Bonds Are Riskier Than People Think

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Alexa9
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Bonds Are Riskier Than People Think

Post by Alexa9 » Sun Nov 26, 2017 5:31 pm

Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?

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Sandtrap
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Re: Bonds Are Riskier Than People Think

Post by Sandtrap » Sun Nov 26, 2017 5:37 pm

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
As a retiree, I've been pondering the same thing so I'm glad you brought it up.
What do you think of both. IE: Vanguard Total Bond. . . plus. . . . CD ladder.?
Best of both worlds?
j :D

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Re: Bonds Are Riskier Than People Think

Post by sambb » Sun Nov 26, 2017 5:38 pm

not worried at all about bonds
have heard it here for years that there is a bubble
worst year ever for vanguard total bond index is negligble downside
concerns about bond market are priced into the market

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dm200
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Re: Bonds Are Riskier Than People Think

Post by dm200 » Sun Nov 26, 2017 5:39 pm

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
With almost all CDs, there is still a degree of "interest rate risk". If, for example, you purchase a 5 year CD at 2.40% rate - and next month the 5 year rate goes up to 2.50% - you (with 20/20 hindsight) have "lost" a small amount. Of course, if you chose to not buy the CD - then the rate may go down to 2.30% OR stay the same.

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Re: Bonds Are Riskier Than People Think

Post by whodidntante » Sun Nov 26, 2017 5:46 pm

If you really can't stand a loss I agree with avoiding a bond fund because something like Vanguard Total Bond Market could realistically suffer a 10% loss. It's not likely, but it is realistic. So the extremely risk averse are stuck with direct CDs, stable value funds, online "high yield" savings accounts, annuities, individual treasuries held to maturity, etc.

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Re: Bonds Are Riskier Than People Think

Post by eye.surgeon » Sun Nov 26, 2017 5:50 pm

Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
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Re: Bonds Are Riskier Than People Think

Post by Kenkat » Sun Nov 26, 2017 6:03 pm

If you look at the Barclays Aggregate Bond Index (which Vanguard Total Bond Index is based on), it has only had 3 down years since 1976 - 1994 at -2.92%, 1999 at -0.82%, and 2012 at -2.02%. So bonds seem relatively stable to me.

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Re: Bonds Are Riskier Than People Think

Post by nisiprius » Sun Nov 26, 2017 6:23 pm

eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
...Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation...
Why do you say that? What's your source for that? I don't think it's so.

I believe that the best savings accounts have usually paid close to the rates for Treasury bills, and Treasury bills usually have kept up with inflation in the short term and eked out a small real return in the long term. For 1926-2014 inclusive, Treasury bills averaged (CAGR) 3.5%, inflation averaged 2.9%, so a real return of +0.6%

CDs have always earned more than savings accounts, often several percent more. Therefore, I believe that CDs have more than kept up with inflation. It's difficult to find the kind of data I'd like to find neatly in one place, unfortunately.
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Re: Bonds Are Riskier Than People Think

Post by TheTimeLord » Sun Nov 26, 2017 6:28 pm

dm200 wrote:
Sun Nov 26, 2017 5:39 pm
Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
With almost all CDs, there is still a degree of "interest rate risk". If, for example, you purchase a 5 year CD at 2.40% rate - and next month the 5 year rate goes up to 2.50% - you (with 20/20 hindsight) have "lost" a small amount. Of course, if you chose to not buy the CD - then the rate may go down to 2.30% OR stay the same.
First, always remember the CD or an Individual Bond isn't fixed duration like a bond fund so it isn't a 5 year CD after a month. Second, I don't see this as a risk you bought the investment for a fixed duration expecting a defined return what are you losing? Risk is a negative result, how is something that does exactly what it say risky?
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Re: Bonds Are Riskier Than People Think

Post by nisiprius » Sun Nov 26, 2017 6:47 pm

I happen to think you're right that reasonably carefully-chosen bank CDs are a reasonable alternative to bond funds. (There are two risks with CDs: the risk of having to pay a penalty for early withdrawal if you need the money before maturity, and the possibility that your bank might have in the fine print, or add something to the fine print, saying that early withdrawal is "with their permission," and denying early withdrawal).
Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
But, with regard to the risk of "losing a considerable amount" in a bond fund, could you put some numbers on that?

What do you mean by a "considerable amount?" Remember, the duration of e.g. Vanguard Total Bond is about six years, and the duration is a reasonable for the amount of time you should be prepared to hold a bond fund.

The largest dip I'm aware of, in the Vanguard Total Bond Market Index Fund, occurred in 1994. It was a dip of less than 6%, and there was full recovery of invested value (I am counting fund dividends) by mid-1995. Is that what you consider to be a "considerable amount" and an unacceptable risk?

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Re: Bonds Are Riskier Than People Think

Post by longinvest » Sun Nov 26, 2017 7:04 pm

  1. The longer one holds an inflation-indexed bond, like a Treasury Inflation Protected Securities (TIPS), the less risky it becomes.
  2. An inflation-indexed bond fund is just a collection of inflation-indexed bonds.
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Re: Bonds Are Riskier Than People Think

Post by dm200 » Sun Nov 26, 2017 7:26 pm

First, always remember the CD or an Individual Bond isn't fixed duration like a bond fund so it isn't a 5 year CD after a month. Second, I don't see this as a risk you bought the investment for a fixed duration expecting a defined return what are you losing? Risk is a negative result, how is something that does exactly what it say risky?
I define "risk" a bit differently. If you have (or buy) something that returns less than some other choice or outcome, the possibility or probability of lower or no return is what I define as a "risk" (Very Low - I agree -)

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Re: Bonds Are Riskier Than People Think

Post by Alexa9 » Sun Nov 26, 2017 7:30 pm

nisiprius wrote:
Sun Nov 26, 2017 6:47 pm
The largest dip I'm aware of, in the Vanguard Total Bond Market Index Fund, occurred in 1994. It was a dip of less than 6%, and there was full recovery of invested value (I am counting fund dividends) by mid-1995. Is that what you consider to be a "considerable amount" and an unacceptable risk?
Image

I was considering another 2008 scenario with someone about to retire. Bonds and stocks both dip. They aren't inversely related and although they bounced back that time I wonder how much protection they provide if the market didn't bounce back so quickly. In contrast a CD would have zero risk in this situation.

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Re: Bonds Are Riskier Than People Think

Post by livesoft » Sun Nov 26, 2017 7:34 pm

I don't worry about my bonds because I don't worry about losing money anymore. It just doesn't bother me to lose money. That fact has been quite liberating to my life.

Think about all the money you lost today when the stock and bond markets were not even open: Most of the things you own got older and thus are worth less than they were worth yesterday. Your car, your appliances, your clothes, your gold, and especially your food. They all lost money.
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Re: Bonds Are Riskier Than People Think

Post by PFInterest » Sun Nov 26, 2017 7:40 pm

Kenkat wrote:
Sun Nov 26, 2017 6:03 pm
If you look at the Barclays Aggregate Bond Index (which Vanguard Total Bond Index is based on), it has only had 3 down years since 1976 - 1994 at -2.92%, 1999 at -0.82%, and 2012 at -2.02%. So bonds seem relatively stable to me.
I remember 2012 like it was yesterday.....such a disaster for FI. :oops: :oops: :oops:

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Re: Bonds Are Riskier Than People Think

Post by Alexa9 » Sun Nov 26, 2017 7:53 pm

Admittedly this is a doomsday scenario and protecting your butt in a global downturn that doesn't bounce back.
CD's are FDIC insured and have no risk other than losing out on rising interest rates.

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Re: Bonds Are Riskier Than People Think

Post by dm200 » Sun Nov 26, 2017 7:59 pm

Alexa9 wrote:
Sun Nov 26, 2017 7:53 pm
Admittedly this is a doomsday scenario and protecting your butt in a global downturn that doesn't bounce back.
CD's are FDIC insured and have no risk other than losing out on rising interest rates.
Very true - CDs/certificates offered by federally insured credit unions have the equivalent backing of the full faith and credit of the US government through NCUA - a federal government agency.

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Re: Bonds Are Riskier Than People Think

Post by avalpert » Sun Nov 26, 2017 8:28 pm

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
Just because you don't see the downside pricing risk of a CD published daily doesn't mean it isn't there. When interest rates go up above what you got the CD at then the value of that CD went down - exactly the same way as it does for a bond.

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Re: Bonds Are Riskier Than People Think

Post by bottlecap » Sun Nov 26, 2017 8:35 pm

No one here says to keep money you can't afford to lose in bonds. We almost uniformly recommend CDs or savings account.

JT

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Re: Bonds Are Riskier Than People Think

Post by David Jay » Sun Nov 26, 2017 8:47 pm

Alexa9 wrote:
Sun Nov 26, 2017 7:30 pm
nisiprius wrote:
Sun Nov 26, 2017 6:47 pm
The largest dip I'm aware of, in the Vanguard Total Bond Market Index Fund, occurred in 1994. It was a dip of less than 6%, and there was full recovery of invested value (I am counting fund dividends) by mid-1995. Is that what you consider to be a "considerable amount" and an unacceptable risk?
Image
I was considering another 2008 scenario with someone about to retire. Bonds and stocks both dip. They aren't inversely related and although they bounced back that time I wonder how much protection they provide if the market didn't bounce back so quickly. In contrast a CD would have zero risk in this situation.
Your chart has nothing to do with stock correlation, it has to do with the fact that the whole economic system was on the verge of meltdown (AIG, Shearson Lehman, etc.). Bonds still recovered in a few weeks.

Your fears about bond funds are essentially unfounded. Not that there is anything wrong with a CD ladder if you want to invest the time and effort, but don't do it just because of your fear of bonds.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Alexa9
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Re: Bonds Are Riskier Than People Think

Post by Alexa9 » Sun Nov 26, 2017 8:54 pm

bottlecap wrote:
Sun Nov 26, 2017 8:35 pm
No one here says to keep money you can't afford to lose in bonds. We almost uniformly recommend CDs or savings account.

JT
Taylor Larimore wrote:
Wed Sep 06, 2017 10:43 pm

My "Bond Fund Philosophy" is simple:

Money that I cannot afford to lose is in cash and bonds (Vanguard Total Bond Market Index Fund).

Best wishes.
Taylor

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Re: Bonds Are Riskier Than People Think

Post by jalbert » Sun Nov 26, 2017 9:02 pm

Not only do you risk losing a considerable amount in a bear market with bonds,
If you stick to high credit quality short or intermediate term bonds then you don't risk that.
Last edited by jalbert on Sun Nov 26, 2017 9:33 pm, edited 1 time in total.
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Re: Bonds Are Riskier Than People Think

Post by NPT » Sun Nov 26, 2017 9:26 pm

It is much more useful to discuss real instead of nominal returns in my opinion, and since historical data is easily available, it makes sense to go back further than the 1970s.

According to Simba's backtesting spreadsheet the total U.S. bond market index produced negative total returns in 48 calendar years since 1871, the worst being -16%. For comparison, the total U.S. stock market index had negative total returns in 50 calendar years, and the worst was -37%.

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Re: Bonds Are Riskier Than People Think

Post by jalbert » Sun Nov 26, 2017 9:32 pm

According to Simba's backtesting spreadsheet the total U.S. bond market index produced negative total returns in 48 calendar years since 1871,
The index was created in 1973.
Index fund investor since 1987.

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Re: Bonds Are Riskier Than People Think

Post by NPT » Sun Nov 26, 2017 9:39 pm

jalbert wrote:
Sun Nov 26, 2017 9:32 pm
According to Simba's backtesting spreadsheet the total U.S. bond market index produced negative total returns in 48 calendar years since 1871,
The index was created in 1973.
Indeed. The backtesting spreadsheet uses an approximation, as explained in the "Data_Sources" tab in the spreadsheet.

Better data is available about intermediate-term U.S. treasuries. According to Simba's spreadsheet those produced negative total returns after inflation in 51 calendar years since 1871, and the worst real return was -17%.

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Re: Bonds Are Riskier Than People Think

Post by greg24 » Sun Nov 26, 2017 9:43 pm

Straw man premise.

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Re: Bonds Are Riskier Than People Think

Post by Stormbringer » Sun Nov 26, 2017 10:02 pm

Something to consider is that there will be a recession at some point. When that happens, rates may go right back down to zero.
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Re: Bonds Are Riskier Than People Think

Post by venkman » Sun Nov 26, 2017 10:46 pm

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
A Treasury bond that you hold until maturity also has zero downside risk with regard to principal. And it's exempt from state and local taxes. If you shop around, you can probably find a CD with a slightly higher yield than the going rate for Treasuries, just because there's a lot more money competing to buy Treasuries than CD's.

Bond FUNDS are riskier than CD's, with regard to principal; but you can also invest in a bond fund in a lot less time than it takes to fully create a CD ladder.

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Re: Bonds Are Riskier Than People Think

Post by telemark » Sun Nov 26, 2017 11:44 pm

I feel that feelings are a terrible way to choose one's investments.

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Re: Bonds Are Riskier Than People Think

Post by Taylor Larimore » Sun Nov 26, 2017 11:59 pm

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
Alexa9:

There are many kinds of bonds. Some are very risky (junk bonds) and some are very safe (short-term Treasury bonds).

Vanguard Total Bond Market is a good quality, intermediate-term bond fund. It's worst annual decline was -2.66% in 1994. In 1995 it gained +16%.

TBM seems like a worthwhile trade-off compared with CDs or cash.

Best wishes.
Taylor
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Re: Bonds Are Riskier Than People Think

Post by BolderBoy » Mon Nov 27, 2017 12:08 am

Taylor Larimore wrote:
Sun Nov 26, 2017 11:59 pm
Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
Alexa9:

There are many kinds of bonds. Some are very risky (junk bonds) and some are very safe (short-term Treasury bonds).

Vanguard Total Bond Market is a good quality, intermediate-term bond fund. It's worst annual decline was -2.66% in 1994. In 1995 it gained +16%.

TBM seems like a worthwhile trade-off compared with CDs or cash.
I'm totally with Taylor on this. For the long-term investor, stocks and bonds are generally the way to go. Cash (savings/checking), CDs, etc, good for short-term needs.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Re: Bonds Are Riskier Than People Think

Post by bottlecap » Mon Nov 27, 2017 7:53 am

Alexa9 wrote:
Sun Nov 26, 2017 8:54 pm
bottlecap wrote:
Sun Nov 26, 2017 8:35 pm
No one here says to keep money you can't afford to lose in bonds. We almost uniformly recommend CDs or savings account.

JT
Taylor Larimore wrote:
Wed Sep 06, 2017 10:43 pm

My "Bond Fund Philosophy" is simple:

Money that I cannot afford to lose is in cash and bonds (Vanguard Total Bond Market Index Fund).

Best wishes.
Taylor
I don’t know the context of the post, but nearly everyone here recommends cash for money “you can’t afford to lose," because, well, everyone knows bonds can lose money.

Nonetheless, I'm certain that Mr. Larimore understands bond risk. I don’t know about "people" because they are an unquantifiable benchmark.

JT

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Re: Bonds Are Riskier Than People Think

Post by Call_Me_Op » Mon Nov 27, 2017 8:34 am

eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I do not agree with this - in the sense that CD rates are comparable to rates on bonds with the same maturity. So any statement regarding CD's not keeping-up with inflation would also apply to bonds.
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Re: Bonds Are Riskier Than People Think

Post by nisiprius » Mon Nov 27, 2017 9:10 am

Alexa9, if you feel uncomfortable with bonds and comfortable with bank CDs, you should go with bank CDs. It's your money, your responsibility, you are the one who has to sleep at night. Whatever the (weak) case to be made for sticking with e.g. Vanguard Total Bond instead of CDs, it's not worth it if Total Bond just makes you uncomfortable for any reason.

But, "bonds are riskier than people think?" I don't like that at all. What are the "people," what do they "think," and what do you mean by "bonds?"

Your illustration of the BND ETF experiencing a -9% glitch that lasted several days (blue) is very interesting and I thank you for it. I didn't know about it. But to my way of thinking that doesn't illustrate a "bond" risk, it illustrate an "ETF" risk. In exchange for the benefits of ETFs, you are incurring the risks of trusting the market rather than a fund provider to pay you the net asset value (NAV).

I say it's not a "bond" risk, because the net asset value did not show that dip. The market value of the individual bonds within the ETF did not dip. All that happened was that on 10/10/2008, if you wanted to sell this particular package of bonds on the market, prospective buyers would have said "Yeah, I agree that your ETF is worth $75/share, but I'm a little short of cash today and I can't pay you what it's worth. I'm not flat broke, but if you want to do business today, can you come down to $70? If not, please try me again in a week, hopefully things will be back to normal."

Notice that the mutual fund, VBMFX, orange, showed no such dip. If you had gone to Vanguard that day, they would have calculated the NAV and paid you that amount, as they are obligated to according to the Investment Company Act of 1940 which requires the fund company to provide daily liquidity based on the NAV. Mutual funds hold cash to meet redemptions. They're obligated to make a book entry on your behalf based on the NAV. They then have, I believe, seven calendar days to actually come up with the money, which gives them some leeway. (They usually settle faster than that, of course). Notice that in this particular case, seven calendar days would have been enough.

Source

Image

So all you are doing is pointing out a fairly-well-known "bond ETF" issue. What's new is that you are pointing out that it affected BND for several days in 2008, which is interesting because the usual warnings concern ETFs that invest in less-liquid assets, like junk bonds.

You've pointed out:

(a) a -9% dip in a bond ETF, which is alarming if you didn't expect that from something with the word "bond" in its name, that

(b) lasted perhaps three or four days, and

(c) affected only the ETF and did not affect mutual fund holders, and

(d) did not reflect a drop in the market value of the underlying bond assets, only the willingness of market participants to buy one particular package of bonds.
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Re: Bonds Are Riskier Than People Think

Post by flamesabers » Mon Nov 27, 2017 12:04 pm

IMO, money you can't afford to lose should be kept in FDIC-insured products, not bonds.

In regards to favoring CDs vs. bond funds for fixed income, I think it really depends on your circumstances. If you rely on this portion of fixed income to pay your routine expenses, I think CDs are the better choice as the interest is guaranteed and you don't have to worry about downturns in the market when you liquidate a CD. If on the other hand this income is used for preserving the value of your portfolio, I think bond funds are a better choice particularly since they require far less maintenance then CDs.

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Re: Bonds Are Riskier Than People Think

Post by dm200 » Mon Nov 27, 2017 12:19 pm

flamesabers wrote:
Mon Nov 27, 2017 12:04 pm
IMO, money you can't afford to lose should be kept in FDIC-insured products, not bonds.
In regards to favoring CDs vs. bond funds for fixed income, I think it really depends on your circumstances. If you rely on this portion of fixed income to pay your routine expenses, I think CDs are the better choice as the interest is guaranteed and you don't have to worry about downturns in the market when you liquidate a CD. If on the other hand this income is used for preserving the value of your portfolio, I think bond funds are a better choice particularly since they require far less maintenance then CDs.
Very good points..

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Re: Bonds Are Riskier Than People Think

Post by TomatoTomahto » Mon Nov 27, 2017 12:56 pm

flamesabers wrote:
Mon Nov 27, 2017 12:04 pm
IMO, money you can't afford to lose should be kept in FDIC-insured products, not bonds.
“Can’t afford to lose” is vague, or extreme. My liability matching portfolio (LMP) is mostly in Total Bond Market (TBM). It is roughly 30x residual expenses after SS and pensions, probably more. It would suck to have this portfolio go to $0, but how likely is that? I think that’s extreme. Is it safe enough to think that, at worst, my LMP would go to 25x expenses? 20x?

Perhaps I just don’t know how to do this, but I think keeping 30x expenses in a tax deferred account in CDs would be a PITA. TBM is easy. A Stable Value Fund is easy, but not necessarily bullet proof. I-bonds are easy, but don’t scale.

Maybe I just don’t have enough sense to be scared, but I’m not scared of the portion of my portfolio in TBM.

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Alexa9
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Re: Bonds Are Riskier Than People Think

Post by Alexa9 » Mon Nov 27, 2017 1:56 pm

nisiprius wrote:
Mon Nov 27, 2017 9:10 am
But, "bonds are riskier than people think?" I don't like that at all. What are the "people," what do they "think," and what do you mean by "bonds?"
I am referring to Vanguard Total Bond Market and Vanguard Total International Bond Market. The most widely recommended bond funds by Vanguard and Bogleheads and used in Lifestrategy/Target Date Funds. I am referring to the average investor and Boglehead. Bonds are often touted as being much safer than stocks but they still have much more risk than CD's in a severe global downturn which is very possible. I admit I'm somewhat playing devil's advocate here.

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Re: Bonds Are Riskier Than People Think

Post by flamesabers » Mon Nov 27, 2017 2:10 pm

TomatoTomahto wrote:
Mon Nov 27, 2017 12:56 pm
flamesabers wrote:
Mon Nov 27, 2017 12:04 pm
IMO, money you can't afford to lose should be kept in FDIC-insured products, not bonds.
“Can’t afford to lose” is vague, or extreme. My liability matching portfolio (LMP) is mostly in Total Bond Market (TBM). It is roughly 30x residual expenses after SS and pensions, probably more. It would suck to have this portfolio go to $0, but how likely is that? I think that’s extreme. Is it safe enough to think that, at worst, my LMP would go to 25x expenses? 20x?

Perhaps I just don’t know how to do this, but I think keeping 30x expenses in a tax deferred account in CDs would be a PITA. TBM is easy. A Stable Value Fund is easy, but not necessarily bullet proof. I-bonds are easy, but don’t scale.

Maybe I just don’t have enough sense to be scared, but I’m not scared of the portion of my portfolio in TBM.
I would define "can't afford to lose" as money you don't want to have invested during a downturn in the market.

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Re: Bonds Are Riskier Than People Think

Post by avalpert » Mon Nov 27, 2017 2:13 pm

Alexa9 wrote:
Mon Nov 27, 2017 1:56 pm
nisiprius wrote:
Mon Nov 27, 2017 9:10 am
But, "bonds are riskier than people think?" I don't like that at all. What are the "people," what do they "think," and what do you mean by "bonds?"
I am referring to Vanguard Total Bond Market and Vanguard Total International Bond Market. The most widely recommended bond funds by Vanguard and Bogleheads and used in Lifestrategy/Target Date Funds. I am referring to the average investor and Boglehead. Bonds are often touted as being much safer than stocks but they still have much more risk than CD's in a severe global downturn which is very possible. I admit I'm somewhat playing devil's advocate here.
You have to be more precise on what risks you are talking about. Total Bond Market of course has more credit risk than an FDIC-insured CD, and that type of risk often shows up with severe economic downturns - but a Treasury bond fund doesn't have any more credit risk than an FDIC-insured CD. Both CDs and Bonds (of all stripes) are exposed to duration risk in similar ways. CDs and nominal bonds are exposed to inflation risk in similar ways - but inflation-protected bonds aren't so in that case bonds are less riskier than CDs.

But I don't think any of this is news to most people here - so I'm not sure your premise is accurate. The question of whether they are aligning the duration risk they take appropriately with their duration needs for the capital is one worth digging into - but also wouldn't be a novel discussion here.

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Re: Bonds Are Riskier Than People Think

Post by ofcmetz » Mon Nov 27, 2017 2:14 pm

Bonds index funds have much more liquidity than CD’s in some cases. Over time they may yield more as well. They are also the only thing some workers may have available to them if they invest primarily through 401K’s still.

I don’t find them riskier than other fixed income. They are just different.

I agree with livesoft that you have to get ok with the fact that investments may lose money. If my bond fund drops in the future it’s ok because my equity has gone up more than enough to compensate. If fixed income drops by 10% does it clean out the average investor?
Never underestimate the power of the force of low cost index funds.

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Re: Bonds Are Riskier Than People Think

Post by dbr » Mon Nov 27, 2017 7:06 pm

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
I would not feel safer with some of my fixed income in CDs. I don't agree that you risk losing a considerable amount of money in a stock bear market with bonds and I do not agree that there is any such thing as a bear market in bonds in the same sense. It is true that you do risk low return holding bonds rather than stocks and in that sense I agree with you that bonds are riskier than some people sometimes appear to think. I think a saying like keep money you can't afford to lose in bonds is simplistic and more of a truism than helpful advice.

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Re: Bonds Are Riskier Than People Think

Post by nisiprius » Mon Nov 27, 2017 7:48 pm

Alexa9 wrote:
Mon Nov 27, 2017 1:56 pm
nisiprius wrote:
Mon Nov 27, 2017 9:10 am
But, "bonds are riskier than people think?" I don't like that at all. What are the "people," what do they "think," and what do you mean by "bonds?"
I am referring to Vanguard Total Bond Market and Vanguard Total International Bond Market. The most widely recommended bond funds by Vanguard and Bogleheads and used in Lifestrategy/Target Date Funds. I am referring to the average investor and Boglehead. Bonds are often touted as being much safer than stocks but they still have much more risk than CD's in a severe global downturn which is very possible. I admit I'm somewhat playing devil's advocate here.
The most severe global downturn during my lifetime was 2008-2009. The Vanguard Total International Bond Market Fund, VTIBX didn't exist then, but the PIMCO Global Bond Fund (U.S. Dollar-Hedged) is reasonably similar, and has paralleled VTIBX fairly closely since VTIBX's inception. I agree that bond funds have more risk than CDs, it would be hard not to agree. But why do you say they have much more risk and why do you say they are riskier than the average Boglehead thinks? Please, put some numbers on that.

How bad was 2008-2009 for Total Bond (VBMFX, blue) and the PIMCO dollar-hedged bond fund (PGBIX, orange)? For comparison, the green line is Total Stock.

Source

Image

Where is all this "risk during a severe global downturn?" Or do you think the next global downturn will be much worse for bonds than the last one, and, if so, why? $10,000 invested on 12/31/2007 became $10,452 in Total Bond--you made money on Total Bond during the worst financial crisis in my lifetime. The international bond fund fell to $9,791, so you lost about 2%, again during the worst financial crisis of my lifetime. It's a loss, but it seems like a very acceptable risk--given that the stock fund fell to $4,764, losing more than half is value.

If you had put $10,000 into a five-year CD on early in 2008, you might have been earning about 4% annually, so by 3/2009 it might have been worth 15 months at 4% = $10,500. But if you'd needed the money then, there might have been a 180-day early withdrawal penalty, which would cut that down to 9 months at 4% = $10,300. Thus, if you'd needed the money in 3/2009, the CD would have give you a little bit less than Total Bond, but a little bit more than the international bond fund. In every case--Total Bond, PIMCO's international bond fund, or CD, you'd have had close to $10,000 versus less than $5,000 in the stock market.

I just don't see the big difference between bond funds and CDs, either in risk or in return. What's so bad about the two bond funds on this chart during the financial crisis?
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Re: Bonds Are Riskier Than People Think

Post by Toons » Mon Nov 27, 2017 7:52 pm

Taylor Larimore wrote:
Sun Nov 26, 2017 11:59 pm
Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Looking at recent dips in bonds in the past 20 years, I feel safer with some of my fixed income allocation in CD's with zero downside risk.
I've heard it quoted on here that you should keep the money you can't afford to lose in bonds, but feel that is not a good theory especially for retirees.
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
Anyone else feel the same way?
Alexa9:

There are many kinds of bonds. Some are very risky (junk bonds) and some are very safe (short-term Treasury bonds).


Vanguard Total Bond Market is a good quality, intermediate-term bond fund. It's worst annual decline was -2.66% in 1994. In 1995 it gained +16%.

TBM seems like a worthwhile trade-off compared with CDs or cash.


Best wishes.
Taylor

+1 :happy
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Re: Bonds Are Riskier Than People Think

Post by Finridge » Wed Nov 29, 2017 11:48 pm

I agree that "bonds are riskier than people think" but for different reasons. Subject an all cash or all bond portfolio to backtesting, and then compare to a 50/50 portfolio. The all bond portfolio probably won't fare as well as you expected it to.

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Re: Bonds Are Riskier Than People Think

Post by cfs » Thu Nov 30, 2017 12:13 am

Yes, bonds are riskier than people think. And so are equities. I have lost money in US bonds. I have lost money in international bonds. I have lost money in US equities. I have lost money in international equities. But my portfolio continues to grow significantly. Disclosure, member of the Active Retired Force since 2014, with a portfolio withdrawal rate of zero percent. Wishing you a Merry Christmas, and thanks for reading.
~ Member of the Active Retired Force since 2014 ~

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Re: Bonds Are Riskier Than People Think

Post by randomizer » Thu Nov 30, 2017 1:17 am

Alexa9 wrote:
Sun Nov 26, 2017 5:31 pm
Not only do you risk losing a considerable amount in a bear market with bonds, but you risk underperformance compared with equities in a bull market. (I realize these are two separate issues)
The real risk is not underperformance compared to equities. It's failure to maintain real purchasing power in the face of inflation.
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stemikger
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Re: Bonds Are Riskier Than People Think

Post by stemikger » Thu Nov 30, 2017 1:18 am

I like what the pros at Vanguard say in this video.

https://www.youtube.com/watch?v=rZgN6lVRytg&t=40s
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Bonds Are Riskier Than People Think

Post by Munir » Thu Nov 30, 2017 2:05 am

If one gets worried about the transient dips in bond funds (much smaller than stock funds), then one should not be in them. If one is anxious about driving on freeways, then drive on less congested country roads (which I assume are safer).

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Re: Bonds Are Riskier Than People Think

Post by triceratop » Thu Nov 30, 2017 4:14 am

Call_Me_Op wrote:
Mon Nov 27, 2017 8:34 am
eye.surgeon wrote:
Sun Nov 26, 2017 5:50 pm
Keep in mind your CD not only has risk, it is a virtually guaranteed risk that you will lose to inflation. Use CDs for money needed in the near term. It is not an investment vehicle.
I do not agree with this - in the sense that CD rates are comparable to rates on bonds with the same maturity. So any statement regarding CD's not keeping-up with inflation would also apply to bonds.
Bonds have reinvestment risk on interest payments. CDs do not. Thus there's additional risk with bonds. Also, the EWP means your "duration"(to the very limited extent that has any meaning with CDs) with a CD is quite low relative to equivalently-yielding instruments. Of course, you have to reinvest when your CD comes to maturity.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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