Poll: "Bonds are for safety (True or False)".

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

"Bonds are for safety."

True
146
70%
False
63
30%
 
Total votes: 209

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Boglenaut
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Poll: "Bonds are for safety (True or False)".

Post by Boglenaut » Wed Dec 25, 2013 6:33 pm

I see this statement often. Let's do a true or false (no "other" on purpose).

I'll wait until some folks have time to respond before I give my opinion.

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Re: Poll: "Bonds are for safety (True or False)".

Post by Retread » Wed Dec 25, 2013 7:30 pm

Boglenaut wrote:I see this statement often. Let's do a true or false (no "other" on purpose).

I'll wait until some folks have time to respond before I give my opinion.
And many other things...
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Re: Poll: "Bonds are for safety (True or False)".

Post by ThePrune » Wed Dec 25, 2013 7:33 pm

Glad your poll was't for bond funds or my answer would have been different :)
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Re: Poll: "Bonds are for safety (True or False)".

Post by bondsr4me » Wed Dec 25, 2013 7:39 pm

No question about it......YES.

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Re: Poll: "Bonds are for safety (True or False)".

Post by longinvest » Wed Dec 25, 2013 7:42 pm

Boglenaut wrote:I see this statement often. Let's do a true or false (no "other" on purpose).

I'll wait until some folks have time to respond before I give my opinion.
I can't answer this poll. What do you mean by safety? What kind of bonds? Investment grade? High yield? Short term? Long term?
Last edited by longinvest on Wed Dec 25, 2013 9:15 pm, edited 1 time in total.
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Taylor Larimore
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Bonds are for safety (and income)

Post by Taylor Larimore » Wed Dec 25, 2013 8:30 pm

Boglenaut wrote:I see this statement often. Let's do a true or false (no "other" on purpose).

I'll wait until some folks have time to respond before I give my opinion.
Boglenaut:

There should be little doubt that a good quality, short- or intermediate-term bond fund provides safety in a portfolio. It's why every Target Fund increases its bond allocation at older ages when the shareholder can't afford to lose.

Vanguard Fund Losses in 2008:
-37.02% S&P 500 Index
-37.04% Total Stock Market
-37.26% Total International
-32.05% Small-Cap Value
-37.05% REIT
-25.57% Dividend Growth
-42.87% Precious Metals & Mining
-21.29% Hi-Yield Bond Fund
-61.57% Emerging Markets

Total Bond Market GAINED +5.05%

Past performance does not guarantee future returns.

Merry Christmas!
Taylor
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Re: Poll: "Bonds are for safety (True or False)".

Post by livesoft » Wed Dec 25, 2013 8:34 pm

I would say that bonds are to reduce risk. They are not safe. But I suppose "are for safety" does not preclude them from not being safe.

One just has to read all the posts and threads from back in June when interest rates rose and folks noticed that their bond funds had lost 1% to 4%. They did not like that kind of "safety".
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Re: Poll: "Bonds are for safety (True or False)".

Post by haban01 » Wed Dec 25, 2013 9:20 pm

Totally Agree with Livesoft.. Bonds are to reduce portfolio Volatility and should not be considered "safe". That would be a FDIC account earning nothing. But then again how safe would that be losing 2% a year to inflation. :|
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Re: Poll: "Bonds are for safety (True or False)".

Post by john94549 » Wed Dec 25, 2013 9:41 pm

There are "bonds", and then there are "bond-like-instruments." CDs (NCUA- or FDIC-insured) are "bond-like instruments", which some liken to bonds, but which are totally safe. So long as you are below the insured limit. So, I voted "false", as bonds are not "safe". In a rising-rate environment, they can go down and stay down for protracted periods of time. Sure, they reduce volatility in your portfolio, but so does cash. Earning zero.

Bond funds are better than individual bonds. Bonds are better than bond funds. It just depends on your investing goals. Individual bonds are great if laddered, government-guaranteed, and held to maturity. Bond funds are great if held for stated duration, and rates obey. But "safety'? Such assumes you're investing for heirs, not yourself.

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Re: Poll: "Bonds are for safety (True or False)".

Post by VictoriaF » Wed Dec 25, 2013 10:01 pm

My bonds are for safety. They include the TSP G fund, a TIPS fund and a variety of individual TIPS, as well as some I bonds.

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Re: Poll: "Bonds are for safety (True or False)".

Post by whaleknives » Wed Dec 25, 2013 10:08 pm

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Re: Poll: "Bonds are for safety (True or False)".

Post by Boglenaut » Wed Dec 25, 2013 10:21 pm

Thanks for the replies.

I put the poll up because I often see that statement as if it were dogma. Of course, I like to challenge it then! ;)

My opinion is that while bonds are indeed a safer part of my portfolio, they are not "for" safety. That's what bank accounts and CDs are for. Vanguard rates the bond funds like the ones I own as 2 out of 5. So that is not "for" safety - it has risks.

I don't own any funds that Vanguard would consider a 3 or higher. But that is for a variety of reasons, but not because I believe bonds are "for safety".

PS - Good point above about distinguishing bonds and bond funds. I was thinking mainly in terms of bond funds.

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Re: Bonds are for safety (and income)

Post by Boglenaut » Wed Dec 25, 2013 10:24 pm

Taylor Larimore wrote:
Vanguard Fund Losses in 2008:
-37.02% S&P 500 Index
-37.04% Total Stock Market
-37.26% Total International
-32.05% Small-Cap Value
-37.05% REIT
-25.57% Dividend Growth
-42.87% Precious Metals & Mining
-21.29% Hi-Yield Bond Fund
-61.57% Emerging Markets

Total Bond Market GAINED +5.05%
Taylor, it's the negative correlation that makes bonds attractive in this example.

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Re: Poll: "Bonds are for safety (True or False)".

Post by JoMoney » Wed Dec 25, 2013 10:55 pm

To define "Safety", you have to understand what risks you're seeking safety from. There are risks with everything, some of the risks with bonds are more apparent (to say nothing about the hidden affects of inflation):
Interest rate risk: The chance that bond prices overall will decline because of rising interest rates. Interest rate risk should be moderate for the fund because it invests primarily in short- and intermediate-term bonds, whose prices are less sensitive to interest rate changes than are the prices of long-term bonds.
Income risk: The chance that the fund’s income will decline because of falling interest rates.
Credit risk: The chance that a bond issuer will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
Call risk: The chance that during periods of falling interest rates, issuers of callable bonds may call (redeem) securities with higher coupons or interest rates before their maturity dates. The fund would then lose any price appreciation above the bond’s call price and would be forced to reinvest the unanticipated proceeds at lower interest rates, resulting in a decline in the fund’s income.
https://personal.vanguard.com/us/funds/ ... =INT#tab=2
But generally, for most purposes... Yes, U.S. Treasury Bonds held to maturity are safe. They also yield so little currently they're hardly an investment, it's more of a partial hedge against inflation.
Ten Year Treasury: 3% (- Taxes: 25%)
So roughly 2.25% net of taxes
Past ten years Inflation averaged around 2.6%
The current inflation rate is lower, and the Fed is targeting around 2%, but there's plenty of reason to believe they'll have a much harder time containing it if inflation gets out of control. Future rates may retrospectively compensate for a period of high inflation, but that's less helpful to people who lock in a low rate with a long duration today.
On his past weeks radio show, I heard Bob Brinker comment that he would much prefer taking on more credit risk (less than AAA) than taking on interest rate risk (longer duration). It's highly unlikely that in the current economic environment that the Fed can justify continuing "emergency" procedures like quantitative easing. It's likely to be more of a prolonged process than a sudden jolting stop, but we're likely to see a normalization of interest rates over the next few years, which will not bode well for those holding longer duration / longer maturity bonds.... at least in a notional marked-to-market sense. If the bonds are held to maturity, they're not likely to see any losses in dollar amount - no such guarantee in stocks.
"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: Poll: "Bonds are for safety (True or False)".

Post by stemikger » Wed Dec 25, 2013 11:22 pm

I always looked at bonds as a smoother ride. But who knows. This year Warren Buffett has been calling bonds a dangerous investment going forward. I'm still staying the course and sticking with the Total Bond Market in my asset allocation.
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Re: Poll: "Bonds are for safety (True or False)".

Post by Kalo » Thu Dec 26, 2013 12:14 am

I think that a portfolio takes on a characteristic that is different than its component parts. I would not be happy holding only bonds, but I'm quite comfortable holding them as part of my portfolio. Same for stocks and cash. So I don't really care that much about the attributes of bonds, except inasmuch as they impact my overall portfolio.

For long term earnings (to grow and outpace inflation), bonds make my portfolio riskier than stocks but safer than cash.

For shallow risk, bonds make my portfolio safer than stocks but riskier than cash.

For deep risk, I guess I might need a fallout shelter.

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Re: Poll: "Bonds are for safety (True or False)".

Post by nedsaid » Thu Dec 26, 2013 12:17 am

Probably a better way to say it is that Bonds are relatively safe compared to stocks. Not safe in absolute terms but certainly safer than stocks. In the context of this discussion, I would define safety with low or lower volatility.

It could be said that in terms of preserving purchasing power, stocks over long periods of time are safer than bonds.

But most of us think in terms of safe as being low volatility.
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Re: Poll: "Bonds are for safety (True or False)".

Post by tpm871 » Thu Dec 26, 2013 2:16 am

I voted false. It's hard for me to think of bonds as being safe after the bond dips that we had this year. It felt like a preview of far worse declines to come when interest rates start increasing for real. I'd complete the phrase "bonds are for..." with:

1. diversification (negative correlation with equities)
2. parking money so that it can be rebalanced into equities during stock market crashes

Bonds are not safe on their own, for the reasons that others have pointed out. But they can contribute to a portfolio's stability by being a complement for even more risky things.

I've shifted my bond approach with this in mind. That is, moving away from bond funds and into using bond ladders instead. I won't lose principal when interest rates increase. When the next crash occurs, I will have bonds maturing every few months that I can reinvest in equities, when they are cheap and primed for a reversion to the mean.

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Re: Poll: "Bonds are for safety (True or False)".

Post by Elbowman » Thu Dec 26, 2013 3:14 am

Boglenaut wrote:Thanks for the replies.

I put the poll up because I often see that statement as if it were dogma. Of course, I like to challenge it then! ;)

My opinion is that while bonds are indeed a safer part of my portfolio, they are not "for" safety. That's what bank accounts and CDs are for. Vanguard rates the bond funds like the ones I own as 2 out of 5. So that is not "for" safety - it has risks.

I don't own any funds that Vanguard would consider a 3 or higher. But that is for a variety of reasons, but not because I believe bonds are "for safety".

PS - Good point above about distinguishing bonds and bond funds. I was thinking mainly in terms of bond funds.
It seems like your point is more about semantics than investing, but even so, I disagree. Here is how I would reason about it:

We usually measure risk in terms of variance (you could also say risk is the chance you will not meet your goal, but the former definition seems closer to the way you are using "risk"). It seems reasonable to say "safe" is the opposite of risk in this context, so something is "safer" than X if it has lower variance than X. One of the main reasons people here (especially pre-retirement people) hold bonds is because the low correlation with stocks causes a reduction in total portfolio variance that is disproportionately large relative to the reduction in return. So, people hold bonds to reduce the variance of their portfolio, a.k.a. people hold bonds to make their portfolio safer. If you still want to claim that something held to make a portfolio safer is not held "for safety", then I think you are being silly.

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Re: Poll: "Bonds are for safety (True or False)".

Post by richard » Thu Dec 26, 2013 6:48 am

JoMoney wrote:The current inflation rate is lower, and the Fed is targeting around 2%, but there's plenty of reason to believe they'll have a much harder time containing it if inflation gets out of control. Future rates may retrospectively compensate for a period of high inflation, but that's less helpful to people who lock in a low rate with a long duration today.
When has a modern major central bank announced it was trying to reduce inflation and failed?

What reason is there to believe they wouldn't be able to? Other than near the zero lower bound, central banks have lots of power.
JoMoney wrote:On his past weeks radio show, I heard Bob Brinker comment that he would much prefer taking on more credit risk (less than AAA) than taking on interest rate risk (longer duration).
One hears all sorts of things on the radio
JoMoney wrote: It's highly unlikely that in the current economic environment that the Fed can justify continuing "emergency" procedures like quantitative easing. It's likely to be more of a prolonged process than a sudden jolting stop, but we're likely to see a normalization of interest rates over the next few years, which will not bode well for those holding longer duration / longer maturity bonds.... at least in a notional marked-to-market sense. If the bonds are held to maturity, they're not likely to see any losses in dollar amount - no such guarantee in stocks.
The current environment is inflation well below target and unemployment well above. The Feds two targets point to an accommodative stance.

The Fed is switching from QE to providing forward guidance on interest rates. In other words, they are phasing out QE (buying longer bonds) and are explicitly saying they will keep rates low for a long time. The market seems quite happy with this - its reaction was what you'd expect from policy easing, not tightening.

Eventually, the economy will strengthen (which could bode well for stocks) and interest rates will rise. In the interim, longer bonds have higher yields than short and, when rates rise, long term holders will benefit (higher yields overcoming short-term principal declines).

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Re: Poll: "Bonds are for safety (True or False)".

Post by YDNAL » Thu Dec 26, 2013 7:10 am

Boglenaut wrote:I put the poll up because I often see that statement as if it were dogma. Of course, I like to challenge it then! ;)

My opinion is that while bonds are indeed a safer part of my portfolio, they are not "for" safety. That's what bank accounts and CDs are for. Vanguard rates the bond funds like the ones I own as 2 out of 5. So that is not "for" safety - it has risks.
Everything has risks - even driving down to Starbucks this morning to get coffee. This is a silly poll.
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Re: Poll: "Bonds are for safety (True or False)".

Post by JoMoney » Thu Dec 26, 2013 7:16 am

richard wrote: When has a modern major central bank announced it was trying to reduce inflation and failed?

What reason is there to believe they wouldn't be able to? Other than near the zero lower bound, central banks have lots of power.
"Failed" is a tough word, but it was certainly troublesome for well over a decade culminating in the early 1980's
http://www.investopedia.com/articles/ec ... lation.asp
They do have lots of options available to them, among them, tightening the money supply and rising interest rates.
I'm not disagreeing with you. We're certainly not seeing inflation problems now... that would be an improvement at this point. But I'm not putting my money into any long-term or even interm-term bonds any time soon either... and I'll have to deal with whatever comes of that.
"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: Poll: "Bonds are for safety (True or False)".

Post by mhc » Thu Dec 26, 2013 8:15 am

My understanding is that bonds are not for safety. Bonds are a form of loan.

I buy bonds/bond funds to make money.

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Re: Poll: "Bonds are for safety (True or False)".

Post by Levett » Thu Dec 26, 2013 8:22 am

I'm unable to answer the poll because I haven't stopped beating my wife!

That's more or less what you have asked. :annoyed

Lev

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Re: Poll: "Bonds are for safety (True or False)".

Post by VictoriaF » Thu Dec 26, 2013 8:25 am

Levett wrote:I'm unable to answer the poll because I haven't stopped beating my wife!

That's more or less what you have asked. :annoyed

Lev
But, Lev, can your wife run to the safety of bonds?

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Re: Poll: "Bonds are for safety (True or False)".

Post by YDNAL » Thu Dec 26, 2013 8:29 am

mhc wrote:My understanding is that bonds are not for safety. Bonds are a form of loan.

I buy bonds/bond funds to make money.
Yeah, but loans that can be liquidated to use the capital while other [invested] capital is deemed no longer worth what it used to (by Mr. Market].

ps. just shy of 5 years ago, 1 share invested in the S&P 500 was believed to we worth 666. :twisted:
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Re: Poll: "Bonds are for safety (True or False)".

Post by Sconie » Thu Dec 26, 2013 8:36 am

Bonds are primarily an investment tool for managing risk. In a high, if not hyper, inflationary environment, bonds are very unsafe. It is vital to remember that "safety" is a function of and dependent upon what the risk is.
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Re: Poll: "Bonds are for safety (True or False)".

Post by richard » Thu Dec 26, 2013 9:03 am

JoMoney wrote:
richard wrote: When has a modern major central bank announced it was trying to reduce inflation and failed?

What reason is there to believe they wouldn't be able to? Other than near the zero lower bound, central banks have lots of power.
"Failed" is a tough word, but it was certainly troublesome for well over a decade culminating in the early 1980's
http://www.investopedia.com/articles/ec ... lation.asp
They do have lots of options available to them, among them, tightening the money supply and rising interest rates.
I'm not disagreeing with you. We're certainly not seeing inflation problems now... that would be an improvement at this point. But I'm not putting my money into any long-term or even interm-term bonds any time soon either... and I'll have to deal with whatever comes of that.
The Fed wasn't really trying to stop inflation until Volcker was appointed in 1979. He decided inflation was the major problem and that unemployment was not as high a priority. He tightened, inflation went away.

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Re: Poll: "Bonds are for safety (True or False)".

Post by Levett » Thu Dec 26, 2013 12:16 pm

Victoria,

Only if the bond's name is James! :wink:

Lev

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Re: Poll: "Bonds are for safety (True or False)".

Post by VictoriaF » Thu Dec 26, 2013 12:19 pm

Levett wrote:Victoria,

Only if the bond's name is James! :wink:

Lev
Lev,

That would only work for an altercation that is shaken, not stirred {winking back},

Victoria
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Re: Poll: "Bonds are for safety (True or False)".

Post by gkaplan » Thu Dec 26, 2013 12:39 pm

I agree with those who said that bonds are not necessarily for safety but for risk control.
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Re: Poll: "Bonds are for safety (True or False)".

Post by JPH » Thu Dec 26, 2013 12:53 pm

Yes; in my portfolio they are there for safety.
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Re: Bonds are for safety (and income)

Post by bucksfan2 » Thu Dec 26, 2013 2:13 pm

Taylor Larimore wrote:
Boglenaut wrote:
Vanguard Fund Losses in 2008:
-37.02% S&P 500 Index
-37.04% Total Stock Market
-37.26% Total International
-32.05% Small-Cap Value
-37.05% REIT
-25.57% Dividend Growth
-42.87% Precious Metals & Mining
-21.29% Hi-Yield Bond Fund
-61.57% Emerging Markets

Total Bond Market GAINED +5.05%
Taylor
You are going to greatly skew results by looking at one of the worst years ever in the stock market. Is 2008 indicative of the market overall or a once in a generation scenario.

Vanguard Total Stock Market over the past 10 years returned 8.19%
Vanguard Total Bond Market over the past 10 years returned 4.58%

Over the past decade Bond funds have been much less volatile but equities have returned more, even considering one of the largest declines in the equity market in its history. But to take it a step further, what is going to happen when interest rates rise? Will Bond funds lose a substantial amount? Will Bond funds go from a safe investment to one that you could see a 5-10% drop?

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Re: Poll: "Bonds are for safety (True or False)".

Post by JoMoney » Thu Dec 26, 2013 3:00 pm

richard wrote:..
The Fed wasn't really trying to stop inflation until Volcker was appointed in 1979. He decided inflation was the major problem and that unemployment was not as high a priority. He tightened, inflation went away.
They certainly waited long enough, and let inflation get pretty high before deciding it was a problem... and it would seem they had already begone tightening, before then, just maybe not to the same extent.

Code: Select all

Friday, June 14, 1963
The Federal Reserve System, which controls and influences the flow of money in the U.S., favors "leaning into the winds" of economic change in setting its monetary policy. For months it has kept money easy-or comparatively well circulated and cheap to borrow-in order to stimulate a lagging economy. Now that the economy is rising and has less need for easy credit, the Fed has begun to tighten the money market, and the cost of money is slowly creeping up.
Read more: http://content.time.com/time/magazine/article/0,9171,874851,00.html#ixzz2e6tzF4A6

Friday, Apr. 14, 1967
What the Johnson Administration wants, the Federal Reserve Board has not always delivered—at least not while the economy was booming. In late 1965, when the President wanted an easy-money policy, the Fed seemed to go out of its way to tighten things up.
Read more: http://content.time.com/time/magazine/article/0,9171,836980,00.html#ixzz2e6lI8vhL

Friday, Apr. 05, 1968
Whenever the cost of borrowing swings to extreme highs or lows, financiers regard it as a signal of national ill-health. Last week interest rates for long-term securities climbed to a level that clearly meant economic fever.
For example, underwriters provided $25 million worth of Kansas City Power & Light bonds with a 6.67% rate, a record among top-grade electric utilities. New York City sold $45 million worth of housing bonds that offered investors up to 5.36% tax free, the juiciest return on a city issue since the early '30s. Most startling of all, the Federal Government paid its highest interest...
Read more: http://content.time.com/time/magazine/article/0,9171,900089,00.html#ixzz2e6s9jKPN

Friday, May 31, 1968
Two separate but related kinds of financial crises crept closer to reality last week for the non-Communist world. The continuing Washington impasse over higher taxes and lower federal spending—the fiscal antidote for inflation—caused an ominous upward surge of U.S. interest rates. Abroad, the paralysis of France helped to lift gold prices to a new peak, renewing anxieties about the international monetary system. "We're all in the same boat," said Chairman Howard C. Petersen of Philadelphia's Fidelity Bank, "and it's not necessarily only our end of the boat that's leaking."
Read more: http://content.time.com/time/magazine/article/0,9171,844552,00.html#ixzz2e6owqgxf

Friday, Jan. 17, 1969
In response to Washington's battle against inflation, the cost of borrowing from U.S. banks last week climbed to a historic high. For the third time in six weeks, major banks raised their prime rate, the interest that they charge their best corporate customers for loans. The latest increase, from 6¾% to 7%, is in tended to help curb the nation's overexuberant economy by making credit so costly that businessmen will borrow and spend less. 
Read more: http://content.time.com/time/magazine/article/0,9171,838890,00.html#ixzz2e6qPlIQf

Friday, Mar. 28, 1969
IN the manner of Janis Paige in the old Broadway smash, Pajama Game, U.S. bankers are lamenting the discovery that a 71% interest rate "doesn't mean a helluva lot." Pinched for lendable funds by Washington's fight against inflation, the nation's major banks last week raised the cost of borrowing to that level—the fourth rise in little more than three months. The prime rate, the interest that banks charge their best corporate customers, went up a full i% from the 7% rate set only last January. Although the new rate was a historic peak, neither businessmen nor bankers seemed much impressed.
Read more: http://content.time.com/time/magazine/article/0,9171,839981,00.html#ixzz2e6lkh61a

Friday, July 04, 1969
The installment buyer is in for a shock this week. If he applies for a car loan, his banker will have to tell him that the true interest rate is about double the 6% or so that the bank may have been advertising. If he uses a department store revolving-credit plan, his next bill will inform him that the 1½%-a-month interest charged on his unpaid balance works out to a yearly interest charge of 18%.
Such candor is required by Federal Reserve Board Regulation "Z," which takes effect July 1.
Read more: http://content.time.com/time/magazine/article/0,9171,840203,00.html#ixzz2e6iFnhvx

Monday, June 07, 1971
IT was just about a year ago that interest rates began falling sharply, a decline that the Nixon Administration and private economists have since been counting on to help lift business out of the 1970 recession. But in the past three to four months, the rates have been rising again (see chart) and the bounceback has gone high enough to stir worry. Henry Kaufman, a partner of Salomon Bros., warned last week that a continuation of the rise would "eventually abort the economic recovery" by making financing difficult.
Read more: http://content.time.com/time/magazine/article/0,9171,905155,00.html#ixzz2e6j2zGWe

Monday, Sept. 27, 1971
When it comes to buying U.S. savings bonds, patriotism has not paid —until recently. One of the Government's highest economic policymakers was asked not long ago by the Treasury to urge the public to buy bonds; he refused, on grounds that the 5.5% interest rate did not keep up with inflation. In sum, bond buyers actually lost money. Realizing this, Americans long redeemed their old bonds faster than they bought new ones.
Now, in an unexpected turnabout, the Treasury Department reports that savings bonds are selling better than they have since 1945.
Read more: http://content.time.com/time/magazine/article/0,9171,910065,00.html#ixzz2e6hrRtWf

Monday, Apr. 09, 1973
Although public and political anger lately has focused against rising food prices (see cover), that concern by no means measures the full extent to which resurging inflation has become U.S. Topic A. In recent days, Congressmen have opened a drive to force President Nixon to freeze or even roll back prices, interest and rents, home builders have staged a march on Washington to protest soaring lumber prices, the Government has won a dubious victory in a battle with bankers over the price of loan money, and labor leaders have begun presenting demands...
Read more: http://content.time.com/time/magazine/article/0,9171,903967,00.html#ixzz2e6nyh1uP

Monday, Aug. 13, 1973
Neither a borrower nor a lender be—the real bread is going to the savers.
Thus might a hip Polonius summarize the frenzied rise in U.S. interest rates. Last week the biggest U.S. corporations had to pay a record—and painful—8¾% to borrow from banks.* Some banks will raise that "prime" rate further to 9% this week; it could go higher still, perhaps to 9½% in the fall. The banks in turn had to pay as much as 10.3% to get money to lend; that was the highest rate offered last week to depositors who would buy $100,000 certificates of deposit...
Read more: http://content.time.com/time/magazine/article/0,9171,907691,00.html#ixzz2e6jx8N00

Monday, Sept. 03, 1973
A few weeks ago, bankers were cautiously predicting that their prime rate—the interest charge on loans to the most creditworthy corporations—would top out at 9½% in the fall. Last week the prime hit that level much earlier, and no one voiced the slightest belief that that would end the dizzying ascent from 6% in January. Bankers and economists are now forecasting a series of further rises to 10½% or even an unheard-of 11%.
The major reason is that the climb in the prime has not yet discouraged ravenous loan demand from business.
Read more: http://content.time.com/time/magazine/article/0,9171,910763,00.html#ixzz2e6rJfnsg

Monday, Oct. 20, 1975
One of the most serious threats to the nation's growing business recovery has been the possibility of a continuing rise in interest rates that would discourage borrowing by businessmen and consumers, weaken the stock market and abort a barely begun revival of the housing industry. Last week, however, a consensus formed among experts that a three-month upswing in credit costs is ending, and that interest rates are expected to hold steady, or even inch down.
Read more: http://content.time.com/time/magazine/article/0,9171,946589,00.html#ixzz2e6jWGuhD

Monday, June 04, 1979
Federal interest rate ceilings limit the payout on their passbook accounts to 5% in commercial banks and 5.25% in savings institutions, which is less than half the current rate of inflation—and much less than a higher-roller gets for investing $ 1,000 or more in a money market mutual fund. The small saver's squeeze is summed up in a Citibank anti-ceiling advertisement: "Deposit $500 with us today and we'll give you back $475 next year."
Read more: http://content.time.com/time/magazine/article/0,9171,946264,00.html#ixzz2e6XFsIDJ

Monday, Oct. 22, 1979
The Federal Reserve's dramatic tightening of credit will in time hurt every consumer who wants—or needs—to borrow for any purpose, from paying medical bills to buying a house. Says Saul Klaman, president of the National Association of Mutual Savings Banks: "Those who need credit most will have the most difficulty getting it. That's the way it always is." As prices inevitably rise, says Charles Lehing, senior vice president of New York's Chemical Bank, the people who will have the most trouble will be those on fixed incomes. 
Read more: http://content.time.com/time/magazine/article/0,9171,947500,00.html#ixzz2e6cqqwqC

Monday, Nov. 19, 1979
When he boldly 'tackled the twin problems of runaway inflation at home and a hemorrhaging dollar abroad by tightening credit and raising interest rates a month ago, Federal Reserve Chairman Paul Volcker was almost universally hailed. The road down from 13% inflation would be long and difficult, but it was also imperative; and Volcker's policy was acclaimed as necessary. Now the costs of the descent are beginning to become evident.
Read more: http://content.time.com/time/magazine/article/0,9171,948800,00.html#ixzz2e6bRroYB

Monday, Feb. 18, 1980
Consumers are getting what they want and hoping to pay later
"We've bought everything we could get our hands on—buy it now and pay it back later with cheaper dollars." So says Walter Salvi, 36, a Boston public relations man. Like millions of other inflation-savvy consumers, Salvi, his wife and three children have caused wonder and befuddlement for the economics profession. Since interest rates are at their highest levels in a century, and the economy is by all accounts poised for its second slump in six years,
Read more: http://content.time.com/time/magazine/article/0,9171,921837,00.html#ixzz2e6afEbb8

Monday, Mar. 31, 1980
Financial markets gyrate, as the banking system faces historic change
Confusion, turmoil and a struggle to cope. That was the mood of the nation's topsy-turvy world of money last week, as bankers, brokers and businessmen grappled unsurely with the consequences of Jimmy Carter's latest effort to rally the nation to the inflation fight.
Read more: http://content.time.com/time/magazine/article/0,9171,921938,00.html#ixzz2e6ZuJWbC


Monday, May 19, 1980
America's interest-rate fever broke last week. The bench-mark prime rate, the interest that banks charge their best corporate customers, dropped from 20% only four weeks ago to 17%. 
Read more: http://content.time.com/time/magazine/article/0,9171,924125,00.html#ixzz2e6Vsfw62

Monday, Apr. 14, 1980
Is there economic life after a 20% prime rate? That was the question in the nation's business and financial community last week, as banks hiked their best corporate interest rate to 20%, the ninth increase in the prime since the first of the year. The latest rise pushed the country's basic price for business borrowing money to its highest level in 141 years. The alltime record holder: 36% interest in 1839 during the Martin Van Buren Administration, when overextended land speculators and merchants set off financial panic, one-quarter of the young nation's banks failed
Read more: http://content.time.com/time/magazine/article/0,9171,923968,00.html#ixzz2e6Wjdl32

Monday, Jan. 19, 1981
Interest rates used to be a topic confined to the annual meeting of the gnomes of Zurich or to hushed discussions by corporate treasurers. Now everybody is talking and worrying about them. "I don't ever remember feeling so tense over the prime rate," says Ellen Greenfield, 27, a reporter for Women 's Wear Daily, the trade publication of the garment industry. "I follow it daily."
Read more: http://content.time.com/time/magazine/article/0,9171,924673,00.html#ixzz2e6aJhhzC

Monday, June 08, 1981
20% annual interest—Trust Deeds Safely Secured... 18% United States Government Guaranteed Securities ... $3,000 earns 15.086% per year for 26 weeks ... 15% interest on as little as $1,000. No risks. No penalties. No fees.
Read more: http://content.time.com/time/magazine/article/0,9171,922571,00.html#ixzz2e6Ya28pa

Monday, July 27, 1981
Instead of declining, as Administration economic officials have been predicting all spring, interest rates have continued to hover at near record levels, weakening businesses, slowing growth and making a mockery of economic and budgetary planning by companies large and small alike.
Read more: http://content.time.com/time/magazine/article/0,9171,949229,00.html#ixzz2e6Z5RNSH

Monday, Sept. 21, 1981
The small investor who was boasting in the mid-'60s about his killing in the stock market or in the late '70s about his big earnings from real estate is now telling everyone within earshot about the yield on his money-market fund. Last week he was bragging that the money he took out of a savings bank, where it was earning 5.5% interest, was paying a 17% return.
Read more: http://content.time.com/time/magazine/article/0,9171,953084,00.html#ixzz2e6bxcyje

Monday, May 24, 1982
Quickly dying are the days when cocktail-party chatter revolved around the rapidly appreciating value of a suburban house on a half-acre lot. Already dead is the tennis-court talk about coin collections and Krugerrands. Millions of Americans are now taking a crash course in a new savings strategy: how to make money during a period when the rate of inflation is declining, a phenomenon known as disinflation.
Read more: http://content.time.com/time/magazine/article/0,9171,953516,00.html#ixzz2e6dH9YkR
Last edited by JoMoney on Thu Dec 26, 2013 3:08 pm, edited 1 time in total.
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Re: Poll: "Bonds are for safety (True or False)".

Post by ruralavalon » Thu Dec 26, 2013 3:07 pm

I agree with those who said that bonds are not necessarily for safety but for risk control.
And controlling risk is for the purpose of safety, right?

No investment is completely risk free or "safe" in any absolute sense.

I voted "true".
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Re: Poll: "Bonds are for safety (True or False)".

Post by Levett » Thu Dec 26, 2013 5:15 pm

Once more I've been outwitted by Victoria--a most formidable adversary! :happy

Lev

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Re: Poll: "Bonds are for safety (True or False)".

Post by joe8d » Thu Dec 26, 2013 7:04 pm

mhc wrote:My understanding is that bonds are not for safety. Bonds are a form of loan.

I buy bonds/bond funds to make money.
+1
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Re: Poll: "Bonds are for safety (True or False)".

Post by patrick » Thu Dec 26, 2013 7:42 pm

Returns are often examined in nominal terms, and risk is often measured in terms of short-term volatility in the nominal return, but is that really the best way to think about risk and return? For someone who is saving for retirement, is the real risk that the nominal value will bounce around day to day? Or should they instead be more worried that they will end up with an insufficient real value much later? I believe it is the latter.

A young investor just starting out may invest for a few decades before withdrawing. From the US the historical data, it is certainly possible to lose a great deal in real terms with a long term investment in nominal bonds. Here are the results from the 41 years from the end of 1940 to the end of 1981, using data from http://pages.stern.nyu.edu/~%20adamodar ... retSP.html and ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt:

Cumulative real total return of US 10-year Treasury bonds: negative 55.5%
Cumulative real total return of US 3-month Treasury bills: negative 34.5%
Cumulative real total return of US stocks: positive 956%

Is something really safe if a long-term investor can lose that much? I don't think so, and the situation is even worse in some other countries! I conclude that nominal bonds are not for safety because, for long term investors, nominal bonds are not safe. This is not to say that stocks are safe either; all the US stock market crashes at least back to 1900 recovered within a couple of decades, but I see no guarantee that will necessarily happen in the future.

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Re: Poll: "Bonds are for safety (True or False)".

Post by fjsfjsfjs » Thu Dec 26, 2013 8:05 pm

joe8d wrote:
mhc wrote:My understanding is that bonds are not for safety. Bonds are a form of loan.

I buy bonds/bond funds to make money.
+1
+1 - the statement as it is would also mean that long term treasuries/EM bonds/high yield bonds are not proper bonds because they are "not safe".

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Re: Poll: "Bonds are for safety (True or False)".

Post by Boglenaut » Thu Dec 26, 2013 9:16 pm

YDNAL wrote:This is a silly poll.
I am sorry you feel this way. I am quite pleased with the discussion it has generated on both sides. That was my intent, and the Bogleheads came through with some interesting comments.

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Re: Poll: "Bonds are for safety (True or False)".

Post by YDNAL » Fri Dec 27, 2013 9:02 am

Boglenaut wrote:
YDNAL wrote:This is a silly poll.
I am sorry you feel this way. I am quite pleased with the discussion it has generated on both sides.
I stand by my comment and also glad that you are pleased with the discussion. There shouldn't be "both sides," since all investing decisions come with risks. Saving too little to pay bills later when there is no paycheck, for instance, has the highest risk of all.
  1. Fixed Income investments are less risky than Equity Investments and some FI investments negatively correlate with Equities when you need them to.
  2. That is what matters, not whether Bonds are risky (yes/no).
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Re: Poll: "Bonds are for safety (True or False)".

Post by magellan » Fri Dec 27, 2013 9:09 am

Bonds are for diversification.

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Re: Poll: "Bonds are for safety (True or False)".

Post by Boglenaut » Fri Dec 27, 2013 9:12 am

YDNAL wrote:
Boglenaut wrote:
YDNAL wrote:This is a silly poll.
I am sorry you feel this way. I am quite pleased with the discussion it has generated on both sides.
I stand by my comment and also glad that you are pleased with the discussion. There shouldn't be "both sides," since all investing decisions come with risks. Saving too little to pay bills later when there is no paycheck, for instance, has the highest risk of all.
  1. Fixed Income investments are less risky than Equity Investments and some FI investments negatively correlate with Equities when you need them to.
  2. That is what matters, not whether Bonds are risky (yes/no).
See? It's making people think about the meaning of terms like risk and what is means to be "safe". They are thinking about portfolios as a whole versus individual positions. How it could differ between funds and individual bonds, etc.

I didn't ask about any of that explicitly, but it all came up in discussion.
Bonds are risky (yes/no)
By the way, that is not what I asked. The exact wording of the poll was chosen very carefully. Please don't criticize it if you do not understand it.

If you are not enjoying the thread, please do not feel you need to post on it. Why are you posting on a thread you think is silly? Thanks.

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Re: Poll: "Bonds are for safety (True or False)".

Post by YDNAL » Fri Dec 27, 2013 10:06 am

Boglenaut wrote:See? It's making people think about the meaning of terms like risk and what is means to be "safe".....

I didn't ask about any of that explicitly, but it all came up in discussion.
Investing 101, Boglenaut!
Boglenaut wrote:If you are not enjoying the thread, please do not feel you need to post on it. Why are you posting on a thread you think is silly? Thanks.
It would be rude to ignore your specific posts to me... but since you just asked, I shall oblige.
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Forum Policy

Post by Taylor Larimore » Fri Dec 27, 2013 12:10 pm

This is a silly poll.
Forum Policy:
At all times we must conduct ourselves in a respectful manner to other posters.
Thank you and enjoy a Happy Holiday!
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Re: Poll: "Bonds are for safety (True or False)".

Post by ogd » Fri Dec 27, 2013 12:19 pm

Of course they are for safety. It's not even questionable, in my mind -- just look at the graphs, tiny vibrations instead of crazy rollercoasters.

I'm a little disappointed that we're having such discussions after less than a year of stock/bond divergence. I would have thought it takes bogleheads half a decade at least to start questioning basic fundamentals.

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Re: Poll: "Bonds are for safety (True or False)".

Post by Phineas J. Whoopee » Fri Dec 27, 2013 12:45 pm

Oy. This poll doesn't get to the heart of anything.

Suggested poll if you want to start it, Boglenaut:

Safety means:

A net asset value which never goes down; or

An asset less volatile over long periods of time than common stocks.

PJW

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Re: Poll: "Bonds are for safety (True or False)".

Post by tetractys » Fri Dec 27, 2013 12:55 pm

A reduction of risk equates loosely to an increase in safety.

An analogy that relates to this poll might be the standard ship's life ring. It will give safety to one or even several tired and injured shipwrecked passengers from drowning, temporarily; but it won't protect them from sun, sharks, hypothermia, draught, or crashing onto rocks. -- Tet

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Re: Poll: "Bonds are for safety (True or False)".

Post by patrick » Fri Dec 27, 2013 6:24 pm

ogd wrote:Of course they are for safety. It's not even questionable, in my mind -- just look at the graphs, tiny vibrations instead of crazy rollercoasters.

I'm a little disappointed that we're having such discussions after less than a year of stock/bond divergence. I would have thought it takes bogleheads half a decade at least to start questioning basic fundamentals.
Looking at the graphs (i.e. inspecting for the level of short-term nominal volatility) is indeed often considered a basic fundamental. But does that mean it is right? If you lost 55% of your money (in real terms) is it really much comfort that the money was drained slowly instead of all at once in roller-coaster style?

Lest anyone think I only mention this because of events in the past year, here is a post from the middle of 2011 where I referenced huge losses in bonds after inflation: http://www.bogleheads.org/forum/viewtop ... 5#p1109975

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Re: Poll: "Bonds are for safety (True or False)".

Post by ogd » Fri Dec 27, 2013 6:59 pm

patrick wrote: Looking at the graphs (i.e. inspecting for the level of short-term nominal volatility) is indeed often considered a basic fundamental. But does that mean it is right? If you lost 55% of your money (in real terms) is it really much comfort that the money was drained slowly instead of all at once in roller-coaster style?
I think it is better. In a 40 year period you would realistically have used them for spending, emergencies and rebalancing with much lower losses realized. Try doing that with Depression-era stocks, or during the recent recession if things had turned out like the market was afraid they would in March 2009. And try to remember which losses correlate with job losses, i.e. you needing the money.

Furthermore - I don't have the numbers for cash, but I'm guessing it lost as much or more to inflation in the same period. Would you deny that cash is "for safety"? If the standard is that high and it includes every possible risk, that would truly render the OP question meaningless, like some posters have been complaining, because nothing on Earth could possibly meet it.

The "basic fundamental" that I was talking about wasn't eyeballing volatility graphs, but the fact that high-quality bonds are pieces of paper with dates and amounts written on them that do pretty much always get paid. That's what makes them fundamentally safe.
patrick wrote:Lest anyone think I only mention this because of events in the past year, here is a post from the middle of 2011 where I referenced huge losses in bonds after inflation: http://www.bogleheads.org/forum/viewtop ... 5#p1109975
I appreciate the reference. It's instructive that the discussion was taking place at the same rates that we're currently at.

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