Bond Funds? Or put your money under mattress?

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modhatter
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Bond Funds? Or put your money under mattress?

Post by modhatter » Sat Aug 10, 2013 7:24 pm

I am not as astute as most of you on here, so I would like to pose this question. With a lump sum to invest (say $1,000,000) at this time. How could one justify buying bond funds with interest rates ranging from
.02 to $1.37 for five years, not to mention the fees of the fund. I can't imagine a worse financial decision at this interest rate environment, short of putting your $400,000 bond allotment under your mattress. (actually thinking about it, the mattress idea might be better :mrgreen: )

There is no point in arguing the safety factor for buying bonds ( I am retired by the way) to even out the volatility of the stock market, especially in a large downturn. I am certainly aware of this. That is not the real question at hand. It is rather, where's the better place to put this "safer" money at this time - August 2013?

And as everyone states that you should only buy short to mid term bonds now anyway because their is really no where to go from here but up (most likely) and with that, comes of course an inevitable drop in the bond funds value. (loss) So who can argue in favor of buying bonds or bond funds at this juncture over a CD paying even 1 - 1.89% interest, with no fear of loss of real principal. I am not advocating this as a long term position. Only short term, just like the bonds.

Is it my greenness in assuming I would be better off with CD's for now, until I see some sort of more realistic
bond rate increases in the ensuing years? I think there is a difference also in someone who all ready has a well seasoned bond fund that has gained appreciably over the years selling these funds, vs. someone just buying for first time. Please correct me if I am wrong.

livesoft
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Re: Bond Funds? Or put your money under mattress?

Post by livesoft » Sat Aug 10, 2013 7:30 pm

You know only time will tell.

I think I read something that goes like this:

Sure, go ahead and use CDs and short-term bonds now, but when will you get back into intermediate-term bonds and their higher yields? Chances are you will stick with lower-yielding CDs and short-terms, so that after a few years, you will be at the same place as the folks who stayed in bonds.

But who knows?

For myself, I shortened duration after the poll I made earlier this year. That saved me a few percent drop in the corporate bond fund I sold back then. OTOH, the total bond index fund and GNMA fund I own are down between 2 and 3 percent. OTOH, my equities are up quite a bit. OTOH, my market timing of bonds to equities back to bonds has done really well this year.

Do I have too many hands?
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Re: Bond Funds? Or put your money under mattress?

Post by Call_Me_Op » Sat Aug 10, 2013 7:37 pm

modhatter,

Nobody has mandated that the safe portion of your portfolio needs to be in bond mutual funds. There are other alternatives - and the yields are perhaps even lower - but these alternatives do not carry the same downside risk. Examples are bank money-market funds, bank CD's, short-term brokerage CD's, and short-term treasuries.

Now, if you are looking for a high return AND safety (for that sum of money) in today's environment - forget it.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

MitchC
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Re: Bond Funds? Or put your money under mattress?

Post by MitchC » Sat Aug 10, 2013 7:42 pm

Yep, the modified 2013 and beyond 3-fund portfolio is:

Total Stock Mkt Index
Total Int'l Stock Index
Mattress

Luckily, wife and I have access to a stable value fund in our 401k's. That's where our entire 40% bond allocation went about 4 months ago. Out of Total Bond Index and Pimco Total Return into SV. For now at least...

gerrym51
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Re: Bond Funds? Or put your money under mattress?

Post by gerrym51 » Sat Aug 10, 2013 7:43 pm

mattress :mrgreen:

modhatter
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Re: Bond Funds? Or put your money under mattress?

Post by modhatter » Sat Aug 10, 2013 8:28 pm

MitchC wrote:Yep, the modified 2013 and beyond 3-fund portfolio is:

Total Stock Mkt Index
Total Int'l Stock Index
Mattress

Luckily, wife and I have access to a stable value fund in our 401k's. That's where our entire 40% bond allocation went about 4 months ago. Out of Total Bond Index and Pimco Total Return into SV. For now at least...
I like that one. Gave me a good laugh. :D

modhatter
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Re: Bond Funds? Or put your money under mattress?

Post by modhatter » Sat Aug 10, 2013 9:28 pm

Let me understand something that I am not clear about, with regard to my original question.
Even in this very low interest rate environment, and assuming a gradual uptick of interest rates. Let us say we experience another crash. After all we are at one of the highest peaks of all times when looking at the PE10. data going back to the deep depression.

If we were to experience say a 30% drop as an example, according to Larry Sweedroe, in the 2008 crash - 5 yr. Treasuries experienced a 13% gain, softening the loss to stock portfolio to some degree. Kind of like a partial insurance policy. Now if we experience a substantial (we'll call it market correction) in the next two years, then purchasing these bonds now would have some merit. However, if we do not experience any sort of significant correction for at least another 7 yrs., while interest rates slowly climb. Are we benefiting at all by buying bonds?

BrightFuture1
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Re: Bond Funds? Or put your money under mattress?

Post by BrightFuture1 » Sat Aug 10, 2013 9:31 pm

I am reinvesting my funds using the 3 fund portfolio and decided on a 75% Total Stock Market/Total International and 25% bonds allocation. I know the recommendation is to just invest now and don't time the market but my main concern is with the Total Bond. Should I just ignore the headlines and put it all in? What do you guys think? I'm 35 years old so my horizon is long term.

thanks!

livesoft
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Re: Bond Funds? Or put your money under mattress?

Post by livesoft » Sat Aug 10, 2013 9:48 pm

@BrightFuture1, since you clearly do not mind losing money as shown by your 75% allocation to equities, you should not have any problem losing money in the bond fund as well. The 25% allocation you have to Total Bond Index is perfectly OK.
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JoMoney
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Re: Bond Funds? Or put your money under mattress?

Post by JoMoney » Sat Aug 10, 2013 9:59 pm

modhatter wrote:Let me understand something that I am not clear about, with regard to my original question.
Even in this very low interest rate environment, and assuming a gradual uptick of interest rates. Let us say we experience another crash. After all we are at one of the highest peaks of all times when looking at the PE10. data going back to the deep depression.

If we were to experience say a 30% drop as an example, according to Larry Sweedroe, in the 2008 crash - 5 yr. Treasuries experienced a 13% gain, softening the loss to stock portfolio to some degree. Kind of like a partial insurance policy. Now if we experience a substantial (we'll call it market correction) in the next two years, then purchasing these bonds now would have some merit. However, if we do not experience any sort of significant correction for at least another 7 yrs., while interest rates slowly climb. Are we benefiting at all by buying bonds?
I don't particularly like calling a 30% drop a correction. I think the correction is where we are today (which I think is fairly valued given our investment options). A 30% drop to me is either a signal we're headed into another recession, or a quick "blip" that will be blamed on traders... but that's just an opinion, I'm not alone in that opinion, but there's the old saying "opinions are like a..h...., everyone has got one, and they all stink".

There is no saying that we can't have a stock market crash, and have interest rates rise at the same time. In fact, I think there's a reasonable argument that can be made that the market will see some sort of hit as interests rates rise. Lots of possible reasons why, including lowered profits because of the increase in loan carry costs by corporations, there's also the possibility that traders who have overextended in leverage may be selling to cover themselves before interest rates get out of hand.

But then there's the question as to why interest rates will rise? Is it because the economy is improving (and theoretically more money moving around, companies doing better, and inflation increasing)? Or because of some some massive sell off in the bond market? Rampant inflation/stagflation?

Nobody knows the future. Bonds could stay at this level for decades (it's not unprecedented) I've bet on stocks for anything more then a few years out, the rest is kept in short term bonds and money markets (more for simplicity and easy access then for the interest rates). Interest rates stink, but I'm not about to commit money for 5+ years to a bond.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Jim180
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Re: Bond Funds? Or put your money under mattress?

Post by Jim180 » Sat Aug 10, 2013 10:39 pm

I think before anyone can make a case against bonds they first need to make a case for inflation. Interest rates will not rise significantly without inflation. I don't see it right now. The 10-year is around 2.6%. If the economy would have a setback the 10-year could go back to 1.6%. That would be a nice rally for bonds. The most likely scenario however is that we continue to get slow growth without much inflation. So interest rates could stay in a range for quite a while. That means a rather steady NAV while still collecting dividends at a better yield than CD's or mattress.

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Re: Bond Funds? Or put your money under mattress?

Post by Sriracha » Sat Aug 10, 2013 11:41 pm

It admittedly turned my stomach to do it, but my IPS indicated it was time for me to rebalance selling equities to buy bonds and I bit the bullet and did it. Still a little quesy, but at least you can't call me a wimp. :wink:
Don't reach for yield.

island
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Re: Bond Funds? Or put your money under mattress?

Post by island » Sun Aug 11, 2013 12:06 am

Sriracha wrote:It admittedly turned my stomach to do it, but my IPS indicated it was time for me to rebalance selling equities to buy bonds and I bit the bullet and did it. Still a little quesy, but at least you can't call me a wimp. :wink:
What did you buy?

Sriracha
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Re: Bond Funds? Or put your money under mattress?

Post by Sriracha » Sun Aug 11, 2013 12:23 am

island wrote:
Sriracha wrote:It admittedly turned my stomach to do it, but my IPS indicated it was time for me to rebalance selling equities to buy bonds and I bit the bullet and did it. Still a little quesy, but at least you can't call me a wimp. :wink:
What did you buy?
Best location to do the deed was in the 401k so Fidelity funds ... Fidelity Spartan US Bond Index and, gulp, Fidelity Spartan Inflation-Protected Bond Index.
Don't reach for yield.

island
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Re: Bond Funds? Or put your money under mattress?

Post by island » Sun Aug 11, 2013 12:44 am

Sriracha wrote:
island wrote:
Sriracha wrote:It admittedly turned my stomach to do it, but my IPS indicated it was time for me to rebalance selling equities to buy bonds and I bit the bullet and did it. Still a little quesy, but at least you can't call me a wimp. :wink:
What did you buy?
Best location to do the deed was in the 401k so Fidelity funds ... Fidelity Spartan US Bond Index and, gulp, Fidelity Spartan Inflation-Protected Bond Index.

Thanks for the scoop. Husband and I are in the same boat. We max our 401Ks and that's about all the attention we've given it for years and now we have waaaay more equity than we should at mid-50's. So now that we're paying attention we're not sure what to do to tone down our overly aggressive portfolios. Bonds which seem risky now or stable income. Both seem painful!

Sriracha
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Re: Bond Funds? Or put your money under mattress?

Post by Sriracha » Sun Aug 11, 2013 1:01 am

island wrote:Thanks for the scoop. Husband and I are in the same boat. We max our 401Ks and that's about all the attention we've given it for years and now we have waaaay more equity than we should at mid-50's. So now that we're paying attention we're not sure what to do to tone down our overly aggressive portfolios. Bonds which seem risky now or stable income. Both seem painful!
I don't know your whole situation, obviously, but it sounds like you're talking about a bigger overall asset allocation change and not just a rebalancing act like I was. I decided a while ago when I wrote my IPS how far I'd let my equity/fixed split drift before rebalancing and that's what I had to do last week. As for risk, I guess it's all risky all the time; figure out what'll allow you to sleep at night while giving you a fighting chance to reach your goal, whatever that might be. If you haven't already posted for suggestions on how to "tone down [your] overly aggressive portfolio," maybe you might post on the "Help with Personal Investments" board. Folks are pretty willing to share what they know here. Have a good weekend.
Don't reach for yield.

IlliniDave
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Re: Bond Funds? Or put your money under mattress?

Post by IlliniDave » Sun Aug 11, 2013 5:16 am

I don't know all the specifics of your situation but maybe the solution is to split the 40%, putting part in cash (or TIPs?) and part in bonds. A lot of experts advise up to two years expenses held in cash during retirement, for similar reasons to what you describe. With bonds the yields in the medium term will rise with rates, but in the short term, as we've seen, principal can take a hit. My horizon is is a bit longer so I haven't thought through all of this intensely, but if I was in retirement and expected to be substantially dependent on the non-equity money, I'd probably go with a split between short-term bonds and cash/CDs, with the safest portion sized in consideration of what I anticipate needing over the next 2-3 years. I'm not overly familiar with TIPS but it's possible they could have a role in there, in the event there's some volatility in inflation as rates return to "normal" (whatever that is).
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Van
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Re: Bond Funds? Or put your money under mattress?

Post by Van » Sun Aug 11, 2013 6:42 am

From what I've read on this forum, a key factor in making the decision on whether or not to put money in bond funds is when/if you will need to access the principal. If you will not need to access the principal for say 10 or more years, then it is perfectly ok to put money in a bond fund with a duration of let's say 5 to 7 years. It all has to do with the point of indifference, the point at which everything evens out, i.e. the positive factors from rising interest rates have just overcome the negative factors.

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Re: Bond Funds? Or put your money under mattress?

Post by Tigermoose » Sun Aug 11, 2013 6:56 am

I'm using a Stable Value mattress for my fixed income (75% of bonds/fixed income), TIPS holds 20%, and treasuries 5%. To keep my desired overall fixed income %, I'm putting money into the SVF rather than TIPs, Treasuries, or Corporates.

As someone else mentioned, the trick is figuring out when to go back in to bonds. I still need to do that analysis and figure out a yield from the Total Bond index that I think outperforms the SVF given the increased volatility. Current SEC yield on VBTLX is 2.02%. SVF is paying 3% with no volatility. Seeing that the function of fixed income in my portfolio is to provide stability and to act as a ballast for the more volatile equities, this seems like a "no-brainer."
Institutions matter

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Re: Bond Funds? Or put your money under mattress?

Post by user5027 » Sun Aug 11, 2013 7:31 am

I have a memory foam and inner spring mattress at my disposal. What would be the best allocation? :happy

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Re: Bond Funds? Or put your money under mattress?

Post by YDNAL » Sun Aug 11, 2013 8:25 am

modhatter wrote:I am not as astute as most of you on here, so I would like to pose this question. With a lump sum to invest (say $1,000,000) at this time. How could one justify buying bond funds with interest rates ranging from .02 to $1.37 for five years, not to mention the fees of the fund. I can't imagine a worse financial decision at this interest rate environment, short of putting your $400,000 bond allotment under your mattress. (actually thinking about it, the mattress idea might be better :mrgreen: )

There is no point in arguing the safety factor for buying bonds ( I am retired by the way) to even out the volatility of the stock market, especially in a large downturn. I am certainly aware of this. That is not the real question at hand. It is rather, where's the better place to put this "safer" money at this time - August 2013?
Since you accept that owning a "Bond fund" mitigates Equity risk, then alternatives to make more on this "safer" money are limited. Yes, we all know, fixed income investments suck at this time - August 2013.

That said (above ↑), I would rather earn 2.61% (tax deferred) on Intermediate Bond funds - held through duration - than earn 0% less Inflation under the mattress. Can you hold this $400K through duration ?
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Re: Bond Funds? Or put your money under mattress?

Post by Call_Me_Op » Sun Aug 11, 2013 8:29 am

modhatter wrote: If we were to experience say a 30% drop as an example, according to Larry Sweedroe [sic], in the 2008 crash - 5 yr. Treasuries experienced a 13% gain, softening the loss to stock portfolio to some degree. Kind of like a partial insurance policy. Now if we experience a substantial (we'll call it market correction) in the next two years, then purchasing these bonds now would have some merit.
No. At current low rates on 5 year treasuries, they will not provide the same counterbalancing as they did in 2008.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

dbr
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Re: Bond Funds? Or put your money under mattress?

Post by dbr » Sun Aug 11, 2013 8:35 am

modhatter wrote: There is no point in arguing the safety factor for buying bonds ( I am retired by the way) to even out the volatility of the stock market, especially in a large downturn. I am certainly aware of this. That is not the real question at hand. It is rather, where's the better place to put this "safer" money at this time - August 2013?

And as everyone states that you should only buy short to mid term bonds now anyway because their is really no where to go from here but up (most likely) and with that, comes of course an inevitable drop in the bond funds value. (loss) So who can argue in favor of buying bonds or bond funds at this juncture over a CD paying even 1 - 1.89% interest, with no fear of loss of real principal. I am not advocating this as a long term position. Only short term, just like the bonds.
CD's are not paying a whopping amount more than a reasonable choice in a bond fund. For a person following a long term plan the difference doesn't amount to enough to get all worried about it. CD's thought of as "only short term" do present the issue that one will have to decide when to shift back to bonds, if that is the real long term plan. I think that those who have a good stable value fund in their 401K have a more serious opportunity there as current yields on such funds are probably still as good as about 2.5% or more, but those should continue to decline as they lag current interest rate changes. We are not discussing I bonds because in this instance a large lump sum is involved.

An overlooked and in my opinion very important point is that interest rates are low right now and fundamentally there is nothing an investor can do about it.

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Re: Bond Funds? Or put your money under mattress?

Post by Call_Me_Op » Sun Aug 11, 2013 9:42 am

dbr wrote: An overlooked and in my opinion very important point is that interest rates are low right now and fundamentally there is nothing an investor can do about it.
Do you really think that is overlooked? I think most everyone is aware of that, but I can't knock them for trying to find options with an escape clause - especially when the opportunity cost is so low right now.
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Re: Bond Funds? Or put your money under mattress?

Post by Sconie » Sun Aug 11, 2013 9:57 am

Jim180 wrote:I think before anyone can make a case against bonds they first need to make a case for inflation. Interest rates will not rise significantly without inflation. I don't see it right now. The 10-year is around 2.6%. If the economy would have a setback the 10-year could go back to 1.6%. That would be a nice rally for bonds. The most likely scenario however is that we continue to get slow growth without much inflation. So interest rates could stay in a range for quite a while. That means a rather steady NAV while still collecting dividends at a better yield than CD's or mattress.
The problem with this is that while Vanguard's Total Bond Market Fund is only yielding 1.9%, 5 year CDs are available yielding 2.0%-----why take the chance of a loss?
I know that you think you understand what you thought I said, but I don't think you realize that what I said is necessarily what I meant......

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Re: Bond Funds? Or put your money under mattress?

Post by livesoft » Sun Aug 11, 2013 10:03 am

Sconie wrote:The problem with this is that while Vanguard's Total Bond Market Fund is only yielding 1.9%, 5 year CDs are available yielding 2.0%-----why take the chance of a loss?
In order to take a chance of a gain?
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Re: Bond Funds? Or put your money under mattress?

Post by Cut-Throat » Sun Aug 11, 2013 10:09 am

My guess is that you'll change your opinion after reading this paper.

https://personal.vanguard.com/us/insigh ... isk-082013

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Re: Bond Funds? Or put your money under mattress?

Post by dbr » Sun Aug 11, 2013 10:09 am

Call_Me_Op wrote:
dbr wrote: An overlooked and in my opinion very important point is that interest rates are low right now and fundamentally there is nothing an investor can do about it.
Do you really think that is overlooked? I think most everyone is aware of that, but I can't knock them for trying to find options with an escape clause - especially when the opportunity cost is so low right now.
Its the "there is pretty much nothing that can be done about it part" that is being overlooked. Dancing on the head of a pin may be energetic and entertaining but it is still a pinhead.

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Re: Bond Funds? Or put your money under mattress?

Post by SnapShots » Sun Aug 11, 2013 10:33 am

Tigermoose wrote:I'm using a Stable Value mattress for my fixed income (75% of bonds/fixed income), TIPS holds 20%, and treasuries 5%. To keep my desired overall fixed income %, I'm putting money into the SVF rather than TIPs, Treasuries, or Corporates.

As someone else mentioned, the trick is figuring out when to go back in to bonds. I still need to do that analysis and figure out a yield from the Total Bond index that I think outperforms the SVF given the increased volatility. Current SEC yield on VBTLX is 2.02%. SVF is paying 3% with no volatility. Seeing that the function of fixed income in my portfolio is to provide stability and to act as a ballast for the more volatile equities, this seems like a "no-brainer."
3% and no volatility IS a no-brainer. What's the downside?
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Re: Bond Funds? Or put your money under mattress?

Post by Phineas J. Whoopee » Sun Aug 11, 2013 10:34 am

user5027 wrote:I have a memory foam and inner spring mattress at my disposal. What would be the best allocation? :happy
Difficult to say. If I were you I'd sleep on it.
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Re: Bond Funds? Or put your money under mattress?

Post by jeffyscott » Sun Aug 11, 2013 10:41 am

modhatter wrote:I think there is a difference also in someone who all ready has a well seasoned bond fund that has gained appreciably over the years selling these funds, vs. someone just buying for first time. Please correct me if I am wrong.
No, there is no real difference there. Having had good returns in the past does not mean that one should stick with an investment that is now a poor choice, given the other available options. I would take a 5 year CD at 2% over total bond market fund at 2% or intermediate term treasury at 1.3%. Why choose a non-risk free 2% from total bond over a risk-free 2% from a CD?

Our "safe" money is in stable value at about 2.2%, I-bonds, EE bonds, one CD at about 3%, and savings account at about 0.85%. The bond funds we do have are ones that have greater risk than a bond index in one way or another.
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Re: Bond Funds? Or put your money under mattress?

Post by JamesSFO » Sun Aug 11, 2013 10:42 am

Cut-Throat wrote:My guess is that you'll change your opinion after reading this paper.

https://personal.vanguard.com/us/insigh ... isk-082013
Thank you, this was really helpful.

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Re: Bond Funds? Or put your money under mattress?

Post by Munir » Sun Aug 11, 2013 11:16 am

JamesSFO wrote:
Cut-Throat wrote:My guess is that you'll change your opinion after reading this paper.

https://personal.vanguard.com/us/insigh ... isk-082013
Thank you, this was really helpful.
My conclusions from reading this paper, and as a retiree in a distribution phase with a shorter time-horizon than younger individuals, it makes sense in the current environment to have most -if not all- my fixed income in the short term term investment grade bond fund or short term term bond index fund.

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Re: Bond Funds? Or put your money under mattress?

Post by Cut-Throat » Sun Aug 11, 2013 11:23 am

Munir wrote: My conclusions from reading this paper, and as a retiree in a distribution phase with a shorter time-horizon than younger individuals, it makes sense in the current environment to have most -if not all- my fixed income in the short term term investment grade bond fund or short term term bond index fund.
I am also retired and in the 'distribution phase' and did not come to this conclusion.
Vanguard also does not come to this conclusion as evidenced by their Target Retirement Income Fund's Asset Allocation.

I am 62 and my 'time-horizon' is 38 years left in my withdrawal 'plan'.
Last edited by Cut-Throat on Sun Aug 11, 2013 12:35 pm, edited 1 time in total.

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Re: Bond Funds? Or put your money under mattress?

Post by dbr » Sun Aug 11, 2013 11:32 am

Cut-Throat wrote:
Munir wrote: My conclusions from reading this paper, and as a retiree in a distribution phase with a shorter time-horizon than younger individuals, it makes sense in the current environment to have most -if not all- my fixed income in the short term term investment grade bond fund or short term term bond index fund.
I am also retired and in the 'distribution phase' and did not come to this conclusion.
Vanguard also does not come to this conclusion as evidenced by their Target Retirement Income Fund's Asset Allocation.
Likewise.

A retiree may have a planning time to death of 20 or 30 years or more. This is hardly a justification for short bonds based on timing. An older person who may really expect no more than 5 or 10 years more life does not need to worry about investment returns anymore at all, excepting some sort of disastrous decline as might happen to stocks but not to bonds.

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Re: Bond Funds? Or put your money under mattress?

Post by Munir » Sun Aug 11, 2013 11:33 am

Cut-Throat wrote:
Munir wrote: My conclusions from reading this paper, and as a retiree in a distribution phase with a shorter time-horizon than younger individuals, it makes sense in the current environment to have most -if not all- my fixed income in the short term term investment grade bond fund or short term term bond index fund.
I am also retired and in the 'distribution phase' and did not come to this conclusion.
Vanguard also does not come to this conclusion as evidenced by their Target Retirement Income Fund's Asset Allocation.
As Bogleheads, I'm glad we can each come to our own conclusions as to what seems best for our own individual situation instead of following cookie-cutter formulas.

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Re: Bond Funds? Or put your money under mattress?

Post by Call_Me_Op » Sun Aug 11, 2013 11:39 am

dbr wrote:
Call_Me_Op wrote:
dbr wrote: An overlooked and in my opinion very important point is that interest rates are low right now and fundamentally there is nothing an investor can do about it.
Do you really think that is overlooked? I think most everyone is aware of that, but I can't knock them for trying to find options with an escape clause - especially when the opportunity cost is so low right now.
Its the "there is pretty much nothing that can be done about it part" that is being overlooked. Dancing on the head of a pin may be energetic and entertaining but it is still a pinhead.
OK, I follow where you were going. I think there is a human instinct to try to solve a problem - but you are right that the generally low interest-rate environment means by definition there is no good solution because risk and expected return are tightly coupled, and it all anchors to the T-bill rate. In the recent past, there were rare exceptions such as 5 year CD's yielding 5% with a 3-month early-redemption penalty - but these are gone now.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Bond Funds? Or put your money under mattress?

Post by ogd » Sun Aug 11, 2013 12:00 pm

modhatter wrote:With a lump sum to invest (say $1,000,000) at this time. How could one justify buying bond funds with interest rates ranging from
.02 to $1.37 for five years, not to mention the fees of the fund. I can't imagine a worse financial decision at this interest rate environment, short of putting your $400,000 bond allotment under your mattress. (actually thinking about it, the mattress idea might be better )
Munis might be a good reward proposition. E.g. the VG CA muni fund at 6.5 years duration can yield 7% taxable equivalent in a high enough Cali tax bracket. No CD or mattress comes even close. They have their attendant risks, but you are handsomely compensated for it right now.

Similarly, if you have to relocate fixed income from a 401k to a taxable account in order to gain access to CDs, the tax hit should be taken into account. This may or may not apply to you.
modhatter wrote:So who can argue in favor of buying bonds or bond funds at this juncture over a CD paying even 1 - 1.89% interest, with no fear of loss of real principal.
Keep in mind that the "no loss" argument hinges on the ability to withdraw money early from a CD. So you need to pay attention to the penalty and be prepared for a lengthy conversation with the bank before you can access your money. Without early withdrawals, a CD is no different from a bond.
modhatter wrote: I think there is a difference also in someone who all ready has a well seasoned bond fund that has gained appreciably over the years selling these funds, vs. someone just buying for first time. Please correct me if I am wrong.
There isn't a big difference between buying and not selling. Only things that come to mind are: the taxes on capital gains (muted for bond funds) and the psychological comfort of knowing you're still ahead.

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Re: Bond Funds? Or put your money under mattress?

Post by ResearchMed » Sun Aug 11, 2013 12:24 pm

user5027 wrote:I have a memory foam and inner spring mattress at my disposal. What would be the best allocation? :happy
The Memory Foam Mattress would be guided ONLY by "past performance".

So if you are in the "past performance shouldn't be used in choosing investments", you should probably choose the Inner Spring Mattress.

(Do you also happen to have an "old fashioned" plain foam mattress as another choice?)

:D

RM

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Re: Bond Funds? Or put your money under mattress?

Post by modhatter » Sun Aug 11, 2013 4:56 pm

I think saying that interest rates are low now and that is just the way it is, and there is nothing you can do about it, is not entirely correct. When you are retired and in the draw down phase of your life (especially when it is an early retirement and you need to project at least 40 yrs.) you naturally are looking to dividends and interest to help sustain your portfolio. Those dividends and interest payments are not being re-invested. They are being used to live on, and to minimize the amount of your principal you must draw down. (especially in a down or stagnant market)

So, we tend to look a little harder for the best road to take in order to make our portfolio a more sustainable portfolio. As someone else has mentioned, the days of the 5% CD and 7% fixed bonds are no longer available to us. When bonds are yielding only 2% income, and you need more than 2% to live on, then having to sell falling bonds for income in the next 5 to 7 years is not such a good strategy. It is a new ballgame and challenge today, as the old formula no longer works. So we want to tweak it the very best way we can with what we've got - and so we ask these questions.

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Re: Bond Funds? Or put your money under mattress?

Post by linuxizer » Sun Aug 11, 2013 5:08 pm

ResearchMed wrote:So if you are in the "past performance shouldn't be used in choosing investments", you should probably choose the Inner Spring Mattress.
Doesn't the inner spring mattress just oscillate around its long-term mean though?

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Re: Bond Funds? Or put your money under mattress?

Post by Cut-Throat » Sun Aug 11, 2013 5:10 pm

modhatter wrote:I think saying that interest rates are low now and that is just the way it is, and there is nothing you can do about it, is not entirely correct. When you are retired and in the draw down phase of your life (especially when it is an early retirement and you need to project at least 40 yrs.) you naturally are looking to dividends and interest to help sustain your portfolio. Those dividends and interest payments are not being re-invested. They are being used to live on, and to minimize the amount of your principal you must draw down. (especially in a down or stagnant market)

So, we tend to look a little harder for the best road to take in order to make our portfolio a more sustainable portfolio. As someone else has mentioned, the days of the 5% CD and 7% fixed bonds are no longer available to us. When bonds are yielding only 2% income, and you need more than 2% to live on, then having to sell falling bonds for income in the next 5 to 7 years is not such a good strategy. It is a new ballgame and challenge today, as the old formula no longer works. So we want to tweak it the very best way we can with what we've got - and so we ask these questions.
Did you read this ?

https://personal.vanguard.com/us/insigh ... isk-082013
Last edited by Cut-Throat on Sun Aug 11, 2013 5:12 pm, edited 1 time in total.

dbr
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Re: Bond Funds? Or put your money under mattress?

Post by dbr » Sun Aug 11, 2013 5:12 pm

modhatter wrote:I think saying that interest rates are low now and that is just the way it is, and there is nothing you can do about it, is not entirely correct. When you are retired and in the draw down phase of your life (especially when it is an early retirement and you need to project at least 40 yrs.) you naturally are looking to dividends and interest to help sustain your portfolio. Those dividends and interest payments are not being re-invested. They are being used to live on, and to minimize the amount of your principal you must draw down. (especially in a down or stagnant market)

So, we tend to look a little harder for the best road to take in order to make our portfolio a more sustainable portfolio. As someone else has mentioned, the days of the 5% CD and 7% fixed bonds are no longer available to us. So the retiree of past generations splitting their portfolio to 50% stocks and 50% income, had a much better chance for survival. It is a new ballgame and challenge today, as the old formula no longer works. So we want to tweak it the very best way we can with what we've got.
Well, in this context the handwriting on the wall is that the only thing you can do about it is to spend less or accumulate more before you retire. That conclusion assumes a lot about where stock and bond returns will actually go over a period much longer than the immediate future we see for bonds. Nobody can asset allocate their way out of the dominance of withdrawal rate and the chances of history in prospects for retirement success.

It is a possibility that retirees on the cusp of not being able to support the withdrawal rate they want should depend more on annuitization than on trying to manipulate fixed income yields. That is a classic result which is also supported by recent work by people such as Wade Pfau. People can read Bodie and Milevsky on the same topic. I think this is a different discussion than the one this thread is about.

By the way, the concept that retirement depends on dividend and interest payments is flat wrong. The outcome is dependent on return vs withdrawal. That does not mean there is not a return problem in bonds, however, but to get a really serious issue there also needs to be a return problem in stocks, and that is not at all clear to be the case.

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Re: Bond Funds? Or put your money under mattress?

Post by billyt » Sun Aug 11, 2013 5:13 pm

The sky is falling! The sky is falling!

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Re: Bond Funds? Or put your money under mattress?

Post by dbr » Sun Aug 11, 2013 5:17 pm

billyt wrote:The sky is falling! The sky is falling!
I agree that one should take predictions of disaster with a grain of salt.

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Re: Bond Funds? Or put your money under mattress?

Post by Jack » Sun Aug 11, 2013 5:43 pm

modhatter wrote:I think saying that interest rates are low now and that is just the way it is, and there is nothing you can do about it, is not entirely correct. When you are retired and in the draw down phase of your life (especially when it is an early retirement and you need to project at least 40 yrs.) you naturally are looking to dividends and interest to help sustain your portfolio. Those dividends and interest payments are not being re-invested. They are being used to live on, and to minimize the amount of your principal you must draw down. (especially in a down or stagnant market)

So, we tend to look a little harder for the best road to take in order to make our portfolio a more sustainable portfolio. As someone else has mentioned, the days of the 5% CD and 7% fixed bonds are no longer available to us. When bonds are yielding only 2% income, and you need more than 2% to live on, then having to sell falling bonds for income in the next 5 to 7 years is not such a good strategy. It is a new ballgame and challenge today, as the old formula no longer works. So we want to tweak it the very best way we can with what we've got - and so we ask these questions.
Are you sure the old formula no longer works? The Trinity Study, on which many withdrawal strategies are based, covered several decades of periods in which bond returns were very low. Are you sure this time is different?

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Re: Bond Funds? Or put your money under mattress?

Post by rnitz » Sun Aug 11, 2013 6:59 pm

Sometimes these discussions drive me a little bit crazy. I think most of us agree that we can't market time stocks and know when to get in and out. Why do we think we can market time the bond market? Given the simpler parameters of bond analysis, isn't it likely that it's at least as efficient as the stock market?

Yes, yes, I know that interest rates are at an all time low and they must go up. The problem is that I said this last year. And the year before. And the year before. And the year before. If I'd timed the market then and gone to the mattress I'd have not only lost the capital gain in bonds but the interest as well. Suppose the (mandatory?) rise in interest rates doesn't come for several more years? Suppose the rise in interest rates are really slow - how will you know when to get back in? This also goes for CDs - when will you cancel your CDs and rebuy them (or go back into bonds)? Are you sure the bank won't exercise their right to deny your redemption?

The older I get, the more I come to appreciate the wisdom of the simple phrase "stay the course". /rant

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Re: Bond Funds? Or put your money under mattress?

Post by Call_Me_Op » Sun Aug 11, 2013 7:20 pm

rnitz,

In general, I agree with the stay the course stuff. However, I think that all Bogleheads speculate to some extent or another. Including certain asset classes while ignoring others, keeping bond duration to 5 years, avoiding foreign bonds, home country stock bias, etc, are all forms of speculation. I do not think it is much different to select certain types of fixed-income assets - such as cash, CD's, I-bonds, etc - and avoid bond funds in the current environment. It's a speculation, but so is putting your money in a bond fund with 5 year duration.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Bond Funds? Or put your money under mattress?

Post by JoMoney » Sun Aug 11, 2013 7:26 pm

In the end, it's all speculation and exchanging some form of risk or reward for some other risk or reward.
When it comes to interest on cash, I'm exchanging a few points of interest for the simplicity of not moving my accounts around.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Bond Funds? Or put your money under mattress?

Post by dbr » Sun Aug 11, 2013 7:55 pm

Jack wrote: Are you sure the old formula no longer works? The Trinity Study, on which many withdrawal strategies are based, covered several decades of periods in which bond returns were very low. Are you sure this time is different?
Long Statement (see Short Statement below):

There is a subtle statistical nuance going on here. You are correct that the Trinity study and many other models, such as FireCalc, calculate a probability of success or failure based on the overall chances, on average, so to speak. But in statistics one can calculate the probability of something conditional on some factors being set to certain values, or known to have certain values. So, for example, on average over all of the last 120 years or something, if you withdraw at 4% then no more than 5%, or 1%, or even no historical portfolios would fail. However, the conditions in some years are worse than others. If we were to repeatedly re-run the chances of failure only for those years that were known to be very bad years for retirement then random variations in an on-the-edge condition could generate high chances of failure, 20% or 50%. To avoid those bad outcomes it may suffice to reduce the withdrawal rate when applied to only those negative conditions. So the exercise is to decide whether or not we know the present is a bad time to retire. We could think that because we know returns in bonds for someone retiring now are going to be much less than the average over history. The odds conditional on knowing that is so are worse than the average odds. Of course, we might also presume that stocks are overvalued, or that future stock returns will be less than the average over the historical experience. Conditional on knowing that is so, the odds get worse for retirees and they can't spend as much to survive. A problem in all this is that the certainty in finding conditional probabilities is much less than that in finding overall probabilities because we have much less data about what happens in restricted cases. If Monte Carlo simulations are used, then one evaluates the problem by entering pessimistic assumptions (not really assumptions but experiments in varying the input data). The problem here is that you still have to find a basis for assuming that the input data actually represents the future.

Short Statement:

A shorter way of saying the same thing is to say that the fact that worst case situations did survive in past experience does not mean the chances of worst cases situations surviving the next time are high. The inference problem is that it is difficult to know that today is indeed a worst case situation because no two worst cases are alike in the limited experience we have.

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