How to weather the upcoming bond crash in my 401k

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livesoft
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Re: How to weather the upcoming bond crash in my 401k

Post by livesoft »

nisiprius wrote:…., then one way to shorten duration is to move to bank CDs. I think this makes much more sense than fiddling around with different flavors of bond fund. ....
CDs are unlikely to be available within the confines of the OP's 401(k) plan. It is true that they would be reasonably tax-efficient in a taxable account nowadays since they don't pay any interest.

Usually a 401(k) plan will have a "no-lose principal" option such as a money market fund. In my spouse's 401(k) plan for 2013 the money market fund was the best performing fixed income option.
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ogd
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Re: How to weather the upcoming bond crash in my 401k

Post by ogd »

in_reality wrote:I am buying long at the moment because having looked at how long it would take my bonds to recover from rising interest, I feel I can hold them that long. Of course if rates start rising and keep rising and never stop rising then my funds will never recover. I am not saying my strategy is without risks.
Interestingly enough, you will. If they rise linearly, you'll be better off after about 2x duration. If they rise quadratically (+1%, +2%, +3%, ...), about 3x duration. Only if they rise exponentially will you never recover. The effect of accumulated higher yields is very powerful. (There's also inflation to worry about, though, but cash or short will be even worse then).

I too am buying long in the rebalancing space, i.e. munis in taxable. Can't resist those yields, term risk be damned -- and I'm told by Larry and others that term risk works well with my large stock allocation.
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Re: How to weather the upcoming bond crash in my 401k

Post by abuss368 »

When is the bond "crash" to take place. After they "crash" and you sell, I will buy!
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MichaelM24
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Re: How to weather the upcoming bond crash in my 401k

Post by MichaelM24 »

The total stock market index is up over 8% from 2000 through today.
I don't think that's true. I think the stock market is up 3.3% from 2000 through today.

Bonds have had a 15 year bull run. I expect a 15 year run of zero real returns to balance things out.

Here are returns for the last 15 years (This includes 1999 and 2013!):

VTSMX 3.37%
SP500 4.6%
bonds 4.11%

And the next 15 years look like more of the same, so no retirement for me.
Last edited by MichaelM24 on Thu Jan 09, 2014 7:45 pm, edited 2 times in total.
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ogd
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Re: How to weather the upcoming bond crash in my 401k

Post by ogd »

MichaelM24 wrote:
The total stock market index is up over 8% from 2000 through today.
I don't think that's true. I think the stock market is up 3.3% from 2000 through today.

Bonds have had a 15 year bull run. I expect a 15 year run of zero real returns to balance things out.
Interestingly enough, as an intermediate bond investor you'd have been far better off if the "great bull run" had never occured. Just do the math. Hold on, I did it out of pure curiosity: +127% at 1999 yields vs +54% actual +108% actual. Edit: darn Morningstar and their resetting date boxes. So it's 20% more and you'd be sitting on a 5.63% Total Bond Market portfolio.

Bonds are not like stocks in so many ways.
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Re: How to weather the upcoming bond crash in my 401k

Post by MichaelM24 »

you'd have been far better off if the "great bull run" had never occured
I don't quite understand your post. Can you explain what you are showing?
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Re: How to weather the upcoming bond crash in my 401k

Post by ajcp »

MichaelM24 wrote:
you'd have been far better off if the "great bull run" had never occured
I don't quite understand your post. Can you explain what you are showing?
Bonds would have made more money if interest rates had stayed the same as they were in 1999. (ie higher dividends, but no NAV increases)
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ogd
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Re: How to weather the upcoming bond crash in my 401k

Post by ogd »

ajcp wrote:
MichaelM24 wrote:
you'd have been far better off if the "great bull run" had never occured
I don't quite understand your post. Can you explain what you are showing?
Bonds would have made more money if interest rates had stayed the same as they were in 1999. (ie higher dividends, but no NAV increases)
Yup. In other words, bond bull markets are bear markets in terms of returns, in the long run, and viceversa. The term is almost meaningless beyond, say, the few years where NAV changes are the most impactful.

Compare that to stocks: if stocks had stayed where they were in 2002 (or 1980, or 2009, i.e. the start of some bull market), you'd be absolutely worse off today.
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Re: How to weather the upcoming bond crash in my 401k

Post by leonard »

I thought the consensus was that it is impossible to foretell the future.

Set your asset allocation and stay the course.
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Re: How to weather the upcoming bond crash in my 401k

Post by MichaelM24 »

I thought this was interesting. Real returns from 2000-2013 stock/bond portfolios.
Taken from Vanguard's Economic and Investment Outlook.

20/80 = 2.4%
60/40 = 2.1%
80/20 = 1.8% <- Me :?
...investors reaching for yield and moving out of bonds into equities should realize that risk premia--the compensation for taking on this extra risk--are likely lower now than at any point in the last five years
sambb
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Re: How to weather the upcoming bond crash in my 401k

Post by sambb »

livesoft wrote:OTOH, lots of us talk out of both sides of our mouths. Many folks here have shortened the average duration of their fixed income holdings. Some examples are:
1. Exchanging out of intermediate-term TIPS to short-term TIPS.
2. Selling bond funds and buying CDs with maturities of 3, 5, 7-years.
3. Exchanging out of intermediate-term bond funds and buying short-term bond funds.
4. Increasing use of stable value funds and TIAA traditional annuity.
5. Combo of any and all of above.

seems to be market timing = usually a bad move IMHO
billyt
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Re: How to weather the upcoming bond crash in my 401k

Post by billyt »

I've got news for you.

You missed the big bond crash.

It happened last year.
rkhusky
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Re: How to weather the upcoming bond crash in my 401k

Post by rkhusky »

UALflyer wrote: If you are not prone to this phenomenon, then mathematically, bonds do significantly and adversely affect your overall performance.
Bonds adversely affect your return at the end of a good year for stocks. Bonds increase the return of your portfolio at the end of a bad year for stocks.
MichaelM24 wrote:I thought this was interesting. Real returns from 2000-2013 stock/bond portfolios.
Taken from Vanguard's Economic and Investment Outlook.

20/80 = 2.4%
60/40 = 2.1%
80/20 = 1.8% <- Me :?
...investors reaching for yield and moving out of bonds into equities should realize that risk premia--the compensation for taking on this extra risk--are likely lower now than at any point in the last five years
Don't put too much stock in returns over any particular time period.
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Re: How to weather the upcoming bond crash in my 401k

Post by UALflyer »

rkhusky wrote:
UALflyer wrote: If you are not prone to this phenomenon, then mathematically, bonds do significantly and adversely affect your overall performance.
Bonds adversely affect your return at the end of a good year for stocks. Bonds increase the return of your portfolio at the end of a bad year for stocks.
So does literally sticking your money under a mattress.

The point here is that over a long time horizon, assuming that you do resist the temptation to sell during market downturns, the higher your bond allocation is, the lower your overall return is likely to be. This absolutely does not mean that all investors should avoid bonds or other fixed income instruments because the vast majority of investors do in fact panic and do in fact sell during downturns. Intellectually, they know that it's a terrible idea but knowing something intellectually and seeing their balances plummeting before their very eyes are two very different things and the vast majority of investors just do not have the stomach to withstand the volatility. It is important to realize that that's all that's happening, however, as some people do continue to be under a mistaken impression that there's some fancy math going on and that they can actually increase their actual returns by adding bonds into the mix.
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kenyan
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Re: How to weather the upcoming bond crash in my 401k

Post by kenyan »

UALflyer wrote:
rkhusky wrote:
UALflyer wrote: Intellectually, they know that it's a terrible idea but knowing something intellectually and seeing their balances plummeting before their very eyes are two very different things and the vast majority of investors just do not have the stomach to withstand the volatility.
I think it goes further than that - they may not know that it is a terrible idea intellectually. Before the crash, they may think that, but they may come to a different intellectual conclusion later. During a crash, we're bombarded with rhetoric, much of it by very smart people, about how what we thought is now wrong; there's a new normal, and this newfangled way is how things should be valued, and changes in world events/market forces/new technologies/natural disasters/global warming/magnetic pole switching unequivocally have resulted in what how we expect XXX to be the future. It will all be backed by convincing graphs and calculations, so it can be difficult to stay the course, even for very smart people.

Bonds don't improve return; they improve risk-adjusted return. That's not meaningless. Buying TSM doesn't improve your expected return over picking an individual stock; it improves risk-adjusted return. That's not meaningless either.
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Re: How to weather the upcoming bond crash in my 401k

Post by YDNAL »

thisismyusername123 wrote:I'm 36 and have $230k in my Fidelity 401k, plus another $100k in Roths and taxable accounts. About $40k (17%) of my 401k is in Pimco Total Return (PTTRX). The remainder of the 401k is in Fidelity Spartan indices: S&P 500 (41%), Extended Market (16%) and International (25%). I have $7k of BSV (short-term bond ETF) in my Roth IRA and no other bond exposure. Across all investments, I'm in bonds to the tune of 14%.
A few bullet points:
  1. If Stocks tumble [say] 50%, your $330K total will tumble $141,500.
  2. The $47K in Bonds will buy Stocks at a 50% price reduction.
  3. If there is a 1% move in interest rates, the $47K in Bonds are going to decrease about $2,100. Yes, twenty one hundred bucks!
  4. Higher interest rates make you whole over the weighed duration of PTTRX and BSV.
Any time you feel like predicting the "inevitable Bond crash," please think about these facts above.
thisismyusername123 wrote:How to weather the upcoming bond crash in my 401k
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UALflyer
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Re: How to weather the upcoming bond crash in my 401k

Post by UALflyer »

kenyan wrote:
UALflyer wrote:
rkhusky wrote:
UALflyer wrote: Intellectually, they know that it's a terrible idea but knowing something intellectually and seeing their balances plummeting before their very eyes are two very different things and the vast majority of investors just do not have the stomach to withstand the volatility.
I think it goes further than that - they may not know that it is a terrible idea intellectually. Before the crash, they may think that, but they may come to a different intellectual conclusion later. During a crash, we're bombarded with rhetoric, much of it by very smart people, about how what we thought is now wrong; there's a new normal, and this newfangled way is how things should be valued, and changes in world events/market forces/new technologies/natural disasters/global warming/magnetic pole switching unequivocally have resulted in what how we expect XXX to be the future. It will all be backed by convincing graphs and calculations, so it can be difficult to stay the course, even for very smart people.
That's exactly right.
Bonds don't improve return; they improve risk-adjusted return. That's not meaningless.
They can but don't always, but even when they do, that doesn't end the conversation. Depending on the time period, literally sticking a person's money under a mattress can also improve risk-adjusted returns, but it probably won't allow you to retire.

Risk-adjusted returns is a very useful and very worthwhile metric but you don't end up retiring based on risk-adjusted returns and, at the end of the day, you don't see risk-adjusted returns on your statements. You see your actual returns and you retire based on your actual returns. According to S&P, from 1/1/1926 to 7/1/2013 the equity risk premium was 4.7%. If you panic and sell during downturns, as many do, you just won't realize that risk premium; if you resist that urge, you will benefit from the risk premium.
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Re: How to weather the upcoming bond crash in my 401k

Post by letsgobobby »

UALflyer wrote:
Risk-adjusted returns is a very useful and very worthwhile metric but you don't end up retiring based on risk-adjusted returns and, at the end of the day, you don't see risk-adjusted returns on your statements. You see your actual returns and you retire based on your actual returns. According to S&P, from 1/1/1926 to 7/1/2013 the equity risk premium was 4.7%. If you panic and sell during downturns, as many do, you just won't realize that risk premium; if you resist that urge, you will benefit from the risk premium.
It's even worse than that. The equity risk premium fluctuates greatly - if you panic and sell during downturns, you probably just blew a 10-15% equity risk premium, whereas if you sell at the top, you only lose the benefit of a 0-2% premium. Or something like that. Problem is, how do you know a top from a bottom?
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Re: How to weather the upcoming bond crash in my 401k

Post by rkhusky »

UALflyer wrote: The point here is that over a long time horizon, assuming that you do resist the temptation to sell during market downturns, the higher your bond allocation is, the lower your overall return is likely to be.
The key word in the above sentence is "likely". There are no guarantees. Long time horizon does not guarantee higher return for any particular end point. A more accurate statement would be "if future stock and bond returns are similar to past returns, the odds that a portfolio with a higher percentage of stocks will outperform a portfolio with a lower percentage of stocks is greater than zero ".
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Re: How to weather the upcoming bond crash in my 401k

Post by mall0c »

I thought the bond crash already happened?
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mall0c
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Re: How to weather the upcoming bond crash in my 401k

Post by mall0c »

MichaelM24 wrote:I thought this was interesting. Real returns from 2000-2013 stock/bond portfolios.
Taken from Vanguard's Economic and Investment Outlook.

20/80 = 2.4%
60/40 = 2.1%
80/20 = 1.8% <- Me :?
...investors reaching for yield and moving out of bonds into equities should realize that risk premia--the compensation for taking on this extra risk--are likely lower now than at any point in the last five years
So you retired on Jan 1, 2000? All the money in your portfolio was there on Jan 1, 2000 and you haven't added any since then?
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Re: How to weather the upcoming bond crash in my 401k

Post by nisiprius »

billyt wrote:I've got news for you.

You missed the big bond crash.

It happened last year.
We don't know that there isn't more to come.

However, what happened last year gives us a decent look at the actual real-world effect of a 1.5% rise in the 10-year rate. I think it shows us that a 1.5% rise is a bummer. Another 1.5% rise would be a double bummer. But not the apocalypse some have been talking about. If the clever folks think they know how to dodge them, more power to them, it's worth dodging--but it's dodging snowballs, not dodging bullets.
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Re: How to weather the upcoming bond crash in my 401k

Post by FrugalInvestor »

If your certain othat we're "about to get hosed in the long and intermediate bond market" and are more comfortable with short-term bonds as a result then move into short-term. There are many here who have shortened the duration of their bond portfolios due to queasiness about the bond market - certainly nowhere close to a majority if this poll is representative though.....

http://www.bogleheads.org/forum/viewtop ... 1&t=112412
Last edited by FrugalInvestor on Sat Jan 11, 2014 12:20 am, edited 2 times in total.
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letsgobobby
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Re: How to weather the upcoming bond crash in my 401k

Post by letsgobobby »

What bond crash? So far in 2014, bonds are up and stocks are down.
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Re: How to weather the upcoming bond crash in my 401k

Post by livesoft »

letsgobobby wrote:What bond crash? So far in 2014, bonds are up and stocks are down.
Folks who bought on the RBD are UP.
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letsgobobby
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Re: How to weather the upcoming bond crash in my 401k

Post by letsgobobby »

what RBD? the one where stocks fell less than 1%? Your standards are slipping.
livesoft
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Re: How to weather the upcoming bond crash in my 401k

Post by livesoft »

You must've missed the 3.5% one-day drop in VWO.
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Re: How to weather the upcoming bond crash in my 401k

Post by Electron »

Here's what happens when rates rise or fall. Which would you prefer over the long term?

The duration of the fund is 5.5 years.

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kenyan
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Re: How to weather the upcoming bond crash in my 401k

Post by kenyan »

livesoft wrote:
letsgobobby wrote:What bond crash? So far in 2014, bonds are up and stocks are down.
Folks who bought on the RBD are UP.
I see:

VWO at the beginning of the year: 41.14
VWO on Jan 2 after the 3.5% drop: 39.70 (RBD)
VWO on Jan 9 after several more days of steady drops: 39.11 (best day to buy so far for the psychics)
VWO at today's close: 39.87

I fail to see how earning 0.17 on a few shares of VWO would more than make up for the drop in the rest of the shares from 41.14 to 39.87, unless you had zero shares at the beginning of the year.
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nedsaid
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Re: How to weather the upcoming bond crash in my 401k

Post by nedsaid »

At age 36, the upcoming bond crash should be the least of your worries. You have almost 30 years before retirement to reinvest your dividends. Vanguard has a white paper out that concludes that rising interest rates benefit investors who reinvest the dividends in their bond funds. These investors will see higher returns from the increasing interest rates.

Pick a good Investment Grade Intermediate Term Bond Fund, reinvest the dividends, and just forget it.

At age 54, I still have years to reinvest my bond fund dividends. I have more reason than you do to be worried about falling bond prices. A retiree or near retiree has most reason to be worried about this as they are or will be soon harvesting the interest to live on rather than reinvesting it.

The Great Boglehead Bond Panic of 2013 had the following results for me. Intermediate Term Bonds down 2-3%. International Bonds down 5%. TIPS down 9%. Since most of my fixed income investments are in the Intermediate Term Bonds, I weathered the Great Bond Panic pretty well. Particularly when the US Stock Market was up 30% or more. My losses in bonds hurt a bit but weren't felt in the context of a broadly diversified portfolio.

My advice is don't sweat it.
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chrisjul
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Re: How to weather the upcoming bond crash in my 401k

Post by chrisjul »

Well, you will find this an interesting but consistent group. I suspect they will recommend that you "stay the course" regardless of bond performance.

I would suggest that you also seek other opinions also.

The bond allocation recommended here may disappoint you over the short term. I think you might want to be a bit more………..nimble.

Just my opinion.

Good luck!
swaption
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Re: How to weather the upcoming bond crash in my 401k

Post by swaption »

You know, given the recent equity and bond market dynamics, I think one has to really appreciate the timing of this thread from early January!
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Re: How to weather the upcoming bond crash in my 401k

Post by swaption »

Sorry, can't help it. Just amazing how wrong the "concensus" can be. As I see the 10 year down to about 2.48%, reminded of this post from early January when it was roughly 0.50% above the current level. Just step away from the keyboard folks and leave your portfolio alone.
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Re: How to weather the upcoming bond crash in my 401k

Post by Buddtholomew »

Agreed. If I had followed the advice to shorten duration, my FI investments would not be up more than 10% as of this post. Of course, yields have no where to go but up, sure...
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Re: How to weather the upcoming bond crash in my 401k

Post by Tier1Capital »

Exactly - take your hands off the mouse and take two steps back! We might be entering hyperinflation with double-digit Treasury yields or the 10yr Treasury might rally to 0.50% in a flight-to-quality panic. Nobody knows...
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Re: How to weather the upcoming bond crash in my 401k

Post by thisismyusername123 »

OP here. I wised up, did the right thing, and maintained my bond index position.

I did dabble in some small-cap equity overweighting, though. I am not quite yet ready to be a purist.
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Re: How to weather the upcoming bond crash in my 401k

Post by Grt2bOutdoors »

thisismyusername123 wrote:OP here. I wised up, did the right thing, and maintained my bond index position.

I did dabble in some small-cap equity overweighting, though. I am not quite yet ready to be a purist.
Glad you came to your senses. I was just about to ask how that "bond crash" affected your portfolio values? :P
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