Charles Ellis says stay out of bonds

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stemikger
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Charles Ellis says stay out of bonds

Post by stemikger » Wed Apr 10, 2013 6:43 pm

In this month's edition of Money Magazine Charles Ellis was asked this question:

Money Mag: Let's turn to bonds. What's your take on them, given ultralow rates?

Charles Ellis: The best piece of advice I could give long-term investors today is don't own bonds. And if you do own them, you probably ought to move out of them. Right now the Federal Reserve is set on keeping rates down. The yield on a 10-year Treasury bond is under 2%. When yields go back to their historical average of 5.5%, an intermediate bond fund could go down 25% in value. People who are putting their retirement money into save-quote, unquote safe-bonds can get hurt badly.

Money Mag: So they should be buying stocks?

CE: They should absolutely invest in a low-cost index fund.

Boy when all these professionals that you admire are changing their advice from Mr. Bogle's age in bonds, it's getting harder and harder to Stay the Course.

FYI, this is not the order of the interview he was actually asked the stock questioin first.
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Re: Charles Ellis says stay out of bonds

Post by Scooter57 » Wed Apr 10, 2013 6:45 pm

Stay the course just means, "Don't make changes based on emotional responses to short term changes in the markets."

Ellis and others are pointing out that there are changes that affect the LONG TERM in today's markets. That makes it appropriate to rethink how your portfolio is set up. A debate about this is already going on in this thread:

http://www.bogleheads.org/forum/viewtop ... 0&t=114529

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Re: Charles Ellis says stay out of bonds

Post by joe8d » Wed Apr 10, 2013 7:58 pm

Stay the course just means, "Don't make changes based on emotional responses to short term changes in the markets".
Exactly. that's been my interpretation of what "Stay The Course" means
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Re: Charles Ellis says stay out of bonds

Post by nimo956 » Wed Apr 10, 2013 8:11 pm

I think people have a tendency to confuse "normal" with the recent past. Where do you think 30 year treasury interest rates "should" be? 5%? 7%? If you asked a person what they thought "normal" interest rates were in 1980, 1990, and 2000, what do you think the answers would be? Could we be in a new normal now? Could you imagine kicking yourself in 10 years for not locking in those 3% rates today?
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Re: Charles Ellis says stay out of bonds

Post by z3r0c00l » Wed Apr 10, 2013 8:21 pm

" When yields go back to their historical average of 5.5%" In 10 years? Over the course of 5-7 years? A very likely outcome is extremely slow rate increases, in which case owning bonds works just fine. That 25% drop is just not a likely scenario at all.

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Re: Charles Ellis says stay out of bonds

Post by stevewolfe » Wed Apr 10, 2013 8:23 pm

z3r0c00l wrote:" When yields go back to their historical average of 5.5%" In 10 years? Over the course of 5-7 years? A very likely outcome is extremely slow rate increases, in which case owning bonds works just fine. That 25% drop is just not a likely scenario at all.

I'd tend to agree with the above. Yes, there is some distortion in the market from the current monetary policy, and it will need to be unwound. No one knows when or how the intended and unintended consequences will unfold.

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Re: Charles Ellis says stay out of bonds

Post by Scooter57 » Wed Apr 10, 2013 8:26 pm

Normal, to me, means within 2 standard deviations from the norm. Our rates right now are out at the tip of the long tail of one end of a bell curve plotted with the average rate for every year going back several hundred years.

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Re: Charles Ellis says stay out of bonds

Post by baw703916 » Wed Apr 10, 2013 8:29 pm

OK, so I see two threads at the top of the list talking about what Ellis and Malkiel say about bonds.

I apologize for the opinionated rant to follow:

I don't care what Ellis or Malkiel thinks. And neither should any of you.

End of rant. :happy
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Re: Charles Ellis says stay out of bonds

Post by Levett » Wed Apr 10, 2013 8:31 pm

"Boy when all these professionals that you admire are changing their advice from Mr. Bogle's age in bonds, it's getting harder and harder to Stay the Course"

So when Ellis talks, he's somehow superior to all the other talking heads. Is that it?

All the others are investment porno, but Ellis is all virtue 'cause he's been associated with Vanguard?

He's admirable?

Sorry. The "logic" escapes me.

Lev

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Re: Charles Ellis says stay out of bonds

Post by pennstater2005 » Wed Apr 10, 2013 8:36 pm

baw703916 wrote:OK, so I see two threads at the top of the list talking about what Ellis and Malkiel say about bonds.

I apologize for the opinionated rant to follow:

I don't care what Ellis or Malkiel thinks. And neither should any of you.

End of rant. :happy
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Re: Charles Ellis says stay out of bonds

Post by Grt2bOutdoors » Wed Apr 10, 2013 9:48 pm

While I have one of Ellis's books - I really don't care what he says about "bonds" or "stocks". "Nobody knows nuthin" My horizon is very long, so what happens over the course of the next 1,5,10,20 years is beyond anyone's control including mine. I have a plan, I'm going with it.
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Re: Charles Ellis says stay out of bonds

Post by Scooter57 » Wed Apr 10, 2013 10:11 pm

Lev,

He and Malkiel came up with and/or made known the investment ideas that are the foundation of the theory propounded here--and they did it at a time when everyone 'knew' that choosing individual stocks would beat the market. So they deserve some respect.

Denigrating anyone who argues a case you don't agree with may make you feel better, but it is a very dangerous approach to living in a constantly changing world.

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Re: Charles Ellis says stay out of bonds

Post by grok87 » Wed Apr 10, 2013 10:23 pm

stemikger wrote:In this month's edition of Money Magazine Charles Ellis was asked this question:

Money Mag: Let's turn to bonds. What's your take on them, given ultralow rates?

Charles Ellis: The best piece of advice I could give long-term investors today is don't own bonds. And if you do own them, you probably ought to move out of them. Right now the Federal Reserve is set on keeping rates down. The yield on a 10-year Treasury bond is under 2%. When yields go back to their historical average of 5.5%, an intermediate bond fund could go down 25% in value. People who are putting their retirement money into save-quote, unquote safe-bonds can get hurt badly.

Money Mag: So they should be buying stocks?

CE: They should absolutely invest in a low-cost index fund.

Boy when all these professionals that you admire are changing their advice from Mr. Bogle's age in bonds, it's getting harder and harder to Stay the Course.

FYI, this is not the order of the interview he was actually asked the stock questioin first.
i don't think he is saying be 100% stocks. He would probably agree that instead of bonds one should hold cash, cds (with guaranteed early withdrawal penalties), ibonds, etc.
cheers,
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Re: Charles Ellis says stay out of bonds

Post by Archie Sinclair » Wed Apr 10, 2013 10:56 pm

grok87 wrote: i don't think he is saying be 100% stocks. He would probably agree that instead of bonds one should hold cash, cds (with guaranteed early withdrawal penalties), ibonds, etc.
cheers,
He probably doesn't know that savings bonds and certificates of deposit can have reasonable interest. There's a mindset that "investments" consist of stocks and bonds.

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Re: Charles Ellis says stay out of bonds

Post by Browser » Wed Apr 10, 2013 11:38 pm

You know, if you look at nominal rates they are way below their historical range. But if you look at real (inflation-adjusted) rates, they are at the low end of their normal range but not out of that range. If you go by nominal rates it looks a lot scarier than referencing real rates. So, which is the correct way to look at it? Also, nobody ever talks about inflation-linked bonds. What are the chances that interest rates start going up unless the inflation rate is rising also? Are you going to get killed owning TIPS and IBonds?
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Re: Charles Ellis says stay out of bonds

Post by stemikger » Thu Apr 11, 2013 12:11 am

Scooter57 wrote:Stay the course just means, "Don't make changes based on emotional responses to short term changes in the markets."

Ellis and others are pointing out that there are changes that affect the LONG TERM in today's markets. That makes it appropriate to rethink how your portfolio is set up. A debate about this is already going on in this thread:

http://www.bogleheads.org/forum/viewtop ... 0&t=114529
Thanks.
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Re: Charles Ellis says stay out of bonds

Post by stemikger » Thu Apr 11, 2013 12:14 am

I have bashed Dave Ramsey for his investment advice:

Dave recommends mutual funds for your employer-sponsored retirement savings and your IRAs. Divide your investments equally between each of these four types of funds:

•Growth
•Growth & Income
•Aggressive Growth
•International

Who knows maybe he is on to something.

I would have a hard time investing in managed funds, but the 100% stocks he reccomends seems to be what others are saying also.

Warren Buffett recently wrote a piece on 100% stocks for average investors.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Charles Ellis says stay out of bonds

Post by fidelio » Thu Apr 11, 2013 3:11 am

what happened to short term bond funds?

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Re: Charles Ellis says stay out of bonds

Post by rustymutt » Thu Apr 11, 2013 6:22 am

Scooter57 wrote:Stay the course just means, "Don't make changes based on emotional responses to short term changes in the markets."

Ellis and others are pointing out that there are changes that affect the LONG TERM in today's markets. That makes it appropriate to rethink how your portfolio is set up. A debate about this is already going on in this thread:

http://www.bogleheads.org/forum/viewtop ... 0&t=114529
Stay the course, but......
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Re: Charles Ellis says stay out of bonds

Post by rustymutt » Thu Apr 11, 2013 6:26 am

I find it very interesting that they don't mention duration of bonds in the "don't hold bond" quote. Short term bond holders will recover because of the purchase of new holdings, with higher yields, but they're not even bringing this wisdom into the discussion.
Think short term treasuries.
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Re: Charles Ellis says stay out of bonds

Post by rkhusky » Thu Apr 11, 2013 7:04 am

If all one cares about are the dividends and don't plan to sell, who cares if the NAV drops because interest rates go up. Over time you will get more dividends.

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Re: Charles Ellis says stay out of bonds

Post by NYBoglehead » Thu Apr 11, 2013 7:10 am

rkhusky wrote:If all one cares about are the dividends and don't plan to sell, who cares if the NAV drops because interest rates go up. Over time you will get more dividends.
True, and if the NAV goes down you'll be able to soak up shares on the cheap if you're still in the accumulation phase. A lot of these finance gurus preach having a backbone and moving money into stocks when the market crashes, to me it only makes sense that we do the same with bonds/bond funds when a period of rising rates and dropping NAVs occurs.

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Re: Charles Ellis says stay out of bonds

Post by Levett » Thu Apr 11, 2013 7:15 am

Scooter,

I sorta admire a good many people--some of them even investment professionals. :wink:

But I try to make responsible decisions based on my judgment, not the judgment of others.

Owning your own decisions is a wonderfully liberating experience. 8-)

Lev

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Re: Charles Ellis says stay out of bonds

Post by Call_Me_Op » Thu Apr 11, 2013 8:02 am

fidelio wrote:what happened to short term bond funds?
Problem with these, in my view, is that they are not short enough - given the pathetic slope of the yield curve at the short end coupled with the historically-low risk-free return. Why should I extend to a 2.2 year duration and risk (say) a 10% drop to pick-up an extra 0.3% yield on top of the "risk-free" 0.2%? I'd rather collect my 0.2% essentially risk free (in terms of probability of nominal loss).
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Re: Charles Ellis says stay out of bonds

Post by SpaceCommander » Thu Apr 11, 2013 5:40 pm

I hear those of you banging the "Stay the Course" drum. That certainly is a viable strategy. HOWEVER:

If we've learned anything in the last two market crashes it's this: FUNDAMENTALS MATTER

Think of Buffet shaking his head at tech stocks in the late 90's. "Where's does the return come from? These companies aren't making any money!" Likewise, real estate circa 2005: "At these valuations, these properties can't cash flow. There's no money to be made here!" Similarly, consider bonds today: where does the return come from? Capital gains? That ship has sailed. The coupon? It's practically nothing. And when interest rates move, you're looking at capital losses, and we haven't even factored inflation into the picture yet.

I think fundamentals do indeed matter (even in the bond market!)
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Re: Charles Ellis says stay out of bonds

Post by l2ridehd » Thu Apr 11, 2013 5:55 pm

With everyone who is supposed to know, telling everyone who will listen, to sell bonds, it is probably a really good time to be buying bonds. The only concession or change I have made is as I re-balance and add new money, if I need bonds I add to short term vs total market. There are probably 20 different scenarios that "could happen" with bonds. The only one that is pretty bad is a rapid rise in interest rates. And even that is not so bad if you have time on your side. So far in my life time when everyone is telling you to do X your usually better off doing Y. So stay the course and maintain your desired AA, re-balance as necessary is still more then likely good advise.

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Re: Charles Ellis says stay out of bonds

Post by LH » Thu Apr 11, 2013 5:59 pm

Heh, its all emotional.

Every side of every trade has beautiful rational reasons to it, and both lists come to complete opposite conclusion
1)Sell at price x
2)BUY at price x

So..... lets say one is 60/40 stock bond now.
What are you going to do, go 100 stock? get rid of all bonds? Where stocks can drop 50 percent, or more, say 70 percent, or even 90 percent if Great Depression II????

I posit, risk wise, thats just simply wrong.

yeah, there is financial repression. Yeah, its not fun to pay for negative real return expectantly. (deflation may occur though people, one may get real yield aka Japan like conditions for tens of years... ditto inflation, high inflation, nobody knows etc). Regardless, if real risk shows up, treasury bonds are still safer than stocks.

There is always a "rational" reason to not stay the course. A rational reason to buy or sell at a given price, take your pick. Its true by definition of what the market is.

good luck,

LH

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Re: Charles Ellis says stay out of bonds

Post by LH » Thu Apr 11, 2013 6:17 pm

SpaceCommander wrote:I hear those of you banging the "Stay the Course" drum. That certainly is a viable strategy. HOWEVER:

If we've learned anything in the last two market crashes it's this: FUNDAMENTALS MATTER

Think of Buffet shaking his head at tech stocks in the late 90's. "Where's does the return come from? These companies aren't making any money!" Likewise, real estate circa 2005: "At these valuations, these properties can't cash flow. There's no money to be made here!" Similarly, consider bonds today: where does the return come from? Capital gains? That ship has sailed. The coupon? It's practically nothing. And when interest rates move, you're looking at capital losses, and we haven't even factored inflation into the picture yet.

I think fundamentals do indeed matter (even in the bond market!)
Great.

Make a "fundamentals matter" mutual fund. Use "fundamental" principles, and then win big.....

Problem is, doesn't happen. those are just nice words, which feel good to your gut.

What does happen is, a buy and hold strategy will expectantly win. It will expectantly win through a great depression II, a stagflation 70s, it will win through the recent downturn....

Thats what history shows. There are always reasons that sound/feel great. yeah sure, "fundamentals matter", but do they "matter" in such a way that you can expectantly make money versus passive indexing?

No.

In a highly non scientific, and hugely prone to human error aka beardstown ladies, I as a single human did my internal rate of return recently about 4-6 months ago, and I got 7 percent yearly return starting in 2000 (which is when I started investing) in my main account. My taxable account, my second biggest, is 12 percent yearly return, as it started during the downturn, and I bought low then.

I continued to buy as directed, "apocalypse now" in europe read the yahoo finance headline, I bought VGK, the vanguard europe etf on that exact day, at 38, whereas before it was 70. etc. etc. etc. Not because I was timing it, but because it had dropped so much, and I had new money, that it was the only thing to buy according to plan. Others where fleeing, I was buying. Thats what happens.

Stay the course is unchanged, passive indexing is unchanged.

Its very hard to do, very anti-human thing.

good luck,

LH

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Re: Charles Ellis says stay out of bonds

Post by baw703916 » Thu Apr 11, 2013 6:27 pm

LH wrote: Regardless, if real risk shows up, treasury bonds are still safer than stocks.
+1
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Re: Charles Ellis says stay out of bonds

Post by Leesbro63 » Thu Apr 11, 2013 6:42 pm

baw703916 wrote:
LH wrote: Regardless, if real risk shows up, treasury bonds are still safer than stocks.
+1
Perhaps only in the short run.

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Re: Charles Ellis says stay out of bonds

Post by Leesbro63 » Thu Apr 11, 2013 6:43 pm

We have enough respected professionals (as opposed to the many out there who do not earn Boglehead respect) screaming for bond caution beyond...including our own Dr. Bernstein...that blindly staying the course with intermediate to long term bonds probably at least deserves a second look.

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Re: Charles Ellis says stay out of bonds

Post by Nahum » Thu Apr 11, 2013 7:30 pm

I'm not budging. I'm mostly in stocks. When I hear professionals speak I listen but according to my situation. Everyone's situation is different. I'm staying the course, I believe these financial professionals have enough money to shuffle their funds and not get hurt too much. I for one don't have that luxury. When in doubt, read the last chapter of Mr. Bogle's Little Book of Common Sense Investing. Just stay the course the worse that can happen is you can buy more bonds for cheap. These events happen in cycles, when rates rise and bonds tumble just think of it as a clearance sale.

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Re: Charles Ellis says stay out of bonds

Post by Ed 2 » Thu Apr 11, 2013 8:03 pm

Nahum wrote:I'm not budging. I'm mostly in stocks. When I hear professionals speak I listen but according to my situation. Everyone's situation is different. I'm staying the course, I believe these financial professionals have enough money to shuffle their funds and not get hurt too much. I for one don't have that luxury. When in doubt, read the last chapter of Mr. Bogle's Little Book of Common Sense Investing. Just stay the course the worse that can happen is you can buy more bonds for cheap. These events happen in cycles, when rates rise and bonds tumble just think of it as a clearance sale.
+++1. My portfolio mostly in stocks,bond portion in IBonds,I sleep like a baby.My way-stay the course,buy low ,hold and hold long time. Bond funds are expensive and stinky now. Why to buzzer even having them instead of having just IBonds or CD's without any risk to principle??? If I was 65 years old [time is not your friend guys] and higher, I would seriously started thinking about bond funds and their role supposedly as "low risk" investment. :twisted:
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel

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Re: Charles Ellis says stay out of bonds

Post by Leesbro63 » Thu Apr 11, 2013 8:04 pm

For Naham, two replies above:

A sale implies a temporary price reduction. Do you really think 0-3% rates are the norm and if they go up that they'll come back down? And if bonds crash, what will you buy more with? New money is small compared to a lifetime of "safe money" that loses 10-25% of its value. Very perhaps permanently. The only potential good scenario that can come out of owning bonds at these price levels is we stay in a slow growth economy for years and rates merely remain low. Very possible, but the consequences of being wrong could be at least semi-catastropic. What if rates rise fast and furious like the late '70's period?

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Re: Charles Ellis says stay out of bonds

Post by dewey » Thu Apr 11, 2013 8:12 pm

Levett wrote:Scooter,

I sorta admire a good many people--some of them even investment professionals. :wink:

But I try to make responsible decisions based on my judgment, not the judgment of others.

Owning your own decisions is a wonderfully liberating experience. 8-)

Lev
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Re: Charles Ellis says stay out of bonds

Post by Blues » Thu Apr 11, 2013 8:32 pm

dewey wrote:
Levett wrote:Scooter,

I sorta admire a good many people--some of them even investment professionals. :wink:

But I try to make responsible decisions based on my judgment, not the judgment of others.

Owning your own decisions is a wonderfully liberating experience. 8-)

Lev
+1 Own your own thoughts or someone else surely does.
There's a great quote from a character in "The Virginian" by Owen Wister along the same lines:

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Re: Charles Ellis says stay out of bonds

Post by Leesbro63 » Thu Apr 11, 2013 8:35 pm

Of course everyone has to think for themselves. But I see a lot of shooting the messenger here. There are enough Boglehead-credible experts calling for shortened duration that the idea cannot just be dismissed as the usual "noise".

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Re: Charles Ellis says stay out of bonds

Post by SpaceCommander » Thu Apr 11, 2013 9:00 pm

Indeed fundamentals matter. I don't know see any rational person can dispute this. The fundamentals are showing us that expected return for bonds going forward is, for all intents and purposes, ZERO. Factor in inflation and the expected return for bonds for years on end is negative.

Under normal circumstances rational investors would never lend their money at these kind of rates below inflation that lock in a real loss. Fiscal policy has created another bubble. I don't see how anybody can deny that. We see this scenario playing out in slow motion for all to see. If some choose to ride it out, that's great. I choose to invest where there is a reasonable expectation for a real return. That's not bond index funds. 100% stock is not the only alternative. I prefer not to get into debates over what the alternatives are because it all depends on an individuals personal situation, risk tolerance, investment horizon, etc. But there are indeed other options besides merely going 100% stocks.

I think that in addition to our cherished investment philosophy, we also need a good dose of common sense and a refresher on our math skills. Gentlemen: I defer the last word to you....
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Re: Charles Ellis says stay out of bonds

Post by steve roy » Thu Apr 11, 2013 9:29 pm

Since so many are warning against bonds right now, think of THIS Mark Twain quote:

"When you find yourself on the side of the majority ...
It is time to pause and reflect."

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Re: Charles Ellis says stay out of bonds

Post by Leesbro63 » Thu Apr 11, 2013 9:41 pm

steve roy wrote:Since so many are warning against bonds right now, think of THIS Mark Twain quote:

"When you find yourself on the side of the majority ...
It is time to pause and reflect."
"The majority" are reaching for yield. Only BOGLEHEADS (and others who have more sophisticated financial knowledge) have some dissenters (like me) "warning against bonds"

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Re: Charles Ellis says stay out of bonds

Post by Scooter57 » Fri Apr 12, 2013 7:40 am

When you quote Mark Twain you should remember that his investments bankrupted him despite his having earned an enormous amount of money from his writings.

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Re: Charles Ellis says stay out of bonds

Post by Tigermoose » Fri Apr 12, 2013 8:01 am

SpaceCommander wrote:Indeed fundamentals matter....
I think that in addition to our cherished investment philosophy, we also need a good dose of common sense and a refresher on our math skills. Gentlemen: I defer the last word to you....
I'm with the Commander on this one. We can't let ideology blind us from the facts on the ground. We should avoid Fear, Greed, and Ideology. Also, take a look at this article:
http://www.spiegel.de/international/bus ... 93213.html
Institutions matter

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Re: Charles Ellis says stay out of bonds

Post by grok87 » Fri Apr 12, 2013 8:11 am

Leesbro63 wrote:
steve roy wrote:Since so many are warning against bonds right now, think of THIS Mark Twain quote:

"When you find yourself on the side of the majority ...
It is time to pause and reflect."
"The majority" are reaching for yield. Only BOGLEHEADS (and others who have more sophisticated financial knowledge) have some dissenters (like me) "warning against bonds"
I think there is a third way. We all definitely need some bonds. But think broadly. Just buy ibonds, bank/credit union savings accounts yielding 0.5%-1%, credit union cds with guaranteed early withdrawal at low penalties, the "G" Fund, etc. You get better yields and mimimal interest rate risk.
What's not to like?
cheers,
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Charles Ellis says stay out of bonds

Post by Tigermoose » Fri Apr 12, 2013 8:13 am

grok87 wrote: I think there is a third way. We all definitely need some bonds. But think broadly. Just buy ibonds, bank/credit union savings accounts yielding 0.5%-1%, credit union cds with guaranteed early withdrawal at low penalties, the "G" Fund, etc. You get better yields and mimimal interest rate risk.
What's not to like?
cheers,
Grok for the win!
Institutions matter

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CyberBob
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Re: Charles Ellis says stay out of bonds

Post by CyberBob » Fri Apr 12, 2013 8:31 am

LH wrote: Regardless, if real risk shows up, treasury bonds are still safer than stocks.
Volatility isn't risk. To quote Warren Buffett:
The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.

Investments that are denominated in a given currency, like bonds, are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

I believe that over any extended period of time investment in productive assets, whether businesses, farms, or real estate will prove to be the runaway winning category. More important, it will be by far the safest.
Bob

carolinaman
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Re: Charles Ellis says stay out of bonds

Post by carolinaman » Fri Apr 12, 2013 8:34 am

SpaceCommander wrote:Indeed fundamentals matter. I don't know see any rational person can dispute this. The fundamentals are showing us that expected return for bonds going forward is, for all intents and purposes, ZERO. Factor in inflation and the expected return for bonds for years on end is negative.

Under normal circumstances rational investors would never lend their money at these kind of rates below inflation that lock in a real loss. Fiscal policy has created another bubble. I don't see how anybody can deny that. We see this scenario playing out in slow motion for all to see. If some choose to ride it out, that's great. I choose to invest where there is a reasonable expectation for a real return. That's not bond index funds. 100% stock is not the only alternative. I prefer not to get into debates over what the alternatives are because it all depends on an individuals personal situation, risk tolerance, investment horizon, etc. But there are indeed other options besides merely going 100% stocks.

I think that in addition to our cherished investment philosophy, we also need a good dose of common sense and a refresher on our math skills. Gentlemen: I defer the last word to you....
Since some posters are providing clever quotes, here is mine: "Common sense ain't common" Will Rogers

Stay the course is admirable and is a good strategy for many situations. However, I think every long term investor should periodically reassess their investment plan and determine if any changes are warranted based upon their situation. Major market changes that appear to be long term should cause one to seriously reconsider their AA. A good question to ask is if I were starting my investment plan today from scratch, what would it look like? If it is materially different than your current plan, you should be seriously consider making changes.

Leesbro63
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Re: Charles Ellis says stay out of bonds

Post by Leesbro63 » Fri Apr 12, 2013 8:41 am

grok87 wrote:
Leesbro63 wrote:
steve roy wrote:Since so many are warning against bonds right now, think of THIS Mark Twain quote:

"When you find yourself on the side of the majority ...
It is time to pause and reflect."
"The majority" are reaching for yield. Only BOGLEHEADS (and others who have more sophisticated financial knowledge) have some dissenters (like me) "warning against bonds"
I think there is a third way. We all definitely need some bonds. But think broadly. Just buy ibonds, bank/credit union savings accounts yielding 0.5%-1%, credit union cds with guaranteed early withdrawal at low penalties, the "G" Fund, etc. You get better yields and mimimal interest rate risk.
What's not to like?
cheers,
This has it's limits for large taxable investors.

Scooter57
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Re: Charles Ellis says stay out of bonds

Post by Scooter57 » Fri Apr 12, 2013 9:33 am

My assets are 98% in taxable accounts. I figured out years ago that while being unprofitable is a great way to avoid taxes, I'd rather pay taxes. Even after taxes, you have more left than you would have had if you didn't earn whatever was taxed.

The advantage of those investment-stable vehicles is that you can take advantage of opportunties for better yield down the road, to say nothing of major dips in the market or falls in the price of housing you'd like to own.

It is the size of the yields right now that make bonds such a bad idea going forward. Locking a 7.2% rate which doubles your investment in 10 years is quite different from locking in a 1.69% rate which doubles the same investment in 42 years.

connya
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Re: Charles Ellis says stay out of bonds

Post by connya » Fri Apr 12, 2013 9:56 am

Call_Me_Op wrote:
fidelio wrote:what happened to short term bond funds?
Problem with these, in my view, is that they are not short enough - given the pathetic slope of the yield curve at the short end coupled with the historically-low risk-free return. Why should I extend to a 2.2 year duration and risk (say) a 10% drop to pick-up an extra 0.3% yield on top of the "risk-free" 0.2%? I'd rather collect my 0.2% essentially risk free (in terms of probability of nominal loss).
Couldn't you just hold a proportion of a ST fund and a MM fund to lower your average duration?

garlandwhizzer
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Re: Charles Ellis says stay out of bonds

Post by garlandwhizzer » Fri Apr 12, 2013 11:08 am

I totally agree with CyberBob and SpaceCommander on this one. I have already lowered my bond allocation to 25% of my portfolio, anticipating a zero or slightly negative real return on bonds over the next decade. I am keeping some bonds as an anchor for stormy times and I plan to rebalance into stocks if the equity market crashes again which is probable given the past decade. I feel that while it will increase my portfolio volatility over the next decade, it will almost certainly reduce the risk of underperformance in the portfolio as a whole. Bogle himself, a great fan of bonds and the originator of "age in bonds," recently said that there is an 85% -90% probability that stocks will outperform bonds over the next decade. Those are odds I'm willing to bet on and I think that Bogle conservatively understated the case. Volatility doesn't bother me so much. I have been on roller coasters before. The prospect of zero or negative real returns for 50% - 80% of my portfolio over a decade bothers me a great deal.

Garland Whizzer

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