Corporate Bond Investing Strategy

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glossolalia
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Corporate Bond Investing Strategy

Post by glossolalia »

I'm new to buying bonds so I wanted to lay out my gameplan and get some much-needed guidance.

Basically, I'm looking to alternate between being 100% invested in stocks and bonds at all times, according to a market timing strategy I developed (let's leave aside the dangers of market timing for the purpose of this thread, please). When I'm out of stocks, I'd like to maximize my return with corporate bonds (A-rated and above only), and I don't expect to hold until maturity as I will likely re-enter the equities market within 3-9 months. Given this requirement, imagine I have a choice between two bonds, everything else being equal:

High coupon, high price, 3.5% yield

Low coupon, low price, 3.5% yield

Part of me tells me to shoot for the highest coupon since I won't be holding to maturity anyway, so make the most hay while the sun is shining.

The other part of me says I'm going to be screwed by the depreciation of the bond price as time goes by, which will outweigh the coupon differential.

It's entirely possible everything I just said above is complete gibberish as I've only begun learning about bonds very recently. But hopefully someone out there can read between the incoherent lines and kind of intuit what I'm going for here.

Thanks in advance.
Elysium
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Re: Corporate Bond Investing Strategy

Post by Elysium »

How about starting here and do some learning on how to invest properly:

https://www.bogleheads.org/wiki/Getting_started
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FrankLUSMC
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Re: Corporate Bond Investing Strategy

Post by FrankLUSMC »

Elysium wrote: Wed Dec 12, 2018 4:28 pm How about starting here and do some learning on how to invest properly:

https://www.bogleheads.org/wiki/Getting_started
Ha Ha, ouch!!
3funder
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Re: Corporate Bond Investing Strategy

Post by 3funder »

I fear the best case scenario is that you're making investing much more complicated than it has to be. PM me if you'd like to discuss further.
Global stocks, US bonds, and time.
Topic Author
glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

3funder wrote: Wed Dec 12, 2018 4:36 pm I fear the best case scenario is that you're making investing much more complicated than it has to be. PM me if you'd like to discuss further.
Thanks, just sent you a PM.
rasta
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Re: Corporate Bond Investing Strategy

Post by rasta »

traders don't park their money in corporate bonds, t-bills maybe
Topic Author
glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

rasta wrote: Wed Dec 12, 2018 4:51 pm traders don't park their money in corporate bonds, t-bills maybe
Reason being?
rasta
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Re: Corporate Bond Investing Strategy

Post by rasta »

t-bills have less bid/ask spread and are more liquid.

corporate bonds just the opposite.
HEDGEFUNDIE
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Re: Corporate Bond Investing Strategy

Post by HEDGEFUNDIE »

Corporate bonds are the most equity-like of Bonds, why would you lean into them when equities are dropping?
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David Jay
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Re: Corporate Bond Investing Strategy

Post by David Jay »

glossolalia wrote: Wed Dec 12, 2018 4:24 pm Basically, I'm looking to alternate between being 100% invested in stocks and bonds at all times, according to a market timing strategy I developed (let's leave aside the dangers of market timing for the purpose of this thread, please)
:!:
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

HEDGEFUNDIE wrote: Wed Dec 12, 2018 5:04 pm Corporate bonds are the most equity-like of Bonds, why would you lean into them when equities are dropping?
Because they're a source of near-guaranteed return even in bear markets? Just like T-Bills, but higher return. Microsoft isn't defaulting on a bond, not even in 2008.
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JoMoney
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Re: Corporate Bond Investing Strategy

Post by JoMoney »

glossolalia wrote: Wed Dec 12, 2018 4:54 pm
rasta wrote: Wed Dec 12, 2018 4:51 pm traders don't park their money in corporate bonds, t-bills maybe
Reason being?
Liquidity. Your strategy may be different, but if you're expecting to trade into equities on a drop, corporate bonds are highly likely to suffer a hit from a credit crunch at the time you need them. Tbills are not only of the highest quality, they're practically cash, they have very short maturities that will turn them into cash even if there was no liquid market.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Topic Author
glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

JoMoney wrote: Wed Dec 12, 2018 7:44 pm
glossolalia wrote: Wed Dec 12, 2018 4:54 pm
rasta wrote: Wed Dec 12, 2018 4:51 pm traders don't park their money in corporate bonds, t-bills maybe
Reason being?
Liquidity. Your strategy may be different, but if you're expecting to trade into equities on a drop, corporate bonds are highly likely to suffer a hit from a credit crunch at the time you need them.
Thank you, this is the kind of perspective I was hoping to get.

Are you saying that during a recession, the loss I would take on selling a bond would likely negate the gains I made on them for all the months prior?

Also, would this issue be solved if I just got short term corporate bonds (3-6 month) and just held to maturity?
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galeno
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Re: Corporate Bond Investing Strategy

Post by galeno »

VCIT (Interm term) or VCSH (Short term) are the ETFs I would use for corporate bonds.

I HOPE you KNOW what you're doing. It sounds pretty crazy to me.
KISS & STC.
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JoMoney
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Re: Corporate Bond Investing Strategy

Post by JoMoney »

glossolalia wrote: Wed Dec 12, 2018 7:50 pm
JoMoney wrote: Wed Dec 12, 2018 7:44 pm
glossolalia wrote: Wed Dec 12, 2018 4:54 pm
rasta wrote: Wed Dec 12, 2018 4:51 pm traders don't park their money in corporate bonds, t-bills maybe
Reason being?
Liquidity. Your strategy may be different, but if you're expecting to trade into equities on a drop, corporate bonds are highly likely to suffer a hit from a credit crunch at the time you need them.
Thank you, this is the kind of perspective I was hoping to get.

Are you saying that during a recession, the loss I would take on selling a bond would likely negate the gains I made on them for all the months prior?

Also, would this issue be solved if I just got short term corporate bonds (3-6 month) and just held to maturity?
No. A credit crunch is not necessarily the same as a recession, you can have one or the other independently or simultaneously. It's impossible to say whether or not any hit you would take on credit bonds would negate the higher interest rate. Corporate bonds of 3-6months may negate most of the problem, but I would just assume use something like Vanguard's "Prime Money Market" if I was going to do that, but there is still a bit of a liquidity issue as that fund could potentially be impacted by temporary freezes exit fees and other control gates in a crisis. What I'm getting at, is that a bond is a promise to pay a certain amount of money in a specific time frame. You expect/hope the creditor to make good on their end of the promise, but you're going into it with the expectation that you'll be able to get out early on a whim or to trade into something else, your ability to do that relies on an expectation of an orderly market allowing you to sell to someone else, and in a crisis an orderly market may not exist. Cash and short-term treasuries guaranteed by the people who print the cash (and are likely to come to the rescue in a crisis), would be the most reliable.
"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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David Jay
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Re: Corporate Bond Investing Strategy

Post by David Jay »

galeno wrote: Wed Dec 12, 2018 8:04 pmI HOPE you KNOW what you're doing.
Individual corporate bonds, held to maturity, as the exchange asset in a market timing strategy...

I think not.
Last edited by David Jay on Wed Dec 12, 2018 9:08 pm, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
HEDGEFUNDIE
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Re: Corporate Bond Investing Strategy

Post by HEDGEFUNDIE »

glossolalia wrote: Wed Dec 12, 2018 7:35 pm
HEDGEFUNDIE wrote: Wed Dec 12, 2018 5:04 pm Corporate bonds are the most equity-like of Bonds, why would you lean into them when equities are dropping?
Because they're a source of near-guaranteed return even in bear markets? Just like T-Bills, but higher return. Microsoft isn't defaulting on a bond, not even in 2008.
During times of equity crisis, there is no “flight to safety” to corporate bonds, not even Microsoft. Bond prices will drop even if actual defaults are low. Since you are not holding to maturity you will be hit.
Topic Author
glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

Thanks to all those who offered their insight. My idea was likely misguided, and I appreciate those who helped me understand why without resorting to belittlement.
BSBHead
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Re: Corporate Bond Investing Strategy

Post by BSBHead »

Corporate bonds have had a nice bull run and issuance the past few years has been at record levels, so my own view is not optimistic. I think looking at duration is more important than anything in looking at bonds at the moment as there will be a glut of corporate bond maturities in the next few years. If I did want to invest in corporate bonds directly (I don't), I think short duration floating rate corporate bonds make the most sense with the steep yield curve on the front-end, credit risk that correlates to equities during a crisis, and looming maturity glut. You basically get this strategy in a Prime MM fund, so that's where I go. I remember Lehman bonds being offered to institutional investors as a corporate bonds and preferred shares being offered as a non-correlated safe haven at the start of the crisis. Risk aversion will got to treasuries during a crisis. Good luck.
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glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

galeno wrote: Wed Dec 12, 2018 8:04 pm VCIT (Interm term) or VCSH (Short term) are the ETFs I would use for corporate bonds.

I HOPE you KNOW what you're doing. It sounds pretty crazy to me.
The issue I have with using a Bond ETF is that the losses they incur often outweigh their dividend yield. You're just as likely to see a -1% return as you are a 4% return. VCIT and VCSH have a -2.55% and 0.22% return in the last calendar year, respectively.

At least with an individual bond, you're guaranteed to see a positive return if held to maturity and no default.
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galeno
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Re: Corporate Bond Investing Strategy

Post by galeno »

So you're going to trade INDIVIDUAL corporate bonds in this market timing strategy? How many individual corporate bonds are you going to hold?

VCIT has 1467 INDIVIDUAL holdings. ER = 0.07%. How can YOU as a RETAIL bond trader beat THAT? Short answer. You can't.

I'd love to hear your timing strategy. It sounds interesting.

glossolalia wrote: Thu Dec 13, 2018 5:25 pm
galeno wrote: Wed Dec 12, 2018 8:04 pm VCIT (Interm term) or VCSH (Short term) are the ETFs I would use for corporate bonds.

I HOPE you KNOW what you're doing. It sounds pretty crazy to me.
The issue I have with using a Bond ETF is that the losses they incur often outweigh their dividend yield. You're just as likely to see a -1% return as you are a 4% return. VCIT and VCSH have a -2.55% and 0.22% return in the last calendar year, respectively.

At least with an individual bond, you're guaranteed to see a positive return if held to maturity and no default.
KISS & STC.
Topic Author
glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

galeno wrote: Thu Dec 13, 2018 5:55 pm So you're going to trade INDIVIDUAL corporate bonds in this market timing strategy? How many individual corporate bonds are you going to hold?
I've already stated that temporarily holding individual corporate bonds was misguided. I don't currently have a solution other than t-bills or a high yield savings account.

And my timing strategy is something close to this:

https://tinyurl.com/ybv3r9ax

Nothing too complex. Plug in any non-correlated major ETF in there, it's going to beat Buy and Hold. But B&H is so sacred on this forum that I don't expect anything other than ridicule.

It's funny because Jack Bogle was also considered crazy and his ideas were out in left field for his time. But anyone on this forum with off-the-wall ideas is basically sent packing. Irony.
l1am
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Re: Corporate Bond Investing Strategy

Post by l1am »

glossolalia wrote: Wed Dec 12, 2018 4:24 pm Basically, I'm looking to alternate between being 100% invested in stocks and bonds at all times, according to a market timing strategy I developed
At least backtest this if possible. Compare your strategy to a lazy portfolio over many years. Very few can beat the S&P500 index.
Topic Author
glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

l1am wrote: Thu Dec 13, 2018 7:43 pm
glossolalia wrote: Wed Dec 12, 2018 4:24 pm Basically, I'm looking to alternate between being 100% invested in stocks and bonds at all times, according to a market timing strategy I developed
At least backtest this if possible. Compare your strategy to a lazy portfolio over many years. Very few can beat the S&P500 index.
I spent about 3 months backtesting hundreds of different strategies. The one I settled on has been backtested to death across dozens of uncorrelated ETFs, and tweaking the variables a bit only reduces the return slightly, but still beats B&H by a wide margin.

Basically my strategy underperforms B&H 95% of the time, but severely outperforms B&H during recessions, which more than make up for its tiny losses during all other times.
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Re: Corporate Bond Investing Strategy

Post by z3r0c00l »

glossolalia wrote: Thu Dec 13, 2018 11:55 pm
l1am wrote: Thu Dec 13, 2018 7:43 pm
glossolalia wrote: Wed Dec 12, 2018 4:24 pm Basically, I'm looking to alternate between being 100% invested in stocks and bonds at all times, according to a market timing strategy I developed
At least backtest this if possible. Compare your strategy to a lazy portfolio over many years. Very few can beat the S&P500 index.
I spent about 3 months backtesting hundreds of different strategies. The one I settled on has been backtested to death across dozens of uncorrelated ETFs, and tweaking the variables a bit only reduces the return slightly, but still beats B&H by a wide margin.

Basically my strategy underperforms B&H 95% of the time, but severely outperforms B&H during recessions, which more than make up for its tiny losses during all other times.
So you discovered a technique that is basically a perfect hedge fund, and you are just spilling the beans online and only using your own money to try it? Start your own hedge fund and make billions off this. Because basically that is what you are saying, you have found a simple and obvious trick that the trillion dollar money managers have not.
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glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

z3r0c00l wrote: Fri Dec 14, 2018 12:10 am
glossolalia wrote: Thu Dec 13, 2018 11:55 pm
l1am wrote: Thu Dec 13, 2018 7:43 pm
glossolalia wrote: Wed Dec 12, 2018 4:24 pm Basically, I'm looking to alternate between being 100% invested in stocks and bonds at all times, according to a market timing strategy I developed
At least backtest this if possible. Compare your strategy to a lazy portfolio over many years. Very few can beat the S&P500 index.
I spent about 3 months backtesting hundreds of different strategies. The one I settled on has been backtested to death across dozens of uncorrelated ETFs, and tweaking the variables a bit only reduces the return slightly, but still beats B&H by a wide margin.

Basically my strategy underperforms B&H 95% of the time, but severely outperforms B&H during recessions, which more than make up for its tiny losses during all other times.
So you discovered a technique that is basically a perfect hedge fund, and you are just spilling the beans online and only using your own money to try it? Start your own hedge fund and make billions off this. Because basically that is what you are saying, you have found a simple and obvious trick that the trillion dollar money managers have not.
My strategy's performance is completely in line with what hedge funds have been doing for decades: underperforming during bull markets and outperforming during bear markets.

Image

Again, I know it's dogma on this forum that "hedge funds don't beat the market" but the full truth is a bit more complex than that.
l1am
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Re: Corporate Bond Investing Strategy

Post by l1am »

glossolalia wrote: Fri Dec 14, 2018 2:16 am My strategy's performance is completely in line with what hedge funds have been doing for decades: underperforming during bull markets and outperforming during bear markets.

Again, I know it's dogma on this forum that "hedge funds don't beat the market" but the full truth is a bit more complex than that.
So your strategy is currently beating the S&P500 in that chart?
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glossolalia
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Re: Corporate Bond Investing Strategy

Post by glossolalia »

l1am wrote: Fri Dec 14, 2018 2:34 am
glossolalia wrote: Fri Dec 14, 2018 2:16 am My strategy's performance is completely in line with what hedge funds have been doing for decades: underperforming during bull markets and outperforming during bear markets.

Again, I know it's dogma on this forum that "hedge funds don't beat the market" but the full truth is a bit more complex than that.
So your strategy is currently beating the S&P500 in that chart?
It depends what your starting point is. If you start from 2010, then no, I'm not beating the market. If you start at 1995, then my strategy beats the market by over 50%. With my particular strategy, protracted recessions are required in order to outperform. It gets killed in a choppy bull market.
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Re: Corporate Bond Investing Strategy

Post by z3r0c00l »

May I suggest adding a bond mutual fund to that chart too? Or a combination of stocks and bonds.
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