Good News For Bonds!

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rattlenap
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Good News For Bonds!

Post by rattlenap » Wed Dec 14, 2016 4:08 pm

http://www.cnbc.com/2016/12/14/fed-rais ... ecade.html

Interest rates are finally going up.

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Taylor Larimore
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Re: Good News

Post by Taylor Larimore » Wed Dec 14, 2016 4:23 pm

rattlenap wrote:Good News For Bonds

rattlenap:

It is also good news for the media who are always looking for something to write about.

Stay-the-course.

Best wishes
Taylor
Last edited by Taylor Larimore on Wed Dec 14, 2016 4:26 pm, edited 1 time in total.
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Phineas J. Whoopee
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Re: Good News For Bonds!

Post by Phineas J. Whoopee » Wed Dec 14, 2016 4:24 pm

rattlenap wrote:...
Interest rates are finally going up.

The Federal Funds Rate has gone up, very modestly, and the prospects for future increases are no greater or less than prior prospects for them.
PJW

Quark
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Re: Good News For Bonds!

Post by Quark » Wed Dec 14, 2016 4:34 pm

Bond prices are down!

That actually is good news for bonds, unless you're selling them.

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Re: Good News For Bonds!

Post by Quark » Wed Dec 14, 2016 4:36 pm

Phineas J. Whoopee wrote:
rattlenap wrote:...
Interest rates are finally going up.

The Federal Funds Rate has gone up, very modestly, and the prospects for future increases are no greater or less than prior prospects for them.
PJW

The Fed now contemplates three increases in 2017 rather than two. It remains to be seen whether they actually will hike or whether this is yet another in a long string of Fed overly optimistic expectations that are not born out.

Now that the market has seen the Fed's announcement and Yellen's news conference, today's Fed thoughts would seem to be priced in. The future of interest rates is, always, uncertain.
Last edited by Quark on Wed Dec 14, 2016 4:38 pm, edited 1 time in total.

malabargold
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Re: Good News For Bonds!

Post by malabargold » Wed Dec 14, 2016 4:38 pm

It's bad news for most bonds and bond funds that you already own

Quark
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Re: Good News For Bonds!

Post by Quark » Wed Dec 14, 2016 4:40 pm

malabargold wrote:It's bad news for most bonds and bond funds that you already own

The will continue to generate the amount of interest they did before and now you have the chance to roll them into higher yielding bonds (bond funds will do this for you).

How is that bad, unless you're selling?

selters
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Re: Good News For Bonds!

Post by selters » Wed Dec 14, 2016 4:41 pm

malabargold wrote:It's bad news for most bonds and bond funds that you already own


Yeah, for a few years. But after a few a years you will have more money than if interest rates had stayed low.

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Re: Good News For Bonds!

Post by oldcomputerguy » Wed Dec 14, 2016 4:52 pm

malabargold wrote:It's bad news for most bonds and bond funds that you already own


As I understand it, if you hold your bond fund longer than the fund's duration, you should actually start to see a benefit from the higher rates.
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Re: Good News For Bonds!

Post by Oicuryy » Wed Dec 14, 2016 5:04 pm

Also good news for shareholders of money market mutual funds. The Fed doubled the rate it pays on overnight reverse repurchase agreements from 25 basis points to 50.

Ron
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Re: Good News For Bonds!

Post by Quark » Wed Dec 14, 2016 5:09 pm


qwertyjazz
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Re: Good News For Bonds!

Post by qwertyjazz » Wed Dec 14, 2016 5:10 pm

Still learning about bonds and interest rates. But if I understand it, the Fed might raise the risk free rate to 100 basis points by the end of 2017. Yeah let the good times roll. Champagne for everyone with money in the banks :oops:
G.E. Box "All models are wrong, but some are useful."

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Phineas J. Whoopee
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Re: Good News For Bonds!

Post by Phineas J. Whoopee » Wed Dec 14, 2016 5:18 pm

smartinwate wrote:...
As I understand it, if you hold your bond fund longer than the fund's duration, you should actually start to see a benefit from the higher rates.

That's true in a simplified world, because it only refers to one yield change at one point in time, but it's good as a conceptual guide. In reality yields constantly fluctuate. I believe poster ogd has presented some math that shows if you're in for around twice the average duration you're almost always good.

One thing these conversations don't make explicit, and perhaps they shouldn't, is if you have a need say six years out, and you buy something like Vanguard's Total Bond Market Index Fund, VBMFX, with its 5.8 year average duration, each day your need gets 24 hours closer, but the fund doesn't get a duration one day shorter.

In other words, what you stated is very useful for introducing the concepts, but not especially so for calculating future dollar amounts, nominal or real.

I hope this post is helpful for somebody out there.

PJW

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nedsaid
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Re: Good News For Bonds!

Post by nedsaid » Wed Dec 14, 2016 5:22 pm

Quark wrote:Bond prices are down!

That actually is good news for bonds, unless you're selling them.


The key is to reinvest the dividends as rates are going up. Another thing to keep in mind is that the longer the duration of the fund, the longer period of time before you break even. That is where you get to the point where the reinvested dividends make up for the loss of Net Asset Value in the fund. As I recall, for intermediate term bond funds, it is about three to five years. If you stay the course and reinvest, the rise in interest rates will actually increase the return of your bond funds.
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Quark
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Re: Good News For Bonds!

Post by Quark » Wed Dec 14, 2016 6:13 pm

nedsaid wrote:
Quark wrote:Bond prices are down!

That actually is good news for bonds, unless you're selling them.

The key is to reinvest the dividends as rates are going up. Another thing to keep in mind is that the longer the duration of the fund, the longer period of time before you break even. That is where you get to the point where the reinvested dividends make up for the loss of Net Asset Value in the fund. As I recall, for intermediate term bond funds, it is about three to five years. If you stay the course and reinvest, the rise in interest rates will actually increase the return of your bond funds.

Reinvesting dividends will increase values faster, but even if you spend the dividends and just reinvest principal (or let a fund do it for you), you'll eventually end up ahead.

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patrick013
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Re: Good News For Bonds!

Post by patrick013 » Wed Dec 14, 2016 6:31 pm

You're going to get the original yield (YTM) as when you bought
the fund, plus a little extra yield from reinvestment at better yields.
But, it takes some of the duration period at least to make that
extra yield become reality in the total return column for bond funds.

The FOMC is supposed to publish a schedule next month of future
possible rate increases. All depending on the future current data.
age in bonds, buy-and-hold, 10 year business cycle

mac808
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Re: Good News For Bonds!

Post by mac808 » Wed Dec 14, 2016 6:41 pm

How soon will Internet banks like Ally and Synchrony be raising their checking account rates?

flyingaway
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Re: Good News For Bonds!

Post by flyingaway » Wed Dec 14, 2016 7:02 pm

smartinwate wrote:[quote="


As I understand it, if you hold your bond fund longer than the fund's duration, you should actually start to see a benefit from the higher rates.[/quote]

I have seen this statement many times, what does it actually mean? Does it mean, after the holding period = the duration,
(1) your total loss is offset by the higher interest paid, and your total return is zero, or
(2) the total return is the (almost) same as that from the same fund without the interest change, or
(2) your (same) fund will actually have a return higher than that from the same fund without the higher interest rates?

Saphomd
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Re: Good News For Bonds!

Post by Saphomd » Wed Dec 14, 2016 7:24 pm

I will continue to DCA into my VG Total Bond Market Index fund monthly. I just dont know if I should contribute to my Star Fund which I believe has 40% bonds and if any future interest rate hikes will decrease the bond price because of its equity holdings. My guess is yes.

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Phineas J. Whoopee
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Re: Good News For Bonds!

Post by Phineas J. Whoopee » Wed Dec 14, 2016 7:46 pm

mac808 wrote:How soon will Internet banks like Ally and Synchrony be raising their checking account rates?

Each bank makes its own interest rate decisions, both for deposits and for loans. The Federal Funds Rate has influence, but the Fed doesn't control the rates banks offer.

A bank will pay enough interest to attract enough deposits that its reserves will support what it believes will be profitable investments. Retrieved just now, Synchrony Bank is offering 1.05% on savings accounts, and HSBC is offering 0.01%, 105 times less. Synchrony is signaling that it has profitable uses for more reserves, and HSBC is signaling it's swimming in reserves already and can't do much with any more.

The Fed directly sets two rates, neither of which applies to you or me, and sets a target, these days a target range, for a third, the Federal Funds Rate at which banks that end the day with more reserves than required lend the excess to banks which end the day with too little, but it doesn't directly control that rate. It has strong influence, but not full control.

Contrary to some reports, the Federal Funds Rate is not the rate at which banks borrow from the Fed. Banks try to avoid borrowing reserves from the Fed if they can, because it's more expensive, and because if the information gets out it will tell their stock holders they're in trouble and might fail soon, which would create a bank run and a selloff in their shares, which would be a self-fulfilling failure prophecy. The FFR is a rate at which banks borrow reserves from each other overnight, which includes over weekend.

Although individual banks certainly are important, the Fed is more concerned with the stability of the banking system as a whole.

PJW

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Taylor Larimore
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Bonds are for Safety

Post by Taylor Larimore » Wed Dec 14, 2016 8:35 pm

Bogleheads:

We tend to concentrate on bond returns. This is not what bonds are for. Bonds are primarily to reduce the loss in our portfolio when stocks plunge. Use stocks for higher expected returns.

Best wishes and Happy Holiday!
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Miriam2
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Re: Bonds are for Safety

Post by Miriam2 » Wed Dec 14, 2016 8:49 pm

Taylor Larimore wrote:Bogleheads:

We tend to concentrate on bond returns. This is not what bonds are for. Bonds are primarily to reduce the loss in our portfolio when stocks plunge. Use stocks for higher expected returns.

Best wishes and Happy Holiday!
Taylor

If I may tell my little true sad story about understanding bond returns. Way back when the Bogleheads were Vanguard Diehards I learned that we needed bonds or bond funds and that the best simple fund was the Vanguard Total Bond Index Fund. I was very proud that I understood enough to take this advice and I bought a proper amount of Total Bond Index.

After a year I compared my funds and noticed that my Total Bond Index fund was just poking along BUT my Vanguard Windsor II fund (a large cap value stock fund) was GOING THROUGH THE ROOF!!!! I was making tons of money on Windsor II and nothing with Total Bond. :shock: I sold Total Bond - and wondered why those Diehards kept talking about the importance of the fund :mrgreen: :mrgreen: :mrgreen:

malabargold
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Re: Good News For Bonds!

Post by malabargold » Thu Dec 15, 2016 6:46 pm

And the good times like these will keep on rolling!

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Re: Good News For Bonds!

Post by inbox788 » Thu Dec 15, 2016 6:51 pm

qwertyjazz wrote:Still learning about bonds and interest rates. But if I understand it, the Fed might raise the risk free rate to 100 basis points by the end of 2017. Yeah let the good times roll. Champagne for everyone with money in the banks :oops:

Before, there's no inflation and money in the bank was earning near zero interest. Now, inflation is going up, so all my expenses and everything I buy goes up by 1%. Meanwhile, my savings in the bank earns 1%. I'm not so sure that's a good thing for me.

Quark wrote:Bond prices are down!

That actually is good news for bonds, unless you're selling them.


Bad news, it's snowing! (shovel car, no business, etc.)

Good news, it's snowing! (snow plower, ski resort)

To the weatherman, it's always news!

https://ca.finance.yahoo.com/q/bc?s=BND ... z=l&q=l&c=

Quark
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Re: Bonds are for Safety

Post by Quark » Thu Dec 15, 2016 7:17 pm

Taylor Larimore wrote:Bogleheads:

We tend to concentrate on bond returns. This is not what bonds are for. Bonds are primarily to reduce the loss in our portfolio when stocks plunge. Use stocks for higher expected returns.

Best wishes and Happy Holiday!
Taylor

Taylor,

There are people who live off of bond interest, with a smattering of stock for diversification. For these people, bonds have a different function.

All the best!

qwertyjazz
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Re: Good News For Bonds!

Post by qwertyjazz » Thu Dec 15, 2016 7:19 pm

inbox788 wrote:
qwertyjazz wrote:Still learning about bonds and interest rates. But if I understand it, the Fed might raise the risk free rate to 100 basis points by the end of 2017. Yeah let the good times roll. Champagne for everyone with money in the banks :oops:

Before, there's no inflation and money in the bank was earning near zero interest. Now, inflation is going up, so all my expenses and everything I buy goes up by 1%. Meanwhile, my savings in the bank earns 1%. I'm not so sure that's a good thing for me.

Quark wrote:Bond prices are down!

That actually is good news for bonds, unless you're selling them.


Bad news, it's snowing! (shovel car, no business, etc.)

Good news, it's snowing! (snow plower, ski resort)

To the weatherman, it's always news!

https://ca.finance.yahoo.com/q/bc?s=BND ... z=l&q=l&c=


At 1 percent return - if I hold onto for 1000 years it would be worth nearly 21000 times what I start with ...

I just cannot get myself excited about numbers like 100 BP with the amount of money I have no matter how I phrase it
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Re: Bonds are for Safety

Post by McGilicutty » Thu Dec 15, 2016 7:24 pm

Quark wrote:There are people who live off of bond interest, with a smattering of stock for diversification. For these people, bonds have a different function.


Who are these people? Do they just have massive portfolios are did they buy bonds years ago when interest rates were higher?

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Re: Bonds are for Safety

Post by Quark » Thu Dec 15, 2016 7:31 pm

McGilicutty wrote:
Quark wrote:There are people who live off of bond interest, with a smattering of stock for diversification. For these people, bonds have a different function.
Who are these people? Do they just have massive portfolios are did they buy bonds years ago when interest rates were higher?

One way to do it is with a massive portfolio compared to required income.

You could also live off a bond ladder with a not very high rate of interest by spending down principle. The traditional 4% SWR is based on a 30 year time frame. You don't need a massive portfolio or a very high rate of interest with bonds and have a decent income for 30 years. Even at 0%, you only need 33x compared to the traditional 25x.

Copernicus
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Re: Good News For Bonds!

Post by Copernicus » Thu Dec 15, 2016 8:02 pm

Phineas J. Whoopee wrote:
smartinwate wrote:...
As I understand it, if you hold your bond fund longer than the fund's duration, you should actually start to see a benefit from the higher rates.

That's true in a simplified world, because it only refers to one yield change at one point in time, but it's good as a conceptual guide. In reality yields constantly fluctuate. I believe poster ogd has presented some math that shows if you're in for around twice the average duration you're almost always good.

One thing these conversations don't make explicit, and perhaps they shouldn't, is if you have a need say six years out, and you buy something like Vanguard's Total Bond Market Index Fund, VBMFX, with its 5.8 year average duration, each day your need gets 24 hours closer, but the fund doesn't get a duration one day shorter.

In other words, what you stated is very useful for introducing the concepts, but not especially so for calculating future dollar amounts, nominal or real.

I hope this post is helpful for somebody out there.

PJW


As time goes by, some bonds in the fund will mature, will be replaced by new bonds meeting the fund criteria. The new bonds will have their full maturities still ahead, and the replacement bond may actually slightly increase the duration of the whole fund. The bond fund manager will buy replacement bonds of different (shorter + longer) maturities to maintain the fund duration within its policy limits. Though the duration may not shift over a period, the new bonds yielding higher dividends will slightly and slowly increase the yield of the fund.

Correct?
.

Copernicus
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Re: Bonds are for Safety

Post by Copernicus » Thu Dec 15, 2016 8:05 pm

Taylor Larimore wrote:Bogleheads:

We tend to concentrate on bond returns. This is not what bonds are for. Bonds are primarily to reduce the loss in our portfolio when stocks plunge. Use stocks for higher expected returns.

Best wishes and Happy Holiday!
Taylor


Taylor, Thank you.
I have read your reminder of this fact in the past; but it is easy to be overshadowed. It is useful to be reminded of the main role of bonds in a portfolio.

Best regards,
copernicus

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Taylor Larimore
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Living off "yield" or "total return" ?

Post by Taylor Larimore » Thu Dec 15, 2016 9:26 pm

Quark wrote:
Taylor Larimore wrote:Bogleheads:

We tend to concentrate on bond returns. This is not what bonds are for. Bonds are primarily to reduce the loss in our portfolio when stocks plunge. Use stocks for higher expected returns.

Best wishes and Happy Holiday!
Taylor

Taylor,

There are people who live off of bond interest, with a smattering of stock for diversification. For these people, bonds have a different function.

All the best!

Quark:

You make a good point. However, for most of us, I think living off total return is a better way--and so does Vanguard:

https://personal.vanguard.com/pdf/s352.pdf

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

frugalecon
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Re: Good News For Bonds!

Post by frugalecon » Thu Dec 15, 2016 9:40 pm

I was prepared to pay cash for a car in September, but after negotiating the deal the salesman pointed out the zero percent financing offer I could take advantage of. I will now possibly be able to pocket a bigger spread on the cash.

Between that loan and my mortgage, my debts approximately equal my fixed income position, so on net I guess I really shouldn't care.

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Bogle_Feet
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Re: Good News For Bonds!

Post by Bogle_Feet » Thu Dec 15, 2016 9:44 pm

rattlenap wrote:Good News For Bonds!

You mean bad news. Look at the price of bonds -- not just yield.

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patrick013
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Re: Living off "yield" or "total return" ?

Post by patrick013 » Thu Dec 15, 2016 9:45 pm

Taylor Larimore wrote:
Quark wrote:
Taylor Larimore wrote:Bogleheads:

We tend to concentrate on bond returns. This is not what bonds are for. Bonds are primarily to reduce the loss in our portfolio when stocks plunge. Use stocks for higher expected returns.

Best wishes and Happy Holiday!
Taylor

Taylor,

There are people who live off of bond interest, with a smattering of stock for diversification. For these people, bonds have a different function.

All the best!

Quark:

You make a good point. However, for most of us, I think living off total return is a better way--and so does Vanguard:

https://personal.vanguard.com/pdf/s352.pdf

Best wishes.
Taylor


But Taylor, what is your conclusion ? A list of fee'd advisors, one way or another ?
An unconvincing table ? Do you think VG would have billions without "income investors" ?
A 50-50 retired investor needs some simple bond advice IMO, you guys manage TSM
quite well, and keep me from buying too many new issue GNMA's. :) :)
age in bonds, buy-and-hold, 10 year business cycle

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Phineas J. Whoopee
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Re: Good News For Bonds!

Post by Phineas J. Whoopee » Thu Dec 15, 2016 10:25 pm

Hi Copernicus. I enjoyed your book.

At this spot, but only this one, I'm going to quote you out of sequence:
Copernicus wrote:... Correct?

I think you grasp the basic dynamics, but I'd like to state them more precisely. I'll quote you bit by bit, not leaving anything out, and I'm not arguing with you. I'm just embellishing.

Copernicus wrote:...
As time goes by, some bonds in the fund will mature, will be replaced by new bonds meeting the fund criteria.

Conceptually yes, but in practice not exactly. It's rare for most bond funds to hold a bond to maturity. Usually they sell them earlier than that. You are correct that the fund will replace its former holdings with new ones, consistent with its objectives.

Copernicus wrote:The new bonds will have their full maturities still ahead,

Funds, like most institutional investors, are willing to buy bonds on the secondary market, in addition to initial auction, so yes there will be a well-defined period until each bond matures, but funds often acquire them after they've aged a bit to, as you wrote, meet the fund criteria.

Copernicus wrote:and the replacement bond may actually slightly increase the duration of the whole fund.

Here's where I have to be careful not to make this conversation overly complicated. The calculated duration depends on a number of things, but at least it's a standardized calculation. As a general concept it's an imprecise measure of the the amount of interest rate risk, but it's pretty good for comparing one bond, or bond fund, to another. The longer the duration the greater the likely net asset value fluctuation between two funds which invest in bonds of similar risk of default, credit risk, often described using the word quality.

With respect to your standard, garden-variety low-cost high-quality bond fund, tiny little changes in duration are of little consequence, but most funds are not holding bonds to maturity then buying new ones at initial auction. They buy and sell based on new cash coming in or redemptions, and to maintain their stated portfolio goals (which might be tighter or looser than their peers'). An investment-grade fund, for example, might sell bonds from an issuer whose rating has recently been reduced below BBB, and replace them with something else, such that they maintain roughly constant exposure to both credit and interest-rate risk.

Copernicus wrote:The bond fund manager will buy replacement bonds of different (shorter + longer) maturities to maintain the fund duration within its policy limits.

Yes, that's correct.

Copernicus wrote:Though the duration may not shift over a period, the new bonds yielding higher dividends will slightly and slowly increase the yield of the fund.
...

And thereby hangs a tale.

We often have difficulties with specific technical terms here, which shouldn't be surprising. What's happened is you've struck one of the more problematic ones, at least in my opinion.

This is the increased precision part.

You've written the terms bonds, dividends, and yields, and I'm not sure I can sign up to the particulars of your statements about them. I'm not being pedantic. Countless hours have been wasted over simply not speaking clearly with each other. It is not your fault, Copernicus. The introduction of the heliocentric model is more than adequate as an intellectual contribution. Nobody, at least not since the Renaissance, can be an expert in everything.

Bonds pay interest. A bond is a contract. When it's issued the borrower promises to pay specific numbers of dollars to the bondholder on specific dates.

The rate a bond pays as a percentage of its face value is called its coupon rate. A $1000 ten-year bond with a 5% coupon will pay $50 at the end of each of the next ten years, and along with the last $50 the issuer will send the original $1000. The term coupon is important.

The checks it sends, electronically of course today, are the bond's cash flow. For so-called plain vanilla bonds, those without complicated terms and conditions, the cash flow is set when the bond is issued, and buying the bond is nothing more nor less than buying the right to receive the remaining cash flow.

Bond funds pay dividends, not interest, as a consequence of how they're legally organized under the Investment Company Act of 1940.

It's the term yield which frequently is misunderstood. It is not the equivalent of cash flow, interest, dividend, or coupon. The yield, which unless otherwise specified by the writer customarily means yield to maturity, YTM, takes the present market price of the bond into account. It incorporates the fact that, up or down, a bond's market value will approach its face value as it approaches maturity (because who would pay much more, or accept much less, for a $1000 face-value bond that matures tomorrow), the remaining interest, and the effects of investing the interest until the time the original bond matures, often called interest-on-interest, or more colloquially, compounding.

So, let me restate the last bit of yours I quoted, without putting words into your mouth, but aiming for greater precision:

Though the duration may not shift over a period, the new bonds yielding higher dividends paying higher coupons will slightly and slowly increase the yield the cash flow of the fund, even as its yield fluctuates with market conditions and the individual prospects of the underlying issuers.

Fair enough? If not, please say why not, and I'll try to do better.

PJW

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Taylor Larimore
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My simple asset-allocation plan in retirement

Post by Taylor Larimore » Thu Dec 15, 2016 10:33 pm

But Taylor, what is your conclusion ? A list of fee'd advisors, one way or another ?
An unconvincing table ? Do you think VG would have billions without "income investors" ?
A 50-50 retired investor needs some simple bond advice IMO, you guys manage TSM
quite well, and keep me from buying too many new issue GNMA's.

Patrick:

I'm not certain about your question, but this is similar to what I do in retirement (I'm 92):

1. I determine the amount of money I cannot afford to lose and put this amount in Vanguard Total Bond Market and my checking account.

2. I put the rest in Vanguard Total Stock Market.

I sleep like a baby. :happy

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

McGilicutty
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Re: My simple asset-allocation plan in retirement

Post by McGilicutty » Thu Dec 15, 2016 11:21 pm

Taylor Larimore wrote:
1. I determine the amount of money I cannot afford to lose and put this amount in Vanguard Total Bond Market and my checking account.



This doesn't quite work. You can definitely lose money in Vanguard Total Bond Market if enough people request their money back from the fund causing the fund to sell their bonds at a loss. Just look at the value of BND going from 84.5 to 80.2 in the last six months. With the current annual yield of 2.5%, that's about a 3.8% loss of six months or over 7% annualized.

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Re: My simple asset-allocation plan in retirement

Post by patrick013 » Thu Dec 15, 2016 11:37 pm

Taylor Larimore wrote:
But Taylor, what is your conclusion ? A list of fee'd advisors, one way or another ?
An unconvincing table ? Do you think VG would have billions without "income investors" ?
A 50-50 retired investor needs some simple bond advice IMO, you guys manage TSM
quite well, and keep me from buying too many new issue GNMA's.

Patrick:

I'm not certain about your question, but this is similar to what I do in retirement (I'm 92):

1. I determine the amount of money I cannot afford to lose and put this amount in Vanguard Total Bond Market and my checking account.

2. I put the rest in Vanguard Total Stock Market.

I sleep like a baby. :happy

Best wishes.
Taylor


It's a shame there's no S&P 500 for bonds.

I wish there was too.

It's alot "breakeven". Can my income = my expenses.
age in bonds, buy-and-hold, 10 year business cycle

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Phineas J. Whoopee
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Re: My simple asset-allocation plan in retirement

Post by Phineas J. Whoopee » Fri Dec 16, 2016 12:00 am

patrick013 wrote:...
It's a shame there's no S&P 500 for bonds.
...

Other, presumably, than the Bloomberg Barclays US Aggregate Bond Index, and its float-adjusted variant as defined on p. 4, or the somewhat broader but probably too aggressively named 'cause we keep having threads about bond index names US Universal Index, now seemingly more difficult, or is it my browser, to copy links to, but both fact sheets are located here toward the top of the webpage?
PJW

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saltycaper
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Re: My simple asset-allocation plan in retirement

Post by saltycaper » Fri Dec 16, 2016 12:13 am

Taylor Larimore wrote:
1. I determine the amount of money I cannot afford to lose and put this amount in Vanguard Total Bond Market and my checking account.



Most investors should not do this. They'd be putting themselves at great risk of outliving their money, not only because the bond returns would be insufficient to support their spending needs in nominal terms, but also because they'd be taking on far too much inflation risk. Wealthier investors could perhaps get away with it, but still not prudent, IMO.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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patrick013
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Re: My simple asset-allocation plan in retirement

Post by patrick013 » Fri Dec 16, 2016 12:16 am

Phineas J. Whoopee wrote:
patrick013 wrote:...
It's a shame there's no S&P 500 for bonds.
...

Other, presumably, than the Bloomberg Barclays US Aggregate Bond Index, and its float-adjusted version as defined on p. 4, or the somewhat broader but probably too aggressively named 'cause we keep having threads about bond index names US Universal Index, now seemingly more difficult, or is it my browser, to copy links to, but both fact sheets are located here toward the top of the webpage?
PJW


Actually I enjoy rate and spread strategies. An index
is not a active position but a static proposal. So be it.
Bond strategies can be very simple. But the stock position
is better for the investor as an index.
age in bonds, buy-and-hold, 10 year business cycle

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Kalo
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Re: My simple asset-allocation plan in retirement

Post by Kalo » Fri Dec 16, 2016 1:27 am

saltycaper wrote:
Taylor Larimore wrote:
1. I determine the amount of money I cannot afford to lose and put this amount in Vanguard Total Bond Market and my checking account.



Most investors should not do this. They'd be putting themselves at great risk of outliving their money, not only because the bond returns would be insufficient to support their spending needs in nominal terms, but also because they'd be taking on far too much inflation risk. Wealthier investors could perhaps get away with it, but still not prudent, IMO.


I think it depends on what is meant by cannot afford to lose. I just did a quick back of the envelope, using the assumption that my bonds would not lose to inflation. What I can't afford to lose is what I need to get me to age 70, when I plan to start taking SS. I don't want to have to live only on SS, but it would not be a catastrophe. But running out of money before age 70 I would consider somewhat of a catastrophe. My calc gave me 49% bonds, using the same 3.5% withdrawal rate I'm using with my 70% stock, 30% bond portfolio. Age in bonds on the other hand gives me 56% bonds. I am definitely not wealthy, but that really doesn't matter, because I'm using my chosen safe withdrawal rate to figure out what I can't afford to lose, so it should be the same regardless of wealth level. It's all based on number of years and percentages withdrawn.

Granted, someone else may say that the amount they can't afford to lose is much greater, and this could put them at risk of outliving their money, as you suggested. I think it's a good exercise anyway, just to see the result. Kind of like a stress test that banks do. "What if worst case scenario occurs and my stocks just tank like crazy for the next 15 years?. What would happen with my current portfolio in that instance? How could holding a greater percentage of bonds mitigate that risk?"

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

rockonhumblepie
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Re: Good News For Bonds!

Post by rockonhumblepie » Fri Dec 16, 2016 1:38 am

Taylor Larimore wrote:
rattlenap wrote:Good News For Bonds

rattlenap:

It is also good news for the media who are always looking for something to write about.

Stay-the-course.

Best wishes
Taylor


I agree

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saltycaper
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Re: My simple asset-allocation plan in retirement

Post by saltycaper » Fri Dec 16, 2016 1:51 am

Kalo wrote:
I think it depends on what is meant by cannot afford to lose. I just did a quick back of the envelope, using the assumption that my bonds would not lose to inflation. What I can't afford to lose is what I need to get me to age 70, when I plan to start taking SS. I don't want to have to live only on SS, but it would not be a catastrophe. But running out of money before age 70 I would consider somewhat of a catastrophe. My calc gave me 49% bonds, using the same 3.5% withdrawal rate I'm using with my 70% stock, 30% bond portfolio. Age in bonds on the other hand gives me 56% bonds. I am definitely not wealthy, but that really doesn't matter, because I'm using my chosen safe withdrawal rate to figure out what I can't afford to lose, so it should be the same regardless of wealth level. It's all based on number of years and percentages withdrawn.



If I'm reading your inputs as 3.5% nominal with a theoretical 100% bond portfolio lasting you until age 70, and then taking that dollar amount of your actual portfolio and putting it in bonds and coming up with 49% of your actual portfolio, that's not too realistic given current rates and factoring in inflation. Whether or not that's what you did, that's how I read, "can't afford to lose." Maybe you don't mean 3.5% is needed. In any event, counting only on SS upon reaching age 70, that's a dim picture IMO, especially for those far from retirement.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

Quark
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Re: Living off "yield" or "total return" ?

Post by Quark » Fri Dec 16, 2016 6:27 am

Taylor Larimore wrote:
Quark wrote:
Taylor Larimore wrote:Bogleheads:

We tend to concentrate on bond returns. This is not what bonds are for. Bonds are primarily to reduce the loss in our portfolio when stocks plunge. Use stocks for higher expected returns.

Best wishes and Happy Holiday!
Taylor

Taylor,

There are people who live off of bond interest, with a smattering of stock for diversification. For these people, bonds have a different function.

All the best!

Quark:

You make a good point. However, for most of us, I think living off total return is a better way--and so does Vanguard:

https://personal.vanguard.com/pdf/s352.pdf

Best wishes.
Taylor

HI Taylor,

As I read it, that paper is primarily about total return investing compared to income investing, rather than bonds for income compared to bonds to reduce losses when stocks plunge.

Happy Holiday!

lostdog
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Re: My simple asset-allocation plan in retirement

Post by lostdog » Fri Dec 16, 2016 7:41 am

Taylor Larimore wrote:
But Taylor, what is your conclusion ? A list of fee'd advisors, one way or another ?
An unconvincing table ? Do you think VG would have billions without "income investors" ?
A 50-50 retired investor needs some simple bond advice IMO, you guys manage TSM
quite well, and keep me from buying too many new issue GNMA's.

Patrick:

I'm not certain about your question, but this is similar to what I do in retirement (I'm 92):

1. I determine the amount of money I cannot afford to lose and put this amount in Vanguard Total Bond Market and my checking account.

2. I put the rest in Vanguard Total Stock Market.

I sleep like a baby. :happy

Best wishes.
Taylor


Hi Taylor,

I like your simple plan. The money you put into total bond you mention you cannot afford to lose. Is this money for yearly expenses or just a certain percentage of your total portfolio?
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

strafe
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Re: Good News For Bonds!

Post by strafe » Fri Dec 16, 2016 7:57 am

flyingaway wrote:
smartinwate wrote:As I understand it, if you hold your bond fund longer than the fund's duration, you should actually start to see a benefit from the higher rates.


I have seen this statement many times, what does it actually mean? Does it mean, after the holding period = the duration,
(1) your total loss is offset by the higher interest paid, and your total return is zero, or
(2) the total return is the (almost) same as that from the same fund without the interest change, or
(2) your (same) fund will actually have a return higher than that from the same fund without the higher interest rates?


In the event of a one-time increase in yield...

When the holding period = the duration, #2 above will be true.

When the holding period > duration, #3 will be true.

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Taylor Larimore
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No one knows the future

Post by Taylor Larimore » Fri Dec 16, 2016 9:21 am

Hi Taylor,

I like your simple plan. The money you put into total bond you mention you cannot afford to lose. Is this money for yearly expenses or just a certain percentage of your total portfolio?

Lostdog:

It's an educated guess. No one knows the future.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

dbr
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Re: Good News For Bonds!

Post by dbr » Fri Dec 16, 2016 9:51 am

strafe wrote:
flyingaway wrote:
smartinwate wrote:As I understand it, if you hold your bond fund longer than the fund's duration, you should actually start to see a benefit from the higher rates.


I have seen this statement many times, what does it actually mean? Does it mean, after the holding period = the duration,
(1) your total loss is offset by the higher interest paid, and your total return is zero, or
(2) the total return is the (almost) same as that from the same fund without the interest change, or
(2) your (same) fund will actually have a return higher than that from the same fund without the higher interest rates?


In the event of a one-time increase in yield...

When the holding period = the duration, #2 above will be true.

When the holding period > duration, #3 will be true.


In reality interest rates don't make a one time change and remain steady thereafter. Consequently thinking of duration as when you will not have a loss of money is not very helpful. A better idea to have about duration is that it is a factor that multiplies interest rate fluctuations to produce variability in the price of bonds. If we agree with certain infamous discussions that variability is the meaning of risk, then the result is that a bond or bond fund is more risky the higher the duration. Note that the result can be increases as well as decreases in bond prices. The actual problem is to attempt to forecast interest rates, and that is not doable in much of a practical sense.

I think the whole idea that one can somehow invest in risky assets and yet not have risk is a misunderstanding that plagues this forum every day. A better approach is to recognize that financial planning is about how to make good decisions in the presence of risk.

zadie
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Re: Good News For Bonds!

Post by zadie » Sat Dec 17, 2016 6:36 am

So is one better off investing now in muni bond fund (per their IPS), or simply stashing the cash in a high yield savings acct (for $ that is not needed for 10+ years)?

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