Are bonds worth investing in with fed rate of 0.25%?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
pbrooke546
Posts: 5
Joined: Wed Sep 30, 2020 9:22 am

Are bonds worth investing in with fed rate of 0.25%?

Post by pbrooke546 »

I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
tibbitts
Posts: 12261
Joined: Tue Feb 27, 2007 6:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by tibbitts »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
I think people were asking that from about 2% all the way down to 0-0.25%. But I do understand the point. I just don't have a good alternative.
User avatar
anon_investor
Posts: 3733
Joined: Mon Jun 03, 2019 1:43 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by anon_investor »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
It depends how old you are and how stable your job is. Some people advocate 100% equities + an emergency fund for anyone in their 20s, this may apply to someone in their 30s even if they have a stable job.

But also understand that total bond market index funds (e.g. VTSAX/BND) yield over 1%, right now.
sandan
Posts: 58
Joined: Wed Apr 03, 2013 12:48 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by sandan »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
The interest rate should not have any factor in allocation unless you want to time the market (All things held equal some people might want to hold more bonds because of lower taxes). Obviously, it is okay to time the market.. just don't kid yourself about it.
User avatar
22twain
Posts: 2590
Joined: Thu May 10, 2012 5:42 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by 22twain »

anon_investor wrote: Wed Oct 07, 2020 3:37 pmBut also understand that total bond market index funds (e.g. VTSAX/BND) yield over 1%, right now.
My monthly dividend from BND arrived today. About 2.05%, annualized. It's been declining gradually, of course. At the beginning of April (6 months ago) it was about 2.65%.
Help save endangered words! When you write "princiPLE", make sure you don't really mean "princiPAL"!
Grt2bOutdoors
Posts: 23148
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by Grt2bOutdoors »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
If you are fine with a constant rollercoaster ride, then go 100 percent equity. But go in knowing this:

You don’t want to get off the ride when things get rocky, you want to buy because the equity premium has gone up when things are shakiest. Now, if you owned bonds, you could sell them and rebalance into equity - essentially you are selling high in bonds and buying low in equities. In times of trouble, skittish hands will run into stable assets like bonds, you should be running the opposite way - into equities so you can pick them up cheap. If you don’t have any bonds, and you don’t have any cash to buy low but you hold equities then you must hold on for dear life, otherwise you’ve defeated the purpose of investing for long term gains and sell low instead. If you can do that, then just hold mostly equities but at some point down the road when your human capital starts going down, you will want to protect the value of your financial capital. That’s where fixed income comes into the picture. It’s not the return on principal as much as it’s the return of principal.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
RyeBourbon
Posts: 154
Joined: Tue Sep 01, 2020 12:20 pm
Location: NJ/Philly

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by RyeBourbon »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
If it's for retirement, you don't need bonds yet. I was 100% equities for 30 years.

Now 5 years from retirement, I've just gone to 70/30.
nix4me
Posts: 821
Joined: Sat Oct 13, 2018 9:32 am

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by nix4me »

Bonds are headed down down down. I have almost none and now I'm thinking about selling the almost none that i have for a loss.
User avatar
ruralavalon
Posts: 19711
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by ruralavalon »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
Invest for the long-term, not for the short-term. The primary purpose of a fixed income allocation is to reduce portfolio volatility.

In my opinion a fixed income allocation is worthwhile even when young.

Vanguard Intermediate-term Bond Index Fund (VBILX) currently has a SEC Yield = 1.03%, dividend yield (TTM) has been 2.38%. Vanguard Total Bond Market Index Fund (VBTLX) currently has a SEC Yield = 1.19%, and dividend yield (TTM) has been 2.33%.
Last edited by ruralavalon on Wed Oct 07, 2020 7:58 pm, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
User avatar
whodidntante
Posts: 9254
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by whodidntante »

The economy is terrible right now and could get even worse. I predict that a number of people reading this post will suffer unemployment or underemployment. So you can decide if you want to prepare for that or not. Most people who do prepare will not have needed it. Some people who do not prepare will wish they were in better financial shape when it hits them.

But I do agree with your inner voice that bonds aren't good for your situation. They are also not good for my situation.
Rcnut223
Posts: 5
Joined: Sun Sep 27, 2020 5:22 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by Rcnut223 »

I’m trying to answer this question as well

Regardless of the current yield , it’s the cost of a share that concerns me. All bonds prices have dropped
Over the last couple months.

This isn’t a question of holding for the long run bonds are not going to give a good return for years.
aristotelian
Posts: 8255
Joined: Wed Jan 11, 2017 8:05 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by aristotelian »

Sure, if expected inflation is 0% or less.
User avatar
ruralavalon
Posts: 19711
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by ruralavalon »

Rcnut223 wrote: Wed Oct 07, 2020 8:02 pm I’m trying to answer this question as well

Regardless of the current yield , it’s the cost of a share that concerns me. All bonds prices have dropped
Over the last couple months.

This isn’t a question of holding for the long run bonds are not going to give a good return for years.
But buying when prices are low is good.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
tesuzuki2002
Posts: 1147
Joined: Fri Dec 11, 2015 12:40 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by tesuzuki2002 »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment,
Sounds like you are right on track to me!! I'd stick with low to NO bonds if you're under 35...
tesuzuki2002
Posts: 1147
Joined: Fri Dec 11, 2015 12:40 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by tesuzuki2002 »

Bonds are at ALL TIME highs with many retiree retreating there.... It's going to pop....
ivgrivchuck
Posts: 293
Joined: Sun Sep 27, 2020 6:20 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by ivgrivchuck »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
I decided some time ago that bonds are not for me anymore. Fixed income assets are much more attractive. Make your pick:

- I-bonds ($10k purchase limit per year per person, $5k from tax return)
- EE-bonds ($10k purchase limit per year per person)
- CDs
- HYSAs
- MYGAs
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
User avatar
ruralavalon
Posts: 19711
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by ruralavalon »

ivgrivchuck wrote: Wed Oct 07, 2020 8:19 pm
pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
I decided some time ago that bonds are not for me anymore. Fixed income assets are much more attractive. Make your pick:

- I-bonds ($10k purchase limit per year per person, $5k from tax return)
- EE-bonds ($10k purchase limit per year per person)
- CDs
- HYSAs
- MYGAs
"bonds are not for me", but I-bonds and EE-bonds are bonds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
ivgrivchuck
Posts: 293
Joined: Sun Sep 27, 2020 6:20 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by ivgrivchuck »

ruralavalon wrote: Wed Oct 07, 2020 8:34 pm "bonds are not for me", but I-bonds and EE-bonds are bonds.
Maybe by name, but they behave like fixed income assets. There is no fixed duration (and hence no duration risk), and there is no secondary market. I don't consider them to be "real bonds".
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
000
Posts: 3291
Joined: Thu Jul 23, 2020 12:04 am

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by 000 »

I have no interest in any bonds. I think a cash liquidity fund + invest the rest in uninflatable assets will be best for me.
aristotelian
Posts: 8255
Joined: Wed Jan 11, 2017 8:05 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by aristotelian »

tesuzuki2002 wrote: Wed Oct 07, 2020 8:10 pm Bonds are at ALL TIME highs with many retiree retreating there.... It's going to pop....
So are stocks! You just hope that with a diversified portfolio they don't crash at the same time.
User avatar
joe8d
Posts: 4446
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by joe8d »

If you are saving FOR retirement, No.
All the Best, | Joe
User avatar
HomerJ
Posts: 15344
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by HomerJ »

nix4me wrote: Wed Oct 07, 2020 7:36 pm Bonds are headed down down down. I have almost none and now I'm thinking about selling the almost none that i have for a loss.
I call Shenanigans... What bonds do you have that are currently at a loss?

Rates have gone down over the past few years... Bond fund values have gone UP, not down.

Yes, the OP has a legitimate question about future returns, but no one is selling bonds for a loss today. Unless maybe you bought them very recently.
Last edited by HomerJ on Wed Oct 07, 2020 9:07 pm, edited 1 time in total.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
abuss368
Posts: 22139
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by abuss368 »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
Welcome to the best forum on the internet!

I would say “yes” for sure, bonds are ”worthwhile” to invest in. Bonds provide ballast and dry powder to a portfolio. In addition, as I have learned, bonds provide capital to rebalance into stocks when the markets eventually pull back.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
abuss368
Posts: 22139
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by abuss368 »

When I read that Vanguard no longer recommends bonds and many other investment experts then I will consider moving on from bonds.
John C. Bogle: “Simplicity is the master key to financial success."
000
Posts: 3291
Joined: Thu Jul 23, 2020 12:04 am

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by 000 »

HomerJ wrote: Wed Oct 07, 2020 9:04 pm
nix4me wrote: Wed Oct 07, 2020 7:36 pm Bonds are headed down down down. I have almost none and now I'm thinking about selling the almost none that i have for a loss.
I call Shenanigans... What bonds do you have that are currently at a loss?

Rates have gone down over the past few years... Bond fund values have gone UP, not down.

Yes, the OP has a legitimate question about future returns, but no one is selling bonds for a loss today. Unless maybe you bought them very recently.
Maybe he bought BND since mid June.
User avatar
HomerJ
Posts: 15344
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by HomerJ »

Bonds may not make you a lot going forward for a while, but will probably hold their value.

And that's worthwhile if one is near or in retirement.

I would probably stick with short-term bonds, or maybe even CDs, but bonds even returning 0%-1% is still worth something.

Stocks can drop 50% in a year. Bonds almost certainly will not.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
abuss368
Posts: 22139
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by abuss368 »

When I read questions concerning holding bonds in a portfolio, I often think about Taylor’s excellent advice: “Bonds let us sleep well. Stocks let us eat well.”
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
HomerJ
Posts: 15344
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by HomerJ »

000 wrote: Wed Oct 07, 2020 9:09 pm
HomerJ wrote: Wed Oct 07, 2020 9:04 pm
nix4me wrote: Wed Oct 07, 2020 7:36 pm Bonds are headed down down down. I have almost none and now I'm thinking about selling the almost none that i have for a loss.
I call Shenanigans... What bonds do you have that are currently at a loss?

Rates have gone down over the past few years... Bond fund values have gone UP, not down.

Yes, the OP has a legitimate question about future returns, but no one is selling bonds for a loss today. Unless maybe you bought them very recently.
Maybe he bought BND since mid June.
Yeah maybe... I suggest one should not take advice from the investor who gives up on a fund after 3 months with a tiny loss (3 month return on Total Bond Market Index Fund is -0.08%) - (But 6 month return is positive 2.97% and 1 year return is 6.08%)
Last edited by HomerJ on Wed Oct 07, 2020 9:14 pm, edited 1 time in total.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
HomerJ
Posts: 15344
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by HomerJ »

abuss368 wrote: Wed Oct 07, 2020 9:11 pm When I read questions concerning holding bonds in a portfolio, I often think about Taylor’s excellent advice: “Bonds let us sleep well. Stocks let us eat well.”
Indeed... hold stocks for long-term appreciation. Hold bonds when you need money in the short-term waiting for the long-term appreciation in stocks.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
User avatar
abuss368
Posts: 22139
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by abuss368 »

HomerJ wrote: Wed Oct 07, 2020 9:13 pm
abuss368 wrote: Wed Oct 07, 2020 9:11 pm When I read questions concerning holding bonds in a portfolio, I often think about Taylor’s excellent advice: “Bonds let us sleep well. Stocks let us eat well.”
Indeed... hold stocks for long-term appreciation. Hold bonds when you need money in the short-term waiting for the long-term appreciation in stocks.
Exactly and also having that bond allocation available to rebalance into stocks when the markets decline.
John C. Bogle: “Simplicity is the master key to financial success."
ivgrivchuck
Posts: 293
Joined: Sun Sep 27, 2020 6:20 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by ivgrivchuck »

abuss368 wrote: Wed Oct 07, 2020 9:08 pm When I read that Vanguard no longer recommends bonds and many other investment experts then I will consider moving on from bonds.
Here is one: https://www.bridgewater.com/grappling-w ... everywhere

Their recommendation:
As we work with clients to consider alternatives, we look to the same principles that we apply ourselves:
- Select assets that will outperform cash over time.
- Diversify those assets based on how they will react to future economic scenarios.

Applying these two principles to the 60/40 portfolio, we see two key shifts that have the potential to provide a lot of impact:
- Balance the portfolio’s exposure to inflation by shifting part of the portfolio from nominal bonds into inflation-sensitive assets.
- Balance the portfolio's exposure to the major monetary and credit systems of the world, of which the big three are the US dollar, the euro, and the RMB.
And about Vanguard recommending avoiding bonds... I think you can wait for a long time... Have you ever seen a car salesman to tell you *not* to buy a car.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
tesuzuki2002
Posts: 1147
Joined: Fri Dec 11, 2015 12:40 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by tesuzuki2002 »

aristotelian wrote: Wed Oct 07, 2020 8:58 pm
tesuzuki2002 wrote: Wed Oct 07, 2020 8:10 pm Bonds are at ALL TIME highs with many retiree retreating there.... It's going to pop....
So are stocks! You just hope that with a diversified portfolio they don't crash at the same time.
Roughly yes...

Stocks are down approx ~6% from peak first week of Sept.

Bonds are down approx ~2%...

But NONE of it makes sense anymore... Bonds should be propped up with stocking coming down..
User avatar
abuss368
Posts: 22139
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by abuss368 »

ivgrivchuck wrote: Wed Oct 07, 2020 9:41 pm
abuss368 wrote: Wed Oct 07, 2020 9:08 pm When I read that Vanguard no longer recommends bonds and many other investment experts then I will consider moving on from bonds.
Here is one: https://www.bridgewater.com/grappling-w ... everywhere

Their recommendation:
As we work with clients to consider alternatives, we look to the same principles that we apply ourselves:
- Select assets that will outperform cash over time.
- Diversify those assets based on how they will react to future economic scenarios.

Applying these two principles to the 60/40 portfolio, we see two key shifts that have the potential to provide a lot of impact:
- Balance the portfolio’s exposure to inflation by shifting part of the portfolio from nominal bonds into inflation-sensitive assets.
- Balance the portfolio's exposure to the major monetary and credit systems of the world, of which the big three are the US dollar, the euro, and the RMB.
And about Vanguard recommending avoiding bonds... I think you can wait for a long time... Have you ever seen a car salesman to tell you *not* to buy a car.
Good point.
John C. Bogle: “Simplicity is the master key to financial success."
User avatar
Voltaire2.0
Posts: 131
Joined: Thu Sep 26, 2019 10:12 am

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by Voltaire2.0 »

Bond funds, IMO, are generally bad bets.

For someone seeking income and/or wanting to add ballast to a portfolio, individual bonds can be useful. I recommend assuming "holding to maturity" and begin your analysis from there. Understand the risks of the issuer (e.g., Johnson & Johnson is not CenturyLink) and carefully compare yield-to-maturity and yield-to-worst. It's not calculus, but it requires tedious research to find bargains.

Reward follows risk, so if you'll accept some of the latter you'll gain the former, and be higher up the corporate capital structure than preferred and common stockholders.
User avatar
grabiner
Advisory Board
Posts: 28244
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by grabiner »

Voltaire2.0 wrote: Wed Oct 07, 2020 9:57 pm Bond funds, IMO, are generally bad bets.

For someone seeking income and/or wanting to add ballast to a portfolio, individual bonds can be useful. I recommend assuming "holding to maturity" and begin your analysis from there. Understand the risks of the issuer (e.g., Johnson & Johnson is not CenturyLink) and carefully compare yield-to-maturity and yield-to-worst. It's not calculus, but it requires tedious research to find bargains.
The effect of bonds on your portfolio doesn't depend on whether you hold individual bonds or a bond fund.

You can get the same effect of holding to maturity with a bond fund. Buy a fund with a ten-year duration, and then in one year, move some of the money to a shorter-term fund so that your duration is nine years, and so on for the next ten years.

Conversely, if you aren't investing for a future date, you probably don't want to hold a bunch of bonds maturing all at once. If you build a rolling ladder, holding bonds maturing in 1-10 years, and then using the maturing 1-year bond to buy a new 10-year bond, you will have the same portfolio as a bond fund which holds bonds maturing in 1-10 years.

The most important difference between the two is diversification. If you are buying corporate bonds, you don't want to put too much of your money in one company, even a reliable company (which will have lower-yielding bonds). You can get a diversified portfolio of corporate bonds with something like Vanguard Intermediate-Term Investment Grade (yield 1.43%) or Intermediate-Term Corporate Bond ETF (yield 1.72%, because of a longer duration and more BBB bonds), and not have to worry much about losses if a few corporations default. Both of these funds hold bonds rated BBB or higher, which is considered investment-grade. If you are buying Treasury bonds, you don't need diversification and can buy from Treasury Direct.
Wiki David Grabiner
User avatar
HomerJ
Posts: 15344
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by HomerJ »

tesuzuki2002 wrote: Wed Oct 07, 2020 9:51 pm
aristotelian wrote: Wed Oct 07, 2020 8:58 pm
tesuzuki2002 wrote: Wed Oct 07, 2020 8:10 pm Bonds are at ALL TIME highs with many retiree retreating there.... It's going to pop....
So are stocks! You just hope that with a diversified portfolio they don't crash at the same time.
Roughly yes...

Stocks are down approx ~6% from peak first week of Sept.

Bonds are down approx ~2%...

But NONE of it makes sense anymore... Bonds should be propped up with stocking coming down..
From Sept 2 (stock peak), Vanguard Total Stock Market is down -3.45% and Vanguard Total Bond Market is down -0.83%

They don't always move in opposite directions. I certainly wouldn't be crying over a 0.83% drop... especially since VTBLX is still up 6.29% YTD.

And in any case, bonds do not "pop". I have no idea what it means to say bonds are at "all time highs" or why a small drop in the stock market and a smaller drop in the bond market equals "none of it makes sense anymore"

What doesn't make sense?
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
hudson
Posts: 3388
Joined: Fri Apr 06, 2007 9:15 am

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by hudson »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
pbrooke546,

I like to use the term fixed income rather than bonds because I like CDs...which are technically not bonds. I've seen a 1.7% 5 year CD recently. (Thanks MikeG62!)
I think a beginning investor should start with a safe pile of fixed income money...money invested in very safe fixed income.
This would be the anchor of his/her portfolio. I think that this would be more than an emergency fund.
I believe that living below one's means and socking away extra money is more valuable than relying on the stock market for increasing one's holdings.
Last edited by hudson on Thu Oct 08, 2020 9:53 am, edited 2 times in total.
3funder
Posts: 1485
Joined: Sun Oct 15, 2017 9:35 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by 3funder »

ruralavalon wrote: Wed Oct 07, 2020 7:47 pm
pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
Invest for the long-term, not for the short-term. The primary purpose of a fixed income allocation is to reduce portfolio volatility.

In my opinion a fixed income allocation is worthwhile even when young.

Vanguard Intermediate-term Bond Index Fund (VBILX) currently has a SEC Yield = 1.03%, dividend yield (TTM) has been 2.38%. Vanguard Total Bond Market Index Fund (VBTLX) currently has a SEC Yield = 1.19%, and dividend yield (TTM) has been 2.33%.
+1, and at your age, you don't need to have a significant bond allocation, so even with low rates, it won't matter. Leave your small allotment alone, and gradually increase it as you age. Time, not timing interest rates, is your friend.
prairieman
Posts: 358
Joined: Thu Mar 01, 2018 3:17 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by prairieman »

The thing I just don’t see discussed here is the increased risk associated with possible inflation and rising interest rates - which would cause correspond losses in bond principal. I think what the OP means is wondering, and so do I, is whether the low rate of interest justifies the risk of losing some of the money you put in.
Holding cash doesn’t come with the risk in losing principal, serves as ballast.
I, personally, moved some bond funds to cash this year and am, so far, glad I did. I had to do it to help myself sleep better.
“As long as the roots are not severed, all is well.” Chauncey Gardner
JimmyD
Posts: 871
Joined: Fri Sep 27, 2013 4:03 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by JimmyD »

Another question worth pondering: Maybe you're not saving enough?

Why do you feel the need to take additional risk? If you're saving enough, keeping an age-appropriate allocation in bonds (or similar) shouldn't bother you because you're plowing more than enough into equities.

Speaking for myself (and wife), we're age 38 and hold 20% in combined bonds and cash. Yes, the paltry return is somewhat bothersome, but that allocation isn't for the return, it's for the stability.

I'd also add that the bond and cash allocation served us very well back in March when we moved a large portion into equities while others panicked and did the opposite...or worse.
razorbacker
Posts: 36
Joined: Tue Feb 25, 2020 11:04 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by razorbacker »

You are young investor with a long term view. Bonds are ballast to counterbalance your stocks. The real growth you achieve will be with your stock investments. If you have a little growth in your bonds great, if you have no growth that is ok also.
MikeG62
Posts: 3252
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by MikeG62 »

pbrooke546 wrote: Wed Oct 07, 2020 3:19 pm I'm young and have a relatively low bond allotment, but with the current rates of interest I wonder if it's even worthwhile owning bonds for the near future. I know you can't time markets, but you can't get lower fed rate than 0-0.25% can you?
As a young person this should not be a big issue - maintain a very high allocation to equities. It's a bigger problem for those of us who are retired. :(
Real Knowledge Comes Only From Experience
Rcnut223
Posts: 5
Joined: Sun Sep 27, 2020 5:22 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by Rcnut223 »

000 wrote: Wed Oct 07, 2020 9:09 pm
HomerJ wrote: Wed Oct 07, 2020 9:04 pm
nix4me wrote: Wed Oct 07, 2020 7:36 pm Bonds are headed down down down. I have almost none and now I'm thinking about selling the almost none that i have for a loss.
I call Shenanigans... What bonds do you have that are currently at a loss?

Rates have gone down over the past few years... Bond fund values have gone UP, not down.

Yes, the OP has a legitimate question about future returns, but no one is selling bonds for a loss today. Unless maybe you bought them very recently.
Maybe he bought BND since mid June.

I bought BND recently, unfortunately. I don’t have the benefit of the upward movement in bond prices after the crash

I see the action by the fed recently Really pulling the rug out from under bonds

As a retiree, no return and or a loss in the bond portion of the portfolio is a real issue.
User avatar
HomerJ
Posts: 15344
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by HomerJ »

prairieman wrote: Thu Oct 08, 2020 7:33 am The thing I just don’t see discussed here is the increased risk associated with possible inflation and rising interest rates - which would cause correspond losses in bond principal. I think what the OP means is wondering, and so do I, is whether the low rate of interest justifies the risk of losing some of the money you put in.
Holding cash doesn’t come with the risk in losing principal, serves as ballast.
I, personally, moved some bond funds to cash this year and am, so far, glad I did. I had to do it to help myself sleep better.
Bond funds are self-correcting.

Imagine you have an intermediate (say 5-year duration) bond fund that is paying 1% a year now.

If nothing changed, $10,000 would grow to $10,510 by year 5, and $11,046 by year 10.

If interest rates went up 1%, the bond fund might drop 5% in value that firstyear... but it slowly would start paying more as low paying bonds age out and are replaced by bonds paying the new rate of 2%.

You'd drop to $9,500 at first, but over the first 5 years, you'd probably make 1.5% instead of 1%, and then 2% a year for the following 5 years.

So $10,000 would drop to $9,500, but then grow back to $10,234 by year 5, and $11,299 by year 10.

That rise in interest rates doesn't make much of a difference over the short-term, and you actually make more over the long run.

All that said, CDs are a viable substitute for bond funds, if you're worried about any loss of principal.

But note that inflation is the real danger for both CDs and bonds.

Rising interest rates doesn't break bond fund returns, but inflation can.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Rcnut223
Posts: 5
Joined: Sun Sep 27, 2020 5:22 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by Rcnut223 »

HomerJ wrote: Thu Oct 08, 2020 9:22 am
prairieman wrote: Thu Oct 08, 2020 7:33 am The thing I just don’t see discussed here is the increased risk associated with possible inflation and rising interest rates - which would cause correspond losses in bond principal. I think what the OP means is wondering, and so do I, is whether the low rate of interest justifies the risk of losing some of the money you put in.
Holding cash doesn’t come with the risk in losing principal, serves as ballast.
I, personally, moved some bond funds to cash this year and am, so far, glad I did. I had to do it to help myself sleep better.
Bond funds are self-correcting.

Imagine you have an intermediate (say 5-year duration) bond fund that is paying 1% a year now.

If nothing changed, $10,000 would grow to $10,510 by year 5, and $11,046 by year 10.

If interest rates went up 1%, the bond fund might drop 5% in value that firstyear... but it slowly would start paying more as low paying bonds age out and are replaced by bonds paying the new rate of 2%.

You'd drop to $9,500 at first, but over the first 5 years, you'd probably make 1.5% instead of 1%, and then 2% a year for the following 5 years.

So $10,000 would drop to $9,500, but then grow back to $10,234 by year 5, and $11,299 by year 10.

That rise in interest rates doesn't make much of a difference over the short-term, and you actually make more over the long run.

All that said, CDs are a viable substitute for bond funds, if you're worried about any loss of principal.

But note that inflation is the real danger for both CDs and bonds.

Rising interest rates doesn't break bond fund returns, but inflation can.
It maybe self correcting over a long period of time with s if you have a small drop in value

2 % drop , like we’ve seen may not be correctable with returns forecasted.am I wrong here?
Rcnut223
Posts: 5
Joined: Sun Sep 27, 2020 5:22 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by Rcnut223 »

10 years to recover principle is a long time
000
Posts: 3291
Joined: Thu Jul 23, 2020 12:04 am

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by 000 »

Rcnut223 wrote: Thu Oct 08, 2020 8:42 am I bought BND recently, unfortunately. I don’t have the benefit of the upward movement in bond prices after the crash

I see the action by the fed recently Really pulling the rug out from under bonds

As a retiree, no return and or a loss in the bond portion of the portfolio is a real issue.
I agree. Not a lot of good solutions. I am not a retiree, but I have a cash emergency fund and precious metals.
User avatar
anon_investor
Posts: 3733
Joined: Mon Jun 03, 2019 1:43 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by anon_investor »

22twain wrote: Wed Oct 07, 2020 5:27 pm
anon_investor wrote: Wed Oct 07, 2020 3:37 pmBut also understand that total bond market index funds (e.g. VTSAX/BND) yield over 1%, right now.
My monthly dividend from BND arrived today. About 2.05%, annualized. It's been declining gradually, of course. At the beginning of April (6 months ago) it was about 2.65%.
I was referring to the 30 day SEC yield, which is over 1.1% right now.
hudson
Posts: 3388
Joined: Fri Apr 06, 2007 9:15 am

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by hudson »

Rcnut223 wrote: Thu Oct 08, 2020 9:37 am 10 years to recover principal is a long time
An investor with this concern...like me...might go with a lower percentage of bonds/bond funds and a higher percentage of CDs.
User avatar
HomerJ
Posts: 15344
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are bonds worth investing in with fed rate of 0.25%?

Post by HomerJ »

Rcnut223 wrote: Thu Oct 08, 2020 9:35 am
HomerJ wrote: Thu Oct 08, 2020 9:22 am
prairieman wrote: Thu Oct 08, 2020 7:33 am The thing I just don’t see discussed here is the increased risk associated with possible inflation and rising interest rates - which would cause correspond losses in bond principal. I think what the OP means is wondering, and so do I, is whether the low rate of interest justifies the risk of losing some of the money you put in.
Holding cash doesn’t come with the risk in losing principal, serves as ballast.
I, personally, moved some bond funds to cash this year and am, so far, glad I did. I had to do it to help myself sleep better.
Bond funds are self-correcting.

Imagine you have an intermediate (say 5-year duration) bond fund that is paying 1% a year now.

If nothing changed, $10,000 would grow to $10,510 by year 5, and $11,046 by year 10.

If interest rates went up 1%, the bond fund might drop 5% in value that firstyear... but it slowly would start paying more as low paying bonds age out and are replaced by bonds paying the new rate of 2%.

You'd drop to $9,500 at first, but over the first 5 years, you'd probably make 1.5% instead of 1%, and then 2% a year for the following 5 years.

So $10,000 would drop to $9,500, but then grow back to $10,234 by year 5, and $11,299 by year 10.

That rise in interest rates doesn't make much of a difference over the short-term, and you actually make more over the long run.

All that said, CDs are a viable substitute for bond funds, if you're worried about any loss of principal.

But note that inflation is the real danger for both CDs and bonds.

Rising interest rates doesn't break bond fund returns, but inflation can.
It maybe self correcting over a long period of time with s if you have a small drop in value

2 % drop , like we’ve seen may not be correctable with returns forecasted.am I wrong here?
If interest rates rise 2%, then bonds will pay more faster... the math works out the same.

If we have a fast 2% rise in bond rates, a $10,000 bond fund will drop to $9,000... But then it will slowly pay out more...

Year 1, you'd get 1.4%
Year 2, you'd get 1.8%
Year 3, you'd get 2.2%
Year 4, you'd get 2.6%
Year 5, you'd get 3.0%

$9,000 would grow to $10,033... And the next 5 years, you'd get the full 3%... so by year 10, you'd have $11,630

So technically, a giant 2% spike in interest rates would be a GOOD thing in the long run.

It doesn't matter what numbers you use... The math comes out about the same.. You break even around the duration of the fund. If a short-term fund has an average duration of 2 years... then you'll break even in 2 years or so regardless how the interest rates change.

An intermediate fund with a duration of 5 years would take around 5 years to recover.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Post Reply