Isn't it a good thing if bond prices fall?
Isn't it a good thing if bond prices fall?
Correct me if I'm wrong, but if bond prices fall in response to rising interest rates, won't I get to purchase more bonds at a lower price, that will also be higher-yielding, to boot?
For a guy like me, who dollar cost averages biweekly into his 401k consisting of 70% total stock market/30% total bond market, isn't this a good thing? I mean, how is it any different from purchasing more shares of stocks when prices dip? Isn't the goal to hog up as many shares of stocks or bonds as one can afford?
For a guy like me, who dollar cost averages biweekly into his 401k consisting of 70% total stock market/30% total bond market, isn't this a good thing? I mean, how is it any different from purchasing more shares of stocks when prices dip? Isn't the goal to hog up as many shares of stocks or bonds as one can afford?
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Re: Isn't it a good thing if bond prices fall?
Nuance aside, yes.
Re: Isn't it a good thing if bond prices fall?
If you are still investing or don't need to touch the principle of your bond fund for many years then yes. I also would like to see higher yields for fixed income investments across the board.
Never underestimate the power of the force of low cost index funds.
Re: Isn't it a good thing if bond prices fall?
It's a bad thing only if you will sell soon or if seeing a temporary drop in net worth will make you unhappy.ofcmetz wrote:If you are still investing or don't need to touch the principle of your bond fund for many years then yes. I also would like to see higher yields for fixed income investments across the board.
The problem is many people don't really believe this. They complain about low rates and they complain about the drop in principal value from rates increasing.
Re: Isn't it a good thing if bond prices fall?
Falling prices and rising rates will increase the total return for fixed income investors.
Re: Isn't it a good thing if bond prices fall?
For a guy like you, it doesn't matter much, presumably because you are perhaps in your 30s or 40s (70/30 AA) and accumulating biweekly.joer1212 wrote:Correct me if I'm wrong, but if bond prices fall in response to rising interest rates, won't I get to purchase more bonds at a lower price, that will also be higher-yielding, to boot?
For a guy like me, who dollar cost averages biweekly into his 401k consisting of 70% total stock market/30% total bond market, isn't this a good thing? I mean, how is it any different from purchasing more shares of stocks when prices dip? Isn't the goal to hog up as many shares of stocks or bonds as one can afford?
For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% (-$61,700) price change in 1 year, it is a difficult pill to swallow.
Link: https://personal.vanguard.com/us/funds/ ... =INT#tab=1
Last edited by YDNAL on Tue Jul 09, 2013 7:22 am, edited 1 time in total.
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
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Re: Isn't it a good thing if bond prices fall?
For me, yes, as long as the bond fund managers are buying newer bonds of similar credit quality and duration which have higher interest rates which will result in my seeing higher monthly dividends (which are based on the daily mil rate and the number of shares I own, not the NAV of the fund).
Re: Isn't it a good thing if bond prices fall?
It depends on what the retiree is doing. If they are selling, it's a bad thing. If they are only withdrawing interest, it's a good thing in economic terms (although seeing a lower portfolio value may make them unhappy).YDNAL wrote:For a guy like you, it doesn't matter much, presumably because you are perhaps in your 30s or 40s (70/30 AA) and accumulating biweekly.
For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% price change in 1 year, it is a difficult pill to swallow.
Link: https://personal.vanguard.com/us/funds/ ... =INT#tab=1
For a retiree with a diversified portfolio, the increase in stock value can easily make up for the decrease in bond value.
Where are you getting -6.17? One year change as of 6/30 is -1.64 and as of yesterday it's about -2.7%. Over longer periods, it's doing fine.
Re: Isn't it a good thing if bond prices fall?
If you haven't purchased the bonds yet, then falling bond prices is good news, because you'll be able to buy more.joer1212 wrote:Correct me if I'm wrong, but if bond prices fall in response to rising interest rates, won't I get to purchase more bonds at a lower price, that will also be higher-yielding, to boot?
If you already own bonds, then falling bond prices are bad news, because if you'd waited you could've bought the same bonds for less money.
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Re: Isn't it a good thing if bond prices fall?
Seems to me that we are in a very unique time with respect to bonds. Bonds are paying historically low yields and are at priced a historically high prices. That is a short term recipe for disaster for a NOOB in the bond market. I'm not a market timer, but there are times when sitting out of the market makes sense. With respect to the bond market, this is one of those times. For those that say you cannot time the market, I respond with these questions: What's the worst that can happen if you sit out of the bond market for a couple years and put your savings in CDs? What's the best that can happen if you stay fully invested in the bond market for the next two years? I believe the answer is essentially the same. So I ask a follow-up question: Haven't I unloaded a boat-load of short term risk by moving into CDs during this two year timeframe?
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Re: Isn't it a good thing if bond prices fall?
I'm 41 years old, and an accumulator. And I recently switched TO a longer overall average duration on my bond funds from shorter funds after digesting all the threads during the past couple of years.
Assuming a long life expectancy, I'll have 25 years of accumulation and 25 years of de-cumulation. Thus, I'm comfortable with "long-term" bonds funds which have a duration of 5-8 years (i.e. Vanguard's NY LT tax exempt has a duration of 6, so it's not very long). Given that I'll be dollar cost averaging for a while, I'm not too concerned about any fluctuations which will happen in the next few years.
In general, for the accumulator, interest rate rises are better if they happen earlier. And if my long-term funds take a big hit and decline in value, I'll rebalance into them at lower prices and higher interest. In taxable accounts, I can mitigate the losses perhaps with tax-loss harvesting.
I'm not saying I have the right answers, but for me, I'm not going to try to worry about the bond market and deciding whether I should be in CDs, and what duration CDs, and when to get back into bond funds, etc. I stick with my overall plan of using bond funds and hope that when I'm 95 I'll look back and see that it worked out ok.
Everyone has to work out an answer that they are comfortable with.
NS
Assuming a long life expectancy, I'll have 25 years of accumulation and 25 years of de-cumulation. Thus, I'm comfortable with "long-term" bonds funds which have a duration of 5-8 years (i.e. Vanguard's NY LT tax exempt has a duration of 6, so it's not very long). Given that I'll be dollar cost averaging for a while, I'm not too concerned about any fluctuations which will happen in the next few years.
In general, for the accumulator, interest rate rises are better if they happen earlier. And if my long-term funds take a big hit and decline in value, I'll rebalance into them at lower prices and higher interest. In taxable accounts, I can mitigate the losses perhaps with tax-loss harvesting.
I'm not saying I have the right answers, but for me, I'm not going to try to worry about the bond market and deciding whether I should be in CDs, and what duration CDs, and when to get back into bond funds, etc. I stick with my overall plan of using bond funds and hope that when I'm 95 I'll look back and see that it worked out ok.
Everyone has to work out an answer that they are comfortable with.
NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
Re: Isn't it a good thing if bond prices fall?
Your mortgage is a short position on bonds and hopefully everybody refinanced when the rates were really really low.
My bank is pricing our exact fixed-rate mortgage product 100 basis points higher than they were when we refi'd in February.
My bank is pricing our exact fixed-rate mortgage product 100 basis points higher than they were when we refi'd in February.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
Re: Isn't it a good thing if bond prices fall?
What depends.... the "size of the pill" to swallow ?richard wrote:It depends on what the retiree is doing....YDNAL wrote:For a guy like you, it doesn't matter much, presumably because you are perhaps in your 30s or 40s (70/30 AA) and accumulating biweekly.
For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% price change in 1 year, it is a difficult pill to swallow.
Link: https://personal.vanguard.com/us/funds/ ... =INT#tab=1
- What does a retiree with a diversified portfolio have to do with "my retiree guy/gal with $1 million in Treasuries" ?For a retiree with a diversified portfolio, the increase in stock value can easily make up for the decrease in bond value.
- Additionally, did it occur to you that not everyone is forced to own a diversified portfolio ?
- Funny thing, I respond to OPs and avoid getting into other posters' posts - for the most part - and I post to offer contrasting scenarios [food for thought] and the last thing I expected is to be quoted and have to respond to this nonsense that offers nothing to OP's subject, AFAIC.
I said "price change in 1 year" and you see why I said that IF you pull the link (did you, Richard?). Actually, the absolute drop in price is 5.2% but who's counting and who cares ?Where are you getting -6.17? One year change as of 6/30 is -1.64 and as of yesterday it's about -2.7%. Over longer periods, it's doing fine.
Vanguard wrote:Inter-Term Treasury Adm
52-week high 07/25/2012 $11.88
52-week low 07/05/2013 $11.19
Range $0.69 6.17%
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Isn't it a good thing if bond prices fall?
If someone chooses to increase risk by having a non-diversified portfolio and that one undiversified asset declines in value, what's the complaint? You are right that no one is forced to reduce risk through diversification, but one must be aware of the consequences of non-diversification.YDNAL wrote: - What does a retiree with a diversified portfolio have to do with "my retiree guy/gal with $1 million in Treasuries" ?
- Additionally, did it occur to you that not everyone is forced to own a diversified portfolio ?
Re: Isn't it a good thing if bond prices fall?
Which goes to my original point. If I keep dollar cost averaging, and rebalance my stock/bond portfolio annually, won't the fact that I can purchase more bonds (that yield higher) with the same amount of money be akin to getting the stock market on sale when equity prices drop? Why are people so afraid of a drop in bond prices, but not in stock prices?investor.saver1 wrote:Seems to me that we are in a very unique time with respect to bonds. Bonds are paying historically low yields and are at priced a historically high prices. That is a short term recipe for disaster for a NOOB in the bond market. I'm not a market timer, but there are times when sitting out of the market makes sense. With respect to the bond market, this is one of those times. For those that say you cannot time the market, I respond with these questions: What's the worst that can happen if you sit out of the bond market for a couple years and put your savings in CDs? What's the best that can happen if you stay fully invested in the bond market for the next two years? I believe the answer is essentially the same. So I ask a follow-up question: Haven't I unloaded a boat-load of short term risk by moving into CDs during this two year timeframe?
Re: Isn't it a good thing if bond prices fall?
Except that I am planning on an early retirement, possibly in 8 years. I'll be 52 by then. Should I be worried?neurosphere wrote:I'm 41 years old, and an accumulator. And I recently switched TO a longer overall average duration on my bond funds from shorter funds after digesting all the threads during the past couple of years.
Assuming a long life expectancy, I'll have 25 years of accumulation and 25 years of de-cumulation. Thus, I'm comfortable with "long-term" bonds funds which have a duration of 5-8 years (i.e. Vanguard's NY LT tax exempt has a duration of 6, so it's not very long). Given that I'll be dollar cost averaging for a while, I'm not too concerned about any fluctuations which will happen in the next few years.
In general, for the accumulator, interest rate rises are better if they happen earlier. And if my long-term funds take a big hit and decline in value, I'll rebalance into them at lower prices and higher interest. In taxable accounts, I can mitigate the losses perhaps with tax-loss harvesting.
I'm not saying I have the right answers, but for me, I'm not going to try to worry about the bond market and deciding whether I should be in CDs, and what duration CDs, and when to get back into bond funds, etc. I stick with my overall plan of using bond funds and hope that when I'm 95 I'll look back and see that it worked out ok.
Everyone has to work out an answer that they are comfortable with.
NS
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Re: Isn't it a good thing if bond prices fall?
You've missed my point.....I'm suggesting that it makes sense to purchase an asset that will not decline in value rather than an asset that is declining in value. What do we know for certain...that interest rates will rise from current historic lows. What is the unknown....when it is that interest rates will rise and how much they will rise. What I'm suggesting is simply to purchase and hold the asset that will not decline in value as rates rise. Since I can get rates on CDs equal to the yield on comparable bond funds (term and duration being equal) it makes more sense "now" to buy the CD. At the maturity date of the CD, if interest rates have normalized, use the proceeds from the maturing CD to buy the bond fund at "on-sale" prices. If at that time interest are still rising and bond prices are still falling, delay the bond fund purchase and buy another short term CD. Eventually, it will make good sense to buy into bond funds...but that time is not today....it's sometime in the future. Or buy the bond fund now, watch its value decline over the next few years, and then wait many years for your investment to recover to its original value.joer1212 wrote:Which goes to my original point. If I keep dollar cost averaging, and rebalance my stock/bond portfolio annually, won't the fact that I can purchase more bonds (that yield higher) with the same amount of money be akin to getting the stock market on sale when equity prices drop? Why are people so afraid of a drop in bond prices, but not in stock prices?investor.saver1 wrote:Seems to me that we are in a very unique time with respect to bonds. Bonds are paying historically low yields and are at priced a historically high prices. That is a short term recipe for disaster for a NOOB in the bond market. I'm not a market timer, but there are times when sitting out of the market makes sense. With respect to the bond market, this is one of those times. For those that say you cannot time the market, I respond with these questions: What's the worst that can happen if you sit out of the bond market for a couple years and put your savings in CDs? What's the best that can happen if you stay fully invested in the bond market for the next two years? I believe the answer is essentially the same. So I ask a follow-up question: Haven't I unloaded a boat-load of short term risk by moving into CDs during this two year timeframe?
Investor.Saver1 |
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Experience is something you don't get until just after you need it.
Re: Isn't it a good thing if bond prices fall?
Would it be wise to sell the total bond fund portion of my portfolio in my 401k, and buy stable value fund in its place at this point?investor.saver1 wrote:You've missed my point.....I'm suggesting that it makes sense to purchase an asset that will not decline in value rather than an asset that is declining in value. What do we know for certain...that interest rates will rise from current historic lows. What is the unknown....when it is that interest rates will rise and how much they will rise. What I'm suggesting is simply to purchase and hold the asset that will not decline in value as rates rise. Since I can get rates on CDs equal to the yield on comparable bond funds (term and duration being equal) it makes more sense "now" to buy the CD. At the maturity date of the CD, if interest rates have normalized, use the proceeds from the maturing CD to buy the bond fund at "on-sale" prices. If at that time interest are still rising and bond prices are still falling, delay the bond fund purchase and buy another short term CD. Eventually, it will make good sense to buy into bond funds...but that time is not today....it's sometime in the future. Or buy the bond fund now, watch its value decline over the next few years, and then wait many years for your investment to recover to its original value.
It's kind of a lose-lose situation right now for me: if I do this, I will be selling low; if I hold on to my total bond fund, I run the risk of losing money in a declining bond market.
Re: Isn't it a good thing if bond prices fall?
Rising rates would increase the return of bond funds, so I would not be inclined to sell an existing TBM position. The hit on NAV is temporary. Short term pain, long term gain. Trading in and out of a bond position in an attempt to increase your returns might succeed, or might not. If directing new money to the stable value fund makes you feel better, there is nothing wrong with that. You can look back 5 years from now and see which turned out to be the better buy, but if the current yields on the bond fund vs. the stable value are close, there will not be enough difference to worry about.
Re: Isn't it a good thing if bond prices fall?
The first part and last part here don't agree with each other. You seem to know that bond funds will decline over the next few years, meaning you know interest rates will go up. This is the usual time in the thread where I remind everyone of Japan. Interest rates can stay low for 20 years. So the strategy to buy CDs then check back in two years... well what if they are still low, do you go back to CDs again?investor.saver1 wrote:
You've missed my point.....I'm suggesting that it makes sense to purchase an asset that will not decline in value rather than an asset that is declining in value. What do we know for certain...that interest rates will rise from current historic lows. What is the unknown....when it is that interest rates will rise and how much they will rise. Or buy the bond fund now, watch its value decline over the next few years, and then wait many years for your investment to recover to its original value.
70% Global Stocks / 30% Bonds
Re: Isn't it a good thing if bond prices fall?
+1. Why don't people understand this?billyt wrote:Rising rates would increase the return of bond funds, so I would not be inclined to sell an existing TBM position. The hit on NAV is temporary. Short term pain, long term gain. Trading in and out of a bond position in an attempt to increase your returns might succeed, or might not. If directing new money to the stable value fund makes you feel better, there is nothing wrong with that. You can look back 5 years from now and see which turned out to be the better buy, but if the current yields on the bond fund vs. the stable value are close, there will not be enough difference to worry about.
If rates on Total Bond Market went up one percent a year for the next ten years, the total return over that time would be positive, not negative. And that's with ten years of rising rates.
All some people seem to hear is "rate goes up, price goes down." They are forgetting part two: "rate goes up, I earn more interest." The longer you hold your fund, the better off you are. If you are trying to trade in or out of funds, or you plan to dump your bond fund in a couple of years, then yes, you shouldn't be in a bond fund. Over the long term, you are better off holding (and adding as rates go up.)
I think there's an argument to stay away from long-term bond funds, but for something like TBM,I don't see a problem.
Re: Isn't it a good thing if bond prices fall?
I was under the impression that once interest rates start to rise, the NAV of my TBM index fund would fall and take years to recover to its original value. In other words, while it's true that I would receive more interest on part of my TBM index fund (the part that reaches maturity and is sold for higher-yielding bonds), it would be more than offset by the dropping value of the rest of my bond fund due to the interest rate rise.All some people seem to hear is "rate goes up, price goes down." They are forgetting part two: "rate goes up, I earn more interest." The longer you hold your fund, the better off you are. If you are trying to trade in or out of funds, or you plan to dump your bond fund in a couple of years, then yes, you shouldn't be in a bond fund. Over the long term, you are better off holding (and adding as rates go up.)
By the way, I plan on retiring in about 8 years, at the age of 52, so I don't have a very long time horizon to recover from any dramatic drops in the bond portion of my portfolio, unless, of course, a rise in interest rates actually means an immediate rise (not fall) in the NAV of my TBM index fund. In that case, it would be a no-brainer to just keep dollar-cost averaging into into my bond index fund.
This might get a little technical, but let's take 2 scenarios and compare them to each other:
Scenario 1: interest rates don't rise at all for the next 6 years.
Scenario 2: interest rates rise at 1% a year for the next 6 years.
What would be the effect of each scenario on a portfolio consisting of 70% TSM index fund, and 30% TBM index fund, assuming that I have $100,000 in this portfolio?
Re: Isn't it a good thing if bond prices fall?
Actually, I have diversified the fixed income portion of my portfolio, as well as the equity portion, as follows (numbers are rounded off):billyt wrote:Rising rates would increase the return of bond funds, so I would not be inclined to sell an existing TBM position. The hit on NAV is temporary. Short term pain, long term gain. Trading in and out of a bond position in an attempt to increase your returns might succeed, or might not. If directing new money to the stable value fund makes you feel better, there is nothing wrong with that. You can look back 5 years from now and see which turned out to be the better buy, but if the current yields on the bond fund vs. the stable value are close, there will not be enough difference to worry about.
Stable value fund 5%
Total bond fund 15%
Vanguard TIPS 10%
Total stock market 50%
Total international market 15%
Vanguard REITs 5%
Re: Isn't it a good thing if bond prices fall?
Joer: Go to Morningstar and pull up a growth chart for Putnam Income Fund A (PINCX), a bond fund that goes back to the 50's. First look at the year to date chart. Not a pretty picture. Now look at the maximum time interval. Do you see what this years downturn looks like in the big picture? Between 1950 and 1980, interest rates rose fairly continuously and dramatically. What did this bond fund do? If you can live with that, you will be fine with TMB in the current rate environment.
Re: Isn't it a good thing if bond prices fall?
Translation: you are a market timer.investor.saver1 wrote:I'm not a market timer, but there are times when sitting out of the market makes sense. With respect to the bond market, this is one of those times. For those that say you cannot time the market, I respond with these questions: What's the worst that can happen if you sit out of the bond market for a couple years and put your savings in CDs? What's the best that can happen if you stay fully invested in the bond market for the next two years? I believe the answer is essentially the same. So I ask a follow-up question: Haven't I unloaded a boat-load of short term risk by moving into CDs during this two year timeframe?
I am not a market timer. I follow my IPS, which has been telling me to buy bonds. So I buy bonds; mostly intermediate but even a little bit of long (my long funds aren't very long though). The NAV keeps going down, which is annoying but not unexpected. I've considered market timing (or more euphemistically, "tactical asset allocation") which does seem a bit more tempting than usual, but upon closer look I never find it convincing. Besides, looking back I've never regretted staying the course, so if I wanted to change my course I'd rewrite my IPS first.
You have unloaded some short term risk by market timing. You may outperform me by doing so. Or not. You and I are not in competition, so I don't figure it matters much; we'll probably both be fine.
Re: Isn't it a good thing if bond prices fall?
I think that you are imagining maturity as a distinct jump in the value of the bond, when in reality it's just one end of a continuum. Bonds that have depreciated due to a rate increase appreciate back towards par continuously with the passage of time. It's easy to understand why -- you wouldn't accept a steep discount for selling a bond just one month from maturity, would you? You could just wait. Same with two months, and so on. And in a rising rate environment, when bonds are replaced (in a fund -- not necessarily at maturity), one can buy higher yielding bonds which continue to make up for the lost ground.joer1212 wrote:I was under the impression that once interest rates start to rise, the NAV of my TBM index fund would fall and take years to recover to its original value. In other words, while it's true that I would receive more interest on part of my TBM index fund (the part that reaches maturity and is sold for higher-yielding bonds), it would be more than offset by the dropping value of the rest of my bond fund due to the interest rate rise.
8 years is a rather long time for TBM. The fund has a duration of 5.3 years, which means if a rate increase occurs tomorrow, 5 years from now you'll be better off than if no increase had occured. Later increases might push that date further, but the higher the rate the faster the recovery.joer1212 wrote:By the way, I plan on retiring in about 8 years, at the age of 52, so I don't have a very long time horizon to recover from any dramatic drops in the bond portion of my portfolio, unless, of course, a rise in interest rates actually means an immediate rise (not fall) in the NAV of my TBM index fund. In that case, it would be a no-brainer to just keep dollar-cost averaging into into my bond index fund.
I'm sorry, but TBM is too complicated for anyone to do this calculation for you -- it includes a wide variety of bond types and maturities. Much like TSM is a lot harder to break down than a Dow fund with 30 stocks. Other funds might be more amenable to this.joer1212 wrote:This might get a little technical, but let's take 2 scenarios and compare them to each other:
Scenario 1: interest rates don't rise at all for the next 6 years.
Scenario 2: interest rates rise at 1% a year for the next 6 years.
What would be the effect of each scenario on a portfolio consisting of 70% TSM index fund, and 30% TBM index fund, assuming that I have $100,000 in this portfolio?
It's hard to find exact examples in the past, but we can try to find something close. On 6/13/2003 the 5-year treasury yield reached a low of 2.08%. On 6/12/2007 it reached a high of 5.18%. Between these two dates TBM returned about 10% -- not spectacular but still above the 8.5% compounded that the 5-year treasury promised you at the beginning (TBM is somewhat riskier than pure treasuries, of course). During the same period the Fed funds rate (what people generally mean by interest rate increases) went from 1% to 5.5%, so steeper but the market had anticipated some of this judging by the yield curve -- much like it does at present given that the Fed funds rate are still stuck at zero.
Of course, in the two year storm that followed TBM was one of the few investments that you could hang onto for dear life.
Which brings us to your asset allocation. Your 70% stocks, relatively high for your retirement horizon, is what you really should worry about. Consider this: in the absolute worst case for TBM given your numbers: rate rises 6% tomorrow, and the day after tomorrow you need to sell everything. Cost to your portfolio: -31% x 30% = -9.3%. The same cost can be caused by a move in stocks of ... 13.2%. You know what 13.2% is for stocks? A bad week caused by some random thing like an untimely wink from Bernanke. So we're talking a terrible historically unprecedented hit to bonds with no time to recover -- versus a bad week. I think you're worrying about the wrong thing. It's one reason I recommend LifeStrategy funds to people, where the volatility of the individual parts is out of sight.
Re: Isn't it a good thing if bond prices fall?
My Vanguard Aussie Bond Index fund has been falling as have Aussie Bank interest rates?joer1212 wrote:Correct me if I'm wrong, but if bond prices fall in response to rising interest rates, won't I get to purchase more bonds at a lower price, that will also be higher-yielding, to boot?
For a guy like me, who dollar cost averages biweekly into his 401k consisting of 70% total stock market/30% total bond market, isn't this a good thing? I mean, how is it any different from purchasing more shares of stocks when prices dip? Isn't the goal to hog up as many shares of stocks or bonds as one can afford?
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Re: Isn't it a good thing if bond prices fall?
No...I'm really not a market timer! I would much prefer following my prescribed allocation of 40% equities and 60% bonds. But, there are times when (call it tactical allocation if you will) it simply does not make common sense to follow a rigid policy with respect to of portfolio allocation. This is one of those times for the bond market. Bonds are going to be declining in value over the next few years (short term) so how does it make common sense to buy now? Sorry...I just disagree and feel it is bad advice to buy in now. Yes....I will in all probability outperform you in the short term and during the long term I will also in all probability outperform you because I will have purchased bonds at a lower price and will therefore own more shares than you.epilnk wrote:Translation: you are a market timer.investor.saver1 wrote:I'm not a market timer, but there are times when sitting out of the market makes sense. With respect to the bond market, this is one of those times. For those that say you cannot time the market, I respond with these questions: What's the worst that can happen if you sit out of the bond market for a couple years and put your savings in CDs? What's the best that can happen if you stay fully invested in the bond market for the next two years? I believe the answer is essentially the same. So I ask a follow-up question: Haven't I unloaded a boat-load of short term risk by moving into CDs during this two year timeframe?
I am not a market timer. I follow my IPS, which has been telling me to buy bonds. So I buy bonds; mostly intermediate but even a little bit of long (my long funds aren't very long though). The NAV keeps going down, which is annoying but not unexpected. I've considered market timing (or more euphemistically, "tactical asset allocation") which does seem a bit more tempting than usual, but upon closer look I never find it convincing. Besides, looking back I've never regretted staying the course, so if I wanted to change my course I'd rewrite my IPS first.
You have unloaded some short term risk by market timing. You may outperform me by doing so. Or not. You and I are not in competition, so I don't figure it matters much; we'll probably both be fine.
Agreed, we're not in competition and also agreed that we'll both be OK. Much appreciate the opportunity to voice my opinion!
Investor.Saver1 |
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Experience is something you don't get until just after you need it.
Re: Isn't it a good thing if bond prices fall?
Although this is a likely scenario, perhaps the most likely by a small margin, you claim to know something that you simply do not. If you did know the future this well, you could make a fortune from that info alone.investor.saver1 wrote: No...I'm really not a market timer! I would much prefer following my prescribed allocation of 40% equities and 60% bonds. But, there are times when (call it tactical allocation if you will) it simply does not make common sense to follow a rigid policy with respect to of portfolio allocation. This is one of those times for the bond market. Bonds are going to be declining in value over the next few years (short term) so how does it make common sense to buy now?
70% Global Stocks / 30% Bonds
- investor.saver1
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Re: Isn't it a good thing if bond prices fall?
Well, I'm totally certain that interest rates will either increase, decrease or remain the same. Let's take a quick look at each of these outcomes and see how my strategy of riding out the short term in CDs holds up vs your strategy of remaining fully invested in bond funds.z3r0c00l wrote:Although this is a likely scenario, perhaps the most likely by a small margin, you claim to know something that you simply do not. If you did know the future this well, you could make a fortune from that info alone.investor.saver1 wrote: No...I'm really not a market timer! I would much prefer following my prescribed allocation of 40% equities and 60% bonds. But, there are times when (call it tactical allocation if you will) it simply does not make common sense to follow a rigid policy with respect to of portfolio allocation. This is one of those times for the bond market. Bonds are going to be declining in value over the next few years (short term) so how does it make common sense to buy now?
1) Interest rates rise in the next two years...most likely scenario; but as you point out, not a certainty. If correct, then at the end of two years, I'll cash out of CDs and buy bond funds at deflated market prices. You will experience a decline in the market value of your holdings and this decline could be significant. My basis will be lower than your basis and I will own more shares than you. From this point forward, assuming we both reinvest dividends, I'll continue to outperform you every year because I will always hold more shares.
2) Interest rates remain the same at the end of two years and for some time beyond...in this case, I'll simply extend out my CD ladders. Since I own Credit Union CDs which are paying more than comparable duration bond funds, I'll continue to earn superior interest vs the yield of the bond fund. I'll just wait it out in a risk free investment.
3) Interest rate decrease further....well, if this happens my strategy fails. Is anyone betting interest rates will fall more? I'm extremely comfortable taking this risk!
Given the above, I just don't see any way that remaining fully invested in bond funds or adding to a position in bond funds is superior to being in CDs.
I'm not suggesting that my strategy will win by a large margin. I'm not advocating taking on more risk and I'm not advocating adjusting ones investment plan other than substituting a riskier holding for a less risky holding. Reducing short term risk without reducing short term results seems like a total "no brainer". I just don't understand how it can be argued that holding bond funds during the short term is superior. What am I missing...I'd really like to understand.
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- zaboomafoozarg
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Re: Isn't it a good thing if bond prices fall?
Good thing their US stocks are up almost 20% and their international stocks about 3%.YDNAL wrote:For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% (-$61,700) price change in 1 year, it is a difficult pill to swallow.
- zaboomafoozarg
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Re: Isn't it a good thing if bond prices fall?
Because stocks could potentially decline in value over the next few years, way more than bonds could.investor.saver1 wrote:Bonds are going to be declining in value over the next few years (short term) so how does it make common sense to buy now?
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Re: Isn't it a good thing if bond prices fall?
OK...but what does this have to do with bonds vs CDs during the short term?zaboomafoozarg wrote:Because stocks could potentially decline in value over the next few years, way more than bonds could.investor.saver1 wrote:Bonds are going to be declining in value over the next few years (short term) so how does it make common sense to buy now?
Investor.Saver1 |
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Experience is something you don't get until just after you need it.
Re: Isn't it a good thing if bond prices fall?
If inflation is rising faster than interest rates, seems you're losing with the higher rates. The reverse could be true too.
Re: Isn't it a good thing if bond prices fall?
I guess I should just invest in my stable bond fund in my 401k for the fixed income portion of my portfolio, especially since it has higher returns than CD's. Then I can implement your strategy above.investor.saver1 wrote:Well, I'm totally certain that interest rates will either increase, decrease or remain the same. Let's take a quick look at each of these outcomes and see how my strategy of riding out the short term in CDs holds up vs your strategy of remaining fully invested in bond funds.z3r0c00l wrote:Although this is a likely scenario, perhaps the most likely by a small margin, you claim to know something that you simply do not. If you did know the future this well, you could make a fortune from that info alone.investor.saver1 wrote: No...I'm really not a market timer! I would much prefer following my prescribed allocation of 40% equities and 60% bonds. But, there are times when (call it tactical allocation if you will) it simply does not make common sense to follow a rigid policy with respect to of portfolio allocation. This is one of those times for the bond market. Bonds are going to be declining in value over the next few years (short term) so how does it make common sense to buy now?
1) Interest rates rise in the next two years...most likely scenario; but as you point out, not a certainty. If correct, then at the end of two years, I'll cash out of CDs and buy bond funds at deflated market prices. You will experience a decline in the market value of your holdings and this decline could be significant. My basis will be lower than your basis and I will own more shares than you. From this point forward, assuming we both reinvest dividends, I'll continue to outperform you every year because I will always hold more shares.
2) Interest rates remain the same at the end of two years and for some time beyond...in this case, I'll simply extend out my CD ladders. Since I own Credit Union CDs which are paying more than comparable duration bond funds, I'll continue to earn superior interest vs the yield of the bond fund. I'll just wait it out in a risk free investment.
3) Interest rate decrease further....well, if this happens my strategy fails. Is anyone betting interest rates will fall more? I'm extremely comfortable taking this risk!
Given the above, I just don't see any way that remaining fully invested in bond funds or adding to a position in bond funds is superior to being in CDs.
I'm not suggesting that my strategy will win by a large margin. I'm not advocating taking on more risk and I'm not advocating adjusting ones investment plan other than substituting a riskier holding for a less risky holding. Reducing short term risk without reducing short term results seems like a total "no brainer". I just don't understand how it can be argued that holding bond funds during the short term is superior. What am I missing...I'd really like to understand.
Re: Isn't it a good thing if bond prices fall?
You don't know anything about this guy/gal... (s)he is a figment of my imagination.zaboomafoozarg wrote:Good thing their US stocks are up almost 20% and their international stocks about 3%.YDNAL wrote:For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% (-$61,700) price change in 1 year, it is a difficult pill to swallow.
As such, I imagine:
- A 70 year old with $0.429/$1.000 Equity/Fixed.
- Also 50/50 US/non-US Equities.
- 120% x $0.2145 = $4K
- 103% X $0.2145 = $0.6K
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Isn't it a good thing if bond prices fall?
I don't understand. How did you expect your Treasuries to behave? Did something happen to surprise you?YDNAL wrote:For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% (-$61,700) price change in 1 year, it is a difficult pill to swallow.
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Re: Isn't it a good thing if bond prices fall?
Yes, bonds and stocks both.joer1212 wrote:For a guy like me, who dollar cost averages biweekly into his 401k consisting of 70% total stock market/30% total bond market, isn't this a good thing?
Bill Bernstein once wrote that young investors should "get on their knees and pray" for a market downturn [to buy/accumulate cheaper shares]. Accordingly, I love market downturns (as long as they are not so severe on the economy that I lose my job). Most of the "growth" in our portfolio came from the two market crashes (and subsequent recoveries) in the last decade.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Re: Isn't it a good thing if bond prices fall?
I agree fully.investor.saver1 wrote:You've missed my point.....I'm suggesting that it makes sense to purchase an asset that will not decline in value rather than an asset that is declining in value. What do we know for certain...that interest rates will rise from current historic lows. What is the unknown....when it is that interest rates will rise and how much they will rise. What I'm suggesting is simply to purchase and hold the asset that will not decline in value as rates rise. Since I can get rates on CDs equal to the yield on comparable bond funds (term and duration being equal) it makes more sense "now" to buy the CD. At the maturity date of the CD, if interest rates have normalized, use the proceeds from the maturing CD to buy the bond fund at "on-sale" prices. If at that time interest are still rising and bond prices are still falling, delay the bond fund purchase and buy another short term CD. Eventually, it will make good sense to buy into bond funds...but that time is not today....it's sometime in the future. Or buy the bond fund now, watch its value decline over the next few years, and then wait many years for your investment to recover to its original value.joer1212 wrote:Which goes to my original point. If I keep dollar cost averaging, and rebalance my stock/bond portfolio annually, won't the fact that I can purchase more bonds (that yield higher) with the same amount of money be akin to getting the stock market on sale when equity prices drop? Why are people so afraid of a drop in bond prices, but not in stock prices?investor.saver1 wrote:Seems to me that we are in a very unique time with respect to bonds. Bonds are paying historically low yields and are at priced a historically high prices. That is a short term recipe for disaster for a NOOB in the bond market. I'm not a market timer, but there are times when sitting out of the market makes sense. With respect to the bond market, this is one of those times. For those that say you cannot time the market, I respond with these questions: What's the worst that can happen if you sit out of the bond market for a couple years and put your savings in CDs? What's the best that can happen if you stay fully invested in the bond market for the next two years? I believe the answer is essentially the same. So I ask a follow-up question: Haven't I unloaded a boat-load of short term risk by moving into CDs during this two year timeframe?
But better yet, try to withdraw the CD early (and pay the penalty) once the yield on comparable bonds becomes higher than the yield on your CD. How much higher? That is a good question. Maybe something like 1% higher than your CD?
Re: Isn't it a good thing if bond prices fall?
I think bonds are less "safe" than people think.Tom_T wrote:I don't understand. How did you expect your Treasuries to behave? Did something happen to surprise you?YDNAL wrote:For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% (-$61,700) price change in 1 year, it is a difficult pill to swallow.
Yes, they are pretty "safe" in nominal returns, but they can go through bad periods where there is a lot of erosion of purchasing power, like the late 70's. Bonds were not very "safe" back then.
Re: Isn't it a good thing if bond prices fall?
The trouble is, however, when you have money already in a bond fund. I agree that market downturns are great, provided that you are not already invested in the market, and you can can gobble up cheap shares after the dust settles.Sunny Sarkar wrote:Yes, bonds and stocks both.joer1212 wrote:For a guy like me, who dollar cost averages biweekly into his 401k consisting of 70% total stock market/30% total bond market, isn't this a good thing?
Bill Bernstein once wrote that young investors should "get on their knees and pray" for a market downturn [to buy/accumulate cheaper shares]. Accordingly, I love market downturns (as long as they are not so severe on the economy that I lose my job). Most of the "growth" in our portfolio came from the two market crashes (and subsequent recoveries) in the last decade.
Re: Isn't it a good thing if bond prices fall?
joer: If you plan to hold your bond funds for the long haul, you will ultimately benefit from rising rates. Most of the return of a bond fund, over an investment lifetime, comes from the interest and compounding. The NAV changes are just temporary noise.
Re: Isn't it a good thing if bond prices fall?
YDNAL wrote:You don't know anything about this guy/gal... (s)he is a figment of my imagination.zaboomafoozarg wrote:Good thing their US stocks are up almost 20% and their international stocks about 3%.YDNAL wrote:For a guy/gal in retirement and withdrawing (not accumulating), with $1 million in Treasuries, who gets hit with a -6.17% (-$61,700) price change in 1 year, it is a difficult pill to swallow.
As such, I imagine:According to you, (s)he sees:
- A 70 year old with $0.429/$1.000 Equity/Fixed.
- Also 50/50 US/non-US Equities.
You see, zaboomafoozarg, it is "a difficult pill to swallow" to drop -$61.7K in the "safe" portion of my imagined guy/gal's portfolio. Nothing else of value to discuss in this regard.
- 120% x $0.2145 = $4K
- 103% X $0.2145 = $0.6K
Tom_T, you should ask the imagined guy/gal.Tom_T wrote:I don't understand. How did you expect your Treasuries to behave? Did something happen to surprise you?
Anyone invested in Bonds, at today's low yields, should understand the interest rate risk they take. To "understand" means NOTHING when it is time to "experience" - temporary (duration) as that may be. On a related note, just review hundreds (thousands?) of posts in late-2008 and early-2009 w.r.t. Equities. The point of my first post - which has been quoted now 3 or 4 times (lost count) - is that people are generally loss averse (not necessarily risk averse).
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Isn't it a good thing if bond prices fall?
Somehow I missed the part about the imaginary person... and you are one of the best posters on the Forum, so I should have known better. Sorry!YDNAL wrote:You see, zaboomafoozarg, it is "a difficult pill to swallow" to drop -$61.7K in the "safe" portion of my imagined guy/gal's portfolio. Nothing else of value to discuss in this regard.Tom_T, you should ask the imagined guy/gal.Tom_T wrote:I don't understand. How did you expect your Treasuries to behave? Did something happen to surprise you?
Anyone invested in Bonds, at today's low yields, should understand the interest rate risk they take. To "understand" means NOTHING when it is time to "experience" - temporary (duration) as that may be. On a related note, just review hundreds (thousands?) of posts in late-2008 and early-2009 w.r.t. Equities. The point of my first post - which has been quoted now 3 or 4 times (lost count) - is that people are generally loss averse (not necessarily risk averse).
I find it interesting that when rates were falling and bond fund prices were rising, nobody said "Oh, these bond funds are much too unstable for me. I need to find something steadier." Everyone just smiled whenever they looked at their account statements. It's only now that people are bemoaning the behavior of bonds.
Re: Isn't it a good thing if bond prices fall?
No problemo, Tom!Tom_T wrote: Somehow I missed the part about the imaginary person... and you are one of the best posters on the Forum, so I should have known better. Sorry!
I find it interesting that when rates were falling and bond fund prices were rising, nobody said "Oh, these bond funds are much too unstable for me. I need to find something steadier." Everyone just smiled whenever they looked at their account statements. It's only now that people are bemoaning the behavior of bonds.
People have been discussing potential/perceived changes in interest rates for what... 3-5 years ? As far as I can tell, most everyone should be sufficiently informed w.r.t. to risks in Bonds.
Link: http://www.bogleheads.org/wiki/Bond_Basics
That doesn't mean that when risks show-up, that people are not generally uneasy (remember, loss aversion not risk aversion).Bogleheads Wiki wrote:‣ Interest rate risk
‣ Credit risk
‣ Call risk
‣ Reinvestment risk
‣ Inflation risk
‣ Liquidity risk
‣ Other risks
- - Yield curve or maturity risk
- Exchange rate or currency risk
- Volatility risk
- Political or legal risk
- Event risk
- Sector risk
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Isn't it a good thing if bond prices fall?
That's true--if my investment horizon was 30 years; I plan on retiring in 6-8 years.billyt wrote:joer: If you plan to hold your bond funds for the long haul, you will ultimately benefit from rising rates. Most of the return of a bond fund, over an investment lifetime, comes from the interest and compounding. The NAV changes are just temporary noise.
Since we are in a unique environment right now, with interest rates poised to rise, I was wondering if a buy-and-hold strategy would be superior to selling my bond index fund, and putting that money into my stable value fund. I would then wait for the storm to clear in a couple of years, then buy back a bond index fund, which would be a lot cheaper.
Re: Isn't it a good thing if bond prices fall?
What if bond prices are about the same as (or lower than) they are now in "a couple of years". Will you buy then? If not then, when?joer1212 wrote:That's true--if my investment horizon was 30 years; I plan on retiring in 6-8 years.billyt wrote:joer: If you plan to hold your bond funds for the long haul, you will ultimately benefit from rising rates. Most of the return of a bond fund, over an investment lifetime, comes from the interest and compounding. The NAV changes are just temporary noise.
Since we are in a unique environment right now, with interest rates poised to rise, I was wondering if a buy-and-hold strategy would be superior to selling my bond index fund, and putting that money into my stable value fund. I would then wait for the storm to clear in a couple of years, then buy back a bond index fund, which would be a lot cheaper.
When you retire in 6-8 years, are you going to start taking principal from your bond funds right away? Even if you are, won't most of the principal remain in the fund for a much longer period of time? Given the duration of, say, TBM is ~6.5 years, it seems like a safe place for your non-equity money to reside for the next 6-30 years.
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas
Re: Isn't it a good thing if bond prices fall?
joer: If your scenario plays out, you might do better that way. The problem is (as Floyd is saying) we have no way to know the future. Seeing your timeframe, I understand your concern. I am very close to retirement (a few years), and I have set aside 3 years of expenses in CD's, which is part of my plan to get me to age 70 before I start SS. You might want to consider something similar as you get closer. In the end, I doubt it will make a really significant difference in your outcome if bond funds lose some NAV in the short run. You have many years of retirement to enjoy and spend down that bond money. If it is a substantial sum, I would hesitate to move it all to cash. Good luck.
Re: Isn't it a good thing if bond prices fall?
You are a market timer. You believe that there are times when it is just common sense to depart from the IPS in response to market conditions. You believe you know something about the future of the market. That's the very definition of market timing.investor.saver1 wrote:No...I'm really not a market timer! I would much prefer following my prescribed allocation of 40% equities and 60% bonds. But, there are times when (call it tactical allocation if you will) it simply does not make common sense to follow a rigid policy with respect to of portfolio allocation. This is one of those times for the bond market. Bonds are going to be declining in value over the next few years (short term) so how does it make common sense to buy now? Sorry...I just disagree and feel it is bad advice to buy in now. Yes....I will in all probability outperform you in the short term and during the long term I will also in all probability outperform you because I will have purchased bonds at a lower price and will therefore own more shares than you.
Agreed, we're not in competition and also agreed that we'll both be OK. Much appreciate the opportunity to voice my opinion!
I've already conceded that I've been tempted to market time bonds based on the information contained in interest rates - bonds are not quite a random walk. Though had I acted on that I would have locked in a couple of years underperformance, since bonds have done surprisingly well in the 2-4 years since everyone and his sister and his sister's dog started fretting about bond crashes. Bonds are having a bad year now, of course. Maybe next year will be worse. I expect bad years to happen so it doesn't bother me; in my portfolio bonds are more for noncorrelation than absolute safety of principal.
I'm not giving anyone advice to buy bonds now. I'm buying bonds now. You place your chips and you take your chances.
Re: Isn't it a good thing if bond prices fall?
It sounds like OP's entire portfolio is in a 401k, so CDs aren't an option. However, the SV fund sounds like a good alternative.
OP, what is the current yield on the SV fund?
You say it's higher than CDs. You can earn about 2% on a 5-year CD, which is higher than the SEC yield of Intermediate-Term Treasury fund (1.38%, comparable credit risk, much more interest-rate risk), and comparable to Total Bond Market (2.00%, more credit risk, more interest-rate risk).
If you can earn 2% or more in the SV fund, then your expected return over the next 5-10 years is comparable to TBM, but there is no interest-rate risk. There is some credit risk in SV funds, but my understanding is that it typically is quite low. I probably would use the SV fund.
Yes, if rates fall from here, you will recover some of the NAV loss you have experienced (you've already recovered some). Not being able to predict the future, I just look at the expected return vs. risk, and conclude that a stable value fund yielding 2% or more (or a good 5-year, non-brokered CD with decent early withdrawal terms) is a better proposition.
If still unsure, you could gradually increase your allocation to the SV fund over the next few months, perhaps increasing it more if TBM NAV increases, and less if TBM NAV decreases (kind of a value averaging approach).
Kevin
OP, what is the current yield on the SV fund?
You say it's higher than CDs. You can earn about 2% on a 5-year CD, which is higher than the SEC yield of Intermediate-Term Treasury fund (1.38%, comparable credit risk, much more interest-rate risk), and comparable to Total Bond Market (2.00%, more credit risk, more interest-rate risk).
If you can earn 2% or more in the SV fund, then your expected return over the next 5-10 years is comparable to TBM, but there is no interest-rate risk. There is some credit risk in SV funds, but my understanding is that it typically is quite low. I probably would use the SV fund.
Yes, if rates fall from here, you will recover some of the NAV loss you have experienced (you've already recovered some). Not being able to predict the future, I just look at the expected return vs. risk, and conclude that a stable value fund yielding 2% or more (or a good 5-year, non-brokered CD with decent early withdrawal terms) is a better proposition.
If still unsure, you could gradually increase your allocation to the SV fund over the next few months, perhaps increasing it more if TBM NAV increases, and less if TBM NAV decreases (kind of a value averaging approach).
Kevin
If I make a calculation error, #Cruncher probably will let me know.