Why not go EE bonds (instead of bond funds)?

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fatFIRE
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Why not go EE bonds (instead of bond funds)?

Post by fatFIRE » Sat Apr 04, 2020 12:19 am

I bet those who started investing in EE bonds in the last crash (2008) are laughing their way to the bank now.

If you hold for 20-years, it's basically a 3.5% APY bond, which beats the current treasury rates by a lot (more so when it did in 2008, where I was debating going EE-bonds).

So, why not go EE bonds? At the risk of oversimplifying it, if 20-year treasuries are below 3.5%, go for EE bonds, if not then go back to a total bond fund. I'm also referring to accumulators and using new money to buy EE-bonds, so not advocating to sell EE bonds before the 20-year period is up.

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raven15
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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by raven15 » Sat Apr 04, 2020 12:33 am

If long term bond yields and inflation continue to fall into negative rates and deflation, long term bond funds such as EDV will have capital appreciation which exceeds 3.5%.

If interest rates and inflation rise markedly, shorter term bonds and inflation protected bonds will quickly exceed 3.5%.

If interest rates and inflation stay modest (let's say 1%-4%) then that is the perfect environment for stocks to flourish.

You can rebalance anything except EE bonds, which might allow one to profit from a tail event which otherwise would cause your return to fall below 3.5%. Finally, there are other assets like international stocks or even wild cards like gold to consider.

Essentially, the window for EE bonds to be the best investment is very narrow. So narrow that I do not ever see myself bothering.
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Re: Why not go EE bonds (instead of bond funds)?

Post by fujiters » Sat Apr 04, 2020 3:28 am

To me, the primary concern is not being able to use them to rebalance. You have to hold them for 20 years to get the 3.5% yield and they can't be sold to anyone else (who could wait for the 20 year mark instead of you) either.

I'm strongly considering adding EE bonds to my bond holdings for their strong yield anyway (plus it's tax deferred and exempt from state taxes!), but I wouldn't want them to become a majority of my bond holdings due to the rebalancing problem. Luckily, the $10k/person limit should keep that from happening anyway.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor » Sat Apr 04, 2020 4:00 am

fatFIRE wrote:
Sat Apr 04, 2020 12:19 am
I bet those who started investing in EE bonds in the last crash (2008) are laughing their way to the bank now.

If you hold for 20-years, it's basically a 3.5% APY bond, which beats the current treasury rates by a lot (more so when it did in 2008, where I was debating going EE-bonds).

So, why not go EE bonds? At the risk of oversimplifying it, if 20-year treasuries are below 3.5%, go for EE bonds, if not then go back to a total bond fund. I'm also referring to accumulators and using new money to buy EE-bonds, so not advocating to sell EE bonds before the 20-year period is up.
I've been investing in EE Bonds for close to a decade. Yields have gone up and down, but mostly down since then, so yes: I'm happy about these. I also buy I Bonds each year. Together, they offer inflation and deflation protection - really good deals on both fronts.

As another poster pointed out, however, there are issues with being 100% invested in these regarding rebalancing. In this current downturn, I am glad to have a mix of I Bonds, EE Bonds, TIPS and Treasuries, the last of which have gone up recently (and some of which have been sold to be rebalanced). There is also the risk of inflation - historically, high inflation is rare, but can be devastating, so I prefer to have some of each.

For me, a lot of this was circumstantial and individual, having to do with windfalls and having a lot of money in taxable relative to tax-advantaged accounts - but regardless, I think having a combination of more liquid bonds and I and EE Bonds is probably ideal for most investors who want to rebalance along the way (lots of caveats, including age, accumulation rate, etc...). In particular, in today's low-yield environment, these bond types offer the chance to hold bonds in taxable in a relatively tax-efficient way - EE Bonds: taxes due after doubling and cashed out; I Bonds: taxes due when cashed in anywhere between 1 and 30 years. Lots of flexibility there, making more room for stocks in IRAs and 401(ks). /2 cents
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Re: Why not go EE bonds (instead of bond funds)?

Post by FishTaco » Sat Apr 04, 2020 6:20 am

EE bond are great for alot of reasons but you're limited to 10k purchase a year, which may or may not work for you. I get around the rebalancing issue by holding EE bonds and rebalancing with TIAA Traditional as needed.

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Re: Why not go EE bonds (instead of bond funds)?

Post by WolfgangPauli » Sat Apr 04, 2020 6:27 am

I generally do not compare all these asset classes as I do believe in theory that once you win, why keep playing. EE bonds essentially take money "off the table" as they are so secure. So, I try to align my investment time horizon with my needs time horizon and get what I need - not worrying about if I took more risk could I have made more.

At 58 my time horizon for this part of my portfolio is roughly 20 years. About then I may need the money for retirement but until then I cannot forsee needing the money. So, what this does is guarantee I will receive 3.5% for 20 years on this money. I take all the risk of everything off the table. For example, it would be my luck that the next pandemic would occur exactly 20 years from now. I would have earned 3.5% absolutely risk free at a time when all my other investments would lose the previous 10 year gains.

Bottom line, as always, you should diversify for sure. But these seem like a good part of diversification.
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Re: Why not go EE bonds (instead of bond funds)?

Post by langelgjm » Sat Apr 04, 2020 7:49 am

This isn't really an answer to your question, but I bought EE bonds for the first time last year (besides what parents/grandparents gave as gifts during childhood).

Pros of EE bonds:
  • Virtually no default risk
  • 0% expense ratio
  • Interest exempt from state and local tax
  • Efficient way to hold bonds outside of tax-advantaged space
  • Can redeem in increments as small as $25
  • deflation or low inflation hedge
Cons of EE bonds:
  • Will lose real value if inflation is higher than expected
  • High liquidity penalty after first few years until year 20
Neither pros nor cons, but interesting features of EE bonds:
  • No secondary market, thus no price volatility
  • Can be exempt from federal tax if used for educational expenses, but there are caveats
In my mind, EE bonds behave as a hybrid of cash and ultra-safe bond. Cash because the fixed rates are usually so low as to be negligible, you can in fact easily redeem your funds in small increments after the 1 year waiting period, and the inflation risk. Ultra-safe bond for obvious reasons.

For me, then, they are a way to tuck away money into an ultra-safe vehicle that will not lose principal, and may even offer a reasonable return. They face less default risk than the best corporate bonds, and are far less volatile than long term treasuries (whether that's good or bad is up to you).

Personally, I think the low inflation hedge is valuable. But I don't pretend to know the future, which is why I also buy I bonds. The combination of I and EE work as emergency fund + "sleep at night" money (where "sleep at night" can turn into emergency fund if things really go south).

I feel I understand I bonds and EE bonds. I don't understand the larger bond market. The only bond fund I hold is the total bond market index that is part of my target date fund. I'm happy to pay the ER to let someone else rebalance that for me.

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Re: Why not go EE bonds (instead of bond funds)?

Post by Call_Me_Op » Sat Apr 04, 2020 7:51 am

Can only invest a small amount in EE Bonds each year. For many of us, that will not suffice.
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Re: Why not go EE bonds (instead of bond funds)?

Post by alluringreality » Sat Apr 04, 2020 9:20 am

As previously noted, the main reservations I have with EE bonds are the following:

They need to be held for 20 years. Any shorter holding period brings into question if they should have been purchased in the first place, although it is possible to only sell part of a purchase if needed. For practical purposes, they can't be used as collateral to secure a loan, while it would be possible to do that with marketable bonds. If someone is interested in liquidity from savings bonds, I bonds make more sense.

High inflation could potentially mean that they might lose to alternate investments, such as I bonds or TIPS. Personally I doubt if inflation might exceed an average of 3.5% over the next 20 years, so I consider EE bonds a decent bet at this time. Of course I could be wrong, so I'm also buying some I bonds for liquidity and unexpected inflation.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)

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Re: Why not go EE bonds (instead of bond funds)?

Post by beyou » Sat Apr 04, 2020 12:12 pm

Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.

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Re: Why not go EE bonds (instead of bond funds)?

Post by Van » Sat Apr 04, 2020 12:36 pm

Why not? Maybe a person is 75 years old or older.

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Re: Why not go EE bonds (instead of bond funds)?

Post by Mel Lindauer » Sun Apr 05, 2020 12:21 am

beyou wrote:
Sat Apr 04, 2020 12:12 pm
Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.
I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
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Re: Why not go EE bonds (instead of bond funds)?

Post by watchnerd » Sun Apr 05, 2020 12:41 am

fatFIRE wrote:
Sat Apr 04, 2020 12:19 am

So, why not go EE bonds?
Because the purchase limits are too small to allow me to accumulate enough of them, quickly enough, for it to be a viable strategy for my age, portfolio size, and living expenses.

$20k would cover ~1/4 of a year's current living expenses, so I still have to do something for the other 3/4th no matter what.

Whereas I can just plow $800k into TIPS right now and be good to go for 10 years of living expenses.
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Re: Why not go EE bonds (instead of bond funds)?

Post by WolfgangPauli » Sun Apr 05, 2020 5:47 am

Mel Lindauer wrote:
Sun Apr 05, 2020 12:21 am
beyou wrote:
Sat Apr 04, 2020 12:12 pm
Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.
I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
.
I agree 100% and while I had not read your article until now I am 100% in agreement. My only issue is my advisor wants everything in a revocable trust. This means we are stuck with only buying $10K per year (the limit on the trust account is as if it is one person). Any thoughts on this? If I buy them outside the trust and register "with" do I protect us so if one dies the other gets it or does that complicate?
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Re: Why not go EE bonds (instead of bond funds)?

Post by 209south » Sun Apr 05, 2020 7:54 am

I have a defensive 35-65 portfolio so a lot of fixed income exposure. I like EE Bonds and started buying the max 5 years ago due to research on this forum. Between my wife and me we now have $100k invested and, as Mel said above, as we start to hit year 20 at age 75 for us these will provide a very nice annuity, and along with social security, a TIPs ladder and some DIAs we've funded, we are building some very nice, secure cash flow for retirement and longevity purposes. Three more points: (a) our portfolio is substantial so I think you'd need to have a LOT of money for these $40,000 (nominal) maturies in 20 years to be immaterial; (b) agree that EEs aren't ideal for rebalancing but we have lots of other fixed income investments for that; and (c) I like this so much I began to add I-Bonds this year - wish I'd started both years earlier!

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Re: Why not go EE bonds (instead of bond funds)?

Post by Pikel » Sun Apr 05, 2020 8:21 am

The tax deferral is really important to consider. Inflation would have to go sky high for anything with a coupon to exceed 3.5% tax deferred.

If we make up some scenario where the world pulls back on globalization after covid, and inflation does take hold in the next 5 years, it's not the end of the world to have earned .1% instead of 1% on 10-20k for 3-4 years.

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Re: Why not go EE bonds (instead of bond funds)?

Post by aristotelian » Sun Apr 05, 2020 10:00 am

I just started a position in EE bonds. I am age 45 so I anticipate using them from 65-70 for guaranteed income while delaying SS. I see it as essentially a no penalty CD with a long term but high interest rate. Seems like a very solid option relative to any of the alternatives. Not only does the 3.5% yield compare favorably, you get the additional benefit of tax deferral. EE Bonds may compare favorably to a taxable bond yielding 4% after tax. You never know, but Treasuries have a *long* way to go before getting anywhere near that yield again. Diversify with some I Bonds to hedge against inflation.

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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by willthrill81 » Sun Apr 05, 2020 10:23 am

I'm surprised that no one yet has referenced the big EE bond thread that's been active off and on for years: viewtopic.php?t=217081
raven15 wrote:
Sat Apr 04, 2020 12:33 am
If long term bond yields and inflation continue to fall into negative rates and deflation, long term bond funds such as EDV will have capital appreciation which exceeds 3.5%.

If interest rates and inflation rise markedly, shorter term bonds and inflation protected bonds will quickly exceed 3.5%.

If interest rates and inflation stay modest (let's say 1%-4%) then that is the perfect environment for stocks to flourish.

You can rebalance anything except EE bonds, which might allow one to profit from a tail event which otherwise would cause your return to fall below 3.5%. Finally, there are other assets like international stocks or even wild cards like gold to consider.

Essentially, the window for EE bonds to be the best investment is very narrow. So narrow that I do not ever see myself bothering.
I'm inclined to agree. Historically, stocks have beaten nominal bonds in their ability to at least maintain their inflation-adjusted value better in every 20 year period except two or three, IIRC. That's not even remotely a contest. Combine that with EE bonds' unique declining liquidity due to the penalty for early redemption increasing as the holder gets closer to the 20 year anniversary, and EE bonds are a non-starter for me.
WolfgangPauli wrote:
Sat Apr 04, 2020 6:27 am
EE bonds essentially take money "off the table" as they are so secure.
They are no more secure in terms of default risk than any other fixed income instrument issued by the Treasury, which includes nominal Treasury bonds, TIPS, I bonds, etc.

In terms of maintaining inflation-adjusted value, TIPS and I bonds are more effective because they explicitly account for inflation, which EE bonds do not.
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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by 209south » Sun Apr 05, 2020 10:49 am

willthrill81 wrote:
Sun Apr 05, 2020 10:23 am
I'm surprised that no one yet has referenced the big EE bond thread that's been active off and on for years: viewtopic.php?t=217081
raven15 wrote:
Sat Apr 04, 2020 12:33 am
If long term bond yields and inflation continue to fall into negative rates and deflation, long term bond funds such as EDV will have capital appreciation which exceeds 3.5%.

If interest rates and inflation rise markedly, shorter term bonds and inflation protected bonds will quickly exceed 3.5%.

If interest rates and inflation stay modest (let's say 1%-4%) then that is the perfect environment for stocks to flourish.

You can rebalance anything except EE bonds, which might allow one to profit from a tail event which otherwise would cause your return to fall below 3.5%. Finally, there are other assets like international stocks or even wild cards like gold to consider.

Essentially, the window for EE bonds to be the best investment is very narrow. So narrow that I do not ever see myself bothering.
I'm inclined to agree. Historically, stocks have beaten nominal bonds in their ability to at least maintain their inflation-adjusted value better in every 20 year period except two or three, IIRC. That's not even remotely a contest. Combine that with EE bonds' unique declining liquidity due to the penalty for early redemption increasing as the holder gets closer to the 20 year anniversary, and EE bonds are a non-starter for me.
WolfgangPauli wrote:
Sat Apr 04, 2020 6:27 am
EE bonds essentially take money "off the table" as they are so secure.
They are no more secure in terms of default risk than any other fixed income instrument issued by the Treasury, which includes nominal Treasury bonds, TIPS, I bonds, etc.

In terms of maintaining inflation-adjusted value, TIPS and I bonds are more effective because they explicitly account for inflation, which EE bonds do not.
I agree with you to a point. EE Bonds work particularly well for those with large fixed income exposures looking to build a bond ladder for retirement. For such investors liquidity is less of a concern, and for someone like me they are only 'part' of the retirement solution. EEs are Treasuries and thus safe, and they are tax-deferred which is nice for someone in their high-earning years looking to defer income to retirement. They also provide 'inflation diversification' vs. social security, which I appreciate. My fixed income portfolio is half nominal and half TIPS, with a TIPs ladder representing the largest single component. With SS and the TIPs I have the 'real side' covered; EEs work well with my nominal bond funds and DIAs to cover the 'nominal side'.

Comparing EEs to stocks as inflation protection seems incongruous - I already have stocks, that's the other 35% of my portfolio - with EEs I'm focused on what to do with the fixed income side.

For younger investors EEs probably don't make sense as 20-year horizon might come right in the middle of their peak earning years.

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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by HEDGEFUNDIE » Sun Apr 05, 2020 11:00 am

209south wrote:
Sun Apr 05, 2020 10:49 am
willthrill81 wrote:
Sun Apr 05, 2020 10:23 am
I'm surprised that no one yet has referenced the big EE bond thread that's been active off and on for years: viewtopic.php?t=217081
raven15 wrote:
Sat Apr 04, 2020 12:33 am
If long term bond yields and inflation continue to fall into negative rates and deflation, long term bond funds such as EDV will have capital appreciation which exceeds 3.5%.

If interest rates and inflation rise markedly, shorter term bonds and inflation protected bonds will quickly exceed 3.5%.

If interest rates and inflation stay modest (let's say 1%-4%) then that is the perfect environment for stocks to flourish.

You can rebalance anything except EE bonds, which might allow one to profit from a tail event which otherwise would cause your return to fall below 3.5%. Finally, there are other assets like international stocks or even wild cards like gold to consider.

Essentially, the window for EE bonds to be the best investment is very narrow. So narrow that I do not ever see myself bothering.
I'm inclined to agree. Historically, stocks have beaten nominal bonds in their ability to at least maintain their inflation-adjusted value better in every 20 year period except two or three, IIRC. That's not even remotely a contest. Combine that with EE bonds' unique declining liquidity due to the penalty for early redemption increasing as the holder gets closer to the 20 year anniversary, and EE bonds are a non-starter for me.
WolfgangPauli wrote:
Sat Apr 04, 2020 6:27 am
EE bonds essentially take money "off the table" as they are so secure.
They are no more secure in terms of default risk than any other fixed income instrument issued by the Treasury, which includes nominal Treasury bonds, TIPS, I bonds, etc.

In terms of maintaining inflation-adjusted value, TIPS and I bonds are more effective because they explicitly account for inflation, which EE bonds do not.
I agree with you to a point. EE Bonds work particularly well for those with large fixed income exposures looking to build a bond ladder for retirement. For such investors liquidity is less of a concern, and for someone like me they are only 'part' of the retirement solution. EEs are Treasuries and thus safe, and they are tax-deferred which is nice for someone in their high-earning years looking to defer income to retirement. They also provide 'inflation diversification' vs. social security, which I appreciate. My fixed income portfolio is half nominal and half TIPS, with a TIPs ladder representing the largest single component. With SS and the TIPs I have the 'real side' covered; EEs work well with my nominal bond funds and DIAs to cover the 'nominal side'.

Comparing EEs to stocks as inflation protection seems incongruous - I already have stocks, that's the other 35% of my portfolio - with EEs I'm focused on what to do with the fixed income side.

For younger investors EEs probably don't make sense as 20-year horizon might come right in the middle of their peak earning years.
As a younger investor I am strongly considering relying on EEs to secure my fatFIRE life in my mid 50s.

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Re: Why not go EE bonds (instead of bond funds)?

Post by wander » Sun Apr 05, 2020 11:02 am

We have been buying EE bonds every year so in retirement that would become a nice $40k each year before any amount from SS, 401k and pension. It may be affected by inflation, but we think equity will make up for it.

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Re: Why not go EE bonds (instead of bond funds)?

Post by oneleaf » Sun Apr 05, 2020 11:03 am

aristotelian wrote:
Sun Apr 05, 2020 10:00 am
I see it as essentially a no penalty CD with a long term but high interest rate.
Actually, you should see it as an extremely high penalty CD once you have held it for a couple years. You lose all your pseudo-accrued interest (the effective 3.5% result of doubling after 20 years, which is the real reason we buy EE bonds, not the 0.1% interest) if you sell before 20 years.

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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by willthrill81 » Sun Apr 05, 2020 11:04 am

209south wrote:
Sun Apr 05, 2020 10:49 am
Comparing EEs to stocks as inflation protection seems incongruous - I already have stocks, that's the other 35% of my portfolio - with EEs I'm focused on what to do with the fixed income side.
It's only incongruous if you believe that an asset class cannot be compared in a meaningful way to any other asset class (e.g. stocks vs. bonds). Some here believe that; I do not because, among other reasons, it can easily lead to tunnel vision.

For instance, I've seen many here who have determined that they want a certain percentage of their portfolio to be in fixed income. But then they allocate a significant portion of that fixed income to corporate bonds, which function as a mixture of mostly Treasuries and some stock; total bond market actually does exactly this, which we have very recently seen illustrated in its performance compared to Treasuries during stock downturns. Effectively, these investors are getting some stock exposure in their fixed income, but because they aren't actually holding stocks, they're somehow alright with this.

Back to EE bonds, if investors ask themselves whether they want to allocate money that effectively cannot be touched for 20 years to an investment, there's no obvious reason to say that it should be allocated to a nominal bond. On the contrary, historic data is very clear that it has been less effective to do so than allocating such funds to stocks. The fact that stocks and bonds operate so differently from one another is largely irrelevant. Yes, EE bonds are providing a guaranteed nominal return that stocks do not, which clearly matters a lot to certain investors, but (1) nominal returns are irrelevant and (2) on the basis of the historic data, there's been a high price to be paid for that guarantee.
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Re: Why not go EE bonds (instead of bond funds)?

Post by 209south » Sun Apr 05, 2020 11:19 am

willthrill, appreciate your thoughtful posts. Curious what age you are and how you are thinking about retirement income and whether you are attracted to LMP concepts? My wife and I are 60 with a healthy portfolio but no pension other than social security. We live in a HCOL area and have a nice condo in Florida and would like to maintain both of those, and our two golf clubs, and an active retirement lifestyle, all while leaving something for the kids. It's an ambitious goal and one reason I'm still (happily) working at age 60 and hope to continue for a few more years. So for me, building essentially a liability-managed portfolio has really delivered piece of mind. Between social security, my TIPs ladder, my EE bond ladder, my new I bond ladder and the DIAs that start paying when we turn 80, we have a lot of runway ahead of us. The EEs work for us - I could have built a nominal ladder but prefer the EEs from a tax-deferral and 'forced savings' perspective - i.e. highly unlikely I'll 'need the money' within the next 20 years so I'm more likely to leave it there.

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Re: Why not go EE bonds (instead of bond funds)?

Post by beyou » Sun Apr 05, 2020 11:36 am

Mel Lindauer wrote:
Sun Apr 05, 2020 12:21 am
beyou wrote:
Sat Apr 04, 2020 12:12 pm
Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.
I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
.
Suppose that depends on when you plan to (or want to) retire.
For many in today's economy, the highest earning years abruptly end in their 50s, due to corporate layoffs and health issues.
For many on this site planning on FIRE, they may prefer to retire in their 50s.

I want to have them mature a few years before my RMDs on my 401k kicks in and look at this as spreading out my retirement income
to reduce the chance of increasing my tax bracket at 70. I also plan to wait on SS until 70, but I need income in my 60s to pay for
health insurance before 65, and for any/all expenses between 60-70 when my SS and RMDs kick on.

Of course one can always hold on past 20 years to 30 years if your income is higher than expected when you hit the 20 year mark.
You are not forced to redeem at the 20 year mark.

I am taking the conservative approach that I may not be able to work well into my 60s.
Tax planning is an exercise in the impossible, tax laws change, at federal and state level and you can't really predict how long
you will work nor live. So for me I plan around the predictable, and I know my RMDs will start at 72 (now instead of 70) and I know
I wont have Medicare until 65, so I want some income flowing from safe investments like US savings bonds when I may well need the cash.
Whether it's optimal for taxes is pure guesswork and of secondary consideration IMO.

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Re: Why not go EE bonds (instead of bond funds)?

Post by whodidntante » Sun Apr 05, 2020 11:39 am

If I'm going to commit money for 20 years, it's going in stocks.

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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by beyou » Sun Apr 05, 2020 11:42 am

willthrill81 wrote:
Sun Apr 05, 2020 10:23 am
I'm surprised that no one yet has referenced the big EE bond thread that's been active off and on for years: viewtopic.php?t=217081
raven15 wrote:
Sat Apr 04, 2020 12:33 am
If long term bond yields and inflation continue to fall into negative rates and deflation, long term bond funds such as EDV will have capital appreciation which exceeds 3.5%.

If interest rates and inflation rise markedly, shorter term bonds and inflation protected bonds will quickly exceed 3.5%.

If interest rates and inflation stay modest (let's say 1%-4%) then that is the perfect environment for stocks to flourish.

You can rebalance anything except EE bonds, which might allow one to profit from a tail event which otherwise would cause your return to fall below 3.5%. Finally, there are other assets like international stocks or even wild cards like gold to consider.

Essentially, the window for EE bonds to be the best investment is very narrow. So narrow that I do not ever see myself bothering.
I'm inclined to agree. Historically, stocks have beaten nominal bonds in their ability to at least maintain their inflation-adjusted value better in every 20 year period except two or three, IIRC. That's not even remotely a contest. Combine that with EE bonds' unique declining liquidity due to the penalty for early redemption increasing as the holder gets closer to the 20 year anniversary, and EE bonds are a non-starter for me.
WolfgangPauli wrote:
Sat Apr 04, 2020 6:27 am
EE bonds essentially take money "off the table" as they are so secure.
They are no more secure in terms of default risk than any other fixed income instrument issued by the Treasury, which includes nominal Treasury bonds, TIPS, I bonds, etc.

In terms of maintaining inflation-adjusted value, TIPS and I bonds are more effective because they explicitly account for inflation, which EE bonds do not.
Yes how unfortunate that the Treasury changed EE bonds to pay a low fixed rate (well low if held under 20 years and even at 20 years, low is relative and still fixed). I have older EE bonds that pay 85% of the 5 Year UST which will give protection against rising rates, (usually during inflationary periods). But today buying new ones at the low rates you can only look at them as a 20 year bond, nothing less.

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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 » Sun Apr 05, 2020 11:50 am

whodidntante wrote:
Sun Apr 05, 2020 11:39 am
If I'm going to commit money for 20 years, it's going in stocks.
Historically, that's been the safest bet in terms of at least keeping up with inflation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why not go EE bonds (instead of bond funds)?

Post by Big Dog » Sun Apr 05, 2020 11:56 am

Mel Lindauer wrote:
Sun Apr 05, 2020 12:21 am
beyou wrote:
Sat Apr 04, 2020 12:12 pm
Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.
I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
.
Really like Mel's article. But living in a HCOL area with kids in college, didn't have $20k extra to 'invest' in savings bonds at age 50. So now at age 66, not interested in investing for a payout starting at age 86. Plus, the Treasury Direct site is terrible. (Makes Vanguard's look state of the art.) For (heir) simplicity, we're cashing out inherited bonds as they become due over the next couple of years. Will not replace. So the answer to the OP is, 'no more bonds for us.'

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Re: Why not go EE bonds (instead of bond funds)?

Post by aristotelian » Sun Apr 05, 2020 1:03 pm

oneleaf wrote:
Sun Apr 05, 2020 11:03 am
aristotelian wrote:
Sun Apr 05, 2020 10:00 am
I see it as essentially a no penalty CD with a long term but high interest rate.
Actually, you should see it as an extremely high penalty CD once you have held it for a couple years. You lose all your pseudo-accrued interest (the effective 3.5% result of doubling after 20 years, which is the real reason we buy EE bonds, not the 0.1% interest) if you sell before 20 years.
I mean in the sense that I would get my principal back, like a no penalty CD. Obviously you give up the interest if you don't hold for 20 years. There is definitely risk there.

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Re: Why not go EE bonds (instead of bond funds)?

Post by oneleaf » Sun Apr 05, 2020 1:10 pm

aristotelian wrote:
Sun Apr 05, 2020 1:03 pm
oneleaf wrote:
Sun Apr 05, 2020 11:03 am
aristotelian wrote:
Sun Apr 05, 2020 10:00 am
I see it as essentially a no penalty CD with a long term but high interest rate.
Actually, you should see it as an extremely high penalty CD once you have held it for a couple years. You lose all your pseudo-accrued interest (the effective 3.5% result of doubling after 20 years, which is the real reason we buy EE bonds, not the 0.1% interest) if you sell before 20 years.
I mean in the sense that I would get my principal back, like a no penalty CD. Obviously you give up the interest if you don't hold for 20 years. There is definitely risk there.
Fair enough. But not to get too nitpicky :happy , but a No Penalty CD generally has the following features:
- Required by REG D: 7 day simple interest penalty if withdrawal happens within the first 7 days.
- No penalty after that, AND you get to keep your interest.

Just getting your principal back is not sufficient in calling a CD a "No Penalty CD".

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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by Noobvestor » Sun Apr 05, 2020 2:12 pm

willthrill81 wrote:
Sun Apr 05, 2020 11:04 am
Back to EE bonds, if investors ask themselves whether they want to allocate money that effectively cannot be touched for 20 years to an investment, there's no obvious reason to say that it should be allocated to a nominal bond. On the contrary, historic data is very clear that it has been less effective to do so than allocating such funds to stocks. The fact that stocks and bonds operate so differently from one another is largely irrelevant. Yes, EE bonds are providing a guaranteed nominal return that stocks do not, which clearly matters a lot to certain investors, but (1) nominal returns are irrelevant and (2) on the basis of the historic data, there's been a high price to be paid for that guarantee.
You're isolating investment options too much in this analysis. First, you're lumping it in with nominal bonds often held for other reasons. Second, you're mistakenly ascribing an overly 'high price' for the guarantee. Take this portfolio for instance (very loosely based on my own).

IPS: Hold 60/40 stocks/bonds, 50/50 US/international within stocks, 50/50 nominal/real within bonds.

Holdings

30% Total US
30% Total International
10% Intermediate Treasuries (fund)
10% Intermediate TIPS (fund)
10% I Bonds (treated as short-term)
10% EE Bonds (treated as long-term)

So what you end with is some bonds that will have potential correlation benefits, like Treasuries that tend to go up when stocks go down. You also have some inflation-adjusted bonds. Of the nominal bonds in particular, you have one that has a higher nominal rate guarantee over 20 years than anything else on the safe bond market. It is hands down the better option. It doesn't look that way looking backward, but in looking backward we also see rates (nominal and real) on a steady march downward for decades if not centuries. So locking in some funds at ~3.5% looks good. If one expects yields to stay down for even a few years, it looks better and better fast - YTM of EE Bonds goes up quickly.

As for EE Bonds being nominal, well, the only two exceptional bond options right now are I and EE Bonds. One has a real return, one has a nominal return. Beggars can't be choosers and my IPS calls for a mix anyway, so since both are capped annually, I max out both.

My point is that in isolation having only EE Bonds could create liquidity issues and is a long time to lock into nominal yields. But on the flipside, if you hold other bonds, you can bring down average duration and add elements of inflation protection for greater diversification all around.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by willthrill81 » Sun Apr 05, 2020 2:40 pm

Noobvestor wrote:
Sun Apr 05, 2020 2:12 pm
willthrill81 wrote:
Sun Apr 05, 2020 11:04 am
Back to EE bonds, if investors ask themselves whether they want to allocate money that effectively cannot be touched for 20 years to an investment, there's no obvious reason to say that it should be allocated to a nominal bond. On the contrary, historic data is very clear that it has been less effective to do so than allocating such funds to stocks. The fact that stocks and bonds operate so differently from one another is largely irrelevant. Yes, EE bonds are providing a guaranteed nominal return that stocks do not, which clearly matters a lot to certain investors, but (1) nominal returns are irrelevant and (2) on the basis of the historic data, there's been a high price to be paid for that guarantee.
You're isolating investment options too much in this analysis. First, you're lumping it in with nominal bonds often held for other reasons. Second, you're mistakenly ascribing an overly 'high price' for the guarantee. Take this portfolio for instance (very loosely based on my own).

IPS: Hold 60/40 stocks/bonds, 50/50 US/international within stocks, 50/50 nominal/real within bonds.

Holdings

30% Total US
30% Total International
10% Intermediate Treasuries (fund)
10% Intermediate TIPS (fund)
10% I Bonds (treated as short-term)
10% EE Bonds (treated as long-term)

So what you end with is some bonds that will have potential correlation benefits, like Treasuries that tend to go up when stocks go down. You also have some inflation-adjusted bonds. Of the nominal bonds in particular, you have one that has a higher nominal rate guarantee over 20 years than anything else on the safe bond market. It is hands down the better option. It doesn't look that way looking backward, but in looking backward we also see rates (nominal and real) on a steady march downward for decades if not centuries. So locking in some funds at ~3.5% looks good. If one expects yields to stay down for even a few years, it looks better and better fast - YTM of EE Bonds goes up quickly.

As for EE Bonds being nominal, well, the only two exceptional bond options right now are I and EE Bonds. One has a real return, one has a nominal return. Beggars can't be choosers and my IPS calls for a mix anyway, so since both are capped annually, I max out both.

My point is that in isolation having only EE Bonds could create liquidity issues and is a long time to lock into nominal yields. But on the flipside, if you hold other bonds, you can bring down average duration and add elements of inflation protection for greater diversification all around.
The point you raise is certainly valid (i.e. if you'll always have some nominal bonds, why not have some EE bonds). But I still have a hard time with putting '20 year money' into illiquid bonds paying 3.5%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why not go EE bonds (instead of bond funds)?

Post by neurosphere » Sun Apr 05, 2020 3:07 pm

WolfgangPauli wrote:
Sun Apr 05, 2020 5:47 am
My only issue is my advisor wants everything in a revocable trust. This means we are stuck with only buying $10K per year (the limit on the trust account is as if it is one person). Any thoughts on this? If I buy them outside the trust and register "with" do I protect us so if one dies the other gets it or does that complicate?
What's so bad about having some assets outside the trust? As you state, you can title the bonds "with" such that they immediately go to that other person (but of course that other person can cash at any time). You can also be a single owner and set a beneficiary with a "payable on death" registration. It seems one could work out a viable estate plan with these option. It unlikely that the amount of your savings bond holdings would become so large that it messes up an estate plan due to a little less flexibility, or if so, only purchase as much savings bonds as allows for whatever plan you want to be executed successfully. I wonder if one could name a trust as the beneficiary. I've never looked into that.
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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by Noobvestor » Sun Apr 05, 2020 4:33 pm

willthrill81 wrote:
Sun Apr 05, 2020 2:40 pm
The point you raise is certainly valid (i.e. if you'll always have some nominal bonds, why not have some EE bonds). But I still have a hard time with putting '20 year money' into illiquid bonds paying 3.5%.
I would too in isolation, but I plan to hold bonds now and 20 years plus beyond. It's analogous to holders of Long-Term Treasuries - in isolation, no one advocates them, but if you're starting from the premise 'I'm going to hold bonds for decades' they can make sense.

What are the alternatives? Stocks may not do well over the coming decades if yields stay low. Other types of safe bonds don't offer these kinds of returns. I wouldn't go all-in on EE Bonds, but viewed as part of an allocation, they are potentially very valuable.

To me, it goes something like this: (1) decide if you want bonds to be for safety or diversification (e.g. government and/or corporate), (2) decide the balance of nominal/real you want, (3) decide on a target duration, (4) pick things that fulfill the criteria you've established.

If you decide (like I have) to have ultra-safe, combination of real/nominal, intermediate overall duration, EE Bonds look great.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why not go EE bonds (instead of bond funds)?

Post by beyou » Sun Apr 05, 2020 4:52 pm

Big Dog wrote:
Sun Apr 05, 2020 11:56 am
Mel Lindauer wrote:
Sun Apr 05, 2020 12:21 am
beyou wrote:
Sat Apr 04, 2020 12:12 pm
Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.
I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
.
Really like Mel's article. But living in a HCOL area with kids in college, didn't have $20k extra to 'invest' in savings bonds at age 50. So now at age 66, not interested in investing for a payout starting at age 86. Plus, the Treasury Direct site is terrible. (Makes Vanguard's look state of the art.) For (heir) simplicity, we're cashing out inherited bonds as they become due over the next couple of years. Will not replace. So the answer to the OP is, 'no more bonds for us.'
Forgot but that is another reason I want to cash them in my 60s, don't want to have a Tsy Direct account to leave to my wife nor kids.
Prefer that my heirs don't have to deal with any more complexity than need be. That said, I have POD ownership so from a legal standpoint,
no issue with probate. Just administrative preference.

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Re: Why not go EE bonds (instead of bond funds)?

Post by Mel Lindauer » Sun Apr 05, 2020 9:27 pm

Big Dog wrote:
Sun Apr 05, 2020 11:56 am
Mel Lindauer wrote:
Sun Apr 05, 2020 12:21 am
beyou wrote:
Sat Apr 04, 2020 12:12 pm
Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.
I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
.
Really like Mel's article. But living in a HCOL area with kids in college, didn't have $20k extra to 'invest' in savings bonds at age 50. So now at age 66, not interested in investing for a payout starting at age 86. Plus, the Treasury Direct site is terrible. (Makes Vanguard's look state of the art.) For (heir) simplicity, we're cashing out inherited bonds as they become due over the next couple of years. Will not replace. So the answer to the OP is, 'no more bonds for us.'
Makes sense on all points for you.
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Re: Why not go EE bonds (instead of bond funds)?

Post by donall » Sun Apr 05, 2020 10:08 pm

neurosphere wrote:
Sun Apr 05, 2020 3:07 pm
WolfgangPauli wrote:
Sun Apr 05, 2020 5:47 am
My only issue is my advisor wants everything in a revocable trust. This means we are stuck with only buying $10K per year (the limit on the trust account is as if it is one person). Any thoughts on this? If I buy them outside the trust and register "with" do I protect us so if one dies the other gets it or does that complicate?
What's so bad about having some assets outside the trust? As you state, you can title the bonds "with" such that they immediately go to that other person (but of course that other person can cash at any time). You can also be a single owner and set a beneficiary with a "payable on death" registration. It seems one could work out a viable estate plan with these option. It unlikely that the amount of your savings bond holdings would become so large that it messes up an estate plan due to a little less flexibility, or if so, only purchase as much savings bonds as allows for whatever plan you want to be executed successfully. I wonder if one could name a trust as the beneficiary. I've never looked into that.
You can also purchase more Ibonds with individual accounts (designate beneficiary) and transfer bonds to Trust account at Treasury Direct. The transfer process is started in the online account and a form is printed. After a medallion signature, the form is mailed to TD. It takes a few weeks for the transferred bonds to appear in the Trust account.

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Re: Why not go EE bonds (instead of bond funds)?

Post by Dovahkiin » Sun Apr 05, 2020 10:19 pm

Use revocable living trusts to get around the $10k purchase limit. You can use your SSN on every trust. My lawyer even just handed me over the trust word template so I can create new trusts easily if needed.

I'm not planning on doing EE bonds for quite a while though. For the 20 years of lockup may as well go equities. I'm planning on using them as a nice annuity alternative to say start at age 60-70 as deferred annuities right now grow at a 3% interest rate and require a lot more upfront capital than EE bonds.

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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by raven15 » Sun Apr 05, 2020 11:04 pm

Noobvestor wrote:
Sun Apr 05, 2020 4:33 pm
willthrill81 wrote:
Sun Apr 05, 2020 2:40 pm
The point you raise is certainly valid (i.e. if you'll always have some nominal bonds, why not have some EE bonds). But I still have a hard time with putting '20 year money' into illiquid bonds paying 3.5%.
I would too in isolation, but I plan to hold bonds now and 20 years plus beyond. It's analogous to holders of Long-Term Treasuries - in isolation, no one advocates them, but if you're starting from the premise 'I'm going to hold bonds for decades' they can make sense.

What are the alternatives? Stocks may not do well over the coming decades if yields stay low. Other types of safe bonds don't offer these kinds of returns. I wouldn't go all-in on EE Bonds, but viewed as part of an allocation, they are potentially very valuable.

To me, it goes something like this: (1) decide if you want bonds to be for safety or diversification (e.g. government and/or corporate), (2) decide the balance of nominal/real you want, (3) decide on a target duration, (4) pick things that fulfill the criteria you've established.

If you decide (like I have) to have ultra-safe, combination of real/nominal, intermediate overall duration, EE Bonds look great.
I think you are looking at this wrong. EE's absolutely need to be excluded from the allocation for the first 20 years. Technically they could be redeemed at a real or else most likely relative loss before then, but realistically they should be considered illiquid for the first 20 years, otherwise you would have chosen something else.

Your allocation minus the EE's is 1/3 US, 1/3 Int'l, 1/3 other bonds which is a pretty sound allocation. In the history of the US, there has never (that I am aware) of been a single instance where a 67% stock / 33% bond portfolio returned less than 3.5% nominal. In order for your your EE's to work out favorably you are counting on something that has never happened since at least 1872. (I'm not sure how the international would affect that). In every single year thus far you would have been better off simply splitting the EE's into the rest of your portfolio. You are assuming something that has never happened to justify the allocation.
Noobvestor wrote:
Sun Apr 05, 2020 2:12 pm
It doesn't look that way looking backward, but in looking backward we also see rates (nominal and real) on a steady march downward for decades if not centuries. So locking in some funds at ~3.5% looks good. If one expects yields to stay down for even a few years, it looks better and better fast - YTM of EE Bonds goes up quickly.
The only situation you describe where EE bonds could be a beneficial addition to your portfolio would make a long term bond fund like EDV look even better than that. Yes, I can imagine a case where stocks slump over a 20-year period, while bond yields remain flat, and there is no rebalancing bonus, and no inflation. But so far it has not happened (ever) and it seems improbable. I would like to particularly point out that the biggest threat to a retirement is sequence of returns risk over the first 5 or so years, and that an illiquid asset in that situation is pointless. The other big threat to a retirement is failure to accumulate, and a bond that returns 0.1% nominal for 20 years and then 3.5% nominal is almost as useless for the first half of the game.

I could maybe see EEs as something I would consider if CAPE10 was above ~40 in both US and international stocks and bond yields were around or below zero. But except in such extreme situations I have never seen any evidence that current EE's would be anything other than a detriment to a good portfolio.

(Side note I received some EE's as a kid, and they are still paying 4%!!!! after maturity. Too bad they reach final maturity in a couple years and I need to redeem them. The old ones made more sense for an investor.)
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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by Noobvestor » Mon Apr 06, 2020 12:35 am

I think you are looking at this wrong.
Ditto. But let's break it down piece by piece and see what we find!
raven15 wrote:
Sun Apr 05, 2020 11:04 pm
\ In order for your your EE's to work out favorably you are counting on something that has never happened since at least 1872. (I'm not sure how the international would affect that). In every single year thus far you would have been better off simply splitting the EE's into the rest of your portfolio. You are assuming something that has never happened to justify the allocation.
US Treasury bonds are at their lowest yields in the history of the world, and have been trending down for over a century. If you would prefer to lock into their 1% yields instead, be my guest. If you have a scenario for 20-year Treasuries yielding more than 3.5% in the next 20 years, LMK.
I think you are looking at this wrong. EE's absolutely need to be excluded from the allocation for the first 20 years. Technically they could be redeemed at a real or else most likely relative loss before then, but realistically they should be considered illiquid for the first 20 years, otherwise you would have chosen something else.
Well, there are two safe-bond, 20-year options. Either you get low yields on Treasuries (near zero right now) or you get low yields on EE Bonds. If yields go up in the next few years, congrats, cash in your EE Bonds, invest in higher-yielding Treasuries. If they don't, congrats, you get 3.5% over 20 years. The latter has the bonus of not having NAV go down as yields go up - it's more of a cash-like holding, as in: no interest rate risk. So if rates go up, EE Bonds win. If rates go down, unless they go seriously sub-zero, EE Bonds also win. What am I missing here?! I would also note that if bonds in general of all durations stay low for a few years, it won't be long until the YTM of EE Bonds beats them all by a mile.
Yes, I can imagine a case where stocks slump over a 20-year period, while bond yields remain flat, and there is no rebalancing bonus, and no inflation. But so far it has not happened (ever) and it seems improbable. I
We're not comparing stocks and bonds. We're allocating within bonds. And if you want to rebalance with the portfolio I described, you can do that with Treasuries, TIPS or I Bonds - the small amount of EE Bonds would be the last thing you rebalance if stocks go down by, I don't know, 90%+
The only situation you describe where EE bonds could be a beneficial addition to your portfolio would make a long term bond fund like EDV look even better than that.
I would enjoy seeing the math on that. Far as I can tell EDV would have to go negative for the NAV benefit to net you 3.5%+ annualized for 20 years - as of right now, EDV is yielding around 1.4%, so I'm wondering how you arrive at them doing better. Explain?
I would like to particularly point out that the biggest threat to a retirement is sequence of returns risk over the first 5 or so years, and that an illiquid asset in that situation is pointless.
Again, if you look at the model portfolio, there are plenty of other bonds to draw from - there is zero issue here. In fact, if one buys EE Bonds for decades leading up to retirement, one has those as a baseline to avoid sequence risk. Backward logic IMO. I started buying EE Bonds in the early 2010s so by the early 2030s I'll have a long-term ladder of them built up - a nice baseline to avoid those risks. Again, what?!
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor » Mon Apr 06, 2020 12:54 am

I keep posting this chart, because it shows the trade-offs of different options clearly. EE Bonds held for 20 years starting now yield around 3.5% (not to mention being state tax exempt, having some cash-in flexibility after 20 years, etc...). Right now, other bond yields are all dismally low. If you take serious duration or credit risk you might get close to 1.5%, otherwise we're looking at a ballpark of around .5%. Ouch.

So let's see what happens. Imagine you invest in safe bonds or CDs or savings accounts with a 1.5% yield (to be generous) - how does that look after year one, two, three? You'll see below that very, very quickly, the YTM of EE Bonds goes up. For Treasuries to catch up, they'd have to leap up in yield at essentially an unprecedented pace to keep out with EE Bonds and make it worth cashing in EE Bonds to get their yields instead.

To put it another way: let's say you're banking on yields going up. You invest in a short-term CD or savings account or whatever else for a year or two hoping for that. Unfortunately, while you wait, EE Bonds are pulling out ahead in the race. Each year, they're more valuable. There was a time when people recommended being ready to cash in EE Bonds if a rate jump happened, but that hurdle is higher than it's ever been.

Year YTM Yrs left
1 3.53% 20
2 3.72% 19
3 3.93% 18
4 4.16% 17
5 4.43% 16
6 4.73% 15
7 5.08% 14
8 5.48% 13
9 5.95% 12
10 6.50% 11
11 7.18% 10
12 8.01% 9
13 9.05% 8
14 10.41% 7
15 12.25% 6
16 14.87% 5
17 18.92% 4
18 25.99% 3
19 42.42% 2
29 100.00% 1
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raven15
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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by raven15 » Mon Apr 06, 2020 1:48 am

Noobvestor wrote:
Mon Apr 06, 2020 12:35 am
I think you are looking at this wrong. EE's absolutely need to be excluded from the allocation for the first 20 years. Technically they could be redeemed at a real or else most likely relative loss before then, but realistically they should be considered illiquid for the first 20 years, otherwise you would have chosen something else.
Well, there are two safe-bond, 20-year options. Either you get low yields on Treasuries (near zero right now) or you get low yields on EE Bonds. If yields go up in the next few years, congrats, cash in your EE Bonds, invest in higher-yielding Treasuries. If they don't, congrats, you get 3.5% over 20 years. The latter has the bonus of not having NAV go down as yields go up - it's more of a cash-like holding, as in: no interest rate risk. So if rates go up, EE Bonds win. If rates go down, unless they go seriously sub-zero, EE Bonds also win. What am I missing here?! I would also note that if bonds in general of all durations stay low for a few years, it won't be long until the YTM of EE Bonds beats them all by a mile.
Yes, you could cash in EEs at a loss if short term rates (or longer term rates) went above 3.5%. But if it occurred that would have made EE the wrong choice. You are counting on rates staying low for them to make sense. But not too low, or in a nice easy range associated with good stock returns. Which seems borderline mutually exclusive between "EE is better than marketable bonds" and "stocks lower than 3.5% nominal".
Yes, I can imagine a case where stocks slump over a 20-year period, while bond yields remain flat, and there is no rebalancing bonus, and no inflation. But so far it has not happened (ever) and it seems improbable. I
We're not comparing stocks and bonds. We're allocating within bonds. And if you want to rebalance with the portfolio I described, you can do that with Treasuries, TIPS or I Bonds - the small amount of EE Bonds would be the last thing you rebalance if stocks go down by, I don't know, 90%+
This is the disagreement. Let's take the two major (US) failure cases of the last century. The heart of my argument is that even in 1929-1949 you would have been better off with a 67/33 allocation and rebalancing as needed, then relying on the stocks to lift you out by 20 years. Let's say you use a 25% rebalancing band. In the Great Depression stocks suffered approximately six 25% losses, enough to dissolve your entire liquid bond portfolio, leaving you with only EE's which yes did not drop, but would not have done as well as marketable bonds. In this case you would not have been as well off as if the allocation had been in marketable long term bonds for either short term survival or foresighted rebalancing.

And of course starting from the 1960's the 3.5% would have been flat terrible. In prosperous situations a lower bond allocation achievable by jettisoning the EE would have done better.

But basically the difference I think is this: you are saying that you can't compare a 60/40 to a 67/33 portfolio by jettisoning the EE bonds, and I am saying yes you absolutely can, and thus far and for the foreseeable future the latter was/likely will be better.
The only situation you describe where EE bonds could be a beneficial addition to your portfolio would make a long term bond fund like EDV look even better than that.
I would enjoy seeing the math on that. Far as I can tell EDV would have to go negative for the NAV benefit to net you 3.5%+ annualized for 20 years - as of right now, EDV is yielding around 1.4%, so I'm wondering how you arrive at them doing better. Explain?
Admittedly I did not do the math on this to see the cut off point with today's rates. Maybe tomorrow.
I would like to particularly point out that the biggest threat to a retirement is sequence of returns risk over the first 5 or so years, and that an illiquid asset in that situation is pointless.
Again, if you look at the model portfolio, there are plenty of other bonds to draw from - there is zero issue here. In fact, if one buys EE Bonds for decades leading up to retirement, one has those as a baseline to avoid sequence risk. Backward logic IMO. I started buying EE Bonds in the early 2010s so by the early 2030s I'll have a long-term ladder of them built up - a nice baseline to avoid those risks. Again, what?!
If you look at the 1929 case, the worst sequence of returns, you would have been best off if your entire bond portfolio was available in the first four years. Admittedly you may have been psychologically better with this ladder for the first ten years, but there was some serious inflation in the 1940's, and as a result you would have been better without EE after 20 years. In a very bad sequence it helps to have all safe assets immediately available.

Thus far in history you would have always been better dissolving your 10% EE bonds into 6.7% stocks, 3.3% other bonds. The "has not been the better choice even once in every single 20-year period to date for 150 years" makes me really skeptical of a strategy with a tightly capped upside but unlimited cost-of-living-adjusted downside.
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raven15
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Re: Why not go EE bonds (instead of bond funds)?

Post by raven15 » Mon Apr 06, 2020 1:56 am

Yup, too bad can only buy them at year 1! :happy
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Noobvestor
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Re: Why not go EE bonds all the way (instead of bond funds)?

Post by Noobvestor » Mon Apr 06, 2020 4:13 am

raven15 wrote:
Mon Apr 06, 2020 1:48 am
Yes, you could cash in EEs at a loss if short term rates (or longer term rates) went above 3.5%. But if it occurred that would have made EE the wrong choice. You are counting on rates staying low for them to make sense. But not too low, or in a nice easy range associated with good stock returns. Which seems borderline mutually exclusive between "EE is better than marketable bonds" and "stocks lower than 3.5% nominal".
I don't think you're following the YTM calculations. You can cash them in if yields go way up. But each year that passes, the yield to maturity grows higher and it becomes more and more favorable to stay with them. So each year you pick Treasuries or CDs or MMs, the odds stack up against you. And if there is a huge shift toward high yields, you can cash out the EE Bonds and still come out ahead in most scenarios.

Now, let's explore the opposite scenario. If yields go down, EE Bonds still win, unless yields go to negative numbers that are unprecedented in the history of bond markets (e.g. -1%+ yields on safe Treasuries, something the world has never seen, then maybe you win on the NAV front). Even then, you're stuck with negative-yielding bonds going forward, at which point it probably (again) makes sense to then pivot to EE Bonds.

If your argument is that no one should hold nominal bonds at all, well, that's a case you can make, but it's a very different argument.
This is the disagreement. Let's take the two major (US) failure cases of the last century. The heart of my argument is that even in 1929-1949 you would have been better off with a 67/33 allocation and rebalancing as needed, then relying on the stocks to lift you out by 20 years. Let's say you use a 25% rebalancing band. In the Great Depression stocks suffered approximately six 25% losses, enough to dissolve your entire liquid bond portfolio, leaving you with only EE's which yes did not drop, but would not have done as well as marketable bonds. In this case you would not have been as well off as if the allocation had been in marketable long term bonds for either short term survival or foresighted rebalancing.
If your argument is that stocks beat bonds over 20-year periods, we have periods where that isn't the case. If your argument is that you need marketable bonds to rebalance, having 1/4 of your bonds being non-marketable doesn't matter. There is no scenario here in which EE Bonds present a problem for the scenario, at least for me, because if we do have a 90% equity drop, I would argue that holding onto 10% of peak net worth as an emergency ladder is a good idea rather than cashing in that last 1/4 and betting it all on equities. I suppose it becomes subjective and personal at some point, but I'm not ditching a ladder that provides me $20K/year - there is a low point at which I will not rebalance anymore.
And of course starting from the 1960's the 3.5% would have been flat terrible. In prosperous situations a lower bond allocation achievable by jettisoning the EE would have done better.
Sure. If we have a period of runaway inflation, then the other bonds I included (TIPS And I Bonds) will do better. Again, you can't separate these out as if they're not part of a whole portfolio - the point is to hedge various scenarios, including deflation and inflation. So far over the past decade, my EE Bonds have done better. Maybe my I Bonds will catch up or exceed their returns in the coming decade. I hold both.
But basically the difference I think is this: you are saying that you can't compare a 60/40 to a 67/33 portfolio by jettisoning the EE bonds, and I am saying yes you absolutely can, and thus far and for the foreseeable future the latter was/likely will be better.
I am completely lost here - I don't understand your argument. There is no scenario in the 60/40 or 67/33 range or anything even remotely close to those in which one would need to cash in their EE Bonds early to rebalance. Nothing about this makes sense.
Admittedly I did not do the math on this to see the cut off point with today's rates. Maybe tomorrow.
I would welcome whatever projections you're game to calculate, but spoiler alert: you won't find a favorable outcome here.
If you look at the 1929 case, the worst sequence of returns, you would have been best off if your entire bond portfolio was available in the first four years. Admittedly you may have been psychologically better with this ladder for the first ten years, but there was some serious inflation in the 1940's, and as a result you would have been better without EE after 20 years. In a very bad sequence it helps to have all safe assets immediately available.
I can't address your concerns if you frame them in terms of individual holdings within a larger portfolio. Anyone can pick periods that were bad for stocks or bonds, including nominal and inflation-adjusted bonds, and various stock tilts (US, international, small, value, large, growth). You can't build a portfolio like that - it just doesn't make sense. In a well-built allocation, there is rarely (if ever) a time in which all parts will perform well - the key is having them work well together to produce superior risk-adjusted returns, reduce volatility and offer downside protection.
Thus far in history you would have always been better dissolving your 10% EE bonds into 6.7% stocks, 3.3% other bonds. The "has not been the better choice even once in every single 20-year period to date for 150 years" makes me really skeptical of a strategy with a tightly capped upside but unlimited cost-of-living-adjusted downside.
Again, I don't follow. Treasury bonds are across the board lower than they have been at any point in history. Construct for me a scenario in which any duration of safe nominal bond comes out ahead of EE Bonds. Assuming you can do that (I think it's a challenging scenario) then ask yourself the likelihood of that scenario panning out - i.e. what factors would have to play out in what order to make it happen. I haven't run the math myself, but I suppose if yields shoot up quickly, NAV gets destroyed, you rebalance into higher-yield Treasuries, it's remotely possible.

There is a long history of stocks being compared to bonds in terms of relative yields, risk-free versus risk return, so in a low-yield environment one should expect lower stock and bond returns. But if you want to put your faith in equities despite that, power to you. The one thing I take serious issue with is the idea that EE Bonds aren't exceptional for those seeking nominal bond returns. The scenarios that would result in them performing worse over the next 20 years seem very far-fetched, but again, feel free to play them out and argue for them.

I don't know what the next few decades will look like for any asset class or particular stock or bond of fund. But I can say with absolute certainty that I Bonds and EE Bonds offer a free lunch right now compared to open-market equivalents. Comparable Treasuries yield less than half what EE Bonds of the same duration yield. Comparable TIPS yield less than what I Bonds yield. Both EE and I Bonds also offer a high degree of flexibility, which can provide advantages if yields do change in the near future as well as general tax optimization opportunities. But I digress. If you want to avoid them for whatever reason, you're welcome to leave that free lunch on the table.

Personally, I've been buying up both for years and so far those have proven to be good decisions. Time will tell if that persists.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why not go EE bonds (instead of bond funds)?

Post by Lynette » Mon Apr 06, 2020 6:49 am

Mel Lindauer wrote:
Sun Apr 05, 2020 12:21 am
beyou wrote:
Sat Apr 04, 2020 12:12 pm
Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.

I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
I think that this is a great idea. There may be other pros and cons but if one is disciplined and does this for 20 years it provides a stable annuity. I think that if you are married you and your spouse can both invest $10K each year. I worked into my seventies so that my pensions could grow. I cannot emphasize sufficiently how great it is to have my base expenses covered in these volatile times. My investments are for long term healthcare emergencies. They are roughly 60/40 in a three fund portfolio - thanks Bogleheads. I do not have a clue how my investments are performing during this crisis. I never look. Instead I am spending my time learning Spanish and planting seeds and redoing my garden. It is far more peaceful than worrying about what the market so that I will have enough money in retirement.

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raven15
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Re: Why not go EE bonds (instead of bond funds)?

Post by raven15 » Mon Apr 06, 2020 8:57 am

Very well then. As far as I can tell the 3.5% of EE bonds has done worse than a 70/30 or 60/40 portfolio for every 20 year period on record. Consequently including them in the portfolio has also caused its returns to be lower for every 20 year period on record. Which is 0/130. What I know of the likely relative performance of stocks and bonds in different interest rate scenarios doesn’t give me much hope going forward. Admittedly EE purchased in late 2019 or 2020 give probably the best shot yet, but even if that turns out to be the case “has lowered the returns of a well designed portfolio 149 of 150 times with huge inflation adjusted tail risk” is not a good selling point.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Coltrane75 » Mon Apr 06, 2020 9:32 am

fatFIRE wrote:
Sat Apr 04, 2020 12:19 am
I bet those who started investing in EE bonds in the last crash (2008) are laughing their way to the bank now.

If you hold for 20-years, it's basically a 3.5% APY bond, which beats the current treasury rates by a lot (more so when it did in 2008, where I was debating going EE-bonds).

So, why not go EE bonds? At the risk of oversimplifying it, if 20-year treasuries are below 3.5%, go for EE bonds, if not then go back to a total bond fund. I'm also referring to accumulators and using new money to buy EE-bonds, so not advocating to sell EE bonds before the 20-year period is up.
For long-term investments there's no way I could, if I wanted to, replace my bond allocation with EE bonds given the $10k annual limit. Additionally, I'm not a fan of the 20 year holding period; it makes things more difficult and complex to rebalance. Finally, to go 100% EE for your bond allocation, if that Is what you seem to be suggesting, you open yourself up to inflation and interest rate risk more. If interest rates and/or inflation go up in a significant way over the course of the 20 year holding period, your hands are tied in a lot of different ways.

Finding yourself in an urgent situation where you had to sell EE Bonds before the 20 year timeframe and losing out on the 3.5% interest is a very steep penalty to pay if your many years into it.

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Re: Why not go EE bonds (instead of bond funds)?

Post by alluringreality » Mon Apr 06, 2020 9:35 am

raven15 wrote:
Mon Apr 06, 2020 8:57 am
As far as I can tell the 3.5% of EE bonds has done worse than a 70/30 or 60/40 portfolio for every 20 year period on record.
Why might someone compare EE bonds to a 70/30 or 60/40 portfolio, rather than choosing for the EE bonds to represent a portion of the 30% and 40% bonds in each portfolio? I'd think that people might buy stocks and bonds for different reasons. The returns of EE bonds would seem to follow the stated terms, with future inflation and taxes being a couple unknown items. For my purposes, EE bonds seem to fit well enough with the reasoning outlined for nominal treasury bonds in Unconventional Success. I've only started on Deep Risk, and again they seem to fit the Cliff's Notes deflationary reasoning listed.
Consequently including them in the portfolio has also caused its returns to be lower for every 20 year period on record.
In how many of these 20 year periods might EE bonds represent one of the higher rate US government bonds available to individual investors? The following suggests that 20 year treasury rates were under 3.5% in the 1950s, yet those rates were still at least double current rates.
https://fred.stlouisfed.org/series/GS20

The discontinued long term series does have some older and lower historical rates, which look to average below 3.5%, so I'm not exactly clear how current EE bond doubling at 20 years would necessarily compare too poorly.
https://fred.stlouisfed.org/series/LTGOVTBD
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)

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raven15
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Re: Why not go EE bonds (instead of bond funds)?

Post by raven15 » Mon Apr 06, 2020 12:37 pm

alluringreality wrote:
Mon Apr 06, 2020 9:35 am
Why might someone compare EE bonds to a 70/30 or 60/40 portfolio, rather than choosing for the EE bonds to represent a portion of the 30% and 40% bonds in each portfolio? I'd think that people might buy stocks and bonds for different reasons. The returns of EE bonds would seem to follow the stated terms, with future inflation and taxes being a couple unknown items. For my purposes, EE bonds seem to fit well enough with the reasoning outlined for nominal treasury bonds in Unconventional Success. I've only started on Deep Risk, and again they seem to fit the Cliff's Notes deflationary reasoning listed.
We know that in 20 years EE bonds return exactly 3.5% (ok, whatever decimal place). If every non-EE stock/bond asset allocation in the range of consideration returns more than 3.5% nominal after 20 years, then any addition of EE bonds would have been a detriment.
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