Where to put Profits? Don't trust Bond Funds

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Senin
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Where to put Profits? Don't trust Bond Funds

Post by Senin » Thu Mar 14, 2013 3:00 am

Since the end of last year I have been growing more and more concerned about my bond funds. I have steadily been reducing my bond fund holdings and more into stock funds. Of course at this point I am pleased. I think I went from a 70-30 split to about 90-10 (stock-bond) currently. I just feel that bonds have had their run and are out of steam. I don't see anywhere for them to go and believe in the bond crash (not dramatic but a slow consistent decline).

Here is the problem. With the recent run up of the stock market, I would like to take some profits aside. The problem is where to put the profits? As stated, I think bonds will only decline in the future. It makes little sense to put it in a money market, cd's at 1 %. Where does the money go?

I don't really like the idea of just taking it out and putting it in the bank to keep it safe. I know the market (after some pull backs) will run up higher. But no one can time it for its rises and falls.

Any suggestions?

One thought is Vanguard Wellesley. I know its a bond/stock mix, but it is always a slow steady incline.
Last edited by Senin on Thu Mar 14, 2013 3:54 am, edited 1 time in total.

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Re: Where to put Profits? Don't trust Bond Funds

Post by DaveS » Thu Mar 14, 2013 3:10 am

Send it to me. Alternatively I-bonds from treasury direct or CD's. They don't lose principle if rates rise. Frankly your fear of a bond decline due to rising rates is overstated. Something like Vanguard Short term Investment Grade has a short enough duration that it does not go down much in a rising rate environment, and the coupon goes up due to the higher rate. Dave

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nisiprius
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Re: Where to put Profits? Don't trust Bond Funds

Post by nisiprius » Thu Mar 14, 2013 5:39 am

You are in the same situation everyone else is. I don't know of a good answer. Conditions are what they are. Nobody ever promised that there would always be investments that meet our personal wishes for safety and yield. You say "It makes little sense to put it in a money market, cd's at 1%." Whatever happens to interest rates in future, they are low now. A safe 1% is about the best you can get (and it may be inching down a skosh).

Given your concerns, Wellesley seems pointless. You say "I would like to take some profits aside." As you say yourself, Wellesley is a bond/stock mix, 70% bonds.

If you sell, let us say, $10,000 in stocks and buy $10,000 worth of Wellesley...
...you have sold $10,000 worth of stocks...
...to buy $3,000 worth of stocks and $7,000 worth of bonds.

That's just the same as selling $7,000 worth of stocks and putting the money into bonds.

There's no magic in Wellesley, other than the fund's apparently good choices of what stocks (large value style) and what bonds (a bit longer than Total Bond).

"but it is always a slow steady incline...." What you mean is that it has always been an upward incline--since 2009, or when viewed from a distance. But that's true of just about every investment-grade bond fund. In the past six months or so, pure bond funds like Total Bond have started to flatten out and lean over a bit, and whether that's long-term or short-term I wouldn't know. In the past six months or so, stocks have done well. So, in any mixture of stocks and bonds, and balanced fund, in the past six months the stocks kept the mix growing while the bond stalled.

Don't get me wrong, there's nothing wrong with Wellesley, but you're seeing it as some magic answer and it isn't. Don't kid yourself. If interest rates rise a lot and rise quickly, Wellesley's share value will dip; and if the stock market tanks, Wellesley will dip. It may do better or worse than LifeStrategy Income or your own mix, but the big picture is going to be the same.

There isn't any magic answer. Safe investments that will not decline in dollar value are going to earn very little for some time, years likely if the Fed does what it says it will do. They are likely to fall slightly short of inflation after taxes. Bonds will either surprise everyone by continuing to be boring, slow-and-steady after all... or interest rates will rise, bond fund total growth will take a temporary hit, and after a pause about as long as their duration will start growing faster than before. Stocks will do whatever they do, some say boom and some say doom.

There are no safe investments today that earn more than 1-2% Government policy is either in the best interests of the nation as a whole or not, but in any case it is what it is, and it's had the effect that it's had.

The big danger is getting frantic and suddenly falling for some sales pitch for some oddball "alternative" investment that wouldn't have touched with a ten-foot pole ten years ago.
Last edited by nisiprius on Thu Mar 14, 2013 10:40 am, edited 3 times in total.
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Re: Where to put Profits? Don't trust Bond Funds

Post by Tigermoose » Thu Mar 14, 2013 5:45 am

1. Stable Value Fund (If available in your 401k plan)
2. I-bonds (for your non-retirement account)
3. Pay more down on your mortgage
4. CDs
5. Short term treasury bond funds
Institutions matter

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Re: Where to put Profits? Don't trust Bond Funds

Post by NYBoglehead » Thu Mar 14, 2013 6:46 am

I'd keep on keeping on. While returns for bonds over the next decade are projected to be modest, you'll want to have them for the next time the stock market takes a dive. If you are taking profits from equity holdings in a taxable account, I'd use them to make an extra payment on the mortgage if you are having trouble finding a place for them.

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Re: Where to put Profits? Don't trust Bond Funds

Post by livesoft » Thu Mar 14, 2013 7:12 am

It seems you might be ready for real estate. Buy some real estate and enjoy the rewards.
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Re: Where to put Profits? Don't trust Bond Funds

Post by Ed 2 » Thu Mar 14, 2013 7:28 am

Tigermoose wrote:1. Stable Value Fund (If available in your 401k plan)
2. I-bonds (for your non-retirement account)
3. Pay more down on your mortgage
4. CDs
5. Short term treasury bond funds
not even the Short Term Treasury. Just I Bonds or CD's. I got read off short term a year ago and do not regret. All bond funds are stink and only blind can't see. :happy
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Re: Where to put Profits? Don't trust Bond Funds

Post by Grt2bOutdoors » Thu Mar 14, 2013 7:33 am

If the profits are in the taxable space - I bonds, FDIC insured savings/money market accounts. The point is, you are looking to protect your gains (aka not lose it), if you don't feel comfortable with bond funds, then the next logical and low-yielding choice are capital preservation vehicles. I don't like using Wellesley as a fund that "always seems to be on the incline" - past performance is not indicative of the future, since it holds a good chunk of fixed income vehicles what makes you believe the investment manager (as good as they are) would be able to sidestep any bond fund debacle? What I'm trying to get at here is - your post says "don't trust Bond Funds" - but then, you are considering buying a fund that is heavily into bonds, those are conflicting.

I would place the money in those vehicles mentioned above, when and if your desired allocation deviates from the actual allocation, you should then rebalance those "profits" back into equities. I rebalanced my own portfolio last week into bonds due to hitting a band, since then I've missed 3 days of upswing in equities - such is life.
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Re: Where to put Profits? Don't trust Bond Funds

Post by richard » Thu Mar 14, 2013 7:35 am

Do you have an investment plan or are you buying and selling based on your feeling about the direction of the stock and bond markets?

An investment plan is the better course. Pick and allocation and stick to it with without regard to your feelings on valuations (or put specific valuation criteria into your plan if you're feeling brave).

Bond yields will no doubt go up at some point. This would be a good thing for long-term investors, as it will lead to higher returns over the long term, even if it causes temporary lower principal values. As you say, no one can time the market's rises and falls, so pick a good plan and stay the course.

Alternatively, pick a target interest rate and stay in bank deposits, i bonds, CDs or the like until rates rise to that level. Remember, for market investments, the higher the yield, the higher the risk.

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Re: Where to put Profits? Don't trust Bond Funds

Post by Johm221122 » Thu Mar 14, 2013 7:37 am

Tigermoose wrote:1. Stable Value Fund (If available in your 401k plan)
2. I-bonds (for your non-retirement account)
3. Pay more down on your mortgage
4. CDs
5. Short term treasury bond funds
+1 You could also buy individual Treasuries, but don't add stocks. You need fixed income, stocks could loose lots more
John

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Re: Where to put Profits? Don't trust Bond Funds

Post by bottomfisher » Thu Mar 14, 2013 9:19 am

Jeremy Grantham of GMO is optimistic about international, emerging markets and timber relative to US stocks and bonds over the next 7 years. I'm not sure how to or plan to invest in timber; but I'd be curious how one goes about doing it outside of owning forest land.

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Re: Where to put Profits? Don't trust Bond Funds

Post by Grt2bOutdoors » Thu Mar 14, 2013 9:22 am

bottomfisher wrote:Jeremy Grantham of GMO is optimistic about international, emerging markets and timber relative to US stocks and bonds over the next 7 years. I'm not sure how to or plan to invest in timber; but I'd be curious how one goes about doing it outside of owning forest land.
In May of last year, one could have purchased Weyerhauser which owns a significant chunk of timber land in the US, the Reit was priced at 15 and change, today it's over 30. That was the time to purchase timber. Today, International looks more appealing to me than buying land or Reits. JMO.
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Re: Where to put Profits? Don't trust Bond Funds

Post by Aptenodytes » Thu Mar 14, 2013 9:26 am

If 90-10 works for the money you had yesterday, why won't it work for the money you have today? Whether the money is labeled "profit" or not it behaves the same as all your other money. You should be paying no attention to this designation at all. Stick with 90-10 and rebalance as needed.

That's assuming 90-10 is right for you and that your AA overall is based on a sound plan. If that assumption isn't accurate then focus on that. Either way, ignore the profits.

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Re: Where to put Profits? Don't trust Bond Funds

Post by Sbashore » Thu Mar 14, 2013 9:53 am

If you're growing more and more concerned about your bond funds, what are you going to do when your equities take a fifty percent hit? You seem to be focused on returns, are you considering the value of bonds in reducing portfolio volatility? My first impression of your post is that you are caught up in a "recency" trap and setting yourself up for the classic situation where you find you have exceeded your risk tolerance when equities take a dive.
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Re: Where to put Profits? Don't trust Bond Funds

Post by Blues » Thu Mar 14, 2013 9:58 am

nisiprius wrote:You are in the same situation everyone else is. I don't know of a good answer. Conditions are what they are. Nobody ever promised that there would always be investments that meet our personal wishes for safety and yield. You say "It makes little sense to put it in a money market, cd's at 1%." Whatever happens to interest rates in future, they are low now. A safe 1% is about the best you can get (and it may be inching down a skosh). (Snip...)
Excellent post, nisiprius. :beer
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Re: Where to put Profits? Don't trust Bond Funds

Post by Dulocracy » Thu Mar 14, 2013 10:19 am

nisiprius wrote: There are no safe high-yielding investments today.
I would argue there never were. There were investments that had risk that people got in and out of before the risk became an actual negative impact, but the risk was always there. Higher returns will have higher risk.

OP: I understand taking the profit. Unless you are sinking that money into your mortgage (if you have one) to lower your debt, however, I would not anticipate any good investment options that would allow you to both "take the profit" now and continue to invest in something with high yield. If you take the profit, you are by necessity removing the risk and the potential return on re-investing that profit.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Where to put Profits? Don't trust Bond Funds

Post by YDNAL » Thu Mar 14, 2013 10:30 am

Senin wrote:Since the end of last year I have been growing more and more concerned about my bond funds. I have steadily been reducing my bond fund holdings and more into stock funds.
Lets see, you increased allocation to a riskier Asset because of concern with a LOWER risk Asset?

This doesn't have anything to do with the fact that the S&P 500 has returned 6.61% YTD February 28th... does it?
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Re: Where to put Profits? Don't trust Bond Funds

Post by bertie wooster » Thu Mar 14, 2013 10:36 am

You bought into stocks after they had a big run and now you "know the market will run up higher" and "believe in the bond crash"?

You say no one can time the market, and yet are trying to. stick to your allocation (the 70/30, not the 90/10 you picked after stocks had risen) and move on.

Good luck!

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Re: Where to put Profits? Don't trust Bond Funds

Post by nisiprius » Thu Mar 14, 2013 10:45 am

Dulocracy wrote:
nisiprius wrote: There are no safe high-yielding investments today.
I would argue there never were. There were investments that had risk that people got in and out of before the risk became an actual negative impact, but the risk was always there. Higher returns will have higher risk.
Badly phrased. I edited it in the post now to say "no safe investments earning more than about 1-2%." Back in 2007, my Prime Money Market account was a safe investment that was earning about 5%. And I have series I savings bonds bought around 2000 that are safe investments earning 3% above inflation.

I believe it to be true that at many times in the past, there were safe investments with considerably higher yields--whether measured nominal or real--than any safe investments available today. And that if you demand yesterday's higher yields, you will be looking at riskier investments today than in the past.
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Re: Where to put Profits? Don't trust Bond Funds

Post by midareff » Thu Mar 14, 2013 10:46 am

Rather than make an emotional decision that is most likely to lose money for you, or make a market timing decision research shows no one can call, why don't you review your asset allocation plan in relation to where you are in life, and how in the long term your investment behavior will be. While many say these are tough investment times at the end of the day aren't all times tough? Whether it is bond interest rates, stagnant markets, inflation, geopolitics ... there are plenty of things out there to keep the going tough forever. Set your asset allocation so you can meet realistic goals and sleep at night when the next Black Swan flys over your roof and stick to it. No one knows what the market will do tomorrow, next week, next month or year ... that's why you develop your long term plan and stick to it.

Landy .. that you waving again??? :oops:

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Re: Where to put Profits? Don't trust Bond Funds

Post by YDNAL » Thu Mar 14, 2013 10:54 am

midareff wrote:Landy .. that you waving again??? :oops:
Image
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Re: Where to put Profits? Don't trust Bond Funds

Post by Toons » Thu Mar 14, 2013 11:00 am

Predicting outcomes,forecasting what will be,part of what makes the investing experience
so entertaining,albeit next to impossible to do.
Once again,let your asset allocation plan tell you what to do :happy
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Re: Where to put Profits? Don't trust Bond Funds

Post by RF » Thu Mar 14, 2013 11:06 am

midareff wrote: Set your asset allocation so you can meet realistic goals and sleep at night when the next Black Swan flys over your roof and stick to it. No one knows what the market will do tomorrow, next week, next month or year ... that's why you develop your long term plan and stick
I second this comment. Seems you don't have IPS, otherwise you won't jump from 60:40 to 90:10 in a heartbeat.
Don't try to time the market.

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Re: Where to put Profits? Don't trust Bond Funds

Post by midareff » Thu Mar 14, 2013 11:11 am

With the market being a zero sum gain in many respects ... someone has to lose money for the heads to make it. Looks like the OP wants to be that candidate to lose.

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Re: Where to put Profits? Don't trust Bond Funds

Post by greg24 » Thu Mar 14, 2013 11:15 am

I don't trust bond funds either. But I also don't trust a stock market that keeps setting all time records.

My 60/40 asset allocation is off, and I really should be moving 6.66% from stocks to bonds. Yesterday, I moved 1.33% from stocks to bonds.

I've been hearing for years that bonds stink, and they've done fine. Ben and company insist they're keeping rates low until unemployment gets below 6.5%.

May you live in interesting times.

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Re: Where to put Profits? Don't trust Bond Funds

Post by john94549 » Thu Mar 14, 2013 12:13 pm

Best to develop a plan and stick to it. That said, if your AA is out-of-whack and you generate cash in a re-balance, "where to put it" is a fair question. As the OP, I am less sanguine about bond funds; that noted, VFSTX has weathered the latest bump in the 10-year (from roughly 1.5% to roughly 2%) with barely a hiccup. First to admit I should not have sold it, even with a gain.

Performance issues aside, bond funds are super-slick for re-balancing, as are MMFs/savings accounts. CDs, not so much. I'm firmly of the opinion that CD ladders are worthy, but only for funds over-and-above what you might need in a market swoon.

Hard to tread water these days in fixed-income.

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Re: Where to put Profits? Don't trust Bond Funds

Post by scone » Thu Mar 14, 2013 12:50 pm

I hear you about bond funds, but you have to give up something to get safety. How about munis? I'm considering the Vanguard intermediate one, which has pretty good credits and a 5.1 year duration:

https://personal.vanguard.com/us/funds/ ... IntExt=INT
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Re: Where to put Profits? Don't trust Bond Funds

Post by LH » Thu Mar 14, 2013 1:08 pm

I would stay the course.

What if the stock market tanks 50 percent, and stays down for 20 years?

The market does not care how you "feel" you are just investing on emotion.

Every side you bring up, has another side. Bonds may fall, well, "risk on" stocks may fall harder my friend.

Hey, the efficient frontier is what it is, yeah, we are basically being herded into stocks, a lot of bonds have negative real yield. Interest rate risk is certainly there. It is what it is.

But why you think stocks are the panacea, or have become less risky...... I have no clue why you "feel" like that. And it really doesnt matter, because regardless of how you "feel" about it, stock risk, barring crystal ball, is higher than US treasury risk. Period.

That doesn't mean bonds will outperform stocks, its just means worse case scenario, bonds will return more of principle than stocks. Worst case is not interest rates rise, bond funds lose 10 percent or whatever in their "crash" (after having gained more than 10 percent), and stocks do well, or stay flat. That is nothing.

You have upped the risk of your portfolio substantially. Hope its not 1990 Japan coming up, or 1929 US. Those are some real worst cases.

Image
http://www.marketoracle.co.uk/Article6937.html

Also, I would posit "profits"conceptualization is mental accounting.

http://www.amazon.com/The-Great-Depress ... B005CDU3IE

This is a diary written real time by a lawyer during great depression, published years later by his son I think. In it, he talks about bonds in no uncertain terms, and in a very positive light. Its a quick read, but its a GREAT read about what people think and "feel" and how those feelings turn out.

Now nominal and even TIPS to a hopefully lessor extent, can certainly get killed in inflation (70s). But diversification is key. You cannot expectantly time it. You cannot take the what, 20 percent rise in the TIPS fund over the past years, and say, hey, I am gonna miss the possible downside, by switching to stocks....... Inflation? Deflation? smooth sailing? who knows? If you know, heck, leverage up, and quit talking to us passive indexors, buy your own Caribbean island : )

You have significantly upped your risk of your portfolio based on "feel"
Last edited by LH on Thu Mar 14, 2013 1:34 pm, edited 1 time in total.

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Re: Where to put Profits? Don't trust Bond Funds

Post by DualIncomeNoDebt » Thu Mar 14, 2013 1:33 pm

Read my recent posts on bonds, stocks, and the amount of risk you are taking versus the compensation received for the extra risk. http://www.bogleheads.org/forum/viewtop ... 0&t=112668

Look at those stock drawdowns. Are you sure you want to abandon bonds? Are you really being compensated for the risk inherent in your 90% equity position when compared against other instruments?

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Re: Where to put Profits? Don't trust Bond Funds

Post by Dandy » Thu Mar 14, 2013 1:50 pm

As has been said we are all in the same boat. stocks are good but high, bonds are high and interest rates are likely to go up -- soon?? CDs pay little, and gold has lost it's luster. I am trying to stay the course with equity allocations and reducing my bond duration exposure. Some CDs, some short term bond funds and some intermediate bond funds.

There is no safe, reasonable yielding investment/savings vehicle. So I say spread it around making sure you have explored all reasonably safe fixed income choices. Short term bonds/funds, EE/Ibonds, short term TIPS, CDs, Intermediate bonds/funds. I am about 1/3 safe e.g. CDs, 1/3 short term bond funds, and 1/3 intermediate bond funds - with TIPS in the intermediate category.

If you are old enough you may want to consider some allocation to an immediate fixed annuity. Relatively safe and the distribution rate is higher than you can earn on CDs because of mortality credits. Most suggest buying annuities over time to gain the advantage of increasing age and perhaps better rates. Also, to use several different companies in case of a rare default.

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Re: Where to put Profits? Don't trust Bond Funds

Post by CWRadio » Thu Mar 14, 2013 3:35 pm

Dandy wrote: If you are old enough you may want to consider some allocation to an immediate fixed annuity. Relatively safe and the distribution rate is higher than you can earn on CDs because of mortality credits. Most suggest buying annuities over time to gain the advantage of increasing age and perhaps better rates. Also, to use several different companies in case of a rare default.
At what age does the mortality credits cut in for a immediate annuity? Paul

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Re: Where to put Profits? Don't trust Bond Funds

Post by john94549 » Thu Mar 14, 2013 4:04 pm

Paul, it is my understanding that mortality is always factored in with annuities. I don't think there is a trigger.

For example, a 30-something could buy an immediate annuity. The payout would be much less, as a percent of the purchase price, than that for a 70-something. I think the easiest way to see this is to go to Berkshire Hathaway's annuity quote (I think they call it "EZ Quote" or something like that) and fiddle with various ages.

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Re: Where to put Profits? Don't trust Bond Funds

Post by Senin » Fri Mar 15, 2013 3:12 am

I don't think you can be so rigid with your AA that you don't see the bigger picture. Now and then, different sections of the market do "blow up." There were those who thought Dot Coms would only go up, then 2000 hit. There were those who only thought the housing market would go up, then 2008 hit. I think bonds have had a hellava run up. There are definitely oversold. People were so scared of the stock market the past ten years (especially the new generation) that they flocked the "safety" of bonds. With this new raging stock bull market, people will start jumping on the band wagon--- selling bonds to buy stocks. Currently I am concerned about any bond allocation.

I agree that Wellsley is not the answer. I was just throwing the thought out hoping for the best.

Some one mentioned VWITX (Vanguard Intermediate-Term Tax-Exempt Fund). That is my one and only last remaining bond fund.

You guys are right. There is no safe investment that will pay ya more than 2%. There are the choices.

I could pay down the mortgage, but the rate is 3%, and I need the write off.

My strategy...... let the bull run for as long as it will go while I continue to dollar cost in each month. And on big dips, pour even more cash in.

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Re: Where to put Profits? Don't trust Bond Funds

Post by richard » Fri Mar 15, 2013 5:27 am

Senin wrote:I could pay down the mortgage, but the rate is 3%, and I need the write off.
Are you sure you are better off, on an after tax basis, keeping the mortgage? You still have to pay the after-tax interest costs. It depends on the actual numbers, but if you're in the 25% marginal bracket, you're likely paying at least 2.25% after taxes, which is higher than the yield on intermediate tax exempt.

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Re: Where to put Profits? Don't trust Bond Funds

Post by nisiprius » Fri Mar 15, 2013 7:25 am

Senin wrote:I think bonds have had a hellava run up.
Is this what you call a "helluva run up?" Note: this is a price chart, reflecting NAV--capital appreciation--not my customary growth chart. Run up? Sure. "Helluva?" I wouldn't say say "helluva."

Image

Now let's add QQQ, the NASDAQ-tracking ETF, to that chart:

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I see bonds as having quite possibly having some kind of bubble-like dynamics that might have driven their price up by, perhaps, 10%, but I haven't heard of anyone quitting their job to day-trade bonds. Anyone who is concerned about optimizing their portfolio might be tempted to make some kind of move, and I will not argue at all with anyone who thinks bank CDs are better. For a taxable account, it might be a good idea to max out one's annual allowance of series I savings bonds before buying any taxable bond fund.

But what else is there? The traditional securities are stocks and bonds. They have a certain logic to them because we know how they get their money--from business operations. I don't know any investments outside of securities that for which I can say "I understand where the money comes from, I see that it doesn't come just from taking away from somebody else, and I understand what this investment does to create actual value of some kind."

Everything else seems to me to be either

a) hoop snakes that bite their own tail (complex patterns of derivatives, leverage, etc) or

b) power maneuvers (corner the market, charge what the traffic will bear, and take everyone else's money away from them).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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nydad
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Re: Where to put Profits? Don't trust Bond Funds

Post by nydad » Fri Mar 15, 2013 8:04 am

Buy some alternative investments if you don't like bonds.

You can get into a TIMO if you have money, that gives you a direct timber play. (Alternatively, you can buy and manage your own timberland, but this is not for the faint of heart).
Real estate, as mentioned by others.
If you want to keep your profits, then go to a Sotheby's auction and plonk down a few 100k on a beautiful medieval painting. Over time, it's quite possible the value will increase, or at least hold its value, and you get to enjoy it.
Many other alternative assets to consider, but I personally think you should still hold bonds.

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Sbashore
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Re: Where to put Profits? Don't trust Bond Funds

Post by Sbashore » Fri Mar 15, 2013 10:15 am

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KyleAAA
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Re: Where to put Profits? Don't trust Bond Funds

Post by KyleAAA » Fri Mar 15, 2013 10:18 am

Why not just shorten your duration? A short-term bond index fund should do fine even if rates rise. You won't be getting 4% per year, but who cares? You aren't going to lose money over any period of a few years or more, either. It strikes me as extremely illogical to move out of bonds and into stocks in order to AVOID risk. The worst-case scenario for bonds really isn't all that bad at all unless you're mostly in long-term bonds.

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