Poll: Owning bonds and having debt

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How does debt affect bonds within your AA?

My debts and AA are separate issues to me
19
46%
Debt does not affect my AA
10
24%
I adjust my AA somewhat due to having debts
6
15%
I use some bonds to pay off debts and rebalance back to my original AA
2
5%
I use bonds to pay off debts then start rebuilding my bond AA
1
2%
I am young with an iron stomach and have no use for bonds
3
7%
 
Total votes: 41

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mlewis
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Poll: Owning bonds and having debt

Post by mlewis » Sat Apr 27, 2013 2:58 pm

I am curious how many of you adjust your AA and to what extent if you currently have any debts, even a low interest car loan or mortgage.

In this low interest rate environment it would seem logical, if you have a decent chunk of bonds in your portfolio, to use a bunch of it to just pay off debt and then rebuild your savings from there.

Paying down debt, even debt with very low interest, would be an action that seems to lie above wherever the efficient frontier happens to fall, as the risk is basically zero.

malcolm

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gnosis
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Re: Poll: Owning bonds and having debt

Post by gnosis » Sat Apr 27, 2013 3:17 pm

Since I started investing 5 years ago, I have paid off all of what I consider to be high-interest debts, i.e. greater than 3% interest, and I also just refinanced to a fixed 3% mortgage. I consider debt as negative bond. I've maintained a high equity AA all the while around 85/15, which is a slightly higher ratio than I would have if I never had any high-interest debts. I just paid off a $10k loan @ 5% and I considered that a $10k bond purchase, which is as much as I would have wanted to buy into bonds for the year anyway. Now that I have no high-interest debts to pay down, I'm going to start buying bonds again next year to work down to my desired "real" AA of 80/20.

Random Walker
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Re: Poll: Owning bonds and having debt

Post by Random Walker » Sat Apr 27, 2013 3:54 pm

I've been pretty aggressive @ 80/20 tilted to small and value. I just took some bonds to pay dad's mortgage off. That will take me to about 90/10. Probably will take me about a year and a half to return to my target AA unless the market rebalances for me :shock:

Dave

jbk
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Re: Poll: Owning bonds and having debt

Post by jbk » Sat Apr 27, 2013 8:56 pm

The first two choices don't appear to be mutually exclusive. I voted for the second option, but I could have voted for the first one as well.

gkaplan
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Re: Poll: Owning bonds and having debt

Post by gkaplan » Sat Apr 27, 2013 9:11 pm

What if one does not have debt?
Gordon

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Jake46
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Location: Fort Collins, Colorado

Re: Poll: Owning bonds and having debt

Post by Jake46 » Sat Apr 27, 2013 9:25 pm

No debt. Age in bonds.

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SkolVikes7
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Re: Poll: Owning bonds and having debt

Post by SkolVikes7 » Sat Apr 27, 2013 10:17 pm

No debt.

RNJ
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Re: Poll: Owning bonds and having debt

Post by RNJ » Sat Apr 27, 2013 10:37 pm

Mortgage is our only debt. We do not consider our mortgage in our asset allocation, though I understand why some do. I tend to see this as a philosophical issue rather than a purely financial one. I think if we planned to stay in our current home in retirement we'd consider paying the mortgage off, but by no means would it be a slam dunk (recently refinanced @ 3.5%). As it is, we'll get out in 15 or so years and certainly downsize.

Also, our fixed income holdings, though not offering much in the way of return, offer plenty by way of liquidity (a good proportion is in munis in readily accessible accounts). Much easier to take money out of a taxable account than it is to take money out of a house :happy

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G-Money
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Re: Poll: Owning bonds and having debt

Post by G-Money » Sat Apr 27, 2013 10:44 pm

While interest rates across the board are lower today, the environment is not, IMO, that much different from other times. Retail loans to consumers (mortgages, auto loans, etc.), have always been higher than the risk free rate. If you're tempted to take money in bonds earning 1.5% to pay down loans costing 3.5%, wouldn't you also have been tempted to take money invested in bonds earning 8% to pay down loans costing 10%?
Don't assume I know what I'm talking about.

Default User BR
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Re: Poll: Owning bonds and having debt

Post by Default User BR » Sun Apr 28, 2013 1:34 am

mlewis wrote:I am curious how many of you adjust your AA and to what extent if you currently have any debts, even a low interest car loan or mortgage.
I don't consider my home or home loan as part of my portfolio at all.


Brian

Clive
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Re: Poll: Owning bonds and having debt

Post by Clive » Sun Apr 28, 2013 3:31 am

I voted : I adjust my AA somewhat due to having debts

Borrowing (holding debt) and lending (buying treasuries) have counter cycles. I see holding some of both as being just another form of diversification. When yields are being artificially suppressed during which time inflation might at some point rage, being a borrower can be better than having lent.

No mortgage, so most of my debt exposure is held via the likes of leveraged ETF's (LETF's).

For example as a UK investor, I consider 10% ERX (3x energy LETF) to in effect provide a 'portfolio' of 30% stock, 30% commodity, 10% USD/GBP, 20% debt risk/reward exposure). Holding 20% TIPS (or other inflation bonds) with that 10% ERX (combined 30% allocation) helps ensure that the allocation somewhat closely tracks the same stock motion had all 30% been loaded into the non leveraged (IYE, XOM etc.).

Image
Image
Image

Compare the likes of a Permanent Portfolio that separately holds 25% stocks, 25% commodities (gold), with that of an asset that provides 25% stock, 25% commodity exposure rolled up into one and ....

(Portfolio = 25% IYE, 75% TIPS, PRPFX = proxy for PERM)
Image
[The free version of etfreplay doesn't include yearly rebalancing so that previous chart is buy and hold. Yearly rebalancing back to target weightings would have helped to smooth out the progression i.e. added more when low (buy-low), reduced when high (sell-high)]

Some investors prefer to hold assets separately for the greater transparency of individual holdings/assets perhaps opting to hold 50% US stocks, 50% Australian Dollars as a arbitrary example

gain/loss = 0.5 x stock gain/loss +/- 0.5 x currency gain/loss

Others roll that up and might hold 50% Australian dollar denominated stocks instead. Some debt can be included as part of such 'hybrids'.

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