Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

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Stormbringer
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Stormbringer » Sun May 20, 2018 7:08 am

nisiprius wrote:
Sat May 19, 2018 2:21 pm
He never mentions Treasury inflation-protected securities (TIPS). He never says why. Are his comments supposed to apply to TIPS, too, or only to nominal bonds? I don't know. AFAIK he hasn't said.
I've followed Buffett for a long time and don't recall him ever specifically addressing TIPS, but I feel like I have a sense of what his feelings would be:
  • He doesn't like bonds, generally, because of the corrosive effect of inflation on purchasing power.
  • For that reason, all things being equal, he would prefer TIPS to other bonds of similar duration.
However:
  • Buffett thinks of investments as long term commitments. He talks in terms of owning things "forever".
  • TIPS are issued in terms of 5-30 years, putting them in the investment time horizon.
  • 30-year TIPS are yielding only about 1% real.
  • I don't think Buffett would be at all impressed with that result, and would say that stocks are going to do better over that time horizon.
Putting that all together, I think he would not recommend TIPS, but that if you insist on holding long-term bonds they are better than normal bonds because they eliminate the inflation risk.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Call_Me_Op » Sun May 20, 2018 7:16 am

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Perhaps it would help if you do not consider bonds an investment, but instead, protection against catastrophic loss. If you really want to invest all of your money in vehicles having high expected return, you need to accept the possibility of catastrophic loss.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by jeffyscott » Sun May 20, 2018 7:23 am

ralph124cf wrote:
Sat May 19, 2018 11:18 pm
Berkshire owns a lot of short term high quality "bonds" (debt instruments-many of which retail investors do not have access to).
Well, in the case of treasuries, those with maturities of 10 years or less are officially "notes" and "bills", not "bonds". Perhaps he does not classify those short term debt instruments as "bonds" or as an "investment", but just a parking place for idle cash.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by tennisplyr » Sun May 20, 2018 7:30 am

I do not have Buffet's wealth, goals or risk tolerance therefore I do not find his comments relevant for me.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by abuss368 » Sun May 20, 2018 9:00 am

Stormbringer wrote:
Sun May 20, 2018 7:08 am
nisiprius wrote:
Sat May 19, 2018 2:21 pm
He never mentions Treasury inflation-protected securities (TIPS). He never says why. Are his comments supposed to apply to TIPS, too, or only to nominal bonds? I don't know. AFAIK he hasn't said.
I've followed Buffett for a long time and don't recall him ever specifically addressing TIPS, but I feel like I have a sense of what his feelings would be:
  • He doesn't like bonds, generally, because of the corrosive effect of inflation on purchasing power.
  • For that reason, all things being equal, he would prefer TIPS to other bonds of similar duration.
However:
  • Buffett thinks of investments as long term commitments. He talks in terms of owning things "forever".
  • TIPS are issued in terms of 5-30 years, putting them in the investment time horizon.
  • 30-year TIPS are yielding only about 1% real.
  • I don't think Buffett would be at all impressed with that result, and would say that stocks are going to do better over that time horizon.
Putting that all together, I think he would not recommend TIPS, but that if you insist on holding long-term bonds they are better than normal bonds because they eliminate the inflation risk.
Considering that Berkshire Hathaway invests substantially in Treasury bonds, I do not recall in reading their annual report over the years that they had any position in TIPS.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by drk » Sun May 20, 2018 10:36 am

abuss368 wrote:
Sun May 20, 2018 9:00 am
Stormbringer wrote:
Sun May 20, 2018 7:08 am
nisiprius wrote:
Sat May 19, 2018 2:21 pm
He never mentions Treasury inflation-protected securities (TIPS). He never says why. Are his comments supposed to apply to TIPS, too, or only to nominal bonds? I don't know. AFAIK he hasn't said.
I've followed Buffett for a long time and don't recall him ever specifically addressing TIPS, but I feel like I have a sense of what his feelings would be:
  • He doesn't like bonds, generally, because of the corrosive effect of inflation on purchasing power.
  • For that reason, all things being equal, he would prefer TIPS to other bonds of similar duration.
However:
  • Buffett thinks of investments as long term commitments. He talks in terms of owning things "forever".
  • TIPS are issued in terms of 5-30 years, putting them in the investment time horizon.
  • 30-year TIPS are yielding only about 1% real.
  • I don't think Buffett would be at all impressed with that result, and would say that stocks are going to do better over that time horizon.
Putting that all together, I think he would not recommend TIPS, but that if you insist on holding long-term bonds they are better than normal bonds because they eliminate the inflation risk.
Considering that Berkshire Hathaway invests substantially in Treasury bonds, I do not recall in reading their annual report over the years that they had any position in TIPS.
Treasury Bills, not bonds, with an average maturity of 88 days.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by abuss368 » Sun May 20, 2018 10:40 am

That was my recollection. Thank you for providing a link to the annual reports.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by nedsaid » Sun May 20, 2018 11:53 am

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
My portfolio has been a bit stock heavy for someone my age for the reasons listed above. Bonds are not a very appealing investment right now but on the other hand I am age 58 and want to dampen the volatility of an otherwise all-stock portfolio. From all my reading, bonds seem to be the simplest and cheapest way of dampening volatility, I am pretty nervous about the alternative investments often discussed here. I was 94% stocks until about age 40. Been there, done that, bought that T-Shirt. I am now at 66% stocks, that still seems like I am hanging way out there at my age. Warren Buffett I am not.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by nisiprius » Sun May 20, 2018 12:52 pm

Stormbringer wrote:
Sun May 20, 2018 7:08 am
nisiprius wrote:
Sat May 19, 2018 2:21 pm
He never mentions Treasury inflation-protected securities (TIPS). He never says why. Are his comments supposed to apply to TIPS, too, or only to nominal bonds? I don't know. AFAIK he hasn't said.
I've followed Buffett for a long time and don't recall him ever specifically addressing TIPS, but I feel like I have a sense of what his feelings would be:
  • He doesn't like bonds, generally, because of the corrosive effect of inflation on purchasing power.
  • For that reason, all things being equal, he would prefer TIPS to other bonds of similar duration.
However:
  • Buffett thinks of investments as long term commitments. He talks in terms of owning things "forever".
  • TIPS are issued in terms of 5-30 years, putting them in the investment time horizon.
  • 30-year TIPS are yielding only about 1% real.
  • I don't think Buffett would be at all impressed with that result, and would say that stocks are going to do better over that time horizon.
Putting that all together, I think he would not recommend TIPS, but that if you insist on holding long-term bonds they are better than normal bonds because they eliminate the inflation risk.
My point is that you needed to say "I feel like I have a sense." You couldn't just quote Buffett. With Bogle, for example, his public sound bites are often backed up by whole chapters of Common Sense on Mutual Funds, with charts and data.

Yes, you made sensible guesses and I agree with them, but you are missing my main point, which is that Buffett does not explain himself. We all, almost unconsciously, fill in what he says with interpretation, extrapolation, and guesswork. We still do not know, for example, what Buffett, who frequently suggests Vanguard's S&P 500 fund, would say if you pointed out that Vanguard's total stock market fund has the same expense ratio as the S&P 500 fund. Would he say "In the case of Vanguard, sure, the Total Stock fund is a hair better, but I just wanted to keep things simple?" Or would he say "I think small-caps are nonsense, skip 'em, just go with the S&P?" The point here is not "what would you guess," the point is that you have to guess.
Last edited by nisiprius on Sun May 20, 2018 2:59 pm, edited 1 time in total.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by david1082b » Sun May 20, 2018 1:31 pm

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Bonds were pretty interesting from 2000 to 2010, when the S&P 500 did awful and total bond index did great. That couldn't possibly happen again though, could it?

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by MnD » Sun May 20, 2018 2:13 pm

Call_Me_Op wrote:
Sun May 20, 2018 7:16 am
Perhaps it would help if you do not consider bonds an investment, but instead, protection against catastrophic loss. If you really want to invest all of your money in vehicles having high expected return, you need to accept the possibility of catastrophic loss.
I think of catastrophic loss like broad equity indices declining 80% and never recovering in my lifetime. In that situation I don't think you count on bonds for protection given that this protection requires issuers to meet their interest and maturity obligations along with the absence of currency debasement.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by willthrill81 » Sun May 20, 2018 4:00 pm

ralph124cf wrote:
Sat May 19, 2018 11:18 pm
Buffet says that bonds are a terrible investment. I can agree with that.

He does NOT say don't buy bonds. Berkshire owns a lot of short term high quality "bonds" (debt instruments-many of which retail investors do not have access to). This provides liquidity for future opportunities that Buffet does not see at this moment.

Ralph
:thumbsup

I really don't think that many Bogleheads would argue that something cannot be considered a 'good investment' unless it has a positive expected return. Right now, 10 year treasuries are paying about 3.05%, and inflation over the last 12 months was about 2.5%. So if inflation remains at that level, we can expect 10 year treasuries to only have a real yield of about .5%. That's not what I would call 'good'.

But as the saying goes, you don't own bonds to help you eat well. You own bonds to help you sleep well. In that latter regard, they generally do a fairly good job, but not always even in that regard (e.g. late 1970s).
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by triceratop » Sun May 20, 2018 4:22 pm

siamond wrote:
Sat May 19, 2018 1:11 pm
zmaqoptyxbglp wrote:
Fri May 18, 2018 11:29 pm
US Stocks right now have a forward earnings yield of around 6%. Add in around 2% in earnings growth (tagged to real GDP growth) and that is almost an 8% real return. That's not really that bad.
I am afraid you are confusing earning yield and dividend yield. Expected (real) returns for the US stock market in the coming 10/15 years are WAY lower than 8% nowadays. Plus remember those are expected returns, in the statistical sense, hence the center point of a wide range of possibilities. Here are two useful wiki pages:
https://www.bogleheads.org/wiki/Histori ... ed_returns
https://www.bogleheads.org/wiki/P/E
zmaqoptyxblp is referring to forward estimates of E/P, or forward earnings yield: S&P500 Forward E/P.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by siamond » Sun May 20, 2018 5:33 pm

triceratop wrote:
Sun May 20, 2018 4:22 pm
siamond wrote:
Sat May 19, 2018 1:11 pm
zmaqoptyxbglp wrote:
Fri May 18, 2018 11:29 pm
US Stocks right now have a forward earnings yield of around 6%. Add in around 2% in earnings growth (tagged to real GDP growth) and that is almost an 8% real return. That's not really that bad.
I am afraid you are confusing earning yield and dividend yield. Expected (real) returns for the US stock market in the coming 10/15 years are WAY lower than 8% nowadays. Plus remember those are expected returns, in the statistical sense, hence the center point of a wide range of possibilities. Here are two useful wiki pages:
https://www.bogleheads.org/wiki/Histori ... ed_returns
https://www.bogleheads.org/wiki/P/E
zmaqoptyxblp is referring to forward estimates of E/P, or forward earnings yield: S&P500 Forward E/P.
I understand. My point remains. Combining earning yield and earnings growth doesn't make much sense.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by triceratop » Sun May 20, 2018 5:40 pm

siamond wrote:
Sun May 20, 2018 5:33 pm
triceratop wrote:
Sun May 20, 2018 4:22 pm
siamond wrote:
Sat May 19, 2018 1:11 pm
zmaqoptyxbglp wrote:
Fri May 18, 2018 11:29 pm
US Stocks right now have a forward earnings yield of around 6%. Add in around 2% in earnings growth (tagged to real GDP growth) and that is almost an 8% real return. That's not really that bad.
I am afraid you are confusing earning yield and dividend yield. Expected (real) returns for the US stock market in the coming 10/15 years are WAY lower than 8% nowadays. Plus remember those are expected returns, in the statistical sense, hence the center point of a wide range of possibilities. Here are two useful wiki pages:
https://www.bogleheads.org/wiki/Histori ... ed_returns
https://www.bogleheads.org/wiki/P/E
zmaqoptyxblp is referring to forward estimates of E/P, or forward earnings yield: S&P500 Forward E/P.
I understand. My point remains. Combining earning yield and earnings growth doesn't make much sense.
Fair enough. I wouldn't use Earning yield but instead perhaps Shareholder yield.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Quickfoot » Sun May 20, 2018 6:48 pm

ralph124cf wrote:
Sat May 19, 2018 11:18 pm
Buffet says that bonds are a terrible investment. I can agree with that.

He does NOT say don't buy bonds. Berkshire owns a lot of short term high quality "bonds" (debt instruments-many of which retail investors do not have access to). This provides liquidity for future opportunities that Buffet does not see at this moment.

Ralph
Precisely, bonds are a horrendous investment which is why they shouldn't be bought as an investment at all. Bonds should be bought to decrease portfolio volatility caused by equities to the point the overall portfolio achieves the desired goal without exceeding the portfolio owner's ability or willingness to assume risk. I perceive the statement the same as what wise people say about housing, "a house is not an investment, it it is a place to live, if you are lucky the house value will slightly beat inflation and after selling costs and maintenance you MIGHT break even."

The message isn't "don't buy bonds" it is "don't view the bonds you buy as an investment, while they may tame volatility they also lesson the returns of your actual investments, equities."

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by AndrewXnn » Sun May 20, 2018 7:51 pm

Good point;

If an investor wishes to reduce the volatility of their portfolio, then they would be better off allocating a portion to cash or a money market fund.

Rising interest rates are making MM funds more appealing then they were just a year ago. Meanwhile, Bonds have fallen in value and will likely continue to do so since inflation appears to be making a come back.

The fact that bonds have historically been a good balance within a portfolio is based on the 30 year bull market that they have enjoyed. However, that's because inflation and interest rates have been falling for that period. This is not in the near term future, at least to any significant degree.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Johnnie » Sun May 20, 2018 8:30 pm

The possibility is scary that the glass has turned on 35 years of interest rate declines, which had been preceded by a similar length period of rising rates. How well do all the formulas and break-evens work when rates grind higher for decades, notwithstanding the usual perturbations along the way?

With such notions in mind, and the title of the thread, right now two- and three-year CDs at 2.75 and 3.00 percent at Schwab (and everywhere) are looking attractive.

I have read (probably here) but don't know if it's true, that CDs are one area where the little guy has an edge over the big boys, because the latter can't be bothered with $250,000 lots. And right now a good number of banks want to sell ≤ $250k lots at good rates with a government guarantee.

I've never owned a CD but am in the process of dipping a toe in with a six month 2 percenter in a rollover IRA at Schwab.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by dbr » Sun May 20, 2018 8:47 pm

Johnnie wrote:
Sun May 20, 2018 8:30 pm
The possibility is scary that the glass has turned on 35 years of interest rate declines, which had been preceded by a similar length period of rising rates. How well do all the formulas and break-evens work when rates grind higher for decades, notwithstanding the usual perturbations along the way?
They work that it will be a benefit for investors to see higher interest rates unless driven by inflation. The scariest scenario for someone retiring today would be that real interest rates would not go up over the next thirty years and investors would be stuck with safe fixed income yielding less than 1% real, the real yield on recent 30 year TIPS, which is the correct reference for the risk free asset for a long term investor.

There is no basis for the idea that 2015, for example, should be the beginning of a repeat of the interest rate rise from 1945 to 1980 and fall from 1980 to 2015.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bondsr4me » Sun May 20, 2018 8:48 pm

Quickfoot wrote:
Sun May 20, 2018 6:48 pm
ralph124cf wrote:
Sat May 19, 2018 11:18 pm
Buffet says that bonds are a terrible investment. I can agree with that.

He does NOT say don't buy bonds. Berkshire owns a lot of short term high quality "bonds" (debt instruments-many of which retail investors do not have access to). This provides liquidity for future opportunities that Buffet does not see at this moment.

Ralph
Precisely, bonds are a horrendous investment which is why they shouldn't be bought as an investment at all. Bonds should be bought to decrease portfolio volatility caused by equities to the point the overall portfolio achieves the desired goal without exceeding the portfolio owner's ability or willingness to assume risk. I perceive the statement the same as what wise people say about housing, "a house is not an investment, it it is a place to live, if you are lucky the house value will slightly beat inflation and after selling costs and maintenance you MIGHT break even."

The message isn't "don't buy bonds" it is "don't view the bonds you buy as an investment, while they may tame volatility they also lesson the returns of your actual investments, equities."
+1

I agree with the above.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by willthrill81 » Sun May 20, 2018 9:47 pm

dbr wrote:
Sun May 20, 2018 8:47 pm
The scariest scenario for someone retiring today would be that real interest rates would not go up over the next thirty years and investors would be stuck with safe fixed income yielding less than 1% real, the real yield on recent 30 year TIPS, which is the correct reference for the risk free asset for a long term investor.
I can think of some scenarios scarier than that for someone retiring today. :|
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by md&pharmacist » Sun May 20, 2018 9:55 pm

I also invest in commercial real estate, my own business, fine art - in addition to stock funds.

I don't do any bonds.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by visualguy » Sun May 20, 2018 10:05 pm

md&pharmacist wrote:
Sun May 20, 2018 9:55 pm
I also invest in commercial real estate, my own business, fine art - in addition to stock funds.

I don't do any bonds.
+1

It's not a good idea to put everything in the stock market, but that doesn't mean that it makes sense to put a lot of money (or any money) in bonds.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by NoHeat » Sun May 20, 2018 10:31 pm

Regarding the allocation of 90% stock / 10% bond that Buffett recommends for his future widow — it’s worth remembering that her income needs would be met safely by the return on a cautious 50/50 allocation of a certain sum. But if a larger sum will be hers to invest, the excess capital might as well be invested 100% in stocks, to build wealth. Combine these two buckets, 50/50 for need and 100/0 for excess, and you could easily end up with 90/10 for the overall large portfolio.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by willthrill81 » Sun May 20, 2018 10:40 pm

NoHeat wrote:
Sun May 20, 2018 10:31 pm
Regarding the allocation of 90% stock / 10% bond that Buffett recommends for his future widow — it’s worth remembering that her income needs would be met safely by the return on a cautious 50/50 allocation of a certain sum. But if a larger sum will be hers to invest, the excess capital might as well be invested 100% in stocks, to build wealth. Combine these two buckets, 50/50 for need and 100/0 for excess, and you could easily end up with 90/10 for the overall large portfolio.
She could put the entire amount into pretty much anything and live better than virtually anyone here for the rest of her days, with the same being true of their heirs.

When you have a large enough sum of money, volatility doesn't really matter. Cutting back from $10 million to $5 million of annual spending, for instance, doesn't mean that you're eating cat food.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by permport » Sun May 20, 2018 10:44 pm

willthrill81 wrote:
Sun May 20, 2018 10:40 pm
NoHeat wrote:
Sun May 20, 2018 10:31 pm
Regarding the allocation of 90% stock / 10% bond that Buffett recommends for his future widow — it’s worth remembering that her income needs would be met safely by the return on a cautious 50/50 allocation of a certain sum. But if a larger sum will be hers to invest, the excess capital might as well be invested 100% in stocks, to build wealth. Combine these two buckets, 50/50 for need and 100/0 for excess, and you could easily end up with 90/10 for the overall large portfolio.
She could put the entire amount into pretty much anything and live better than virtually anyone here for the rest of her days, with the same being true of their heirs.

When you have a large enough sum of money, volatility doesn't really matter. Cutting back from $10 million to $5 million of annual spending, for instance, doesn't mean that you're eating cat food.
It's so true. It's like being up 20 points of material in a chess game and not having to fret about the precision of your next move. In the end it hardly matters.
Buy right and hold tight.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Tyler Aspect » Sun May 20, 2018 11:01 pm

We are Bogleheads, not Buffetheads. Buffett has a heavy institutional leaning that some of his personal finance recommendations sound very cryptic and strange.
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by sschullo » Sat May 26, 2018 4:39 pm

Rainier wrote:
Sat May 19, 2018 12:40 pm
sschullo wrote:
Sat May 19, 2018 11:37 am
I invest 70% of my portfolio in bonds, not because of returns, but because of balance. Buffett doesn't have to worry about balancing his portfolio (are you kidding?!). He is in a different universe. And what he says is great for him, and he is correct for him.
As a mere mortal and a nobody, I have a balanced portfolio because if I put too much equity risk in my portfolio as a 70-year old, I could be in deep trouble--losing 50% of my equity position would be very damaging for the rest of my short life. I had already lost 70% during the 2000 tech crash with a 95% equity exposure, and I will never want to make that mistake again. As a 55-year-old at the time, I was extremely lucky to have just enough time to recover and that I had real estate investments.

Steve
Buffett isn't saying bonds are a horrible investment for himself with his billions of dollars, he is saying they are a horrible investment for everybody.
EVERYBODY! Wow, that's quite a statement.

How did you lose 70% in the 2000 crash? Were you 100% in the NASDAQ? Did you invest at the very top and sell out at the very bottom? Buffett has never advocated for being 100% in the NASDAQ.

Yes in the technology sector, but folks in 2008 lost up to 50% of equities. That's why I wrote 50%, if I had all of my portfolio in equities.

Look, I like Buffett and what he has done. When any guru says that bonds are horrible for everybody, well, that's just plain nonsense, wrong and anti-boglehead. But even Buffett has a right to his opinion.
He loves the capitalistic system and he made his money from it and not bonds. I get it, but not for little old me! I have a few bucks saved for my retirement, and its because of 70% bonds and 30% equities fully diversified and extremely low costs, since 2006. I survived the greatest stock market crash since the Great Depression in 2008. Lost 11.8% because of my 70% bond allocation.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by jalbert » Sun May 27, 2018 3:54 am

Re: residential housing as an investment...
- Long term returns about equal to inflation (this is my favorite
That is doutful. Robert Shiller, co-creator of the Case-Shiller index maintains that over long enough periods, house prices track the inflation rate. This would mean that they have a real return consisting of rental income less expenses.
Index fund investor since 1987.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by JoMoney » Sun May 27, 2018 5:09 am

jalbert wrote:
Sun May 27, 2018 3:54 am
Re: residential housing as an investment...
- Long term returns about equal to inflation (this is my favorite
That is doutful. Robert Shiller, co-creator of the Case-Shiller index maintains that over long enough periods, house prices track the inflation rate. This would mean that they have a real return consisting of rental income less expenses.
I believe the way Shiller presents it, is that property (broadly speaking, ignoring differences in specific markets) goes up at about the rate of inflation.
That's just looking at property itself, not at the possibility of deriving income from farming, natural resources, rents, or other business purposes that add to potential total return (but also have expenses, like building and maintaining a structure that depreciates over time)... on top of the property taxes, which in some places (like parts of Texas) can be higher than inflation.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by SGM » Sun May 27, 2018 5:56 am

Buffett can demand higher interest or dividend rates from corporations. I recall 30 years ago he bought $400 million a special UAL preferred issue. Berkshire was getting a higher dividend rate than the preferred that was available to the public. He later wrote off his investment a total loss, however that put pressure on UAL and he did receive his dividends and had no loss.

I don't see bonds so much as an investment but as a way to decrease volatility. This is important to me early in retirement as I no longer have much human capital. While I was accumulating I did not own bonds as I could tolerate the volatility without having to sell in a bear market and flet the added risk would likely be rewarded with a greater return in the long haul to retirement. I have been lucky.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by UpperNwGuy » Sun May 27, 2018 6:15 am

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Buffet says to invest in stocks, period, so I don't understand your question. If you want to invest in something other than stocks, you are already rejecting Buffet's advice, so why adhere so rigidly to his dismissal of bonds?

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by Call_Me_Op » Fri Jun 08, 2018 6:47 am

MnD wrote:
Sun May 20, 2018 2:13 pm
Call_Me_Op wrote:
Sun May 20, 2018 7:16 am
Perhaps it would help if you do not consider bonds an investment, but instead, protection against catastrophic loss. If you really want to invest all of your money in vehicles having high expected return, you need to accept the possibility of catastrophic loss.
I think of catastrophic loss like broad equity indices declining 80% and never recovering in my lifetime. In that situation I don't think you count on bonds for protection given that this protection requires issuers to meet their interest and maturity obligations along with the absence of currency debasement.
That has never happened before, so why would you consider that a realistic possibility? Quantum theory holds-out a minute possibility that I will vanish tomorrow, but I am not incorporating that possibility into my investment policy statement.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bondsr4me » Fri Jun 08, 2018 7:08 am

I greatly admire and respect Warren Buffett. He is, IMHO, the greatest investor of all time.

Not only is he a great investor, he is a great human being. His, and Bill Gates philanthropy are proof of that.

But I don't invest like Warren because I am not Warren.
I do what is best for me based on my personal financial situation.

I don't look at bonds as being an "investment".
Bonds for me are a source to produce a steady, reliable income; not a growth asset.
Dividends are OK; I own a few dividend producing assets.
But dividends are not as reliable as bond interest.
Dividends are discretionary; bond interest is a legal obligation.
Between the two, I'll take bond interest...or some of both.

Have a great weekend.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by tibbitts » Fri Jun 08, 2018 7:46 am

Hasn't WB always said bonds are a terrible investment? Even when, at least in retrospect, they weren't. I think if the treasury runs a one-day special offering unlimited purchase of 3.6% I-bonds - with credit cards no less - most of us won't wait to discuss the merits in any "why not 100% bonds?" or "could WB be wrong?" threads before hitting that "buy" button with every available dollar.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by CyclingDuo » Fri Jun 08, 2018 8:45 am

sschullo wrote:
Sat May 26, 2018 4:39 pm
Rainier wrote:
Sat May 19, 2018 12:40 pm
sschullo wrote:
Sat May 19, 2018 11:37 am
I invest 70% of my portfolio in bonds, not because of returns, but because of balance. Buffett doesn't have to worry about balancing his portfolio (are you kidding?!). He is in a different universe. And what he says is great for him, and he is correct for him.
As a mere mortal and a nobody, I have a balanced portfolio because if I put too much equity risk in my portfolio as a 70-year old, I could be in deep trouble--losing 50% of my equity position would be very damaging for the rest of my short life. I had already lost 70% during the 2000 tech crash with a 95% equity exposure, and I will never want to make that mistake again. As a 55-year-old at the time, I was extremely lucky to have just enough time to recover and that I had real estate investments.

Steve
Buffett isn't saying bonds are a horrible investment for himself with his billions of dollars, he is saying they are a horrible investment for everybody.
EVERYBODY! Wow, that's quite a statement.

How did you lose 70% in the 2000 crash? Were you 100% in the NASDAQ? Did you invest at the very top and sell out at the very bottom? Buffett has never advocated for being 100% in the NASDAQ.

Yes in the technology sector, but folks in 2008 lost up to 50% of equities. That's why I wrote 50%, if I had all of my portfolio in equities.

Look, I like Buffett and what he has done. When any guru says that bonds are horrible for everybody, well, that's just plain nonsense, wrong and anti-boglehead. But even Buffett has a right to his opinion.
He loves the capitalistic system and he made his money from it and not bonds. I get it, but not for little old me! I have a few bucks saved for my retirement, and its because of 70% bonds and 30% equities fully diversified and extremely low costs, since 2006. I survived the greatest stock market crash since the Great Depression in 2008. Lost 11.8% because of my 70% bond allocation.
Curious to touch base with your experiences, Steve.

We, too, were rather equity exposed in 2000-2002 which meant we suffered tremendous declines in the technology sector portion of our portfolio compared to the rest of the portfolio. It took a long time for that portion to bounce back. Time was on our side as we were ages 39 & 43 at the time of the dot.com bust. DCA'd every month into retirement plans and college funds continued through it all and beyond. Once again, the same steep decline in the financial crisis while still being rather equity exposed (80/20 in our portfolio, 100% equity in the college funds for the kids) in 2008-09 where declines were worse than the dot.com bust for us. Again, we DCA'd every 2 weeks and month through employer sponsored retirement plans and college funds for the kids and probably were numb to it all this time around due to raising children, coaching sports, attending everything children were involved in, and pretty much did nothing as time was still on our side. It was after 2009, based on our ages, we began slowly changing asset allocation to include a higher percentage in bonds as we altered our monthly contributions in our retirement plans. Ages 47 & 52 during the financial crisis meant we still had time, but nothing like a second whammy of 50%+ declines to rattle one's investing psyche. Slowly moved to 70/30 in years following 2009, picked up quite a few fire sale prices in the college funds with new funds for the kids and trudged on with our routine. Now, I've reached the age you were in 2000 at the time of that crash. Spouse has moved her AA to 60/40, and I'm slowly following the glide path moving from 70/30 in the direction of 1% more bonds per year.

So, now that you are in retirement at age 70 with a 30/70 allocation, what are your thoughts on the glide path?

Image
https://www.kitces.com/blog/managing-po ... -red-zone/

Is your asset allocation not following along the path of rising equity portion as the V shaped equity glidepath demonstrates above as you move from age 65 to 81? In other words, with the move in equities from 2009 to 2018, are you purposely rebalancing to keep your AA to 30/70? Curious for those that are currently in retirement how they handle the asset allocation from age 65 - 81 (the period you are in right now) through the red zone to see if they are allowing the equity portion to rise or not.

Bond Tent through the red zone...

Image

Obviously, we all need to include other streams of income when choosing asset allocation in the red zone (pension, Social Security, rental income, royalty income, annuity income, gig economy income, etc...). Anyway, just curious if your plan was to remain at 30/70, or will the glidepath as you move through the red zone end up with your equity portion rising as the right side of the bond tent defense dissipates.

TIA
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by md&pharmacist » Fri Jun 08, 2018 9:13 am

Hammered in the dot com bust and in 2008. I lost nothing in either. And you're telling me not to exit on the next beating? Market timing has worked out extremely well for those who know how to do it objectively - most people probably do it on emotion and not information. If my timing is wrong I have a strategy for that too, I buy back into better performing funds so it becomes a win win.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by protagonist » Fri Jun 08, 2018 9:26 am

Stormbringer wrote:
Sat May 19, 2018 7:54 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Completely agree, but I don't think people hold bonds because they think they are a good investment. They hold them because of their defensive characteristics. They drag down your overall return, but also reduce the volatility of your portfolio.
CDs also reduce the volatility of your portfolio, but they don't lose money when interest rates rise. At worst, they may not keep up with inflation, and with a generous enough EWP that need not be too much of a drag on one's portfolio. On the other hand, bonds can potentially positively correlate strongly with equities in a bear market.
I do not worship a person's opinion just because he or she is an expert or a guru, even one I admire. Brilliant people are often spectacularly wrong. But I think what Buffett says makes perfect sense in this case. Interest rates are still near historic lows and positioned to rise. Holding much in bond investments now is like watching one's ship slowly sinking while waiting for a rescue boat. That seems obvious to me. Maybe you will come out ahead and gloat over your brilliant decision and call me an idiot....but the odds are against you. You'd be better off going to Vegas, where the odds are slightly against you but the drinks are cheap and you will have more fun.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by 2b2 » Fri Jun 08, 2018 10:38 am

Bonds are terrible investments in the same way that ballast is a terrible cargo.

2b2

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by dbr » Fri Jun 08, 2018 10:46 am

protagonist wrote:
Fri Jun 08, 2018 9:26 am
Stormbringer wrote:
Sat May 19, 2018 7:54 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Completely agree, but I don't think people hold bonds because they think they are a good investment. They hold them because of their defensive characteristics. They drag down your overall return, but also reduce the volatility of your portfolio.
CDs also reduce the volatility of your portfolio, but they don't lose money when interest rates rise. At worst, they may not keep up with inflation, and with a generous enough EWP that need not be too much of a drag on one's portfolio. On the other hand, bonds can potentially positively correlate strongly with equities in a bear market.
I do not worship a person's opinion just because he or she is an expert or a guru, even one I admire. Brilliant people are often spectacularly wrong. But I think what Buffett says makes perfect sense in this case. Interest rates are still near historic lows and positioned to rise. Holding much in bond investments now is like watching one's ship slowly sinking while waiting for a rescue boat. That seems obvious to me. Maybe you will come out ahead and gloat over your brilliant decision and call me an idiot....but the odds are against you. You'd be better off going to Vegas, where the odds are slightly against you but the drinks are cheap and you will have more fun.
CDs are also a terrible investment from the point of view taken by Buffett. His statement merely does not actually say so, just like nobody knows if recommending the S&P 500 is supposed to mean not to invest in TSM. 90/10 means 90% don't invest in CDs either. Is it true that what he mentioned for the 10% was T-bills or something like that? Nobody is going to lose principal rolling over T-bills.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by kaeltor » Fri Jun 08, 2018 12:45 pm

abuss368 wrote:
Sat May 19, 2018 1:28 pm
The financial crisis taught a really valuable lesson. And that is, bonds provided: 1) safety, and more importantly 2) a pool of assets that were available to rebalance to stocks. In hindsight, staying the course was the best decision we made.
There's posts on this forum and a lot mention bonds dropping during the '08 financial crisis


Date: Thu Oct 09, 2008 4:09 pm
"I have been retired for 10 years. I am one who has said over and over again. Stay the course. Look for the long term. Yeah, sure. That's fine until today. Today did it. I am just starting to be scared so that I won't tell my wife what happened today...stocks down...bonds down...I'm down. "


viewtopic.php?t=25126

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by bondsr4me » Fri Jun 08, 2018 1:05 pm

kaeltor wrote:
Fri Jun 08, 2018 12:45 pm
abuss368 wrote:
Sat May 19, 2018 1:28 pm
The financial crisis taught a really valuable lesson. And that is, bonds provided: 1) safety, and more importantly 2) a pool of assets that were available to rebalance to stocks. In hindsight, staying the course was the best decision we made.
There's posts on this forum and a lot mention bonds dropping during the '08 financial crisis


Date: Thu Oct 09, 2008 4:09 pm
"I have been retired for 10 years. I am one who has said over and over again. Stay the course. Look for the long term. Yeah, sure. That's fine until today. Today did it. I am just starting to be scared so that I won't tell my wife what happened today...stocks down...bonds down...I'm down. "


Sometimes some things are easier said than done.

Late 2007, all 2008, early 2009 were very tough on emotions.

Very stormy seas for the good ship Vanguard :)

rudeboy
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by rudeboy » Fri Jun 08, 2018 1:56 pm

Good quote from Buffet a few days ago: "Being contrarian has no special virtue over being a trend follower."

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by MnD » Fri Jun 08, 2018 6:16 pm

Call_Me_Op wrote:
Fri Jun 08, 2018 6:47 am
MnD wrote:
Sun May 20, 2018 2:13 pm
Call_Me_Op wrote:
Sun May 20, 2018 7:16 am
Perhaps it would help if you do not consider bonds an investment, but instead, protection against catastrophic loss. If you really want to invest all of your money in vehicles having high expected return, you need to accept the possibility of catastrophic loss.
I think of catastrophic loss like broad equity indices declining 80% and never recovering in my lifetime. In that situation I don't think you count on bonds for protection given that this protection requires issuers to meet their interest and maturity obligations along with the absence of currency debasement.
That has never happened before, so why would you consider that a realistic possibility? Quantum theory holds-out a minute possibility that I will vanish tomorrow, but I am not incorporating that possibility into my investment policy statement.
It may not have happened in the US but it has happened in other countries. And furthermore I was just pointing out that I don't consider any stock market declines I've invested through such as 1987, 1990, 2000-02, and 2008-09 to be "catastrophic loss". If hypothetically the US were to experience a catastrophic loss in stock prices I wouldn't be so certain that bonds would be a safe harbor, nor in other market scenarios. For the 1966 retiree attempting live on 4% real from their portfolio, the only thing having a higher bond allocation did for them was to ensure that they went broke a few years sooner versus 100% equity. The adage that stocks are risky and bonds are safe certainly satisfies the availability heuristic for virtually all US investors alive today, but it doesn't always hold up.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by mrgeeze » Fri Jun 08, 2018 7:05 pm

visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
No easy money here.
Rental properties take time and effort.
They often return a lot less than their proponents state.

If you know this business, perhaps.
If you don't - look elsewhere

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by visualguy » Fri Jun 08, 2018 7:28 pm

mrgeeze wrote:
Fri Jun 08, 2018 7:05 pm
visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
No easy money here.
Rental properties take time and effort.
They often return a lot less than their proponents state.

If you know this business, perhaps.
If you don't - look elsewhere
I strongly disagree. Owning rental properties is very common. Most of my colleagues own at least one (a few of them own 2-3), and none of us is a real-estate expert, or spends much time on it. I'm not talking about making a large business out of it, and not sure what you mean by "no easy money". It's a good low-effort investment with good returns above inflation and a favorable tax treatment. You can mess it up like anything else in life, but it doesn't take much to get it right.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by tibbitts » Fri Jun 08, 2018 7:34 pm

visualguy wrote:
Fri Jun 08, 2018 7:28 pm
mrgeeze wrote:
Fri Jun 08, 2018 7:05 pm
visualguy wrote:
Sat May 19, 2018 12:07 am
rjb112 wrote:
Fri May 18, 2018 10:21 pm
So what should we invest in besides stocks?
Direct real estate - rental properties.
No easy money here.
Rental properties take time and effort.
They often return a lot less than their proponents state.

If you know this business, perhaps.
If you don't - look elsewhere
I strongly disagree. Owning rental properties is very common. Most of my colleagues own at least one (a few of them own 2-3), and none of us is a real-estate expert, or spends much time on it. I'm not talking about making a large business out of it, and not sure what you mean by "no easy money". It's a good low-effort investment with good returns above inflation and a favorable tax treatment. You can mess it up like anything else in life, but it doesn't take much to get it right.
You sound like the person who picks one or two individual stocks and gets a good return, and declares stock picking is a good low-effort activity that doesn't take much effort to get right. Of course some people do that and feel that way. But you live in an extremely atypical world where "most" of your colleagues own one or multiple rental properties.

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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by WanderingDoc » Fri Jun 08, 2018 7:47 pm

rjb112 wrote:
Fri May 18, 2018 10:21 pm
During this year's annual Berkshire Hathaway meeting, Buffett said:

"Bonds are a terrible investment at anywhere near current yields.” He continued, “The only time bonds were interesting was in the early to mid-1980’s"

So what should we invest in besides stocks?
Real estate. Banks give you the money to buy the property (trying asking a bank to write you a $400K check to buy $500K of Apple or Amazon stock), tenants provide the money to build your equity, and you legally don't pay any taxes on your income. Things just cannot get sweeter than U.S. real estate :)
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

visualguy
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by visualguy » Fri Jun 08, 2018 8:05 pm

tibbitts wrote:
Fri Jun 08, 2018 7:34 pm
You sound like the person who picks one or two individual stocks and gets a good return, and declares stock picking is a good low-effort activity that doesn't take much effort to get right. Of course some people do that and feel that way. But you live in an extremely atypical world where "most" of your colleagues own one or multiple rental properties.
It has just about zero in common with owning an individual stock.

visualguy
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Re: Buffett says Bonds are a terrible investment now. What should we invest in besides stocks?

Post by visualguy » Fri Jun 08, 2018 8:09 pm

WanderingDoc wrote:
Fri Jun 08, 2018 7:47 pm
Real estate. Banks give you the money to buy the property (trying asking a bank to write you a $400K check to buy $500K of Apple or Amazon stock), tenants provide the money to build your equity, and you legally don't pay any taxes on your income. Things just cannot get sweeter than U.S. real estate :)
+1

Not sure why it's controversial here...

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