Bonds worth it?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Bonds worth it?

Post by frankie1800 »

What is the case for bonds in the future? If the yield is going to zero combined with taxes and the potential of inflation due to an unprecedented amount of press printing causing a real return of negative something, what is the case? Safety? Is this just where we are now? Accept a negative return on bonds because the return on cash will be more negative? Are TIPS the best bet now for bonds?

I have been struggling with where to put fixed income. Obviously from my above statement, I am not bullish on bonds for the future. But I don't want to chase yield increasing my risk either.

Obviously total bond is a big part of boglehead philosophy and I do hold total bond as a part of my fixed income but wondering if anyone out here is pondering a change due to recent events and the continued slide in yields.
cjg
Posts: 72
Joined: Sat Jan 11, 2014 9:03 pm

Re: Bonds worth it?

Post by cjg »

I've been going for FDIC insured CDs, I-Bonds, and EE-Bonds for the majority of my fixed income holding. I have a small amount of marketable bonds for rebalancing. All offer yield premiums over marketable bonds with little risk. Unless you have institutional level money, this seems to be the way to go.

I do believe that traditional bonds provide a valuable safety net to a portfolio even at near zero yields and I would be holding them if the options above didn't exist.
Blake7
Posts: 284
Joined: Fri Mar 30, 2018 2:52 pm
Location: USA

Re: Bonds worth it?

Post by Blake7 »

I’ve never held bonds. SVF (Stable Value Funds) work for me, currently paying a little over 2%. DW and I have access to them through our 401k/457 accounts, which I think is the only way to get access to SVFs as far as I know. Outside of retirement accounts, high yield saving accounts are paying about 1%, which is much better than most MM funds.
Last edited by Blake7 on Thu Jul 23, 2020 12:55 pm, edited 1 time in total.
RTF
Posts: 62
Joined: Thu Jan 30, 2020 10:08 am

Re: Bonds worth it?

Post by RTF »

I know most BHs prefer to hold total bond funds, but is there anything inherently wrong with holding both total bond and short term treasuries(vgsh) at the same time?
User avatar
simplesimon
Posts: 3926
Joined: Mon Feb 25, 2008 8:53 pm

Re: Bonds worth it?

Post by simplesimon »

I don't think I've ever read "yield" as one of the reasons for holding bonds.
retired@50
Posts: 3461
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Bonds worth it?

Post by retired@50 »

frankie1800 wrote: Thu Jul 23, 2020 10:51 am What is the case for bonds in the future?
Since this calls for speculation, what the heck... I'll speculate.

I can imagine a world where interest rates on bonds stay low for 5 or 10 more years until 2025 - 2030. I can also imagine a world where interest rates on bonds return to 4% - 6% in the next 10 years. There's just no telling, is there? I'm sticking with the total bond market fund because I've admitted to myself that guessing the future of interest rates is hopeless. I'm satisfied with the knowledge that I'll earn what the bond market offers, just like stock index funds provide what the stock market offers.

Regards,
This is one person's opinion. Nothing more.
Always passive
Posts: 655
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Bonds worth it?

Post by Always passive »

simplesimon wrote: Thu Jul 23, 2020 11:36 am I don't think I've ever read "yield" as one of the reasons for holding bonds.
When you retire, I think that you will think differently
User avatar
simplesimon
Posts: 3926
Joined: Mon Feb 25, 2008 8:53 pm

Re: Bonds worth it?

Post by simplesimon »

Always passive wrote: Thu Jul 23, 2020 11:45 am
simplesimon wrote: Thu Jul 23, 2020 11:36 am I don't think I've ever read "yield" as one of the reasons for holding bonds.
When you retire, I think that you will think differently
Don't get me wrong, I'd love for yields to be higher (I do hold a decent amount of bonds and cash), but in all the Boglehead literature I've read (several of Bogle's books, Bernstein, the Boglehead's Guide) I don't recall seeing "yield" as one of the reason to own bonds.
000
Posts: 2716
Joined: Thu Jul 23, 2020 12:04 am

Re: Bonds worth it?

Post by 000 »

Personally, for me, I have decided they are not worth it at this time.
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Bonds worth it?

Post by dbr »

frankie1800 wrote: Thu Jul 23, 2020 10:51 am
Obviously total bond is a big part of boglehead philosophy and I do hold total bond as a part of my fixed income but wondering if anyone out here is pondering a change due to recent events and the continued slide in yields.
No, that is not it all. The part of BH Philosophy that has to do with bonds is "Never bear too much or too little risk."

You can read what that is all about here:

https://www.bogleheads.org/wiki/Boglehe ... ittle_risk
https://www.bogleheads.org/wiki/Risk_an ... troduction
https://www.bogleheads.org/wiki/Risk_tolerance
BrooklynInvest
Posts: 272
Joined: Sun Jul 28, 2013 9:23 am

Re: Bonds worth it?

Post by BrooklynInvest »

Used to be three reasons to hold bonds -

1. Income
2. Diversifying my stocks
3. Potential for some gains when rates dropped

1 is reduced, 2 is still there and 3's not really a thing anymore but I'm not rich enough to go 100% equities anymore so something's gotta zig when the stock market zags.
Chicken Little
Posts: 398
Joined: Fri Feb 22, 2019 5:03 am

Re: Bonds worth it?

Post by Chicken Little »

BrooklynInvest wrote: Thu Jul 23, 2020 12:50 pm Used to be three reasons to hold bonds -

1. Income
2. Diversifying my stocks
3. Potential for some gains when rates dropped

1 is reduced, 2 is still there and 3's not really a thing anymore but I'm not rich enough to go 100% equities anymore so something's gotta zig when the stock market zags.
Zero is not a floor, so 3 isn’t dead, particularly for long bonds where capital appreciation increases as low rates go lower, right?

I have STT and ST Tips because I don’t want to be too far on the wrong side of it if inflation shows up. I can rebalance into stock market declines.

I think anyone who has always held bonds and is going 100% equity because of current bond yields is nuts, N-V-T-S nuts.

For the crowd who was always 100% equity, they must be feeling ever better.

The big thing is if we really get tested as investors, not GFC or now, but really tested, I suspect many will find they weren’t where they wanted to be. Time will tell.
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

simplesimon wrote: Thu Jul 23, 2020 11:36 am I don't think I've ever read "yield" as one of the reasons for holding bonds.
Maybe you have not seen that as a reason but why hold a bond with 0% return (hypothetically)? Why not just hold cash in that instance? Or some other investment type. What about TIPS? don't get me wrong simplesimon, I also have never looked at yield as a reason, rather a diversifier and a safe haven to balance my portfolio. But what about the macro environment? Doesn't this massive debt load and money printing creep into anyone's investing philosophy?

I do agree with what someone said, I would also never hold 100% equities chasing returns, although, currently, that may not be such a bad thing! lol
Triple digit golfer
Posts: 5558
Joined: Mon May 18, 2009 5:57 pm

Re: Bonds worth it?

Post by Triple digit golfer »

frankie1800 wrote: Thu Jul 23, 2020 1:21 pm
simplesimon wrote: Thu Jul 23, 2020 11:36 am I don't think I've ever read "yield" as one of the reasons for holding bonds.
Maybe you have not seen that as a reason but why hold a bond with 0% return (hypothetically)? Why not just hold cash in that instance? Or some other investment type. What about TIPS? don't get me wrong simplesimon, I also have never looked at yield as a reason, rather a diversifier and a safe haven to balance my portfolio. But what about the macro environment? Doesn't this massive debt load and money printing creep into anyone's investing philosophy?

I do agree with what someone said, I would also never hold 100% equities chasing returns, although, currently, that may not be such a bad thing! lol
Why would you expect cash to have a higher return than bonds?
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

Triple digit golfer wrote: Thu Jul 23, 2020 1:25 pm

Why would you expect cash to have a higher return than bonds?
I wouldn't but why take additional risk for the same return?
KyleAAA
Posts: 8568
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Bonds worth it?

Post by KyleAAA »

I don't think we'll see negative or 0 returns on bonds for the long term from here.
User avatar
ruralavalon
Posts: 19417
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Bonds worth it?

Post by ruralavalon »

frankie1800 wrote: Thu Jul 23, 2020 10:51 am What is the case for bonds in the future? If the yield is going to zero combined with taxes and the potential of inflation due to an unprecedented amount of press printing causing a real return of negative something, what is the case? Safety? Is this just where we are now? Accept a negative return on bonds because the return on cash will be more negative? Are TIPS the best bet now for bonds?

I have been struggling with where to put fixed income. Obviously from my above statement, I am not bullish on bonds for the future. But I don't want to chase yield increasing my risk either.

Obviously total bond is a big part of boglehead philosophy and I do hold total bond as a part of my fixed income but wondering if anyone out here is pondering a change due to recent events and the continued slide in yields.
Invest for the long-term, not based on short-term conditions. Be diversified. Yields are low, but inflation is also low.

Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

The White Coat Investor (9/23/2016), "In Defense of Bonds".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Triple digit golfer
Posts: 5558
Joined: Mon May 18, 2009 5:57 pm

Re: Bonds worth it?

Post by Triple digit golfer »

frankie1800 wrote: Thu Jul 23, 2020 1:37 pm
Triple digit golfer wrote: Thu Jul 23, 2020 1:25 pm

Why would you expect cash to have a higher return than bonds?
I wouldn't but why take additional risk for the same return?
Okay. Why would you expect cash to have the same return as bonds?
sycamore
Posts: 1209
Joined: Tue May 08, 2018 12:06 pm

Re: Bonds worth it?

Post by sycamore »

RTF wrote: Thu Jul 23, 2020 11:33 am I know most BHs prefer to hold total bond funds, but is there anything inherently wrong with holding both total bond and short term treasuries(vgsh) at the same time?
RTF, as long as you know what you're getting into with a shorter-duration bond portfolio, there's nothing inherently wrong with it.

A better question is: would a mix Total Bond and short-term treasuries be more or less likely to meet your portfolio objectives? There are lots of details to consider if you'd like an informed answer to that question.
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Bonds worth it?

Post by dbr »

sycamore wrote: Thu Jul 23, 2020 2:33 pm
RTF wrote: Thu Jul 23, 2020 11:33 am I know most BHs prefer to hold total bond funds, but is there anything inherently wrong with holding both total bond and short term treasuries(vgsh) at the same time?
RTF, as long as you know what you're getting into with a shorter-duration bond portfolio, there's nothing inherently wrong with it.

A better question is: would a mix Total Bond and short-term treasuries be more or less likely to meet your portfolio objectives? There are lots of details to consider if you'd like an informed answer to that question.
Exactly so. There is nothing "wrong" with it but the question would be "why?"
RCL
Posts: 476
Joined: Sat Jul 05, 2014 2:48 am

Re: Bonds worth it?

Post by RCL »

Always passive wrote: Thu Jul 23, 2020 11:45 am
simplesimon wrote: Thu Jul 23, 2020 11:36 am I don't think I've ever read "yield" as one of the reasons for holding bonds.
When you retire, I think that you will think differently
Why is that? You don't think a retired person needs to shield against huge market gyrations?
We retirees don't necessarily use bonds for yield, that is what equities are for.
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

ruralavalon wrote: Thu Jul 23, 2020 1:51 pm

Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

The White Coat Investor (9/23/2016), "In Defense of Bonds".
The morningstar link sounds a lot like trying to implement a Dalio All Weather Port.
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

Triple digit golfer wrote: Thu Jul 23, 2020 1:25 pm
Why would you expect cash to have a higher return than bonds?
i wouldn't. I wouldn't expect anything. Hypothetically. But we are close. The root of my post really is trying to find a good allocation for the fixed income side of my portfolio.

I am in my mid 40's and have glided down from an aggressive allocation to 60/40 with a 1 year ER fund. My intent is to keep this allocation forever. I will add the present value of my future pension and SS benefits when eligible to my fixed allocation, which will, in essence reduce my equity allocation and increase my fixed allocation.

I have no internal confusion about my equity allocation. 70% total/S&P and 30% total international. I have struggled internally with how my fixed should be allocated. I am wondering about the future of bonds so I like to see what people here think, since the people on here are different and more rationale than some of the tin foil hat stuff I watch and read outside of here. Currently, I have too much of my fixed allocation in cash outside of my retirement accounts. I know what I should do with the cash regarding allocating bonds to tax deferred etc. But it is that fixed allocation I am struggling with and therefore, currently, I am just thinking 50% total bond and 50% TIpS with some of the total being allocated to foreign debt.
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

frankie1800 wrote: Thu Jul 23, 2020 3:08 pm
ruralavalon wrote: Thu Jul 23, 2020 1:51 pm

Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

The White Coat Investor (9/23/2016), "In Defense of Bonds".
The morningstar link sounds a lot like trying to implement a Dalio All Weather Port.
and speaking of Dalio, he is one of the guys out there saying he wouldn't want to hold bonds. He's like, if you are getting virtually no return with a fed that is aiming to erode it by 2% with inflation being paid back in currency that has the potential for massive inflation due to money printing, finally having to pay taxes on it, why would you want to own that bond. Dalio's words, kind of, not mine, nor a direct quote.
000
Posts: 2716
Joined: Thu Jul 23, 2020 12:04 am

Re: Bonds worth it?

Post by 000 »

frankie1800 wrote: Thu Jul 23, 2020 3:27 pm
frankie1800 wrote: Thu Jul 23, 2020 3:08 pm
ruralavalon wrote: Thu Jul 23, 2020 1:51 pm

Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

The White Coat Investor (9/23/2016), "In Defense of Bonds".
The morningstar link sounds a lot like trying to implement a Dalio All Weather Port.
and speaking of Dalio, he is one of the guys out there saying he wouldn't want to hold bonds. He's like, if you are getting virtually no return with a fed that is aiming to erode it by 2% with inflation being paid back in currency that has the potential for massive inflation due to money printing, finally having to pay taxes on it, why would you want to own that bond. Dalio's words, kind of, not mine, nor a direct quote.
I seem to recall Dalio's "All Weather" portfolio included a very robust allocation to bonds.
megabad
Posts: 2964
Joined: Fri Jun 01, 2018 4:00 pm

Re: Bonds worth it?

Post by megabad »

I think if you are wondering if bonds are “worth it” simply due to current yields, you should re examine your investment fundamentals. I hope you draw the conclusion that current yields shouldn’t have any weight in their “worthiness” of inclusion in your overall investment plan. I do agree that TIPS should likely be a consideration for those in or soon approaching the portfolio draw down stage as they can be a good hedge against unexpected inflation (nothing to do with yields or rates).
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

000 wrote: Thu Jul 23, 2020 3:29 pm
I seem to recall Dalio's "All Weather" portfolio included a very robust allocation to bonds.
yes - 55%
User avatar
ruralavalon
Posts: 19417
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Bonds worth it?

Post by ruralavalon »

frankie1800 wrote: Thu Jul 23, 2020 3:08 pm
ruralavalon wrote: Thu Jul 23, 2020 1:51 pm

Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

The White Coat Investor (9/23/2016), "In Defense of Bonds".
The morningstar link sounds a lot like trying to implement a Dalio All Weather Port.
In the Morningstar article the best diversifers were (1) Treasurys, and (2) core intermediate-term bond funds like U.S. Aggregate Bond Index funds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

ruralavalon wrote: Thu Jul 23, 2020 4:43 pm
frankie1800 wrote: Thu Jul 23, 2020 3:08 pm
ruralavalon wrote: Thu Jul 23, 2020 1:51 pm

Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

The White Coat Investor (9/23/2016), "In Defense of Bonds".
The morningstar link sounds a lot like trying to implement a Dalio All Weather Port.
In the Morningstar article the best diversifers were (1) Treasurys, and (2) core intermediate-term bond funds like U.S. Aggregate Bond Index funds.
Yes that is true but was based on a strategy of Asset Correlation "One that we like at Morningstar is a statistic called correlation coefficient"

Dalio bases a strategy on uncorrelated return streams.

https://www.youtube.com/watch?v=Nu4lHaSh7D4
User avatar
nisiprius
Advisory Board
Posts: 41956
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bonds worth it?

Post by nisiprius »

I think a lot of talking heads are either talking nonsense, or talking about something different from, and irrelevant to bond funds like the Vanguard Total Bond Market Index Fund and similar core bond funds.

The first post I can remember seeing in the forum advising against Total Bond on the basis that "interest rates can only go up" was made on July 19th, 2009. $10,000 invested in the Vanguard Total Bond Market Index Fund on July 19th 2009 would, today, have grown to $15,663, for an average annual return (CAGR) of 4.16%, handily beating inflation.

Image

In the eleven years since that posting, there has been a constant stream of commentary in the forum and elsewhere saying that regardless of how much money Total Bond had made up to that point, it was "now" pointless to invest in it, and mathematically impossible for it to be a good investment. Jeremy Schwartz and Jeremy Siegel wrote about "the great American bond bubble" in The Wall Street Journal on August 10th, 2010, and this was a reason cited in the forum as a reason to ditch Total Bond. You can, in fact, see the collapse of the Great American Bond Bubble on the chart above, but, just like comet C/2020 F3 (NEOWISE), you have to know where to look for it.
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.
david9117
Posts: 138
Joined: Tue Dec 25, 2007 8:00 pm
Location: San Diego, Ca

Re: Bonds worth it?

Post by david9117 »

nisiprius wrote: Thu Jul 23, 2020 5:58 pm I think a lot of talking heads are either talking nonsense, or talking about something different from, and irrelevant to bond funds like the Vanguard Total Bond Market Index Fund and similar core bond funds.

The first post I can remember seeing in the forum advising against Total Bond on the basis that "interest rates can only go up" was made on July 19th, 2009. $10,000 invested in the Vanguard Total Bond Market Index Fund on July 19th 2009 would, today, have grown to $15,663, for an average annual return (CAGR) of 4.16%, handily beating inflation.

Image

In the eleven years since that posting, there has been a constant stream of commentary in the forum and elsewhere saying that regardless of how much money Total Bond had made up to that point, it was "now" pointless to invest in it, and mathematically impossible for it to be a good investment. Jeremy Schwartz and Jeremy Siegel wrote about "the great American bond bubble" in The Wall Street Journal on August 10th, 2010, and this was a reason cited in the forum as a reason to ditch Total Bond. You can, in fact, see the collapse of the Great American Bond Bubble on the chart above, but, just like comet C/2020 F3 (NEOWISE), you have to know where to look for it.
In that period the 10yr treasury went from ~3.5% to ~0.6%. Will we have that tail wind going forward.
hudson
Posts: 3232
Joined: Fri Apr 06, 2007 9:15 am

Re: Bonds worth it?

Post by hudson »

frankie1800 wrote: Thu Jul 23, 2020 10:51 am What is the case for bonds in the future? If the yield is going to zero combined with taxes and the potential of inflation due to an unprecedented amount of press printing causing a real return of negative something, what is the case? Safety? Is this just where we are now? Accept a negative return on bonds because the return on cash will be more negative? Are TIPS the best bet now for bonds?

I have been struggling with where to put fixed income. Obviously from my above statement, I am not bullish on bonds for the future. But I don't want to chase yield increasing my risk either.

Obviously total bond is a big part of boglehead philosophy and I do hold total bond as a part of my fixed income but wondering if anyone out here is pondering a change due to recent events and the continued slide in yields.
Random thoughts....
I'm not concerned about the future of bonds as I have no control over that.
I'm 100% fixed... roughly 90% CDs and 10% intermediate muni fund.
I have no plans to move out of fixed income.
When I have money to invest, I just go for the best deal available. I would like to tie or beat inflation, but again I go for the best available.
If I needed to invest money today, I'd likely go for a 3-5 year CD, high yield savings, or an intermediate muni fund like VWIUX or BMBIX.
I'm looking at a move to either TIPs funds or buying individual TIPS in a ladder in a few years.
Total Bond: I have a minor holding; I doubt if I would ever consider it for a major holding....but I wouldn't rule it out.
SPIAs and deferred annuities don't fit my present situation. I think their safety is roughly equivalent to investment grade corporates; I prefer something safer.

Bottom Line: I vote for safe fixed income; it's nice to tie or beat inflation.

Frankie1800, Have you read Swedroe's bond book or Bernstein's Four Pillars/Ages of the Investor?
User avatar
simplesimon
Posts: 3926
Joined: Mon Feb 25, 2008 8:53 pm

Re: Bonds worth it?

Post by simplesimon »

david9117 wrote: Thu Jul 23, 2020 6:14 pmIn that period the 10yr treasury went from ~3.5% to ~0.6%. Will we have that tail wind going forward.
What would the return have been if interest rates didn't change? If interest rates rose?
dziuniek
Posts: 868
Joined: Mon Jul 23, 2012 2:54 pm
Location: Corrupticut

Re: Bonds worth it?

Post by dziuniek »

Yup.

I was up 8% before today in my workplace retirement plane. I got lucky buying a bunch of stocks thru the bottom.

But hey... if I held to total bond ... I''d be pretty much in the same place - without having to be right twice....
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

nisiprius wrote: Thu Jul 23, 2020 5:58 pm I think a lot of talking heads are either talking nonsense, or talking about something different from, and irrelevant to bond funds like the Vanguard Total Bond Market Index Fund and similar core bond funds.

The first post I can remember seeing in the forum advising against Total Bond on the basis that "interest rates can only go up" was made on July 19th, 2009. $10,000 invested in the Vanguard Total Bond Market Index Fund on July 19th 2009 would, today, have grown to $15,663, for an average annual return (CAGR) of 4.16%, handily beating inflation.

Image

In the eleven years since that posting, there has been a constant stream of commentary in the forum and elsewhere saying that regardless of how much money Total Bond had made up to that point, it was "now" pointless to invest in it, and mathematically impossible for it to be a good investment. Jeremy Schwartz and Jeremy Siegel wrote about "the great American bond bubble" in The Wall Street Journal on August 10th, 2010, and this was a reason cited in the forum as a reason to ditch Total Bond. You can, in fact, see the collapse of the Great American Bond Bubble on the chart above, but, just like comet C/2020 F3 (NEOWISE), you have to know where to look for it.
Thank you for this analysis nisiprius. Obviously, nobody can predict interest rates and where they will go. With that being said, it is hard to see them going up with all the fed interaction. I guess my true concern with bonds is the currency risk. What if rates continue to slide? what if they go negative? what if they go negative in an environment of massive stimulus and money printing? why would i want to hod debt in a currency that's depreciating paying little to no interest with a tax responsibility on top of that? I know there are a lot of what ifs in this and I am usually wrong about my predictions so i must concede that and therefore, I have been somewhat using a three fund portfolio (or there about) since I found Bogleheads and have not changed but am looking more closely at my allocation these days and am simply uncomfortable with the fact that I don't simply have a fixed plan that I can simply stick to and not think about. I mean, to me, that's the goal.
Topic Author
frankie1800
Posts: 42
Joined: Sat Oct 28, 2017 7:53 am

Re: Bonds worth it?

Post by frankie1800 »

hudson wrote: Thu Jul 23, 2020 6:24 pm
frankie1800 wrote: Thu Jul 23, 2020 10:51 am What is the case for bonds in the future? If the yield is going to zero combined with taxes and the potential of inflation due to an unprecedented amount of press printing causing a real return of negative something, what is the case? Safety? Is this just where we are now? Accept a negative return on bonds because the return on cash will be more negative? Are TIPS the best bet now for bonds?

I have been struggling with where to put fixed income. Obviously from my above statement, I am not bullish on bonds for the future. But I don't want to chase yield increasing my risk either.

Obviously total bond is a big part of boglehead philosophy and I do hold total bond as a part of my fixed income but wondering if anyone out here is pondering a change due to recent events and the continued slide in yields.
Random thoughts....
I'm not concerned about the future of bonds as I have no control over that.
I'm 100% fixed... roughly 90% CDs and 10% intermediate muni fund.
I have no plans to move out of fixed income.
When I have money to invest, I just go for the best deal available. I would like to tie or beat inflation, but again I go for the best available.
If I needed to invest money today, I'd likely go for a 3-5 year CD, high yield savings, or an intermediate muni fund like VWIUX or BMBIX.
I'm looking at a move to either TIPs funds or buying individual TIPS in a ladder in a few years.
Total Bond: I have a minor holding; I doubt if I would ever consider it for a major holding....but I wouldn't rule it out.
SPIAs and deferred annuities don't fit my present situation. I think their safety is roughly equivalent to investment grade corporates; I prefer something safer.

Bottom Line: I vote for safe fixed income; it's nice to tie or beat inflation.

Frankie1800, Have you read Swedroe's bond book or Bernstein's Four Pillars/Ages of the Investor?
Thank you for your thoughts on fixed hudson. I am thinking along similar lines currently. I have not read these books but have written them down for the potential future at your suggestion. I just finished Paul Volkers last book, and am currently reading the Fourth Turning, which is about the cycles of history. IMO this book aligns with Ray Dalio's thought process on debt cycles. Both will provoke thoughts and could bias you regarding tough times a coming. But I try to keep the tin foil hat in the basement, most of the time :-)
hudson
Posts: 3232
Joined: Fri Apr 06, 2007 9:15 am

Re: Bonds worth it?

Post by hudson »

frankie1800 wrote: Thu Jul 23, 2020 7:53 pm Thank you for your thoughts on fixed hudson. I am thinking along similar lines currently. I have not read these books but have written them down for the potential future at your suggestion. I just finished Paul Volkers last book, and am currently reading the Fourth Turning, which is about the cycles of history. IMO this book aligns with Ray Dalio's thought process on debt cycles. Both will provoke thoughts and could bias you regarding tough times a coming. But I try to keep the tin foil hat in the basement, most of the time :-)
Links to the 3 books: viewtopic.php?p=5372762#p5372762
User avatar
simplesimon
Posts: 3926
Joined: Mon Feb 25, 2008 8:53 pm

Re: Bonds worth it?

Post by simplesimon »

frankie1800 wrote: Thu Jul 23, 2020 7:46 pm Thank you for this analysis nisiprius. Obviously, nobody can predict interest rates and where they will go. With that being said, it is hard to see them going up with all the fed interaction. I guess my true concern with bonds is the currency risk. What if rates continue to slide? what if they go negative? what if they go negative in an environment of massive stimulus and money printing? why would i want to hod debt in a currency that's depreciating paying little to no interest with a tax responsibility on top of that? I know there are a lot of what ifs in this and I am usually wrong about my predictions so i must concede that and therefore, I have been somewhat using a three fund portfolio (or there about) since I found Bogleheads and have not changed but am looking more closely at my allocation these days and am simply uncomfortable with the fact that I don't simply have a fixed plan that I can simply stick to and not think about. I mean, to me, that's the goal.
I don't quite understand the hand wringing around bonds when you're so comfortable with the stock portion of your portfolio. What do you think stocks will be doing under the scenario you describe? What do you think BND will be worth if rates continue to go down?

I also don't understand this concern about taxes. How much tax do you think you're paying on a bond that pays little to no interest? Or do you mean all those capital gains you'll be paying from bond price appreciation?
User avatar
ruralavalon
Posts: 19417
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Bonds worth it?

Post by ruralavalon »

frankie1800 wrote: Thu Jul 23, 2020 7:53 pm
hudson wrote: Thu Jul 23, 2020 6:24 pm
frankie1800 wrote: Thu Jul 23, 2020 10:51 am What is the case for bonds in the future? If the yield is going to zero combined with taxes and the potential of inflation due to an unprecedented amount of press printing causing a real return of negative something, what is the case? Safety? Is this just where we are now? Accept a negative return on bonds because the return on cash will be more negative? Are TIPS the best bet now for bonds?

I have been struggling with where to put fixed income. Obviously from my above statement, I am not bullish on bonds for the future. But I don't want to chase yield increasing my risk either.

Obviously total bond is a big part of boglehead philosophy and I do hold total bond as a part of my fixed income but wondering if anyone out here is pondering a change due to recent events and the continued slide in yields.
Random thoughts....
I'm not concerned about the future of bonds as I have no control over that.
I'm 100% fixed... roughly 90% CDs and 10% intermediate muni fund.
I have no plans to move out of fixed income.
When I have money to invest, I just go for the best deal available. I would like to tie or beat inflation, but again I go for the best available.
If I needed to invest money today, I'd likely go for a 3-5 year CD, high yield savings, or an intermediate muni fund like VWIUX or BMBIX.
I'm looking at a move to either TIPs funds or buying individual TIPS in a ladder in a few years.
Total Bond: I have a minor holding; I doubt if I would ever consider it for a major holding....but I wouldn't rule it out.
SPIAs and deferred annuities don't fit my present situation. I think their safety is roughly equivalent to investment grade corporates; I prefer something safer.

Bottom Line: I vote for safe fixed income; it's nice to tie or beat inflation.

Frankie1800, Have you read Swedroe's bond book or Bernstein's Four Pillars/Ages of the Investor?
Thank you for your thoughts on fixed hudson. I am thinking along similar lines currently. I have not read these books but have written them down for the potential future at your suggestion. I just finished Paul Volkers last book, and am currently reading the Fourth Turning, which is about the cycles of history. IMO this book aligns with Ray Dalio's thought process on debt cycles. Both will provoke thoughts and could bias you regarding tough times a coming. But I try to keep the tin foil hat in the basement, most of the time :-)
I second the suggestion for reading:
1) Larry Swedroe, The Only Guide to a Winning Bond Strategy You'll Ever Need: . . . .;
2) William Bernstein, The Four Pillars of Investing: . . . .; and
3) Willima Bernstein, The Ages of the Investor: . . . .

And lose the tin foil hat :) .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
User avatar
vineviz
Posts: 7810
Joined: Tue May 15, 2018 1:55 pm

Re: Bonds worth it?

Post by vineviz »

frankie1800 wrote: Thu Jul 23, 2020 7:46 pm Thank you for this analysis nisiprius. Obviously, nobody can predict interest rates and where they will go. With that being said, it is hard to see them going up with all the fed interaction.
The thing is, though, that if you're trying to be a bond market timer that it's not sufficient to predict the direction that future yields will move. Rather, you have to make a BETTER prediction than every other market participant.

What do you know about the Fed's intentions, or currency movements, that a world full of other people (many of whom likely have better training than you and more capital to deploy than you) doesn't already know?

I'm betting the answer is "not much", because that is the answer for pretty much everyone.

So don't play a game in which the odds are stacked against you.

Use your risk tolerance and retirement funding ratio to choose an equity/fixed income allocation. Match the duration of your fixed income to your investment time horizon. Implement both of those decisions using low-cost passive funds and then go play golf, or pickleball, or do a jigsaw puzzle.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Bonds worth it?

Post by Steve Reading »

nisiprius wrote: Thu Jul 23, 2020 5:58 pm I think a lot of talking heads are either talking nonsense, or talking about something different from, and irrelevant to bond funds like the Vanguard Total Bond Market Index Fund and similar core bond funds.

The first post I can remember seeing in the forum advising against Total Bond on the basis that "interest rates can only go up" was made on July 19th, 2009. $10,000 invested in the Vanguard Total Bond Market Index Fund on July 19th 2009 would, today, have grown to $15,663, for an average annual return (CAGR) of 4.16%, handily beating inflation.

Image

In the eleven years since that posting, there has been a constant stream of commentary in the forum and elsewhere saying that regardless of how much money Total Bond had made up to that point, it was "now" pointless to invest in it, and mathematically impossible for it to be a good investment.
Lol, Nisi, read the thread you posted. The Total Bond Market Index Fund had, at the time, a yield of 4% (third poster says so). Then, over the following decade, this Intermediate-term fund returned... 4.16%. Umhhh.

Right now, it has a yield of 1.2%. It is unrealistic to expect this fund to return much more than that over the following decade.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
whereskyle
Posts: 1252
Joined: Wed Jan 29, 2020 10:29 am

Re: Bonds worth it?

Post by whereskyle »

frankie1800 wrote: Thu Jul 23, 2020 10:51 am What is the case for bonds in the future? If the yield is going to zero combined with taxes and the potential of inflation due to an unprecedented amount of press printing causing a real return of negative something, what is the case? Safety? Is this just where we are now? Accept a negative return on bonds because the return on cash will be more negative? Are TIPS the best bet now for bonds?

I have been struggling with where to put fixed income. Obviously from my above statement, I am not bullish on bonds for the future. But I don't want to chase yield increasing my risk either.

Obviously total bond is a big part of boglehead philosophy and I do hold total bond as a part of my fixed income but wondering if anyone out here is pondering a change due to recent events and the continued slide in yields.
BNDX, the etf tracking the ex-us bond market, with heavy weightings in the zero-to-negative-yield Japanese and European bond markets, has returned 4.6% annually since its inception in 2014. Nobody knows nothing, and yield does not tell the whole story. So that you do not disappoint yourself, go ahead and assume that you will receive nothing but the yield (even though total bond return is typically higher), just as you should assume a lower-than-average return from stocks, say, 7% nominal, even though the returns are typically higher. Plan conservatively to avoid disappointment and increase happiness when your portfolio outperforms your minimal expectations.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Bonds worth it?

Post by Steve Reading »

whereskyle wrote: Fri Jul 24, 2020 10:36 am BNDX, the etf tracking the ex-us bond market, with heavy weightings in the zero-to-negative-yield Japanese and European bond markets, has returned 4.6% annually since its inception in 2014. Nobody knows nothing, and yield does not tell the whole story.
You're missing the important hedging return, which should make dollar bonds and japanese dollar-hedged bonds similarly profitable (otherwise, there's a clear arbitrage opportunity). It's not surprising at all that BNDX returned 4.6% since inception; BND returned 4.2%, very close indeed.

If you want to estimate the future returns of an international bond fund, don't look at the yields. Look for a US bond fund with similar duration and credit quality. And then estimate the returns for that one (maybe add about 0.5% for a roll return).
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
User avatar
nisiprius
Advisory Board
Posts: 41956
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bonds worth it?

Post by nisiprius »

Steve Reading wrote: Fri Jul 24, 2020 10:29 am...Right now, it has a yield of 1.2%. It is unrealistic to expect this fund to return much more than that over the following decade...
Whatever. I have no particular problem with a return of 1.2%, if, hypothetically, bank accounts are returning 0.05% and stocks are returning 5%. 1.2% is not at all the same thing as "negative." People keep casually flinging dismissive remarks about "bonds returning zero" and "interest rates going negative."

The return has not been constant nor do I expect it to be. What has been constant is the unreliability of everything experts have said would happen, relative to what actually did happen.

I am going to make a P * R * E * D * I * C * T * I * O * N. Vanguard says Total Bond "may be appropriate for investors with medium-term investment horizons (4 to 10 years)." The midpoint of 4-10 years is 7 years. My prediction is that $10,000 invested in Total Bond today will be more than $10,000 in 2027. Not negative return. Not zero return. If it is $10,870 then you and I will both have been right. If a bank account, over the same period of time, grows to $10,035 minus $8.95/month in account maintenance fees, then $10,870 won't even look bad.

I don't mean for anyone to draw a straight line down the center of that curve and expect that to go on happening. What I mean for people to see is what the Great American Bond Bubble in 2010 and its collapse in 2011 actually amounted to.
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.
hudson
Posts: 3232
Joined: Fri Apr 06, 2007 9:15 am

Re: Bonds worth it?

Post by hudson »

Steve Reading wrote: Fri Jul 24, 2020 10:29 am Right now, it has a yield of 1.2%.
Agree...SEC Yield for VBTLX is 1.2%
July 1st Distribution Yield was 2.28%

BND SEC is 1.22%
TTM is 2.43% (https://www.investopedia.com/terms/t/ttm.asp)
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Bonds worth it?

Post by Steve Reading »

nisiprius wrote: Fri Jul 24, 2020 11:40 am
Steve Reading wrote: Fri Jul 24, 2020 10:29 am...Right now, it has a yield of 1.2%. It is unrealistic to expect this fund to return much more than that over the following decade...
Whatever. I have no particular problem with a return of 1.2%
I do, since right now you can get yourself an FDIC-insured savings account with an identical yield. You take on zero volatility and zero credit risk. You imply that "in the past, I've heard the argument that BND was a bad idea a decade ago... now I hear it again. Why should I listen?". Well because it really IS different now that one decade ago. I don't think HY accounts and CDs had 4% rates a decade ago (although if they did, then the arguments against BND and for those apply too).
nisiprius wrote: Fri Jul 24, 2020 11:40 am People keep casually flinging dismissive remarks about "bonds returning zero" and "interest rates going negative."
I can't comment on rates going negative. But some bonds are going to return very nearly zero. Not intermediate-term bond funds with credit risk. Those might return around 1.2%.
This isn't a "casually flung" argument. It's reality. If you think a fund like, say, SHV, with a YTM of 0.13% and an ER of 0.15%, is going to return much more than zero, then I think you're wrong. I don't mean you specifically, I mean you as in "in general".
nisiprius wrote: Fri Jul 24, 2020 11:40 am What has been constant is the unreliability of everything experts have said would happen, relative to what actually did happen.
Probably because you're listening to the wrong "experts". Why are you listening to Prof. Siegel? The guy recommends dividend stocks for retiree portfolios for income. Just forget it, I know he's wrong without even waiting for years to go by to notice it.

Any reasonable investor would have looked at BND's yield of ~4% in 2009, and estimated it would return about that much. And it did.
nisiprius wrote: Fri Jul 24, 2020 11:40 am I am going to make a P * R * E * D * I * C * T * I * O * N. Vanguard says Total Bond "may be appropriate for investors with medium-term investment horizons (4 to 10 years)." The midpoint of 4-10 years is 7 years. My prediction is that $10,000 invested in Total Bond today will be more than $10,000 in 2027. Not negative return. Not zero return. If it is $10,870 then you and I will both have been right. If a bank account, over the same period of time, grows to $10,035 minus $8.95/month in account maintenance fees, then $10,870 won't even look bad.
Evidently, for those who are willing to take on term premium and credit risk, it looks like you'll get a tiny reward. Not sure why you'd do that with CDs and HY savings accounts yielding as much but be my guest.

My problem with your post is that you took an asset class (BND), took some "expert" prediction of its returns that deviated significantly from fundamentals, showed it was wrong because BND returned what fundamentals say, and then extrapolate that to this mentality of "all experts are always wrong". Here's a better conclusion: look at fundamentals. For bonds, it will probably be close to future returns.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
LeftCoastIV
Posts: 206
Joined: Wed May 01, 2019 7:19 pm

Re: Bonds worth it?

Post by LeftCoastIV »

This thread resonates with me, as we have a significant sum of money (7 figures) in taxable accounts in a mix of CDs, HYS, and in some cases just checking accounts, with an overall average yield of 0.43% BEFORE taxes. We are in the 37% marginal bracket, so after taxes the average yield is 0.27%. That's better than zero or negative, and much of it is FDIC insured, but still not a great long-term plan.

My current thinking is to put the money into a mix of Vanguard muni bond funds of varying average durations (from 1.5 years average, to 13.7 years average maturity on the high end), to protect the income from federal income taxes. We have no state income tax.

But... with the economic situation and the financial pressures faced by state and local governments, potential default rates on muni bonds are worrisome. That said, the Vanguard muni bond funds have anywhere from 3,000 to 10,000 bonds per fund, so perhaps I'm being too nervous about the risk of defaults. I would love an opinion on this.
User avatar
vineviz
Posts: 7810
Joined: Tue May 15, 2018 1:55 pm

Re: Bonds worth it?

Post by vineviz »

Steve Reading wrote: Fri Jul 24, 2020 12:02 pm
Evidently, for those who are willing to take on term premium and credit risk, it looks like you'll get a tiny reward. Not sure why you'd do that with CDs and HY savings accounts yielding as much but be my guest.
I think part of the confusion is that I think you may be looking at interest rate risk backwards.

Assuming the investor's time horizon is measured in years and not months, the investor is taking on more interest rate risk with the CDs and HY savings accounts than with the intermediate term bond fund. The dispersion in REAL terminal wealth is lower with the bond fund, and that's partly why banks are induced to offer higher yields on cash instruments (CDs & HY savings) than the market prices into bonds.

That's obviously not the entire reason: not all market participants view CDs and HY savings accounts as substitutes for bonds, so individual investors probably can take advantage - to some degree - of market "inefficiency".

But if we're assuming no shift in the yield curve when setting expectations for bond returns we obviously should do the same when setting expectations on CD and HY savings rates. Banks tend to be slow to reduce yields in response to market conditions, but it's not prudent to assume that the spread between CD rates and the yields on marketable bonds will last forever.

While there are decent yields to be found at some online banks etc., the average 5-year CD rate at the ten largest banks in the U.S. is just 0.2%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Bonds worth it?

Post by Steve Reading »

vineviz wrote: Fri Jul 24, 2020 2:07 pm
Steve Reading wrote: Fri Jul 24, 2020 12:02 pm
Evidently, for those who are willing to take on term premium and credit risk, it looks like you'll get a tiny reward. Not sure why you'd do that with CDs and HY savings accounts yielding as much but be my guest.
I think part of the confusion is that I think you may be looking at interest rate risk backwards.

Assuming the investor's time horizon is measured in years and not months, the investor is taking on more interest rate risk with the CDs and HY savings accounts than with the intermediate term bond fund. The dispersion in REAL terminal wealth is lower with the bond fund, and that's partly why banks are induced to offer higher yields on cash instruments (CDs & HY savings) than the market prices into bonds.

That's obviously not the entire reason: not all market participants view CDs and HY savings accounts as substitutes for bonds, so individual investors probably can take advantage - to some degree - of market "inefficiency".

But if we're assuming no shift in the yield curve when setting expectations for bond returns we obviously should do the same when setting expectations on CD and HY savings rates. Banks tend to be slow to reduce yields in response to market conditions, but it's not prudent to assume that the spread between CD rates and the yields on marketable bonds will last forever.

While there are decent yields to be found at some online banks etc., the average 5-year CD rate at the ten largest banks in the U.S. is just 0.2%.
Duration-matching is part of the consideration and I find it rather rude that you think I don't understand this well after countless threads where I've literally echoed this.

My point is that Nisi is only comparing BND vs cash on the basis on returns. His only point is that BND is still worthwhile because it returns more than cash. Not because it matches his horizon. Because it produces more than cash. He's not making any consideration of duration-matching and eliminating interest rate risk. To the extent you don't, then clearly HY savings accounts are superior because of zero credit risk. Which is my point.

Now IF your horizon is to be considered (which wasn't in this thread, but I agree it should), then I see a reason for BND. It's not a freebie, to be clear, because while it takes less interest rate risk, it takes on more credit risk for no added return vs HY savings. So everyone will have to choose. Personally, I would pick a HY savings account over BND even if my horizon is 7 years. Yeah, I'm taking on reinvestment risk that I'm not paid to take. But then I also avoid credit risk that I wasn't going to be compensated for. But others will choose something else. A 7-year treasury bond fund isn't also a freebie either. Yes, it has no interest risk again, but maybe you are willing to take that reinvestment risk because the 1.2% HY savings rate right now worth that reinvestment risk over the 0.5% or so you'd get from IT treasuries.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
hudson
Posts: 3232
Joined: Fri Apr 06, 2007 9:15 am

Re: Bonds worth it?

Post by hudson »

LeftCoastIV wrote: Fri Jul 24, 2020 1:17 pm the Vanguard muni bond funds have anywhere from 3,000 to 10,000 bonds per fund, so perhaps I'm being too nervous about the risk of defaults. I would love an opinion on this.
Bill Bernstein: "There's nothing wrong with having some municipals and corporates, but you can't count on them during periods when you're going to need capital the most. You always want to be sure there are plenty of T's and CDs in front of them."

viewtopic.php?p=5160087#p5160087

Larry Swedroe in his bond book: He would probably say stick with AAA/AA munis.
For me, AAA/AA/A muni funds are good enough....like Vanguard's intermediate muni VWIUX... or Baird's BMBIX....which is AAA/AA
Post Reply