Bond Be Gone

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Shabber
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Bond Be Gone

Post by Shabber » Tue Oct 01, 2013 4:33 pm

As a heavy investor in Vanguard Wellesley Income Fund and generally pleased with it's performance, I do see a time that the heavily weighted Bond fund may be in trouble as rates go up.
Thought you all may find the article interesting.

http://news.morningstar.com/articlenet/ ... ?id=612684

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grabiner
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Re: Bond Be Gone

Post by grabiner » Tue Oct 01, 2013 4:59 pm

Yes, there is a risk in bond holdings. However, there is also a risk in stock holdings, which is much greater, and that should be your main concern. If interest rates rise, bonds could lose 10%. If any of a large number of other bad things occur, stocks could lose 50%, as they did in 2000-2002 and 2007-2009. Thus a fund such as Wellesley which is 65% bonds is less risky than a stock-heavy portfolio.

You can reduce the inflation risk by holding your bonds as TIPS or I-Bonds. If you like Wellelsey's investment philosophy for stock and want to hold about that amount of stock, you could hold equal amounts of Wellington and TIPS to get half your bond exposure in TIPS and half in nominals.
Wiki David Grabiner

berntson
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Re: Bond Be Gone

Post by berntson » Tue Oct 01, 2013 5:50 pm

grabiner wrote: However, there is also a risk in stock holdings, which is much greater, and that should be your main concern. If interest rates rise, bonds could lose 10%. If any of a large number of other bad things occur, stocks could lose 50%, as they did in 2000-2002 and 2007-2009. Thus a fund such as Wellesley which is 65% bonds is less risky than a stock-heavy portfolio.
Long-term US treasuries lost more than 65% in real terms between 1941 and 1981, so bonds are perfectly capable of suffering catastrophic losses. I would put it this way: The odds that stocks could lose 50% in a few months is clearly much higher than the same thing happening for bonds. In the very long term, the odds of stocks losing 50% is lower than bonds losing 50%.
grabiner wrote: You can reduce the inflation risk by holding your bonds as TIPS or I-Bonds. If you like Wellelsey's investment philosophy for stock and want to hold about that amount of stock, you could hold equal amounts of Wellington and TIPS to get half your bond exposure in TIPS and half in nominals.
This is an excellent suggest. Since most of the losses previously mentioned were due to inflation, TIPs are a good way to diversify the risk of catastrophic bond loss.

john94549
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Re: Bond Be Gone

Post by john94549 » Tue Oct 01, 2013 8:27 pm

A CD ladder is also a good hedge against an untoward spike in interest rates. Rates on the 5-yr rungs aren't all that attractive these days (2%, maybe a tad more), but it is safe ballast for one's fixed-income allocation. Keep enough in bond funds for re-balancing, of course.

thepommel
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Re: Bond Be Gone

Post by thepommel » Tue Oct 01, 2013 8:50 pm

Market winds do interesting things.

I guess if we don't talk about value tilt, REITs, gold, or commodities, we can talk about 100% stock portfolios.

Now, why in the world would we bring this up now?

Kind Regards,

flyfisher
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Re: Bond Be Gone

Post by flyfisher » Tue Oct 01, 2013 8:57 pm

Why not create your own Asset Allocation so you can rebalance as stock and bond funds rise and fall...buying bund funds on the way down when your portfolio AA is out of whack by 5% or so?

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grayfox
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Re: Bond Be Gone

Post by grayfox » Wed Oct 02, 2013 11:34 am

Shabber wrote:As a heavy investor in Vanguard Wellesley Income Fund and generally pleased with it's performance, I do see a time that the heavily weighted Bond fund may be in trouble as rates go up.
Thought you all may find the article interesting.

http://news.morningstar.com/articlenet/ ... ?id=612684
The article made sense to me. So today I sold all of corporate bond ETFs, VCSH and VCIT. I looked at their holdings, and almost all the bonds were trading at premium. No where to go but down when they approach maturity.

Moved most of the proceeds into short-term CDs, unfortunately only 0.3% yield :x , but better than losing money. Will consider more stock if valuations come down. Just rolling the dice and hope doesn't come up ⚀ ⚀ .

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grayfox
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Re: Bond Be Gone

Post by grayfox » Wed Oct 02, 2013 12:12 pm

I just looked at the YTD performance of Vanguard's U.S. stock funds. They are all up 20% to 35% for the year! :mrgreen:

S&P 500 (VFINX) is way down at the bottom of the list, and it's still up +20.73%. Only poor Precious Metals and Mining VGPMX is negative, -33.50% :oops:

See page https://personal.vanguard.com/us/funds/ ... tclass=stk

Here are the last few years foo VFINX:
2013 +20.73% so far
2012 +13.45%
2011 -0.03%
2010 +12.82%
2009 +23.56%
2008 -38.52%

Too many good years there. There's got to be some payback eventually.
This is not a good time to be adding U.S. stocks and going 100%

hsv_climber
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Re: Bond Be Gone

Post by hsv_climber » Wed Oct 02, 2013 12:40 pm

grayfox wrote: Here are the last few years foo VFINX:
2013 +20.73% so far
2012 +13.45%
2011 -0.03%
2010 +12.82%
2009 +23.56%
2008 -38.52%

Too many good years there. There's got to be some payback eventually.
This is not a good time to be adding U.S. stocks and going 100%
Of course, it is hard to predict market cycles, but I don't think that we are already at the end of the current one. It might have another 2-3 years left before repeating 2001 / 2007.

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jainn
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Re: Bond Be Gone

Post by jainn » Wed Oct 02, 2013 12:54 pm

This article linked below, seems to dispute the original article and leads me to think bonds are not bad at all! (no loss of investment or zero inflation adjusted return over 25 years). Appears its only t-bills that are negative real return which makes sense with the yield.

http://www.thornburginvestments.com/pdfs/TH1401.pdf

Which Asset Classes Come out Ahead on A Real Real Return Basis? Stocks and Bonds.

Over the past 30 years, equities have generated positive returns for investors, even after adjusting for inflation, taxes and expenses. The S&P 500 Index posted an average annual nominal return of 10.80%, and a real real return of 5.79%, making U.S. large-cap stocks the highest-performing asset class in our study. International and U.S. small-cap stocks posted average nominal returns of 9.89% and 9.56%,
respectively, with real real returns of 5.13% and 4.92%.

Bonds generated materially positive returns over the past 30 years, and long-term government bonds have actually generated higher nominal returns than international and smallcap stocks. Again, we consider this an anomaly, because yields on government bonds declined toward zero through 2012, pushing prices and returns higher. With the recent selloff in the bond markets, this appears to be reversing. Nevertheless, on a real real basis, long-term government bonds returned 3.38% over 30 years. Corporate bonds generated a real real return of 2.12%, while intermediate government bonds returned 1.69%. Residential real estate generated a barely-positive 0.74%. T-bills and commodities generated negative real real returns.
Last edited by jainn on Wed Oct 02, 2013 1:39 pm, edited 1 time in total.

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Phineas J. Whoopee
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Re: Bond Be Gone

Post by Phineas J. Whoopee » Wed Oct 02, 2013 2:07 pm

grayfox wrote:
Shabber wrote:As a heavy investor in Vanguard Wellesley Income Fund and generally pleased with it's performance, I do see a time that the heavily weighted Bond fund may be in trouble as rates go up.
Thought you all may find the article interesting.

http://news.morningstar.com/articlenet/ ... ?id=612684
The article made sense to me. So today I sold all of corporate bond ETFs, VCSH and VCIT. I looked at their holdings, and almost all the bonds were trading at premium. No where to go but down when they approach maturity.

Moved most of the proceeds into short-term CDs, unfortunately only 0.3% yield :x , but better than losing money. Will consider more stock if valuations come down. Just rolling the dice and hope doesn't come up ⚀ ⚀ .
The premium bonds won't necessarily lose very much value as they only modestly approach maturity. The funds you've listed do not hold bonds to maturity. They roll their portfolios to maintain an average duration. Maybe what they bought at a premium they can sell at a premium. Maybe it will be a discount. If your time horizon is considerably longer than the average duration and you reinvest dividends (even if you draw from your overall portfolio in a total-return sense) it will be fine, discounting severe credit dislocations.

PJW

Call_Me_Op
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Re: Bond Be Gone

Post by Call_Me_Op » Wed Oct 02, 2013 5:53 pm

berntson wrote:
Long-term US treasuries lost more than 65% in real terms between 1941 and 1981, so bonds are perfectly capable of suffering catastrophic losses.
And this is the precise reason why Bogleheads to not recommend long-term US treasuries.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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