Valuation of EE Savings Bonds

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willthrill81
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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Sun Nov 19, 2017 6:11 pm

Noobvestor wrote:
Sun Nov 19, 2017 5:08 pm
I was thinking about this again and I'm revising my answer from four years ago: on my spreadsheets, I have started adding 5% each year (over initial value). For instance, a $10,000 EE bond bought 5 years ago would be marked $1,250 on the spreadsheet.

Why? Because these are the last things I would sell before they double, so short of a huge rate spike in bonds (which requires different math) I figure I should treat them in terms of how far they are to their doubling value and assume they will be held until that value is achieved.

For the purposes of portfolio construction, this has a significant impact on what my total bond allocation is. Basically, instead of the EE bond arcing slowly upward over time, it tracks a linear progression. If it followed a curve, my bond portion would be lower early on. Thoughts/opinions?
#Cruncher's excellent graph depicts what's going on here so well that I have to replicate it.
#Cruncher wrote:
Wed Nov 26, 2014 4:53 pm
Image
If you wish to base the value of your EE bonds on their current (i.e. today's) value, then you should ignore the 'spike' at the end until it comes to fruition. If you wish to base the value of your EE bonds on their final value, then you should value them based on an 3.53% annual interest rate.

There is really no middle ground here, though I'm sure an accountant (I don't think any have posted on this) might find a way to create some.

Personally, considering that EE bonds are the most illiquid bonds I've ever seen and cannot be used for rebalancing purposes or redeemed prior to the 20 year holding period for anything short of emergencies on the order of bankruptcy, I'm not interested in them in the slightest. They have huge interest rate risk as well. Historically, if you know you aren't going to need the money you're putting in EE bonds before 20 years, then you should have put them into equities. There have only been about three periods where stocks would not have returned 3.53% annually over 20 years, so the historic 'odds' are over 95% in favor of stocks. And they don't have the illiquidity issues nor interest rate risk of EE bonds.
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Re: Valuation of EE Savings Bonds

Post by MotoTrojan » Sun Nov 19, 2017 6:16 pm

Noobvestor wrote:
Sun Nov 19, 2017 5:08 pm
I was thinking about this again and I'm revising my answer from four years ago: on my spreadsheets, I have started adding 5% each year (over initial value). For instance, a $10,000 EE bond bought 5 years ago would be marked $1,250 on the spreadsheet.

Why? Because these are the last things I would sell before they double, so short of a huge rate spike in bonds (which requires different math) I figure I should treat them in terms of how far they are to their doubling value and assume they will be held until that value is achieved.

For the purposes of portfolio construction, this has a significant impact on what my total bond allocation is. Basically, instead of the EE bond arcing slowly upward over time, it tracks a linear progression. If it followed a curve, my bond portion would be lower early on. Thoughts/opinions?
Seems reasonable, as long as you have sufficient other bonds and/or emergency fund (cash) to cover a long period of a down market.

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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Sun Nov 19, 2017 8:09 pm

MotoTrojan wrote:
Sun Nov 19, 2017 6:16 pm
Seems reasonable, as long as you have sufficient other bonds and/or emergency fund (cash) to cover a long period of a down market.
I have some cash and I Bonds in taxable as well as a lot of stocks - I could spend down most of my portfolio without touching EE bonds.
willthrill81 wrote:
Sun Nov 19, 2017 6:11 pm
If you wish to base the value of your EE bonds on their final value, then you should value them based on an 3.53% annual interest rate.

There is really no middle ground here, though I'm sure an accountant (I don't think any have posted on this) might find a way to create some.
Intuitively either one makes some sense to me - linear or curved- since they both connect the beginning and end points. That said, for portfolio construction purposes I'm still on the fence (I confess I mainly picked flat/linear for simplicity). I guess if I were holding a CD, say, I would use the present value accumulated, so the 5%/year route is probably skewing my portfolio upward unnaturally, maybe? There's just nothing else comparable in my own portfolio so I've never given it much thought (rest is stock/bond index funds, I Bonds and a bit of cash).
willthrill81 wrote:
Sun Nov 19, 2017 6:11 pm
Personally, considering that EE bonds are the most illiquid bonds I've ever seen and cannot be used for rebalancing purposes or redeemed prior to the 20 year holding period for anything short of emergencies on the order of bankruptcy, I'm not interested in them in the slightest. They have huge interest rate risk as well. Historically, if you know you aren't going to need the money you're putting in EE bonds before 20 years, then you should have put them into equities. There have only been about three periods where stocks would not have returned 3.53% annually over 20 years, so the historic 'odds' are over 95% in favor of stocks. And they don't have the illiquidity issues nor interest rate risk of EE bonds.
I'm risk-adverse enough to be 60/40, so the question of EE vs. equities really isn't an issue for me. As for rebalancing: EE bonds make up less than 10% of my portfolio, so also not much of an issue. Rising rates could be, but so far over the past 7 years my EE bonds are beating my I bonds by a fair margin in terms of 20-year outlook (I think my tax-exempt and TIPS too) - those higher rates haven't materialized yet. The catch in treating them as growing at either 3.53% annualized or 5%/year is of course that the math has to be adjusted down (a 'loss') if rates rise and I cash out.
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Re: Valuation of EE Savings Bonds

Post by aristotelian » Sun Nov 19, 2017 8:16 pm

When the EE Bond is purchased, the market price is $10K for a $10k bond. We know that because that is how much they are sold for, and there is a market for them at that price point. That is its value in today's dollars.

When it is redeemed, it is worth $20k in future dollars.

While I can't prove it because no market exists, I would think the value would be somewhere in between $10k in today's dollars and $20k in 2037 dollars as the bond get closer to maturity. Certainly if I could buy somebody's $10k bond that matures next week for $19K and realize a $1k profit, I would do it.

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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Sun Nov 19, 2017 8:33 pm

Noobvestor wrote:
Sun Nov 19, 2017 8:09 pm
I'm risk-adverse enough to be 60/40, so the question of EE vs. equities really isn't an issue for me. As for rebalancing: EE bonds make up less than 10% of my portfolio, so also not much of an issue. Rising rates could be, but so far over the past 7 years my EE bonds are beating my I bonds by a fair margin in terms of 20-year outlook (I think my tax-exempt and TIPS too) - those higher rates haven't materialized yet.
I'm not trying to cast this as a bonds vs. stocks debate. My point, rather, is that EE bonds are so different from other bonds that they should be treated as qualitatively distinct. With traditional bonds, you can sell them when you want with little or no foregone interest. The overwhelming majority of bond holders don't hold them just because 'they want bonds'; they hold them for rebalancing purposes and for short- and mid-term spending. Historically, there's virtually no reason why a retail investor would need 'safe' money (i.e. fixed income) that is, for most intents and purposes, inaccessible to them for 20 years.

Again, based on the historical record, it's a slam dunk that stocks have beaten bonds over 20 year holding periods.

Don't invest in anything just because your AA 'calls' for it.
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Re: Valuation of EE Savings Bonds

Post by aristotelian » Sun Nov 19, 2017 9:44 pm

willthrill81 wrote:
Sun Nov 19, 2017 8:33 pm

I'm not trying to cast this as a bonds vs. stocks debate. My point, rather, is that EE bonds are so different from other bonds that they should be treated as qualitatively distinct. With traditional bonds, you can sell them when you want with little or no foregone interest. The overwhelming majority of bond holders don't hold them just because 'they want bonds'; they hold them for rebalancing purposes and for short- and mid-term spending. Historically, there's virtually no reason why a retail investor would need 'safe' money (i.e. fixed income) that is, for most intents and purposes, inaccessible to them for 20 years.

Again, based on the historical record, it's a slam dunk that stocks have beaten bonds over 20 year holding periods.

Don't invest in anything just because your AA 'calls' for it.
I get what you are saying, but for a buy and hold investor seeking a certain % of their portfolio in bonds, I think they could do worse than EE Bonds. What is better, holding EE Bonds for 20 years returning 3.5%, or holding Total Bond Market for the same period of time?

By your reasoning, anyone with > 20 year horizon should be 100% stock.

I do not hold EE Bonds. (Whenever I am tempted, I remind myself that I could increase my allocation in TIAA Traditional, which has a higher guaranteed rate and better liquidity). However, I would not begrudge somebody who does.

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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Sun Nov 19, 2017 10:00 pm

aristotelian wrote:
Sun Nov 19, 2017 9:44 pm
willthrill81 wrote:
Sun Nov 19, 2017 8:33 pm

I'm not trying to cast this as a bonds vs. stocks debate. My point, rather, is that EE bonds are so different from other bonds that they should be treated as qualitatively distinct. With traditional bonds, you can sell them when you want with little or no foregone interest. The overwhelming majority of bond holders don't hold them just because 'they want bonds'; they hold them for rebalancing purposes and for short- and mid-term spending. Historically, there's virtually no reason why a retail investor would need 'safe' money (i.e. fixed income) that is, for most intents and purposes, inaccessible to them for 20 years.

Again, based on the historical record, it's a slam dunk that stocks have beaten bonds over 20 year holding periods.

Don't invest in anything just because your AA 'calls' for it.
I get what you are saying, but for a buy and hold investor seeking a certain % of their portfolio in bonds, I think they could do worse than EE Bonds. What is better, holding EE Bonds for 20 years returning 3.5%, or holding Total Bond Market for the same period of time?

By your reasoning, anyone with > 20 year horizon should be 100% stock.

I do not hold EE Bonds. (Whenever I am tempted, I remind myself that I could increase my allocation in TIAA Traditional, which has a higher guaranteed rate and better liquidity). However, I would not begrudge somebody who does.
Based on the historic data, investors with an investment horizon over 20 years AND with the intestinal fortitude to deal with the volatility of stocks should absolutely be 100% stock or very nearly so.

But aside from that, let's do a little mental experiment to better analyze what's going on with EE bonds. Let's imagine that I have W bonds that are federally guaranteed to earn 4% annual interest. However, I must hold them for 50 years to achieve this return or else the return will be .1% annually. The bonds cannot be sold at any point. Would this be a good investment for a retail investor? Absolutely not! There is far too much interest rate risk (historically, such a bond would only have about a 1% real annual return and only 2% if the Fed achieved its targeted inflation rate), and the lack of volatility is terrible; certainly they could be redeemed for the principal plus the .1% annual interest, but the effective penalty for doing so increases throughout the holding period until they are finally redeemed. Such bonds cannot be used for rebalancing purposes, and they cannot be used for spending prior to the 50 year mark.

EE bonds are very similar, except that the holding period is 20 years and the interest rate is 3.53%. How many times in the historic record have nominal bonds held for 20 years beaten stocks? About three. In virtually all of the rest, stocks have absolutely trounced bonds.

Buying EE bonds is taking on a bet with very little upside (significant deflation is about the only way to earn much with them, but that would help all nominal bonds) and substantial downside (significant interest rate risk, illiquid, no rebalancing, cannot be used for spending).
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Re: Valuation of EE Savings Bonds

Post by aristotelian » Sun Nov 19, 2017 10:44 pm

willthrill81 wrote:
Sun Nov 19, 2017 10:00 pm
EE bonds are very similar, except that the holding period is 20 years and the interest rate is 3.53%. How many times in the historic record have nominal bonds held for 20 years beaten stocks? About three. In virtually all of the rest, stocks have absolutely trounced bonds.

Buying EE bonds is taking on a bet with very little upside (significant deflation is about the only way to earn much with them, but that would help all nominal bonds) and substantial downside (significant interest rate risk, illiquid, no rebalancing, cannot be used for spending).
You said you were not making an argument against bonds, only against EE bonds. But your argument against EE bonds applies to all bonds for a buy and hold investor. I think it is rational to accept a guaranteed interest rate for a portion of your portfolio that you do not want to lose even though stocks are likely to outperform. At that point, you try to get the best interest rate you can, and sometimes that means extending your duration. The comparison to stocks seems irrelevant to me. The question would be how does the guaranteed return of EE bonds compare to Total Bond Market or other bond instruments that have better liquidity and lower interest rate risk.

I should add that you seem to be fixated on return and evaluating bonds purely in terms of return. Of course, viewed in those terms, bonds will lose to stocks, and EE bonds are no exception. Maximizing return is a valid goal, but it is not the only goal. That is the goal for the stock side of my portfolio, but my bond side is for capital preservation and stable income. Within those constraints, I will seek the highest yield. Conversely, on the stock side, I am seeking return but I will try to reduce risk through diversification without inhibiting return. While I do not hold EE bonds myself, they would seem to be a valid option for someone seeking an investment with guaranteed principal.
Last edited by aristotelian on Sun Nov 19, 2017 11:40 pm, edited 1 time in total.

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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Sun Nov 19, 2017 11:02 pm

willthrill81 wrote:
Sun Nov 19, 2017 8:33 pm
I'm not trying to cast this as a bonds vs. stocks debate. My point, rather, is that EE bonds are so different from other bonds that they should be treated as qualitatively distinct.
Perhaps so, but again I'm coming at this from a portfolio construction perspective - they may not act like bonds, cash or CDs, but they are a fixed-income instrument, so the question is how to value them at points along the way (assuming they are held to maturity). In particular, I'm curious about valuing them in light of how different approaches impact stock/bond ratio (I'm using 'bond' as a stand-in for 'fixed income).
willthrill81 wrote:
Sun Nov 19, 2017 8:33 pm
The overwhelming majority of bond holders don't hold them just because 'they want bonds'; they hold them for rebalancing purposes and for short- and mid-term spending. Historically, there's virtually no reason why a retail investor would need 'safe' money (i.e. fixed income) that is, for most intents and purposes, inaccessible to them for 20 years.
This is again a stock versus bond argument. You can argue that someone shouldn't hold bonds for 20 years under any circumstances, or only for rebalancing, but that's a different debate. I'm working with the following premises: (1) the bonds will be held to maturity (barring edge cases of fast-rising rates), and (2) there are plenty of other bonds to rebalance with in a portfolio.
aristotelian wrote:
Sun Nov 19, 2017 8:16 pm
While I can't prove it because no market exists, I would think the value would be somewhere in between $10k in today's dollars and $20k in 2037 dollars as the bond get closer to maturity. Certainly if I could buy somebody's $10k bond that matures next week for $19K and realize a $1k profit, I would do it.
Precisely. It would definitely be weird if I had been buying $10K EE bonds/year for 19 years and only valued them at only $190,000. In turn, that would lead to my 'bond' portfolio looking smaller than it actually is from a valuation perspective. I think the logical options are something like ~3.5% annualized or 5% per year in increments on top of the initial amount - both reach the same point just at different rates.
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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Sun Nov 19, 2017 11:37 pm

aristotelian wrote:
Sun Nov 19, 2017 10:44 pm
willthrill81 wrote:
Sun Nov 19, 2017 10:00 pm
EE bonds are very similar, except that the holding period is 20 years and the interest rate is 3.53%. How many times in the historic record have nominal bonds held for 20 years beaten stocks? About three. In virtually all of the rest, stocks have absolutely trounced bonds.

Buying EE bonds is taking on a bet with very little upside (significant deflation is about the only way to earn much with them, but that would help all nominal bonds) and substantial downside (significant interest rate risk, illiquid, no rebalancing, cannot be used for spending).
You said you were not making an argument against bonds, only against EE bonds. But your argument against EE bonds applies to all bonds for a buy and hold investor.
No, it does not. Virtually all other nominal bonds can be bought and sold on any trading day. Consequently, the interest rate risk is far higher with illiquid bonds, particularly when the duration is very long as it is with EE bonds.
aristotelian wrote:
Sun Nov 19, 2017 10:44 pm
I think it is rational to accept a guaranteed interest rate for a portion of your portfolio that you do not want to lose even though stocks are likely to outperform. At that point, you try to get the best interest rate you can, and sometimes that means extending your duration.
Right now, the Vanguard Total Bond Market admiral shares has a yield of 2.47%, and the Vanguard Long-Term Government Bond Index Fund admiral shares, which has a duration of 17.3 years, has a yield of 2.73%. For those who just want bonds because they aren't stocks, the Vanguard Long-Term Bond Index Fund has a yield of 3.5%. Granted, those yields could fall, but the flip side is that they are liquid. Again, there's very little potential upside to a 3.53% guaranteed bond with a 20 year duration and a lot of downside risk.

To quote Larry Swedroe, "Take your risk on the equity side."
aristotelian wrote:
Sun Nov 19, 2017 10:44 pm
The comparison to stocks seems irrelevant to me. The question would be how does the guaranteed return of EE bonds compare to Total Bond Market or other bond instruments that have better liquidity and lower interest rate risk.
Why is it not valid to compare a 20 year bond with equities? The historical downside risk of stocks has been close to zero, whereas the upside potential has been tremendous; by comparison, the downside risk of EE bonds is fairly large, whereas the upside potential is very limited. Over a 20 year holding period, the volatility of stocks shifts almost entirely to the upside (e.g. "do I get a 2.6% annual return or a 10.9% annual return?").

Arbitrarily determining that one's AA should be X percent bonds and then chasing yield with that bond money does not sound like a valid strategy to me. No bond should ever be purchase merely because it is a bond. It should be purchased because it fits within one's overall strategy and complements it appropriately. Perhaps this is the case for some people when it comes to EE bonds, but I haven't seen a convincing argument laid out yet for why.
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Re: Valuation of EE Savings Bonds

Post by aj76er » Mon Nov 20, 2017 12:32 am

willthrill81 wrote:
Sun Nov 19, 2017 6:11 pm
Noobvestor wrote:
Sun Nov 19, 2017 5:08 pm
I was thinking about this again and I'm revising my answer from four years ago: on my spreadsheets, I have started adding 5% each year (over initial value). For instance, a $10,000 EE bond bought 5 years ago would be marked $1,250 on the spreadsheet.

Why? Because these are the last things I would sell before they double, so short of a huge rate spike in bonds (which requires different math) I figure I should treat them in terms of how far they are to their doubling value and assume they will be held until that value is achieved.

For the purposes of portfolio construction, this has a significant impact on what my total bond allocation is. Basically, instead of the EE bond arcing slowly upward over time, it tracks a linear progression. If it followed a curve, my bond portion would be lower early on. Thoughts/opinions?
#Cruncher's excellent graph depicts what's going on here so well that I have to replicate it.
#Cruncher wrote:
Wed Nov 26, 2014 4:53 pm
Image
If you wish to base the value of your EE bonds on their current (i.e. today's) value, then you should ignore the 'spike' at the end until it comes to fruition. If you wish to base the value of your EE bonds on their final value, then you should value them based on an 3.53% annual interest rate.
I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
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Re: Valuation of EE Savings Bonds

Post by aj76er » Mon Nov 20, 2017 12:47 am

aristotelian wrote:
Sun Nov 19, 2017 8:16 pm
While I can't prove it because no market exists
I suppose you could devise a contractual agreement on the future claim of a noobvestor's EE-bond? In this manner, you would be creating a market; but until that happens, the value is simply what the bond redeems for at the U.S. treasury.
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Re: Valuation of EE Savings Bonds

Post by lazyday » Mon Nov 20, 2017 5:26 am

In case anyone missed it, there's some discussion here on who EE bonds are good for, if anyone: viewtopic.php?f=10&t=217081

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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Mon Nov 20, 2017 3:10 pm

aj76er wrote:
Mon Nov 20, 2017 12:32 am
I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
This makes little sense to me. Let's run a simplified scenario, though, and see what you think:

1) I buy to a target of 50/50 stocks bonds, $10,000 in each asset class. The latter $10,000 is in EE Bonds with 0% yield (for simplicity).

2) I fall into a coma, 19 years pass and I have $20,000 in stocks, $10,000 in EE bonds. Do I sell $5,000 in stocks to buy $5,000 in bonds?

Your position implies that's the right move, but I would argue that's too much because the EE bonds are about to be worth $20,000. Assuming (again for simplicity) my target is still 50/50, selling stocks would tilt me too much toward bonds, wouldn't it?
willthrill81 wrote:
Sun Nov 19, 2017 11:37 pm
No, it does not. Virtually all other nominal bonds can be bought and sold on any trading day. Consequently, the interest rate risk is far higher with illiquid bonds, particularly when the duration is very long as it is with EE bonds.
I believe you're using an incorrect definition of interest rate risk. I could be wrong (though a quick Google search seems to suggest otherwise) but I believe interest rate risk actually only applies to bonds that can change in value with rate changes, which EE Bonds do not. I still see what you're saying, but the reality is that bonds in index funds have rate-related risks too - the NAV can go down with interest rate changes.
willthrill81 wrote:
Sun Nov 19, 2017 11:37 pm
Why is it not valid to compare a 20 year bond with equities? The historical downside risk of stocks has been close to zero, whereas the upside potential has been tremendous; by comparison, the downside risk of EE bonds is fairly large, whereas the upside potential is very limited. Over a 20 year holding period, the volatility of stocks shifts almost entirely to the upside (e.g. "do I get a 2.6% annual return or a 10.9% annual return?").
There is a lot of debate on whether stocks get riskier or safer over longer periods. I happen to subscribe to the view they get riskier. There are also some good real-world examples of markets going down and staying down for long periods (e.g. Japan). Regardless, bonds for 20+ year terms are common, EE or otherwise, so I'm not sure I get your point beyond 'anything for 20+ year periods should be in stocks' - a different debate.
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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Mon Nov 20, 2017 4:03 pm

Noobvestor wrote:
Mon Nov 20, 2017 3:10 pm
willthrill81 wrote:
Sun Nov 19, 2017 11:37 pm
No, it does not. Virtually all other nominal bonds can be bought and sold on any trading day. Consequently, the interest rate risk is far higher with illiquid bonds, particularly when the duration is very long as it is with EE bonds.
I believe you're using an incorrect definition of interest rate risk. I could be wrong (though a quick Google search seems to suggest otherwise) but I believe interest rate risk actually only applies to bonds that can change in value with rate changes, which EE Bonds do not. I still see what you're saying, but the reality is that bonds in index funds have rate-related risks too - the NAV can go down with interest rate changes.
Interest rate risk exists even with fixed rate nominal bonds. When you take out a 20 year bond paying 3.53%, you're 'betting' that you won't be able to get a higher interest rate further down the road. If rates are 6% in 10 years, you are still stuck earning 3.53% interest and have experienced the negative side of interest rate risk.
Noobvestor wrote:
Mon Nov 20, 2017 3:10 pm
willthrill81 wrote:
Sun Nov 19, 2017 11:37 pm
Why is it not valid to compare a 20 year bond with equities? The historical downside risk of stocks has been close to zero, whereas the upside potential has been tremendous; by comparison, the downside risk of EE bonds is fairly large, whereas the upside potential is very limited. Over a 20 year holding period, the volatility of stocks shifts almost entirely to the upside (e.g. "do I get a 2.6% annual return or a 10.9% annual return?").
There is a lot of debate on whether stocks get riskier or safer over longer periods. I happen to subscribe to the view they get riskier. There are also some good real-world examples of markets going down and staying down for long periods (e.g. Japan). Regardless, bonds for 20+ year terms are common, EE or otherwise, so I'm not sure I get your point beyond 'anything for 20+ year periods should be in stocks' - a different debate.
The answer to the whole "do stocks get riskier or safer over longer periods," at least in terms of historical performance, is not very debatable. The debate hinges on specifically how you define risk. In the sense I'm using it here, the risk is that of losing money on a lump sum investment in stocks over a 20 year period. Over all 20 year periods with available data, there has been a grand total of one in which the S&P 500 returned less than 3.5% (beginning in 1928, the forward nominal return was 2.05%). In 90% of the 20 year periods, the S&P 500 had a nominal return of least 5.76%. So when it comes to lump sums invested in stocks over 20 year periods, it has absolutely been the case that the likelihood of losing nominal dollars has been zero. This is obviously far less than shorter holding periods (e.g. 1 year, 3 years). So if we define risk as the likelihood of losing nominal dollars, it has absolutely been historically true that stocks get safer over longer periods.

So those investing in EE bonds are betting that the next 20 years of stock returns will be worse than every prior 20 year period in the historic record save one. I don't have that much confidence in my crystal ball.

When it comes to the standard deviation of historical returns, this has also decreased as the holding period for stocks increases. For 10 year holding periods, the std. dev. has been 5.03%, where it's been 3.26% for 20 year periods and 2.23% for 30 year periods, indicating that the dispersion of returns also shrinks as the holding period increases.
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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Mon Nov 20, 2017 5:11 pm

willthrill81 wrote:
Mon Nov 20, 2017 4:03 pm
So those investing in EE bonds are betting that the next 20 years of stock returns will be worse than every prior 20 year period in the historic record save one. I don't have that much confidence in my crystal ball.
Since this is largely covered in the other thread, I won't go too far down this rabbit hole. Suffice it to say that no, I'm not betting stock returns will be worse. If I were, I'd put all my money in bonds. I'm hedging the possibility that they will be worse. In short: I'm diversifying. I believe, incidentally, that if you broaden your comparative analysis (per Wade Pfau) to global markets you'll find the case for EE bonds stronger.
willthrill81 wrote:
Mon Nov 20, 2017 4:03 pm
Interest rate risk exists even with fixed rate nominal bonds. When you take out a 20 year bond paying 3.53%, you're 'betting' that you won't be able to get a higher interest rate further down the road. If rates are 6% in 10 years, you are still stuck earning 3.53% interest and have experienced the negative side of interest rate risk.
Sorry, I was being narrow with the definition, but yes, I get what you're saying and understand that risk. That said, if rates are 6% in 10 years it will depend on what I invested in in the meantime. And if rates are lower, EE bonds could easily win. If rates and inflation stay the same, my EE bonds are on track to beat all my other fixed income holdings: cash, tax-exempt, Treasuries, TIPS and I Bonds. Of course, I don't know what rates and inflation will do, so I'm diversified across an array of bond types, with plenty of bonds to rebalance with should the need arise.

I still don't know exactly how to 'value' my EE bonds from five years ago (and years since) for portfolio construction purposes, but they're certainly worth more to me than $10,000 plus whatever small amount of interest they have accumulated over that period.
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Re: Valuation of EE Savings Bonds

Post by Mel Lindauer » Mon Nov 20, 2017 7:25 pm

While not directly addressing the "how to value" question, here's another way to look at EE Bonds.

It's a Forbes column I did some time ago about building your own annuity with EE Bonds.

https://www.forbes.com/sites/theboglehe ... d4c0047ba3
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Re: Valuation of EE Savings Bonds

Post by Ketawa » Mon Nov 20, 2017 8:44 pm

I'm coming to this discussion late, but within a portfolio e.g. for asset allocation purposes like determining stock/bond split, EE bonds should theoretically be valued based on what you would pay for them if they were offered for sale when compared to other investment options, not what the Treasury tells you they are worth. This is mainly because asset allocation is used to set a level of risk for the portfolio.

Consider this example. You have $50K in stocks and $50K in EE bonds. Your EE bonds will double in value in 1 week. Is your risk that of a 50/50 portfolio, or a 33/67 portfolio? It should be pretty obvious that within all typical market conditions, your portfolio is basically the same as someone who has $50K in equities and $100K in a money market fund, ignoring some premium for short-term liquidity, and things like that.

Let's say your $50K in EE bonds will not double for a year. For asset allocation purposes, i.e. the number I enter on my spreadsheet, they should be worth pretty close to $100K. It's not exactly 3.52%, that is too simplistic since it ignores the liquidity, but the number should still be what you would theoretically pay in an open market for a security that matured in one year that could not be sold again.

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Re: Valuation of EE Savings Bonds

Post by aj76er » Mon Nov 20, 2017 9:02 pm

Noobvestor wrote:
Mon Nov 20, 2017 3:10 pm
aj76er wrote:
Mon Nov 20, 2017 12:32 am
I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
This makes little sense to me. Let's run a simplified scenario, though, and see what you think:

1) I buy to a target of 50/50 stocks bonds, $10,000 in each asset class. The latter $10,000 is in EE Bonds with 0% yield (for simplicity).

2) I fall into a coma, 19 years pass and I have $20,000 in stocks, $10,000 in EE bonds. Do I sell $5,000 in stocks to buy $5,000 in bonds?

Your position implies that's the right move, but I would argue that's too much because the EE bonds are about to be worth $20,000. Assuming (again for simplicity) my target is still 50/50, selling stocks would tilt me too much toward bonds, wouldn't it?
Take the reverse example. Say stocks are down and at the 19yr point you have $5000 in stocks and $10000 in EE-bonds. And let's say you need $15000 to cover medical expenses from being in a coma for 19yrs. Uh-oh, you just had to cash in EE-bonds prior to maturity and their value is exactly $10000 plus 19yrs worth of 0.1% interest.

Again, there's no open market for EE-bonds ... only what the U.S. treasury will pay you for them at the present time. You need to value them as such or else your are "pretending" your portfolio is more conservative than it really is. And that can be dangerous.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Valuation of EE Savings Bonds

Post by Ketawa » Mon Nov 20, 2017 9:08 pm

aj76er wrote:
Mon Nov 20, 2017 9:02 pm
Noobvestor wrote:
Mon Nov 20, 2017 3:10 pm
aj76er wrote:
Mon Nov 20, 2017 12:32 am
I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
This makes little sense to me. Let's run a simplified scenario, though, and see what you think:

1) I buy to a target of 50/50 stocks bonds, $10,000 in each asset class. The latter $10,000 is in EE Bonds with 0% yield (for simplicity).

2) I fall into a coma, 19 years pass and I have $20,000 in stocks, $10,000 in EE bonds. Do I sell $5,000 in stocks to buy $5,000 in bonds?

Your position implies that's the right move, but I would argue that's too much because the EE bonds are about to be worth $20,000. Assuming (again for simplicity) my target is still 50/50, selling stocks would tilt me too much toward bonds, wouldn't it?
Take the reverse example. Say stocks are down and at the 19yr point you have $5000 in stocks and $10000 in EE-bonds. And let's say you need $15000 to cover medical expenses from being in a coma for 19yrs. Uh-oh, you just had to cash in EE-bonds prior to maturity and their value is exactly $10000 plus 19yrs worth of 0.1% interest.

Again, there's no open market for EE-bonds ... only what the U.S. treasury will pay you for them at the present time. You need to value them as such or else your are "pretending" your portfolio is more conservative than it really is. And that can be dangerous.
Valuing the EE bonds at what you would theoretically pay for them if they were offered for sale is still the correct option. Here, what was dangerous was not having an emergency fund. If you have no other assets than the $15K you described and any emergency will wipe you out, then you should more heavily discount the EE bonds from $20K in a probabilistic manner since the liquidity is a serious problem for you.

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Re: Valuation of EE Savings Bonds

Post by jdilla1107 » Mon Nov 20, 2017 9:12 pm

aj76er wrote:
Mon Nov 20, 2017 12:32 am

I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
Trying to come to some agreement of academic correctness on this issue is silly. Like why does this even matter?

The right question is "what are the effects of me valuing EE bonds in different ways on my portfolio?" The answer is that it determines your stock/bond allocation and when to rebalance.

Let's pretend that someone has held EE bonds for 19 years and 360 days. Does it really seem reasonable that in another week the person better RE-BALANCE RIGHT NOW!!!!! THERE WAS A BIG SWING IN THE PORTFOLIO!!!

1) If there wasn't a big swing in the portfolio, then who cares
2) If there was a big swing, then I maintain it's silly to wait until that last day to do something about it.

Personally, I value them at 3.53% increase a year. It's simple and it's called mark-to-model in finance. As long as you don't attempt to deceive yourself with regards to the liquidity, it's also safe.

https://en.wikipedia.org/wiki/Mark_to_model
Last edited by jdilla1107 on Mon Nov 20, 2017 9:24 pm, edited 1 time in total.

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Re: Valuation of EE Savings Bonds

Post by aj76er » Mon Nov 20, 2017 9:19 pm

Ketawa wrote:
Mon Nov 20, 2017 9:08 pm
aj76er wrote:
Mon Nov 20, 2017 9:02 pm
Noobvestor wrote:
Mon Nov 20, 2017 3:10 pm
aj76er wrote:
Mon Nov 20, 2017 12:32 am
I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
This makes little sense to me. Let's run a simplified scenario, though, and see what you think:

1) I buy to a target of 50/50 stocks bonds, $10,000 in each asset class. The latter $10,000 is in EE Bonds with 0% yield (for simplicity).

2) I fall into a coma, 19 years pass and I have $20,000 in stocks, $10,000 in EE bonds. Do I sell $5,000 in stocks to buy $5,000 in bonds?

Your position implies that's the right move, but I would argue that's too much because the EE bonds are about to be worth $20,000. Assuming (again for simplicity) my target is still 50/50, selling stocks would tilt me too much toward bonds, wouldn't it?
Take the reverse example. Say stocks are down and at the 19yr point you have $5000 in stocks and $10000 in EE-bonds. And let's say you need $15000 to cover medical expenses from being in a coma for 19yrs. Uh-oh, you just had to cash in EE-bonds prior to maturity and their value is exactly $10000 plus 19yrs worth of 0.1% interest.

Again, there's no open market for EE-bonds ... only what the U.S. treasury will pay you for them at the present time. You need to value them as such or else your are "pretending" your portfolio is more conservative than it really is. And that can be dangerous.
Valuing the EE bonds at what you would theoretically pay for them if they were offered for sale is still the correct option. Here, what was dangerous was not having an emergency fund. If you have no other assets than the $15K you described and any emergency will wipe you out, then you should more heavily discount the EE bonds from $20K in a probabilistic manner since the liquidity is a serious problem for you.
So, you are changing the example :wink: .

As you get sufficiently close to the 20yr doubling time, then you have a point. For example, a $10k EE-bond that doubles in 1 day could, with a fair amount of confidence, be valued at $20k. One month out? Probably. 1 year out? hmmm. 5yrs out? There's too much uncertainty for my tastes. I suppose it depends on how much other liquidity you have (e.g. money not tied up in 401k, house, etc..). Emergency funds are first line of defense, but sometimes aren't enough (e.g. extended job loss, etc..).
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Re: Valuation of EE Savings Bonds

Post by Ketawa » Mon Nov 20, 2017 9:25 pm

jdilla1107 wrote:
Mon Nov 20, 2017 9:12 pm
aj76er wrote:
Mon Nov 20, 2017 12:32 am

I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
Trying to come to some agreement of academic correctness on this issue is silly. Like why does this even matter? Are we accountants arguing over GAAP standards?

The right question is "what are the effects of me valuing EE bonds in different ways on my portfolio?" The answer is that it determines your stock/bond allocation and when to rebalance.

Let's pretend that someone has held EE bonds for 19 years and 360 days. Does it really seem reasonable that in another week the person better RE-BALANCE RIGHT NOW!!!!! THERE WAS A BIG SWING IN THE PORTFOLIO!!!

1) If there wasn't a big swing in the portfolio, then who cares
2) If there was a big swing, then I maintain it's silly to wait until that last day to do something about it.

Personally I value them at 3.53% increase a year. It's simple and it's called mark-to-model in finance.

https://en.wikipedia.org/wiki/Mark_to_model
I agree with all of this, except I don't think it's good to blindly use 3.53%. EE bonds should be valued compared to other available investments. What if the US was experiencing high inflation and savings account interest rates were 10%? At the 19 year mark of your EE bonds, your model would have them worth almost their full value, when they're really not as great considering you could have 90% of their value in a savings account and be just as well off.

Of course in most interest rate environments, 3.53% is probably good enough.

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Re: Valuation of EE Savings Bonds

Post by Gnirk » Mon Nov 20, 2017 9:34 pm

I inherited a number of EE and I bonds. I entered them into the Treasury Direct website to calculate the value of the bonds and use those calculations to find their present value. Currently, the EE bonds are paying 4%, and the I bonds are paying 5.39%. At this point, I plan on keeping them until maturity, but count only the present value in my portfolio bond allocation, less expected taxes on the interest (and their values are almost ALL interest).

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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Mon Nov 20, 2017 9:37 pm

Ketawa wrote:
Mon Nov 20, 2017 9:08 pm
aj76er wrote:
Mon Nov 20, 2017 9:02 pm
Noobvestor wrote:
Mon Nov 20, 2017 3:10 pm
aj76er wrote:
Mon Nov 20, 2017 12:32 am
I agree with willthrill. An EE-bond within a portfolio should be valued as what it is presently worth. For an EE-bond prior to maturity, this would be the face value plus the 0.1% interest accrued thus far. The 3.53% rate is simply a mental accounting for what the 20yr holding period returns; not a measure of actual value at any point in time.
This makes little sense to me. Let's run a simplified scenario, though, and see what you think:

1) I buy to a target of 50/50 stocks bonds, $10,000 in each asset class. The latter $10,000 is in EE Bonds with 0% yield (for simplicity).

2) I fall into a coma, 19 years pass and I have $20,000 in stocks, $10,000 in EE bonds. Do I sell $5,000 in stocks to buy $5,000 in bonds?

Your position implies that's the right move, but I would argue that's too much because the EE bonds are about to be worth $20,000. Assuming (again for simplicity) my target is still 50/50, selling stocks would tilt me too much toward bonds, wouldn't it?
Take the reverse example. Say stocks are down and at the 19yr point you have $5000 in stocks and $10000 in EE-bonds. And let's say you need $15000 to cover medical expenses from being in a coma for 19yrs. Uh-oh, you just had to cash in EE-bonds prior to maturity and their value is exactly $10000 plus 19yrs worth of 0.1% interest.

Again, there's no open market for EE-bonds ... only what the U.S. treasury will pay you for them at the present time. You need to value them as such or else your are "pretending" your portfolio is more conservative than it really is. And that can be dangerous.
Valuing the EE bonds at what you would theoretically pay for them if they were offered for sale is still the correct option. Here, what was dangerous was not having an emergency fund. If you have no other assets than the $15K you described and any emergency will wipe you out, then you should more heavily discount the EE bonds from $20K in a probabilistic manner since the liquidity is a serious problem for you.
You are arguing that they should be valued based on what you would pay for them, while aj76er says you should claim them based on the money you can extract from them. This is an interesting situation because the difference between these two numbers will become very significant as the holding period of EE bonds progresses. I can see at a somewhat convincing argument being made for either valuation metric, though I lean toward valuing them for what you can currently get out of them (i.e. their current redemption value). Obviously, those who have decided to purchase EE bonds will want to value them the other way so as to make them look as good as possible.
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Re: Valuation of EE Savings Bonds

Post by jdilla1107 » Mon Nov 20, 2017 9:42 pm

Ketawa wrote:
Mon Nov 20, 2017 9:25 pm
I agree with all of this, except I don't think it's good to blindly use 3.53%. EE bonds should be valued compared to other available investments. What if the US was experiencing high inflation and savings account interest rates were 10%? At the 19 year mark of your EE bonds, your model would have them worth almost their full value, when they're really not as great considering you could have 90% of their value in a savings account and be just as well off.

Of course in most interest rate environments, 3.53% is probably good enough.
Yes, but what about all of the years preceding year 19@10% where I didn't credit myself for the "gains"? The point is that over 20 years, 3.53% is a reasonable number which averages itself out. You are right that in reality the growth rate should be dynamic instead of static though.

Would you even be able to model what you are suggesting in excel? Note you would also have to model the embedded put option which also gets the crowd here riled up. (ie: ability to sell back the EE bond if rates spike early in hold; unlike a treasury)

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Re: Valuation of EE Savings Bonds

Post by Ketawa » Mon Nov 20, 2017 9:56 pm

jdilla1107 wrote:
Mon Nov 20, 2017 9:42 pm
Ketawa wrote:
Mon Nov 20, 2017 9:25 pm
I agree with all of this, except I don't think it's good to blindly use 3.53%. EE bonds should be valued compared to other available investments. What if the US was experiencing high inflation and savings account interest rates were 10%? At the 19 year mark of your EE bonds, your model would have them worth almost their full value, when they're really not as great considering you could have 90% of their value in a savings account and be just as well off.

Of course in most interest rate environments, 3.53% is probably good enough.
Yes, but what about all of the years preceding year 19@10% where I didn't credit myself for the "gains"? The point is that over 20 years, 3.53% is a reasonable number which averages itself out. You are right that in reality the growth rate should be dynamic instead of static though.

Would you even be able to model what you are suggesting in excel? Note you would also have to model the embedded put option which also gets the crowd here riled up. (ie: ability to sell back the EE bond if rates spike early in hold; unlike a treasury)
At year 18, interest rates are around where they are now and you use around 4% discount from the full value you will receive in year 20 (2% interest rate per year). However, interest rates spike up to 10% by year 19. In your spreadsheet for asset allocation this would be a 6% loss (2% in interest earned minus 8% due to interest rate increase). This is like a bond fund would experience, because there is still interest rate risk with EE bonds. You will recover the loss by holding until year 20, earning 10% in the final year, 4% overall.

I don't know exactly how to model the embedded put option. I don't put too much thought into fixed income because my fixed income is all G Fund or 5% prepaid cards. My point still stands that the valuation should be based on what you would pay if the EE bond was offered to you for sale.

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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Mon Nov 20, 2017 11:33 pm

Mel Lindauer wrote:
Mon Nov 20, 2017 7:25 pm
While not directly addressing the "how to value" question, here's another way to look at EE Bonds.

It's a Forbes column I did some time ago about building your own annuity with EE Bonds.

https://www.forbes.com/sites/theboglehe ... d4c0047ba3
Hi Mel! Thanks for the link and always good to bump into you on the forums. Do you have any strategy yourself for valuing EE bonds as a portion of your portfolio? As in: do you value them per one of the strategies being discussed, or against other annuities, etc?
willthrill81 wrote:
Mon Nov 20, 2017 9:37 pm
You are arguing that they should be valued based on what you would pay for them, while aj76er says you should claim them based on the money you can extract from them. This is an interesting situation because the difference between these two numbers will become very significant as the holding period of EE bonds progresses. I can see at a somewhat convincing argument being made for either valuation metric, though I lean toward valuing them for what you can currently get out of them (i.e. their current redemption value). Obviously, those who have decided to purchase EE bonds will want to value them the other way so as to make them look as good as possible.
This isn't about making them look good, it's about balancing a portfolio. I don't value assets based on feeling good about them. What I want is a solution that doesn't skew their value downward based on 'what I can get for them today' when I have a ladder that are at various stages of maturity. If I buy 20 $10K (at 0%) EE Bonds over 20 years and some coming this year, next year, etc... surely I have more than $200K in value on the fixed income side of the portfolio, don't you think? This assumes (of course) a portfolio with both stocks and fixed income.
aj76er wrote:
Mon Nov 20, 2017 9:02 pm

Take the reverse example. Say stocks are down and at the 19yr point you have $5000 in stocks and $10000 in EE-bonds. And let's say you need $15000 to cover medical expenses from being in a coma for 19yrs. Uh-oh, you just had to cash in EE-bonds prior to maturity and their value is exactly $10000 plus 19yrs worth of 0.1% interest.

Again, there's no open market for EE-bonds ... only what the U.S. treasury will pay you for them at the present time. You need to value them as such or else your are "pretending" your portfolio is more conservative than it really is. And that can be dangerous.
I was trying to keep my example simple, and thus it got oversimplified, but I'm assuming that the person doesn't need liquidity - i.e. that they have other bond holdings they can rebalance with or cash out as needed to keep the balance as it is. Think of this as a subset of a portfolio.
jdilla1107 wrote:
Mon Nov 20, 2017 9:12 pm

Personally, I value them at 3.53% increase a year. It's simple and it's called mark-to-model in finance. As long as you don't attempt to deceive yourself with regards to the liquidity, it's also safe.

https://en.wikipedia.org/wiki/Mark_to_model
This makes sense to me. Thanks for the link!
Ketawa wrote:
Mon Nov 20, 2017 9:56 pm
At year 18, interest rates are around where they are now and you use around 4% discount from the full value you will receive in year 20 (2% interest rate per year). However, interest rates spike up to 10% by year 19. In your spreadsheet for asset allocation this would be a 6% loss (2% in interest earned minus 8% due to interest rate increase). This is like a bond fund would experience, because there is still interest rate risk with EE bonds. You will recover the loss by holding until year 20, earning 10% in the final year, 4% overall.
This makes sense to me too - hold to the 3.53% rule until conditions change and you need to adjust the value.
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Re: Valuation of EE Savings Bonds

Post by Mel Lindauer » Thu Nov 23, 2017 5:24 pm

Noobvestor wrote:
Mon Nov 20, 2017 11:33 pm
Mel Lindauer wrote:
Mon Nov 20, 2017 7:25 pm
While not directly addressing the "how to value" question, here's another way to look at EE Bonds.

It's a Forbes column I did some time ago about building your own annuity with EE Bonds.

https://www.forbes.com/sites/theboglehe ... d4c0047ba3
Hi Mel! Thanks for the link and always good to bump into you on the forums. Do you have any strategy yourself for valuing EE bonds as a portion of your portfolio? As in: do you value them per one of the strategies being discussed, or against other annuities, etc?
At this stage in my investing career, I opt for simplicity. I just use the value the Savings Bond Wizard says they're worth since I'm redeeming some each year to avoid a huge tax hit by redeeming them all at once when they reach final maturity in 2022 and 2023 (they've already more than tripled in value).
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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Thu Nov 23, 2017 7:57 pm

Mel Lindauer wrote:
Thu Nov 23, 2017 5:24 pm
Noobvestor wrote:
Mon Nov 20, 2017 11:33 pm
Mel Lindauer wrote:
Mon Nov 20, 2017 7:25 pm
While not directly addressing the "how to value" question, here's another way to look at EE Bonds.

It's a Forbes column I did some time ago about building your own annuity with EE Bonds.

https://www.forbes.com/sites/theboglehe ... d4c0047ba3
Hi Mel! Thanks for the link and always good to bump into you on the forums. Do you have any strategy yourself for valuing EE bonds as a portion of your portfolio? As in: do you value them per one of the strategies being discussed, or against other annuities, etc?
At this stage in my investing career, I opt for simplicity. I just use the value the Savings Bond Wizard says they're worth since I'm redeeming some each year to avoid a huge tax hit by redeeming them all at once when they reach final maturity in 2022 and 2023 (they've already more than tripled in value).
Ah, of course - you're dealing with ones that are doing more than doubling. That makes sense!
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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Fri Nov 24, 2017 10:46 am

Noobvestor wrote:
Mon Nov 20, 2017 11:33 pm
willthrill81 wrote:
Mon Nov 20, 2017 9:37 pm
You are arguing that they should be valued based on what you would pay for them, while aj76er says you should claim them based on the money you can extract from them. This is an interesting situation because the difference between these two numbers will become very significant as the holding period of EE bonds progresses. I can see at a somewhat convincing argument being made for either valuation metric, though I lean toward valuing them for what you can currently get out of them (i.e. their current redemption value). Obviously, those who have decided to purchase EE bonds will want to value them the other way so as to make them look as good as possible.
This isn't about making them look good, it's about balancing a portfolio. I don't value assets based on feeling good about them.
You would be an unusual individual if you didn't value things you own more highly than things you don't. It's a very well known and robust phenomenon referred to as the mere ownership effect and the closely related endowment effect.
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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Mon Nov 27, 2017 4:28 pm

willthrill81 wrote:
Fri Nov 24, 2017 10:46 am
Noobvestor wrote:
Mon Nov 20, 2017 11:33 pm
willthrill81 wrote:
Mon Nov 20, 2017 9:37 pm
You are arguing that they should be valued based on what you would pay for them, while aj76er says you should claim them based on the money you can extract from them. This is an interesting situation because the difference between these two numbers will become very significant as the holding period of EE bonds progresses. I can see at a somewhat convincing argument being made for either valuation metric, though I lean toward valuing them for what you can currently get out of them (i.e. their current redemption value). Obviously, those who have decided to purchase EE bonds will want to value them the other way so as to make them look as good as possible.
This isn't about making them look good, it's about balancing a portfolio. I don't value assets based on feeling good about them.
You would be an unusual individual if you didn't value things you own more highly than things you don't. It's a very well known and robust phenomenon referred to as the mere ownership effect and the closely related endowment effect.
I'm not sure I understand your point. You think I'm predisposed to overvaluing one part of my portfolio with respect to other parts? That's the only thing at issue here - what percentage of the portfolio to consider EE bonds that are Y years toward doubling from $X to $2X. Maybe I overvalue all of my owned assets due to some psychological effects, but you seem to be implying I'm just doing it for this one particular investment.
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Re: Valuation of EE Savings Bonds

Post by nisiprius » Mon Nov 27, 2017 4:48 pm

Value (economics) "Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore 'what is the maximum amount of money a specific actor is willing and able to pay for the good or service.'"

If there is no "specific actor" other than the Treasury who is able to pay for the good or service, in this case the EE bond, then the value of the bond is the Treasury redemption value.
Last edited by nisiprius on Mon Nov 27, 2017 5:45 pm, edited 1 time in total.
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Re: Valuation of EE Savings Bonds

Post by willthrill81 » Mon Nov 27, 2017 5:18 pm

Noobvestor wrote:
Mon Nov 27, 2017 4:28 pm
willthrill81 wrote:
Fri Nov 24, 2017 10:46 am
Noobvestor wrote:
Mon Nov 20, 2017 11:33 pm
willthrill81 wrote:
Mon Nov 20, 2017 9:37 pm
You are arguing that they should be valued based on what you would pay for them, while aj76er says you should claim them based on the money you can extract from them. This is an interesting situation because the difference between these two numbers will become very significant as the holding period of EE bonds progresses. I can see at a somewhat convincing argument being made for either valuation metric, though I lean toward valuing them for what you can currently get out of them (i.e. their current redemption value). Obviously, those who have decided to purchase EE bonds will want to value them the other way so as to make them look as good as possible.
This isn't about making them look good, it's about balancing a portfolio. I don't value assets based on feeling good about them.
You would be an unusual individual if you didn't value things you own more highly than things you don't. It's a very well known and robust phenomenon referred to as the mere ownership effect and the closely related endowment effect.
I'm not sure I understand your point. You think I'm predisposed to overvaluing one part of my portfolio with respect to other parts? That's the only thing at issue here - what percentage of the portfolio to consider EE bonds that are Y years toward doubling from $X to $2X. Maybe I overvalue all of my owned assets due to some psychological effects, but you seem to be implying I'm just doing it for this one particular investment.
I am merely saying that when confronted with a challenge as to how to place a dollar value on some asset, the 'typical investor' is naturally biased toward valuing that asset more highly than they would if they did not own it (i.e. owning an object has a strong tendency to lead to a higher valuation of it). It is easier to come to an 'objective' valuation of an asset when you do not own it. This applies to all of one's assets, though most assets are marketable securities with little qualms as to what they are worth at any given point in time.
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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Mon Nov 27, 2017 8:59 pm

nisiprius wrote:
Mon Nov 27, 2017 4:48 pm
Value (economics) "Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore 'what is the maximum amount of money a specific actor is willing and able to pay for the good or service.'"

If there is no "specific actor" other than the Treasury who is able to pay for the good or service, in this case the EE bond, then the value of the bond is the Treasury redemption value.
I saw your strong opinion about this early in the thread and was honestly a bit surprised. So to use your own example: let's say you're 19 years and 364 days in, and you have a $10,000 EE bond at 0% (simplicity) and $20,000 dollars in stocks. Let's also say you have plenty of cash (just to avoid liquidity complications) and you're just trying to decide one thing: do you need to rebalance your 50/50 target portfolio? If you do sell $5,000 in stocks, then the very next day you'll be buying about $5,000 back. That seems strange - like an inadvertent temporary tilt toward fixed income.
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Re: Valuation of EE Savings Bonds

Post by aj76er » Mon Nov 27, 2017 9:19 pm

Noobvestor wrote:
Mon Nov 27, 2017 8:59 pm
nisiprius wrote:
Mon Nov 27, 2017 4:48 pm
Value (economics) "Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore 'what is the maximum amount of money a specific actor is willing and able to pay for the good or service.'"

If there is no "specific actor" other than the Treasury who is able to pay for the good or service, in this case the EE bond, then the value of the bond is the Treasury redemption value.
I saw your strong opinion about this early in the thread and was honestly a bit surprised. So to use your own example: let's say you're 19 years and 364 days in, and you have a $10,000 EE bond at 0% (simplicity) and $20,000 dollars in stocks. Let's also say you have plenty of cash (just to avoid liquidity complications) and you're just trying to decide one thing: do you need to rebalance your 50/50 target portfolio? If you do sell $5,000 in stocks, then the very next day you'll be buying about $5,000 back. That seems strange - like an inadvertent temporary tilt toward fixed income.
I think the underlying issue is that the mental model you are proposing for valuing EE-bonds is fairly accurate at the end points (i.e. beginning/end of maturity) but quite inaccurate otherwise (i.e. middle section of the maturity timeline).

At time 0.1yrs, value of EE-bond ~= purchase price
At time 19.9yrs, value of EE-bond ~= doubling price
At time 5yrs - 15yrs, value of EE-bond ~= ???

The conservative thing to do would be to assume what the treasury will actually give you for it at any point in time. If you are "certain" of holding it for 20yrs, then by all means you can value it however you like to satisfy your glide path. But in doing so, you are adding some risk to your portfolio. Only you can assess the risk of not being able to hold an EE-bond to 20yrs. As I've said above, anything beyond a year would add too much uncertainty for my tastes.
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Re: Valuation of EE Savings Bonds

Post by Noobvestor » Mon Nov 27, 2017 9:26 pm

aj76er wrote:
Mon Nov 27, 2017 9:19 pm
Noobvestor wrote:
Mon Nov 27, 2017 8:59 pm
nisiprius wrote:
Mon Nov 27, 2017 4:48 pm
Value (economics) "Economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured relative to units of currency, and the interpretation is therefore 'what is the maximum amount of money a specific actor is willing and able to pay for the good or service.'"

If there is no "specific actor" other than the Treasury who is able to pay for the good or service, in this case the EE bond, then the value of the bond is the Treasury redemption value.
I saw your strong opinion about this early in the thread and was honestly a bit surprised. So to use your own example: let's say you're 19 years and 364 days in, and you have a $10,000 EE bond at 0% (simplicity) and $20,000 dollars in stocks. Let's also say you have plenty of cash (just to avoid liquidity complications) and you're just trying to decide one thing: do you need to rebalance your 50/50 target portfolio? If you do sell $5,000 in stocks, then the very next day you'll be buying about $5,000 back. That seems strange - like an inadvertent temporary tilt toward fixed income.
I think the underlying issue is that the mental model you are proposing for valuing EE-bonds is fairly accurate at the end points (i.e. beginning/end of maturity) but quite inaccurate otherwise (i.e. middle section of the maturity timeline).

At time 0.1yrs, value of EE-bond ~= purchase price
At time 19.9yrs, value of EE-bond ~= doubling price
At time 5yrs - 15yrs, value of EE-bond ~= ???

The conservative thing to do would be to assume what the treasury will actually give you for it at any point in time. If you are "certain" of holding it for 20yrs, then by all means you can value it however you like to satisfy your glide path. But in doing so, you are adding some risk to your portfolio. Only you can assess the risk of not being able to hold an EE-bond to 20yrs. As I've said above, anything beyond a year would add too much uncertainty for my tastes.
I'm indeed in those middle years right now - I have EE bonds going back 5 years or so, and adding more annually. At first, I just let them sit at their normal value. Then I started to realize if I didn't project doubling it would skew my portfolio (or, arguably: in adjusting I have now skewed it). The longer it goes on, the bigger the divergence of calculations - each year adds basically nothing or 3.5%+ to the value of a growing stack.

I suppose circumstances could change at lot, but if I'm tapping into the last 5-10% of my portfolio when I'm in my 50s then something has gone really wrong and my retirement plans are toast. Not saying it's impossible, but it seems like an outlier you can't plan for. I think I'm reasonable in assuming that there's just no way I'll need 100% liquidity in my 50s - just like we all (I assume) assume we won't pay early 401(k) penalties.
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Re: Valuation of EE Savings Bonds

Post by aj76er » Fri Dec 08, 2017 10:19 pm

In thinking about safe, non-marketable investments I have recently converted my mental model to use separate "Liability Matching Portfolio" (LMP) and "Risk portfolio" (RP) concepts. This is a change from lumping the assets under "fixed-income" portion of a single portfolio. I can tell you that this was a huge mental relief for me as I struggled with lots of issues over how to value the non-marketable investments, how to spend them, and how to allocate them.

So, I have made the following split in my personal portfolio:
LMP - 1 yr no-penalty CDs + I-Bonds. Viewed as a fixed multiple of annual living expenses. No rebalancing
RP - 3 fund portfolio spread across HSA, Roth, 401k, and Taxable. Viewed as a variable multiple of annual living expenses. Rebalanced according to glide-path percentages.

My main use of LMP is as portfolio "insurance" against certain types of scenarios:
1. A one-time large, unforeseen expense that I don't want to draw from my RP.
2. A guard against sequence of return risk early in retirement.

If neither #1 or #2 show up, then I'll likely use the LMP to help seed a TIPS ladder late in retirement.

If I-bonds/EE-bonds will be used for a specific purpose (such as a bridge to SS, etc..) then it may be helpful for you to separate them from the main RP so you are not constantly rebalancing with them. Treating them as a % of overall assets may not make much sense as opposed to multiples of baseline living expenses.
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Re: Valuation of EE Savings Bonds

Post by mhop » Sat Dec 09, 2017 3:06 pm

To point something out, you can only purchase a product today with the set of facts that you know. I’m accumulating, so I know I have future dollars/earnings coming. If I had enough excess income I’d be tempted by EEs for the yield alone.

What if 10 years from now other instruments are yielding 6%? I’d expect EEs to be paying more to account for their long term and I’d definitely be backing the truck up. If not, I’d be chasing yield again whether it be a CD or another bond with the money I had available to deploy or break out of existing instruments (if the math worked).

The math on EEs is simple. Rates will rise eventually, I’d expect future fixed rates on EEs to rise as well (and doubling time to decrease) unless the government decides to stop the program. And when that happens you simply consult a spreadsheet and take the appropriate action. Math doesn’t lie. Perfect is the enemy of good, so you may make a less than perfect decision but you can certainly perfect your portfolio on the bond side to a degree by pruning instruments as new rates dictate to do so.

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