Cash vs Bonds

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ddavis8871
Posts: 12
Joined: Sun Dec 18, 2016 6:33 pm

Cash vs Bonds

Post by ddavis8871 »

Hello fellow Bogleheads:

I'm wanting to de-risk the portfolio as I get closer to planned retirement in next 5-7 years. I'm invested in Vanguard US Large Cap Blend / Growth funds and to a lesser extent Mid-Cap Growth / Value funds. I want to move closer to 20% non-equity allocation. Why would I de-risk by going into a bond fund vs staying in cash. I am currently getting 1.78% in my savings and around the same in my VG money market account - so basically keeping pace with inflation. The 10 Year is currently down 2.7% 1 year ago to 1.7% today and continues to tread lower. It seems like there's more risk and not a lot of reward with bonds vs cash. I feel like I'm missing something. Thanks in advance.


Age: 48
Asset Allocation
Equities 90%
Cash 10%
Bonds0%

Portfolio
Taxable $795
Tax Deferred $630K
Tax Free $200K
Cash $156K
Total: $1.78M
Wanderingwheelz
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Re: Cash vs Bonds

Post by Wanderingwheelz »

The short answer for me is that interest rates and bond values are a see saw of sorts- as interest rates fall, bond prices rise.
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Wiggums
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Re: Cash vs Bonds

Post by Wiggums »

Wanderingwheelz wrote: Fri Jan 24, 2020 6:49 pm The short answer for me is that interest rates and bond values are a see saw of sorts- as interest rates fall, bond prices rise.
Correct. The NAV of the bond fund does the inverse of the interest rate.

I hold the three fund portfolio, so I have Vanguard total bond market fund. Vanguard intermediate bond fund is also another good one. I would not use the long term bond fund at this time.
dbr
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Re: Cash vs Bonds

Post by dbr »

In the context of 20% fixed income vs 10% fixed income the risk and the return in intermediate bonds vs cash is pretty much irrelevant. If there is some analysis to be had, the better long term bond choice for high stock allocations is more likely long bonds than cash, short, or intermediate. High stock allocations are long term allocations.

As far as cash vs. bonds, the yield curve is so flat and low now that all durations of fixed income are about the same. Over a longer term average intermediate duration is probably a better buy and hold position for bonds.

See here: https://stockcharts.com/freecharts/yieldcurve.php
capjak
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Re: Cash vs Bonds

Post by capjak »

Cash will be more stable than a Bond Fund. However a total Bond Fund will usually out perform cash.

Example for 2019 Vanguard Total Bond Market Fund-BND
Average annual returns—updated monthly
as of 12/31/2019
For 2019 return was 8.82%,
3 year average return was 4.03%,
5 year return was 3.01% and
10 year was 3.66%.

30 day sec yield is 2.22% for BND

https://investor.vanguard.com/etf/profi ... rmance/bnd
dbr
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Re: Cash vs Bonds

Post by dbr »

Also keep in mind that after inflation cash is less stable and may lose more than an inflation indexed bond such as TIPS or I bonds. When inflation is low and stable like it is now the benefit may not seem impressive. But now is no more than now.
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nisiprius
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Re: Cash vs Bonds

Post by nisiprius »

First, you aren't missing anything in the sense that the difference between stocks and bonds is much bigger than the difference between bonds and cash. There isn't a humongous difference between a bond fund like Vanguard Total Bond Index Fund and a ladder of the best competitive bank CDs.

But, basically, this is the reason, or it's my reason, anyway, for continuing to stay in Total Bond.

Bonds, blue. (Vanguard Total Bond Market Index Fund, VBMFX)
Cash, orange. (Vanguard Prime Money Market Fund, VMMXX)

Source

Image

Now if you say "well, things changed after 2009," I would say, "yeah, but still." The period of very low interest rates began in, let's say 2012. If we start the chart at 2012:

Image

And if the blue line for bonds looks uncomfortably volatile, we can put it into perspective by adding stocks (green):

Image

To my way of thinking, in a portfolio with any reasonable stock allocation, the volatility of stocks has been so high that I'd never notice the extra volatility I get by using bonds instead of cash, but the difference in return is meaningful.

I don't consider correlation in my decision to hold bonds. It's true that because of the low correlation between stocks and bonds, replacing cash with bonds in a portfolio increases portfolio volatility by a little less than you might expect, but with the kind of bonds I use and the way I use them, it's not an important consideration.

Now, you can do a good deal better than a money market fund if you are willing to buy bank CDs and shop around for them. So the difference between cash and bonds can be smaller than I've shown. If bonds make you jittery for any reason, you're not losing much by using good bank CDs instead. (I say "bank CDs" as opposed to "brokered CDs" which behave about like bonds).

I do have to say that you should ask the question "if interest rates really do spike--in some huge, unprecedented ay--will my bank allow me to make early withdrawals on my CDs? Or will they start to play hardball on the terms and conditions found in many CDs--which often say that early withdrawals are subject to the bank's permission?"

All I can say though, and I've been scratching my head over this for more than a decade, is that the rhetoric about risk in bonds seems insanely exaggerated from my point of view--I am a "mass affluent" ordinary retail investor, using Total Bond in a retirement portfolio. For example, look at the first chart, going back to 1986. Look at the blue line. Somewhere in that chart is an event known as a "bond bubble," followed by a "bond massacre." Can you find it in the blue line? If you are not completely sure, try a Google search on the phrase "bond massacre."
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ruralavalon
Posts: 20137
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Location: Illinois

Re: Cash vs Bonds

Post by ruralavalon »

ddavis8871 wrote: Fri Jan 24, 2020 6:34 pm Hello fellow Bogleheads:

I'm wanting to de-risk the portfolio as I get closer to planned retirement in next 5-7 years. I'm invested in Vanguard US Large Cap Blend / Growth funds and to a lesser extent Mid-Cap Growth / Value funds. I want to move closer to 20% non-equity allocation. Why would I de-risk by going into a bond fund vs staying in cash. I am currently getting 1.78% in my savings and around the same in my VG money market account - so basically keeping pace with inflation. The 10 Year is currently down 2.7% 1 year ago to 1.7% today and continues to tread lower. It seems like there's more risk and not a lot of reward with bonds vs cash. I feel like I'm missing something. Thanks in advance.


Age: 48
Asset Allocation
Equities 90%
Cash 10%
Bonds0%

Portfolio
Taxable $795
Tax Deferred $630K
Tax Free $200K
Cash $156K
Total: $1.78M
You are missing the importance of total return.

Last year total return on Vanguard Total Bond Market Index Fund (VBTLX) was 8.71%, and total return on Vanguard Intermediate-term Bond Index Fund (VBILX) was 10.18%.

Much better than any cash-like investment, and handily beat inflation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
101invest
Posts: 28
Joined: Fri Jan 11, 2019 10:58 pm

Re: Cash vs Bonds

Post by 101invest »

ruralavalon wrote: Sat Jan 25, 2020 11:17 am
ddavis8871 wrote: Fri Jan 24, 2020 6:34 pm Hello fellow Bogleheads:

I'm wanting to de-risk the portfolio as I get closer to planned retirement in next 5-7 years. I'm invested in Vanguard US Large Cap Blend / Growth funds and to a lesser extent Mid-Cap Growth / Value funds. I want to move closer to 20% non-equity allocation. Why would I de-risk by going into a bond fund vs staying in cash. I am currently getting 1.78% in my savings and around the same in my VG money market account - so basically keeping pace with inflation. The 10 Year is currently down 2.7% 1 year ago to 1.7% today and continues to tread lower. It seems like there's more risk and not a lot of reward with bonds vs cash. I feel like I'm missing something. Thanks in advance.


Age: 48
Asset Allocation
Equities 90%
Cash 10%
Bonds0%

Portfolio
Taxable $795
Tax Deferred $630K
Tax Free $200K
Cash $156K
Total: $1.78M
You are missing the importance of total return.

Last year total return on Vanguard Total Bond Market Index Fund (VBTLX) was 8.71%, and total return on Vanguard Intermediate-term Bond Index Fund (VBILX) was 10.18%.

Much better than any cash-like investment, and handily beat inflation.
ruralavalon - I agree 2019 was a great year for bond returns. Although what are the chances this repeats itself in the near future with interest rates already being so low? I'm having the same debate with myself about investing in good bank CDs (2% / 12 months) vs Vanguard Total Bond Market Index Fund (VBTLX) or Vanguard Tax-Exempt Intermediate Term Bond Fund (VWIUX). The graph provided by "nisiprius" clearly shows bonds being the better long term investment but will this hold true over the next 10, 20 years since interest rates have more room to go up than down at this point.

Disclaimer - I'm definetly not an expert on bonds and not sure I totally understand them, so this could be part of my hesitation.
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ruralavalon
Posts: 20137
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Cash vs Bonds

Post by ruralavalon »

101invest wrote: Sat Jan 25, 2020 4:52 pm
ruralavalon wrote: Sat Jan 25, 2020 11:17 am
ddavis8871 wrote: Fri Jan 24, 2020 6:34 pm Hello fellow Bogleheads:

I'm wanting to de-risk the portfolio as I get closer to planned retirement in next 5-7 years. I'm invested in Vanguard US Large Cap Blend / Growth funds and to a lesser extent Mid-Cap Growth / Value funds. I want to move closer to 20% non-equity allocation. Why would I de-risk by going into a bond fund vs staying in cash. I am currently getting 1.78% in my savings and around the same in my VG money market account - so basically keeping pace with inflation. The 10 Year is currently down 2.7% 1 year ago to 1.7% today and continues to tread lower. It seems like there's more risk and not a lot of reward with bonds vs cash. I feel like I'm missing something. Thanks in advance.


Age: 48
Asset Allocation
Equities 90%
Cash 10%
Bonds0%

Portfolio
Taxable $795
Tax Deferred $630K
Tax Free $200K
Cash $156K
Total: $1.78M
You are missing the importance of total return.

Last year total return on Vanguard Total Bond Market Index Fund (VBTLX) was 8.71%, and total return on Vanguard Intermediate-term Bond Index Fund (VBILX) was 10.18%.

Much better than any cash-like investment, and handily beat inflation.
ruralavalon - I agree 2019 was a great year for bond returns. Although what are the chances this repeats itself in the near future with interest rates already being so low? I'm having the same debate with myself about investing in good bank CDs (2% / 12 months) vs Vanguard Total Bond Market Index Fund (VBTLX) or Vanguard Tax-Exempt Intermediate Term Bond Fund (VWIUX). The graph provided by "nisiprius" clearly shows bonds being the better long term investment but will this hold true over the next 10, 20 years since interest rates have more room to go up than down at this point.

Disclaimer - I'm definetly not an expert on bonds and not sure I totally understand them, so this could be part of my hesitation.
I think the teeter-totter (seesaw) analogy is a good way to describe the action of bond funds.

When interest rates go down, then bond fund share prices go up.

When interest rates go up, then bond fund share prices go down.

Either way bond funds are much less volatile than stocks. If anyone wants to worry about volatility, then be concerned about the volatility of stocks.

I prefer "fixed income", rather than "bonds" when describing asset allocation. I do believe that CDs can be an acceptable as part or even all of the fixed income income allocation. CDs have their own risks, like the risk of being stuck with low interest (or a penalty for early withdrawal) if interest rates rise as predicted.

In my opinion it is best to look at total returns, rather than look at interest rates in isolation. Higher interest rates are good for the long-term bond investor. Most here feel that the effect of increasing interest rates on bond fund share prices will likely be small and temporary.
Last edited by ruralavalon on Sat Jan 25, 2020 5:09 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
hudson
Posts: 3531
Joined: Fri Apr 06, 2007 9:15 am

Re: Cash vs Bonds

Post by hudson »

ddavis8871 wrote: Fri Jan 24, 2020 6:34 pm Why would I de-risk by going into a bond fund vs staying in cash. I am currently getting 1.78% in my savings and around the same in my VG money market account - so basically keeping pace with inflation.
Why? You can make another 1% or more interest at very low risk.
If I were in your shoes, I would aim towards 3% fixed. I'd look for 3% CDs at a credit union.

If munis (and a little more risk) fit you, maybe look at VWIUX. The SEC yield is 1.46%; it paid out 2.56% annual rate on Jan. 2d. (distribution yield.) (no fed. tax)

I'm looking strictly at interest return...not changes in NAV.
FIby45
Posts: 90
Joined: Wed Oct 30, 2019 4:41 pm

Re: Cash vs Bonds

Post by FIby45 »

Does equation change for top tax brackets?
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