Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

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GaryA505
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Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
I just don't see it. Of course, if rates drop, bond prices go up, I know that. However, if rates increase, bond prices will drop and the recovery can take years (depending on the duration of course). Since I don't know the future, I won't try to predict which direction rates will go (though I will go out on a limb and predict that they won't go to -10%).

Otherwise, bonds are just ballast.
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climber2020
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by climber2020 »

I joined Bogleheads in 2012, and people have been saying some variation of this for the last 8 years. I'm glad I ignored them.

Don't forget to include reinvested dividends in your calculations.

https://www.morningstar.com/funds/xnas/ ... erformance
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by aristotelian »

Bonds are not just for income, they are also for safety and diversification.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by RomeoMustDie »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
I just don't see it. Of course, if rates drop, bond prices go up, I know that. However, if rates increase, bond prices will drop and the recovery can take years (depending on the duration of course). Since I don't know the future, I won't try to predict which direction rates will go (though I will go out on a limb and predict that they won't go to -10%).

Otherwise, bonds are just ballast.
Just the normal ebb and flow between stocks and bonds as yields go up and down.

Depends on your investment horizon, in the short term you may be right.

Hedging also has value.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by Brianmcg321 »

My LTTs are up 15% this year.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by 02nz »

Look at your portfolio as a whole. Bonds support the portfolio by cushioning the volatility. See also sequence of returns risk. No, bonds don't score the big points, but that doesn't mean you strip your portfolio to only the components that do. Think of bonds and stocks as different roles on a team - just because the goalkeeper never scores a point, doesn't mean you'll do just fine without the goalkeeper.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by 02nz »

climber2020 wrote: Mon Jun 08, 2020 11:40 am I joined Bogleheads in 2012, and people have been saying some variation of this for the last 8 years. I'm glad I ignored them.
I seem to notice there are more of these threads ("why not 100% stocks") when markets are at or near all-time highs. I don't recall a significant number of them around March this year, for some reason. :wink:
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by Clever_Username »

Bonds aren't there to help you eat, they're to help you sleep.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by Ged »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Otherwise, bonds are just ballast.
In a storm ballast is what keeps the ship from capsizing.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

climber2020 wrote: Mon Jun 08, 2020 11:40 am I joined Bogleheads in 2012, and people have been saying some variation of this for the last 8 years. I'm glad I ignored them.

Don't forget to include reinvested dividends in your calculations.

https://www.morningstar.com/funds/xnas/ ... erformance
We have been in a 40-year bull market for bonds, so what happened between 2012 and now is meaningless.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

Brianmcg321 wrote: Mon Jun 08, 2020 11:42 am My LTTs are up 15% this year.
Isn't that only true because interest rates dropped this year?
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by siriusblack »

02nz wrote: Mon Jun 08, 2020 11:42 am Look at your portfolio as a whole. Bonds support the portfolio by cushioning the volatility. See also sequence of returns risk. No, bonds don't score the big points, but that doesn't mean you strip your portfolio to only the components that do. Think of bonds and stocks as different roles on a team - just because the goalkeeper never scores a point, doesn't mean you'll do just fine without the goalkeeper.
Great analogy!
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

Clever_Username wrote: Mon Jun 08, 2020 11:48 am Bonds aren't there to help you eat, they're to help you sleep.
That's exactly what I am suggesting. I am looking for a viable rebuttal.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by rbaldini »

I hold bonds because I feel that being 100% stock is too risky. If there is a superior alternative to bonds for this purpose, let me know.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by JBTX »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
I just don't see it. Of course, if rates drop, bond prices go up, I know that. However, if rates increase, bond prices will drop and the recovery can take years (depending on the duration of course). Since I don't know the future, I won't try to predict which direction rates will go (though I will go out on a limb and predict that they won't go to -10%).

Otherwise, bonds are just ballast.
I think you are basically correct. Long term treasuries basically give you zero return long term as they stand now. As you imply, yes they typically provide cushion when stocks go down due to economic shocks, but at current rates is seems like that cushion will be limited, and the reverse side risk is much higher if rates were to go up due to inflationary pressures.

That doesn't mean you should pile into stocks. Alternatives include high yielding cash accounts, ibonds, eebonds, TIPS and maybe even paying more on your mortgage. Or even I shudder to see myself typing this...gold.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by jebmke »

Clever_Username wrote: Mon Jun 08, 2020 11:48 am Bonds aren't there to help you eat, they're to help you sleep.
In 2008-09 I sold bonds to pay for expenses.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by notinuse »

GaryA505 wrote: Mon Jun 08, 2020 11:53 am
climber2020 wrote: Mon Jun 08, 2020 11:40 am I joined Bogleheads in 2012, and people have been saying some variation of this for the last 8 years. I'm glad I ignored them.

Don't forget to include reinvested dividends in your calculations.

https://www.morningstar.com/funds/xnas/ ... erformance
We have been in a 40-year bull market for bonds, so what happened between 2012 and now is meaningless.
Maybe, but the people that have been dismissing bonds during that time period evidently didn't know what they were talking about were in error.
Last edited by notinuse on Mon Jun 08, 2020 12:16 pm, edited 1 time in total.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by climber2020 »

GaryA505 wrote: Mon Jun 08, 2020 11:53 am We have been in a 40-year bull market for bonds, so what happened between 2012 and now is meaningless.
Ok. Let us know how it goes.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by nisiprius »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
I just don't see it. Of course, if rates drop, bond prices go up, I know that. However, if rates increase, bond prices will drop and the recovery can take years (depending on the duration of course). Since I don't know the future, I won't try to predict which direction rates will go (though I will go out on a limb and predict that they won't go to -10%).

Otherwise, bonds are just ballast.
1) Why do you say "just?" The dictionary says ballast is "Heavy material that is carried to improve stability or maintain proper trim, as on a ship." I am perfectly happy to say "bonds are ballast, and I do carry them to improve stability and maintain proper trim."

2) Some people are saying "bonds suck because interest rates can only go up" while others are saying "bonds suck because interest rates will never go up." I can't believe both of these at the same time.

3) According to Vanguard, Total Bond and similar bonds are "may be appropriate for investors with medium-term investment horizons (4 to 10 years)." So we should be looking at time periods of 4 to 10 years.

If we look at overlapping five-year time periods, Using mutual funds and ETFs for short-term savings (5 years): VBMFX, from 1987 through 2019, we are looking at a time period that has included
  • Sir John Templeton's statement in 1993 that "In general, we have thought that this very long bull market in bonds must be somewhere near the end.
  • The "bond massacre" of 1994.
  • The Fed dropping the (overnight) rate essentially to zero in 2004-2007
  • The posting in this forum of in 2009 of the comment that "Interest rates can only go up, why go intermediate in bonds? ...interest rates are currently zero and whether rates rise in 2010 or 2011 or 2015, eventually they will rise and intermediate term bonds will get hit...
Nevertheless, in 336 overlapping 60-month periods,
  • Total Bond made money in all 336 out of 336 periods
  • Total Bond beat the Vanguard Prime Money Market fund in all 336 out of 336
  • Total Bond beat inflation 335 times out of 336, missing only once
  • In the very worse 60-month period in its history, 5/2013 through 4/2018, a $10,000 investment earned $652.
This is how it performed (blue) compared to a money market fund (orange) during the worst five-year period in its 33-year history:
Source

Image
Last edited by nisiprius on Mon Jun 08, 2020 12:17 pm, edited 3 times in total.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by whodidntante »

I no longer own any bonds since safe bonds pay < 1%. I get double that yield from my stable value fund for now.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by retired@50 »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
They can't.

I view bonds as a way to "rent out" some portion of my money. If you loan the bond issuer $1,000 and they agree to pay you 2% interest, then you'll get $20 bucks per year while they are "borrowing" your $1,000. Eventually, assuming you loaned the money to a credit-worthy issuer, you'll get your $1,000 back in the future. You'll have pocketed the $20 per year along the way.

I wouldn't count on "gains" as these can come and go with the prevailing interest rates in the market place. As a long term buy and hold investor, the only income you should expect from bonds is the payment of the agreed upon interest.

So, you're right, in that now is not a great time to be looking to find someone to pay you a high rate of interest for the privilege of borrowing some of your money. If you loan some money to a desperate, shady company, they might pay more interest, but that's because of the inherent default risk they pose.

Regards,
This is one person's opinion. Nothing more.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by KlangFool »

OP,

If your statement is true, why 60/40 beat 100/0 YTD?

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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by beyou »

Bonds can't be lumped all together as one asset class.

US Tsy bonds, long term, are a hedge against DEFLATION.
US TIPS are a hedge against INFLATION

High yield corporates act almost like equities (higher yields and larger price swings)

Investment grade corporates are somewhere inbetween the above two.
Munis as well.

So if equities are cratering and you own US Tsy long bonds, you will be up in the bonds.
At that point you rebalance out of the bonds into equities, buying low.
That is how they help you with gains.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by delamer »

GaryA505 wrote: Mon Jun 08, 2020 11:56 am
Clever_Username wrote: Mon Jun 08, 2020 11:48 am Bonds aren't there to help you eat, they're to help you sleep.
That's exactly what I am suggesting. I am looking for a viable rebuttal.
Why do you think there should be a viable rebuttal?

If your time horizon is long enough, go with 100% stocks. You’ll have more volatility, but a higher return: https://personal.vanguard.com/us/insigh ... llocations
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Historical Inflation Rates plus Stock and Bond Returns

Post by Taylor Larimore »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
I just don't see it. Of course, if rates drop, bond prices go up, I know that. However, if rates increase, bond prices will drop and the recovery can take years (depending on the duration of course). Since I don't know the future, I won't try to predict which direction rates will go (though I will go out on a limb and predict that they won't go to -10%).

Otherwise, bonds are just ballast.
GaryA505:

It is important to understand that bonds are primarily for safety--not high returns. If higher income (and more risk) is your goal, simply increase your stock allocation.

To help you understand how bonds and stocks interact during various periods, study this:


------------------------AGGREGATE
YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX
1976-------4.9%--------15.6%------------23.84%
1977-------6.7-----------3.0-------------(-7.18)
1978-------9.0-----------1.4---------------6.56
1979------13.3-----------1.9--------------18.44 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.42
1981-------8.9-----------6.3--------------(4.91)
1982-------3.8----------32.6--------------21.55 (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.56
1984-------3.9----------15.2---------------6.27
1985-------3.8----------22.1--------------31.73
1986-------1.1----------15.2--------------18.67 (Vanguard Total Bond Market Inception Date)
1987-------4.4-----------2.8----------------5.25
1988-------4.4-----------7.9---------------16.61
1989-------4.6----------14.5---------------31.69
1990-------6.1-----------8.9---------------(-3.10)
1991-------3.1----------16.0---------------30.47
1992-------2.9-----------7.4-----------------7.62
1993-------2.7-----------9.7----------------10.08
1994-------2.7---------(-2.9)----------------1.32 (Worst Bond Return)
1995-------2.5----------18.5---------------37.58 (Highest Annual S&P Return)
1996-------3.3-----------3.6----------------22.96
1997-------1.7-----------9.7----------------33.36
1998-------1.6-----------8.7----------------28.58
1999-------2.7---------(-0.8)---------------21.04
2000-------3.4----------11.6---------------(-9.10)
2001-------1.6-----------8.4--------------- (11.89)
2002-------2.4----------10.3--------------(-22.10)
2003-------1.9-----------4.1----------------28.68
2004-------3.3-----------4.3----------------10.88
2005-------3.4-----------2.4-----------------4.91
2006-------2.5-----------4.3----------------15.79
2007-------4.1-----------7.0-----------------5.49
2008-------0.1-----------5.2--------------(-37.00) (Worst Annual S&P Return)
2009-------2.7-----------5.9----------------26.46
2010-------1.5-----------6.5----------------15.06
2011-------3.0-----------7.7-----------------2.11
2012-------1.7-----------4.3----------------16.00
2013-------1.5---------(-2.0)---------------32.39
2014-------1.6-----------6.0----------------13.69
2015-------0.7-----------0.5-----------------1.38
2016-------2.1-----------2.6----------------11.96
2017-------2.1-----------3.5----------------21.83
2018-------2.5---------(-0.1)--------------(-4.38)
2019 ------2.3-----------8.7----------------31.49

Lessons learned:

* The Aggregate Bond Index (benchmark for Vanguard Total U.S.Bond Market Index Fund) had only four negative years (all small) reflecting very low risk. Morningstar calls it the The Best Diversifier for Equity Risk.

* In 2008 the S&P 500 Stock Index plunged (-38.5%). During the next 2 years it gained +41.52% (stay-the-course).

* Inflation climbed from 4.9% in 1976 to 13.3% in 1976. During that period a combination of Total Bond Market and S&P stocks beat inflation.

* Always think long-term.

Best wishes
Taylor
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by warowits »

Brianmcg321 wrote: Mon Jun 08, 2020 11:42 am My LTTs are up 15% this year.
Do you believe this is an argument that should convince a person to buy long term bonds right now?

Image

Which way do you think the rates are going in the intermediate to long run? In the end, math will win.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by KlangFool »

OP,

If you are 100/0, how do you "Buy Low and Sell High"?

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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by Waiting_for_Godot »

warowits wrote: Mon Jun 08, 2020 12:47 pm
Brianmcg321 wrote: Mon Jun 08, 2020 11:42 am My LTTs are up 15% this year.
Do you believe this is an argument that should convince a person to buy long term bonds right now?

Image

Which way do you think the rates are going in the intermediate to long run? In the end, math will win.
If you believe the analysis, apparently the 700 year trend for the risk-free rate is downward. Other developed economies have seen negative interest rates for a few years now, even considering the significant monetary stimulus during the Great Recession. Granted, the current stimulus easily blows it out of the water, but it might not be enough to force inflation, particularly given where all of this liquidity is ending up.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by absolute zero »

02nz wrote: Mon Jun 08, 2020 11:42 am Think of bonds and stocks as different roles on a team - just because the goalkeeper never scores a point, doesn't mean you'll do just fine without the goalkeeper.

Super simplistic, but a decent analogy. I might steal that. :beer
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by dbr »

At 0% real a 30 year ladder of 30 year TIPS guarantees a real income of 3.33% of the initial portfolio value for 30 years. That sounds like income to me, but maybe that is not what you meant. At a real yield of 0.5% the income goes up to 3.6% and at 1.0% real yield to 4%. Real yields of 0.5% were available last year and real yield of 1.0% has existed as recently as the first half of 2019. Those opportunities will come about again.

Note this is an illustration and not necessarily advice that one should put a large amount of money in said TIPS ladder as a retirement investment strategy.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by MathWizard »

My VBLAX is up
19.21% from a year ago.

VBILX is up 10.81% for a year ago.

VBLAX is new, but 10 year returns on VBILX are 4.93%

Not exciting, but I also don't get a 50% one year drop like
I did with equities in 2008/9.

If you want to swing for the fences, go 100% (or even more) on equities

Do I not like equities? NO. I was 100% equities for over almost 2 decades,
but I have recently changed my AA to include a decent % of bonds as I near retirement.
I'm currently 60/40 and will probably go to 70/30 in retirement. That will still
mean hundreds of thousands in bonds.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by chuckb84 »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
I just don't see it. Of course, if rates drop, bond prices go up, I know that. However, if rates increase, bond prices will drop and the recovery can take years (depending on the duration of course). Since I don't know the future, I won't try to predict which direction rates will go (though I will go out on a limb and predict that they won't go to -10%).

Otherwise, bonds are just ballast.
Apart from everything else that has been said: Bonds are your reserve, your dry powder, so you can rebalance when stocks go on sale, as just happened.

Very near the bottom, I sold bonds to buy stocks because we hit a rebalance band. Wow, I wish I'd bought more now! If we hadn't had a significant part of the AA in bonds there would have been nothing to use to buy stocks.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by averagelonghorn »

02nz wrote: Mon Jun 08, 2020 11:42 am Think of bonds and stocks as different roles on a team - just because the goalkeeper never scores a point, doesn't mean you'll do just fine without the goalkeeper.
I LOVE that analogy!
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by oldfort »

You can take credit risk with corporate or emerging market bonds. With foreign bonds, you can make or lose a lot if foreign exchange rates shift unexpectedly. Assuming you mean treasury bonds, you can't expect significant income or gains at today's rates.
Last edited by oldfort on Mon Jun 08, 2020 2:36 pm, edited 1 time in total.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by Brianmcg321 »

warowits wrote: Mon Jun 08, 2020 12:47 pm
Brianmcg321 wrote: Mon Jun 08, 2020 11:42 am My LTTs are up 15% this year.
Do you believe this is an argument that should convince a person to buy long term bonds right now?

Image

Which way do you think the rates are going in the intermediate to long run? In the end, math will win.
Don't put all your eggs in one basket. My bond portfolio at the beginning of the year consisted of 20% total bond market and 20% LTT.

As interest rates go up my bond values will go down. I know this. But my stock portion will more than likely increase a great deal.

Then interest rates may go down again as the economy slows for whatever reason, and then their value goes back up.

I am a huge fan of LTT irregardless of the current interest rate. I'm not investing for today or even this year. :beer
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

KlangFool wrote: Mon Jun 08, 2020 12:31 pm OP,

If your statement is true, why 60/40 beat 100/0 YTD?

KlangFool
Declining interest rates YTD?
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

dbr wrote: Mon Jun 08, 2020 1:25 pm At 0% real a 30 year ladder of 30 year TIPS guarantees a real income of 3.33% of the initial portfolio value for 30 years. That sounds like income to me, but maybe that is not what you meant. At a real yield of 0.5% the income goes up to 3.6% and at 1.0% real yield to 4%. Real yields of 0.5% were available last year and real yield of 1.0% has existed as recently as the first half of 2019. Those opportunities will come about again.

Note this is an illustration and not necessarily advice that one should put a large amount of money in said TIPS ladder as a retirement investment strategy.
Now you have my attention. How is such a ladder implemented?
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by Toons »

Vanguard Intermediate Tax Exempt
Monthly income to enjoy if so choose,
Diversification.
70/30 Equity Bond
I do not pay attention to interest rates.
:happy
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by rich126 »

Maybe someone will post a link to the article that did a good job explaining how returns are not linear with regards to interest rate drops on LT treasuries but more exponential.

Now if believe rates go up, it may be another story.
KlangFool
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by KlangFool »

GaryA505 wrote: Mon Jun 08, 2020 5:47 pm
KlangFool wrote: Mon Jun 08, 2020 12:31 pm OP,

If your statement is true, why 60/40 beat 100/0 YTD?

KlangFool
Declining interest rates YTD?
Try again. The key word is rebalancing.

KlangFool
Topic Author
GaryA505
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

KlangFool wrote: Mon Jun 08, 2020 6:46 pm
GaryA505 wrote: Mon Jun 08, 2020 5:47 pm
KlangFool wrote: Mon Jun 08, 2020 12:31 pm OP,

If your statement is true, why 60/40 beat 100/0 YTD?

KlangFool
Declining interest rates YTD?
Try again. The key word is rebalancing.

KlangFool
For 2020 YTD, if you rebalanced monthly, or didn't rebalance at all, 60/40 beat 100 stock. This was due to increases in bond values from declining interest rates.
dbr
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by dbr »

GaryA505 wrote: Mon Jun 08, 2020 5:52 pm
dbr wrote: Mon Jun 08, 2020 1:25 pm At 0% real a 30 year ladder of 30 year TIPS guarantees a real income of 3.33% of the initial portfolio value for 30 years. That sounds like income to me, but maybe that is not what you meant. At a real yield of 0.5% the income goes up to 3.6% and at 1.0% real yield to 4%. Real yields of 0.5% were available last year and real yield of 1.0% has existed as recently as the first half of 2019. Those opportunities will come about again.

Note this is an illustration and not necessarily advice that one should put a large amount of money in said TIPS ladder as a retirement investment strategy.
Now you have my attention. How is such a ladder implemented?
You can search the forum for Liability Matching Portfolio, LMP, an idea of Bill Bernstein and others. The specific reference would be to a TIPS ladder, discussed a lot on the forum. Here are some references https://www.google.com/search?sitesearc ... ips+ladder Somewhere in there certain posters have shown details for exactly how to put it all together. Note there are some tricks because there are not TIPS available that fit all the rungs you need.

I don't personally pay a lot of attention to it except to understand the idea because it is not how I have gone about planning my own portfolio and I am not much of an enthusiast for the whole LMP thought process. But those are things a person can be aware of and think through for themselves. You asked for a serious use of bonds in retirement planning and that is probably one that comes to mind.
AlohaJoe
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by AlohaJoe »

GaryA505 wrote: Mon Jun 08, 2020 11:37 am Can someone explain to me how bond funds, with our all-time low interest rates, could possibly be used for any sort of significant income or gains?
I just don't see it.
No one seems to have actually answered this part of the question for you: convexity.

Due to convexity, bonds don't need to go to -10% to make money.

https://portfoliocharts.com/2019/05/27/ ... convexity/
At high interest rates the coupon is most important, and at low rates capital appreciation is king
KlangFool
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by KlangFool »

GaryA505 wrote: Mon Jun 08, 2020 7:33 pm
KlangFool wrote: Mon Jun 08, 2020 6:46 pm
GaryA505 wrote: Mon Jun 08, 2020 5:47 pm
KlangFool wrote: Mon Jun 08, 2020 12:31 pm OP,

If your statement is true, why 60/40 beat 100/0 YTD?

KlangFool
Declining interest rates YTD?
Try again. The key word is rebalancing.

KlangFool
For 2020 YTD, if you rebalanced monthly, or didn't rebalance at all, 60/40 beat 100 stock. This was due to increases in bond values from declining interest rates.
GaryA505,

1) But, I use my 5/25 band based rebalancing. It is a great "market timing" tool. It rebalances by selling the bond to buy the stock in March. Now, I am selling the stock to buy the bond. So, the rebalancing boosts the return even more.

2) Even if the person does not rebalance, the new contribution will always buy low while the stock market is oscillating. You do not get that with 100/0.

100/0 only beat 60/40 when the market does not oscillate. 60/40 can make money even if the market oscillates sideway.

KlangFool
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GaryA505
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

KlangFool wrote: Mon Jun 08, 2020 9:00 pm
GaryA505 wrote: Mon Jun 08, 2020 7:33 pm
KlangFool wrote: Mon Jun 08, 2020 6:46 pm
GaryA505 wrote: Mon Jun 08, 2020 5:47 pm
KlangFool wrote: Mon Jun 08, 2020 12:31 pm OP,

If your statement is true, why 60/40 beat 100/0 YTD?

KlangFool
Declining interest rates YTD?
Try again. The key word is rebalancing.

KlangFool
For 2020 YTD, if you rebalanced monthly, or didn't rebalance at all, 60/40 beat 100 stock. This was due to increases in bond values from declining interest rates.
GaryA505,

1) But, I use my 5/25 band based rebalancing. It is a great "market timing" tool. It rebalances by selling the bond to buy the stock in March. Now, I am selling the stock to buy the bond. So, the rebalancing boosts the return even more.

2) Even if the person does not rebalance, the new contribution will always buy low while the stock market is oscillating. You do not get that with 100/0.

100/0 only beat 60/40 when the market does not oscillate. 60/40 can make money even if the market oscillates sideway.

KlangFool
In PV for YTD I get:
100 stock: -5.59%
60/40 no rebalance: -1.11%
60/40 monthly rebalance: -0.73
60/40 5/25 rebalance: -0.12%

It's true that your 5/25 rebalancing got you about a full percent over no rebalancing. However, 60/40 beat 100 stock regardless of the balancing method used (or no rebalancing). YTD (through May), intermediate treasury rates dropped about 1%, which gave a 5-year bond about a 5% bump in value. Just look at IEI, the iShares 3-7 year treasury ETF, 6.82% YTD (through May).
KlangFool
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by KlangFool »

GaryA505 wrote: Mon Jun 08, 2020 9:18 pm
KlangFool wrote: Mon Jun 08, 2020 9:00 pm
GaryA505 wrote: Mon Jun 08, 2020 7:33 pm
KlangFool wrote: Mon Jun 08, 2020 6:46 pm
GaryA505 wrote: Mon Jun 08, 2020 5:47 pm

Declining interest rates YTD?
Try again. The key word is rebalancing.

KlangFool
For 2020 YTD, if you rebalanced monthly, or didn't rebalance at all, 60/40 beat 100 stock. This was due to increases in bond values from declining interest rates.
GaryA505,

1) But, I use my 5/25 band based rebalancing. It is a great "market timing" tool. It rebalances by selling the bond to buy the stock in March. Now, I am selling the stock to buy the bond. So, the rebalancing boosts the return even more.

2) Even if the person does not rebalance, the new contribution will always buy low while the stock market is oscillating. You do not get that with 100/0.

100/0 only beat 60/40 when the market does not oscillate. 60/40 can make money even if the market oscillates sideway.

KlangFool
In PV for YTD I get:
100 stock: -5.59%
60/40 no rebalance: -1.11%
60/40 monthly rebalance: -0.73
60/40 5/25 rebalance: -0.12%

It's true that your 5/25 rebalancing got you about a full percent over no rebalancing. However, 60/40 beat 100 stock regardless of the balancing method used (or no rebalancing). YTD (through May), intermediate treasury rates dropped about 1%, which gave a 5-year bond about a 5% bump in value. Just look at IEI, the iShares 3-7 year treasury ETF, 6.82% YTD (through May).
GaryA505,

It is very simple.

You just compare VTSAX (Total Stock Market Index) versus Vanguard Balanced Fund (60/40), VSMGX (LifeStrategy Moderate Growth) (60/40), or Wellington Fund (65/35). Every single one of them beats 100/0.

<<However, 60/40 beat 100 stock regardless of the balancing method used (or no rebalancing).>>

Inherently, when you put new money into the 60/40, you would "Buy Low". You do not get that with 100/0 too. That would give an additional return too.

You asked a question: How could Bond gives good return?

I answered your question. In a 60/40 portfolio, the rebalancing and "Buy Low" with the new contribution allow the 60/40 to beat 100/0 in an oscillating market that we are in now.

The sum of bond and stock is greater than its part individually.

My mini-Larry - 10% SCV and 10% Intermediate-term treasury is the biggest winner in this stretch of market oscillation.

Look at your whole portfolio.

KlangFool

P.S.: My portfolio is up 1.63% YTD with the new contribution.

P.S.2: Diversification is a good thing.
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GaryA505
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

To clarify, I'm not suggesting the going with 100% stock is a good idea because of low interest rates.
The "ballast" side of the AA can always go in CDs, short term treasuries, short term munis, and money market, unless there is some imaginable way to get any significant income or gain by going longer term.
KlangFool
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by KlangFool »

GaryA505 wrote: Mon Jun 08, 2020 9:43 pm To clarify, I'm not suggesting the going with 100% stock is a good idea because of low interest rates.
The "ballast" side of the AA can always go in CDs, short term treasuries, short term munis, and money market, unless there is some imaginable way to get any significant income or gain by going longer term.
GaryA505,

I understand that. But, my point is besides being a "ballast", the FI provides

A) A rebalancing benefit

B) "Buy Low and Sell High" Benefit

That diversification can boost return independent of what the actual bond return is.

The sum is greater than its part. I only use Total Bond and Intermediate-Term treasury for my Fixed Income.

KlangFool
Topic Author
GaryA505
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Location: New Mexico

Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by GaryA505 »

KlangFool wrote: Mon Jun 08, 2020 9:49 pm
GaryA505 wrote: Mon Jun 08, 2020 9:43 pm To clarify, I'm not suggesting the going with 100% stock is a good idea because of low interest rates.
The "ballast" side of the AA can always go in CDs, short term treasuries, short term munis, and money market, unless there is some imaginable way to get any significant income or gain by going longer term.
GaryA505,

I understand that. But, my point is besides being a "ballast", the FI provides

A) A rebalancing benefit

B) "Buy Low and Sell High" Benefit

That diversification can boost return independent of what the actual bond return is.

The sum is greater than its part. I only use Total Bond and Intermediate-Term treasury for my Fixed Income.

KlangFool
I see what you're saying, but I'll have to ask if doing A and B requires intermediate-duration FI assets. Unless you get lucky and bond values move opposite stock values due to interest rate sensitivity, it seems to me that short term FI assets would work just as well for rebalancing.

Hopefully this thread is not going to turn into another short-term vs intermediate-term debate.
KlangFool
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Re: Can someone explain to me how bonds could possibly be used for any sort of significant income or gains?

Post by KlangFool »

GaryA505 wrote: Mon Jun 08, 2020 10:04 pm
KlangFool wrote: Mon Jun 08, 2020 9:49 pm
GaryA505 wrote: Mon Jun 08, 2020 9:43 pm To clarify, I'm not suggesting the going with 100% stock is a good idea because of low interest rates.
The "ballast" side of the AA can always go in CDs, short term treasuries, short term munis, and money market, unless there is some imaginable way to get any significant income or gain by going longer term.
GaryA505,

I understand that. But, my point is besides being a "ballast", the FI provides

A) A rebalancing benefit

B) "Buy Low and Sell High" Benefit

That diversification can boost return independent of what the actual bond return is.

The sum is greater than its part. I only use Total Bond and Intermediate-Term treasury for my Fixed Income.

KlangFool
I see what you're saying, but I'll have to ask if doing A and B requires intermediate-duration FI assets. Unless you get lucky and bond values move opposite stock values due to interest rate sensitivity, it seems to me that short term FI assets would work just as well for rebalancing.

Hopefully this thread is not going to turn into another short-term vs intermediate-term debate.
GaryA505,

I know that I know nothing. If you believe that you know something about interest rate movement, good luck!

I use Total Bond because I know nothing. I use the Intermediate-term treasury because I am using the Larry portfolio.

<<Unless you get lucky and bond values move opposite stock values due to interest rate sensitivity,>.

Why do you think that? As long as the bond does not drop as much as the stock, it works too. No luck is involved here.

It is a "Know-Nothing" approach.

It is very simple but hard.

KlangFool
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