Why I won't have bond funds

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toto238
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Why I won't have bond funds

Post by toto238 »

http://time.com/money/3524487/retiremen ... nds-avoid/

Interesting opinion piece on Time.

"I would love to find a bond fund that could be both a safe haven and could provide steady returns, but I just don’t think that exists anymore."

My question is: did such a bond fund ever exist? By her standards, there used to be magical bond funds that reduced risk without hurting return at all, and never carried any risk at all. You could essentially get a free return. In hindsight, the bond bull market of the past 30+ years looks pretty great. But 30 years ago you didn't know with certainty that it would be that way. Just like right now we don't know what the next 30 years of bonds will look like. The next 30 years may be BETTER than the last 30 years for bonds. Or they could be worse. We just don't know.

But I look at the fundamentals of it. A bond holder gets paid before a stockholder. A bond interest payment is guaranteed by the issuer. Dividends can be ended by the company whenever they like. In case of bankruptcy, stockholders don't see a penny until every single bondholder gets their money back. Bonds are by their very nature, less risky. They aren't meant to boost return. They never were. If you're having trouble sleeping at night thinking about rising interest rates, then go into short term bonds. Interest rate hikes have ALWAYS been a risk for bonds and always will be. If you take on more risk, you get more reward.

Is there anything in the article that makes you question holding bonds?
HurdyGurdy
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Re: Why I won't have bond funds

Post by HurdyGurdy »

She may have no incentive to mention CDs or Savings Bonds.
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MossySF
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Re: Why I won't have bond funds

Post by MossySF »

The author is pining for the high inflation days of the 1970s because back then, you could pick up bonds at 15% nominal interest.
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Re: Why I won't have bond funds

Post by staythecourse »

MossySF wrote:The author is pining for the high inflation days of the 1970s because back then, you could pick up bonds at 15% nominal interest.
Funny how the human mind works. In 2010 or so when interest rates were near zero I found it funny that folks were wishing for the those good old late 70's again. I would just kindly remind them they had it now as real interest rates at that time and now were both near zero.

Good luck.
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JoMoney
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Re: Why I won't have bond funds

Post by JoMoney »

...I would love to find a bond fund that could be both a safe haven and could provide steady returns, but I just don’t think that exists anymore.
The other side of this though, is that there are no equity funds that are a "safe haven and provide steady returns" either. If you decide to save your money your options are pretty much to either accept what the bond market is willing to give, or accept the risks of hoped for future stock returns that may or may not materialize over whatever time period you're looking at.
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Re: Why I won't have bond funds

Post by madbrain »

I wonder what kind of crystal ball the author has.

And I don't share her pessimism about the junk bonds.
Junk bonds are actually less vulnerable to interest rate risk than safer, lower-yield bonds.
What makes them risky is not the interest rate risk, but the credit risk.

If interest rates go up, this will put downward pressure on both stock prices and bond prices.
Unless the yield on equities also goes up, equity prices will go down more than bond prices.
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Re: Why I won't have bond funds

Post by Call_Me_Op »

toto238 wrote:The next 30 years may be BETTER than the last 30 years for bonds.
Interestingly, this scenario can only occur if one's bonds have relatively short duration and would involve a dramatic increase in interest rates over the near term.
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Re: Why I won't have bond funds

Post by bigred77 »

If we get anything close to the 70s again I will start loading up on individual 30 yr STRIPS in tax advantaged accounts.
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Re: Why I won't have bond funds

Post by abuss368 »

I did read this article earlier today. I am not aware of many investors who have the stomach for that. Second, I found during the Great Recession that having bond funds provided a pool of funds that allowed us to rebalance into equities (along with fresh funds). Looking back, it was an excellent strategy that paid dividends. I plan to follow the same strategy in the next downturn.

Best.
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Re: Why I won't have bond funds

Post by Grt2bOutdoors »

I wonder how many clients of Arden get a warm and fuzzy feeling reading that gibberish.
The author fails to back up her "analysis" with the actual math behind total return of a bond fund. :oops: The author clearly does not understand the mechanics of asset allocation, diversification, how promissory notes work, and I believe is a victim of recency bias - "rates will rise, the coming bond apocalypse, omg - run for the hills, listening to Leon and Warren and likely is a serial viewer of CNBC and the fast money segment on it". :oops: :oops:

Here's a tip for the author of that article - if the returns aren't there and you want to retire, save more and spend less. You too, can retire one day!
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Re: Why I won't have bond funds

Post by Grt2bOutdoors »

MossySF wrote:The author is pining for the high inflation days of the 1970s because back then, you could pick up bonds at 15% nominal interest.
The author doesn't remember the 1970's except the bell bottom pants because the author was still a child. I remember the oil embargo and waiting in a very long line for gasoline. Needless to say, I for one am not pining for a return of those days.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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tadamsmar
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Re: Why I won't have bond funds

Post by tadamsmar »

From the article:
Today we have an environment where rates have very little room to fall and at some point will go up (we just don’t know when).
Actually, today we have an environment where rates can fall up to 100% and that's the same environment we have everyday.
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tadamsmar
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Re: Why I won't have bond funds

Post by tadamsmar »

From the article:
My greatest risk is not growing my retirement account as much as humanly possible over the next ten to 15 years.
Actually, your greatest risk is not saving enough in an environment where returns in general (on bonds and stocks) are expected to be low.
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Re: Why I won't have bond funds

Post by Tigermoose »

madbrain wrote: And I don't share her pessimism about the junk bonds.
Junk bonds are actually less vulnerable to interest rate risk than safer, lower-yield bonds.
What makes them risky is not the interest rate risk, but the credit risk.
.
The author was talking about liquidity risk, I believe, as a rather big problem for junk right now.
Institutions matter
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Re: Why I won't have bond funds

Post by madbrain »

Tigermoose wrote:
madbrain wrote: And I don't share her pessimism about the junk bonds.
Junk bonds are actually less vulnerable to interest rate risk than safer, lower-yield bonds.
What makes them risky is not the interest rate risk, but the credit risk.
.
The author was talking about liquidity risk, I believe, as a rather big problem for junk right now.
Actually, she said liquidity for junk could be a problem in the future - but it doesn't seem to be a problem now. I would like to see under what scenario this would happen, and how this would affect my Vanguard and Fidelity junk bond funds which are also managed, not indexed.

And she starts by mentioning interest rate risk, saying that junk bonds "are also vulnerable to rate hikes", while failing to mention that they are less vulnerable than other bonds. If new safe bonds are yielding 3% and rates jump to 4%, new junk rates might jump from 6 to 7%, and the impact on existing junk bond prices would be lower than for existing safe bonds. The call risk on existing junk bonds would also decrease since they would be unlikely to be refinanced at new higher rates. Of course, the credit risk would still be there.
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Re: Why I won't have bond funds

Post by nisiprius »

Sigh. Yet another example of confusing risk and return. Low return is not the same thing as risk. Low return sucks, but it doesn't make bonds "unsafe." It just makes them low in return.

And of course, to the question "I wonder: is there some kind of bond that’s immune to interest rate rises that I don’t know about?" the obvious answer is "United States Series I savings bonds are immune to interest rate risk; don't you know about them?"
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Re: Why I won't have bond funds

Post by Louis Winthorpe III »

My greatest risk is not growing my retirement account as much as humanly possible over the next ten to 15 years. To meet that goal, I think I should stick with equities and use any future crashes as buying opportunities. I’m not 100% comfortable with that decision, but I don’t feel I have much choice.
She is missing the obvious alternative: maintain the same risk profile but save more.
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nisiprius
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Re: Why I won't have bond funds

Post by nisiprius »

Sigh.
Today we have an environment where rates have very little room to fall and at some point will go up (we just don’t know when). Once rates finally rise, bond prices will fall, which means investors will lose money.
The 10-year Treasury rate is 2.21%. It's down from 3%. It had plenty of "room to fall." It has been falling. Just a short-term thing, I think, but that's what's been happening.

"At some point will go up (we just don't know when)." We do know when. It already went up, from 1.5% to 3%, in the last half of 2013.

Will it go up again sometime? They might. A lot more? Maybe, maybe not. Could it they go down more from 2.21%? It could. It could do a lot of things. The future is not set in stone.

"When rates rise, bond prices will fall," True. "which means investors will lose money." False. It ain't necessarily so. They will lose money if they are short-term speculators who care only about the price of the bond. If they are long term investors who aren't throwing away the interest payments, they will probably will make money. Individual bondholders who buy an individual bond and hold it to maturity will make money no matter what happens to interest rates during the term of the bond. Maybe not much, maybe not as much as something else, maybe not as much as Konigsberg will like, maybe not a positive real return, but unless the bond defaults they will not lose money.
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Re: Why I won't have bond funds

Post by rjb112 »

When investment luminaries like Burton Malkiel and Charles "Charley" Ellis echo similar thoughts (about bonds) to the article in question, it makes one take it more seriously.

Malkiel: "Well I’m actually rather worried about the bond market. I think people should remember history. The last time US government bond yields were as low as they are today was at the end of World War II, because we pegged interest rates very low to finance the large government deficit. Rates stayed low into the early 1950s and then started rising steadily till 1980. As those interest rates rose, bond prices fell, bonds became very, very volatile, and those who don’t remember history I think are doomed to repeat it. We’re in the same situation now. We’re financing our large debt with what’s called financial repression, keeping interest rates very, very low. As interest rates normalize, this is not going to be a good place for the bond investor."

From another article, Nov 27, 2013
"The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40," Malkiel, a Princeton professor and Wealthfront chief investment officer, told CNBC. "It's a totally reasonable thing to want stability, but it is not clear to me that that means bonds, or U.S. bonds, specifically."

"When Malkiel first wrote his book, bond yields were much higher. With total bond market yields now around 2.4 percent, he says investors should hold more high-quality dividend growth stocks as well as some bonds of foreign countries with low debt-to-GDP yields and relatively high yields."

In an article on May 24, 2014 Malkiel wrote:
"I think US Treasury Bonds are a little frightening today when you look at near record-low interest rates, our dysfunctional federal government and how hard it is for us to rein in our structural budget deficit"
"..........To manage this, the US government is orchestrating Financial Repression where the Federal Reserve keeps interest rates extremely low for an extended period of time. The last time the 10-year treasury yielded around 2.5% was following World War II, when we had a debt-to-GDP ratio over 100%, much higher than it is now"
(then he mentions some possibilities: muni bond, investment grade corporates, and investing in dividend paying stocks)

Charles Ellis said this in October 2013:
"I'm usually skeptical when someone says, 'This time it's different,' but once in a great while it is," says investment consultant Charles Ellis, author of Winning the Loser's Game. "You really need to think twice about owning bonds today."
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Re: Why I won't have bond funds

Post by Pizzasteve510 »

Makes me think there is not enough profit in buy and hold bond investors so the 'advertising' is pushing 'other.'' I worked in Japan in the early 90s and almost bought long yen denominated bonds. So sad I didn't. Everyone was pushing equities. With interest stuck near zero for 20 years, stocks sank, and the stronger yen stifled growth. Bonds were a great alternative, briefly, before interest rates fell too far. I would have loved 5% nominal in yen. The tax hassles were too much so I closed my local accounts when I moved out of Japan.

I suspect 2-3pct may look very good 10 years from now under some scenarios. Too many people can't fathom how 1-2% real is an excellent return under 0pct nominal interest environments. Some very smart friends of mine think 0pct growth may be the new normal, absent technology innovations that are able to spur 'capturable' productivity gains. Are we at the end if a growth cycle?
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toto238
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Re: Why I won't have bond funds

Post by toto238 »

Call_Me_Op wrote:
toto238 wrote:The next 30 years may be BETTER than the last 30 years for bonds.
Interestingly, this scenario can only occur if one's bonds have relatively short duration and would involve a dramatic increase in interest rates over the near term.
Maybe not. Imagine a situation of massive deflation, in which investors are so desperate for the positive nominal return of a Treasury Bond they're willing to pay a huge premium for it. In fact, they'd buy a Treasury bond with a negative coupon just to avoid the even bigger real loss they would experience keeping the money in cash. Is it likely to occur? maybe not. Is it impossible? Surely not.
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Re: Why I won't have bond funds

Post by nisiprius »

rjb112 wrote:...In an article on May 24, 2014 Malkiel wrote:
"I think US Treasury Bonds are a little frightening today when you look at near record-low interest rates, our dysfunctional federal government and how hard it is for us to rein in our structural budget deficit"...
So let me be sure I have this right.

In 2010, Burton Malkiel and Charles D. Ellis publish The Elements of Investing, and say:
...One asset class that belongs in most portfolios is bonds...

...just as you should diversify by holding a broadly diversified stock fund, so should you hold a broadly diversified bond fund...

...The U.S. Treasury issues large amounts of bonds. These issues are considered the safest of all and these bonds are the one type of security where diversification is not essential...

...High-quality bonds can moderate the risk of a common stock portfolio by providing offsetting variations to the inevitable ups and downs of the stock market...

...Put your long-term investments into low-cost index funds.... For your bonds, choose a total U.S. bond market index fund...

...As you get older, change the mix toward bond investments as the tables indicate.... Once a year, rebalance your portfolio to the stock–bond balance that is right for you.

...We recommend a substantial allocation to bonds for investors in retirement because bonds provide a relatively steady source of income for living expenses...

"Stay the course and ignore market fluctuations; they are likely to lead to serious and costly investing mistakes.

...Focus on the long term.
Just three years later, in the 2013 2nd edition of The Elements of Investing, everything is out the window. Don't use a "total U.S. bond market index fund," use 50% emerging markets bonds and 50% dividend stocks. And why?

Have I got this straight?
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Re: Why I won't have bond funds

Post by bhsince87 »

She says she'll take advantage of stock market crashes as buying opportunities.

I wonder where she'll hold her money while she waits for those crashes?
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tadamsmar
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Re: Why I won't have bond funds

Post by tadamsmar »

nisi,

Your plot just shows a recently improving economy and recent flat outlays that really don't bear much on the actual concern. The actual concern is more the federal outlay growth that is built into federal law and viewed as hard to repeal and hard to overcome with a growing economy.

Your plot has little to do with the future structural deficit.

It's like one thinking that a good yearly check up is evidence that you will not be dead in a few decades.
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Re: Why I won't have bond funds

Post by rjb112 »

nisiprius wrote:So let me be sure I have this right.

In 2010, Burton Malkiel and Charles D. Ellis publish The Elements of Investing, and say..
...One asset class that belongs in most portfolios is bonds...

Just three years later, in the 2013 2nd edition of The Elements of Investing, everything is out the window. Don't use a "total U.S. bond market index fund," use 50% emerging markets bonds and 50% dividend stocks. And why?
+++++++++++++++++++++++++++++++++++++++++++

You're right, their current thinking on bonds is a big change from what they wrote in 2010, per the quotes in your post.

Looks like the 10-year Treasury bond had a yield of 3.85% on January 4, 2010

Three years later, on January 4, 2013, the 10-year Treasury had a yield of 1.93%

Apparently that drop in interest rates/bond yields was enough for them to change their minds.

The question is, how low does the yield on the 10-year Treasury have to go before those bonds become unattractive for investment?

It appears that even Mr. Bogle has had a change in his position on the total bond market index. Was he also possibly influenced by the low yields that prompted the change in the thinking of Malkiel/Ellis?

[Mr. Bogle now thinks that the total market index is a "flawed index", and should be combined with an investment grade corporate bond fund]
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Re: Why I won't have bond funds

Post by Chan_va »

rjb112 wrote:
The question is, how low does the yield on the 10-year Treasury have to go before those bonds become unattractive for investment?
Unattractive compared to what? Investing is not like monopoly (in the version I used to play) where skipping your turn is an option. So the question is, where would you put the money you would have otherwise put into treasuries? Increase your equity allocation? Cash? Other?

The yields are unattractive I admit, but I don't see any options to bonds if I want a portfolio with a level of risk I can stomach. So I grit my teeth and invest in them.
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Re: Why I won't have bond funds

Post by Tigermoose »

I've been reading Siegel's Stocks for the Long Run the last couple of days...

Siegel makes the case that there is a current high demand for bonds currently because people fear deflation (crashes) more than the fear inflation. US Government treasuries have a "safe haven" status that is making them more about return of principal than return. Siegel argues that there could be a significant loss of shareholder value in bonds if the fear switches to fear of inflation rather than fear of deflation. If that happens, US Government Treasuries will NOT be the asset of choice for stability in one's portfolio. On top of this, there will be losses due to interest rate risk. For those of us in our accumulation phase, it really makes you wonder what the point of bonds is if you can just weather the short term volatility.

He also points out that in periods of inflationary risk, stocks and bonds have a positive correlation rather than a negative. That would also undermine a major reason for holding treasury bonds.
Institutions matter
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Re: Why I won't have bond funds

Post by oneleaf »

rjb112 wrote: [Mr. Bogle now thinks that the total market index is a "flawed index", and should be combined with an investment grade corporate bond fund]
Mr. Bogle never liked the total bond market index and always considered it flawed. He has always preferred investment grade or the intermediate term bond index fund.
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Re: Why I won't have bond funds

Post by kenner »

oneleaf wrote:
rjb112 wrote: [Mr. Bogle now thinks that the total market index is a "flawed index", and should be combined with an investment grade corporate bond fund]
Mr. Bogle never liked the total bond market index and always considered it flawed. He has always preferred investment grade or the intermediate term bond index fund.
What is Mr. Bogle's rationale for considering TBM to be flawed?

I do recall that he recommended corporate bond funds, but I thought that recommendation was for the higher yields.
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Re: Why I won't have bond funds

Post by oneleaf »

kenner wrote:
oneleaf wrote:
rjb112 wrote: [Mr. Bogle now thinks that the total market index is a "flawed index", and should be combined with an investment grade corporate bond fund]
Mr. Bogle never liked the total bond market index and always considered it flawed. He has always preferred investment grade or the intermediate term bond index fund.
What is Mr. Bogle's rationale for considering TBM to be flawed?

I do recall that he recommended corporate bond funds, but I thought that recommendation was for the higher yields.
I have read articles over the years that sometimes claims he invests in total bond market index fund, and others where he is critical of it. But it all stems in his skepticism towards GNMA mortgage-backed securities, which TBM owns a very substantial portion of. Many years ago, I read something from him where he recommended the intermediate term Bond Index fund over the total bond market index fund, for this reason. As for now, maybe he has different reasons for believing it is a flawed index, but he does have a history of having concerns about the fund.
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Re: Why I won't have bond funds

Post by Johno »

nisiprius wrote:
rjb112 wrote:...In an article on May 24, 2014 Malkiel wrote:
"I think US Treasury Bonds are a little frightening today when you look at near record-low interest rates, our dysfunctional federal government and how hard it is for us to rein in our structural budget deficit"...
So let me be sure I have this right.
I don't see how the graphs you posted answer the point, which is about the structural (I take that to mean long term structural) US deficit. Since it's a clear fact that nothing has been done to address that issue over the time period of your graphs, no long term spending reform in the areas driving the long term deficit and no tax reform, and since it's a reasonable opinion (though not a proven fact) that the US economy has slid onto a semi-permanently lower trend growth path over that period, I think it's quite plausible to have less long term confidence in treasuries now than several years ago.

Of course again it's a matter of opinion how serious the risk is over a given investment time horizon. IMO not a serious risk for say 5yrs. But in case of 30yrs it's a long time, not necessarily for some debt meltdown to occur, but for market sentiment to change toward emphasizing skepticism about the US political's system's ability to address the long term problem with some combination of tax and spending reform and more pro-growth policies, before the specter of possible eventual debt restructuring enters the picture as an option also, and causes a sharp repricing of long term US govt debt. Reasonable people can disagree, but IMO the recent cyclical narrowing of the deficit last couple of years is neither here nor there wrt the long term threat to credit quality of treasuries. That narrowing was in general terms present in any mainstream projection of a few years ago, as is a renewed widening in years to come as the entitlements 'bow wave' really hits, and with mainstream projections tending toward arguably optimistic growth trends and/or not including any future deep recessions.
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Re: Why I won't have bond funds

Post by kenner »

Oneleaf,

Thanks. I prefer IT Bond Index, too, and was aware Larry Swedeoe is not a fan of MBS in TBM. Didn't know Mr. Bogle's thinking.
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Re: Why I won't have bond funds

Post by ginmqi »

staythecourse wrote:
MossySF wrote:The author is pining for the high inflation days of the 1970s because back then, you could pick up bonds at 15% nominal interest.
Funny how the human mind works. In 2010 or so when interest rates were near zero I found it funny that folks were wishing for the those good old late 70's again. I would just kindly remind them they had it now as real interest rates at that time and now were both near zero.

Good luck.
Yup. The saying goes is that you should take the simplest explanation possible, but not simpler.

Too bad a single number is over-simplifying the other drastic problem with the bond "bull market" in the 70s/80s...high inflation.

Also, as a side question. Why do is everyone hating/dreading the interest rate rises? I get that the price of a bond is inverse of interest rates, and people seem to want better prices for their bond so general trend seems to not like if interest rates MIGHT go up in the near future.

But if I am a buy and hold investor in the bond world as well (not funds, but say a rolling ladder of medium duration Treasuries) then would one WANT higher interest rates since it will yield more when the bond matures? (Of course not hoping for crazy inflation either, as was the case in the 70s/80s)
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Re: Why I won't have bond funds

Post by tibbitts »

rjb112 wrote:
nisiprius wrote:So let me be sure I have this right.

In 2010, Burton Malkiel and Charles D. Ellis publish The Elements of Investing, and say..
...One asset class that belongs in most portfolios is bonds...

Just three years later, in the 2013 2nd edition of The Elements of Investing, everything is out the window. Don't use a "total U.S. bond market index fund," use 50% emerging markets bonds and 50% dividend stocks. And why?
+++++++++++++++++++++++++++++++++++++++++++

You're right, their current thinking on bonds is a big change from what they wrote in 2010, per the quotes in your post.

Looks like the 10-year Treasury bond had a yield of 3.85% on January 4, 2010

Three years later, on January 4, 2013, the 10-year Treasury had a yield of 1.93%

Apparently that drop in interest rates/bond yields was enough for them to change their minds.

The question is, how low does the yield on the 10-year Treasury have to go before those bonds become unattractive for investment?

It appears that even Mr. Bogle has had a change in his position on the total bond market index. Was he also possibly influenced by the low yields that prompted the change in the thinking of Malkiel/Ellis?

[Mr. Bogle now thinks that the total market index is a "flawed index", and should be combined with an investment grade corporate bond fund]
What's disturbing about this is that for years, we've been critical of experts telling everyone "this time it's different" - as in the tech boom in the late 1990s, for example. Now, we have experts telling us "this time it's different", but now we're supposed to pay attention. So before, the simple message was "ignore the noise"; now, the message is "ignore the noise, unless the combination of the quality and percentage of experts advocating paying attention to the noise is sufficient." That's not exactly a clear message to pass along to the investing masses.
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Re: Why I won't have bond funds

Post by azanon »

nisiprius wrote:Sigh. Yet another example of confusing risk and return. Low return is not the same thing as risk. Low return sucks, but it doesn't make bonds "unsafe." It just makes them low in return.
Did you not follow the hyperlink in the article? By risk, she meant the "risk" of not having a large enough portfolio at the time of retirement to allow for an adequate SWR. And I might add the close relationship of low return implying more risk continues into retirement as low return means high risk that you won't keep up with inflation. The most common of mistakes is for the average investor to obsess over volatility when it is usually inflation (or weak human behavior responding poorly TO volatility) that is the real enemy.
And of course, to the question "I wonder: is there some kind of bond that’s immune to interest rate rises that I don’t know about?" the obvious answer is "United States Series I savings bonds are immune to interest rate risk; don't you know about them?"
Was that it she forgot about I bonds, or did she forget to insert after "rises" (that pays damn near anything)? Regardless, not much further down in the article did she give some examples of bonds that have only mild risk to interest rate rises, but at the same time don't promise adequate return in the current interest rate environment. Barring some massive jump in inflation, I bonds will be no exception here.

And I thought there was a very modest cap on I bonds. Certainly a restrictive enough cap that you aren't going to be suddenly putting large amounts into them. In other words, mentioning them would have been largely an academic exercise with little real application value. And it better not be already tax-advantaged money either as that would be foolish. In any event, a damn near useless investment for anyone who's first name isn't Zvi.
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Re: Why I won't have bond funds

Post by nisiprius »

tibbitts wrote:...What's disturbing about this is that for years, we've been critical of experts telling everyone "this time it's different" - as in the tech boom in the late 1990s, for example. Now, we have experts telling us "this time it's different", but now we're supposed to pay attention. So before, the simple message was "ignore the noise"; now, the message is "ignore the noise, unless the combination of the quality and percentage of experts advocating paying attention to the noise is sufficient." That's not exactly a clear message to pass along to the investing masses....
Well, that's why it's not easy to tune out the noise. The noise is always experts saying "this time it's different."

It's just the human self-deception, the belief in a past golden age. "New normal?" There never was any old normal. Nothing seems "normal" while it is happening. The common knock on indexing is, perpetually, "it used to work back then when things were normal, but it doesn't work now." We are always being told that we are beset by unique challenges unprecedented in the history of the universe. We are always being told that the one thing we mustn't do is stay the course.
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Re: Why I won't have bond funds

Post by rjb112 »

kenner wrote:Oneleaf,
Thanks. I prefer IT Bond Index, too, and was aware Larry Swedeoe is not a fan of MBS in TBM. Didn't know Mr. Bogle's thinking.
oneleaf wrote: But it all stems in his skepticism towards GNMA mortgage-backed securities, which TBM owns a very substantial portion of.
++++++++++++++++++++++++++++++
Does anyone know why Mr. Bogle or Larry Swedroe might not be in favor of investing in GNMA mortgage-backed securities?
First I've heard of this.
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Re: Why I won't have bond funds

Post by rjb112 »

Tigermoose wrote:I've been reading Siegel's Stocks for the Long Run the last couple of days...

Siegel makes the case that there is a current high demand for bonds currently because people fear deflation (crashes) more than the fear inflation. US Government treasuries have a "safe haven" status that is making them more about return of principal than return. Siegel argues that there could be a significant loss of shareholder value in bonds if the fear switches to fear of inflation rather than fear of deflation. If that happens, US Government Treasuries will NOT be the asset of choice for stability in one's portfolio. On top of this, there will be losses due to interest rate risk.
+++++++++++++++++++
Would you be able to reference the chapter number/chapter title where he says this?

thanks
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Re: Why I won't have bond funds

Post by oneleaf »

rjb112 wrote: ++++++++++++++++++++++++++++++
Does anyone know why Mr. Bogle or Larry Swedroe might not be in favor of investing in GNMA mortgage-backed securities?
First I've heard of this.
They both have the same issues with them.
Duration is only estimated since mortgages due to possibility of prepayment/refinancing. What happens when rates rise or drop? Prepayments will rise and fall in a manner that makes it undesirable for investors: extending duration when rates rise and shortening duration when rates drop.
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Re: Why I won't have bond funds

Post by IPer »

I don't buy it, none of these people know anything. Only thing I know is the longer I hold some bond funds the more I like them! The other thing I know is
Sh*t Happens!
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Re: Why I won't have bond funds

Post by nisiprius »

azanon wrote:
nisiprius wrote:...Did you not follow the hyperlink in the article? By risk, she meant the "risk" of not having a large enough portfolio at the time of retirement to allow for an adequate SWR...
That is exactly my point. That is not "risk."

Let's consider the case of someone whose investments consists of $5,000,000 in Treasury bills, who wishes to withdraw 5% of it, $250,000 the first year and increase it for inflation in subsequent years. Would you speak of the "risk" of having crazily optimistic expectations? Would you speak of the "risk" of wanting something you can't have? No, you would say that Treasury bills are a highly predictable, very low risk, very low return investment that cannot possibly provide the income you'd like to have. It's not a "risk" that it can't, it's a near-certainty. It's only a pseudo-risk. You can make it go away without changing the nature of the investment, simply by changing the number to $50,000 a year.

The nature of an investment doesn't change when you change your goals. You may want things you can't have. If you want $100,000 and you have $100, you can't say "bank accounts are risky because if I put it in the bank there is a danger I will not get $100,000; therefore I shall buy lottery tickets with them because they are clearly less risky in terms of meeting my unrealistic goal."

What has happened over the past few years is that projected returns from all asset classes have declined. Bonds are no riskier than they were, stocks are no riskier than they were, stocks continue to be riskier than bonds.
And of course, to the question "I wonder: is there some kind of bond that’s immune to interest rate rises that I don’t know about?" the obvious answer is "United States Series I savings bonds are immune to interest rate risk; don't you know about them?"
Was that it she forgot about I bonds, or did she forget to insert after "rises" (that pays damn near anything)?
She's the writer, she had plenty of time to review it before publishing, it's her job to say what she means. She asked if there were some kind of bond immune to interest rate rises that she doesn't know about. Series I saving bonds are a kind of bond that is immune to interest rate rises.

Usually, you pay for safety with lower returns, so if she meant "is there a kind of bond that is immune to interest rate rises yet has returns just as high as those of riskier bonds," she should have said that. The answer is probably "no," if you want higher returns than savings bonds you probably have to take greater risks than with savings bonds.

I bonds are what they are. The current purchase restriction, $20,000 a year for a couple, sucks but it's in the same ballpark as the limit on Roth IRA contributions. If you dismiss $20,000 a year as useless chump change, then so are Roth IRAs. I cannot remember any time when the mainstream investment community had anything good to say about I bonds, but the ones I purchased in 2000 turned out to be--utterly to my surprise--my best-performing investments for the decade, nicely outperforming stocks. I don't expect that to happen again, but I didn't expect it the first time, either.

Meanwhile, they are very safe investments, and as for paying "damn near anything," they are what they are but they are paying about the same or better than every other low-risk investment, including Treasury bills, bank CDs under 2 years, and short-term bond funds.
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Re: Why I won't have bond funds

Post by nedsaid »

I DO own bond funds but in a smaller proportion than I would like to have for somebody my age. My asset allocation has been approximately 70% stocks and 30% bonds and cash for a while. I feel like I am hanging way out there risk wise. But I share the concerns that others have about bonds, there might be more risk there than what is now perceived.

I have to admit that I envy a friend from time to time who has a 100% stock portfolio. The dividends from that portfolio plus Social Security are enough to retire on. He has a few years to go yet before retiring. Is it possible that bonds could at some point be more volatile than his 100% dividend paying stock portfolio? I would not discount that possibility.

So don't bash the author of the article. I don't agree with her but her opinions aren't wacky. People I respect have expressed some of the same concerns about bonds. I share some of those concerns but at the same time am committed to the concept of asset allocation. I have made adjustments to my plans to deal with the way the investment markets actually are and not the way I would like them to be.

I have actually toyed with the idea of starting to buy individual dividend paying stocks again. I have been buying into a bond fund that yields maybe 2-3% with little upside potential. I have been doing this because of my commitment to asset allocation and not because of my enthusiasm for bonds. I like that I get mostly predictable income that is likely to grow over time as well as price appreciation over time. Or perhaps something like Vanguard Dividend Growth fund. It is just hard to be enthusiastic about bonds right now.
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Re: Why I won't have bond funds

Post by IPer »

nedsaid wrote:I DO own bond funds but in a smaller proportion than I would like to have for somebody my age. My asset allocation has been approximately 70% stocks and 30% bonds and cash for a while. I feel like I am hanging way out there risk wise. But I share the concerns that others have about bonds, there might be more risk there than what is now perceived.

I have to admit that I envy a friend from time to time who has a 100% stock portfolio. The dividends from that portfolio plus Social Security are enough to retire on. He has a few years to go yet before retiring. Is it possible that bonds could at some point be more volatile than his 100% dividend paying stock portfolio? I would not discount that possibility.

So don't bash the author of the article. I don't agree with her but her opinions aren't wacky. People I respect have expressed some of the same concerns about bonds. I share some of those concerns but at the same time am committed to the concept of asset allocation. I have made adjustments to my plans to deal with the way the investment markets actually are and not the way I would like them to be.

I have actually toyed with the idea of starting to buy individual dividend paying stocks again. I have been buying into a bond fund that yields maybe 2-3% with little upside potential. I have been doing this because of my commitment to asset allocation and not because of my enthusiasm for bonds. I like that I get mostly predictable income that is likely to grow over time as well as price appreciation over time. Or perhaps something like Vanguard Dividend Growth fund. It is just hard to be enthusiastic about bonds right now.
Bonds - Good, in moderation, depending on risk level.
Individual Dividend Stocks - Good, as long as you can diversify without have a large cost (20 or 50 $3K positions or more but anything less than that starts to become
a cost issue, too many transactions at $7/pr, etc...).
Index Funds - Good
Vanguard Dividend Growth and High Dividen Funds - Good

But I cannot say that a 100 Dividend Champion individual stock holdings portfolio is smarter than holding Vanguard Total Market, but I know it is much much more
trouble to deal with! ;)
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Re: Why I won't have bond funds

Post by abuss368 »

nedsaid wrote:I DO own bond funds but in a smaller proportion than I would like to have for somebody my age. My asset allocation has been approximately 70% stocks and 30% bonds and cash for a while. I feel like I am hanging way out there risk wise. But I share the concerns that others have about bonds, there might be more risk there than what is now perceived.

I have to admit that I envy a friend from time to time who has a 100% stock portfolio. The dividends from that portfolio plus Social Security are enough to retire on. He has a few years to go yet before retiring. Is it possible that bonds could at some point be more volatile than his 100% dividend paying stock portfolio? I would not discount that possibility.

So don't bash the author of the article. I don't agree with her but her opinions aren't wacky. People I respect have expressed some of the same concerns about bonds. I share some of those concerns but at the same time am committed to the concept of asset allocation. I have made adjustments to my plans to deal with the way the investment markets actually are and not the way I would like them to be.

I have actually toyed with the idea of starting to buy individual dividend paying stocks again. I have been buying into a bond fund that yields maybe 2-3% with little upside potential. I have been doing this because of my commitment to asset allocation and not because of my enthusiasm for bonds. I like that I get mostly predictable income that is likely to grow over time as well as price appreciation over time. Or perhaps something like Vanguard Dividend Growth fund. It is just hard to be enthusiastic about bonds right now.
Hi nedsaid,

I have always enjoyed your very thoughtful posts. In terms of bonds, and the decrease in cash flow from bond dividends over the year, I wanted to ask you about the TIPS fund and the almost non-existent dividends. How does this impact your decision to allocate a portion to the TIPS fund, with principal parked there, and really not providing a cash flow stream? I would think this is important considering you are entertaining individual stocks.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Why I won't have bond funds

Post by Tamales »

oneleaf wrote:
rjb112 wrote: ++++++++++++++++++++++++++++++
Does anyone know why Mr. Bogle or Larry Swedroe might not be in favor of investing in GNMA mortgage-backed securities?
First I've heard of this.
They both have the same issues with them.
Duration is only estimated since mortgages due to possibility of prepayment/refinancing. What happens when rates rise or drop? Prepayments will rise and fall in a manner that makes it undesirable for investors: extending duration when rates rise and shortening duration when rates drop.
This seemed like it was worth looking up, so I pulled up a couple dedicated GNMA funds, one from Fidelity (green) and the other from Vanguard (blue). Those are shown below versus the S&P500 (orange) for the past 10 years. That time period included the housing bubble and multiple waves of refinancing and interest rate changes.

So it must be one of those things that sounds good in principle but it doesn't play out in real life. Those two GNMA funds are an awfully smooth ride, with barely a blip from all those factors.

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Re: Why I won't have bond funds

Post by oneleaf »

Tamales wrote: This seemed like it was worth looking up, so I pulled up a couple dedicated GNMA funds, one from Fidelity (green) and the other from Vanguard (blue). Those are shown below versus the S&P500 (orange) for the past 10 years. That time period included the housing bubble and multiple waves of refinancing and interest rate changes.

So it must be one of those things that sounds good in principle but it doesn't play out in real life. Those two GNMA funds are an awfully smooth ride, with barely a blip from all those factors.
But what blips would you expect? An increase in refinancing reduces duration during a time of declining rates, so it would hurt gains, but wouldn't cause any losses. It is when the reverse happens that a drop might be enhanced (extending duration during rising rates due to less refinancing).

If you compare 5 and 10 yr returns, Vanguard's Intermediate Term Bond Index (no MBS) has beaten GNMA and TBM (both having a lot of MBS) significantly during a declining interest rate environment, which was expected.
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Re: Why I won't have bond funds

Post by nedsaid »

abuss368 wrote:
nedsaid wrote:I DO own bond funds but in a smaller proportion than I would like to have for somebody my age. My asset allocation has been approximately 70% stocks and 30% bonds and cash for a while. I feel like I am hanging way out there risk wise. But I share the concerns that others have about bonds, there might be more risk there than what is now perceived.

I have to admit that I envy a friend from time to time who has a 100% stock portfolio. The dividends from that portfolio plus Social Security are enough to retire on. He has a few years to go yet before retiring. Is it possible that bonds could at some point be more volatile than his 100% dividend paying stock portfolio? I would not discount that possibility.

So don't bash the author of the article. I don't agree with her but her opinions aren't wacky. People I respect have expressed some of the same concerns about bonds. I share some of those concerns but at the same time am committed to the concept of asset allocation. I have made adjustments to my plans to deal with the way the investment markets actually are and not the way I would like them to be.

I have actually toyed with the idea of starting to buy individual dividend paying stocks again. I have been buying into a bond fund that yields maybe 2-3% with little upside potential. I have been doing this because of my commitment to asset allocation and not because of my enthusiasm for bonds. I like that I get mostly predictable income that is likely to grow over time as well as price appreciation over time. Or perhaps something like Vanguard Dividend Growth fund. It is just hard to be enthusiastic about bonds right now.
Hi nedsaid,

I have always enjoyed your very thoughtful posts. In terms of bonds, and the decrease in cash flow from bond dividends over the year, I wanted to ask you about the TIPS fund and the almost non-existent dividends. How does this impact your decision to allocate a portion to the TIPS fund, with principal parked there, and really not providing a cash flow stream? I would think this is important considering you are entertaining individual stocks.

Best.
Wow. I sent you a detailed personal message. So I will be brief here. I buy TIPS to protect against unexpected inflation. I do not buy them for income. Yes, I suppose when I look at the big picture of my portfolio that low income from TIPS might factor in the decision of how much to have in individual dividend paying stocks. You raised a great point I haven't thought about too much.

I wish I could say that I make these decisions based on detailed spreadsheets, projections of future returns, and backtested data. The reality is that I use model portfolios as a guide but I construct my portfolios the way a cook creates a meal from scratch. Rather than following a menu exactly, it is a smidgen of this, a dab of that, hmmm that looks good so I'll throw some of that in there. I sort of eyeball it and say, eh close enough. I do not invest with precision. I know that will drive all the engineers and Math PhD's on this forum crazy. They already think I am somewhat of a nut already but now they are certain that I have gone over the edge.
A fool and his money are good for business.
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Re: Why I won't have bond funds

Post by sdsailing »

The author appears to have no financial qualifications whatsoever. I am willing to bet she has not experienced a full market cycle as an investor.
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Re: Why I won't have bond funds

Post by au4all »

rjb112 wrote: "..........To manage this, the US government is orchestrating Financial Repression where the Federal Reserve keeps interest rates extremely low for an extended period of time. The last time the 10-year treasury yielded around 2.5% was following World War II, when we had a debt-to-GDP ratio over 100%, much higher than it is now"
(then he mentions some possibilities: muni bond, investment grade corporates, and investing in dividend paying stocks)
I wonder what evidence he has for his point-of-view. The Federal Reserve has been working to push interest rates higher for quite a while.

See: http://blogs.wsj.com/economics/2014/09/ ... ram-terms/

In fact at times they're unable to push rates as high as they wish. According to the article, at times, interest rates are falling to a negative value: http://online.wsj.com/articles/in-signi ... 1412112275

Long story short, there is zero upwards pressure on short-term interest rates. If interest rates go up it will be because the Federal Reserve pushes them higher. It's definitely not the case that they're holding rates down.
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Re: Why I won't have bond funds

Post by rjb112 »

au4all wrote:
rjb112 wrote: "..........To manage this, the US government is orchestrating Financial Repression where the Federal Reserve keeps interest rates extremely low for an extended period of time. The last time the 10-year treasury yielded around 2.5% was following World War II, when we had a debt-to-GDP ratio over 100%, much higher than it is now"
(then he mentions some possibilities: muni bond, investment grade corporates, and investing in dividend paying stocks)
I wonder what evidence he has for his point-of-view. The Federal Reserve has been working to push interest rates higher for quite a while.

See: http://blogs.wsj.com/economics/2014/09/ ... ram-terms/

In fact at times they're unable to push rates as high as they wish. According to the article, at times, interest rates are falling to a negative value: http://online.wsj.com/articles/in-signi ... 1412112275

Long story short, there is zero upwards pressure on short-term interest rates. If interest rates go up it will be because the Federal Reserve pushes them higher. It's definitely not the case that they're holding rates down.
Hi au4all,
I haven't read the articles you referenced as right now I don't have time, but would like to.
When you say that "It's definitely not the case that they're [the Federal Reserve] holding rates down", and "The Federal Reserve has been working to push interest rates higher for quite a while"......and ask with respect to Burton Malkiel, "I wonder what evidence he has for his point-of-view"

I think his point of view on "financial repression" and the Fed keeping interest rates low has to do with 2 major things:

1. The Fed directly controls and sets the Federal Funds rate. The Federal Funds rate is currently at 0% to 0.25%. This year, it has generally been less than 0.1%. http://www.federalreserve.gov/releases/h15/data.htm
If the Fed wanted rates to go higher, they wouldn't do it by setting the Fed Funds rate as low as possible.

2. The Quantitative Easing programs purchased many billions of dollars of Treasury securities and mortgage backed securities each month. Those purchases continued until today. When the Fed is buying huge quantities of these, naturally there is price pressure towards the upside, and interest rate pressure towards the downside.

Just wondering if you are a big proponent of buying gold, as your userID has "au" in it, the symbol for gold?

take care
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