The "No Bonds" portfolio

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Browser
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The "No Bonds" portfolio

Post by Browser » Sat Jul 11, 2015 10:34 pm

Some are recommending that investors consider getting rid of bond funds/etfs completely in their portfolios. About the only reason to hold bond funds these days is as a possible hedge against a significant stock market selloff, but that's an insurance argument and not an investment return argument -- it's a one-legged stool. I've decided to take that advice and move all my fixed-income allocation to CDs, while a portion remains in a TIPs ladder. Bond funds no mas.
“The absolute best-case scenario for bond investors is that rates remain low in the near future, which means your best hope is the status quo with no upside,” says Johnson, president and CEO of the American College of Financial Services. “If you lock in bonds at these levels, you’re locking in a purchasing-power loss.”

Not long ago, the notion of a no-bond portfolio would have seemed crazy. But what’s really crazy, says Johnson and many of his peers, is clinging to the conventional wisdom. “What are bonds supposed to do? They’re supposed to preserve wealth, provide periodic cash flow, and hopefully some price appreciation,” he says. At the moment, however, they aren’t offering much in the way of income, and there is a real possibility that investors could lose money.
“If you have a bond fund or an ETF, you don’t have any maturity. That’s not a bond; that’s a stock,” says Ron Weiner, CEO of RDM Financial Group, a wealth-advisory firm with offices in Connecticut and Florida. “There is a real, real risk in bond funds.”

http://online.barrons.com/articles/a-ne ... y&mod=mktw
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JoMoney
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Re: The "No Bonds" portfolio

Post by JoMoney » Sat Jul 11, 2015 11:32 pm

I am in the process of moving away from a short-term bond fund I had used as a pseudo savings/emergency fund for many years. Next year I'll have it all in series I Savings Bonds. I got spooked last year when there was talk about "bond fund exit fees" or other potential mitigation that might be put in place to slow down any theoretical mass exodus from bond funds. There might be better options out there, but I like the tax sheltering of savings bonds, and the fact that they're not reliant on the market if I need to sell them. I wish they were yielding something beyond the inflation match, but for most of last year the inflation match was beating the nominal yield of the short-term bond fund.
It might have been a bit of an over reaction, as I'm not so sure a high-quality short-term bond fund was at much risk, but I'm happy with the decision I made. This isn't money I use for "rebalancing" or even consider part of my investment portfolio.
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stemikger
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Re: The "No Bonds" portfolio

Post by stemikger » Sun Jul 12, 2015 8:46 am

If this comes to pass, I wonder if Vanguard will have to reconfigure their all in one portfolios. They still use the Total Bond Market to protect investors from the volatility of an all stock portfolio.
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nedsaid
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Re: The "No Bonds" portfolio

Post by nedsaid » Sun Jul 12, 2015 8:56 am

I think that substituting FDIC Insured Certificates of Deposit for bond funds is an excellent idea. I have advocated many times on this forum for a CD ladder. It all depends on where you are in your life cycle. If you are a younger investor with some years to go before retirement, this is an irrelevant argument. Just reinvest your dividends. Even if you face a few years of increasing interest rates, over time you should come out ahead. If you are a retiree or a near retiree and worried about loss of principal or a possible bond panic, the CDs look like a great option.

The key here is the reinvested dividends. If you are young, you just keep reinvesting. If you are near or in retirement, you don't have years of reinvested dividends to bail you out if rates rise and bond fund net asset values drop. Presumably you are drawing on the dividends to live on so a drop in Net Asset Value is a big issue. One may experience a permanent loss of at least part of the principal.

I am 56 years old now and hopefully I have 10 or so years in the work force. I still have time to reinvest dividends. At some point, I may go to brokered CDs in a ladder as part of my fixed income portfolio. I don't think I will ever sell all my bond funds though.
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Re: The "No Bonds" portfolio

Post by Dandy » Sun Jul 12, 2015 8:57 am

I like that people are considering fixed income alternatives other than just bond funds. But, I don't think it is wise to put all (or almost all) your eggs in CDs or EE bonds. In general, bonds are have so much less risk than stocks that they should probably remain a significant portion of most people's fixed income allocation. If you do over weight CDs for example, keep in mind that when interest rates rise there are still two good opportunities 1. buy another CD at a higher rate 2. buy a bond fund that has taken a hit from rising rates and buy at a lower NAV - and possibly a higher yield than the CD renewal option.

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Re: The "No Bonds" portfolio

Post by fortyofforty » Sun Jul 12, 2015 9:04 am

nedsaid wrote:The key here is the reinvested dividends. If you are young, you just keep reinvesting. If you are near or in retirement, you don't have years of reinvested dividends to bail you out if rates rise and bond fund net asset values drop. Presumably you are drawing on the dividends to live on so a drop in Net Asset Value is a big issue. One may experience a permanent loss of at least part of the principal.
I agree that dividends are the key. As the value of the bond fund shares falls, you buy more with your increasing dividends. It almost forces you to buy more low, as net asset values fall while interest rates rise. Hopefully you've got enough saved so that the net asset value isn't as critical as the dividend yield.
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Re: The "No Bonds" portfolio

Post by dc81584 » Sun Jul 12, 2015 9:09 am

For what it's worth, I have 15% of my retirement portfolio in bonds, and I'm not worried about it. At the end of the day, I'm obviously invested for growth, yet the bonds are there to serve as a small buffer when necessary.

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Re: The "No Bonds" portfolio

Post by cfs » Sun Jul 12, 2015 9:11 am

Long time no read "why bonds."

I have not read one of the why bonds conversations in a couple of months--it is possible that I missed a couple of them.
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jainn
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Re: The "No Bonds" portfolio

Post by jainn » Sun Jul 12, 2015 9:15 am

Link to bogleheads.org discussion "Why Bonds With 20 Year Horizon" [Description added to naked link by Mod Mel]

viewtopic.php?f=10&t=159293

Louis Winthorpe III
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Re: The "No Bonds" portfolio

Post by Louis Winthorpe III » Sun Jul 12, 2015 10:06 am

Browser is substituting bonds with CDs. That's reasonable. It appears Robert Johnson has an all-stock portfolio (not entirely clear, but he talks about his willingness and ability to bear stock market risk, so I assume he's not moving from bonds to cash). That's not something most would recommend, although I've seen plenty of posts here arguing for 100% stocks too.

The bolded quote from Ron Weiner (calling a bond fund a stock because it has no maturity date) is nonsense. Parts of the article perpetuate the notion that rising rates won't hurt holders of individual bonds so long as they hold to maturity, which isn't true.

Rising rates are bad for bonds and stocks but good for cash. There was a time when portfolios were expected to hold stocks, bonds and cash, but at some point people shifted to stocks and bonds. Maybe cash will make a comeback in a rising rate environment. Given the global deflationary forces, I don't think we'll see significant increases in rates for several years, but of course nobody knows.

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Watty
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Re: The "No Bonds" portfolio

Post by Watty » Sun Jul 12, 2015 11:22 am

Louis Winthorpe III wrote:Browser is substituting bonds with CDs. That's reasonable.
+1

Or at least there is limited downside except for the loss of liquidity and some diversification.

In a lot of ways FDIC insured CD's are very similar to a government bond except that they less liquid. With some CD's though you can redeem them early for a small fee so if interest rates do go up a lot that could be good.

In some ways this is little different than deciding to limit yourself to short to mid term government bonds either through a mutual fund or buying them individually.

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Re: The "No Bonds" portfolio

Post by itstoomuch » Sun Jul 12, 2015 12:07 pm

We're going for current Income from divs stock. Unbelievable what some of the DJI are paying in terms of current yield div. All one needs is just 1 quarter's div to beat a year's worth of interest in a CD or a intermediate bond. However there is some risk in market value in div stock-We are about -13% in value but I imagine the value is tracking bond pricing. Even AAPL is yielding 1.7% . VZ @4.8%, XOM @ 3.6%. DUK @ 4.5%. VDADX @2.2%
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Kenkat
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Re: The "No Bonds" portfolio

Post by Kenkat » Sun Jul 12, 2015 12:12 pm

I only see this type of recommendation when the stock market is at all time highs.

CD's are fine but I wouldn't be at all surprised if Total Bond Market returns more than CD's in 5 years.

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Re: The "No Bonds" portfolio

Post by Erwin » Sun Jul 12, 2015 12:14 pm

I have asked the same question a few times without an answer. Has anyone considered a defined maturity corporate bonds ETF ladder? Two companies, Guggenheim and iShares offer them.
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Re: The "No Bonds" portfolio

Post by noyopacific » Sun Jul 12, 2015 12:16 pm

Although the logic behind the argument for a 100% equities portfolio is sound, it ignores the emotional trauma of severe market downturns. I held 100% equities for 15 years. It was rewarding but tremendously painful at times. If you are going to give it a shot, you have my best wishes . . . for fair winds and a strong stomach.
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Re: The "No Bonds" portfolio

Post by itstoomuch » Sun Jul 12, 2015 12:51 pm

mpt follower wrote:I have asked the same question a few times without an answer. Has anyone considered a defined maturity corporate bonds ETF ladder? Two companies, Guggenheim and iShares offer them.
Names?

Tried TLT, PFF, and DVY. They are OK. More stuff that I didn't want to watch. TLT has been sensitive to political and world economic events-again something that I don't wish to track.

Disclaimers: We have our Number. 65/68. Our Funds in this thread are discretionary, although some are within tax qualified accounts.
Last edited by itstoomuch on Sun Jul 12, 2015 12:54 pm, edited 1 time in total.
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Re: The "No Bonds" portfolio

Post by Erwin » Sun Jul 12, 2015 12:54 pm

itstoomuch wrote:
mpt follower wrote:I have asked the same question a few times without an answer. Has anyone considered a defined maturity corporate bonds ETF ladder? Two companies, Guggenheim and iShares offer them.
Names?

Tried TLT, PFF, and DVY. They are OK. More stuff that I didn't want to watch. TLT has been sensitive to political and world economic events-again something that I don't wish to track.

What?
Erwin

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Re: The "No Bonds" portfolio

Post by lack_ey » Sun Jul 12, 2015 1:06 pm

Those aren't defined maturity bond funds, such as iShares iBonds Dec 2020 Corporate (IBDL).
mpt follower wrote:I have asked the same question a few times without an answer. Has anyone considered a defined maturity corporate bonds ETF ladder? Two companies, Guggenheim and iShares offer them.
On the other hand, I thought you got answers here:
viewtopic.php?t=163289

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Re: The "No Bonds" portfolio

Post by itstoomuch » Sun Jul 12, 2015 1:17 pm

^ symbols/names for ishares, guggenhiem, defined maturity corporate funds.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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stemikger
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Re: The "No Bonds" portfolio

Post by stemikger » Sun Jul 12, 2015 1:21 pm

noyopacific wrote:Although the logic behind the argument for a 100% equities portfolio is sound, it ignores the emotional trauma of severe market downturns. I held 100% equities for 15 years. It was rewarding but tremendously painful at times. If you are going to give it a shot, you have my best wishes . . . for fair winds and a strong stomach.
As much as I love and I do love Warren Buffett, it shows me that he is a little out of touch with the common man when he suggests we all just hold enough cash (10% in treasuries is his choice) to feel secure and the rest in equities. Not many have the emotional makeup for this type of portfolio, especially with each passing year.
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Re: The "No Bonds" portfolio

Post by lack_ey » Sun Jul 12, 2015 1:22 pm

itstoomuch wrote:^ symbols/names for ishares, guggenhiem, defined maturity corporate funds.
TLT, PFF, and DVY? Those are iShares 20+ Year Treasury Bond, iShares U.S. Preferred Stock, and iShares Select Dividend, not defined maturity corporate bond funds.

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Re: The "No Bonds" portfolio

Post by ogd » Sun Jul 12, 2015 1:24 pm

lack_ey wrote:Those aren't defined maturity bond funds, such as iShares iBonds Dec 2020 Corporate (IBDL).
mpt follower wrote:I have asked the same question a few times without an answer. Has anyone considered a defined maturity corporate bonds ETF ladder? Two companies, Guggenheim and iShares offer them.
On the other hand, I thought you got answers here:
viewtopic.php?t=163289
Yes.

I spent quite a bit of time writing answers on that thread, Erwin.

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Re: The "No Bonds" portfolio

Post by Erwin » Sun Jul 12, 2015 1:34 pm

ogd wrote:
lack_ey wrote:Those aren't defined maturity bond funds, such as iShares iBonds Dec 2020 Corporate (IBDL).
mpt follower wrote:I have asked the same question a few times without an answer. Has anyone considered a defined maturity corporate bonds ETF ladder? Two companies, Guggenheim and iShares offer them.
On the other hand, I thought you got answers here:
viewtopic.php?t=163289
Yes.

I spent quite a bit of time writing answers on that thread, Erwin.
You right, but I am still struggling. I still own most of my fixed income in the traditional bond funds recommended here, but I am not happy. And the use of direct CDs is cumbersome and because of the FDIC limitation, I would have to invest in quite a few. So, in conclusion, I am still searching for a solution.
Erwin

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Re: The "No Bonds" portfolio

Post by nedsaid » Sun Jul 12, 2015 3:20 pm

mpt follower wrote:
ogd wrote:
lack_ey wrote:Those aren't defined maturity bond funds, such as iShares iBonds Dec 2020 Corporate (IBDL).
mpt follower wrote:I have asked the same question a few times without an answer. Has anyone considered a defined maturity corporate bonds ETF ladder? Two companies, Guggenheim and iShares offer them.
On the other hand, I thought you got answers here:
viewtopic.php?t=163289
Yes.

I spent quite a bit of time writing answers on that thread, Erwin.
You right, but I am still struggling. I still own most of my fixed income in the traditional bond funds recommended here, but I am not happy. And the use of direct CDs is cumbersome and because of the FDIC limitation, I would have to invest in quite a few. So, in conclusion, I am still searching for a solution.
Try the CDARs program. A participating bank will invest your CDs at other banks and keep you within the FDIC limits. That way you don't have to be like WC Fields and have your money in multiple banks. Your money is in one account at one bank.
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Re: The "No Bonds" portfolio

Post by nisiprius » Sun Jul 12, 2015 3:58 pm

Browser wrote:...
“If you have a bond fund or an ETF, you don’t have any maturity. That’s not a bond; that’s a stock,” says Ron Weiner, CEO of RDM Financial Group...
That's not a fact, that's bull.

True, a bond fund isn't a bond. Just because it's not a bond doesn't make it a stock. Anyone talking that way is engaging in spin. "Your chosen low-risk investment isn't risk-free, therefore my high-risk investments are just as safe." No.
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Re: The "No Bonds" portfolio

Post by Sidney » Sun Jul 12, 2015 4:17 pm

cfs wrote:Long time no read "why bonds."

I have not read one of the why bonds conversations in a couple of months--it is possible that I missed a couple of them.
Seem to be both "Why bonds" and "Oh my god, equities might fall" threads (and various versions like "protective puts" and "waiting for dips") today. Balanced portfolio of threads.
I always wanted to be a procrastinator.

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Re: The "No Bonds" portfolio

Post by cfs » Sun Jul 12, 2015 4:46 pm

Sidney wrote:
cfs wrote:Long time no read "why bonds."

I have not read one of the why bonds conversations in a couple of months--it is possible that I missed a couple of them.
Seem to be both "Why bonds" and "Oh my god, equities might fall" threads (and various versions like "protective puts" and "waiting for dips") today. Balanced portfolio of threads.
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Re: The "No Bonds" portfolio

Post by sawhorse » Sun Jul 12, 2015 11:47 pm

Since bonds are the most common form of fixed income, people in the board, and I'm guilty of this, have sometimes used the word "bonds" when they really mean fixed income. There should be some fixed income in any portfolio (I know this isn't a view shared by all), but bonds aren't the only way. CDs, stable value funds, some types of annuities, interest earning bank accounts are all forms of fixed income, and they can have benefits over bonds. There is even an argument to be made that pensions and Social Security can be counted as fixed income in evaluating your portfolio.

For CDs, http://www.depositaccounts.com has a nice calculator of your effective yield if you break a CD early.

By the way, the quote about bond funds being like stocks is ridiculous. Annualized bond fund performance over the next 10 years is almost always within 1% of the SEC yield. Kevin M had a nice post on that. Show me a stock or stock fund where you can predict 10 year performance within 1%.

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Re: The "No Bonds" portfolio

Post by pascalwager » Mon Jul 13, 2015 12:05 am

sawhorse wrote:Since bonds are the most common form of fixed income, people in the board, and I'm guilty of this, have sometimes used the word "bonds" when they really mean fixed income. There should be some fixed income in any portfolio (I know this isn't a view shared by all), but bonds aren't the only way. CDs, stable value funds, some types of annuities, interest earning bank accounts are all forms of fixed income, and they can have benefits over bonds. There is even an argument to be made that pensions and Social Security can be counted as fixed income in evaluating your portfolio.

For CDs, http://www.depositaccounts.com has a nice calculator of your effective yield if you break a CD early.

By the way, the quote about bond funds being like stocks is ridiculous. Annualized bond fund performance over the next 10 years is almost always within 1% of the SEC yield. Kevin M had a nice post on that. Show me a stock or stock fund where you can predict 10 year performance within 1%.
(See blue font above) I believe the article was referring only to bond funds which had a large percentage of illiquid assets, and not bond funds in general.

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Re: The "No Bonds" portfolio

Post by sawhorse » Mon Jul 13, 2015 12:51 am

pascalwager wrote:I believe the article was referring only to bond funds which had a large percentage of illiquid assets, and not bond funds in general.
I could only read the first part of the article because the rest required a subscription.

What do you mean by bond funds that have a large percent of illiquid assets?

This is the post by Kevin M I was referring to

viewtopic.php?f=10&t=155923#p2341140

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Re: The "No Bonds" portfolio

Post by pascalwager » Mon Jul 13, 2015 2:32 pm

sawhorse wrote:
pascalwager wrote:I believe the article was referring only to bond funds which had a large percentage of illiquid assets, and not bond funds in general.
I could only read the first part of the article because the rest required a subscription.

What do you mean by bond funds that have a large percent of illiquid assets?

This is the post by Kevin M I was referring to

viewtopic.php?f=10&t=155923#p2341140
The author of the article made the "bonds like stocks" statement immediately following a statement about bonds containing lots of illiquid assets. By illiquid assets, I assumed he was referring to assets which could only be sold at a significantly discounted price during financial turmoil.

Incidentally, you can access WSJ articles by Googling the article title. That's what I did.

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Re: The "No Bonds" portfolio

Post by Browser » Mon Jul 13, 2015 4:10 pm

nisiprius wrote:
Browser wrote:...
“If you have a bond fund or an ETF, you don’t have any maturity. That’s not a bond; that’s a stock,” says Ron Weiner, CEO of RDM Financial Group...
That's not a fact, that's bull.

True, a bond fund isn't a bond. Just because it's not a bond doesn't make it a stock. Anyone talking that way is engaging in spin. "Your chosen low-risk investment isn't risk-free, therefore my high-risk investments are just as safe." No.
Well, I'm not sure he meant that statement literally -- he was perhaps using a bit of hyperbole to make the point that bond funds/etfs have become quite risky because the "dividend payment" (aka interest payments) have become rather anemic and investors are left with having to count on share appreciation to realize meaningful returns -- and that's becoming more and more of a high odds gamble. Sound like stocks, these days? Yep. Are bond funds really going to help you cushion the risk of stocks as effectively as when bonds had much higher yields, and is the "conventional wisdom" about owning bond funds as valid as it used to be? Probably not. If you can realize the nominal yield of a treasury with 15-20 year duration with an FDIC-insured CD with no term risk, why would you want to own the treasury and be exposed to that risk?
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Re: The "No Bonds" portfolio

Post by ogd » Mon Jul 13, 2015 4:55 pm

Browser wrote: Well, I'm not sure he meant that statement literally -- he was perhaps using a bit of hyperbole to make the point that bond funds/etfs have become quite risky because the "dividend payment" (aka interest payments) have become rather anemic and investors are left with having to count on share appreciation to realize meaningful returns -- and that's becoming more and more of a high odds gamble. Sound like stocks, these days? Yep.
Sorry Browser, but this doesn't make much sense. Investors don't "count on share appreciation", they adjust their expectations down. Which is why you hear them grumbling about the low fixed income returns, as opposed to "well, the dividend is low, but nevermind I'll make the missing returns from share price".

Even if some were thus misguided, it would not make the funds "like stocks". It would just make those investors misguided. Bond funds who don't venture too far aways from A's will continue to be much, much safer.

I will also extend what nisiprius said and say that whenever someone talks about "bond funds" as a separate category from "bonds" without mentioning a specific risky one, that's bull. You can use it as a litmus test. They want your money, they want the publicity, they're talking down to you because they think you don't like to see actual bond values moving around, or in extreme cases they don't know what they're talking about.

Now is it the case that some fund / portfolio managers, despondent at the prospect of having to extract 1%+ fees from 1.6% safe yields, have ventured into territory that's a lot more stock-like? Absolutely. Use good judgment.
Browser wrote:Are bond funds really going to help you cushion the risk of stocks as effectively as when bonds had much higher yields, and is the "conventional wisdom" about owning bond funds as valid as it used to be? Probably not.
Probably not, but you might still be surprised. We haven't yet seen negative yields here, but others have.
Browser wrote:If you can realize the nominal yield of a treasury with 15-20 year duration with an FDIC-insured CD with no term risk, why would you want to own the treasury and be exposed to that risk?
Mostly because you're a large investor, or one with only a 401k, and can't access that FDIC CD. This still means 90%+ of the money out there. For me, it's also because it's hard to get rebalancing money out of CDs and I have some duration budget to spare because of those CDs. But this is only at the margins.

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Re: The "No Bonds" portfolio

Post by sawhorse » Mon Jul 13, 2015 5:16 pm

ogd wrote:
Browser wrote:If you can realize the nominal yield of a treasury with 15-20 year duration with an FDIC-insured CD with no term risk, why would you want to own the treasury and be exposed to that risk?
Mostly because you're a large investor, or one with only a 401k, and can't access that FDIC CD. This still means 90%+ of the money out there. For me, it's also because it's hard to get rebalancing money out of CDs and I have some duration budget to spare because of those CDs. But this is only at the margins.
The SEC yield on Total Bond is 2% I think. Kevin M has in previous posts demonstrated the high predictive power of SEC yields over 5 year and 10 year periods. Here are the effective yields of CDs if you break them early. I do see it as a toss up these days. Getting rebalancing money out can be facilitated by having multiple CDs.

https://www.depositaccounts.com/tools/e ... lator.aspx

I agree with the problem of 401k money that can't be put into CDs. Some people are fortunate to have good stable value options. For those that don't, bond funds are the next best thing.

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Re: The "No Bonds" portfolio

Post by Kevin M » Mon Jul 13, 2015 10:13 pm

sawhorse wrote: The SEC yield on Total Bond is 2% I think. Kevin M has in previous posts demonstrated the high predictive power of SEC yields over 5 year and 10 year periods.
To be clear, my posts were more of a challenge to the oft quoted statistic that there's something like a 90% correlation between initial yield to maturity and subsequent 10-year annualized return for the US aggregate bond market (e.g., TBM). I was demonstrating that although the correlation is high, the prediction accuracy is not as high as this statistic implies.

Although +/-1% doesn't sound like a lot, over 10 years this is +/-10% in cumulative return (not even considering compounding), so for an initial yield of 2%, you are likely to earn something in the range of 10% to 30% cumulative over 10 years. In other words, although not nearly as risk as stocks (obviously), there is more risk in a bond fund than is portrayed by quoting the correlation statistic.

So, I can earn an uncertain 2% in a bond fund or an almost certain 2.25% in a good direct CD over the next five years. And the icing on the cake is that if rates increase much, I can earn even more by doing an early withdrawal, paying the 1% penalty, and reinvesting at the higher rate. Of course the uncertainty of the bond fund has an upside as well, becoming most visible in the short term if rates fall, but the bond fund has more downside risk than the CD. Longer term, we all do better if rates increase.

Kevin
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SpaceCowboy
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Re: The "No Bonds" portfolio

Post by SpaceCowboy » Tue Jul 14, 2015 12:31 am

sawhorse wrote:I agree with the problem of 401k money that can't be put into CDs. Some people are fortunate to have good stable value options. For those that don't, bond funds are the next best thing.
My solution to this problem was to use the self-directed brokerage option within my 401(k). This allows me to buy brokered CDs and other fixed income investments including individual TIPS. In my plan it's a no additional cost option other than commissions through TD Ameritrade. It's also important because the stable value fund in that plan has poor yield of ~1%. I've elected to do that rather than roll it into an IRA for now to keep the low expense institutional fund options.

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Maynard F. Speer
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Re: The "No Bonds" portfolio

Post by Maynard F. Speer » Tue Jul 14, 2015 1:37 am

I sold out of bonds about 8 months ago - had had a good run in UK corporate bonds, but admittedly don't understand the macroeconomics well enough to assess risk going forwards

I've built a bond-analog out of defensive multi-asset funds, mostly in the absolute return sector, and P2P lending ... So far it's held up better than stocks and bonds, with less volatility ... Fees are obviously higher (although generally under 1%), but with market direction a potentially big headwind for bonds, alternatives may be worth looking into
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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abuss368
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Re: The "No Bonds" portfolio

Post by abuss368 » Wed Jul 15, 2015 12:54 am

stemikger wrote:If this comes to pass, I wonder if Vanguard will have to reconfigure their all in one portfolios. They still use the Total Bond Market to protect investors from the volatility of an all stock portfolio.
Total Bond and Total International Bond are in the all in one funds.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

Browser
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Re: The "No Bonds" portfolio

Post by Browser » Fri Jul 17, 2015 7:23 pm

You might want to read this fellow's argument, which contrasts an asset allocation strategy based on MPT to one based on an evaluation of the financial context we find ourselves in particularly with regard to bonds. I think this is an entirely logical approach underlying the "no bonds" portfolio:
But more importantly, I want to take this opportunity to emphatically state that I am not generally against bonds or the utilization of fixed income instruments in retirement portfolios. However, I am temporarily eschewing fixed income instruments because I do not believe they are sound investments under today’s interest rate environment. But more specifically I am currently avoiding fixed income because I believe that the traditional advantages that bonds have typically offered are no longer evident, at least temporarily.
http://www.advisorperspectives.com/comm ... you-endure
We don't know where we are, or where we're going -- but we're making good time.

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ogd
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Re: The "No Bonds" portfolio

Post by ogd » Fri Jul 17, 2015 7:41 pm

This man doesn't know what he is talking about. Evidence:
Older bonds that were issued when rates were higher might make sense to continue holding, especially if they are getting close to maturity.
The article as a whole is pretty bad -- e.g. talking about how "falling interest rates" since the 70's were the perfect environment for performance, when in fact steady interest rates would have tripled or quadrupled your returns, or failing to notice that this exact argument could have been made in 2010, or worse, 2007, and cost you dearly. But the above mistake is elementary.

Interestingly enough, our friend FinancialDave makes an appearance on the boglehead-ish side.

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Re: The "No Bonds" portfolio

Post by lack_ey » Fri Jul 17, 2015 7:41 pm

Browser wrote:You might want to read this fellow's argument, which contrasts an asset allocation strategy based on MPT to one based on an evaluation of the financial context we find ourselves in particularly with regard to bonds. I think this is an entirely logical approach underlying the "no bonds" portfolio:
But more importantly, I want to take this opportunity to emphatically state that I am not generally against bonds or the utilization of fixed income instruments in retirement portfolios. However, I am temporarily eschewing fixed income instruments because I do not believe they are sound investments under today’s interest rate environment. But more specifically I am currently avoiding fixed income because I believe that the traditional advantages that bonds have typically offered are no longer evident, at least temporarily.
http://www.advisorperspectives.com/comm ... you-endure
This guy is either being disingenuous or doesn't know how bonds work:
With interest rates at record lows it is only logical to assume that interest rates will move higher sometime in the not too distant future. Consequently, I believe that bonds, as an asset class, should temporarily at least be avoided, unless of course they were purchased a long time ago. Older bonds that were issued when rates were higher might make sense to continue holding, especially if they are getting close to maturity.
(if rates are going up or whatever reasons you don't want new bonds, you'd want to sell old bonds too...)

On the other hand, at least he thinks highly of himself:
However, rather than merely slinging barbs and arrows, my goal is to argue against MPT with logic and fact-based counter arguments.
However, in what I like to call the good old days or Ancient Portfolio Reality, investment decisions were based on a deeper understanding of business economics and accounting over statistical inferences.
Somehow there's some kind of spin to refute bonds by lumping them with MPT thinkers, never mind the fact that many who reject MPT do recommend and hold bonds.

Then there is a lot of business about dividend stocks. Very convenient to use a stock argument based solely on US returns.

edit: whoops, ogd got that in right before me.

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Re: The "No Bonds" portfolio

Post by pennstater2005 » Fri Jul 17, 2015 8:57 pm

cfs wrote:
Sidney wrote:
cfs wrote:Long time no read "why bonds."

I have not read one of the why bonds conversations in a couple of months--it is possible that I missed a couple of them.
Seem to be both "Why bonds" and "Oh my god, equities might fall" threads (and various versions like "protective puts" and "waiting for dips") today. Balanced portfolio of threads.
And the fact is that ~ Nobody knows nothing ~
This is why my money is accumulating in a lifestrategy fund. I don't peek too often. I don't really care what is going on regarding bonds and stocks. Granted, I'm far from retirement so this suits me and me only. But, I couldn't imagine thinking about this stuff so much. It's definitely not my hobby.

And truly, nobody knows where bonds are headed.
“If you think nobody cares if you're alive, try missing a couple of car payments.” – Earl Wilson

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Re: The "No Bonds" portfolio

Post by Dandy » Sat Jul 18, 2015 6:31 am

People should think fixed income vs bonds. There are a range of different fixed income products - know the pros and cons of each and you can make wise choices. I exclude, high yield, long term and international bonds. But have or would consider most other. I think almost anyone in or near retirement should have a healthy allocation to fixed income - and usually more than one product. Most retirees probably couldn't survive if their "no bonds" portfolio hit a black swan event.

CDs often get overlooked I guess for several reasons: 1. they are often viewed as the product of choice for those without investment savvy. 2. Institutions and large investors have a hard time using them. 3. Brokers and others don't make a commission on their sale and therefore don't include them in asset allocation models. 4. In the past money markets paid a competitive rate and were more liquid.

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Re: The "No Bonds" portfolio

Post by rca1824 » Sat Jul 18, 2015 8:21 am

noyopacific wrote:Although the logic behind the argument for a 100% equities portfolio is sound, it ignores the emotional trauma of severe market downturns. I held 100% equities for 15 years. It was rewarding but tremendously painful at times. If you are going to give it a shot, you have my best wishes . . . for fair winds and a strong stomach.
Were you looking at the price of your equities rather than their dividends? Because dividends have never fallen more than 50% from their peak, even during the great depression, so I consider equities to be rather safe.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: The "No Bonds" portfolio

Post by drzzzzz » Sat Jul 18, 2015 9:08 am

Was reading an article on Vanguard's high dividend yield etf VYM that included very positive comments. Was wondering if you had used this ETF rather than bonds what happened to dividends that were generated by the ETF during 2008? I realize that during 2008 this ETF declined in value about 30% similar to stocks that dropped with the market crash and the recession - my question, however, is if, you had bought it for dividends and didn't need to sell the ETF during the market collapse for needed income, did the fund continue to generate the same amount of dividends both before and during the market decline? Was their stock selection choices for the ETF sufficient to avoid a dividend drop or did this ETF also have much lower distributions during that period? thanks

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Re: The "No Bonds" portfolio

Post by jimishooch » Sat Jul 18, 2015 9:42 am

I choose to be out of bonds but that doesn't mean I'm out of fixed income...

JimInIllinois
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Re: The "No Bonds" portfolio

Post by JimInIllinois » Sat Jul 18, 2015 11:15 am

lack_ey wrote: This guy is either being disingenuous or doesn't know how bonds work:
With interest rates at record lows it is only logical to assume that interest rates will move higher sometime in the not too distant future. Consequently, I believe that bonds, as an asset class, should temporarily at least be avoided, unless of course they were purchased a long time ago. Older bonds that were issued when rates were higher might make sense to continue holding, especially if they are getting close to maturity.
(if rates are going up or whatever reasons you don't want new bonds, you'd want to sell old bonds too...)
This actually seems like reasonable advice to me. Bonds have much higher transaction costs than stocks, especially for individual investors, so holding a few years until maturity is probably the right move, even if you wouldn't want to buy that same asset today. The higher coupon of an older bond may be attractive to an investor looking for income and also reduces its duration, reducing the risk of holding it.

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Re: The "No Bonds" portfolio

Post by hoops777 » Sat Jul 18, 2015 12:23 pm

If one has no intention of ever selling their bond funds but reinvesting dividends for at least ten years....and then maybe using the dividends only for income.....does any of this matter?The whole issue is that people want certainty in their fixed income because they certainly do not have it in stocks.This bond fund battle with interest rates is a royal pain in the @$$.
K.I.S.S........so easy to say so difficult to do.

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Re: The "No Bonds" portfolio

Post by lack_ey » Sat Jul 18, 2015 1:01 pm

JimInIllinois wrote:
lack_ey wrote: This guy is either being disingenuous or doesn't know how bonds work:
With interest rates at record lows it is only logical to assume that interest rates will move higher sometime in the not too distant future. Consequently, I believe that bonds, as an asset class, should temporarily at least be avoided, unless of course they were purchased a long time ago. Older bonds that were issued when rates were higher might make sense to continue holding, especially if they are getting close to maturity.
(if rates are going up or whatever reasons you don't want new bonds, you'd want to sell old bonds too...)
This actually seems like reasonable advice to me. Bonds have much higher transaction costs than stocks, especially for individual investors, so holding a few years until maturity is probably the right move, even if you wouldn't want to buy that same asset today. The higher coupon of an older bond may be attractive to an investor looking for income and also reduces its duration, reducing the risk of holding it.
Transaction cost doesn't explain why someone would want to get rid of and avoid bonds with similar YTM and risk that are newer and have lower coupons, but not the ones that are older and have higher coupons.

etarini
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Re: The "No Bonds" portfolio

Post by etarini » Sat Jul 18, 2015 2:22 pm

drzzzz wrote: ...my question, however, is if, you had bought it for dividends and didn't need to sell the ETF during the market collapse for needed income, did the fund continue to generate the same amount of dividends both before and during the market decline? Was their stock selection choices for the ETF sufficient to avoid a dividend drop or did this ETF also have much lower distributions during that period? thanks
Here's the link to the quarterly dividends for VYM for 2006-2015:

http://finance.yahoo.com/q/hp?s=VYM&a=1 ... f=2015&g=v

Eric

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