VOO vs bonds

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owenmia
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VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 10:40 am

I know I am beating a dead horse here BUT I ask you:

Do you believe the s&P 500 will beat bonds in the next 10 years?

Everyone assumes it will but I can get A+ bonds at 4% and many say the S&P will return 3-4% now as opposed to its historic 6-7% returns.

I am going to stick with VOO because there is a chance it will do 5% or 6% but I will be very annoyed if I get less than 4%. One federal reserve guy said it will return zero over the next 5 years.

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ruralavalon
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Re: VOO vs bonds

Post by ruralavalon » Wed Jul 10, 2019 10:46 am

owenmia wrote:
Wed Jul 10, 2019 10:40 am
I know I am beating a dead horse here BUT I ask you:

Do you believe the s&P 500 will beat bonds in the next 10 years?

Everyone assumes it will but I can get A+ bonds at 4% and many say the S&P will return 3-4% now as opposed to its historic 6-7% returns.

I am going to stick with VOO because there is a chance it will do 5% or 6% but I will be very annoyed if I get less than 4%. One federal reserve guy said it will return zero over the next 5 years.
Here is a collection of guesses about stock and bond markets. Morninstar, "Experts Forecast Long-Term Stock and Bond Returns: 2019 Edition".

The forecasts were not always long-term, more often are intermediate-term.. The author says that the forecasts "suggest that bonds will give U.S. equities a run for their money over the next decade."
Last edited by ruralavalon on Wed Jul 10, 2019 10:51 am, edited 1 time in total.
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retiredjg
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Re: VOO vs bonds

Post by retiredjg » Wed Jul 10, 2019 10:49 am

Nobody knows. I don't know what I believe - which is why my portfolio is 50/50. :D

The 500 will almost certainly beat bonds over the long haul, but there are decades where bonds actually do pay better than stocks. An example would be roughly 2000 - 2010..."the lost decade".

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owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 10:56 am

The part about nobody knows it not really quite true.

Out of pretty much all banks and experts, including Bogle, Blackrock, Morningstar etc. all agree it will be much less than in the past. Almost no one is predicting over 4-5%.

That is much different than no one can predict the market, isn't it? Or am I wrong?

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owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 10:58 am

owenmia wrote:
Wed Jul 10, 2019 10:56 am
I understand The part about nobody knows where the market will go. But what I am talking about is different.

Out of pretty much all banks and experts, including Bogle, Blackrock, Morningstar etc. all agree it will be much less than in the past. Almost no one is predicting over 4-5%.

That is much different than no one can predict the market, isn't it? Or am I wrong?

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nisiprius
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Re: VOO vs bonds

Post by nisiprius » Wed Jul 10, 2019 11:08 am

owenmia wrote:
Wed Jul 10, 2019 10:40 am
I know I am beating a dead horse here BUT I ask you:

Do you believe the s&P 500 will beat bonds in the next 10 years?

Everyone assumes it will but I can get A+ bonds at 4% and many say the S&P will return 3-4% now as opposed to its historic 6-7% returns.

I am going to stick with VOO because there is a chance it will do 5% or 6% but I will be very annoyed if I get less than 4%. One federal reserve guy said it will return zero over the next 5 years.
My Series I savings bonds actually beat the S&P 500 and Total Stock, and by a considerable amount, during the "lost decade" of 2000 through 2009.

According to a reference volume, the Ibbotson SBBI 2015 Yearbook, over the time period 1926 through 2015 inclusive, intermediate-term government bonds outperformed large-company stocks 15 times in 80 overlapping time periods. This happened during these time periods:

1928-1937
1929-1938
1930-1939
1931-1940

1965-1974
1966-1975
1968-1977
1969-1978
1970-1979

1973-1982

1998-2007
1999-2008
2000-2009
2001-2010
2002-2011

You must figure out what to make of this for yourself. In particular, whether to count this as happening three times, four times, or fifteen times.

Ten years just isn't "the long run."

My answer is that I believe the S&P 500 will likely beat bonds over the next year, but I won't go farther than "likely." It wouldn't be astonishing for bonds to be stocks. It isn't any black swan. It isn't even a once-in-a-lifetime event; if we count each cluster as once, it's happened three times in my[/i] lifetime, and four times in Taylor Larimore's.
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nisiprius
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Re: VOO vs bonds

Post by nisiprius » Wed Jul 10, 2019 11:12 am

owenmia wrote:
Wed Jul 10, 2019 10:56 am
The part about nobody knows it not really quite true.

Out of pretty much all banks and experts, including Bogle, Blackrock, Morningstar etc. all agree it will be much less than in the past. Almost no one is predicting over 4-5%.

That is much different than no one can predict the market, isn't it? Or am I wrong?
And I give no credence to "pretty much all banks and experts," including Bogle. My reason for thinking bonds might beat stocks over a decade is simply because it hasn't been that rare, not because "everyone says the market is going to suck."

One of my favorite pieces of reading is Larry Swedroe's reviews of how the "sure things" are doing. Each year, at the beginning of the year, he assembles a list of ten or so things that "everybody" thinks are sure things, and then he reviews what actually happens. It's astonishing how often the things "everybody" is sure will happen, don't. And that's just over one year.

In 2014, Bloomberg asked a panel of 68 economists for their predictions regarding the ten-year Treasury yield over the next six months. Every one of them, 68 out of 68, said the rate would rise, the only disagreement was by how much.

The rate fell.

So, given a choice:

a) Competent experts can make reliable predictions about the market, and
b) Nobody knows nothing,

I think the truth is much closer to (b) than to (a), and that I will make far fewer mistakes by assuming (b).
Last edited by nisiprius on Wed Jul 10, 2019 12:13 pm, edited 3 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 11:16 am

Yup. That's because 2009 was right after the 2009 crash.

I just hope that in 17 years when I am old enough to retire It is not right after a big crash. I understand stock exposure versus time to retirement and that it takes 5-7 years to get your money back after a crash.

I guess the other option is to get a broke who can supposedly put together a portfolio that will "outperform" the markets but that is higher risk too.

retiredjg
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Re: VOO vs bonds

Post by retiredjg » Wed Jul 10, 2019 11:16 am

owenmia wrote:
Wed Jul 10, 2019 10:56 am
The part about nobody knows it not really quite true.

Out of pretty much all banks and experts, including Bogle, Blackrock, Morningstar etc. all agree it will be much less than in the past. Almost no one is predicting over 4-5%.

That is much different than no one can predict the market, isn't it? Or am I wrong?
Well, just about everybody has an opinion. Nobody has any knowledge because the event has not happened yet.

For example, probably before you were born people thought that computers would make us a "paperless society". The truth has turned out very differently. :happy

Alex GR
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Re: VOO vs bonds

Post by Alex GR » Wed Jul 10, 2019 11:34 am

owenmia wrote:
Wed Jul 10, 2019 10:40 am
I know I am beating a dead horse here BUT I ask you:

Do you believe the s&P 500 will beat bonds in the next 10 years?

Everyone assumes it will but I can get A+ bonds at 4% and many say the S&P will return 3-4% now as opposed to its historic 6-7% returns.

I am going to stick with VOO because there is a chance it will do 5% or 6% but I will be very annoyed if I get less than 4%. One federal reserve guy said it will return zero over the next 5 years.
Hi owenmia,
Funny, I've been pondering the same thing when I saw your post and trying to decide on my long-term strategy. As in: "What should it be? Stocks, bonds, real estate? Perhaps this new RE crowdfunding stuff?"
It doesn't really matter what I think 'cause nobody can predict this stuff and I am sort of a beginner, but if I had to guess, S&P is going to go a bit over 3000, then at some point crash to as much as -20% and otherwise keep fluctuating with total return in 10 years averaging 6% per year. Let's check back in 10 years and see how close I am. 8-) Chances are I'll still be on this forum :mrgreen:

Aside from that, can you share some of the bonds you are referring to that are A+ and pay 4%? I am not aware of any. You are referring to individual bonds, not funds, right? Is there a dollar amount at which buying individual bonds makes more sense than a bond mutual fund or index fund? Thanks! :sharebeer
Last edited by Alex GR on Wed Jul 10, 2019 4:05 pm, edited 3 times in total.

MotoTrojan
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Re: VOO vs bonds

Post by MotoTrojan » Wed Jul 10, 2019 11:37 am

4% on bonds??

Also I think most of the 3-4% forecasts are real returns so closer to 5-6% market return. Adjust for taxes and bonds lose even more.

Coburn
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Re: VOO vs bonds

Post by Coburn » Wed Jul 10, 2019 11:54 am

owenmia wrote:
Wed Jul 10, 2019 10:40 am
I can get A+ bonds at 4%
Care to share what bonds these are?

I think the community at large here might like to know.

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owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 12:10 pm

Sure.

There are a bunch of 4%. There are even 7 and 8%. My broker friend said never take anything over 5% because the market is accounting for risk that the bond agencies are not.

983024AF7
WYETH LLC coupon rate 6.5%
Rated AA

478160AF1
JOHNSON & JOHNSON Coupon Rate 6.7%
Rated AAA

373298CF3
GEORGIA-PACIFIC L
Rated A+ Coupon Rate 8%


907818DK1
UNION PACIFIC CORP
Rated A 4.1% coupon

021441AF7
ALTERA CORP
Rates A- Coupon rate 4.1%

Coburn
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Re: VOO vs bonds

Post by Coburn » Wed Jul 10, 2019 1:00 pm

Thank you for that. :beer

While my prognosis isn't quite as gloomy as GMO's in a related thread, the faint of heart for the next 10 years might want to lean slightly toward bonds if merket volitility keeps them awake nights.

Thesaints
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Re: VOO vs bonds

Post by Thesaints » Wed Jul 10, 2019 1:05 pm

owenmia wrote:
Wed Jul 10, 2019 10:40 am
I am going to stick with VOO because there is a chance it will do 5% or 6%
That chance is a lot smaller than stock making 6%/yr.

You've gotta ask yourself if 4% is good for you, in which case, sure take VOO.
But if you need 6%, then stocks give you a better shot.

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Re: VOO vs bonds

Post by MotoTrojan » Wed Jul 10, 2019 1:09 pm

owenmia wrote:
Wed Jul 10, 2019 12:10 pm
Sure.

There are a bunch of 4%. There are even 7 and 8%. My broker friend said never take anything over 5% because the market is accounting for risk that the bond agencies are not.

983024AF7
WYETH LLC coupon rate 6.5%
Rated AA

478160AF1
JOHNSON & JOHNSON Coupon Rate 6.7%
Rated AAA

373298CF3
GEORGIA-PACIFIC L
Rated A+ Coupon Rate 8%


907818DK1
UNION PACIFIC CORP
Rated A 4.1% coupon

021441AF7
ALTERA CORP
Rates A- Coupon rate 4.1%
Broker is right, yield is equivalent to risk. Treasuries are closer to 2% so these must have higher risk. A bond fund yielding <4% would be corporate long term or maybe even junk. After tax these are quite inefficient too.

Good luck.

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Re: VOO vs bonds

Post by nisiprius » Wed Jul 10, 2019 1:22 pm

owenmia wrote:
Wed Jul 10, 2019 11:16 am
...I just hope that in 17 years when I am old enough to retire It is not right after a big crash. I understand stock exposure versus time to retirement and that it takes 5-7 years to get your money back after a crash...
It's a detail, but I think it's important. After the stock crash of 1929, the bottom was in May 1932. 1936 was one of the best years in stock market history, and by Nov. 1936 the stock market had recovered but only just barely. In February 1937 it crashed again. This was a -50% decline, about as deep as 2008-2009, but because 1929 was so much worse, this second crash often escapes notice. It didn't bounce back anywhere near as quickly as it did in 2008-2009. Recovery from the second crash did not occur until 1945.

So, seven years after the 1929 crash, there was an opportunity to "get your money back" but only within a window of three or four months.

These two crashes get counted as two seven-year bear markets, and it's justified because of the tiny gap between them, but in many respects it was more like a fifteen-year bear market.

Here's how it looked using the Morningstar "large blend" category average as our measure:

Source

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 1:27 pm

Yup. I need to decide.

I can get 4% on A bonds now. I don't know why people find that hard to believe.

MotoTrojan
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Re: VOO vs bonds

Post by MotoTrojan » Wed Jul 10, 2019 1:31 pm

owenmia wrote:
Wed Jul 10, 2019 1:27 pm
Yup. I need to decide.

I can get 4% on A bonds now. I don't know why people find that hard to believe.
Because we understand that it’s not risk free, or tax efficient.

Ignore the ratings. Yield tells you everything.

not4me
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Re: VOO vs bonds

Post by not4me » Wed Jul 10, 2019 1:35 pm

owenmia wrote:
Wed Jul 10, 2019 12:10 pm
Sure.

There are a bunch of 4%. There are even 7 and 8%. My broker friend said never take anything over 5% because the market is accounting for risk that the bond agencies are not.

983024AF7
WYETH LLC coupon rate 6.5%
Rated AA

478160AF1
JOHNSON & JOHNSON Coupon Rate 6.7%
Rated AAA

373298CF3
GEORGIA-PACIFIC L
Rated A+ Coupon Rate 8%


907818DK1
UNION PACIFIC CORP
Rated A 4.1% coupon

021441AF7
ALTERA CORP
Rates A- Coupon rate 4.1%
Perhaps part of disconnect is some talking about coupon rate & others "current" yield

smectym
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Re: VOO vs bonds

Post by smectym » Wed Jul 10, 2019 1:51 pm

MotoTrojan wrote:
Wed Jul 10, 2019 1:31 pm
owenmia wrote:
Wed Jul 10, 2019 1:27 pm
Yup. I need to decide.

I can get 4% on A bonds now. I don't know why people find that hard to believe.
Because we understand that it’s not risk free, or tax efficient.

Ignore the ratings. Yield tells you everything.
Of course, owenmia neither stated nor implied that the 4% bonds he was considering were riskfree—indeed, his original post stated he had in mind “A bonds.” “A” is a rating company’s risk assessment. And as to tax efficiency, treasuries share many of the tax-inefficient attributes of bonds generally.

Carol88888
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Re: VOO vs bonds

Post by Carol88888 » Wed Jul 10, 2019 1:59 pm

owenmia wrote:
Wed Jul 10, 2019 10:56 am
The part about nobody knows it not really quite true.

Out of pretty much all banks and experts, including Bogle, Blackrock, Morningstar etc. all agree it will be much less than in the past. Almost no one is predicting over 4-5%.

That is much different than no one can predict the market, isn't it? Or am I wrong?
You are now assuming that because there is a consensus that returns for equity will be low that this opinion must be correct.

Last year how many of the "experts" foresaw the gigantic rally we just had in bonds the last few months? None that I can name.

If anything. the uniform downbeat cast to these predictions gives me a bit of hope that they will all be surprised again at the returns of equity.

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owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 2:06 pm

I assume that A or AA rated bonds are going to be okay. Not sure if I am correct. I am not an expert on bonds.

I am assuming that AA rated bonds at 4% with 5 year maturity rate are much safer than VOO. If I am wrong please let me know because I bought a about $20,000 of them.

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Re: VOO vs bonds

Post by MotoTrojan » Wed Jul 10, 2019 2:08 pm

smectym wrote:
Wed Jul 10, 2019 1:51 pm
MotoTrojan wrote:
Wed Jul 10, 2019 1:31 pm
owenmia wrote:
Wed Jul 10, 2019 1:27 pm
Yup. I need to decide.

I can get 4% on A bonds now. I don't know why people find that hard to believe.
Because we understand that it’s not risk free, or tax efficient.

Ignore the ratings. Yield tells you everything.
Of course, owenmia neither stated nor implied that the 4% bonds he was considering were riskfree—indeed, his original post stated he had in mind “A bonds.” “A” is a rating company’s risk assessment. And as to tax efficiency, treasuries share many of the tax-inefficient attributes of bonds generally.
Treasuries are state-tax free fwiw, but I was comparing the tax-efficiency to VOO or equities in general.

not4me
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Re: VOO vs bonds

Post by not4me » Wed Jul 10, 2019 2:11 pm

owenmia wrote:
Wed Jul 10, 2019 2:06 pm
I assume that A or AA rated bonds are going to be okay. Not sure if I am correct. I am not an expert on bonds.

I am assuming that AA rated bonds at 4% with 5 year maturity rate are much safer than VOO. If I am wrong please let me know because I bought a about $20,000 of them.
can you clarify that is the current yield, yield to maturity, coupon rate, etc when you say "at 4%"

Topic Author
owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 2:21 pm

Company Altera (Intel)
yield to maturity 2.10%
Maturity date 2023
Coupon rate 4.10%


Union Pacific 907818DK1
Yield to Maturity 2.17%
Maturity Date 2022
Coupon Rate 4.163%

Let me know if I am reading this wrong as I own them.

MotoTrojan
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Re: VOO vs bonds

Post by MotoTrojan » Wed Jul 10, 2019 2:28 pm

owenmia wrote:
Wed Jul 10, 2019 2:21 pm
Company Altera (Intel)
yield to maturity 2.10%
Maturity date 2023
Coupon rate 4.10%


Union Pacific 907818DK1
Yield to Maturity 2.17%
Maturity Date 2022
Coupon Rate 4.163%

Let me know if I am reading this wrong as I own them.
Oh boy... You bought bonds that will pay 2.10-2.17% interest. Not much better than 5 year treasuries and with worse tax treatment.

The coupon rate was the yield when the bonds were original sold.

Topic Author
owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 2:32 pm

Wow.

I thought it was 4%. This is what happens when you have no idea what you're doing.

So, the "yield to maturity: is the percentage I will get?

No wonder people did not believe me.

retiredjg
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Re: VOO vs bonds

Post by retiredjg » Wed Jul 10, 2019 2:47 pm

The general trend around here is to buy bond funds, not individual bonds. This is because most people don't have the knowledge or expertise to set up a bond portfolio of individual bonds.

So you are not alone in not knowing how to do it right. :happy

Don't worry about it. Pick up the pieces and move on. And consider intermediate term bond funds for your bond allocation. There are different kinds - a total bond index fund is a common suggestion. There are also other good choices as well.

Topic Author
owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 2:53 pm

Ok, thank you!

Can you all recommend a bond fund for me? I will have to go read up some.

MotoTrojan
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Re: VOO vs bonds

Post by MotoTrojan » Wed Jul 10, 2019 2:56 pm

owenmia wrote:
Wed Jul 10, 2019 2:53 pm
Ok, thank you!

Can you all recommend a bond fund for me? I will have to go read up some.
Well, how much risk do you want to take? Corporate bond funds dropped something like 30% during the GFC I believe, and they are only paying around 3.4% right now.

Treasuries would be more likely to go up than down in a depressed stock market historically, but they are returning closer to 1.8-2.5% depending on what duration you go for, and those longer durations are quite volatile due to interest rate sensitivity.

Jacklh
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Re: VOO vs bonds

Post by Jacklh » Wed Jul 10, 2019 2:59 pm

owenmia wrote:
Wed Jul 10, 2019 2:53 pm
Ok, thank you!

Can you all recommend a bond fund for me? I will have to go read up some.
Try this for for basic bond information.
https://www.bogleheads.org/wiki/Bond_basics

retiredjg
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Re: VOO vs bonds

Post by retiredjg » Wed Jul 10, 2019 3:00 pm

owenmia wrote:
Wed Jul 10, 2019 2:53 pm
Ok, thank you!

Can you all recommend a bond fund for me? I will have to go read up some.
A good place to hold your bond funds is in your plan at work if you have one. What is available there?

If you just want a suggestion, total bond market index funds from various sources, low cost ones only.

Alex GR
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Re: VOO vs bonds

Post by Alex GR » Wed Jul 10, 2019 4:03 pm

owenmia wrote:
Wed Jul 10, 2019 2:32 pm
Wow.

I thought it was 4%. This is what happens when you have no idea what you're doing.

So, the "yield to maturity: is the percentage I will get?

No wonder people did not believe me.
Hi owenmia,
Congratulations on the lesson learned. I have never bought individual bonds (as mentioned above this is not a popular thing to do on this forum), but it's just common sense that those returns are not possible today from A bonds. If we could buy companies like Johnson & Johnson with yield of 6.7%, millions of people would drop their risky stock portfolios and switch to bonds.
I haven't checked, but I am guessing those coupon rates are from the time when that type of rate was standard and something like 15 years to maturity. In 2000, CDs were paying 5% and that's guaranteed, so it makes sense that J&J would be higher @6.7%. Yield to maturity is the real return 'cause it's really irrelevant what the coupon rate was at the time the bond was issued, what matters is your real ROI. Another thing to watch out for is the 'callable' thing. Some bonds can be called on a certain date and you need to be aware of it and reinvest immediately, otherwise it affects your bottom line.

Alex GR
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Re: VOO vs bonds

Post by Alex GR » Wed Jul 10, 2019 4:38 pm

retiredjg wrote:
Wed Jul 10, 2019 2:47 pm
The general trend around here is to buy bond funds, not individual bonds. This is because most people don't have the knowledge or expertise to set up a bond portfolio of individual bonds.

So you are not alone in not knowing how to do it right. :happy

Don't worry about it. Pick up the pieces and move on. And consider intermediate term bond funds for your bond allocation. There are different kinds - a total bond index fund is a common suggestion. There are also other good choices as well.
Hi Retiredjg,
Good to see you. Thanks for all the help, great advice, and all you do on this forum. :happy
I am curious... is there any situation when buying individual bonds makes sense? I have a six figure amount invested in BIV (chose BIV over BND when initially formed the portfolio) but I'm really starting to dislike the low returns. Perhaps developing a scoring system/model in Excel to evaluate individual bond offers (and suggest which ones to buy) would be a fun thing to do :wink:
I heard people make statements such as:
1) "Buying individual bonds only makes sense when dealing in high dollar amounts."
What is the reason behind that?
2) "Individual bonds only make sense if you hold them 'til maturity". When asked why: "Because you run the risk of selling at a discount when you need to sell". Do you agree with this statement? Not sure I fully understand all the implications.

Also, why would anyone buy bonds paying 2.10% or treasuries paying 1.87% when there are CDs paying 3% for a similar term? (Example: Citizens Bank @3,15% for 5yrs) There must be a reason but being a novice investor I am probably just not seeing it.

This whole thread shows how bonds appear simple on the surface when in reality we have so much to learn about bonds.

Thanks!

Topic Author
owenmia
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Re: VOO vs bonds

Post by owenmia » Wed Jul 10, 2019 4:53 pm

Honestly this really sucks.

My Dad used to complain that he only got 5% on bonds and that it was 14% in 1990.

Now, it's jack.

Not to be negative but it actually does suck right.now.

retiredjg
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Re: VOO vs bonds

Post by retiredjg » Wed Jul 10, 2019 4:55 pm

Alex GR wrote:
Wed Jul 10, 2019 4:38 pm
Hi Retiredjg,
Good to see you. Thanks for all the help, great advice, and all you do on this forum. :happy
I am curious... is there any situation when buying individual bonds makes sense? I have a six figure amount invested in BIV (chose BIV over BND when initially formed the portfolio) but I'm really starting to dislike the low returns. Perhaps developing a scoring system/model in Excel to evaluate individual bond offers (and suggest which ones to buy) would be a fun thing to do :wink:
I heard people make statements such as:
1) "Buying individual bonds only makes sense when dealing in high dollar amounts."
What is the reason behind that?
2) "Individual bonds only make sense if you hold them 'til maturity". When asked why: "Because you run the risk of selling at a discount when you need to sell". Do you agree with this statement? Not sure I fully understand all the implications.

Also, why would anyone buy bonds paying 2.10% or treasuries paying 1.87% when there are CDs paying 3% for a similar term? (Example: Citizens Bank @3,15% for 5yrs) There must be a reason but being a novice investor I am probably just not seeing it.

This whole thread shows how bonds appear simple on the surface when in reality we have so much to learn about bonds.

Thanks!
Sorry, but I cannot help you with these questions. I know nothing about individual bonds. :? That's why I use bond funds.

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arcticpineapplecorp.
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Re: VOO vs bonds

Post by arcticpineapplecorp. » Wed Jul 10, 2019 4:56 pm

owenmia wrote:
Wed Jul 10, 2019 2:32 pm
Wow.

I thought it was 4%. This is what happens when you have no idea what you're doing.

So, the "yield to maturity: is the percentage I will get?

No wonder people did not believe me.
interesting that you bought first and then asked questions later. See how doing the opposite (asking questions first) can prevent you from making mistakes and/or helps you make more informed decisions?

Makes you wonder what else you might not have any idea about what you're doing, but are doing it anyway. Care to ask us more questions about how the rest of your portfolio (400k+) is invested so you don't make other mistakes you're not aware of?

asking portfolio questions:
https://www.bogleheads.org/wiki/Asking_ ... _questions
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

retiredjg
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Re: VOO vs bonds

Post by retiredjg » Wed Jul 10, 2019 4:58 pm

owenmia wrote:
Wed Jul 10, 2019 4:53 pm
Not to be negative but it actually does suck right.now.
The sandbox is constantly changing. Your job is to figure out what to do under current conditions. Past conditions are not relevant so don't waste your energy on that.

Some things are sure. Your portfolio probably needs a bond allocation. Where can you best get it?

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ruralavalon
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Re: VOO vs bonds

Post by ruralavalon » Wed Jul 10, 2019 5:02 pm

I heard people make statements such as:
1) "Buying individual bonds only makes sense when dealing in high dollar amounts."
What is the reason behind that?
Because you cannot get a diversified collection of individual bonds without several hundred thousand dollars to put in bonds.

With smaller amounts it's better (in terms of risk) to stick with Treasuries for your individual bonds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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arcticpineapplecorp.
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Re: VOO vs bonds

Post by arcticpineapplecorp. » Wed Jul 10, 2019 5:22 pm

are you buying bonds in a taxable account or a tax-deferred/tax free account? Do you understand the difference it could make and why? People are telling you there are tax implications/drag on bonds in a taxable account. Without saying so, they're telling you to consider bonds in accounts that don't have tax implications.

The total bond market index fund (Vanguard, admiral shares) has a yield to maturity of 2.77% (and sec yield of 2.53%) but the year to date return is 6.11%.

question: do you know why the return is 6.11% so far this year?

Image

spoiler alert:
it's because of the low interest rates you're complaining about.

when interest rates fall (as they have from 3% to 2% over the past many months) the value of your bonds increases and vice versa(when interest rates rise the value of your bonds will fall). You're focusing on the yield but bonds' return is made up of two parts: interest received and change in price (which is affected by changes in interest rates).
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

MotoTrojan
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Re: VOO vs bonds

Post by MotoTrojan » Wed Jul 10, 2019 5:26 pm

Alex GR wrote:
Wed Jul 10, 2019 4:38 pm
retiredjg wrote:
Wed Jul 10, 2019 2:47 pm
The general trend around here is to buy bond funds, not individual bonds. This is because most people don't have the knowledge or expertise to set up a bond portfolio of individual bonds.

So you are not alone in not knowing how to do it right. :happy

Don't worry about it. Pick up the pieces and move on. And consider intermediate term bond funds for your bond allocation. There are different kinds - a total bond index fund is a common suggestion. There are also other good choices as well.
Hi Retiredjg,
Good to see you. Thanks for all the help, great advice, and all you do on this forum. :happy
I am curious... is there any situation when buying individual bonds makes sense? I have a six figure amount invested in BIV (chose BIV over BND when initially formed the portfolio) but I'm really starting to dislike the low returns. Perhaps developing a scoring system/model in Excel to evaluate individual bond offers (and suggest which ones to buy) would be a fun thing to do :wink:
I heard people make statements such as:
1) "Buying individual bonds only makes sense when dealing in high dollar amounts."
What is the reason behind that?
2) "Individual bonds only make sense if you hold them 'til maturity". When asked why: "Because you run the risk of selling at a discount when you need to sell". Do you agree with this statement? Not sure I fully understand all the implications.

Also, why would anyone buy bonds paying 2.10% or treasuries paying 1.87% when there are CDs paying 3% for a similar term? (Example: Citizens Bank @3,15% for 5yrs) There must be a reason but being a novice investor I am probably just not seeing it.

This whole thread shows how bonds appear simple on the surface when in reality we have so much to learn about bonds.

Thanks!
Frankly I don’t think it ever makes sense. As to the second point, it’s no different than holding a fund and selling after rates have gone up and resulted in a NAV reduction.

If you want more yield use a riskier fund like corporate or junk, or a longer term, but just like dividends there is no free lunch. Much more efficient to take the risk on the equity side.

Broken Man 1999
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Re: VOO vs bonds

Post by Broken Man 1999 » Wed Jul 10, 2019 5:32 pm

owenmia wrote:
Wed Jul 10, 2019 12:10 pm
Sure.

There are a bunch of 4%. There are even 7 and 8%. My broker friend said never take anything over 5% because the market is accounting for risk that the bond agencies are not.

983024AF7
WYETH LLC coupon rate 6.5%
Rated AA

478160AF1
JOHNSON & JOHNSON Coupon Rate 6.7%
Rated AAA

373298CF3
GEORGIA-PACIFIC L
Rated A+ Coupon Rate 8%


907818DK1
UNION PACIFIC CORP
Rated A 4.1% coupon

021441AF7
ALTERA CORP
Rates A- Coupon rate 4.1%
None of these bonds will get you 4%, or even 3%, at the present time.

You need to find out what they are currently yielding. Just put in the cusip and you will see what you can get at their present value.

Broken Man 19990

ETA: Ah, I see while I was checking the cusip numbers someone has already delivered the bad news. Sorry, I was not trying to pile on.
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

bondsr4me
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Re: VOO vs bonds

Post by bondsr4me » Wed Jul 10, 2019 5:56 pm

owenmia wrote:
Wed Jul 10, 2019 2:53 pm
Ok, thank you!

Can you all recommend a bond fund for me? I will have to go read up some.
My best recommendation for you is to get and read “Bonds The Unbeaten Path to Secure Investment Growth” by Hildy & Stan Richelson.

This book is packed with information.

I keep this book close by as my bond “Bible”.

I sincerely hope this helps you learn about bonds.

Don

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grabiner
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Re: VOO vs bonds

Post by grabiner » Wed Jul 10, 2019 6:41 pm

Alex GR wrote:
Wed Jul 10, 2019 4:38 pm
2) "Individual bonds only make sense if you hold them 'til maturity". When asked why: "Because you run the risk of selling at a discount when you need to sell". Do you agree with this statement? Not sure I fully understand all the implications.
Except for Treasury bonds, the spreads for individual investors trading bonds are fairly large. If you hold a bond to maturity, you don't pay any trading costs when selling it, as you get back the full par value. If you sell before maturity, you lose the spread.
Wiki David Grabiner

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Phineas J. Whoopee
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Re: VOO vs bonds

Post by Phineas J. Whoopee » Wed Jul 10, 2019 7:07 pm

grabiner wrote:
Wed Jul 10, 2019 6:41 pm
Alex GR wrote:
Wed Jul 10, 2019 4:38 pm
2) "Individual bonds only make sense if you hold them 'til maturity". When asked why: "Because you run the risk of selling at a discount when you need to sell". Do you agree with this statement? Not sure I fully understand all the implications.
Except for Treasury bonds, the spreads for individual investors trading bonds are fairly large. If you hold a bond to maturity, you don't pay any trading costs when selling it, as you get back the full par value. If you sell before maturity, you lose the spread.
I agree with David, and would like to add that the present market values of the bonds constantly change anyhow. Pretending they don't is just fooling oneself, whether or not one happens to sell today. If that's the path a person chooses then fair enough. One might sell at a discount or at a premium.

And yet they fluctuate.

PJW

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Nate79
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Re: VOO vs bonds

Post by Nate79 » Wed Jul 10, 2019 7:10 pm

The question is why do you care. It is a fools game to guess what asset class will earn more over such a short period of time as 10 years. Stocks may have earned more on average but that is no guarantee. But bond return is also no guarantee. The better question is what is the purpose of this money and what asset allocation will best help you reach your goal.

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JoMoney
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Re: VOO vs bonds

Post by JoMoney » Wed Jul 10, 2019 7:17 pm

Dividends on the S&P 500 have averaged a growth rate of 6% annualized for the past 30+ years.
https://www.multpl.com/s-p-500-dividend-growth

If we continue to have 6% growth + 2% yield on top of that, it's not hard to imagine beating a 4% bond...
:happy
Unfortunately, it's also not hard to imagine growth stagnating to something less, or the price multiples contracting, which might raise the yield and make future expected returns higher, but might make the total return from the prior period relatively dismal (depending on how fast, and how far they contracted)...
:confused
"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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JoMoney
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Re: VOO vs bonds

Post by JoMoney » Wed Jul 10, 2019 7:23 pm

Nate79 wrote:
Wed Jul 10, 2019 7:10 pm
... But bond return is also no guarantee...
Well, a bond literally is a promise that they'll pay a certain return. Whether or not the companies "guarantee" is creditworthy is a concern, but to the extent that it is, you know precisely what the return will be over the specific time frame provided you hold it under the terms of the bond.
"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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Nate79
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Re: VOO vs bonds

Post by Nate79 » Wed Jul 10, 2019 7:41 pm

JoMoney wrote:
Wed Jul 10, 2019 7:23 pm
Nate79 wrote:
Wed Jul 10, 2019 7:10 pm
... But bond return is also no guarantee...
Well, a bond literally is a promise that they'll pay a certain return. Whether or not the companies "guarantee" is creditworthy is a concern, but to the extent that it is, you know precisely what the return will be over the specific time frame provided you hold it under the terms of the bond.
Sure if you buy a specific 10 year bond and hold it for 10 years and there is little to no credit risk you will know the return ahead of time. In most other bond cases (bond funds, or bonds of a different duration) you won't know the return ahead of time.

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