Bonds Investors running for the hills

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
dozer183e
Posts: 46
Joined: Fri May 10, 2013 8:24 pm

Bonds Investors running for the hills

Post by dozer183e » Wed Jun 19, 2013 5:43 am

http://online.wsj.com/article/SB1000142 ... 29034.html

All this talk makes me think my new bond allocations should go to i-bonds or CDs.

User avatar
nisiprius
Advisory Board
Posts: 36637
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bonds Investors running for the hills

Post by nisiprius » Wed Jun 19, 2013 6:42 am

dozer183e wrote:http://online.wsj.com/article/SB1000142 ... 29034.html

All this talk makes me think my new bond allocations should go to i-bonds or CDs.
I don't see any possible harm in putting new money into i-bonds and CDs, and to some extent I'm doing it myself. (Broken record: because of the possibility that the bank might actually deny early withdrawal, don't put so much into CDs that it would be a serious problem if you had to wait for them to mature).

The language used in the article suggests that "all this talk" is about market psychology, not about rational reaction to quantitative expectations. "Head for the Hills." The word fear, rather than expectation or anticipation in "fear of higher rates." "sending investors and corporate leaders racing," "on tenterhooks," "Bernanke's Rubicon day," "Bracing for the turmoil," etc. etc. That's the language of emotion, not of calculation.

So if we are talking about Mr. Market here, the point I want to make is this: if Mr. Market is in a tizzy, we could run for the hills along with him, because, after all, he might be right. Or, if we are smartypants speculator types, we could just as well say "Overreaction, great buying opportunity." Or, if we are lazy or inattentive or paralyzed with fear or virtuously staying the course, we could just wait for Mr. Market to calm down and reasonably hope that when the dust settles it won't have been that big a deal. That some of the smartypants types who called it right will, in fact, have done better than us--but they will have done it mostly by taking money away from other smartypants types who called it wrong.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Scooter57
Posts: 782
Joined: Thu Jan 24, 2013 9:20 am

Re: Bonds Investors running for the hills

Post by Scooter57 » Wed Jun 19, 2013 9:29 am

Nisi,

Every time the subject of CDs comes up you mention that early withdrawal might be forbidden, based on actions of two, tiny, marginal CUs in regulatory-poor states--two out of many thousands of institutions, and some wording in the Ally contract which Ally is on record as saying does not mean they will forbid early withdrawals.

Since the chances of this happening are far, far lower than that corporate bonds might default, why aren't you also warning, "Corporate bonds might default, even ones with investment grade ratings so don't put any money into a bond fund holding corporate bonds that you might need anytime during the maturity period of the bonds held in the fund."

Corporations are very highly leveraged right now, thanks to the cheap credit of the past five years, and another economic downturn that hit sales hard would be much more likely to result in corporate bond defaults than it would be to result in banks and credit unions refusing to honor the terms of their CD contracts.

As for Municipal bonds, the chances of default there are far, far higher, given that congress refuses to fund much of what it has been funding for decades, passing the costs of many of those services which still must be paid for down to cities and towns.

So if we are going to mention long tail risks every time the word CD is mentioned here, fairness suggests we do the same with every other class of investment, doesn't it?

SPG8
Posts: 357
Joined: Tue Mar 29, 2011 10:27 am

Re: Bonds Investors running for the hills

Post by SPG8 » Wed Jun 19, 2013 9:35 am

What are the numbers?

User avatar
Blues
Posts: 1659
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Re: Bonds Investors running for the hills

Post by Blues » Wed Jun 19, 2013 9:43 am

As if we needed yet another of these threads decrying bonds...

Where's Emma Lazarus when we need her?

(with apologies for liberties taken...)

Give me your tired, your poor,
Your muddled investors yearning to be free,
O' the wretched bond funds of your teeming shore.
Send these, the hopeless, interest-tost to me,
I lift my lamp beside the trading floor!



I guess one can at least hope for a return to sanity and rationality. :oops:
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

Call_Me_Op
Posts: 7028
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Bonds Investors running for the hills

Post by Call_Me_Op » Wed Jun 19, 2013 9:49 am

Perhaps some bond investors are running for the hills, but if it were happening on a large scale, the 10-year treasury would not be yielding a measly 2.2%.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
nisiprius
Advisory Board
Posts: 36637
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bonds Investors running for the hills

Post by nisiprius » Wed Jun 19, 2013 9:50 am

Scooter57 wrote:Nisi,

Every time the subject of CDs comes up you mention that early withdrawal might be forbidden, based on actions of two, tiny, marginal CUs in regulatory-poor states--two out of many thousands of institutions, and some wording in the Ally contract which Ally is on record as saying does not mean they will forbid early withdrawals.

Since the chances of this happening are far, far lower than that corporate bonds might default, why aren't you also warning, "Corporate bonds might default, even ones with investment grade ratings so don't put any money into a bond fund holding corporate bonds that you might need anytime during the maturity period of the bonds held in the fund."

Corporations are very highly leveraged right now, thanks to the cheap credit of the past five years, and another economic downturn that hit sales hard would be much more likely to result in corporate bond defaults than it would be to result in banks and credit unions refusing to honor the terms of their CD contracts.

As for Municipal bonds, the chances of default there are far, far higher, given that congress refuses to fund much of what it has been funding for decades, passing the costs of many of those services which still must be paid for down to cities and towns.

So if we are going to mention long tail risks every time the word CD is mentioned here, fairness suggests we do the same with every other class of investment, doesn't it?
Do as you please. I have frequently characterized my attitude toward denial of early withdrawal as "paranoid."

The honest truth is that I don't know how to evaluate the risk. If I were sure it were really "long tail risk" I'd neglect it, not because it doesn't exist but because it can't be evaluated. I think the fact that Ally added that condition to an agreement that didn't previously have it is significant, and leads me to downgrade my self-evaluation from "paranoid" to merely "pessimistic."

I don't know what was happening in the lead-up to 1980; I am not sure whether or not there has ever before been a period when people were breaking CDs on a large scale, do you? That would be a very relevant bit of history.

I don't think either tfb or Kevin M. believe that the fear is unreasonable; I think their argument is that CDs are superior even if you assume they must be held to maturity. I think that, in turn, is based on an expectation that interest rates are not going to rise so fast that it's ever worth paying the penalty. Thus, it will continue to be true that CDs get broken mostly because of emergencies, not from cold calculation of financial advantage.

It depends on your reason for buying CDs. If you plan to hold them to maturity and are going to CDs because you think they will earn more than a bond fund, then you simply don't need to worry about early withdrawal. If your reason for buying CDs is to bypass a dip in bond fund value, then you at least need to consider early withdrawal, and while you are looking at the penalty you should also look at what the terms and conditions for the individual CD say--and, if there is no restriction on early withdrawal, what they say about whether the terms and conditions can be changed. And then actually read any fine-print notices or emails you get.

I would completely brush aside verbal assurances that they've given themselves power to do something but that it is not their policy ever to use that power. John D. Macdonald has a funny episode in a novel in which someone signs something that he's told is "just a legal formality." Then the condominum management exercises that clause; the victim says "but you said it was just a formality," and the manager replies, "Yes, it is a formal, legal, binding contract."

Yes, the most likely scenario is that we will never find out who is right, because interest rates will not rise so much as to create more demands for early withdrawal than banks can handle comfortably.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
stemikger
Posts: 4902
Joined: Thu Apr 08, 2010 5:02 am

Re: Bonds Investors running for the hills

Post by stemikger » Wed Jun 19, 2013 9:58 am

I for one am going to listen to this guy: When my two idols agree it's time for me to listen.

http://www.youtube.com/watch?v=1N3g47P-iRc

John Bogle has been much more cryptic but he is also saying there are no easy answers when it comes to this bond situation we will soon find ourselves facing. As Warren says it's not if, but when.

He is also more vocal about including social security in your asset allocation. That would mean I should be 100% in equities. I also have a house that is completely paid off. I recently asked for advise from the person who gives investing advise to the employees. He told me that if he were me he would be 100% equities. I thought he was crazy, but now I'm agreeing with him.

Dave Ramsey who I'm no longer a fan of has been promoting 100% equities since day one.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

gerrym51
Posts: 1679
Joined: Sat Apr 27, 2013 1:44 pm

Re: Bonds Investors running for the hills

Post by gerrym51 » Wed Jun 19, 2013 10:03 am

Locusts are eating the country. Hail is destroying buildings. the sewers are backing up.Hang Ben Bernacke.Call security. get bigger mattreses. :mrgreen:

User avatar
Blues
Posts: 1659
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Run Chicken Little!

Post by Blues » Wed Jun 19, 2013 10:07 am

Image

"This time it's really, really different."

:oops:
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

User avatar
stemikger
Posts: 4902
Joined: Thu Apr 08, 2010 5:02 am

Re: Run Chicken Little!

Post by stemikger » Wed Jun 19, 2013 10:39 am

Blues wrote:Image

"This time it's really, really different."

:oops:
Not that it's different, but if you look at what is going to happen, and listen to the best minds in the business I don't think it is a bad thing to act accordingly. When will it happen? To what extent it will happen? No one knows, but it will happen! If you invested in the S&P during the last decade you had the lost decade. I believe and so does Warren and Jack that as an equity investor in index funds we are going to be rewarded.

I used to think if I met a young Warren Buffett would I listen to him? I really don't know if I would. However, I have the advantage of knowing he is the best in the world. So I am definitely going to take his advice this time.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

User avatar
Blues
Posts: 1659
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Re: Bonds Investors running for the hills

Post by Blues » Wed Jun 19, 2013 10:49 am

And I wish you the best of luck, sincerely.

I'm not Buffett and I'm not Bogle and I don't know the future, (as many on this board profess to), I only know what has worked for me since the mid 80's when my I began investing outside of the workplace. I intend to stick with what I have learned from my own experience as well as with the help of some of the brighter minds both here on the boards and elsewhere. The learning process never really ends.

That said, I don't think there's anything wrong with adopting a defensive position. I liquidated my taxable bond funds a while back and have put the proceeds in a combination of CDs, I-Bonds and MMs...while still retaining an investment in intermediate term bonds in our tax advantaged accounts.

We are well set up to ride out any periods of bond under performance as well as temporary loss of principal. All of this has been accomplished without running around like our hair was on fire and without fear that the bond or equity markets wouldn't end up doing what they've pretty much always done.

Risk management is good. Fear mongering and losing sight of the big picture...not so much, imho.
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

billyt
Posts: 687
Joined: Wed Aug 06, 2008 9:57 am

Re: Bonds Investors running for the hills

Post by billyt » Wed Jun 19, 2013 10:51 am

Setting and maintaining a well thought out asset allocation in the face of all market conditions seems like the appropriate response to me. An allocation to bonds smooths out the portfolios return. This means when stocks are rising bonds will be a drag on portfolio returns. When stocks are tanking, you are very glad to have those bonds. Bonds are the 'springs' to cushion the ride of your portfolio. Right now, at such low bond yields, those springs are not so good. With each basis point rise in interest rates, those springs get a little better. Sure, if you are convinced you know the future, by all means go 100% stocks and bail out just before the bear market (good luck with that). Immunizing against interest rate rise by purchasing CDs or i-bonds is not the necessarily the worst thing you can do, but you won't know if it was the best thing to do only in retrospect.

User avatar
midareff
Posts: 5725
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Bonds Investors running for the hills

Post by midareff » Wed Jun 19, 2013 10:54 am

Head for the hill, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic, head for the hills, stay the course, emotional panic, talking heads, unemotional logic.....................

SOS, ignore the noise.

User avatar
nisiprius
Advisory Board
Posts: 36637
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Bonds Investors running for the hills

Post by nisiprius » Wed Jun 19, 2013 11:09 am

gerrym51 wrote:Locusts are eating the country. Hail is destroying buildings. the sewers are backing up.Hang Ben Bernacke.Call security. get bigger mattreses. :mrgreen:
Surely I'm not the only one who instantly recalled The Merry Minuet, by Sheldon Harnick, popularized by the Kingston Trio.

They're selling in South Africa, (tweedle deedle deedle deedle)
They're bankrupt in Spain, (tweedle deedle deedle dee);
The bull has left the China shop, (tweedle deedle deedle deedle)
And PIMCO feels pain (twee tweedle deedle dee).

The markets are festering
With no magic wands,
Investors fear stocks
And investors fear bonds;
No one can figure out
Just what the Fed meant;
My bank pays me point-oh-one percent!
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
neurosphere
Posts: 2952
Joined: Sun Jan 17, 2010 1:55 pm

Re: Bonds Investors running for the hills

Post by neurosphere » Wed Jun 19, 2013 11:14 am

Scooter57 wrote:Nisi,

Every time the subject of CDs comes up you mention that early withdrawal might be forbidden, based on actions of two, tiny, marginal CUs in regulatory-poor states--two out of many thousands of institutions, and some wording in the Ally contract which Ally is on record as saying does not mean they will forbid early withdrawals.

Since the chances of this happening are far, far lower than that corporate bonds might default, why aren't you also warning, "Corporate bonds might default, even ones with investment grade ratings so don't put any money into a bond fund holding corporate bonds that you might need anytime during the maturity period of the bonds held in the fund."

Corporations are very highly leveraged right now, thanks to the cheap credit of the past five years, and another economic downturn that hit sales hard would be much more likely to result in corporate bond defaults than it would be to result in banks and credit unions refusing to honor the terms of their CD contracts.

As for Municipal bonds, the chances of default there are far, far higher, given that congress refuses to fund much of what it has been funding for decades, passing the costs of many of those services which still must be paid for down to cities and towns.

So if we are going to mention long tail risks every time the word CD is mentioned here, fairness suggests we do the same with every other class of investment, doesn't it?
While I think nisi is somewhere on the border between paranoid and pessimistic, your analogy is not a good one.

The risks of decline in the bond fund are well known, and the magnitude of the event can be estimated to some extent by historical data, and the consequences evaluated. I.e. what are the chances that my short-term investment grade mutual fund will suffer a decline of 50% during the next year? Very very low, but not zero. So one can determine based on their own personal situation what the consequences of being wrong about the probability of this particular event occurring.

In the case of a CD, nisi was being very careful about his wording regarding the admittedly small risk of not being able to cash out a CD. He said (emphasis mine):
Broken record: because of the possibility that the bank might actually deny early withdrawal, don't put so much into CDs that it would be a serious problem if you had to wait for them to mature.
Yes a low probability event, but if the consequences are a "serious problem", then one needs to evaluate the risk of a low probability event in that context. Should one put their 20% down payment intended to purchase a home in 4 years, into a 5 year CD? If the penalty for early withdrawal were trivial, you might say, not a big risk. But on the off chance they deny getting at your money AT ALL, that could really mess up big plans.

Also, I agree with nisi somewhat that the risks are not easily quantifiable because we don't really have a good historical perspective on individuals' behaviour with respect to CDs during times of rapid rises in interest rates. Or do we? What did people do with long-term CDs bought in the 60s or 70s? I don't know.

In any case, I think the risk nisi is worried about are low enough as to not affect any decision I would make. However, I do think that an investor should hear at least once during their investing lifetime that such a risk (might/might not) exist. I feel it's a risk that I am glad I at least heard of once, even if I then choose to immediately discount the chances of that risk affecting my personal situation.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

Scooter57
Posts: 782
Joined: Thu Jan 24, 2013 9:20 am

Re: Bonds Investors running for the hills

Post by Scooter57 » Wed Jun 19, 2013 1:19 pm

Given that when this issue came up in the past only 2 incidents where CD redemptions were refused were cited, it seems to me that the odds are vanishingly small. Especially if you avoid Ally Bank or any other institution that has weasel wording in their CD contract allowing them to change terms on the fly. My CD contracts do not have that kind of wording.

And it's worth noting that at current rates and typical contract terms, if you broke a 2% 5 year CD with a 6 month interest penalty after the penalty you have a 1% CD (broken after 1 year) or a 1.52% CD (2 years) or 1.68% (3 years) , 1.77% (4 years). These rates are quite close to what the CUs are charging now for these shorter maturities. So the bank or CU isn't taking the kind of loss on these early withdrawals that would force it to slam on the brakes.

The kind of bank you'd want to invest in is one that has thought this through and calculated the penalties so that it doesn't suffer harm if you invoke the clause they have put into the contract.

Ally is an exception because it has a very small early withdrawal penalty. It also has a shaky financial position which is why it is going out beating the bushes for depositors. Easy solution: Avoid Ally and stick with institutions in fine financial shape with industry standard penalties, which are those that reduce the bank's risk if you withdraw early.

User avatar
neurosphere
Posts: 2952
Joined: Sun Jan 17, 2010 1:55 pm

Re: Bonds Investors running for the hills

Post by neurosphere » Wed Jun 19, 2013 1:36 pm

Scooter57 wrote:Given that when this issue came up in the past only 2 incidents where CD redemptions were refused were cited, it seems to me that the odds are vanishingly small.

(Agreed).

[snip]

Ally is an exception because it has a very small early withdrawal penalty. It also has a shaky financial position which is why it is going out beating the bushes for depositors. Easy solution: Avoid Ally and stick with institutions in fine financial shape with industry standard penalties, which are those that reduce the bank's risk if you withdraw early.

(Agreed)
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

User avatar
Ged
Posts: 3593
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Run Chicken Little!

Post by Ged » Wed Jun 19, 2013 1:44 pm

Blues wrote:Image
"This time it's really, really different."
:oops:
Bill Gross was on today saying he thinks we are likely to see declining interest rates for the rest of the year and that he is buying bonds.

gkaplan
Posts: 7034
Joined: Sat Mar 03, 2007 8:34 pm
Location: Portland, Oregon

Re: Bonds Investors running for the hills

Post by gkaplan » Wed Jun 19, 2013 1:48 pm

Gordon

User avatar
Blues
Posts: 1659
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Re: Run Chicken Little!

Post by Blues » Wed Jun 19, 2013 1:54 pm

Ged wrote:Bill Gross was on today saying he thinks we are likely to see declining interest rates for the rest of the year and that he is buying bonds.
Like he knows anything about bonds... :P

:mrgreen:

(Stay on the forum long enough and it's like the old song says... "the music goes round and round and it comes out here".
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

User avatar
floydtime
Posts: 410
Joined: Sat Feb 26, 2011 10:09 pm
Location: A book

Re: Run Chicken Little!

Post by floydtime » Wed Jun 19, 2013 2:03 pm

Ged wrote:Bill Gross was on today saying he thinks we are likely to see declining interest rates for the rest of the year and that he is buying bonds.
Oh no. For the first time , I am afraid of rising interest rates in the near term. :wink:
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas

User avatar
mephistophles
Posts: 3110
Joined: Tue Mar 27, 2007 2:34 am

Re: Bonds Investors running for the hills

Post by mephistophles » Wed Jun 19, 2013 2:06 pm

I listen carefully to Bogle and Buffet. Following their suggestions is a far cry from "chicken-little" behavior. For example, a boglehead thread authored by Bogle warned us of stocks being overpriced before the last crash and that one should reconsider their allocation. I followed his advice and profited greatly.
ole meph

User avatar
Blues
Posts: 1659
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Re: Bonds Investors running for the hills

Post by Blues » Wed Jun 19, 2013 2:12 pm

mephistophles wrote:I listen carefully to Bogle and Buffet. Following their suggestions is a far cry from "chicken-little" behavior. For example, a boglehead thread authored by Bogle warned us of stocks being overpriced before the last crash and that one should reconsider their allocation. I followed his advice and profited greatly.
ole meph
Trust me when I say I have great respect for both gentlemen but that doesn't mean I believe they are clairvoyant.

On topic with this thread, what do you think the dire result will be for someone who has a high(er) allocation to bonds?

Do you expect them to suffer some catastrophic loss from which they will not be able to recover?

Or is it merely that you don't feel that it's an ideal allocation to take advantage of current circumstances?

Keep us posted, if you would, on what steps we should be taking. (I'm being a little facetious with that remark, so please forgive me.)
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Re: Bonds Investors running for the hills

Post by hsv_climber » Wed Jun 19, 2013 2:22 pm

Sure, bond funds are down by 1-2% after Bernanke speech and that is the reason for concern.
But some stock funds are down even more. Em. Markets and REITs are down near 3%.

gerrym51
Posts: 1679
Joined: Sat Apr 27, 2013 1:44 pm

Re: Run Chicken Little!

Post by gerrym51 » Wed Jun 19, 2013 2:28 pm

Blues wrote:
Ged wrote:Bill Gross was on today saying he thinks we are likely to see declining interest rates for the rest of the year and that he is buying bonds.
Like he knows anything about bonds... :P

:mrgreen:

(Stay on the forum long enough and it's like the old song says... "the music goes round and round and it comes out here".

didn't Bill Gross a few weeks ago say Pimco was getting out of bonds?.

head for the hills for sure

hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Re: Run Chicken Little!

Post by hsv_climber » Wed Jun 19, 2013 2:33 pm

gerrym51 wrote: didn't Bill Gross a few weeks ago say Pimco was getting out of bonds?.
Is not he saying that every year?

remus421
Posts: 1
Joined: Wed Jun 19, 2013 2:59 pm

Re: Bonds Investors running for the hills

Post by remus421 » Wed Jun 19, 2013 3:30 pm

i have always stuck with the 70-30 percentages. can any body explain to me why anybody would have monies in bonds when the interest rates are at an all time Low and can only go up from here. I'm seriously considering staying 70% in stocks but putting the bond % in cds and cash.

User avatar
floydtime
Posts: 410
Joined: Sat Feb 26, 2011 10:09 pm
Location: A book

Re: Bonds Investors running for the hills

Post by floydtime » Wed Jun 19, 2013 3:48 pm

remus421 wrote:i have always stuck with the 70-30 percentages. can any body explain to me why anybody would have monies in bonds when the interest rates are at an all time Low and can only go up from here. I'm seriously considering staying 70% in stocks but putting the bond % in cds and cash.
When will you need the money? If you're talking 10-20 years or more, keep it in bonds and HOPE that yields go up and up and up. Celebrate it! Your (hopefully huge) dividends will dwarf any nearer-term, and irrelevant, NAV loss.

Understanding Duration is the key. Many lately seem to have forgotten how bonds work. Even very respected experts who should know better.

If you need the money sooner, then CDs or cash or short-term bonds would likely be a better choice.
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas

User avatar
stemikger
Posts: 4902
Joined: Thu Apr 08, 2010 5:02 am

Re: Bonds Investors running for the hills

Post by stemikger » Wed Jun 19, 2013 4:07 pm

remus421 wrote:i have always stuck with the 70-30 percentages. can any body explain to me why anybody would have monies in bonds when the interest rates are at an all time Low and can only go up from here. I'm seriously considering staying 70% in stocks but putting the bond % in cds and cash.
Mr. Bogle has said that the Total Bond Market Index needs to be fixed. He things one should possibly consider putting half of your Total Bond Market allocation in some corporate bonds. Or put that portion in dividend paying stocks (does that mean the S&P? I'm not sure).

He also recently said count social security as part of your bond allocation. If I take that advise that puts me 100% in stocks in my 401K. I also have a paid for house which makes it even more applicable to my situation.

Warren Buffett has said several times (even before this) that cash is the worst investment and that the only reason to hold enough cash is so you can sleep at night but don't make the mistake of looking at it as an investment. He is not shy about saying that the average guy or girl should be 100% in a stock index fund if they want to be a passive investor.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

User avatar
LadyGeek
Site Admin
Posts: 47963
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Bonds Investors running for the hills

Post by LadyGeek » Wed Jun 19, 2013 4:09 pm

This thread is now in the Investing - Theory, News & General forum.

BTW, you can view WSJ articles without a subscription if you find it via google: bond investors head for the hills site:wsj.com - Google Search - it's the first link after "News for..."
gkaplan wrote:http://www.bogleheads.org/forum/viewtop ... ead#unread

Are these two threads the same?
Yes, that link points back to here.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

User avatar
stemikger
Posts: 4902
Joined: Thu Apr 08, 2010 5:02 am

Re: Bonds Investors running for the hills

Post by stemikger » Wed Jun 19, 2013 4:15 pm

Blues wrote:And I wish you the best of luck, sincerely.

I'm not Buffett and I'm not Bogle and I don't know the future, (as many on this board profess to), I only know what has worked for me since the mid 80's when my I began investing outside of the workplace. I intend to stick with what I have learned from my own experience as well as with the help of some of the brighter minds both here on the boards and elsewhere. The learning process never really ends.

That said, I don't think there's anything wrong with adopting a defensive position. I liquidated my taxable bond funds a while back and have put the proceeds in a combination of CDs, I-Bonds and MMs...while still retaining an investment in intermediate term bonds in our tax advantaged accounts.

We are well set up to ride out any periods of bond under performance as well as temporary loss of principal. All of this has been accomplished without running around like our hair was on fire and without fear that the bond or equity markets wouldn't end up doing what they've pretty much always done.

Risk management is good. Fear mongering and losing sight of the big picture...not so much, imho.
I did well holding bonds when the S&P was flat and bonds did very well. However, the fact is is that interest rates are eventually going to rise. No one knows when but every single person pros and armatures alike know and agree it will happen. So by leaving money in bonds right now may still seem like a defensive position but you are losing an enormous amount of money to inflation. It does not seem risky like the stock market because we don't see it immediately like when the stock market goes down 20% but in the long run you are losing just as much.

Bogle and Buffett do agree we will always see ups and downs in the market but what happened in 2008 was a once in a lifetime situation and it is highly unlikely people living today will live through something like that again. Good Luck to you as well.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

staythecourse
Posts: 5968
Joined: Mon Jan 03, 2011 9:40 am

Re: Bonds Investors running for the hills

Post by staythecourse » Wed Jun 19, 2013 4:24 pm

mephistophles wrote:I listen carefully to Bogle and Buffet. Following their suggestions is a far cry from "chicken-little" behavior. For example, a boglehead thread authored by Bogle warned us of stocks being overpriced before the last crash and that one should reconsider their allocation. I followed his advice and profited greatly.
ole meph
Did you really do better?? If you are in the accumulation mode I would guess you lost money by moving your asset allocation more conservative based on short term changes instead of just doing nothing and just keep plowing money in 2008, 2009, 2010, 2012, and 2013 into a high equity allocation.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Quickfoot
Posts: 999
Joined: Fri Jan 11, 2013 1:03 pm

Re: Bonds Investors running for the hills

Post by Quickfoot » Wed Jun 19, 2013 4:43 pm

This is EXACTLY why most people shouldn't invest / manage their own money, they are incapable of sticking to a well thought out and well diversified investment plan and putting emotion aside. This situation with bonds will pass, it will probably not be as bad as a lot of people are afraid of and if it is, those that stick to their plan will recover their money just like they do with equities. The number of threads of people asking if they should ditch bonds, what they should do with bonds, and the discount on bond funds this year SHOULD have people happily maintaining their asset allocation and buying bonds. If you are investing in the market you shouldn't be looking even at the next 5 years, you should be thinking 10, 15, 20 years out.

Even with 80% bonds (40% high yield, 20% long term, 20% intermediate term), 10% High Dividend Equities and 10% REITS a 1M portfolio is only down 1.72% this year and has yielded $16,446.12 with only 5 months of dividend payments. This portfolio only dropped 0.14% more than a standard 60/40 3 fund portfolio today.

But please let's everyone freak out OR you could have an asset allocation you #1 understand and #2 can tolerate the risk and #3 understand there are going to be asset classes that under perform or out perform every single year :).
Last edited by Quickfoot on Wed Jun 19, 2013 4:49 pm, edited 1 time in total.

User avatar
mephistophles
Posts: 3110
Joined: Tue Mar 27, 2007 2:34 am

Re: Bonds Investors running for the hills

Post by mephistophles » Wed Jun 19, 2013 4:48 pm

Blues wrote:
mephistophles wrote:I listen carefully to Bogle and Buffet. Following their suggestions is a far cry from "chicken-little" behavior. For example, a boglehead thread authored by Bogle warned us of stocks being overpriced before the last crash and that one should reconsider their allocation. I followed his advice and profited greatly.
ole meph
Trust me when I say I have great respect for both gentlemen but that doesn't mean I believe they are clairvoyant.

On topic with this thread, what do you think the dire result will be for someone who has a high(er) allocation to bonds?

Do you expect them to suffer some catastrophic loss from which they will not be able to recover?

Or is it merely that you don't feel that it's an ideal allocation to take advantage of current circumstances?

Keep us posted, if you would, on what steps we should be taking. (I'm being a little facetious with that remark, so please forgive me.)
I am not recommending anything for you, Mr. Blue. Just paying attention to two of the greatests leaders in this field. Of course, choose for yourself.

User avatar
mephistophles
Posts: 3110
Joined: Tue Mar 27, 2007 2:34 am

Re: Bonds Investors running for the hills

Post by mephistophles » Wed Jun 19, 2013 4:52 pm

mephistophles wrote:
Blues wrote:
mephistophles wrote:I listen carefully to Bogle and Buffet. Following their suggestions is a far cry from "chicken-little" behavior. For example, a boglehead thread authored by Bogle warned us of stocks being overpriced before the last crash and that one should reconsider their allocation. I followed his advice and profited greatly.
ole meph
Trust me when I say I have great respect for both gentlemen but that doesn't mean I believe they are clairvoyant.

On topic with this thread, what do you think the dire result will be for someone who has a high(er) allocation to bonds?

Do you expect them to suffer some catastrophic loss from which they will not be able to recover?

Or is it merely that you don't feel that it's an ideal allocation to take advantage of current circumstances?

Keep us posted, if you would, on what steps we should be taking. (I'm being a little facetious with that remark, so please forgive me.)
I am not recommending anything for you, Mr. Blue. Just paying attention to two of the greatests leaders in this field. Of course, choose for yourself.
Of course they are not clarivoyant. That said, I respect the opinion of these two investment greats far more than anyone else I know. Do as you please...and learn by experience.

User avatar
Blues
Posts: 1659
Joined: Wed Dec 10, 2008 11:58 am
Location: Blue Ridge Mtns

Re: Bonds Investors running for the hills

Post by Blues » Wed Jun 19, 2013 5:32 pm

Okey dokey, Meph. Sorry you didn't answer the questions i proffered (quoted below) but that's okay, I suppose I didn't really expect one.
What do you think the dire result will be for someone who has a high(er) allocation to bonds?

Do you expect them to suffer some catastrophic loss from which they will not be able to recover?

Or, is it merely that you don't feel that it's an ideal allocation to take advantage of current circumstances?


Alright then. To each to his own foxhole, I suppose.

Good luck to us all. :beer
Last edited by Blues on Wed Jun 19, 2013 6:27 pm, edited 2 times in total.
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson

tibbitts
Posts: 8003
Joined: Tue Feb 27, 2007 6:50 pm

Re: Bonds Investors running for the hills

Post by tibbitts » Wed Jun 19, 2013 5:35 pm

stemikger wrote:
Blues wrote:
Risk management is good. Fear mongering and losing sight of the big picture...not so much, imho.
Bogle and Buffett do agree we will always see ups and downs in the market but what happened in 2008 was a once in a lifetime situation and it is highly unlikely people living today will live through something like that again. Good Luck to you as well.
Seriously? Highly unlikely? Are we talking people of their age, or people in general? The specifics of 2008 might not repeat, just like the specifics of 1929 haven't repeated, but that's far from saying a downturn of similar or greater magnitude isn't likely to occur.

Paul

User avatar
stemikger
Posts: 4902
Joined: Thu Apr 08, 2010 5:02 am

Re: Bonds Investors running for the hills

Post by stemikger » Wed Jun 19, 2013 5:55 pm

tibbitts wrote:
stemikger wrote:
Blues wrote:
Risk management is good. Fear mongering and losing sight of the big picture...not so much, imho.
Bogle and Buffett do agree we will always see ups and downs in the market but what happened in 2008 was a once in a lifetime situation and it is highly unlikely people living today will live through something like that again. Good Luck to you as well.
Seriously? Highly unlikely? Are we talking people of their age, or people in general? The specifics of 2008 might not repeat, just like the specifics of 1929 haven't repeated, but that's far from saying a downturn of similar or greater magnitude isn't likely to occur.

Paul
I believe they believe probably the next two decades. They didn't exactly say. They said we will see times when the market goes down 20% but if you just stay put you will do better buying an all equity portfolio then any other asset class. The trick is not to sell when it does go down and just keep buying over time. Please note, these are not my words but the words of Warren Buffett. Who are any of us to argue or disagree with his wisdom. There are very smart people who pay a few million to charity every year just to get his opinion on these things. So here he is all over the place telling us what to do. Should we listen? It's up to us as individuals. I for one am going to listen this time. And I'll get back to you in 10 years. P.S. Charles Ellis also agrees with an equity heavy portfolio in his new book The Elements of Investing. He himself was 100% equities in his 70s. Here are his recommendations:

Age 20 - 30s 100% in equities
Age 40s - 85 - 100
Age 50s - 65 - 90
Age 60s - 60 - 80
Age 70s - 40 - 60
80s and beyond 30 - 50
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

User avatar
telemark
Posts: 2309
Joined: Sat Aug 11, 2012 6:35 am

Re: Bonds Investors running for the hills

Post by telemark » Wed Jun 19, 2013 7:32 pm

Signs of strength in the economy? How awful. What's next, an outbreak of peace somewhere? A spell of good weather, perhaps? It's a cruel world out there...

pastafarian
Posts: 386
Joined: Fri Apr 20, 2007 12:55 am

Re: Bonds Investors running for the hills

Post by pastafarian » Wed Jun 19, 2013 7:41 pm

Quickfoot wrote:This is EXACTLY why most people shouldn't invest / manage their own money, they are incapable of sticking to a well thought out and well diversified investment plan and putting emotion aside.
Shack! :moneybag

IlliniDave
Posts: 2294
Joined: Fri May 17, 2013 7:09 am

Re: Bonds Investors running for the hills

Post by IlliniDave » Wed Jun 19, 2013 7:44 pm

I don't have much money in bond funds so I'm gonna just ride it out. Everything's intermediate-term or shorter. I guess I'll get what ever the yield was when I bought and whatever the rising yields (oh, the horror) are as money is reinvested. I won't be selling for decades so I guess I don't care that the NAV gyrates a little.

Maybe I'm missing some really big point? I'm not an expert bond investor by any means.
Don't do something. Just stand there!

epilnk
Posts: 2632
Joined: Wed Apr 18, 2007 7:05 pm

Re: Bonds Investors running for the hills

Post by epilnk » Wed Jun 19, 2013 7:56 pm

I just bought a big chunk of VCAIX this week, increasing the number of shares by more than 10%. No CDs for me.

User avatar
NightOwl
Posts: 664
Joined: Fri Feb 06, 2009 2:08 am
Location: New York, NY

Re: Bonds Investors running for the hills

Post by NightOwl » Wed Jun 19, 2013 7:57 pm

I'm a bond investor -intermediate term total bond in my 401k - and I'm not changing a danged thing. Stay the course. Noise ain't just CNBC - if so it would be more easily tuned out. Sometimes noise comes from unexpected quarters, even from Bogleheads. Make a plan and stick to it.
NightOwl
"Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements." | Peter Bernstein, "The 60/40 Solution."

pastafarian
Posts: 386
Joined: Fri Apr 20, 2007 12:55 am

Re: Bonds Investors running for the hills

Post by pastafarian » Wed Jun 19, 2013 8:01 pm

Long Term Returns, a very fine blog IMO (one of Mike Piper's Friday Investing Blog Roundup emails turned me on to it months ago) has this response to Warren Buffet's opinion :sharebeer

User avatar
stevewolfe
Posts: 1529
Joined: Fri Oct 10, 2008 7:07 pm

Re: Bonds Investors running for the hills

Post by stevewolfe » Wed Jun 19, 2013 8:05 pm

remus421 wrote:i have always stuck with the 70-30 percentages. can any body explain to me why anybody would have monies in bonds when the interest rates are at an all time Low and can only go up from here. I'm seriously considering staying 70% in stocks but putting the bond % in cds and cash.
Tell you what, if the stock market drops -22.61% tomorrow like it did on 10/19/1987, please do come back and talk to us about the comparative killing bonds took today (like Total Bond Market index down -0.55%).

User avatar
zaboomafoozarg
Posts: 1954
Joined: Sun Jun 12, 2011 12:34 pm

Re: Bonds Investors running for the hills

Post by zaboomafoozarg » Wed Jun 19, 2013 8:11 pm

stemikger wrote:The trick is not to sell when it does go down and just keep buying over time. Please note, these are not my words but the words of Warren Buffett. Who are any of us to argue or disagree with his wisdom.
Ah yes, it comes down to that trick. I'm not doubting that you can do it, I just know there are many people who won't be able to.

User avatar
nedsaid
Posts: 10313
Joined: Fri Nov 23, 2012 12:33 pm

Re: Bonds Investors running for the hills

Post by nedsaid » Wed Jun 19, 2013 9:31 pm

Remember that as prices drop, yields will rise. If you reinvest the dividends you will benefit from the rising rates. Unless you are in or near retirement, you should not be too concerned about this. The other exception would be if you owned long term bonds. The intermediate term part of the bond market is where most investors should be for the long term.

The bond market has been particularly strong since the 2008-2009 financial crisis as folks fled to safety. It shouldn't be surprising that interest rates are returning to normal. Remember that Fed policy has been to keep rates artificially low to stimulate the economy. This is good news because it means that the economy is recovering.

Just think of all the retirees that yearn to earn decent interest again. It looks like their prayers are being answered.
A fool and his money are good for business.

User avatar
mephistophles
Posts: 3110
Joined: Tue Mar 27, 2007 2:34 am

Re: Bonds Investors running for the hills

Post by mephistophles » Wed Jun 19, 2013 11:15 pm

Blues wrote:Okey dokey, Meph. Sorry you didn't answer the questions i proffered (quoted below) but that's okay, I suppose I didn't really expect one.
What do you think the dire result will be for someone who has a high(er) allocation to bonds?

Do you expect them to suffer some catastrophic loss from which they will not be able to recover?

Or, is it merely that you don't feel that it's an ideal allocation to take advantage of current circumstances?


Alright then. To each to his own foxhole, I suppose.

Good luck to us all. :beer
O.K. chief! I would expect the value of the bond funds to decrease significantly. Obviously more decrease for longer durations. Probably not catastrophic for younger investors, but very damaging for older investers closer to and in retirement. I would think that the fixed part of one's allocation would be better served in CD's or other FDIC insured product.

User avatar
stemikger
Posts: 4902
Joined: Thu Apr 08, 2010 5:02 am

Re: Bonds Investors running for the hills

Post by stemikger » Wed Jun 19, 2013 11:56 pm

zaboomafoozarg wrote:
stemikger wrote:The trick is not to sell when it does go down and just keep buying over time. Please note, these are not my words but the words of Warren Buffett. Who are any of us to argue or disagree with his wisdom.
Ah yes, it comes down to that trick. I'm not doubting that you can do it, I just know there are many people who won't be able to.
This is true. At the end of the day we all have to either stick to our plan or see what's going on and modify it. However, we also need to sleep at night. As Mr. Bogle says about this, there are no easy answers.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

Post Reply