

Garland Whizzer


Who says stock losses are 'Short'?.......They may take a Decade or more to recover. That has not been the case recently, but if you go back to the depression or the 1960s to 1980, if was not a short period at all. If you are retired and drawing your portfolio down this would not be acceptable. It's not necessarily about the 'recovery of losses, if you're retired, it's mostly about the Magnitude of the losses.

Clarification: I am not arguing against holding stocks. I always hold 30%+ Stocks in my Portfolio, the highest level of 'risky' assets that I am ever comfortable with.
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Re: Rising Interest Environment

Postby garlandwhizzer » Mon Dec 02, 2013 6:59 pm

Cut-throat wrote:
Who says stock losses are 'Short'?.......They may take a Decade or more to recover. That has not been the case recently, but if you go back to the depression or the 1960s to 1980, if was not a short period at all. If you are retired and drawing your portfolio down this would not be acceptable. It's not necessarily about the 'recovery of losses, if you're retired, it's mostly about the Magnitude of the losses.


True that stocks can stay down for a long time but so can bonds, in fact for even longer. Measured in real inflation adjusted dollars, bonds lost substantial real purchasing power for the 40 years from 1941 to 1982. As Bernstein, a lover of bonds, says when discussing shallow risk versus deep risk, there are multi-decade periods in which bonds lose in real dollar terms. He calls that deep risk, sufficient to doom an investor over an entire lifetime of investing. This is not theoretical, such multi-decade periods have happened in every country he studied. We just happen to have lived through several decades of decreasing inflation which has been great for bonds and why we tend to think of bonds as safe. But the future is very unlikely to be a carbon copy of the past. The deep risk with bonds comes with inflation which is unpredictable over the intermediate and long term. Because we haven't seen increasing inflation for 30+ years does not mean that it will not return. Bonds offer excellent protection from the volatility of stocks, but that does not mean that they are risk-free. Recency bias suggests they are safe. Those who held bonds from 1940 - 1981 wouldn't agree with their safety.

No one knows the future, but one thing is certain. Nothing--not bonds, stocks, cash, real estate, commodities, gold--is always risk-free. Freedom from risk is a cherished concept in our minds, but it doesn't exist in the real life investing world. You can trade risk for return up to a point, but in my opinion you cannot trade away all risk in all circumstances.

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Re: Rising Interest Environment

Postby Cut-Throat » Mon Dec 02, 2013 7:16 pm

garlandwhizzer wrote:Cut-throat wrote:
Who says stock losses are 'Short'?.......They may take a Decade or more to recover. That has not been the case recently, but if you go back to the depression or the 1960s to 1980, if was not a short period at all. If you are retired and drawing your portfolio down this would not be acceptable. It's not necessarily about the 'recovery of losses, if you're retired, it's mostly about the Magnitude of the losses.


True that stocks can stay down for a long time but so can bonds, in fact for even longer. Measured in real inflation adjusted dollars, bonds lost substantial real purchasing power for the 40 years from 1941 to 1982. As Bernstein, a lover of bonds, says when discussing shallow risk versus deep risk, there are multi-decade periods in which bonds lose in real dollar terms. He calls that deep risk, sufficient to doom an investor over an entire lifetime of investing. This is not theoretical, such multi-decade periods have happened in every country he studied. We just happen to have lived through several decades of decreasing inflation which has been great for bonds and why we tend to think of bonds as safe. But the future is very unlikely to be a carbon copy of the past. The deep risk with bonds comes with inflation which is unpredictable over the intermediate and long term. Because we haven't seen increasing inflation for 30+ years does not mean that it will not return. Bonds offer excellent protection from the volatility of stocks, but that does not mean that they are risk-free. Recency bias suggests they are safe. Those who held bonds from 1940 - 1981 wouldn't agree with their safety.

No one knows the future, but one thing is certain. Nothing--not bonds, stocks, cash, real estate, commodities, gold--is always risk-free. Freedom from risk is a cherished concept in our minds, but it doesn't exist in the real life investing world. You can trade risk for return up to a point, but in my opinion you cannot trade away all risk in all circumstances.

Garland Whizzer


And as you say, nothing is 'risk free', but that is not a good reason to shift your asset allocation to stock heavy.
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Re: Rising Interest Environment

Postby Rodc » Mon Dec 02, 2013 7:32 pm

Cut-Throat wrote:
neurosphere wrote:
Cut-Throat wrote:
neurosphere wrote:I agree! 0.05% per month for 20 years. That's the graph I want to see. :)


Why?......That is less than 2% for 20 years.....

That would not tell me much....


Hmm. 0.05% per month, times 12 months times 20 years = 0.05% x 12 X 20 = 12% rise in rates over those 20 years.

For some, fear of such a scenario prevents them from being in an intermediate or long-term bond fund. But an illustration of a long, sustained rise in interest rates over a prolonged period (followed by perhaps a plateau or decline) might help to assuage fears of interest rate increases for a long-term investor.


Yup, my math was faulty.... :oops:.......But, you are probably correct with this example.....It would appear to be a 'Dream Scenario' for someone invested in Bonds.


20 years of increasing interest rates is a dream?

The opposite led to the greatest bond period when rates dropped for this long starting in the early 1980s. For the most effected, long bonds, they briefly beat TSM over the 20 year period.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Rising Interest Environment

Postby Rodc » Mon Dec 02, 2013 7:34 pm

garlandwhizzer wrote:Cut-throat wrote:
Who says stock losses are 'Short'?.......They may take a Decade or more to recover. That has not been the case recently, but if you go back to the depression or the 1960s to 1980, if was not a short period at all. If you are retired and drawing your portfolio down this would not be acceptable. It's not necessarily about the 'recovery of losses, if you're retired, it's mostly about the Magnitude of the losses.


True that stocks can stay down for a long time but so can bonds, in fact for even longer. Measured in real inflation adjusted dollars, bonds lost substantial real purchasing power for the 40 years from 1941 to 1982. As Bernstein, a lover of bonds, says when discussing shallow risk versus deep risk, there are multi-decade periods in which bonds lose in real dollar terms. He calls that deep risk, sufficient to doom an investor over an entire lifetime of investing. This is not theoretical, such multi-decade periods have happened in every country he studied. We just happen to have lived through several decades of decreasing inflation which has been great for bonds and why we tend to think of bonds as safe. But the future is very unlikely to be a carbon copy of the past. The deep risk with bonds comes with inflation which is unpredictable over the intermediate and long term. Because we haven't seen increasing inflation for 30+ years does not mean that it will not return. Bonds offer excellent protection from the volatility of stocks, but that does not mean that they are risk-free. Recency bias suggests they are safe. Those who held bonds from 1940 - 1981 wouldn't agree with their safety.

No one knows the future, but one thing is certain. Nothing--not bonds, stocks, cash, real estate, commodities, gold--is always risk-free. Freedom from risk is a cherished concept in our minds, but it doesn't exist in the real life investing world. You can trade risk for return up to a point, but in my opinion you cannot trade away all risk in all circumstances.

Garland Whizzer


Absolutely true.

A good reason to include a healthy dose of long TIPS in a portfolio it seems to me. Not perfect but better than nominal bonds (which I also hold).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Rising Interest Environment

Postby Cut-Throat » Mon Dec 02, 2013 8:24 pm

Rodc wrote:20 years of increasing interest rates is a dream?

The opposite led to the greatest bond period when rates dropped for this long starting in the early 1980s. For the most effected, long bonds, they briefly beat TSM over the 20 year period.


Yes, rising interest rates are great for Bonds over time........ The greatest period that you refereed to started out with high interest rates for Bonds. They had a ways to fall.

Keeping Bond rates low at this point is not good for Bond Investors.
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Re: Rising Interest Environment

Postby Rodc » Tue Dec 03, 2013 8:40 pm

Cut-Throat wrote:
Rodc wrote:20 years of increasing interest rates is a dream?

The opposite led to the greatest bond period when rates dropped for this long starting in the early 1980s. For the most effected, long bonds, they briefly beat TSM over the 20 year period.


Yes, rising interest rates are great for Bonds over time........ The greatest period that you refereed to started out with high interest rates for Bonds. They had a ways to fall.

Keeping Bond rates low at this point is not good for Bond Investors.


Well eventually sure. If they rise steadily for the next 20 years and then drop for 20 years, I might be happy in 40 years at age 96. :)

Unfortunately from here I don't see any happiness in bonds for a very long time. Maybe in 10 years things will look a little better for those starting to buy bonds, I don't know. Who knows, maybe a little quicker. Hopefully not later.

What you are really saying is that if we ever want to see bond do decently we have to take our pain of rehab. Yes rehab is good for you in the long run but it is still painful.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Rising Interest Environment

Postby elgob.bogle » Wed Dec 04, 2013 1:59 pm

RodC suggested "include a healthy dose of long TIPS in a portfolio ". Would you think that my 58yo spouse would benefit for participating in the upcoming (Feb 2014) Treasury Auction of 30yr TIPS? HAs she reached the age where she shouldn't buy 30-year TIPS?

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Re: Rising Interest Environment

Postby alexost » Wed Dec 04, 2013 3:18 pm

garlandwhizzer wrote:

True that stocks can stay down for a long time but so can bonds, in fact for even longer. Measured in real inflation adjusted dollars, bonds lost substantial real purchasing power for the 40 years from 1941 to 1982. As Bernstein, a lover of bonds, says when discussing shallow risk versus deep risk, there are multi-decade periods in which bonds lose in real dollar terms. He calls that deep risk, sufficient to doom an investor over an entire lifetime of investing. This is not theoretical, such multi-decade periods have happened in every country he studied. We just happen to have lived through several decades of decreasing inflation which has been great for bonds and why we tend to think of bonds as safe. But the future is very unlikely to be a carbon copy of the past. The deep risk with bonds comes with inflation which is unpredictable over the intermediate and long term. Because we haven't seen increasing inflation for 30+ years does not mean that it will not return. Bonds offer excellent protection from the volatility of stocks, but that does not mean that they are risk-free. Recency bias suggests they are safe. Those who held bonds from 1940 - 1981 wouldn't agree with their safety.

No one knows the future, but one thing is certain. Nothing--not bonds, stocks, cash, real estate, commodities, gold--is always risk-free. Freedom from risk is a cherished concept in our minds, but it doesn't exist in the real life investing world. You can trade risk for return up to a point, but in my opinion you cannot trade away all risk in all circumstances.

Garland Whizzer


This scenario worries me. Jeremy Siegel concurs in this lecture (about 17 minutes in) that we might be in for a period similar to 41-82 where bonds have negative real returns.

http://blogs.cfainstitute.org/investor/ ... -long-run/

I hope as I gradually increase my retirement account bond holdings over the next 25 years that money doesn't lose purchasing power.
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Re: Rising Interest Environment

Postby billyt » Wed Dec 04, 2013 3:36 pm

Thank goodness we have TIPS which can guarantee a positive real rate of return.
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