I don't understand the case for EE bonds

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james22
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Re: I don't understand the case for EE bonds

Post by james22 » Wed Jan 09, 2019 12:45 am

Yeah, I don't believe nominal returns guarantee anything that matters. EE bonds too risky for me.


And sure, while the Treasury wishes to encourage savings they still might limit purchases because it too costly a program (and benefiting the wealthy), but if it is expected to be net positive? Why not then remove the limit (even the $50k income individual may have inherited/lotto-won wealth)?

Maybe they recognize the EE bond limit protects the consumer? :happy

fennewaldaj
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Re: I don't understand the case for EE bonds

Post by fennewaldaj » Wed Jan 09, 2019 3:25 am

Grt2bOutdoors wrote:
Tue Jan 08, 2019 11:56 pm
james22 wrote:
Tue Jan 08, 2019 12:34 pm
Grt2bOutdoors wrote:
Tue Jan 08, 2019 8:50 am
james22 wrote:
Tue Jan 08, 2019 2:22 am
letsgobobby wrote:
Tue Apr 25, 2017 6:22 pm
I wish I could buy more EE bonds but we are limited in our annual purchases.
And I wish I could borrow from you at EE bond terms.
You are - how do you think the government finances itself? The people are the government.
No, I'm an individual. The people do not borrow from themselves.

I meant, of course, that I'd bet I could do better than 3.5% nominal over 20 years.

What I don't understand is why the annual purchases are limited?
And there is a good chance you may, but for that one slice of my account buying the EE bond guarantees it.

Annual purchases are limited because the whole savings bond program was intended for the average citizen to be able to save in these vehicles. The Treasury did a study where they must have realized that the average person with a salary of $50k a year would not be able to buy/invest 20% of their gross pay let alone net pay in these vehicles. They likely found that the week-to-do were however piling into these, and they’d be right. Just search the forum for “backing up the truck” on the I bond threads, back then the annual purchase limit was $30k per individual, a married couple could buy $60k worth of each type, the average family is not buying $60k worth when average income was less than that.
Yeah I think the idea is that these are a reasonably good deal but they mostly benefit the wealthy. Considering a married couple with 2 401ks and 2 IRAs has $50,000 worth of tax advantaged space available there is little need for savings bonds for most remotely average couples (except maybe some i bonds as an emergency fund). 50k savings is a 25% savings rate on a 200k income. 25% is a pretty high savings rate by most non bogleheads standards and 200k a year is an extremely high family income by most peoples standards.

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willthrill81
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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sat Jan 12, 2019 11:21 am

james22 wrote:
Wed Jan 09, 2019 12:45 am
Yeah, I don't believe nominal returns guarantee anything that matters. EE bonds too risky for me.
To the extent that the future resembles the past, EE bonds are riskier than stocks. In real dollars, the worst twenty year period for stocks would have done better than the worst twenty year period where your initial investment doubled in nominal dollars.

Apart from significant deflation, EE bonds will have a real return, at best, close to what long-term TIPS are guaranteeing, and at worst, inflation will destroy them. Significant deflation is about the only potential for much upside they have.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

letsgobobby
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Re: I don't understand the case for EE bonds

Post by letsgobobby » Sat Jan 12, 2019 12:21 pm

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james22
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Re: I don't understand the case for EE bonds

Post by james22 » Sat Jan 12, 2019 1:26 pm

I value bonds for their optionality, bobby. I am paid to wait until I rebalance or valuations are more attractive elsewhere.

EE bond's lesser liquidity doesn't allow that.

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willthrill81
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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sat Jan 12, 2019 2:21 pm

letsgobobby wrote:
Sat Jan 12, 2019 12:21 pm
willthrill81 wrote:
Sat Jan 12, 2019 11:21 am
james22 wrote:
Wed Jan 09, 2019 12:45 am
Yeah, I don't believe nominal returns guarantee anything that matters. EE bonds too risky for me.
To the extent that the future resembles the past, EE bonds are riskier than stocks. In real dollars, the worst twenty year period for stocks would have done better than the worst twenty year period where your initial investment doubled in nominal dollars.

Apart from significant deflation, EE bonds will have a real return, at best, close to what long-term TIPS are guaranteeing, and at worst, inflation will destroy them. Significant deflation is about the only potential for much upside they have.
Really missing the boat Will. Even if inflation continues exactly as it has been, EE will outperform nominal treasuries. I know you don't own any, but many millions (hundreds of millions) of investors do, domestic and foreign, to the tune of trillions of dollars, and are perfectly content with the mix of risk/return they offer. EE bonds are better than any currently offered nominal treasury bond between 20-30 years duration, if the investor can accept the lesser liquidity. In fact if EE bond purchases were unlimited I would today sell 100% of my TBM and replace with a mix of EE and corporate bond funds.
You keep referring to nominal bonds, but I specifically addressed TIPS. If inflation comes in at the Fed's targeted 2.0%, then the real return of EE bonds will be 1.53%. 30 year TIPS, which are marketable and liquid, currently offer a guaranteed real yield of 1.20%. So those buying EE bonds are taking on inflation risk and sacrificing marketability and liquidity for around 33 basis points if the Fed achieves their target. If inflation reaches historic levels, EE bonds will come out far behind TIPS.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

letsgobobby
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Re: I don't understand the case for EE bonds

Post by letsgobobby » Sat Jan 12, 2019 5:15 pm

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willthrill81
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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sat Jan 12, 2019 7:43 pm

letsgobobby wrote:
Sat Jan 12, 2019 5:15 pm
You specifically said that significant deflation is the only upside EE bonds have, but they have upside relative to nominal treausuries under a wide range of inflation outcomes.
No, I didn't. I said "much upside."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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raven15
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Re: I don't understand the case for EE bonds

Post by raven15 » Sat Jan 12, 2019 8:01 pm

I remember thinking this through back when the thread was in vogue. I pictured three different ending interest scenarios after 20 years: general bond rates end up much higher than now, rates end up about the same as now, and they end up much lower than now. For each, rates can either go much higher before dropping to that level, they can go there in a fairly straight line, or they can go much lower before arriving at that level. Then I thought of what would happen to stocks, international stocks, very long term treasury bonds (EDV), intermediate term bonds /CDs, and Ibonds for each.

Any scenario in which rates end much higher will not favor EE bonds.

Of scenarios in which rates end much lower than now, nominal bonds will probably end with a better total return than EE bonds in most of them. There might be a few odd ball scenarios where stocks are crushed first a lot, then a little, and rates go very low, then low, that EE bonds could maybe come out ahead over everything including a balanced portfolio.

If rates first go high then end even intermediate term bonds or CDs will have been better. If things are generally steady stocks will do very well. If there is lots of volatility in stocks and long term rates then a rebalanced portfolio is highly likely to be best.

Basically I figured there close to no chance I would end up being glad to have had EE bonds after 20 years.
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Re: I don't understand the case for EE bonds

Post by letsgobobby » Sat Jan 12, 2019 8:05 pm

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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sat Jan 12, 2019 10:34 pm

letsgobobby wrote:
Sat Jan 12, 2019 8:05 pm
But as of right now, if someone wants to buy a 15+ year US government bond, he ought to give EE bonds a serious look-see. And most investors who own TBM, or a Target date retirement fund, own US treausuries of 15+ years.
Treasuries and EE bonds are not equivalent. Treasuries can be sold at any time, and while EE bonds can be redeemed early, the penalty for selling them prior to the 20 year holding period grows continually steeper right until the period ends.

EE bonds only make sense for capital that the investor has absolutely no intention of touching for 20 years. Most retail investors don't buy bonds with that intention.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: I don't understand the case for EE bonds

Post by Willmunny » Sat Jan 12, 2019 11:05 pm

willthrill81 wrote:
Sat Jan 12, 2019 11:21 am
james22 wrote:
Wed Jan 09, 2019 12:45 am
Yeah, I don't believe nominal returns guarantee anything that matters. EE bonds too risky for me.
To the extent that the future resembles the past, EE bonds are riskier than stocks. In real dollars, the worst twenty year period for stocks would have done better than the worst twenty year period where your initial investment doubled in nominal dollars.

Apart from significant deflation, EE bonds will have a real return, at best, close to what long-term TIPS are guaranteeing, and at worst, inflation will destroy them. Significant deflation is about the only potential for much upside they have.
Not trying to quibble, but is this correct - even if only restricted to U.S. stocks? Putting aside stock performances in other developed countries during our lifetimes, I was under the impression that one who jumped in the U.S. market at the peak in the fall of 1929 would have had to wait more than 20 years to see his or her money double. I know it doesn't factor in dividends, but the U.S. market was still well below its 1929 peak in 1949.

I don't own any EE bonds, and I wouldn't consider them now. If short term nominal rates go back to zero and long term treasury real rates are significantly negative, I may consider EE bonds at that time.

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Re: I don't understand the case for EE bonds

Post by randomguy » Sat Jan 12, 2019 11:45 pm

Willmunny wrote:
Sat Jan 12, 2019 11:05 pm
willthrill81 wrote:
Sat Jan 12, 2019 11:21 am
james22 wrote:
Wed Jan 09, 2019 12:45 am
Yeah, I don't believe nominal returns guarantee anything that matters. EE bonds too risky for me.
To the extent that the future resembles the past, EE bonds are riskier than stocks. In real dollars, the worst twenty year period for stocks would have done better than the worst twenty year period where your initial investment doubled in nominal dollars.

Apart from significant deflation, EE bonds will have a real return, at best, close to what long-term TIPS are guaranteeing, and at worst, inflation will destroy them. Significant deflation is about the only potential for much upside they have.
Not trying to quibble, but is this correct - even if only restricted to U.S. stocks? Putting aside stock performances in other developed countries during our lifetimes, I was under the impression that one who jumped in the U.S. market at the peak in the fall of 1929 would have had to wait more than 20 years to see his or her money double. I know it doesn't factor in dividends, but the U.S. market was still well below its 1929 peak in 1949.

I don't own any EE bonds, and I wouldn't consider them now. If short term nominal rates go back to zero and long term treasury real rates are significantly negative, I may consider EE bonds at that time.
You can't ignore dividends. The market was paying out 5%+ for a lot of the 30s. If you look at it as a 20 year investment and compare stocks to EE bonds, pretty much anyone is taking stocks. The upside is a ton more and the downside is minimal. If you instead say should for my bond portion of my portfolio should I hold EE bonds or 20 year nominal treasuries, EE bonds are a lot more appealing but far from something to really get excited about. Now the 3% I-Bonds when they came out were a killer deal for someone looking to set up some liability matching 5-20 years out.

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Re: I don't understand the case for EE bonds

Post by Willmunny » Sun Jan 13, 2019 12:01 am

randomguy wrote:
Sat Jan 12, 2019 11:45 pm
Willmunny wrote:
Sat Jan 12, 2019 11:05 pm
willthrill81 wrote:
Sat Jan 12, 2019 11:21 am
james22 wrote:
Wed Jan 09, 2019 12:45 am
Yeah, I don't believe nominal returns guarantee anything that matters. EE bonds too risky for me.
To the extent that the future resembles the past, EE bonds are riskier than stocks. In real dollars, the worst twenty year period for stocks would have done better than the worst twenty year period where your initial investment doubled in nominal dollars.

Apart from significant deflation, EE bonds will have a real return, at best, close to what long-term TIPS are guaranteeing, and at worst, inflation will destroy them. Significant deflation is about the only potential for much upside they have.
Not trying to quibble, but is this correct - even if only restricted to U.S. stocks? Putting aside stock performances in other developed countries during our lifetimes, I was under the impression that one who jumped in the U.S. market at the peak in the fall of 1929 would have had to wait more than 20 years to see his or her money double. I know it doesn't factor in dividends, but the U.S. market was still well below its 1929 peak in 1949.

I don't own any EE bonds, and I wouldn't consider them now. If short term nominal rates go back to zero and long term treasury real rates are significantly negative, I may consider EE bonds at that time.
You can't ignore dividends. The market was paying out 5%+ for a lot of the 30s. If you look at it as a 20 year investment and compare stocks to EE bonds, pretty much anyone is taking stocks. The upside is a ton more and the downside is minimal. If you instead say should for my bond portion of my portfolio should I hold EE bonds or 20 year nominal treasuries, EE bonds are a lot more appealing but far from something to really get excited about. Now the 3% I-Bonds when they came out were a killer deal for someone looking to set up some liability matching 5-20 years out.
Respectfully, I am not ignoring dividends. I address them by saying I know it doesn't factor in dividends. I would like to know if, factoring in dividends, it is correct that the investor who went all in the U.S. stock market in the fall of 1929 was better off than the investor who had his or her money double in nominal dollars between the fall of 1929 and 1949. I don't have the data and I am not sure if the data are out there, but I have a hard time believing that would be correct, even with dividends, with the Dow at approximately 5500 at the 1929 peak and approximately 2000 in the fall of 1929.

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Re: I don't understand the case for EE bonds

Post by randomguy » Sun Jan 13, 2019 12:12 am

Willmunny wrote:
Sun Jan 13, 2019 12:01 am

Respectfully, I am not ignoring dividends. I address them by saying I know it doesn't factor in dividends. I would like to know if, factoring in dividends, it is correct that the investor who went all in the U.S. stock market in the fall of 1929 was better off than the investor who had his or her money double in nominal dollars between the fall of 1929 and 1949. I don't have the data and I am not sure if the data are out there, but I have a hard time believing that would be correct, even with dividends, with the Dow at approximately 5500 at the 1929 peak and approximately 2000 in the fall of 1929.
http://www.moneychimp.com/features/market_cagr.htm has 1 dollar to 1.84 so nope it didn't quite double. Add one more year though and you get 2.13 (i.e. you more than double). Granted you couldn't buy savings bonds or S&P 500 indexes in 1929.

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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sun Jan 13, 2019 12:18 am

Willmunny wrote:
Sun Jan 13, 2019 12:01 am
randomguy wrote:
Sat Jan 12, 2019 11:45 pm
Willmunny wrote:
Sat Jan 12, 2019 11:05 pm
willthrill81 wrote:
Sat Jan 12, 2019 11:21 am
james22 wrote:
Wed Jan 09, 2019 12:45 am
Yeah, I don't believe nominal returns guarantee anything that matters. EE bonds too risky for me.
To the extent that the future resembles the past, EE bonds are riskier than stocks. In real dollars, the worst twenty year period for stocks would have done better than the worst twenty year period where your initial investment doubled in nominal dollars.

Apart from significant deflation, EE bonds will have a real return, at best, close to what long-term TIPS are guaranteeing, and at worst, inflation will destroy them. Significant deflation is about the only potential for much upside they have.
Not trying to quibble, but is this correct - even if only restricted to U.S. stocks? Putting aside stock performances in other developed countries during our lifetimes, I was under the impression that one who jumped in the U.S. market at the peak in the fall of 1929 would have had to wait more than 20 years to see his or her money double. I know it doesn't factor in dividends, but the U.S. market was still well below its 1929 peak in 1949.

I don't own any EE bonds, and I wouldn't consider them now. If short term nominal rates go back to zero and long term treasury real rates are significantly negative, I may consider EE bonds at that time.
You can't ignore dividends. The market was paying out 5%+ for a lot of the 30s. If you look at it as a 20 year investment and compare stocks to EE bonds, pretty much anyone is taking stocks. The upside is a ton more and the downside is minimal. If you instead say should for my bond portion of my portfolio should I hold EE bonds or 20 year nominal treasuries, EE bonds are a lot more appealing but far from something to really get excited about. Now the 3% I-Bonds when they came out were a killer deal for someone looking to set up some liability matching 5-20 years out.
Respectfully, I am not ignoring dividends. I address them by saying I know it doesn't factor in dividends. I would like to know if, factoring in dividends, it is correct that the investor who went all in the U.S. stock market in the fall of 1929 was better off than the investor who had his or her money double in nominal dollars between the fall of 1929 and 1949. I don't have the data and I am not sure if the data are out there, but I have a hard time believing that would be correct, even with dividends, with the Dow at approximately 5500 at the 1929 peak and approximately 2000 in the fall of 1929.
The data I was referring to are from this site. The worst 20 year period for U.S. stocks had a real annualized return of -.22%. By comparison, the worst 20 year period where you experienced a nominal doubling of your original investment would have resulted in a negative annualized real return of -2.7% (1966-1985). In the entire historic record, there has been a grand total of one 20 year period where stocks didn't return a nominal 3.53%; they returned 3.0%.

To the extent that the future resembles the past, EE bonds seem to have a lot more downside than upside potential.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

letsgobobby
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Re: I don't understand the case for EE bonds

Post by letsgobobby » Sun Jan 13, 2019 12:24 am

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Re: I don't understand the case for EE bonds

Post by james22 » Sun Jan 13, 2019 6:56 am

letsgobobby wrote:
Sat Jan 12, 2019 5:15 pm
James, EE bonds are most appropriate for a portion of one's fixed income holdings, not all.
The portion you aren't going to touch for 20 years?

Why would that portion be in your fixed income holdings then?

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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sun Jan 13, 2019 11:19 am

james22 wrote:
Sun Jan 13, 2019 6:56 am
letsgobobby wrote:
Sat Jan 12, 2019 5:15 pm
James, EE bonds are most appropriate for a portion of one's fixed income holdings, not all.
The portion you aren't going to touch for 20 years?

Why would that portion be in your fixed income holdings then?
The logic used by such proponents is often "I will always hold some fixed income." But then the question becomes "why are you holding fixed income in the first place?" If the answer is simple 'portfolio ballast', then EE bonds might be appropriate. If the answer is for rebalancing purposes, then EE bonds are completely inappropriate.

Beyond that, investors should ask themselves "If I don't need the capital I would put in EE bonds for 20 years, are there better investment opportunities, not just bonds, for that period of time than a guaranteed nominal doubling of my capital?"

EE bonds are not just another 'flavor' of bonds; they are qualitatively distinct. Their illiquidity is both the source of their higher nominal return and their biggest drawback. Owning a bond that cannot be redeemed before 20 years is not something that most retail investors are interested in. Long-term Treasuries are more appealing to most retail investors because they are liquid. 30 year TIPS, while less liquid than Treasuries, guarantee a real return that is only 33 basis points lower than EE bonds if the Fed achieves its inflation target.

There is an illiquidity premium to be had with EE bonds (for now). Whether that premium is worth sacrificing virtually all liquidity is a matter of personal preference.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: I don't understand the case for EE bonds

Post by dknightd » Sun Jan 13, 2019 11:47 am

I thought the appeal of EE bonds is that the interest was tax free if they were used for education. Even if cashed out early they still provide income about the same as a savings account. They are very liquid, after 3-6 months they can be cashed out at will. I ended up with more EE bonds than I could use. I keep them because even though the income is now taxable they still pay about 3%. So far, above inflation.
I have not kept up with the rules since the main reason I bought them was tax free growth if used for education expenses. I don't think they had 529 plans back then.
In the old days they would double in value after 17 years.
I quit buying them about 20 years ago.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sun Jan 13, 2019 12:59 pm

dknightd wrote:
Sun Jan 13, 2019 11:47 am
Even if cashed out early they still provide income about the same as a savings account.
A high yield savings account yields about 2.0% right now. EE bonds redeemed before the 20 year anniversary yield .1%.
dknightd wrote:
Sun Jan 13, 2019 11:47 am
They are very liquid, after 3-6 months they can be cashed out at will.
They can be redeemed before the 20 year anniversary, but with them only yielding .1% annually until then, you take a bigger and bigger kick in the teeth due to inflation if you redeem them before that time.
dknightd wrote:
Sun Jan 13, 2019 11:47 am
I have not kept up with the rules since the main reason I bought them was tax free growth if used for education expenses. I don't think they had 529 plans back then.
Today, a 529 plan is likely far better than EE bonds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: I don't understand the case for EE bonds

Post by dcw213 » Sun Jan 13, 2019 2:54 pm

I meant, of course, that I'd bet I could do better than 3.5% nominal over 20 years.

What I don't understand is why the annual purchases are limited?
[/quote]

You do realize that 20 and 30 year treasuries yield considerably lower than 3.5%. By your logic nobody would buy treasuries yet they are purchased at high volume every month. EE bonds offer individuals a better rate than large global investors, seems to make sense that there would be a limit. For institutional investors and ultra high net worth individuals, safe fixed income securities serve a purpose, as they do for me.

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Re: I don't understand the case for EE bonds

Post by letsgobobby » Sun Jan 13, 2019 3:02 pm

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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sun Jan 13, 2019 3:57 pm

dcw213 wrote:
Sun Jan 13, 2019 2:54 pm
By your logic nobody would buy treasuries yet they are purchased at high volume every month.
Again, EE bonds and Treasuries are apples and oranges in the bond world. How many of the entities, organization and individuals, buying long-term Treasuries right now will hold those bonds to maturity? Only a small minority. You won't find many BHs doing that, even among those who advocate LTT.
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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sun Jan 13, 2019 4:06 pm

letsgobobby wrote:
Sun Jan 13, 2019 3:02 pm
And anyway, I've already made the stock/bond decision. The question is what bonds.
You've said this several times before, but I still don't understand your logic here. Someone taking this route could easily say, "I must have X% bonds in my portfolio, but these long-term, high-yield corporate bonds have a much higher yield than Treasuries, so I'll load up on them." History has shown that this decision would have very similar performance to a portfolio with some stocks and Treasuries. Corporate bonds blur the line between government bonds and stocks.

In a similar vein, you seem to have concluded "I want X% bonds, now what can I do to get the highest yield possible, regardless of liquidity or inflation risk." I don't see why you are drawing such a hard line between stocks and bonds. Few others here seem to do so.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: I don't understand the case for EE bonds

Post by dknightd » Sun Jan 13, 2019 9:00 pm

willthrill81 wrote:
Sun Jan 13, 2019 12:59 pm
EE bonds redeemed before the 20 year anniversary yield .1%.
Ouch, that is not very good!
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

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Re: I don't understand the case for EE bonds

Post by randomguy » Sun Jan 13, 2019 9:07 pm

willthrill81 wrote:
Sun Jan 13, 2019 3:57 pm
dcw213 wrote:
Sun Jan 13, 2019 2:54 pm
By your logic nobody would buy treasuries yet they are purchased at high volume every month.
Again, EE bonds and Treasuries are apples and oranges in the bond world. How many of the entities, organization and individuals, buying long-term Treasuries right now will hold those bonds to maturity? Only a small minority. You won't find many BHs doing that, even among those who advocate LTT.
I thought most long term bonds were bought by entities looking to do liability matching (i.e. pension funds and the like). I would imagine most of them hold to maturity.

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Re: I don't understand the case for EE bonds

Post by letsgobobby » Sun Jan 13, 2019 9:10 pm

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Re: I don't understand the case for EE bonds

Post by LilyFleur » Sun Jan 13, 2019 9:17 pm

I bought EE bonds through an employer (they were auto-deducted from my paycheck) and was also participating in the maximum match to my 401k. Now, much much later in life, I have a healthy 401k and a little savings pot of EEs which are getting close to maturity.

Did my company stock earn more for my retirement than my savings bonds? Absolutely, exponentially.

Would I have frittered away the small amount I paid for the series EEs had they not been auto-deducted from my paycheck? Yes.

I view my bonds as a little savings account that I can choose to use as income on a year that the market is way down and I would rather not take as much out of my 401k.

When I look at my AA, I add the current value of my savings bonds to the bonds index fund in my 401k to see my total bond investment.

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Re: I don't understand the case for EE bonds

Post by james22 » Sun Jan 13, 2019 11:19 pm

letsgobobby wrote:
Sun Jan 13, 2019 9:10 pm
i made the choice to take all my risk on the equity side.
I know you believe that, bobby, but EE bonds are *riskier* than stocks over 20 years.

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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sun Jan 13, 2019 11:30 pm

randomguy wrote:
Sun Jan 13, 2019 9:07 pm
willthrill81 wrote:
Sun Jan 13, 2019 3:57 pm
dcw213 wrote:
Sun Jan 13, 2019 2:54 pm
By your logic nobody would buy treasuries yet they are purchased at high volume every month.
Again, EE bonds and Treasuries are apples and oranges in the bond world. How many of the entities, organization and individuals, buying long-term Treasuries right now will hold those bonds to maturity? Only a small minority. You won't find many BHs doing that, even among those who advocate LTT.
I thought most long term bonds were bought by entities looking to do liability matching (i.e. pension funds and the like). I would imagine most of them hold to maturity.
I haven't seen enough data to know with certainty. Perhaps it's true of organizations, but I highly doubt it's true of individual investors.
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Re: I don't understand the case for EE bonds

Post by willthrill81 » Sun Jan 13, 2019 11:48 pm

james22 wrote:
Sun Jan 13, 2019 11:19 pm
letsgobobby wrote:
Sun Jan 13, 2019 9:10 pm
i made the choice to take all my risk on the equity side.
I know you believe that, bobby, but EE bonds are *riskier* than stocks over 20 years.
They don't have credit risk, but they do have interest rate risk and inflation risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: I don't understand the case for EE bonds

Post by james22 » Mon Jan 14, 2019 12:22 am

dcw213 wrote:
Sun Jan 13, 2019 2:54 pm
EE bonds offer individuals a better rate than large global investors, seems to make sense that there would be a limit.
Why?

You don't believe the government comes out ahead?

Fixating on the rate without considering the strings attached and risks seems blinding.

If anyone was willing to loan me money at 3.5% nominal for 20 years, I wouldn't limit the amount I'd borrow.

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Re: I don't understand the case for EE bonds

Post by letsgobobby » Mon Jan 14, 2019 1:00 am

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Re: I don't understand the case for EE bonds

Post by james22 » Mon Jan 14, 2019 4:11 am

There's only one definition of risk that matters: that of failing to reach your financial goal.

However secure EE bonds seem, they are riskier than stocks because they are less likely to contribute to that goal.

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Re: I don't understand the case for EE bonds

Post by letsgobobby » Mon Jan 14, 2019 8:34 am

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Re: I don't understand the case for EE bonds

Post by willthrill81 » Mon Jan 14, 2019 10:58 am

letsgobobby wrote:
Mon Jan 14, 2019 8:34 am
james22 wrote:
Mon Jan 14, 2019 4:11 am
There's only one definition of risk that matters: that of failing to reach your financial goal.

However secure EE bonds seem, they are riskier than stocks because they are less likely to contribute to that goal.
By your definition nearly every bond is riskier than stocks.
In the short-term, stocks have historically been riskier than bonds, if we define risk as the likelihood of your investment declining in real value. In the long-term (i.e. 20 years or more), bonds have historically been riskier than stocks.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: I don't understand the case for EE bonds

Post by letsgobobby » Mon Jan 14, 2019 11:00 am

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Re: I don't understand the case for EE bonds

Post by james22 » Mon Jan 14, 2019 12:35 pm

Good luck, bobby.

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Re: I don't understand the case for EE bonds

Post by market timer » Mon Jan 14, 2019 8:27 pm

I just purchased my annual installment of $10K EE bonds. Hope to use them for my daughter's final semester in college, assuming interest rates remain low in the interim.

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Re: I don't understand the case for EE bonds

Post by smectym » Mon Jan 14, 2019 10:42 pm

lack_ey wrote:
Thu Apr 20, 2017 8:11 pm
Kevin M wrote:
Dominic wrote:There has yet to be a 15-year period where stocks have lost money, but it's not impossible for it to happen in the future.
Based on data in our Simba backtest spreadsheet, US stocks had a cumulative real return of -5% over the 17-year period 1965-1981 (inclusive). Of course that high-inflation period would have killed EE bonds in real terms.

Kevin
Hm, well EE bonds didn't exist back then, I don't think, and prior EE bonds had different conditions. For a certain range of years they doubled in 17 rather than 20 years IIRC, and a similar hypothetical product offered around that time might not have been as bad as you're suggesting here. In any case we should think about forward inflation and return expectations when analyzing these now.

Point is made with respect to historical returns of stocks, though.
Yes, for whatever reason (this site had something to do with it) I went nuts buying EE back in 2002, when the doubling guarantee was 17 years. Now all if a sudden its 2019 and what do you know, the guarantee is kicking in (and due to the interest rate supppression since the GFC, the guarantee is worth something).

OK, so we got our 3.5%. No big deal. Of course we also invested in stocks and held real estate and other things as well, which with hindsight have returned a lot better than 3.5%. But it’s not a bad idea for the portfolio to hold some stable value assets.

Smectym

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Re: I don't understand the case for EE bonds

Post by letsgobobby » Tue Jan 15, 2019 9:33 am

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Re: I don't understand the case for EE bonds

Post by Kevin M » Tue Jan 15, 2019 11:52 am

smectym wrote:
Mon Jan 14, 2019 10:42 pm
lack_ey wrote:
Thu Apr 20, 2017 8:11 pm
Kevin M wrote:
Dominic wrote:There has yet to be a 15-year period where stocks have lost money, but it's not impossible for it to happen in the future.
Based on data in our Simba backtest spreadsheet, US stocks had a cumulative real return of -5% over the 17-year period 1965-1981 (inclusive). Of course that high-inflation period would have killed EE bonds in real terms.

Kevin
Hm, well EE bonds didn't exist back then, I don't think, and prior EE bonds had different conditions. For a certain range of years they doubled in 17 rather than 20 years IIRC, and a similar hypothetical product offered around that time might not have been as bad as you're suggesting here. In any case we should think about forward inflation and return expectations when analyzing these now.

Point is made with respect to historical returns of stocks, though.
Yes, for whatever reason (this site had something to do with it) I went nuts buying EE back in 2002, when the doubling guarantee was 17 years. Now all if a sudden its 2019 and what do you know, the guarantee is kicking in (and due to the interest rate supppression since the GFC, the guarantee is worth something).

OK, so we got our 3.5%. No big deal. Of course we also invested in stocks and held real estate and other things as well, which with hindsight have returned a lot better than 3.5%. But it’s not a bad idea for the portfolio to hold some stable value assets.

Smectym
letsgobobby wrote:
Tue Jan 15, 2019 9:33 am
Doubling in 17 years is 4.16%, not 3.5%.
The EE bond rate was 3.96% in May 2002, when the the 20-year Treasury yield was 5.81%, so an EE bond then wasn't as good a relative deal as it is now (ignoring the liquidity risk, etc.). The rate for EE bonds issued in 2002 was variable, and has been much lower than the initial yield for much of the time since then, so the doubling probably will pay off from that respect. Since yields are much lower now than in 2002, the price return component would be positive as of now (coupon rate much higher than the 3-year yield), so the return would be higher than the initial yield, and one would have done much better with the 20-year Treasury.

https://www.treasurydirect.gov/indiv/re ... 042005.htm

https://fred.stlouisfed.org/graph/?g=mFcD

Kevin
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Re: I don't understand the case for EE bonds

Post by willthrill81 » Fri Mar 29, 2019 3:55 pm

Strictly out of curiosity, I wonder if anyone is currently buying EE bonds now that you can get a 5 year CD paying 3.51%. Yes, there is reinvestment risk, but it's far more liquid than EE bonds.
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Re: I don't understand the case for EE bonds

Post by Dudley » Fri Mar 29, 2019 6:36 pm

willthrill81 wrote:
Fri Mar 29, 2019 3:55 pm
Strictly out of curiosity, I wonder if anyone is currently buying EE bonds now
Yes, and I wish I could buy lots more.

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Re: I don't understand the case for EE bonds

Post by Grt2bOutdoors » Fri Mar 29, 2019 7:46 pm

willthrill81 wrote:
Fri Mar 29, 2019 3:55 pm
Strictly out of curiosity, I wonder if anyone is currently buying EE bonds now that you can get a 5 year CD paying 3.51%. Yes, there is reinvestment risk, but it's far more liquid than EE bonds.
Yes, 5 years and then what? 20 year Treasuries are paying 2.78%, makes EE the superior choice for those who hold exactly 20 years.
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Re: I don't understand the case for EE bonds

Post by willthrill81 » Fri Mar 29, 2019 7:47 pm

Grt2bOutdoors wrote:
Fri Mar 29, 2019 7:46 pm
willthrill81 wrote:
Fri Mar 29, 2019 3:55 pm
Strictly out of curiosity, I wonder if anyone is currently buying EE bonds now that you can get a 5 year CD paying 3.51%. Yes, there is reinvestment risk, but it's far more liquid than EE bonds.
Yes, 5 years and then what? 20 year Treasuries are paying 2.78%, makes EE the superior choice for those who hold exactly 20 years.
That's the reinvestment risk I was referring to.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: I don't understand the case for EE bonds

Post by jdilla1107 » Sat Mar 30, 2019 7:49 pm

EE bonds are also tax deferred. The CD is not. This can be quite an advantage if you are in prime working years now and will have much lower income in retirement.

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Re: I don't understand the case for EE bonds

Post by letsgobobby » Sat Mar 30, 2019 8:22 pm

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Re: I don't understand the case for EE bonds

Post by tooluser » Sat Mar 30, 2019 8:32 pm

Long ago when I first started working, for the first six months I bought a $100 EE savings bond each month (for $50). That $300 investment, over 30 years, turned into about $1200, at a 4% interest rate. I cashed them out last year. Regardless of whether the decision was optimal, I'm glad I didn't spend it on beer at nightclubs during those six months.

Total return of the S&P500 over that time is approximately 1900%. So the $300 would have turned into $5700, if I had chosen that investment. Inflation would make the $300 equal to approximately $650 in today's dollars, or $12,350 total return if I had invested in the S&P500. Alternately, over 30 years I made $13 on each $50 investment, or 0.77% average annually.

Hindsight is 20/20. For all everyone knew at that time, the world was going to end in nuclear Armageddon any day. Nice to have a little stash somewhere for brighter days. I could have done a lot worse (and I did with some other investments!)
The discovery of America, and that of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of mankind. -- Adam Smith, 1776

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