Bonds worth it?

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palanzo
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Re: Bonds worth it?

Post by palanzo »

Thereum wrote: Sat Jul 25, 2020 10:55 pm The biggest potential advantage of bonds right now, particularly long term treasuries, is that they are probably going to continue to show a negative correlation with US equities. This means they essentially serve as a type of put option, which will reduce portfolio volatility and improve risk-adjusted returns. With regular rebalancing, you will be continually buying the cheaper asset.

A lot of the benefits of bonds are relevant to leveraged investors. If you are strictly a cash-based investor, it might be easier to go 100% equities, as risk-adjusted returns aren't going to be your primary concern.

In summary, my recommendation is to hold onto some long term treasuries for the negative correlation with US equities, particularly if you employ leverage. All other bonds are not worth holding because they have poor yields and do not offer protection against declines in the US equities market.
IT Treasuries definitely do offer protection against declines in US equities. Bill Bernstein would not agree with you, I think.
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simplesimon
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Re: Bonds worth it?

Post by simplesimon »

SantaClaraSurfer wrote: Sat Jul 25, 2020 9:32 pm
simplesimon wrote: Sat Jul 25, 2020 7:14 pm You only get the 3.5% rate if you hold it the full 20 years. Hold it for 19 years and sell and you get almost no return at all.
Hold EE Bonds for 15 years and you'd have to find an investment that would guarantee you 12.25% to make it worth cashing your EE Bond out early, and at 19 years that number is 42%.

It's funny to me with so much discussion that bonds won't be worth it the next half-decade, doesn't that make the case for EE bonds all that much stronger? If you buy an EE Bond today, with rates universally low, in 6 short years you'd have to find a competing investment that would pay 4.73% over the following 14 years guaranteed to make it worth selling your EE Bond early.
Good points, so even if there was rampant inflation, you likely wouldn’t sell anyways. I was responding to your last comment about selling.
hudson
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Re: Bonds worth it?

Post by hudson »

Trader Joe wrote: Sat Jul 25, 2020 9:40 pm "Bonds worth it?"
No, bonds are not worth it in today's environment.
Trader Joe,
I agree, today's interest rates aren't attractive.
If bonds don't work, where do you invest? What's the alternative?
Do you go all equities? Do you invest in rental houses? Do you start a business? Do you dump it all in high yield savings?
Risky fixed income doesn't sound attractive.
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Re: Bonds worth it?

Post by Call_Me_Op »

vineviz wrote: Sat Jul 25, 2020 3:08 pm
flaccidsteele wrote: Sat Jul 25, 2020 2:58 pm Cash is enough diversification for me
Cash is not a diversifying asset at all.
That sounds like a technically based upon the way you are defining the terms. Bottom line is when all hell is breaking loose, I am very happy to be holding a big chunk of cash.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Bonds worth it?

Post by Call_Me_Op »

Trader Joe wrote: Sat Jul 25, 2020 9:40 pm "Bonds worth it?"

No, bonds are not worth it in today's environment.
Depends upon what you mean by bond. Are you including CDs? They are a type of bond - or certainly a fixed-income investment. If you think fixed-income isn't worth it, what is the alternative?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Nowizard
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Re: Bonds worth it?

Post by Nowizard »

The recent threads asking how to best invest in bonds reflects the complexity of that market and the interaction of portfolio safety and investment returns. This is a point in time, and for long term investors who focus on the Stay the Course approach, it is a significant issue at the moment. Some would say it is "noise" and to stay with what your overall plan or recognize that you are ultimately on your own since recommendations are so varied. Our decision is that based on the confusion of ourselves and more analytical investors, we are doing nothing and staying with Total Bond and smaller allocations to shorter bond funds. So, yes, they are worth it for us, but we are not pleased with the uncertainties.

Tim
KlangFool
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Re: Bonds worth it?

Post by KlangFool »

Trader Joe wrote: Sat Jul 25, 2020 9:40 pm "Bonds worth it?"

No, bonds are not worth it in today's environment.
My family member worked on Wall Street. He earned 7 figures in annual salary and bonuses. He underwrote billions in bonds. So, he knows bonds and interest rates very well.

He lost 10 million in Telecom Bust.

Nobody knows nothing.

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Re: Bonds worth it?

Post by Angst »

simplesimon wrote: Sun Jul 26, 2020 5:02 am
SantaClaraSurfer wrote: Sat Jul 25, 2020 9:32 pm
simplesimon wrote: Sat Jul 25, 2020 7:14 pm You only get the 3.5% rate if you hold it the full 20 years. Hold it for 19 years and sell and you get almost no return at all.
Hold EE Bonds for 15 years and you'd have to find an investment that would guarantee you 12.25% to make it worth cashing your EE Bond out early, and at 19 years that number is 42%.

It's funny to me with so much discussion that bonds won't be worth it the next half-decade, doesn't that make the case for EE bonds all that much stronger? If you buy an EE Bond today, with rates universally low, in 6 short years you'd have to find a competing investment that would pay 4.73% over the following 14 years guaranteed to make it worth selling your EE Bond early.
Good points, so even if there was rampant inflation, you likely wouldn’t sell anyways. I was responding to your last comment about selling.
Here's a chart I made to help decide if it's time to sell or stay the course with one's EE savings bonds:

Code: Select all

For an EE Bond Purchased in 2020

Year    YTM   Yrs left
2020    3.53%    20
2021    3.72%    19
2022    3.93%    18
2023    4.16%    17
2024    4.43%    16
2025    4.73%    15
2026    5.08%    14
2027    5.48%    13
2028    5.95%    12
2029    6.50%    11
2030    7.18%    10
2031    8.01%     9
2032    9.05%     8
2033   10.41%     7
2034   12.25%     6
2035   14.87%     5
2036   18.92%     4
2037   25.99%     3
2038   42.42%     2
2039  100.00%     1
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simplesimon
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Re: Bonds worth it?

Post by simplesimon »

Angst wrote: Sun Jul 26, 2020 8:34 am
Here's a chart I made to help decide if it's time to sell or stay the course with one's EE savings bonds:
The cost of liquidity, so to speak.
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vineviz
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Re: Bonds worth it?

Post by vineviz »

Call_Me_Op wrote: Sun Jul 26, 2020 7:08 am
Cash is not a diversifying asset at all.
That sounds like a technically based upon the way you are defining the terms. [/quote]

It sort of is. I mean, it’s no “me” defining the terms: the definitions are what they are.

The diversification potential that exists between two assets is a function of their correlation coefficient (i.e “1 - ρxy”) and their relative variances (i.e. “var(a)/var(b)”). If either of the assets has a variance of zero, or the correlation coefficient is one, the product is zero.
Call_Me_Op wrote: Sun Jul 26, 2020 7:08 am
Bottom line is when all h*ll is breaking loose, I am very happy to be holding a big chunk of cash.
No doubt, because cash is an effective asset in terms of de-risking a portfolio.

However, a powerful diversifier would presumably make you even happier: something with high variance that is poorly (or even negatively) correlated with the parts of your portfolio that are going to h*ll.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
dbr
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Re: Bonds worth it?

Post by dbr »

Yep, the person asking the question has to decide if they are trying to improve the efficiency of the portfolio or if they are trying to make a large reduction in risk at the inevitable cost in return. An example is that a person might pair a large investment in stocks with long bonds for best diversification but that portfolio is still highly risky. That investor might reduce risk by shifting from 80/20 to 20/80 and probably not with long bonds if they wanted to move to the other extreme of risk. I have no idea if there really even is a "best" diversification around 50/50 allowing for some adjustment in stock allocation to set a return or risk target. (People often make an unfair comparison in changing bonds around but then don't compare at exactly the same risk or return target by also adjusting stocks a little bit.)
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Re: Bonds worth it?

Post by AerialWombat »

All these recent threads questioning cash and bonds is kind of confusing to me.

When I first came to BH in 2018, I read much of the Wiki, and read many other threads about asset allocation and portfolio design. Everything said that "bonds are for safety", and that one should critically assess their "need, willingness, and ability" to take risk. And let's not forget the classic "take your risk in equities".

The principles that one incorporates into their investing strategy need to remain true, regardless of market conditions. That's one of the most important things I've learned from this forum.

This is my first downturn/recession as a member of the "investor class". While I'm a wee bit of an admitted "yield chaser", I have been since I really started investing in publicly traded securities in 2018. My primary goal is still capital preservation, which my 30/70 AA attests to. My mix of HYS, CDs, corporate bonds in Wellesley, and muni bond funds in taxable all correlate to my stated goals.

Cash, bonds, and other fixed income securities are absolutely worth it, if they have a role in your portfolio. Interest rates, yields, bond prices have no bearing on the decision to hold fixed income or not.
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Re: Bonds worth it?

Post by KlangFool »

AerialWombat wrote: Sun Jul 26, 2020 10:45 am All these recent threads questioning cash and bonds is kind of confusing to me.

When I first came to BH in 2018, I read much of the Wiki, and read many other threads about asset allocation and portfolio design. Everything said that "bonds are for safety", and that one should critically assess their "need, willingness, and ability" to take risk. And let's not forget the classic "take your risk in equities".

The principles that one incorporates into their investing strategy need to remain true, regardless of market conditions. That's one of the most important things I've learned from this forum.

This is my first downturn/recession as a member of the "investor class". While I'm a wee bit of an admitted "yield chaser", I have been since I really started investing in publicly traded securities in 2018. My primary goal is still capital preservation, which my 30/70 AA attests to. My mix of HYS, CDs, corporate bonds in Wellesley, and muni bond funds in taxable all correlate to my stated goals.

Cash, bonds, and other fixed income securities are absolutely worth it, if they have a role in your portfolio. Interest rates, yields, bond prices have no bearing on the decision to hold fixed income or not.
AerialWombat,

It is not confusing.

I know that I know nothing. I believe in diversification in order to protect myself from my own ignorance. Meanwhile, many folks believe that they are smart enough to pick the right asset class that will do well this time.

It is very hard to accept that you know nothing.

KlangFool
Last edited by KlangFool on Sun Jul 26, 2020 11:39 am, edited 1 time in total.
palanzo
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Re: Bonds worth it?

Post by palanzo »

vineviz wrote: Sun Jul 26, 2020 10:16 am It sort of is. I mean, it’s no “me” defining the terms: the definitions are what they are.

The diversification potential that exists between two assets is a function of their correlation coefficient (i.e “1 - ρxy”) and their relative variances (i.e. “var(a)/var(b)”). If either of the assets has a variance of zero, or the correlation coefficient is one, the product is zero.
You may be correct but you are applying mathematics to finance which is not a science.
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Re: Bonds worth it?

Post by abuss368 »

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.
Inflation never appeared during the financial crisis despite many folks thinking it would rear its ugly head.
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palanzo
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Re: Bonds worth it?

Post by palanzo »

KlangFool wrote: Sun Jul 26, 2020 8:07 am
Trader Joe wrote: Sat Jul 25, 2020 9:40 pm "Bonds worth it?"

No, bonds are not worth it in today's environment.
My family member worked on Wall Street. He earned 7 figures in annual salary and bonuses. He underwrote billions in bonds. So, he knows bonds and interest rates very well.

He lost 10 million in Telecom Bust.

Nobody knows nothing.

KlangFool
10 million in bonds?
palanzo
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Re: Bonds worth it?

Post by palanzo »

KlangFool wrote: Sun Jul 26, 2020 11:14 am
AerialWombat wrote: Sun Jul 26, 2020 10:45 am All these recent threads questioning cash and bonds is kind of confusing to me.

When I first came to BH in 2018, I read much of the Wiki, and read many other threads about asset allocation and portfolio design. Everything said that "bonds are for safety", and that one should critically assess their "need, willingness, and ability" to take risk. And let's not forget the classic "take your risk in equities".

The principles that one incorporates into their investing strategy need to remain true, regardless of market conditions. That's one of the most important things I've learned from this forum.

This is my first downturn/recession as a member of the "investor class". While I'm a wee bit of an admitted "yield chaser", I have been since I really started investing in publicly traded securities in 2018. My primary goal is still capital preservation, which my 30/70 AA attests to. My mix of HYS, CDs, corporate bonds in Wellesley, and muni bond funds in taxable all correlate to my stated goals.

Cash, bonds, and other fixed income securities are absolutely worth it, if they have a role in your portfolio. Interest rates, yields, bond prices have no bearing on the decision to hold fixed income or not.
AerialWombat,

It is not confusing.

I know that I know nothing. I believe in diversification in order to protect myself from my own ignorance. Meanwhile, many folks believe that they are smart enough to pick the right asset class that will do well this time.

It is very hard to know that you know nothing.

KlangFool
It is very hard to know that you know nothing.

That is so true in all walks of life.
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abuss368
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Re: Bonds worth it?

Post by abuss368 »

Vanguard investment experts have not recommended TIPS except in the Target funds close to retirement. They still recommend a two fund bond strategy of Total Bond and Total International Bond.

Keep investing simple and tune out the market noise.
John C. Bogle: “Simplicity is the master key to financial success."
KlangFool
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Re: Bonds worth it?

Post by KlangFool »

palanzo wrote: Sun Jul 26, 2020 11:25 am
KlangFool wrote: Sun Jul 26, 2020 8:07 am
Trader Joe wrote: Sat Jul 25, 2020 9:40 pm "Bonds worth it?"

No, bonds are not worth it in today's environment.
My family member worked on Wall Street. He earned 7 figures in annual salary and bonuses. He underwrote billions in bonds. So, he knows bonds and interest rates very well.

He lost 10 million in Telecom Bust.

Nobody knows nothing.

KlangFool
10 million in bonds?
Stock.

KlangFool
hudson
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Re: Bonds worth it?

Post by hudson »

AerialWombat wrote: Sun Jul 26, 2020 10:45 am All these recent threads questioning cash and bonds is kind of confusing to me.

When I first came to BH in 2018, I read much of the Wiki, and read many other threads about asset allocation and portfolio design. Everything said that "bonds are for safety", and that one should critically assess their "need, willingness, and ability" to take risk. And let's not forget the classic "take your risk in equities".

The principles that one incorporates into their investing strategy need to remain true, regardless of market conditions. That's one of the most important things I've learned from this forum.

This is my first downturn/recession as a member of the "investor class". While I'm a wee bit of an admitted "yield chaser", I have been since I really started investing in publicly traded securities in 2018. My primary goal is still capital preservation, which my 30/70 AA attests to. My mix of HYS, CDs, corporate bonds in Wellesley, and muni bond funds in taxable all correlate to my stated goals.

Cash, bonds, and other fixed income securities are absolutely worth it, if they have a role in your portfolio. Interest rates, yields, bond prices have no bearing on the decision to hold fixed income or not.
A 30/70 AA is good!
I think that I agree with all that you said... but it all depends.
As a 100% fixed investor (ever since 2008), I really pay attention to interest rates, distribution yields, and bond prices.
I take no risk on the equity side. I also try not to take much risk on the fixed side.
sycamore
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Re: Bonds worth it?

Post by sycamore »

SantaClaraSurfer wrote: Sat Jul 25, 2020 9:44 pm
000 wrote: Sat Jul 25, 2020 9:34 pm Great points. I had never looked at EE bonds from this perspective before. I suspect many will still dislike the feeling of being "locked in".
Thanks, I thought that, too, but experienced people here kept telling me to take a look at those numbers.

Then it clicked that EE Bonds are great if you've got 20 years till retirement.
Good points on EE bonds.

They're also great even if retirement is closer in - say you're 55 now, retire in 10 years, you've got 65-75 spending already covered and want to cover spending when you're 75+.
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vineviz
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Re: Bonds worth it?

Post by vineviz »

palanzo wrote: Sun Jul 26, 2020 11:23 am You may be correct but you are applying mathematics to finance which is not a science.
Even if it were true that finance “is not a science” (and it’s quite obviously not true) this statement is a complete non-sequitur: mathematics is no more a “science” than economics is, and in any case the computation of portfolio variance is entirely a mathematical computation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Bonds worth it?

Post by aj76er »

vineviz wrote: Sat Jul 25, 2020 8:48 pm
palanzo wrote: Sat Jul 25, 2020 8:26 pm So where did the 4.6% come from if the yields are zero-to-negative?
BNDX is a currency-hedged international bond fund. One of the reasons that many International bond markets have negative yields is because of the relationship between their currency and the US dollar. Hedging the currency assures US investors that they receive a total return the is the sum of the bond yield and the currency appreciation/depreciation.


https://institutional.vanguard.com/VGAp ... neGlobalBd


One last question: We know that a globally diversified bond allocation can help reduce volatility through exposure to more securities, markets, and economic and inflation environments than you'd have if you invested only in your home fixed income market. But if it means investing in bond markets where rates are negative, is the diversification benefit worth it?

Ms. Wright-Casparius:
If you're hedging your international bond allocation so that currency volatility doesn't overwhelm the diversification advantage that international bonds can bring, you'll actually have two return streams: the income return from the underlying bonds and a hedge return.¹ As the hedge return adjusts for fundamental differences across markets, mainly interest rates and inflation, it effectively pushes total return on hedged international bonds closer to what investors would earn in their domestic bond market.
Does the “hedge return” always manifest as a capital appreciation (rather than yield) of the bond fund?
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vineviz
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Re: Bonds worth it?

Post by vineviz »

aj76er wrote: Sun Jul 26, 2020 12:39 pm
Does the “hedge return” always manifest as a capital appreciation (rather than yield) of the bond fund?
I’d have to consider whether “always” is something I’m comfortable confirming, but basically yes.

The published SEC yield doesn’t account for the hedge return, so this is the exception to the rule that fund yield is a reliable estimate of expected return.

Fund profits from currency hedging would should up for investors as a capital gains distribution I think, but maybe the rules are that they are rolled into “dividends”.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
retired@50
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Re: Bonds worth it?

Post by retired@50 »

vineviz wrote: Sun Jul 26, 2020 1:20 pm
aj76er wrote: Sun Jul 26, 2020 12:39 pm
Does the “hedge return” always manifest as a capital appreciation (rather than yield) of the bond fund?
I’d have to consider whether “always” is something I’m comfortable confirming, but basically yes.

The published SEC yield doesn’t account for the hedge return, so this is the exception to the rule that fund yield is a reliable estimate of expected return.

Fund profits from currency hedging would should up for investors as a capital gains distribution in every scenario I can think of.
The Vanguard International Bond Index fund (VTABX) typically kicks out a larger than average monthly payout each December. See distributions tab in link below if you're curious to try and generate any sort of estimate. I know of no way to estimate a future payout.

https://investor.vanguard.com/mutual-fu ... ions/vtabx

Regards,
This is one person's opinion. Nothing more.
palanzo
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Re: Bonds worth it?

Post by palanzo »

vineviz wrote: Sun Jul 26, 2020 12:21 pm
palanzo wrote: Sun Jul 26, 2020 11:23 am You may be correct but you are applying mathematics to finance which is not a science.
Even if it were true that finance “is not a science” (and it’s quite obviously not true) this statement is a complete non-sequitur: mathematics is no more a “science” than economics is, and in any case the computation of portfolio variance is entirely a mathematical computation.
You're using mathematics to describe the behavior of financial instruments devised by humans and influenced by human behavior and whose characteristics can change quite quickly. Good luck.
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vineviz
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Re: Bonds worth it?

Post by vineviz »

palanzo wrote: Sun Jul 26, 2020 1:28 pm
You're using mathematics to describe the behavior of financial instruments devised by humans and influenced by human behavior and whose characteristics can change quite quickly. Good luck.
Whatever philosophical musings you conjure, the fact remains that solving a mathematical equation can only be done by using mathematics.

You don’t need to understand how to compute correlations and variances to be a successful investor, but don’t imagine that you can upend 60 years of financial economics without knowing the fundamentals.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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frankie1800
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Re: Bonds worth it?

Post by frankie1800 »

vineviz wrote: Sat Jul 25, 2020 3:08 pm
flaccidsteele wrote: Sat Jul 25, 2020 2:58 pm Cash is enough diversification for me
Cash is not a diversifying asset at all.
Cash is Trash! - (Dalio, 2019)
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Re: Bonds worth it?

Post by LeftCoastIV »

SantaClaraSurfer wrote: Sat Jul 25, 2020 9:32 pm
simplesimon wrote: Sat Jul 25, 2020 7:14 pm You only get the 3.5% rate if you hold it the full 20 years. Hold it for 19 years and sell and you get almost no return at all.
Hold EE Bonds for 15 years and you'd have to find an investment that would guarantee you 12.25% to make it worth cashing your EE Bond out early, and at 19 years that number is 42%.

It's funny to me with so much discussion that bonds won't be worth it the next half-decade, doesn't that make the case for EE bonds all that much stronger? If you buy an EE Bond today, with rates universally low, in 6 short years you'd have to find a competing investment that would pay 4.73% over the following 14 years guaranteed to make it worth selling your EE Bond early.
In a sense, you are being paid a premium to sacrifice liquidity. The money you put into EE bonds is then not available for rebalancing. It's essentially a "fixed" part of your fixed income allocation.
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frankie1800
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Re: Bonds worth it?

Post by frankie1800 »

Steve Reading wrote: Sat Jul 25, 2020 10:03 am
frankie1800 wrote: Sat Jul 25, 2020 1:59 am
Steve Reading wrote: Fri Jul 24, 2020 10:56 am
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 Steve, then based on this I would assume you don't put much emphasis on foreign bonds as a good diversifier for your fixed income allocation?
I don't hold any FI. But if I did, I would absolutely hold International bonds. The cost to diversify is basically nonexistent with the rock-bottom ER of BNDX, and the expected returns should be similar to BND. It's just a no-brainer IMO.
I have always thought the same. Can you explain the no-brainer part tho? My thought process is that I like the currency diversification that comes with owning total international in both the equity and bond aspects of my portfolio. I am concerned about the dollar and its status as the reserve currency. Past results do not guarantee future results but every country that had reserve status lost it. I don't expect the U.S. to be any different. But just like everything else, i can't time anything. It could be 100 more years!
kimura king
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Re: Bonds worth it?

Post by kimura king »

Dalio also says cash is trash, bonds are trash, equities are overpriced, and he recommends gold. If you buy gold right now you are buying high and it is pretty volatile to begin with. If you don't do cash, bonds or equities, I guess that leaves real estate or just not invest at all.

To answer the question, I think a lot of the people are here are quite wealthy with multi-million dollar porfolio's and have "won the game." They like bonds and they aren't wealth building since they are already wealthy. Other people seem to consider their portfolio an "emergency fund." I don't care that much if my portfolio goes down in a crash, I'm not managing millions of dollars here. I think some bonds to smooth things out and for a couple other reasons are good, say 10-25% bonds for those under 50 and 20-50% bonds for those over 50.

Also, long term bonds according to Buffet are a "horrible investment" right now. I think a small % in a bond index fund or short or intermediate term bonds can be good for peace of mind.
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vineviz
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Re: Bonds worth it?

Post by vineviz »

retired@50 wrote: Sun Jul 26, 2020 1:26 pm I know of no way to estimate a future payout.

I haven't tried to estimate a future payout, but in principle the expected return of a fund like BNDX would simply be the sum of the SEC yield (about 0.4% right now,) and the average yield on currency forward rates (which for the Euro right now is between 1.4% and 1.5%).

You'd have to weight the currency basket according to Vanguard's actual portfolio, but European bonds are about 60% of the portfolio so an expected return of 1.8% to 1.9% is probably in the ballpark. US bond fund only has a SEC yield of 1.2%, so the international bond expected return is maybe 50% greater than for US bonds.
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Steve Reading
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Re: Bonds worth it?

Post by Steve Reading »

frankie1800 wrote: Sun Jul 26, 2020 2:08 pm
Steve Reading wrote: Sat Jul 25, 2020 10:03 am
frankie1800 wrote: Sat Jul 25, 2020 1:59 am
Steve Reading wrote: Fri Jul 24, 2020 10:56 am
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 Steve, then based on this I would assume you don't put much emphasis on foreign bonds as a good diversifier for your fixed income allocation?
I don't hold any FI. But if I did, I would absolutely hold International bonds. The cost to diversify is basically nonexistent with the rock-bottom ER of BNDX, and the expected returns should be similar to BND. It's just a no-brainer IMO.
I have always thought the same. Can you explain the no-brainer part tho? My thought process is that I like the currency diversification that comes with owning total international in both the equity and bond aspects of my portfolio. I am concerned about the dollar and its status as the reserve currency. Past results do not guarantee future results but every country that had reserve status lost it. I don't expect the U.S. to be any different. But just like everything else, i can't time anything. It could be 100 more years!
BNDX has international bonds, yes, but they're hedged back to the US dollar so it offers no "currency diversification". It is like buying dollar-denominated foreign debt. I am a fan of currency diversification and would prefer a total International bond index fund that wasn't hedged but I don't know if any with rock-bottom fees like BNDX.

BNDX, coupled with BND, is a "no-brainer" because it just improves diversification. It's pretty marginal but the ER is so tiny and the effort to maintain two bond funds so little (IMO) that you're just better off doing it. I also think TSM is a no-brainer vs S&P 500. Or that a world equity fund is a no-brainer instead of just US stocks. Etc etc.
"... 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
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Re: Bonds worth it?

Post by 000 »

abuss368 wrote: Sun Jul 26, 2020 11:24 am Inflation never appeared during the financial crisis despite many folks thinking it would rear its ugly head.
Asset inflation absolutely appeared and has continued over the last 10+ years.
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Re: Bonds worth it?

Post by sycamore »

Steve Reading wrote: Sun Jul 26, 2020 2:31 pm ...
BNDX has international bonds, yes, but they're hedged back to the US dollar so it offers no "currency diversification". It is like buying dollar-denominated foreign debt. I am a fan of currency diversification and would prefer a total International bond index fund that wasn't hedged but I don't know if any with rock-bottom fees like BNDX.

BNDX, coupled with BND, is a "no-brainer" because it just improves diversification. It's pretty marginal but the ER is so tiny and the effort to maintain two bond funds so little (IMO) that you're just better off doing it. I also think TSM is a no-brainer vs S&P 500. Or that a world equity fund is a no-brainer instead of just US stocks. Etc etc.
And if one wants to use US + International bonds at capitalization weight, Vanguard does have a Total World Bond Index Fund BNDW. It's a fund of funds that holds BND + BNDX.
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Re: Bonds worth it?

Post by jason2459 »

Steve Reading wrote: Sun Jul 26, 2020 2:31 pm
frankie1800 wrote: Sun Jul 26, 2020 2:08 pm
Steve Reading wrote: Sat Jul 25, 2020 10:03 am
frankie1800 wrote: Sat Jul 25, 2020 1:59 am
Steve Reading wrote: Fri Jul 24, 2020 10:56 am

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 Steve, then based on this I would assume you don't put much emphasis on foreign bonds as a good diversifier for your fixed income allocation?
I don't hold any FI. But if I did, I would absolutely hold International bonds. The cost to diversify is basically nonexistent with the rock-bottom ER of BNDX, and the expected returns should be similar to BND. It's just a no-brainer IMO.
I have always thought the same. Can you explain the no-brainer part tho? My thought process is that I like the currency diversification that comes with owning total international in both the equity and bond aspects of my portfolio. I am concerned about the dollar and its status as the reserve currency. Past results do not guarantee future results but every country that had reserve status lost it. I don't expect the U.S. to be any different. But just like everything else, i can't time anything. It could be 100 more years!
BNDX has international bonds, yes, but they're hedged back to the US dollar so it offers no "currency diversification". It is like buying dollar-denominated foreign debt. I am a fan of currency diversification and would prefer a total International bond index fund that wasn't hedged but I don't know if any with rock-bottom fees like BNDX.

BNDX, coupled with BND, is a "no-brainer" because it just improves diversification. It's pretty marginal but the ER is so tiny and the effort to maintain two bond funds so little (IMO) that you're just better off doing it. I also think TSM is a no-brainer vs S&P 500. Or that a world equity fund is a no-brainer instead of just US stocks. Etc etc.
Would BNDW not be a good choice vs holding both bnd and bndx?

Edit: looks like sycamore posted about BNDW as well. Missed that post.
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Re: Bonds worth it?

Post by Steve Reading »

jason2459 wrote: Sun Jul 26, 2020 3:53 pm
Steve Reading wrote: Sun Jul 26, 2020 2:31 pm
frankie1800 wrote: Sun Jul 26, 2020 2:08 pm
Steve Reading wrote: Sat Jul 25, 2020 10:03 am
frankie1800 wrote: Sat Jul 25, 2020 1:59 am

So Steve, then based on this I would assume you don't put much emphasis on foreign bonds as a good diversifier for your fixed income allocation?
I don't hold any FI. But if I did, I would absolutely hold International bonds. The cost to diversify is basically nonexistent with the rock-bottom ER of BNDX, and the expected returns should be similar to BND. It's just a no-brainer IMO.
I have always thought the same. Can you explain the no-brainer part tho? My thought process is that I like the currency diversification that comes with owning total international in both the equity and bond aspects of my portfolio. I am concerned about the dollar and its status as the reserve currency. Past results do not guarantee future results but every country that had reserve status lost it. I don't expect the U.S. to be any different. But just like everything else, i can't time anything. It could be 100 more years!
BNDX has international bonds, yes, but they're hedged back to the US dollar so it offers no "currency diversification". It is like buying dollar-denominated foreign debt. I am a fan of currency diversification and would prefer a total International bond index fund that wasn't hedged but I don't know if any with rock-bottom fees like BNDX.

BNDX, coupled with BND, is a "no-brainer" because it just improves diversification. It's pretty marginal but the ER is so tiny and the effort to maintain two bond funds so little (IMO) that you're just better off doing it. I also think TSM is a no-brainer vs S&P 500. Or that a world equity fund is a no-brainer instead of just US stocks. Etc etc.
Would BNDW not be a good choice vs holding both bnd and bndx?

Edit: looks like sycamore posted about BNDW as well. Missed that post.
A perfectly acceptable choice. I don't know if 50/50 is your desired BND/BNDX spread but if it is, then BNDW does the job.
"... 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
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Re: Bonds worth it?

Post by spdoublebass »

LeftCoastIV wrote: Sun Jul 26, 2020 2:00 pm
SantaClaraSurfer wrote: Sat Jul 25, 2020 9:32 pm
simplesimon wrote: Sat Jul 25, 2020 7:14 pm You only get the 3.5% rate if you hold it the full 20 years. Hold it for 19 years and sell and you get almost no return at all.
Hold EE Bonds for 15 years and you'd have to find an investment that would guarantee you 12.25% to make it worth cashing your EE Bond out early, and at 19 years that number is 42%.

It's funny to me with so much discussion that bonds won't be worth it the next half-decade, doesn't that make the case for EE bonds all that much stronger? If you buy an EE Bond today, with rates universally low, in 6 short years you'd have to find a competing investment that would pay 4.73% over the following 14 years guaranteed to make it worth selling your EE Bond early.
In a sense, you are being paid a premium to sacrifice liquidity. The money you put into EE bonds is then not available for rebalancing. It's essentially a "fixed" part of your fixed income allocation.
Yeah the only hang up is the rebalancing aspect to EE bonds. For myself, in the accumulation phase, I rebalance with the new money I add. Also, another downside is the limitation of $10K per year, but being a lower income earner it doesn't really matter to me.

I like them and have been adding them. When I hit 45 I want to see the numbers on how much I have. I'd like to have 2K a month coming in from them between 65 and 80 to supplement SS.
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