Sweet Spot Between Short and Intermediate Term Bonds

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Sweet Spot Between Short and Intermediate Term Bonds

Post by Park » Sun Jun 16, 2019 8:59 pm

https://www.nytimes.com/2016/07/02/your ... collection

David A. Levine is a former chief economist at Sanford C. Bernstein & Co., now a unit of AllianceBernstein, who also founded and ran the firm’s fixed-income department.

From 1926-2015, real returns of common stocks, long term bonds, intermediate term bonds and Treasury bills have been 7.0%, 2.6%, 2.2% and 0.5%. However, intermediate term bonds have beaten inflation more than long term bonds have over holding periods of 1 year, 5 years, 10 years, 20 years and 30 years. The same statement could be made about intermediate term bonds beating inflation more than Treasury bills.

"The return you expect to earn and the risk associated with bonds rise as maturity lengthens. But the rates at which they rise are neither uniform nor equal. At first, as you move out of cash into short-term bonds your expected return rises rapidly, but risk — if we define it as the chance that you will lose to inflation — actually diminishes...

As you then extend your maturity from short-term bonds to intermediate, the increase in return slows down and risk begins increasing, but the trade-off between the two seems commensurate. Extend your maturity beyond intermediate, however, and the additional expected return that you gain seems wholly inadequate compared with the amount of extra risk incurred.

With long bonds you are at the mercy of the inflation gods: If inflation is low enough, you can win big; if it’s high enough, you get buried.

The moral of the story: Don’t put your money in long bonds (too risky) and don’t put your money in money market funds or bank accounts. The latter give up way too much return for the (supposed) perfect safety of zero fluctuation in the value of your investments.

Instead, the place to be is what is essentially a large “sweet spot” between short and intermediate. That’s where the reward-risk trade-off is at its greatest...

it’s even better to avoid Treasury securities in favor of low-cost mutual funds that invest in either corporate or municipal bonds. The extra yield these bonds pay (after tax) swamps the tiny costs they incur on those rare occasions when bond issuers default."

https://humbledollar.com/money-guide/my ... portfolio/

Jonathan Clement's bond portfolio:

"The bulk of my bond portfolio is split between short-term corporate bond funds and inflation-indexed bond funds."

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