Bonds vs. Savings Account

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Closer2323
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Bonds vs. Savings Account

Post by Closer2323 » Tue Nov 13, 2018 11:45 am

Newbie question here - can a high interest savings account i.e. say 1.9% take the place of Bonds in a portfolio? Why or why not?

In terms of giving yourself a buffer or peace of mind in a downturn let's say you have "X" amount of dollars in a high interest earning savings account by which this allows you to stomach a large drop in your equities during a downturn.

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Re: Bonds vs. Savings Account

Post by PolarBearMarket » Tue Nov 13, 2018 11:50 am

Closer2323 wrote:
Tue Nov 13, 2018 11:45 am
Newbie question here - can a high interest savings account i.e. say 1.9% take the place of Bonds in a portfolio? Why or why not?

In terms of giving yourself a buffer or peace of mind in a downturn let's say you have "X" amount of dollars in a high interest earning savings account by which this allows you to stomach a large drop in your equities during a downturn.
IMO a HYSA like Ally is perfect for your emergency fund and for storing cash for a near-term purchase (e.g., down payment). A savings account will have a lower long-term growth than bonds and is a different kind of asset, so I wouldn't put it in the same category. Some people might be intentional about doing, for example, 70/20/10, where 20% is the bond allocation and 10% is the cash allocation. If that's an AA you're willing to stick with, it's not a bad one.

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Re: Bonds vs. Savings Account

Post by JBTX » Tue Nov 13, 2018 11:53 am

Closer2323 wrote:
Tue Nov 13, 2018 11:45 am
Newbie question here - can a high interest savings account i.e. say 1.9% take the place of Bonds in a portfolio? Why or why not?

In terms of giving yourself a buffer or peace of mind in a downturn let's say you have "X" amount of dollars in a high interest earning savings account by which this allows you to stomach a large drop in your equities during a downturn.
It depends on what you are trying to accomplish. Bonds will typically yield more but have interest rate risk. High quality Longer term bonds can be negatively correlated with stocks in certain situations like severe economic downturns.

Cash in the bank probably won't keep up with inflation.

If you are a long term investor bonds are more appropriate. If you may need the money in less than a decade then cash makes more sense.

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Re: Bonds vs. Savings Account

Post by ruralavalon » Tue Nov 13, 2018 11:59 am

Closer2323 wrote:
Tue Nov 13, 2018 11:45 am
Newbie question here - can a high interest savings account i.e. say 1.9% take the place of Bonds in a portfolio? Why or why not?

In terms of giving yourself a buffer or peace of mind in a downturn let's say you have "X" amount of dollars in a high interest earning savings account by which this allows you to stomach a large drop in your equities during a downturn.
A savings account with 1.9% interest is not likely to give a positive real return net of inflation, so in my opinion it's hard to consider that savings account as an investment.

By contrast intermediate-term bond funds currently have SEC Yields in the range of 3.3-4.3%, so seem likely to have a positive real return net of inflation.

A savings account is fixed income and does allow for peace of mind in a stock market downturn. Some people do include a "cash" holding as part of their "bond" allocation.
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Re: Bonds vs. Savings Account

Post by billfromct » Tue Nov 13, 2018 12:00 pm

Of course.

A lot of people, including me, base their fixed income allocation on the timing of when they will need the money.

I have the fixed income allocation in my IRA in money market, short term (2.5 years duration) & intermediate term bonds (5-6 years duration). I will start RMDs next year.

The Vanguard Prime MM Fund is now paying 2.23% interest, can be transferred to your checking account in 1-2 business days (depending on the time of the day you make the transfer) and checks can be written if over $250.

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Re: Bonds vs. Savings Account

Post by aristotelian » Tue Nov 13, 2018 12:04 pm

For an accumulating investor, a 10% cash allocation probably isn't going to make a difference. For a conservative 30/70 investor in retirement, that is a lot of money to be earning 2% when inflation is likely higher than that, and you could be earning 3-3.5% in bonds.

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Closer2323
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Re: Bonds vs. Savings Account

Post by Closer2323 » Tue Nov 13, 2018 12:42 pm

Let's say that you run out of your emergency fund and you are forced to tap into your investment for survival. Would you then start to tap into your Roth IRA and 401K with the Bonds or the Taxable Account with the equities?

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Re: Bonds vs. Savings Account

Post by dwickenh » Tue Nov 13, 2018 1:42 pm

Closer2323 wrote:
Tue Nov 13, 2018 12:42 pm
Let's say that you run out of your emergency fund and you are forced to tap into your investment for survival. Would you then start to tap into your Roth IRA and 401K with the Bonds or the Taxable Account with the equities?
You could tap you taxable account equities, and then buy them back with bonds in your 401K to keep the allocation correct. That way
you are actually selling bonds in your tax deferred but not paying the taxes(only long term capital gains in your taxable account).

You might even get to tax harvest some losing equities in the taxable, and buy a (not the same) replacement in the 401k.

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Re: Bonds vs. Savings Account

Post by jimishooch » Wed Nov 14, 2018 11:51 am

my fixed income is VG prime MM, synchrony HYS, VG brokerage CD ladder and Ibonds.

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Closer2323
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High yield savings vs. Bonds

Post by Closer2323 » Wed Nov 14, 2018 12:03 pm

[Thread merged into here, see below. --admin LadyGeek]

I understand the differences between Savings and Bonds and that Bonds historically have better returns than a Savings or Money Market however from what I can tell right now:

1. Rising interest rates will probably cause Bonds to be a worse investment in the near future.

2. High yield savings accounts interest rates will probably increase in the near future. Currently the one I am using is 2%.

So my question is if I am using the High yield savings account for the purpose of keeping myself from selling my Equities in a down market - i.e. to "smooth the ride" so to speak than is there anything inherently wrong with that?

Essentially my investment breakdown would be currently: 75% Equities and 25% High yield savings account

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Re: High yield savings vs. Bonds

Post by PFInterest » Wed Nov 14, 2018 12:35 pm

I don't see why you would be scared of bonds when you have 75% in stocks...

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Re: High yield savings vs. Bonds

Post by Flyer24 » Wed Nov 14, 2018 12:51 pm

The rising interest rate only hurts the bond fund share price in the short term. Over the long term, you make more with the higher yield. The NAV price eventually comes back up. Buy when it is down and get more shares. I see that you are 38. So you have plenty of time to invest.

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Re: High yield savings vs. Bonds

Post by Dandy » Wed Nov 14, 2018 1:00 pm

In a rising rate environment having a portion of your fixed income allocation in a high yield savings is fine. You have to make sure it is high yield. Most legit savings are paying about 1.9% or a bit more. VG Fed Money Market is paying 2.15 and the Prime Money Market is paying 2.26% -- neither is FDIC protected but are considered very safe. They will also participate in rising rates. The advantage of using VG money markets if you invest with vanguard is that you can quickly move assets from money market to investments and vice versa.

Of course the bonds funds will decline during a rising rate environment but they should recover as they replace lower yielding bonds with newer ones with a better yield. So, longer term they should be solid.

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Re: High yield savings vs. Bonds

Post by vineviz » Wed Nov 14, 2018 1:20 pm

Closer2323 wrote:
Wed Nov 14, 2018 12:03 pm
So my question is if I am using the High yield savings account for the purpose of keeping myself from selling my Equities in a down market - i.e. to "smooth the ride" so to speak than is there anything inherently wrong with that?
Let me answer your question with a question: which of these three portfolios would you prefer? Which would you say provided the "smoothest ride"?

Image
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Re: High yield savings vs. Bonds

Post by Closer2323 » Wed Nov 14, 2018 1:28 pm

Portfolio 1

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Re: High yield savings vs. Bonds

Post by vineviz » Wed Nov 14, 2018 5:31 pm

Closer2323 wrote:
Wed Nov 14, 2018 1:28 pm
Portfolio 1
Okay, so here's the magic.

All three are combinations of a stock index (Vanguard 500 Index) with a Vanguard treasury fund of short, intermediate, or long duration over the period 1992 to 2018.

It's an illustration more than anything else, since I chose each portfolio to produce EXACTLY the same return over the period so that we could see how portfolios with the same return can have different amounts of volatility or risk. No guarantee this "trick" works exactly this way in the future, but the principle is eternal.

Portfolio 1 is stocks with long-term Treasuries (34.2% stocks/65.8% bonds).

Portfolio 2 is stocks with intermediate Treasuries (60% stocks/40% bonds)

Portfolio 3 is stocks with short-term Treasuries (72.26% stocks/27.74% bonds).

The magic is that the "riskier" bonds can, when mixed in a portfolio with stocks, produce a much less volatile portfolio. This is counterintuitive, and trips people up. Intuition tells you to buy the short-term bonds to lower the risk of your portfolio, but the truth is the opposite reaction is often the best bet.

This is true even in "rising rate" environments, for instance. From 2003 to 2006, the yield on the 7-year treasury went from a low of 2.6% to a high of 5.2%. It effectively doubled. What was the total return of short-term bonds versus long-term bonds during that period of time?

Image

This period of rising yields was volatile, but if you were a buy-and-hold long-term investor you came out just fine.

The takeaway, I think, is to not worry about "the current environment" if you are a long-term investor. Stick with a long-term plan that is based on reasoned principles, not emotional reactions.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: High yield savings vs. Bonds

Post by michaeljmroger » Wed Nov 14, 2018 6:06 pm

vineviz wrote:
Wed Nov 14, 2018 5:31 pm
The takeaway, I think, is to not worry about "the current environment" if you are a long-term investor.
Can you define what's a "long-term investor"? More than 5, 10, 20 years?

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Re: High yield savings vs. Bonds

Post by vineviz » Wed Nov 14, 2018 6:09 pm

michaeljmroger wrote:
Wed Nov 14, 2018 6:06 pm
vineviz wrote:
Wed Nov 14, 2018 5:31 pm
The takeaway, I think, is to not worry about "the current environment" if you are a long-term investor.
Can you define what's a "long-term investor"? More than 5, 10, 20 years?
Generally, I'd say 'longer than the duration of the bonds of bond funds".

Most intermediate bond funds have a duration of 5-7 years, so I'd only own them if you plan to hold them at least that long.

Long-term bond funds can have durations in excess of 10-15 years.
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Re: High yield savings vs. Bonds

Post by nisiprius » Wed Nov 14, 2018 6:15 pm

Closer2323 wrote:
Wed Nov 14, 2018 12:03 pm
I understand the differences between Savings and Bonds and that Bonds historically have better returns than a Savings or Money Market however from what I can tell right now:

1. Rising interest rates will probably cause Bonds to be a worse investment in the near future.
Wrong. It's not that simple. Ignoring inflation, a simple and correct answer is that of course if interest rates rise, freshly purchased bonds become better and better investments--just as you'd expect. However, if interest rates rise, the bonds you have already bought decline in value... temporarily
2. High yield savings accounts interest rates will probably increase in the near future. Currently the one I am using is 2%.

So my question is if I am using the High yield savings account for the purpose of keeping myself from selling my Equities in a down market - i.e. to "smooth the ride" so to speak than is there anything inherently wrong with that?
There's nothing wrong with that, but be clear about what you're doing. It's not by any means the obvious slam dunk some people think it is. It is a conscious decision to take lower risk, and almost certainly get lower return, and to do so in a part of your portfolio where risk reduction won't have much impact.

The reasons this might not be a good move are that

a) stocks are relatively very volatile, so reducing the volatility in the non-stock part of your portfolio actually isn't going to reduce the overall portfolio volatility that much, and

b) historically, bonds have moved independently from stocks, and therefore reducing the volatility of the bond part of your portfolio reduces it even less than you'd expect from simple arithmetic that doesn't take that independent movement into account. In my opinion the value and importance of this independent movement is often wildly exaggerated, but it's there.

But, yes: bonds and the best available bank accounts are broadly in the same ballpark with regard to return, and if bonds really bother you there is nothing "inherently wrong" with replacing them with savings accounts. But look before you leap. It's not inherently wrong, but it's not obviously right, either.
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Re: High yield savings vs. Bonds

Post by UpperNwGuy » Wed Nov 14, 2018 6:28 pm

I'm planning to stick with Total Bond and Intermediate Tax Exempt.

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Re: Bonds vs. Savings Account

Post by LadyGeek » Wed Nov 14, 2018 8:02 pm

Closer2323 - In order to give appropriate advice, it's best to keep all the information in one spot. I merged your updated thread back into the original. If you have any questions, ask them here.
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Closer2323
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Re: Bonds vs. Savings Account

Post by Closer2323 » Wed Nov 14, 2018 9:25 pm

Sort of off topic but related; are there any “set it and forget it” Vanguard Funds that can be placed in a taxable account? It seems like the TR and LifeStrategy are out because of the bond tax issues. The other option is paying a vanguard adviser .30% for management.

I am not concerned about myself but rather if something were to happen and my wife having to worry about rebalancing.

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Re: Bonds vs. Savings Account

Post by michaeljmroger » Wed Nov 14, 2018 9:30 pm

Closer2323 wrote:
Wed Nov 14, 2018 9:25 pm
Sort of off topic but related; are there any “set it and forget it” Vanguard Funds that can be placed in a taxable account? It seems like the TR and LifeStrategy are out because of the bond tax issues. The other option is paying a vanguard adviser .30% for management.

I am not concerned about myself but rather if something were to happen and my wife having to worry about rebalancing.
VTMFX is probably what you’re looking for.

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Re: Bonds vs. Savings Account

Post by vineviz » Wed Nov 14, 2018 9:30 pm

Closer2323 wrote:
Wed Nov 14, 2018 9:25 pm
Sort of off topic but related; are there any “set it and forget it” Vanguard Funds that can be placed in a taxable account? It seems like the TR and LifeStrategy are out because of the bond tax issues. The other option is paying a vanguard adviser .30% for management.

I am not concerned about myself but rather if something were to happen and my wife having to worry about rebalancing.
If you’re not in a high tax bracket, the tax drag of Vanguard Target Retirement Income might not be as high as you think.

There is also Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX) which is very tax efficient.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Closer2323
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Re: Bonds vs. Savings Account

Post by Closer2323 » Wed Nov 14, 2018 9:42 pm

I am currently in a high tax bracket. This may be a dumb question but once you get closer to Retirement and the TR fund is heavier in bonds wouldn’t you be at that point in a lower tax bracket and thus not matter as much?

For example if I have a TD of 2045 with a 90/10 stock/bond ratio and the account is $600K how much is that costing me?

I have noticed that the advisors that I’ve talked with dont seem to care as much about bonds in taxable.When I asked directly about that they stated the 401K would mirror the Taxable and you wouldn’t necessarily have your bonds in the more tax efficient bucket.

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Re: Bonds vs. Savings Account

Post by Closer2323 » Wed Nov 14, 2018 9:45 pm

vineviz wrote:
Wed Nov 14, 2018 9:30 pm
Closer2323 wrote:
Wed Nov 14, 2018 9:25 pm
Sort of off topic but related; are there any “set it and forget it” Vanguard Funds that can be placed in a taxable account? It seems like the TR and LifeStrategy are out because of the bond tax issues. The other option is paying a vanguard adviser .30% for management.

I am not concerned about myself but rather if something were to happen and my wife having to worry about rebalancing.
If you’re not in a high tax bracket, the tax drag of Vanguard Target Retirement Income might not be as high as you think.

There is also Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX) which is very tax efficient.
What is your opinion of this VTMFX Fund as a set it and forget it option? It doesnt contain International right? It’s basically 50/50 stocks bonds?

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Re: Bonds vs. Savings Account

Post by vineviz » Wed Nov 14, 2018 10:15 pm

Closer2323 wrote:
Wed Nov 14, 2018 9:45 pm
vineviz wrote:
Wed Nov 14, 2018 9:30 pm
Closer2323 wrote:
Wed Nov 14, 2018 9:25 pm
Sort of off topic but related; are there any “set it and forget it” Vanguard Funds that can be placed in a taxable account? It seems like the TR and LifeStrategy are out because of the bond tax issues. The other option is paying a vanguard adviser .30% for management.

I am not concerned about myself but rather if something were to happen and my wife having to worry about rebalancing.
If you’re not in a high tax bracket, the tax drag of Vanguard Target Retirement Income might not be as high as you think.

There is also Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX) which is very tax efficient.
What is your opinion of this VTMFX Fund as a set it and forget it option? It doesnt contain International right? It’s basically 50/50 stocks bonds?
I think if 50/50 is a reasonable allocation for you that VTMFX is s good fund to taxable accounts. If you have tax-advantaged accounts you could use a more aggressive LifeStrategy fund there to balance things out.

The advantages of having a single fund with the right allocation are powerful enough, in my opinion, that I’d personally sacrifice some tax-efficiency to get that simplicity. You’ll probably end up richer in the end.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Bonds vs. Savings Account

Post by whodidntante » Wed Nov 14, 2018 10:19 pm

I think you are still better off with "bonds" e.g. 52 week T-bills. A 52 week T-bill does have some term risk but it's mild. The yield is higher than a savings account and it's state tax exempt.

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Re: Bonds vs. Savings Account

Post by radiowave » Wed Nov 14, 2018 10:47 pm

Closer2323 wrote:
Wed Nov 14, 2018 9:45 pm

What is your opinion of this VTMFX Fund as a set it and forget it option? It doesnt contain International right? It’s basically 50/50 stocks bonds?
VTMFX in taxable and VBIAX in tax deferred make a good pair and a very simple portfolio giving you somewhere between 50 and 60% equity. ER slightly higher at 0.09 and 0.07% compared to 0.04% for VTSAX (Vanguard total stock market Admiral fund) and 0.05% for VG Total Bond. You loose some flexibility for changing asset allocation with the two balanced funds, but if you want to set and forget, I can't think of a better combination.
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Re: Bonds vs. Savings Account

Post by alex123711 » Wed Jan 08, 2020 9:14 pm

Are you still better off buying bonds than leaving in a high interest account at these low interest rates?

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Re: Bonds vs. Savings Account

Post by Dandy » Thu Jan 09, 2020 8:29 am

For most people fixed income whether bonds or savings is often just to provide some stability to the portfolio and some ability to rebalance their portfolio. Bonds or bond funds aren't really for growth and with today's low interest rate don't really provide meaningful income. So, having some of your fixed income in savings at a decent rate makes some sense. Unless there are some unusual circumstances usually intermediate or short term bond funds should probably be the bulk of your fixed income allocation.

Understand that rising interest rates will have a negative effect on bond values -- for awhile while savings usually will gradually rise with the rising rates. If rates drop bond funds will rise a bit temporarily while savings rates will usually decline.
Finally, savings accounts don't usually keep up with inflation so it is not usually good to have much of your portfolio that will lag inflation especially in a taxable account.

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Re: Bonds vs. Savings Account

Post by Blue456 » Thu Jan 09, 2020 8:39 am

Closer2323 wrote:
Tue Nov 13, 2018 11:45 am
Newbie question here - can a high interest savings account i.e. say 1.9% take the place of Bonds in a portfolio? Why or why not?

In terms of giving yourself a buffer or peace of mind in a downturn let's say you have "X" amount of dollars in a high interest earning savings account by which this allows you to stomach a large drop in your equities during a downturn.
Depends what kind of bond fund you are comparing it to.
Ultra Short Term Treaury = SHV will give you 1.6% yield. This maybe higher yield than 1.9% from high yield savings because you don’t pay state and local taxes on it. Interest rate risk is minimal because the bond fund is less than 1 year in terms of duration. You can go with 1.5% BIL which is 1-3 months that has zero interest rate risk. If you live in California your state tax is 13% which would mean your 1.9% HYS actually gives 1.66%. So at current rates 1.9% HYS could replace ultra short term bonds and give higher net yield.
Now if you compare to short term and intermediate term bonds then HYS will loose in terms of income but will win in terms of safety and stability. So it all comes down to taxes and how much risk you willing to take.

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Re: Bonds vs. Savings Account

Post by JoMoney » Thu Jan 09, 2020 8:50 am

A HY savings account can be liquidated immediately, often at an ATM machine. Selling a bond fund or ETF will have a settlement period, and requires a functioning market to find someone to sell it to. If the market goes haywire, the Fed and FDIC will come to the aid of banks and their depositors... markets might have to wait awhile and sort things out in less orderly way.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: High yield savings vs. Bonds

Post by wolf359 » Thu Jan 09, 2020 9:33 am

vineviz wrote:
Wed Nov 14, 2018 5:31 pm
Closer2323 wrote:
Wed Nov 14, 2018 1:28 pm
Portfolio 1
Okay, so here's the magic.

All three are combinations of a stock index (Vanguard 500 Index) with a Vanguard treasury fund of short, intermediate, or long duration over the period 1992 to 2018.

It's an illustration more than anything else, since I chose each portfolio to produce EXACTLY the same return over the period so that we could see how portfolios with the same return can have different amounts of volatility or risk. No guarantee this "trick" works exactly this way in the future, but the principle is eternal.

Portfolio 1 is stocks with long-term Treasuries (34.2% stocks/65.8% bonds).

Portfolio 2 is stocks with intermediate Treasuries (60% stocks/40% bonds)

Portfolio 3 is stocks with short-term Treasuries (72.26% stocks/27.74% bonds).

The magic is that the "riskier" bonds can, when mixed in a portfolio with stocks, produce a much less volatile portfolio. This is counterintuitive, and trips people up. Intuition tells you to buy the short-term bonds to lower the risk of your portfolio, but the truth is the opposite reaction is often the best bet.

This is true even in "rising rate" environments, for instance. From 2003 to 2006, the yield on the 7-year treasury went from a low of 2.6% to a high of 5.2%. It effectively doubled. What was the total return of short-term bonds versus long-term bonds during that period of time?

Image

This period of rising yields was volatile, but if you were a buy-and-hold long-term investor you came out just fine.

The takeaway, I think, is to not worry about "the current environment" if you are a long-term investor. Stick with a long-term plan that is based on reasoned principles, not emotional reactions.
Someone resurrected this older thread, and as a result I read this post. This was very well presented, and gave me a lot to think about.

I started playing around with my portfolio in portfolio visualizer, and substituting in bonds or treasuries of different maturities and in different time frames. There does seem to be something there, and I may consider changing my asset allocation (eventually) to incorporate this information.

Vineviz, I just wanted to say thank you for posting it.

If I'm getting it right:

Longer term treasuries (as long as they match up with your investment time horizon) are better for diversification than short-term or ultra-short term bonds. It's definitely counter-intuitive, but it works when combined with equities because the longer the term the fixed income product is, the less the portfolio will track the stock market. Shorter term fixed income returns so much less that their returns DO track the market, and result in less diversification if you're buying and holding over longer time periods.

Longer term bonds will beat shorter term bonds if your portfolio is meant to be held over the long term. Both will definitely beat a savings account, which is neither safe nor adds stability in this context.

I'm still not fully convinced because the effect is so weird, but I'm getting there.

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Re: High yield savings vs. Bonds

Post by Dottie57 » Thu Jan 09, 2020 12:26 pm

wolf359 wrote:
Thu Jan 09, 2020 9:33 am
vineviz wrote:
Wed Nov 14, 2018 5:31 pm
Closer2323 wrote:
Wed Nov 14, 2018 1:28 pm
Portfolio 1
Okay, so here's the magic.

All three are combinations of a stock index (Vanguard 500 Index) with a Vanguard treasury fund of short, intermediate, or long duration over the period 1992 to 2018.

It's an illustration more than anything else, since I chose each portfolio to produce EXACTLY the same return over the period so that we could see how portfolios with the same return can have different amounts of volatility or risk. No guarantee this "trick" works exactly this way in the future, but the principle is eternal.

Portfolio 1 is stocks with long-term Treasuries (34.2% stocks/65.8% bonds).

Portfolio 2 is stocks with intermediate Treasuries (60% stocks/40% bonds)

Portfolio 3 is stocks with short-term Treasuries (72.26% stocks/27.74% bonds).

The magic is that the "riskier" bonds can, when mixed in a portfolio with stocks, produce a much less volatile portfolio. This is counterintuitive, and trips people up. Intuition tells you to buy the short-term bonds to lower the risk of your portfolio, but the truth is the opposite reaction is often the best bet.

This is true even in "rising rate" environments, for instance. From 2003 to 2006, the yield on the 7-year treasury went from a low of 2.6% to a high of 5.2%. It effectively doubled. What was the total return of short-term bonds versus long-term bonds during that period of time?

Image

This period of rising yields was volatile, but if you were a buy-and-hold long-term investor you came out just fine.

The takeaway, I think, is to not worry about "the current environment" if you are a long-term investor. Stick with a long-term plan that is based on reasoned principles, not emotional reactions.
Someone resurrected this older thread, and as a result I read this post. This was very well presented, and gave me a lot to think about.

I started playing around with my portfolio in portfolio visualizer, and substituting in bonds or treasuries of different maturities and in different time frames. There does seem to be something there, and I may consider changing my asset allocation (eventually) to incorporate this information.

Vineviz, I just wanted to say thank you for posting it.

If I'm getting it right:

Longer term treasuries (as long as they match up with your investment time horizon) are better for diversification than short-term or ultra-short term bonds. It's definitely counter-intuitive, but it works when combined with equities because the longer the term the fixed income product is, the less the portfolio will track the stock market. Shorter term fixed income returns so much less that their returns DO track the market, and result in less diversification if you're buying and holding over longer time periods.

Longer term bonds will beat shorter term bonds if your portfolio is meant to be held over the long term. Both will definitely beat a savings account, which is neither safe nor adds stability in this context.

I'm still not fully convinced because the effect is so weird, but I'm getting there.
Long term bonds in the 80’s were at least 8%. My mom is still collecting 8% on a few individual bonds. I would expect that with that type of interest a long term funds would be valuable. I really question how long term funds will do as time marches on and the current low rates become a larger and larger portion of the fund.

wolf359
Posts: 2155
Joined: Sun Mar 15, 2015 8:47 am

Re: High yield savings vs. Bonds

Post by wolf359 » Thu Jan 09, 2020 2:18 pm

Dottie57 wrote:
Thu Jan 09, 2020 12:26 pm
wolf359 wrote:
Thu Jan 09, 2020 9:33 am
vineviz wrote:
Wed Nov 14, 2018 5:31 pm
Closer2323 wrote:
Wed Nov 14, 2018 1:28 pm
Portfolio 1
Okay, so here's the magic.

All three are combinations of a stock index (Vanguard 500 Index) with a Vanguard treasury fund of short, intermediate, or long duration over the period 1992 to 2018.

It's an illustration more than anything else, since I chose each portfolio to produce EXACTLY the same return over the period so that we could see how portfolios with the same return can have different amounts of volatility or risk. No guarantee this "trick" works exactly this way in the future, but the principle is eternal.

Portfolio 1 is stocks with long-term Treasuries (34.2% stocks/65.8% bonds).

Portfolio 2 is stocks with intermediate Treasuries (60% stocks/40% bonds)

Portfolio 3 is stocks with short-term Treasuries (72.26% stocks/27.74% bonds).

The magic is that the "riskier" bonds can, when mixed in a portfolio with stocks, produce a much less volatile portfolio. This is counterintuitive, and trips people up. Intuition tells you to buy the short-term bonds to lower the risk of your portfolio, but the truth is the opposite reaction is often the best bet.

This is true even in "rising rate" environments, for instance. From 2003 to 2006, the yield on the 7-year treasury went from a low of 2.6% to a high of 5.2%. It effectively doubled. What was the total return of short-term bonds versus long-term bonds during that period of time?

Image

This period of rising yields was volatile, but if you were a buy-and-hold long-term investor you came out just fine.

The takeaway, I think, is to not worry about "the current environment" if you are a long-term investor. Stick with a long-term plan that is based on reasoned principles, not emotional reactions.
Someone resurrected this older thread, and as a result I read this post. This was very well presented, and gave me a lot to think about.

I started playing around with my portfolio in portfolio visualizer, and substituting in bonds or treasuries of different maturities and in different time frames. There does seem to be something there, and I may consider changing my asset allocation (eventually) to incorporate this information.

Vineviz, I just wanted to say thank you for posting it.

If I'm getting it right:

Longer term treasuries (as long as they match up with your investment time horizon) are better for diversification than short-term or ultra-short term bonds. It's definitely counter-intuitive, but it works when combined with equities because the longer the term the fixed income product is, the less the portfolio will track the stock market. Shorter term fixed income returns so much less that their returns DO track the market, and result in less diversification if you're buying and holding over longer time periods.

Longer term bonds will beat shorter term bonds if your portfolio is meant to be held over the long term. Both will definitely beat a savings account, which is neither safe nor adds stability in this context.

I'm still not fully convinced because the effect is so weird, but I'm getting there.
Long term bonds in the 80’s were at least 8%. My mom is still collecting 8% on a few individual bonds. I would expect that with that type of interest a long term funds would be valuable. I really question how long term funds will do as time marches on and the current low rates become a larger and larger portion of the fund.
Bond rates in the 80's aren't relevant to a fund whose holdings have a maturity of about 25 years. That does drop back to about 1995, though. The bigger issue is that they're much more sensitive to interest rate changes, with a duration of 17.9 years. If interest rates fall by 1%, the price rises by about 17.9%. If interest rates climb by 1%, the price drops by about 17.9%.

Usually the Fed only drops rates when the economy is tanking. The Fed dropped rates this year, and the Vanguard Long-term Treasury index went up by 14.3%. Eventually the Fed will have to raise rates again, and then long-term treasuries will take a hit. In addition, the Fed seems to be using factors other than the economy to make its decisions. (The gain in LTT didn't offset a stock market loss.) Those are the reasons I'm not fully convinced.

Dottie57
Posts: 8662
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: High yield savings vs. Bonds

Post by Dottie57 » Thu Jan 09, 2020 5:11 pm

wolf359 wrote:
Thu Jan 09, 2020 2:18 pm
Dottie57 wrote:
Thu Jan 09, 2020 12:26 pm
wolf359 wrote:
Thu Jan 09, 2020 9:33 am
vineviz wrote:
Wed Nov 14, 2018 5:31 pm
Closer2323 wrote:
Wed Nov 14, 2018 1:28 pm
Portfolio 1
Okay, so here's the magic.

All three are combinations of a stock index (Vanguard 500 Index) with a Vanguard treasury fund of short, intermediate, or long duration over the period 1992 to 2018.

It's an illustration more than anything else, since I chose each portfolio to produce EXACTLY the same return over the period so that we could see how portfolios with the same return can have different amounts of volatility or risk. No guarantee this "trick" works exactly this way in the future, but the principle is eternal.

Portfolio 1 is stocks with long-term Treasuries (34.2% stocks/65.8% bonds).

Portfolio 2 is stocks with intermediate Treasuries (60% stocks/40% bonds)

Portfolio 3 is stocks with short-term Treasuries (72.26% stocks/27.74% bonds).

The magic is that the "riskier" bonds can, when mixed in a portfolio with stocks, produce a much less volatile portfolio. This is counterintuitive, and trips people up. Intuition tells you to buy the short-term bonds to lower the risk of your portfolio, but the truth is the opposite reaction is often the best bet.

This is true even in "rising rate" environments, for instance. From 2003 to 2006, the yield on the 7-year treasury went from a low of 2.6% to a high of 5.2%. It effectively doubled. What was the total return of short-term bonds versus long-term bonds during that period of time?

Image

This period of rising yields was volatile, but if you were a buy-and-hold long-term investor you came out just fine.

The takeaway, I think, is to not worry about "the current environment" if you are a long-term investor. Stick with a long-term plan that is based on reasoned principles, not emotional reactions.
Someone resurrected this older thread, and as a result I read this post. This was very well presented, and gave me a lot to think about.

I started playing around with my portfolio in portfolio visualizer, and substituting in bonds or treasuries of different maturities and in different time frames. There does seem to be something there, and I may consider changing my asset allocation (eventually) to incorporate this information.

Vineviz, I just wanted to say thank you for posting it.

If I'm getting it right:

Longer term treasuries (as long as they match up with your investment time horizon) are better for diversification than short-term or ultra-short term bonds. It's definitely counter-intuitive, but it works when combined with equities because the longer the term the fixed income product is, the less the portfolio will track the stock market. Shorter term fixed income returns so much less that their returns DO track the market, and result in less diversification if you're buying and holding over longer time periods.

Longer term bonds will beat shorter term bonds if your portfolio is meant to be held over the long term. Both will definitely beat a savings account, which is neither safe nor adds stability in this context.

I'm still not fully convinced because the effect is so weird, but I'm getting there.
Long term bonds in the 80’s were at least 8%. My mom is still collecting 8% on a few individual bonds. I would expect that with that type of interest a long term funds would be valuable. I really question how long term funds will do as time marches on and the current low rates become a larger and larger portion of the fund.
Bond rates in the 80's aren't relevant to a fund whose holdings have a maturity of about 25 years. That does drop back to about 1995, though. The bigger issue is that they're much more sensitive to interest rate changes, with a duration of 17.9 years. If interest rates fall by 1%, the price rises by about 17.9%. If interest rates climb by 1%, the price drops by about 17.9%.

Usually the Fed only drops rates when the economy is tanking. The Fed dropped rates this year, and the Vanguard Long-term Treasury index went up by 14.3%. Eventually the Fed will have to raise rates again, and then long-term treasuries will take a hit. In addition, the Fed seems to be using factors other than the economy to make its decisions. (The gain in LTT didn't offset a stock market loss.) Those are the reasons I'm not fully convinced.
You do understand my point tho. 8% interest on my mom’s bonds are great. If they were in a bond fund that would be great too.

wolf359
Posts: 2155
Joined: Sun Mar 15, 2015 8:47 am

Re: High yield savings vs. Bonds

Post by wolf359 » Fri Jan 10, 2020 9:13 am

Dottie57 wrote:
Thu Jan 09, 2020 5:11 pm
You do understand my point tho. 8% interest on my mom’s bonds are great. If they were in a bond fund that would be great too.
Yes, having an 8% yield is very beneficial for your Mom. Having higher interest rate bonds in a bond fund also positively impact that fund, and contribute to its return. As new 30 year bonds are purchased at 2-3% and replace the oldest 8% bonds, the yield will necessarily drop.

But just like I can't go back to the 80's and buy an 8% bond like your Mom enjoys, I also can't get the same yield from a long-term bond fund if I buy it today. When I buy the fund today, the prices are adjusted so that my effective yield is what the current rates are, or about 2-3%. People who were holding onto the bond fund before the interest rates got to the current level would have had the appropriate gains or losses to reflect that adjustment.

That's why I was referring to the duration. There is a magnifying affect. A bond fund with a duration of 2 years can be expected to move about 2% for each 1% move in interest rates. (Bond prices move opposite interest rates, so if rates go up, prices go down, and vice-versa). The longer durations inherent in long-term bond funds when interest rates change are what provides the diversification effect. This effect will remain even when the higher yielding bonds are no longer held by the fund.

Triple digit golfer
Posts: 5315
Joined: Mon May 18, 2009 5:57 pm

Re: Bonds vs. Savings Account

Post by Triple digit golfer » Fri Jan 10, 2020 9:24 am

I have always wondered why, as they seemingly zig when equities zag, nobody really recommends only holding LT treasuries as their bond portion.

A bond holding is supposed to be the safe portion of one's portfolio, but when that safety is needed most, LT treasuries have crushed Total Bond Index. Even keeping the stock/bond split the same, an 80/20 split of TSM/TBM and TSM/LT Treasuries has produced the following from 1987-2019:

80/20 TSM/TBM:
9.69% CAGR
12.02% Stdev
32.26% best year
-28.62% worst year
-41.22% max drawdown
0.57 Sharpe
0.82 Sortino

80/20 TSM/LT Treasuries:
10.16% CAGR
11.85% Stdev
34.65% best year
-25.13% worst year
-39.30% max drawdown
0.62 Sharpe
0.89 Sortino

Of course, the difference is greater on a more balanced portfolio.

User avatar
JoMoney
Posts: 9338
Joined: Tue Jul 23, 2013 5:31 am

Re: High yield savings vs. Bonds

Post by JoMoney » Fri Jan 10, 2020 9:38 am

wolf359 wrote:
Thu Jan 09, 2020 9:33 am
...
Longer term treasuries (as long as they match up with your investment time horizon) are better for diversification than short-term or ultra-short term bonds. It's definitely counter-intuitive, but it works when combined with equities because the longer the term the fixed income product is, the less the portfolio will track the stock market. Shorter term fixed income returns so much less that their returns DO track the market, and result in less diversification if you're buying and holding over longer time periods.

Longer term bonds will beat shorter term bonds if your portfolio is meant to be held over the long term. Both will definitely beat a savings account, which is neither safe nor adds stability in this context.

I'm still not fully convinced because the effect is so weird, but I'm getting there.
Part of the problem, is very few people have portfolios expected to go forever. A portfolio that's constantly rolling into Long-Term bonds isn't going to "match up with your investment horizon", it should be getting shorter and shorter as your need for the money potentially approaches.

The time period you looked at was especially good for bonds, mostly high interest rates following a long trend of falling rates. Over a different time period you would see different results. Consider the 40 year period from 1945-1985 where 30day TBills would have outperformed a portfolio of Long-Term Bonds.

Image
M* Chart LINK
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Dottie57
Posts: 8662
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: High yield savings vs. Bonds

Post by Dottie57 » Fri Jan 10, 2020 3:49 pm

wolf359 wrote:
Fri Jan 10, 2020 9:13 am
Dottie57 wrote:
Thu Jan 09, 2020 5:11 pm
You do understand my point tho. 8% interest on my mom’s bonds are great. If they were in a bond fund that would be great too.
Yes, having an 8% yield is very beneficial for your Mom. Having higher interest rate bonds in a bond fund also positively impact that fund, and contribute to its return. As new 30 year bonds are purchased at 2-3% and replace the oldest 8% bonds, the yield will necessarily drop.

But just like I can't go back to the 80's and buy an 8% bond like your Mom enjoys, I also can't get the same yield from a long-term bond fund if I buy it today. When I buy the fund today, the prices are adjusted so that my effective yield is what the current rates are, or about 2-3%. People who were holding onto the bond fund before the interest rates got to the current level would have had the appropriate gains or losses to reflect that adjustment.

That's why I was referring to the duration. There is a magnifying affect. A bond fund with a duration of 2 years can be expected to move about 2% for each 1% move in interest rates. (Bond prices move opposite interest rates, so if rates go up, prices go down, and vice-versa). The longer durations inherent in long-term bond funds when interest rates change are what provides the diversification effect. This effect will remain even when the higher yielding bonds are no longer held by the fund.
Yes, I understand what you are saying about duration and movement in interest rates.

tawebacon
Posts: 15
Joined: Fri Aug 30, 2019 9:01 am

Re: Bonds vs. Savings Account

Post by tawebacon » Fri Jan 10, 2020 5:13 pm

One thing comes to mind --the money in your savings account would probably be FDIC (or NCUA) insured for cases where your institution goes under.

marky2kk
Posts: 37
Joined: Tue Feb 11, 2020 10:53 am

Re: Bonds vs. Savings Account

Post by marky2kk » Tue Feb 11, 2020 5:19 pm

I am trying to get my head around the trade-off HYS vs. (short-term) treasuries vs. long-term treasuries.

With a HYS, there is no volatility in prices. Treasuries have volatility in prices which---all else equal---is bad.

A HYS gives around 1.7% currently, SHV has a yield of 1.48% (add back a couple of basis points because of state tax exemption). Still, it seems like HYS is the better deal: Larger return, no volatility in prices; so I don't quite understand why the common recommendation appears to be to go with treasuries instead of HYS.

In the broader context of a stock-bond portfolio, volatile bond prices can be good if bond prices have zero or negative correlation with stocks. As I understand, there is some evidence that the stock-bond correlation has turned negative since the 2000s (short-term and intermediate term, haven't checked LT).

Assuming that is true going forward (it may be not), can I interpret 1.7-1.48=22bpts as the price to pay for additional portfolio stabilization during downturns?


When it comes to short-term vs long-term treasuries. Sure, long-term treasuries in combination with stocks have provided a better outcome than short-term treasures with stocks in the long-run, but pretty apparent from the graph the former portfolio was also more volatile during times when I looked into my portfolio and couldn't sleep at night, questioning my asset allocation and close to making (behavorial?) trading mistakes.

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