Should you be worried about losing money in bonds?

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CULater
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Should you be worried about losing money in bonds?

Post by CULater » Tue Jan 17, 2017 4:34 pm

Chart of historical drawdowns of U.S. bonds vs. stocks since 1926. How risky do bonds look?

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During the Great Depression, stocks fell nearly 90%. The worst drawdown for intermediate-term bonds was less than 9% over this entire period. You can barely see the bond market losses on this graph because they’re so tiny in comparison. So even though stocks tend to dominate risk measurement, bonds can still help with risk management, especially when you need it the most.
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livesoft
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Re: Should you be worried about losing money in bonds?

Post by livesoft » Tue Jan 17, 2017 4:39 pm

Ha! Two pet peeves of mine were mentioned in the article: dog food and dry powder.
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teigers
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Re: Should you be worried about losing money in bonds?

Post by teigers » Wed Jan 18, 2017 2:42 pm

I'm going to post this link to a buzzfeed article from 2013 about the risk in rising interest rates https://www.buzzfeed.com/felixsalmon/se ... .wanMDWr15. I'd also like to post this recent podcast discussion of bonds and rising interest rates http://www.slate.com/articles/podcasts/ ... money.html. Start listening around 15:50. It's a very accessible explanation for how interest rates will affect our bond holdings.

Bonds are not with out risk as we sometimes assume. With interest rates rising the risk comes from the bond or bond fund's maturity and how fast interest rates rise. Whenever someone points out that interest rates have nowhere to go but up, remember that no one knows where interest rates will go or when. We hold bonds to add stability to our portfolios and if your duration is shorter than your investment time horizon then you're going to be okay... even if it means several years of falling bond prices.

kdsunday
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Re: Should you be worried about losing money in bonds?

Post by kdsunday » Wed Jan 18, 2017 2:52 pm

Based on that chart, and in comparison to the worst years for stocks? No, I would not be worried. Is there potential for bonds to fall in value in a given year? Yes, the chart shows that has happened. But while the value of a portfolio or its components may fall over a given period of time, I only consider money to be lost if I realized those losses with a sale.

A couple things to keep in mind (which the article points out) - what are your alternatives to bonds? If cash, consider the impact of inflation. If stocks, consider a higher volatility. Why have you invested in bonds? In my case, I am investing in them to lower risk exposure. You should want to consider carefully what your goals are in investing as well as why you have decided to invest in certain instruments, even if your portfolio is as simple as 60/40.
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Re: Should you be worried about losing money in bonds?

Post by pkcrafter » Wed Jan 18, 2017 4:47 pm

livesoft wrote:Ha! Two pet peeves of mine were mentioned in the article: dog food and dry powder.
Ha-ha, +2. But tell me, is the dog food remark worse or better than the cat food remark?

No, we should not be worried about losing money in bonds. Do people that say that actually also hold equities?

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FelixTheCat
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Re: Should you be worried about losing money in bonds?

Post by FelixTheCat » Wed Jan 18, 2017 4:52 pm

Risk: Inflation. Your biggest risk as an investor is running out of money before you die and being forced to live on dog food for your remaining days.
To freak my kid out, I tried the cat's food. The dry food tasted like oats. I guess I'm ok with inflation risk. :D
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livesoft
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Re: Should you be worried about losing money in bonds?

Post by livesoft » Wed Jan 18, 2017 5:09 pm

pkcrafter wrote:
livesoft wrote:Ha! Two pet peeves of mine were mentioned in the article: dog food and dry powder.
Ha-ha, +2. But tell me, is the dog food remark worse or better than the cat food remark?
Pet food is so 1960's. We all eat the free food samples at Costco and other grocery stores even if we don't run out of money.
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patrick
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Re: Should you be worried about losing money in bonds?

Post by patrick » Wed Jan 18, 2017 7:55 pm

CULater wrote:Chart of historical drawdowns of U.S. bonds vs. stocks since 1926. How risky do bonds look?
If you update the chart to account for inflation, they would look risky. For example, from the end of 1940 to the end of 1981, 10-year treasuries had a 55% loss after accounting for inflation (see http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html and table 24 from http://www.bls.gov/cpi/cpid1404.pdf).

Rodc
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Re: Should you be worried about losing money in bonds?

Post by Rodc » Wed Jan 18, 2017 8:39 pm

patrick wrote:
CULater wrote:Chart of historical drawdowns of U.S. bonds vs. stocks since 1926. How risky do bonds look?
If you update the chart to account for inflation, they would look risky. For example, from the end of 1940 to the end of 1981, 10-year treasuries had a 55% loss after accounting for inflation (see http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html and table 24 from http://www.bls.gov/cpi/cpid1404.pdf).
Yes, it is not the year to year losses that one should be concerned with but the slow multi-decade bleeding.

TIPS may or may not help as we do not know what TIPS might have yielded. We know the real yield on 10-year (and other) nominal treasuries was provided a negative real yield over that time. Would the real yield of TIPS really diverged significantly from the real yield of nominals?

This is one reason I don't really like the advice for age in bonds which would have one 70% bonds at the relatively young age of 70.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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David Jay
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Re: Should you be worried about losing money in bonds?

Post by David Jay » Wed Jan 18, 2017 8:43 pm

I was wondering if the other thread would freak you out.

The drops that VA Gent was quoting were REAL returns, that is, return after subtracting inflation. The periods of time he listed were to times of high inflation and the bonds he quoted were long duration. That is a double-worst case and not a portfolio folks here would recommend.

The problem with long bonds in a mutual fund is it will be a long time before the bonds "turn over", that is, they reach their maturity. At maturity, the fund takes the principle and invests it in new, higher interest rate bond. So bond funds recover but how long it takes depends on duration. 30 Day Treasuries recover in 30 days. Short term bonds recover in a year or so.

So long term bonds are a risk in a rising interest rate environment if, as the commenter above said, your need to withdraw is sooner than the bond fund duration (average maturity). Bogleheads usually recommend intermediate-term bonds to reduce this risk.
Last edited by David Jay on Wed Jan 18, 2017 9:08 pm, edited 1 time in total.
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Re: Should you be worried about losing money in bonds?

Post by MoonOrb » Wed Jan 18, 2017 9:03 pm

All the angst about bonds just makes me want to buy more bonds. Which, I guess I will if the value of Total Bond Fund drops.

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Re: Should you be worried about losing money in bonds?

Post by pkcrafter » Wed Jan 18, 2017 9:05 pm

FelixTheCat wrote:
Risk: Inflation. Your biggest risk as an investor is running out of money before you die and being forced to live on dog food for your remaining days.
To freak my kid out, I tried the cat's food. The dry food tasted like oats. I guess I'm ok with inflation risk. :D
:D Thanks, now we know.

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Kevin M
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Re: Should you be worried about losing money in bonds?

Post by Kevin M » Wed Jan 18, 2017 9:19 pm

patrick wrote:
CULater wrote:Chart of historical drawdowns of U.S. bonds vs. stocks since 1926. How risky do bonds look?
If you update the chart to account for inflation, they would look risky. For example, from the end of 1940 to the end of 1981, 10-year treasuries had a 55% loss after accounting for inflation (see http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html and table 24 from http://www.bls.gov/cpi/cpid1404.pdf).
Yes, this was the relevant sentence from the linked article:
Higher inflation, not interest rates rising, is your biggest risk for bonds.
The really bad period for bonds was the 1940s, during which time interest rate controls were in place but inflation was high. This was especially problematical for short-term bonds, since you were not able to benefit from nominal rates increasing with inflation. So unlike what you'd normally expect, real returns for short-term bonds were actually worse than for longer-term bonds.

The 1970s was the other somewhat bad period, but not nearly as bad for short-term bonds, since nominal interest rates increased with inflation. This was more in line with typical expectations for nominal bonds during inflationary periods.

So if you look at this bad bond performance in the 1940-1981 period, it really boils down to horrible real returns in the 1940s, and bad real returns in the 1970s.

Kevin
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Dirghatamas
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Re: Should you be worried about losing money in bonds?

Post by Dirghatamas » Wed Jan 18, 2017 10:46 pm

FelixTheCat wrote: To freak my kid out, I tried the cat's food. The dry food tasted like oats. I guess I'm ok with inflation risk. :D
FelixTheCat
Of course you will be fine with cat's food. You are a CAT after all. How do you even know what oats taste like. I have never seen cats eat oats. You are one weird cat that like oats.

Now if you were human, we would take your talk about cat vs. dog food more seriously! Next we know Fido will chime in and tell us dog food is tasty.

Umm what is this thread about and why am I reading this when I don't even invest in bonds :?

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Re: Should you be worried about losing money in bonds?

Post by Doc » Thu Jan 19, 2017 4:58 pm

No, you should not worry about losing money in bonds
Alfred E. Neuman wrote:What, me worry?
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