Is it ok to invest in bonds?

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Jesteroftheswamp
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Is it ok to invest in bonds?

Post by Jesteroftheswamp » Sat Jun 30, 2018 9:42 am

I understand why/how bond values decrease when there is an increase in interest rates, but how relevant is this if one buys a bond and holds til maturity? What about in bond index funds, certainly the overall price of the fund can decrease with increasing rates but is this a reason to not invest in bond index funds? I would like to contribute a little more money to my bond index fund on a two year horizon to earn a little more than what I earn in my money market account (1.6%) but I worry about how an increase in interest rates may affect the fund.

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nedsaid
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Re: Is it ok to invest in bonds?

Post by nedsaid » Sat Jun 30, 2018 9:46 am

Yes. Reinvest the dividends and over long periods of time you will do just fine. Next question?
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Re: Is it ok to invest in bonds?

Post by oldcomputerguy » Sat Jun 30, 2018 10:01 am

Jesteroftheswamp wrote:
Sat Jun 30, 2018 9:42 am
I understand why/how bond values decrease when there is an increase in interest rates, but how relevant is this if one buys a bond and holds til maturity? What about in bond index funds, certainly the overall price of the fund can decrease with increasing rates but is this a reason to not invest in bond index funds? I would like to contribute a little more money to my bond index fund on a two year horizon to earn a little more than what I earn in my money market account (1.6%) but I worry about how an increase in interest rates may affect the fund.
In the short term, you'll see a drop in NAV. Over the longer term, as bonds owned by the fund mature and are replaced by newer-issue bonds at the new, higher rates, the drop in NAV will eventually be made up by the higher yields of the newer bonds.

I'm 62 and retired, DW is 59 and about 1-1/2 years out. We hold about half our combined portfolio in bond index funds, mostly in funds benchmarking Barclay's Aggregate (i.e. total bond) but with about 1 year's expenses shoved off into short-term Treasuries.

Yes. It's perfectly fine to invest in bonds.
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dbr
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Re: Is it ok to invest in bonds?

Post by dbr » Sat Jun 30, 2018 10:06 am

Yes, invest in bonds if that fits your asset allocation plan, which you have, right? Interest rates are always changing and it is impossible to predict exactly how much when. It is already all taken care of in the estimated volatility of bonds, which is much less than that of stocks. The only person who should be concerned about the NAV falling when they need the money is someone who needs all the money soon at a specific time. That investor should not be invested in inappropriate bonds, but almost everyone here including you is not that person.

Jesteroftheswamp
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Re: Is it ok to invest in bonds?

Post by Jesteroftheswamp » Sat Jun 30, 2018 10:43 am

dbr wrote:
Sat Jun 30, 2018 10:06 am
Yes, invest in bonds if that fits your asset allocation plan, which you have, right? Interest rates are always changing and it is impossible to predict exactly how much when. It is already all taken care of in the estimated volatility of bonds, which is much less than that of stocks. The only person who should be concerned about the NAV falling when they need the money is someone who needs all the money soon at a specific time. That investor should not be invested in inappropriate bonds, but almost everyone here including you is not that person.
What about if that money may be needed in 6-24 months?

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Re: Is it ok to invest in bonds?

Post by Sandtrap » Sat Jun 30, 2018 10:49 am

Jesteroftheswamp wrote:
Sat Jun 30, 2018 10:43 am
dbr wrote:
Sat Jun 30, 2018 10:06 am
Yes, invest in bonds if that fits your asset allocation plan, which you have, right? Interest rates are always changing and it is impossible to predict exactly how much when. It is already all taken care of in the estimated volatility of bonds, which is much less than that of stocks. The only person who should be concerned about the NAV falling when they need the money is someone who needs all the money soon at a specific time. That investor should not be invested in inappropriate bonds, but almost everyone here including you is not that person.
What about if that money may be needed in 6-24 months?
In that short time frame, the most important factors are:
Liquidity
Preservation of principal
Zero volatility

Thus, Money Market, High Yield Accounts, Short Term CD's, etc.

j

aristotelian
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Re: Is it ok to invest in bonds?

Post by aristotelian » Sat Jun 30, 2018 10:53 am

All investments have risk, and bonds have interest rate risk. If that bothers you, you do not have to invest in bonds. Generally a diversified portfolio gives you the best combination of expected returns while hedging against different risks, with stocks and bonds performing differently at different times.

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Peter Foley
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Re: Is it ok to invest in bonds?

Post by Peter Foley » Sat Jun 30, 2018 10:58 am

Jester wrote:
I would like to contribute a little more money to my bond index fund on a two year horizon to earn a little more than what I earn in my money market account (1.6%) but I worry about how an increase in interest rates may affect the fund.
A two year time horizon is too short. You would be better off with CD's. If you have a retirement account with a stable value fund that would be a reasonable option. My guess is that it is unlikely that you are taking about a retirement account with a two year time horizon for bonds.

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Re: Is it ok to invest in bonds?

Post by linenfort » Sat Jun 30, 2018 11:30 am

Jesteroftheswamp wrote:
Sat Jun 30, 2018 10:43 am
What about if that money may be needed in 6-24 months?
Money market or T-Bills.
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Alexa9
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Re: Is it ok to invest in bonds?

Post by Alexa9 » Sat Jun 30, 2018 11:41 am

Bonds are a safety place that still accumulate a fair amount. They have underperformed stocks significantly over most long and short term periods. Past performance doesn't equate to future performance. Bonds have outperformed stocks in bear markets even over 10 year periods. They provide a rebalancing bonus in a volatile market.

Here is a comparison of Total Stock/Bond Market using www.portfoliovisualizer.com
Image
Image

livesoft
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Re: Is it ok to invest in bonds?

Post by livesoft » Sat Jun 30, 2018 11:47 am

No one can predict the future. Bond funds can lose a little bit of money sometimes ... otherwise if there was no risk of losing money, then they would not be able "to earn a little more than what I earn in my money market account ...."

Did you notice that from May 17, 2018 to May 29, 2018 that Vanguard Total Bond Market Index fund went UP 1.6%?? So bond funds do not always lose money and way outperform a money market fund. 1.6% in less than 2 weeks ... simply amazing! And that won't show up in Portfolio Visualizer either.
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aristotelian
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Re: Is it ok to invest in bonds?

Post by aristotelian » Sat Jun 30, 2018 2:18 pm

livesoft wrote:
Sat Jun 30, 2018 11:47 am
No one can predict the future. Bond funds can lose a little bit of money sometimes ... otherwise if there was no risk of losing money, then they would not be able "to earn a little more than what I earn in my money market account ...."

Did you notice that from May 17, 2018 to May 29, 2018 that Vanguard Total Bond Market Index fund went UP 1.6%?? So bond funds do not always lose money and way outperform a money market fund. 1.6% in less than 2 weeks ... simply amazing! And that won't show up in Portfolio Visualizer either.
Correct. And that occurred in a "rising interest rate environment."

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Peter Foley
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Re: Is it ok to invest in bonds?

Post by Peter Foley » Sat Jun 30, 2018 4:16 pm

Using mortgage interest rates as a proxy . . .

1981 16% + then a long term downward trend to 3.6% in 2017. That is the past environment for interest rates in general.

Falling interest rates are favorable for bonds. A 35 + year trend has essentially leveled off over the past 5 years or so. Something to keep in mind when investing in bond funds.

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Re: Is it ok to invest in bonds?

Post by dbr » Sat Jun 30, 2018 5:10 pm

Peter Foley wrote:
Sat Jun 30, 2018 4:16 pm
Using mortgage interest rates as a proxy . . .

1981 16% + then a long term downward trend to 3.6% in 2017. That is the past environment for interest rates in general.

Falling interest rates are favorable for bonds. A 35 + year trend has essentially leveled off over the past 5 years or so. Something to keep in mind when investing in bond funds.
Actually what is favorable for bonds is to buy at a high interest rates and have the interest rate not fall. On the opposite side of the coin the worst purchase for bonds is to buy at a low interest rate and have interest rates not rise. The exception is if one intends to speculate on interest rate moves. The same applies for CDs. The ten year 10% CDs I once owned blow the doors off the big "bargains" everyone is chasing today. For retirees current years will be bad years to retire to the extent interest rates do not rise unless stocks take up the slack. Again, all of this conversation applies to long term investors accumulating savings and then disbursing the savings over years of retirement. People that want the money back in full in a year or two need to find investments appropriate to that condition.

Jesteroftheswamp
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Re: Is it ok to invest in bonds?

Post by Jesteroftheswamp » Sat Jun 30, 2018 5:43 pm

dbr wrote:
Sat Jun 30, 2018 5:10 pm
Peter Foley wrote:
Sat Jun 30, 2018 4:16 pm
Using mortgage interest rates as a proxy . . .

1981 16% + then a long term downward trend to 3.6% in 2017. That is the past environment for interest rates in general.

Falling interest rates are favorable for bonds. A 35 + year trend has essentially leveled off over the past 5 years or so. Something to keep in mind when investing in bond funds.
Actually what is favorable for bonds is to buy at a high interest rates and have the interest rate not fall. On the opposite side of the coin the worst purchase for bonds is to buy at a low interest rate and have interest rates not rise. The exception is if one intends to speculate on interest rate moves. The same applies for CDs. The ten year 10% CDs I once owned blow the doors off the big "bargains" everyone is chasing today. For retirees current years will be bad years to retire to the extent interest rates do not rise unless stocks take up the slack. Again, all of this conversation applies to long term investors accumulating savings and then disbursing the savings over years of retirement. People that want the money back in full in a year or two need to find investments appropriate to that condition.
Why would a “worst case” bond purchase be to buy at low interest rates and interest not rise?

Jesteroftheswamp
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Re: Is it ok to invest in bonds?

Post by Jesteroftheswamp » Sat Jun 30, 2018 5:58 pm

livesoft wrote:
Sat Jun 30, 2018 11:47 am
No one can predict the future. Bond funds can lose a little bit of money sometimes ... otherwise if there was no risk of losing money, then they would not be able "to earn a little more than what I earn in my money market account ...."

Did you notice that from May 17, 2018 to May 29, 2018 that Vanguard Total Bond Market Index fund went UP 1.6%?? So bond funds do not always lose money and way outperform a money market fund. 1.6% in less than 2 weeks ... simply amazing! And that won't show up in Portfolio Visualizer either.
What about Trasuries via Vanguard? They are earning 2+%, wouldn’t this be sufficient for my stated goals if I was to hold until maturity?

Jesteroftheswamp
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Re: Is it ok to invest in bonds?

Post by Jesteroftheswamp » Sat Jun 30, 2018 6:03 pm

Sandtrap wrote:
Sat Jun 30, 2018 10:49 am
Jesteroftheswamp wrote:
Sat Jun 30, 2018 10:43 am
dbr wrote:
Sat Jun 30, 2018 10:06 am
Yes, invest in bonds if that fits your asset allocation plan, which you have, right? Interest rates are always changing and it is impossible to predict exactly how much when. It is already all taken care of in the estimated volatility of bonds, which is much less than that of stocks. The only person who should be concerned about the NAV falling when they need the money is someone who needs all the money soon at a specific time. That investor should not be invested in inappropriate bonds, but almost everyone here including you is not that person.
What about if that money may be needed in 6-24 months?
In that short time frame, the most important factors are:
Liquidity
Preservation of principal
Zero volatility

Thus, Money Market, High Yield Accounts, Short Term CD's, etc.

j


Would it be wrong to invest money in CDs that I currently have in my money market account that has already earned interest? I worry about paying taxes on interest gains and wonder if I should just buy CDs with money from my paycheck, however I have probably 10K in Money Market that I would earn much more interest with if I buy a CD.

livesoft
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Re: Is it ok to invest in bonds?

Post by livesoft » Sat Jun 30, 2018 6:22 pm

Jesteroftheswamp wrote:
Sat Jun 30, 2018 5:58 pm
What about Trasuries via Vanguard? They are earning 2+%, wouldn’t this be sufficient for my stated goals if I was to hold until maturity?
Sure, try them out.

I think Vanguard Prime Money Market pays about the same as 1-3 Month Treasury bills. Stated SEC yield is 2+%.
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dbr
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Re: Is it ok to invest in bonds?

Post by dbr » Sat Jun 30, 2018 6:27 pm

Jesteroftheswamp wrote:
Sat Jun 30, 2018 5:43 pm
dbr wrote:
Sat Jun 30, 2018 5:10 pm
Peter Foley wrote:
Sat Jun 30, 2018 4:16 pm
Using mortgage interest rates as a proxy . . .

1981 16% + then a long term downward trend to 3.6% in 2017. That is the past environment for interest rates in general.

Falling interest rates are favorable for bonds. A 35 + year trend has essentially leveled off over the past 5 years or so. Something to keep in mind when investing in bond funds.
Actually what is favorable for bonds is to buy at a high interest rates and have the interest rate not fall. On the opposite side of the coin the worst purchase for bonds is to buy at a low interest rate and have interest rates not rise. The exception is if one intends to speculate on interest rate moves. The same applies for CDs. The ten year 10% CDs I once owned blow the doors off the big "bargains" everyone is chasing today. For retirees current years will be bad years to retire to the extent interest rates do not rise unless stocks take up the slack. Again, all of this conversation applies to long term investors accumulating savings and then disbursing the savings over years of retirement. People that want the money back in full in a year or two need to find investments appropriate to that condition.
Why would a “worst case” bond purchase be to buy at low interest rates and interest not rise?
Because the return is too low to enable the investor to meet his goals. Compare retiring on 5% income from 5% bonds to retiring on 1% income from 1% bonds and the yield never going up.

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Re: Is it ok to invest in bonds?

Post by michaeljc70 » Sat Jun 30, 2018 6:43 pm

dbr wrote:
Sat Jun 30, 2018 5:10 pm
Peter Foley wrote:
Sat Jun 30, 2018 4:16 pm
Using mortgage interest rates as a proxy . . .

1981 16% + then a long term downward trend to 3.6% in 2017. That is the past environment for interest rates in general.

Falling interest rates are favorable for bonds. A 35 + year trend has essentially leveled off over the past 5 years or so. Something to keep in mind when investing in bond funds.
Actually what is favorable for bonds is to buy at a high interest rates and have the interest rate not fall. On the opposite side of the coin the worst purchase for bonds is to buy at a low interest rate and have interest rates not rise. The exception is if one intends to speculate on interest rate moves. The same applies for CDs. The ten year 10% CDs I once owned blow the doors off the big "bargains" everyone is chasing today. For retirees current years will be bad years to retire to the extent interest rates do not rise unless stocks take up the slack. Again, all of this conversation applies to long term investors accumulating savings and then disbursing the savings over years of retirement. People that want the money back in full in a year or two need to find investments appropriate to that condition.
What was inflation when you had those 10% CDs?

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Re: Is it ok to invest in bonds?

Post by dbr » Sat Jun 30, 2018 6:50 pm

michaeljc70 wrote:
Sat Jun 30, 2018 6:43 pm
dbr wrote:
Sat Jun 30, 2018 5:10 pm
Peter Foley wrote:
Sat Jun 30, 2018 4:16 pm
Using mortgage interest rates as a proxy . . .

1981 16% + then a long term downward trend to 3.6% in 2017. That is the past environment for interest rates in general.

Falling interest rates are favorable for bonds. A 35 + year trend has essentially leveled off over the past 5 years or so. Something to keep in mind when investing in bond funds.
Actually what is favorable for bonds is to buy at a high interest rates and have the interest rate not fall. On the opposite side of the coin the worst purchase for bonds is to buy at a low interest rate and have interest rates not rise. The exception is if one intends to speculate on interest rate moves. The same applies for CDs. The ten year 10% CDs I once owned blow the doors off the big "bargains" everyone is chasing today. For retirees current years will be bad years to retire to the extent interest rates do not rise unless stocks take up the slack. Again, all of this conversation applies to long term investors accumulating savings and then disbursing the savings over years of retirement. People that want the money back in full in a year or two need to find investments appropriate to that condition.
What was inflation when you had those 10% CDs?
At the start very high, probably 8% or so. The genius was that inflation and interest rates fell so the real yield on the CD was very high in the latter part of the run. The irony here is that a CD may actually work out really well if interest falls. There are a lot of moving parts.

I think a caveat is that interest rates in the US, nominal or real, experienced an excursion from 1950 to 1980 and back down from 1980 to 2015 that is nothing like anything that is going to be repeated. Interest rates just don't seem to have a consistency of long term, medium term, or short term behavior so nobody knows what the future will bring.

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Re: Is it ok to invest in bonds?

Post by tennisplyr » Sat Jun 30, 2018 6:53 pm

Let's say your time horizon is 5 to 10 years, would it be better to hold CDs or a bond index fund?
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Sandtrap
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Re: Is it ok to invest in bonds?

Post by Sandtrap » Sat Jun 30, 2018 7:55 pm

Jesteroftheswamp wrote:
Sat Jun 30, 2018 6:03 pm
Sandtrap wrote:
Sat Jun 30, 2018 10:49 am
Jesteroftheswamp wrote:
Sat Jun 30, 2018 10:43 am
dbr wrote:
Sat Jun 30, 2018 10:06 am
Yes, invest in bonds if that fits your asset allocation plan, which you have, right? Interest rates are always changing and it is impossible to predict exactly how much when. It is already all taken care of in the estimated volatility of bonds, which is much less than that of stocks. The only person who should be concerned about the NAV falling when they need the money is someone who needs all the money soon at a specific time. That investor should not be invested in inappropriate bonds, but almost everyone here including you is not that person.
What about if that money may be needed in 6-24 months?
In that short time frame, the most important factors are:
Liquidity
Preservation of principal
Zero volatility

Thus, Money Market, High Yield Accounts, Short Term CD's, etc.

j


Would it be wrong to invest money in CDs that I currently have in my money market account that has already earned interest? I worry about paying taxes on interest gains and wonder if I should just buy CDs with money from my paycheck, however I have probably 10K in Money Market that I would earn much more interest with if I buy a CD.
You pay taxes when you make money.
Any optimal interest earning vehicle suited to your time frame is good.
j

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Phineas J. Whoopee
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Re: Is it ok to invest in bonds?

Post by Phineas J. Whoopee » Sat Jun 30, 2018 9:47 pm

Jesteroftheswamp wrote:
Sat Jun 30, 2018 5:43 pm
...
Why would a “worst case” bond purchase be to buy at low interest rates and interest not rise?
Because the long-term return from bonds is their coupon payments, even as their market values change, and because they mature. If you bought at a low Yield to Maturity, YTM, let's at least get our terms right, and YTM of later-issued bonds of similar risk and duration never goes up, your return never goes up. If later-issued bond YTM goes up then your return eventually goes up.

The key to understanding is bonds are contracts that mature, and a bond fund is simply a means by which to hold a basket of those contracts. A bond fund works out the same as holding the identical issues yourself, directly.

A bond is not forever.

Stocks don't mature. They have no set expiration date. Of course, many of the companies they enable ownership in eventually expire anyway, which is why it's good to hold a whole lot of different ones.

Does that help?

PJW

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Phineas J. Whoopee
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Re: Is it ok to invest in bonds?

Post by Phineas J. Whoopee » Sat Jun 30, 2018 9:55 pm

tennisplyr wrote:
Sat Jun 30, 2018 6:53 pm
Let's say your time horizon is 5 to 10 years, would it be better to hold CDs or a bond index fund?
It depends on what you mean by better. If you mean will end up having had a higher return, even if you'll tell us which bond index fund you're talking about, the answer is unknown and unknowable. We can tell you, of course, what did happen over the last five to ten years.

If you mean what are the risk and reward tradeoffs, then the answer depends on what risks you face and what rewards you value.

Please tell us the answer you want.

PJW

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Re: Is it ok to invest in bonds?

Post by dbr » Sun Jul 01, 2018 8:32 am

Phineas J. Whoopee wrote:
Sat Jun 30, 2018 9:55 pm
tennisplyr wrote:
Sat Jun 30, 2018 6:53 pm
Let's say your time horizon is 5 to 10 years, would it be better to hold CDs or a bond index fund?
It depends on what you mean by better. If you mean will end up having had a higher return, even if you'll tell us which bond index fund you're talking about, the answer is unknown and unknowable. We can tell you, of course, what did happen over the last five to ten years.

If you mean what are the risk and reward tradeoffs, then the answer depends on what risks you face and what rewards you value.

Please tell us the answer you want.

PJW
Exactly so. "Better" and "best" are not very useful criteria in investing. The useful criteria have to to do with what suits what the investor wants. When that is known in a useful way, then one can start deciding among different choices.

Hint: For most people most of the time, nothing else said, neither CDs nor bond funds are better or worse than the other.

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Re: Is it ok to invest in bonds?

Post by 3funder » Sun Jul 01, 2018 8:44 am

nedsaid wrote:
Sat Jun 30, 2018 9:46 am
Yes. Reinvest the dividends and over long periods of time you will do just fine. Next question?
+1.

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Re: Is it ok to invest in bonds?

Post by Jesteroftheswamp » Wed Jul 04, 2018 9:26 pm

Phineas J. Whoopee wrote:
Sat Jun 30, 2018 9:55 pm
tennisplyr wrote:
Sat Jun 30, 2018 6:53 pm
Let's say your time horizon is 5 to 10 years, would it be better to hold CDs or a bond index fund?
It depends on what you mean by better. If you mean will end up having had a higher return, even if you'll tell us which bond index fund you're talking about, the answer is unknown and unknowable. We can tell you, of course, what did happen over the last five to ten years.

If you mean what are the risk and reward tradeoffs, then the answer depends on what risks you face and what rewards you value.

Please tell us the answer you want.

PJW

Yes tennisplyr, please tell us as I am interested in reading the responses.

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Re: Is it ok to invest in bonds?

Post by tennisplyr » Thu Jul 05, 2018 6:28 am

Phineas J. Whoopee wrote:
Sat Jun 30, 2018 9:55 pm
tennisplyr wrote:
Sat Jun 30, 2018 6:53 pm
Let's say your time horizon is 5 to 10 years, would it be better to hold CDs or a bond index fund?
It depends on what you mean by better. If you mean will end up having had a higher return, even if you'll tell us which bond index fund you're talking about, the answer is unknown and unknowable. We can tell you, of course, what did happen over the last five to ten years.

If you mean what are the risk and reward tradeoffs, then the answer depends on what risks you face and what rewards you value.

Please tell us the answer you want.

PJW
I would be interested in which would likely provide a better return over time.
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Re: Is it ok to invest in bonds?

Post by Rick Ferri » Thu Jul 05, 2018 7:50 am

Here is a simple way to think about investment grade bond funds. There are three elements:

1) Duration
2) Yield-to-maturity (YTM)
3) Fees

Let’s take the first two, duration and YTM. If you by a bond fund that has a 4% YTM and a duration of 6 years, reinvest all dividends over the 6 years, your total return will be about 4% regardless of what interest rates do over the 6 year period.

If rates move higher, the interest and maturing bonds will be reinvested at a higher rate than 4%, but the value of longer-term bonds in the portfolio will fall. It’s about a wash, so you’ll get about 4% in 6 years.

If rates move lower, the interest and maturing bonds will be reinvested at a lower rate than 4%, but the value of longer-term bonds in the portfolio will rise. It’s about a wash, so you’ll get about 4% in 6 years.

Last, buy broadly diversified ultra-low fee bond funds. Every dollar you pay in fees subtracts from your return.

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Re: Is it ok to invest in bonds?

Post by ruralavalon » Thu Jul 05, 2018 10:48 am

Jesteroftheswamp wrote:
Sat Jun 30, 2018 9:42 am
I understand why/how bond values decrease when there is an increase in interest rates, but how relevant is this if one buys a bond and holds til maturity? What about in bond index funds, certainly the overall price of the fund can decrease with increasing rates but is this a reason to not invest in bond index funds? I would like to contribute a little more money to my bond index fund on a two year horizon to earn a little more than what I earn in my money market account (1.6%) [emphasis added]but I worry about how an increase in interest rates may affect the fund.
Why the two year horizon?

I usually suggest investing for the long-term, ignoring short-term events, and using an intermediate-term bond fund. For the long-term investor rising interest rates are a good thing.

If you have some short-term savings goal in mind, you could consider Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.04%.
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Re: Is it ok to invest in bonds?

Post by Phineas J. Whoopee » Thu Jul 05, 2018 12:34 pm

tennisplyr wrote:
Thu Jul 05, 2018 6:28 am
...
I would be interested in which would likely provide a better return over time.
As I wrote in my first response that is precisely the question we cannot answer. It's unknown and unknowable.

PJW

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Re: Is it ok to invest in bonds?

Post by Rick Ferri » Thu Jul 05, 2018 12:39 pm

Phineas J. Whoopee wrote:
Thu Jul 05, 2018 12:34 pm
tennisplyr wrote:
Thu Jul 05, 2018 6:28 am
...
I would be interested in which would likely provide a better return over time.
As I wrote in my first response that is precisely the question we cannot answer. It's unknown and unknowable.

PJW
Ahh! You want the high return of the riskier asset without the risk. Got it!
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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tennisplyr
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Re: Is it ok to invest in bonds?

Post by tennisplyr » Thu Jul 05, 2018 6:19 pm

Rick Ferri wrote:
Thu Jul 05, 2018 12:39 pm
Phineas J. Whoopee wrote:
Thu Jul 05, 2018 12:34 pm
tennisplyr wrote:
Thu Jul 05, 2018 6:28 am
...
I would be interested in which would likely provide a better return over time.
As I wrote in my first response that is precisely the question we cannot answer. It's unknown and unknowable.

PJW
Ahh! You want the high return of the riskier asset without the risk. Got it!
No....never said I was unwilling to take a risk, I guess I knew the answer before I asked it.
Those who move forward with a happy spirit will find that things always work out.

Jesteroftheswamp
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Re: Is it ok to invest in bonds?

Post by Jesteroftheswamp » Wed Jul 11, 2018 8:53 pm

ruralavalon wrote:
Thu Jul 05, 2018 10:48 am
Jesteroftheswamp wrote:
Sat Jun 30, 2018 9:42 am
I understand why/how bond values decrease when there is an increase in interest rates, but how relevant is this if one buys a bond and holds til maturity? What about in bond index funds, certainly the overall price of the fund can decrease with increasing rates but is this a reason to not invest in bond index funds? I would like to contribute a little more money to my bond index fund on a two year horizon to earn a little more than what I earn in my money market account (1.6%) [emphasis added]but I worry about how an increase in interest rates may affect the fund.
Why the two year horizon?

I usually suggest investing for the long-term, ignoring short-term events, and using an intermediate-term bond fund. For the long-term investor rising interest rates are a good thing.

If you have some short-term savings goal in mind, you could consider Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.04%.
Short term because I really want to buy a house, but I am really really indecisive and can never make up my mind; however, I don’t see myself renting for longer than five more years, and ideally I’d like to buy within the next two. I have enough for a down payment but am just mentally all over the place - not sure how much house I want to buy, where, and obviously exactly when.


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ruralavalon
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Re: Is it ok to invest in bonds?

Post by ruralavalon » Thu Jul 12, 2018 9:23 am

Jesteroftheswamp wrote:
Wed Jul 11, 2018 8:53 pm
ruralavalon wrote:
Thu Jul 05, 2018 10:48 am
Jesteroftheswamp wrote:
Sat Jun 30, 2018 9:42 am
I understand why/how bond values decrease when there is an increase in interest rates, but how relevant is this if one buys a bond and holds til maturity? What about in bond index funds, certainly the overall price of the fund can decrease with increasing rates but is this a reason to not invest in bond index funds? I would like to contribute a little more money to my bond index fund on a two year horizon to earn a little more than what I earn in my money market account (1.6%) [emphasis added]but I worry about how an increase in interest rates may affect the fund.
Why the two year horizon?

I usually suggest investing for the long-term, ignoring short-term events, and using an intermediate-term bond fund. For the long-term investor rising interest rates are a good thing.

If you have some short-term savings goal in mind, you could consider Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.04%.
Short term because I really want to buy a house, but I am really really indecisive and can never make up my mind; however, I don’t see myself renting for longer than five more years, and ideally I’d like to buy within the next two. I have enough for a down payment but am just mentally all over the place - not sure how much house I want to buy, where, and obviously exactly when.
For a short-term savings goal like buying a home in 2 years in my opinion it is reasonable to use:
(1) a money market fund like Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.04%;
(2) a high yield savings account or short-term CDs (see www.bankrate.com for rates);
(3) Vanguard Ultra-Short-Term Bond Fund Admiral Shares (VUSFX) current SEC Yield = 2.53%, average effective duration = 0.98 years, average credit quality = BBB;
(4) a short-term bond fund like Vanguard Short-term Corporate Bond Index Fund Admiral Shares.(VSCSX) current SEC Yield = 3.37%, average effective duration = 2.79 years, average credit quality = A; or
(5) a combination.
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Jesteroftheswamp
Posts: 94
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Re: Is it ok to invest in bonds?

Post by Jesteroftheswamp » Sat Jul 14, 2018 4:22 pm

ruralavalon wrote:
Thu Jul 12, 2018 9:23 am
Jesteroftheswamp wrote:
Wed Jul 11, 2018 8:53 pm
ruralavalon wrote:
Thu Jul 05, 2018 10:48 am
Jesteroftheswamp wrote:
Sat Jun 30, 2018 9:42 am
I understand why/how bond values decrease when there is an increase in interest rates, but how relevant is this if one buys a bond and holds til maturity? What about in bond index funds, certainly the overall price of the fund can decrease with increasing rates but is this a reason to not invest in bond index funds? I would like to contribute a little more money to my bond index fund on a two year horizon to earn a little more than what I earn in my money market account (1.6%) [emphasis added]but I worry about how an increase in interest rates may affect the fund.
Why the two year horizon?

I usually suggest investing for the long-term, ignoring short-term events, and using an intermediate-term bond fund. For the long-term investor rising interest rates are a good thing.

If you have some short-term savings goal in mind, you could consider Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.04%.
Short term because I really want to buy a house, but I am really really indecisive and can never make up my mind; however, I don’t see myself renting for longer than five more years, and ideally I’d like to buy within the next two. I have enough for a down payment but am just mentally all over the place - not sure how much house I want to buy, where, and obviously exactly when.
For a short-term savings goal like buying a home in 2 years in my opinion it is reasonable to use:
(1) a money market fund like Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.04%;
(2) a high yield savings account or short-term CDs (see www.bankrate.com for rates);
(3) Vanguard Ultra-Short-Term Bond Fund Admiral Shares (VUSFX) current SEC Yield = 2.53%, average effective duration = 0.98 years, average credit quality = BBB;
(4) a short-term bond fund like Vanguard Short-term Corporate Bond Index Fund Admiral Shares.(VSCSX) current SEC Yield = 3.37%, average effective duration = 2.79 years, average credit quality = A; or
(5) a combination.
Thank you

petergibbons
Posts: 21
Joined: Sun Apr 05, 2015 11:50 am

Re: Is it ok to invest in bonds?

Post by petergibbons » Sat Jul 14, 2018 8:11 pm

Alexa9 wrote:
Sat Jun 30, 2018 11:41 am
Bonds are a safety place that still accumulate a fair amount. They have underperformed stocks significantly over most long and short term periods. Past performance doesn't equate to future performance. Bonds have outperformed stocks in bear markets even over 10 year periods. They provide a rebalancing bonus in a volatile market.

Here is a comparison of Total Stock/Bond Market using www.portfoliovisualizer.com
Image
Image
For the bond graph, does it also include the dividends paid out by the bond?

petulant
Posts: 346
Joined: Thu Sep 22, 2016 1:09 pm

Re: Is it ok to invest in bonds?

Post by petulant » Sat Jul 14, 2018 9:24 pm

petergibbons wrote:
Sat Jul 14, 2018 8:11 pm
Alexa9 wrote:
Sat Jun 30, 2018 11:41 am
Bonds are a safety place that still accumulate a fair amount. They have underperformed stocks significantly over most long and short term periods. Past performance doesn't equate to future performance. Bonds have outperformed stocks in bear markets even over 10 year periods. They provide a rebalancing bonus in a volatile market.

Here is a comparison of Total Stock/Bond Market using www.portfoliovisualizer.com
Image
Image
For the bond graph, does it also include the dividends paid out by the bond?
Yes, portfoliovisualizer uses data on total return of asset classes and funds.

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