Rekenthaler: Long Bonds Are for Fools

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typical.investor
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Re: Rekenthaler: Long Bonds Are for Fools

Post by typical.investor »

abuss368 wrote: Sun May 24, 2020 7:31 pm I have always kept our bonds in an intermediate term duration bond fund.
I think intermediate nominals (I assume) make perfect sense.

Assuming we don't know future inflation, it's difficult to choose between nominals and TIPS. Long-term nominals have inflation risk. Long-term tips are not as good for deflation (and are priced now to return a real loss).

Intermediate-term seems like a practical admittance that we don't know future inflation and so can't optimize perfectly by choosing long duration.

While I 100% agree that if you know future inflation, you should choose long-term. I don't think it's useful or helpful to shout at people that their decision to not choose long duration is perverse, irrational, and the opposite of what they want to do.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by KEotSK66 »

The details of this scheme are complicated an beyond the scope of this thread, but I think the concept is a helpful way to wrap your brain around the fact that the fundamental goal of investing for retirement should be around managing the volatility of future income not managing the short-term price volatility of the assets.

you have to do both, must be a great paper
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Re: Rekenthaler: Long Bonds Are for Fools

Post by abuss368 »

typical.investor wrote: Sun May 24, 2020 7:45 pm
abuss368 wrote: Sun May 24, 2020 7:31 pm I have always kept our bonds in an intermediate term duration bond fund.
I think intermediate nominals (I assume) make perfect sense.

Assuming we don't know future inflation, it's difficult to choose between nominals and TIPS. Long-term nominals have inflation risk. Long-term tips are not as good for deflation (and are priced now to return a real loss).

Intermediate-term seems like a practical admittance that we don't know future inflation and so can't optimize perfectly by choosing long duration.

While I 100% agree that if you know future inflation, you should choose long-term. I don't think it's useful or helpful to shout at people that their decision to not choose long duration is perverse, irrational, and the opposite of what they want to do.
I agree. I gave up on TIPS over a decade ago. Consolidated everything to Total Bond and it has worked well.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

typical.investor wrote: Sun May 24, 2020 7:34 pm And what if you don't know whether you will see deflation or inflation?

You don't know whether to choose nominals or TIPS.
If you want to minimize interest rate risk, you choose based on how sensitive your future income needs are to inflation.

The approach I use is that non-discretionary expenses should be treated as 100% sensitive to inflation. This includes basic living expenses like food, clothing, housing, taxes, health care, etc.

Discretionary expenses can be bucketed into groups of HOW painful it would be to cut them out if they became expensive.

For instance, maybe you have a "I'd be really sad if I couldn't" bucket that includes traveling to visit grandchildren, going out for a steak twice a month, and season tickets to your favorite sports team. Treat those as 75% "sensitive" to inflation.

Maybe you have. second bucket of "It'd be kind of cool to do that but not heart-breaking if I can't" that includes a week at the beach every year, your hobby of collecting vintage doorknobs, and a season subscription to the symphony. Treat those as 25% "sensitive" to inflation.

Let's say your forecast is $40k/year of non-discretionary expenses, $12k/year of 75% sensitive expenses, and $12k/year of 25% sensitive expenses. You need $52k/year covered by inflation-linked income and $12k/year from nominal income. If Social Security will cover $40k/year, you're left with $12k you should probably cover with real assets (i.e. TIPS, real estate, maybe stocks) and $12k that can be covered with nominal assets (CDs, nominal bonds, maybe stocks).
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

anon_investor wrote: Sun May 24, 2020 7:34 pm Vineviz, would you recommend maxing out EE Bonds before buying any nominal LTTs?
Probably yes. Assuming you can deal with the liquidity constraints, have sufficient wealth in taxable accounts, and aren't worried about the tax deferral. The guaranteed 3.5% for holding 20 years seems awfully attractive relative to the yield on marketable 20-year Treasuries.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

vineviz wrote: Sun May 24, 2020 6:31 pm
Noobvestor wrote: Sun May 24, 2020 5:28 pm
Here it is so other people can decide - do the past 20 years give us a better picture of the range of future possibilities ... or the past 90?
I won’t bore you with details (lest I be accused again of relying on my professional training and education instead using “plain folks talk”), but due to a number of well-documented changes in the political economy (global and domestic) and in US Treasury debt instruments it is indeed likely that future correlations are more likely to resemble the past 25 years than the 65 years before that.
You just got done telling me that market timing is bad, but now are telling me you can predict the (most likely) future. Which is it?! :shock:

As for the "plain folks talk" ... no need to condescend - I'm just suggesting you define terms when you're using them in unconventional ways. I think it's great that people with a range of experiences and educations participate on this forum, but to communicate, we need clarity and common ground. In this case, we have you saying Treasuries have 'reliably' negative correlations to stocks but meaning 'recently' and 'mostly.'
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Re: Rekenthaler: Long Bonds Are for Fools

Post by anon_investor »

vineviz wrote: Sun May 24, 2020 8:18 pm
anon_investor wrote: Sun May 24, 2020 7:34 pm Vineviz, would you recommend maxing out EE Bonds before buying any nominal LTTs?
Probably yes. Assuming you can deal with the liquidity constraints, have sufficient wealth in taxable accounts, and aren't worried about the tax deferral. The guaranteed 3.5% for holding 20 years seems awfully attractive relative to the yield on marketable 20-year Treasuries.
The liquidity is not my concern, it is more the fact that there is a good chance I will still be working and in a high tax bracket in 20 years, but I almost definitely will be retired within 30 years. I am already maxing out I Bonds, since there is no similar tax concern. I will have to run the numbers for EE Bonds to see what the equivalent yield for each year held beyond the 20 years needed to double (I am going to assuming the fixed rate afterwards will remain 0.1%, athough I know it can theoretically change).
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

petulant wrote: Sun May 24, 2020 7:07 pm Third, there are "well-documented" reasons why U.S. long-term bonds may not be the safe haven in the future, including pressure from other countries to shift demand to different reserve currencies, an eventual shift in U.S. demographics to be less age-heavy that will not be replicated in other countries, pressure on the U.S. fiscal budget, and political developments akin to the shutdown in 2013. These are real risks.
Agreed. Also, one can look into the past for precedents. We know long-term bonds have not always been the best choice for long-term investors, and that US Treasury bonds were not always the safe-haven instruments they are today. So unless we assume the future will forever look like the present, things will inevitably shift again over time. Might they over the course of a few decades? It seems likely. In what ways? Who knows?!

So if the next 50 years look like the past 20 years, maybe LTTs remain the best equity diversifier. That's way too far out for my hazy crystal ball.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

vineviz wrote: Sun May 24, 2020 7:19 pmIt seems that Bogleheads largely believe that risk-averse long-term investors would prefer short-term bonds to long-term bonds, and it seems that Rekenthaler thinks so to. This creates a perverse tendency to take on MORE risk when they think they are taking on LESS risk.
It's these kinds of sweeping statements with buried assumptions that can lead to oversimplified conclusions. On some risk metrics, shorter bonds are indeed safer. On others, they aren't. I don't believe you or I or anyone can say in absolute terms which has more or less risk. /2 cents
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

Noobvestor wrote: Sun May 24, 2020 8:26 pm
You just got done telling me that market timing is bad, but now are telling me you can predict the (most likely) future. Which is it?! :shock:
"Market timing is bad" doesn't sound like something I'd say, so I'm guessing you're embellishing via paraphrase?

It is NOT predicting the future to say the "correlation of nominal Treasury bonds with stocks is reliably negative". Rather, this is merely a statement that the relationship is consistent: it's been dependably negative in the recent past and can be expected to be dependably negative in the future.

The correlation isn't some form of magical force: it depends on factors that are known and estimable. The only factor likely to materially upset the current relationship is rapidly increasing inflation, something the markets are telling us is highly unlikely.

Is that a guarantee that correlations will stay negative? Of course not.

But I've said it before and I'll say it again: even if correlations between stocks and Treasury bonds does increase, even to the point of being positive, long-term Treasuries will STILL be better diversifiers for stocks than short- or intermediate-term Treasuries. That's a mathematical certainty.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

Noobvestor wrote: Sun May 24, 2020 9:00 pm On some risk metrics, shorter bonds are indeed safer.
There's only one risk metric that matters to long-term investors, and short-term bonds aren't "safer" by that metric.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

vineviz wrote: Sun May 24, 2020 9:17 pm It is NOT predicting the future to say the "correlation of nominal Treasury bonds with stocks is reliably negative". Rather, this is merely a statement that the relationship is consistent: it's been dependably negative in the recent past and can be expected to be dependably negative in the future.
In the same sentence you say you're not predicting the future but ... also predicting the future. I can't really make sense of this.
vineviz wrote: Sun May 24, 2020 9:17 pm... even if correlations between stocks and Treasury bonds does increase, even to the point of being positive, long-term Treasuries will STILL be better diversifiers for stocks than short- or intermediate-term Treasuries. That's a mathematical certainty.
So now we're into 'mathematical certainty' territory and I'm just at a loss. We have long past periods in which shorter bonds did better while long bonds and equities suffered - particularly, periods of rising rates and inflation (I keep mentioning the 40s to 80s ... but you just skim past that).

I don't see how something can go from 'actually happened in the past' to 'mathematically impossible in the future'. The only way I see that working is if you believe that there is no way in the world (it's mathematically impossible) for high inflation and high rates to ever happen again. :shock:
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

vineviz wrote: Sun May 24, 2020 9:19 pm
Noobvestor wrote: Sun May 24, 2020 9:00 pm On some risk metrics, shorter bonds are indeed safer.
There's only one risk metric that matters to long-term investors, and short-term bonds aren't "safer" by that metric.
Strange. I'm a long-term investor and concerned with a variety of risks. Also fairly sure I'm not the only one ... :confused
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Rekenthaler: Long Bonds Are for Fools

Post by petulant »

Noobvestor wrote: Sun May 24, 2020 9:48 pm
vineviz wrote: Sun May 24, 2020 9:19 pm
Noobvestor wrote: Sun May 24, 2020 9:00 pm On some risk metrics, shorter bonds are indeed safer.
There's only one risk metric that matters to long-term investors, and short-term bonds aren't "safer" by that metric.
Strange. I'm a long-term investor and concerned with a variety of risks. Also fairly sure I'm not the only one ... :confused
Under vineviz's telling, anything you care about other than the risk he cares about is an irrational/behavioral problem. :wink:
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Re: Rekenthaler: Long Bonds Are for Fools

Post by petulant »

anon_investor wrote: Sun May 24, 2020 7:14 pm
petulant wrote: Sun May 24, 2020 7:07 pm
vineviz wrote: Sun May 24, 2020 6:31 pm
Noobvestor wrote: Sun May 24, 2020 5:28 pm
Here it is so other people can decide - do the past 20 years give us a better picture of the range of future possibilities ... or the past 90?
I won’t bore you with details (lest I be accused again of relying on my professional training and education instead using “plain folks talk”), but due to a number of well-documented changes in the political economy (global and domestic) and in US Treasury debt instruments it is indeed likely that future correlations are more likely to resemble the past 25 years than the 65 years before that.

It’s possible that correlations will you increase, of course, especially if we experience an increase in inflation volatility. On the other hand , deflationary pressures would like lower correlations even further.

That doesn’t change the fact that, even with a increased correlations, long term bonds are still better diversified than short term bonds. And if you fear a return of inflation volatility, long-term TIPS have you covered.
Yeah I'm gonna call [insert word here] on this one. First, the question is whether there's a risk long-term bonds get hit at the same time as stocks, not whether it's more likely than not. So to start out, you're setting a standard of what's "more likely," which is moving the goal posts, an activity in which you regularly engage (and why posters shouldn't give credence to your hyperbolic statements).

Second, this idea that you have "professional training" about "well-documented" trends should be ignored, for a couple reasons. First, anybody with professional training who is being responsible would be quick to admit that there is a risk of people losing faith in some aspect of the U.S. financial system. If more training makes somebody think that the current system is practically invulnerable, it seems to me that person is being made less wise, not more wise. And training sometimes does that to people--it can irrationally close them off to very real possibilities because it doesn't fit the training. And by the way, I've got an economics degree and regularly deal with economics and finance issues, too.

Third, there are "well-documented" reasons why U.S. long-term bonds may not be the safe haven in the future, including pressure from other countries to shift demand to different reserve currencies, an eventual shift in U.S. demographics to be less age-heavy that will not be replicated in other countries, pressure on the U.S. fiscal budget, and political developments akin to the shutdown in 2013. These are real risks.
Based on what is known today, what is a better fixed income option than long term treasuries (be it nominal or inflation protected)?

I still have not read anyone offering a better option (aside from EE or I Bonds).

Anyone?
Well, I've been pretty clear with a recommendation for stocks to fill the role of long-term assets up to volatility tolerance, then bonds somewhere around a short or intermediate duration. Generally, a portfolio should have a much higher expected return with similar volatility using this strategy. It is similar to the recommendation of Larry Swedroe.

That implies minimizing bond allocation for accumulators. As an accumulator approaches retirement (15 or so years out), I would recommend the bond allocation increase based on needs before SS, but at retirement during the first few years I would recommend duration come down. Then, as SS approaches, I would recommend a lower bond allocation but keep lower duration. This is called a rising equity glidepath or bond tent. Michael Kitces has some great articles on this approach.

Of course, I Bonds and EE Bonds may or may not be the best options for some of those periods.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

Noobvestor wrote: Sun May 24, 2020 9:44 pm
vineviz wrote: Sun May 24, 2020 9:17 pm... even if correlations between stocks and Treasury bonds does increase, even to the point of being positive, long-term Treasuries will STILL be better diversifiers for stocks than short- or intermediate-term Treasuries. That's a mathematical certainty.
So now we're into 'mathematical certainty' territory and I'm just at a loss. We have long past periods in which shorter bonds did better while long bonds and equities suffered - particularly, periods of rising rates and inflation (I keep mentioning the 40s to 80s ... but you just skim past that).

I don't see how something can go from 'actually happened in the past' to 'mathematically impossible in the future'. The only way I see that working is if you believe that there is no way in the world (it's mathematically impossible) for high inflation and high rates to ever happen again. :shock:
What I said was this: " long-term Treasuries will STILL be better diversifiers for stocks than short- or intermediate-term Treasuries."

Diversification is a mathematical function, and the equation has just two inputs: variance and correlation. The other things you mention (returns, inflation, etc.) are important but they are NOT part of that equation.

In simple terms, the equation is a + b = c. The value of some other variable (say, "d") might be important for OTHER formulas but it has no effect on the value of "c".
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

Noobvestor wrote: Sun May 24, 2020 9:48 pm
vineviz wrote: Sun May 24, 2020 9:19 pm
Noobvestor wrote: Sun May 24, 2020 9:00 pm On some risk metrics, shorter bonds are indeed safer.
There's only one risk metric that matters to long-term investors, and short-term bonds aren't "safer" by that metric.
Strange. I'm a long-term investor and concerned with a variety of risks. Also fairly sure I'm not the only one ... :confused
Fine, name one risk metric by which short-term bonds are "safer" that should matter to long-term investors.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

anon_investor wrote: Sun May 24, 2020 8:43 pm The liquidity is not my concern, it is more the fact that there is a good chance I will still be working and in a high tax bracket in 20 years, but I almost definitely will be retired within 30 years. I am already maxing out I Bonds, since there is no similar tax concern. I will have to run the numbers for EE Bonds to see what the equivalent yield for each year held beyond the 20 years needed to double (I am going to assuming the fixed rate afterwards will remain 0.1%, athough I know it can theoretically change).
Depends on your state tax rate, but I think the only way to get a higher after-tax expected return on 20+ year bonds would be with very low-quality corporate bonds (BBB- or worse) so it's hard to imagine a scenario in which most investors wouldn't be better off maxing out their EE allowance before moving on to marketable securities in a taxable account.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by anon_investor »

vineviz wrote: Mon May 25, 2020 8:27 am
anon_investor wrote: Sun May 24, 2020 8:43 pm The liquidity is not my concern, it is more the fact that there is a good chance I will still be working and in a high tax bracket in 20 years, but I almost definitely will be retired within 30 years. I am already maxing out I Bonds, since there is no similar tax concern. I will have to run the numbers for EE Bonds to see what the equivalent yield for each year held beyond the 20 years needed to double (I am going to assuming the fixed rate afterwards will remain 0.1%, athough I know it can theoretically change).
Depends on your state tax rate, but I think the only way to get a higher after-tax expected return on 20+ year bonds would be with very low-quality corporate bonds (BBB- or worse) so it's hard to imagine a scenario in which most investors wouldn't be better off maxing out their EE allowance before moving on to marketable securities in a taxable account.
Thanks! The way you frame it, EE bonds sound almost too good to be true! I wonder if the Treasury will increase the doubling time soon. I guess it makes sense to buy my 2020 allotment before November to ensure I get the 20 year doubling time. I am glad I bought my I Bond allotment at the end of April when the fixed rate was still 0.2% instead of 0%...
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Re: Rekenthaler: Long Bonds Are for Fools

Post by CULater »

Bond investment risk has different definitions and depends on investment goals. If the goal is capital preservation, then short duration bonds are less risky than long duration bonds. That's because the market value of short bonds is less affected by changes in interest rates than long bonds. For example, if I have $1,000 nominal and I want to assure that I'll still have that $1,000 predictably at my disposal at any time I should consider such investments alternatives as cash, a money market fund, or T-bills. I would not consider longer-term bonds.

If the investment goal is targeted future consumption, then bonds with durations that precisely match consumption needs are less risky than short term bonds. For example, if my planned consumption need is to have $1,000 nominal to spend in 10 years then I should consider such investments as 10-year zero-coupon bond, a 10-year conventional bond, or a 10-year certificate of deposit. If the consumption goal was to have $1,000 per year available for 20 years beginning 10 years from now, then a bond ladder corresponding to this consumption pattern would be the default choice. I could also use bond funds with a duration-matching strategy to closely accomplish this objective. This is called a liability-driven investment strategy (LDI).

So, there's nothing wrong with asserting that bond risk varies with investment objectives; but it would be more precise to say that the riskiness of ones' bond investment strategy varies according to the fit between that strategy and investment objectives.

It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.

So, it's important to clarify your bond investment goals, implement an appropriate strategy, and stick with it. You have to pick which bull you want to ride and then try to stay on it until the horn sounds.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by HEDGEFUNDIE »

CULater wrote: Mon May 25, 2020 11:15 am Bond investment risk has different definitions and depends on investment goals. If the goal is capital preservation, then short duration bonds are less risky than long duration bonds. That's because the market value of short bonds is less affected by changes in interest rates than long bonds. For example, if I have $1,000 nominal and I want to assure that I'll still have that $1,000 predictably at my disposal at any time I should consider such investments alternatives as cash, a money market fund, or T-bills. I would not consider longer-term bonds.

If the investment goal is targeted future consumption, then bonds with durations that precisely match consumption needs are less risky than short term bonds. For example, if my planned consumption need is to have $1,000 nominal to spend in 10 years then I should consider such investments as 10-year zero-coupon bond, a 10-year conventional bond, or a 10-year certificate of deposit. If the consumption goal was to have $1,000 per year available for 20 years beginning 10 years from now, then a bond ladder corresponding to this consumption pattern would be the default choice. I could also use bond funds with a duration-matching strategy to closely accomplish this objective. This is called a liability-driven investment strategy (LDI).

So, there's nothing wrong with asserting that bond risk varies with investment objectives; but it would be more precise to say that the riskiness of ones' bond investment strategy varies according to the fit between that strategy and investment objectives.

It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.

So, it's important to clarify your bond investment goals, implement an appropriate strategy, and stick with it. You have to pick which bull you want to ride and then try to stay on it until the horn sounds.
I like this framing a lot, but does capital preservation for its own sake ever make sense? Isn’t the point of having money to spend it at some point in the future? Whether that’s one day in the future or 20 years. Which turns one’s investment strategy inevitably into LDI, no?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by patrick »

vineviz wrote: Sun May 24, 2020 8:14 pm
typical.investor wrote: Sun May 24, 2020 7:34 pm And what if you don't know whether you will see deflation or inflation?

You don't know whether to choose nominals or TIPS.
If you want to minimize interest rate risk, you choose based on how sensitive your future income needs are to inflation.

The approach I use is that non-discretionary expenses should be treated as 100% sensitive to inflation. This includes basic living expenses like food, clothing, housing, taxes, health care, etc.

Discretionary expenses can be bucketed into groups of HOW painful it would be to cut them out if they became expensive.

For instance, maybe you have a "I'd be really sad if I couldn't" bucket that includes traveling to visit grandchildren, going out for a steak twice a month, and season tickets to your favorite sports team. Treat those as 75% "sensitive" to inflation.

Maybe you have. second bucket of "It'd be kind of cool to do that but not heart-breaking if I can't" that includes a week at the beach every year, your hobby of collecting vintage doorknobs, and a season subscription to the symphony. Treat those as 25% "sensitive" to inflation.
If you can no longer afford to go to the beach each year because your nominal bonds didn't keep up with inflation, that means that inflation risk has in fact hit you. If you don't consider such a loss heart-breaking, that doesn't mean the risk isn't there, it just means that you have accepted the risk. Cam we expect to get a large enough inflation risk premium from nominal bonds to compensate for the risk you accepted?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by CULater »

HEDGEFUNDIE wrote: Mon May 25, 2020 11:21 am
CULater wrote: Mon May 25, 2020 11:15 am Bond investment risk has different definitions and depends on investment goals. If the goal is capital preservation, then short duration bonds are less risky than long duration bonds. That's because the market value of short bonds is less affected by changes in interest rates than long bonds. For example, if I have $1,000 nominal and I want to assure that I'll still have that $1,000 predictably at my disposal at any time I should consider such investments alternatives as cash, a money market fund, or T-bills. I would not consider longer-term bonds.

If the investment goal is targeted future consumption, then bonds with durations that precisely match consumption needs are less risky than short term bonds. For example, if my planned consumption need is to have $1,000 nominal to spend in 10 years then I should consider such investments as 10-year zero-coupon bond, a 10-year conventional bond, or a 10-year certificate of deposit. If the consumption goal was to have $1,000 per year available for 20 years beginning 10 years from now, then a bond ladder corresponding to this consumption pattern would be the default choice. I could also use bond funds with a duration-matching strategy to closely accomplish this objective. This is called a liability-driven investment strategy (LDI).

So, there's nothing wrong with asserting that bond risk varies with investment objectives; but it would be more precise to say that the riskiness of ones' bond investment strategy varies according to the fit between that strategy and investment objectives.

It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.

So, it's important to clarify your bond investment goals, implement an appropriate strategy, and stick with it. You have to pick which bull you want to ride and then try to stay on it until the horn sounds.
I like this framing a lot, but does capital preservation for its own sake ever make sense? Isn’t the point of having money to spend it at some point in the future? Whether that’s one day in the future or 20 years. Which turns one’s investment strategy inevitably into LDI, no?
I think you're correct. I see it as a continuum. I think another way it can be viewed is in terms of predictability of cash flow from near term to long term. Predictability corresponds to bond duration. Short duration bonds have high short term cash flow predictability but unpredictable long term cash flow predictability; while longer term bonds have the opposite.

You want to match bond duration to the duration of your cash flow needs. If you are buying bonds or bond funds to generate cash flow in retirement, implementing an LDI strategy is going to allow you to increase the predictability of the cash flow your portfolio can generate in retirement. Using short term bonds, which appear to be safer, actually degrades the predictability of your portfolio cash flow in retirement. IF you are investing in bonds with the plan of holding onto that investment until retirement without trading or rebalancing that allocation, then it makes sense to try to match the duration of that bond allocation to your retirement horizon as closely as possible. That's not to say that all of your bond investment would have to be managed that way.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by CULater »

Yet another way to view bonds within a LDI framework is that the consumption (cash flow) goal is akin to a long term bond. The LDI strategy is designed to have the same interest rate sensitivity as the consumption goal. To the extent this is implemented effectively, this assures that the value of the bond portfolio moves in lockstep with the present value cost of funding the consumption goal. For example, if interest rates go up then the value of the bond portfolio goes down; but so does the present value cost of funding the projected consumption goal by a similar amount. And vice versa. That's the explanation for how "duration matching" works.

Note that long bonds don't have less interest rate sensitivity (risk), per se, for investors with long term consumption goals. The interest rate sensitivity (risk) is greater in terms of fluctuations in bond values, but that risk is matched to the cost risk of funding the consumption goal. If the LDI strategy is fully executed, then there is lower risk, or fluctuation, in the future cash flow stream that can be funded by the bond portfolio. So in that sense long term bonds are less risky for investors who desire a predictable future cash flow to fund consumption goals.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by KEotSK66 »

to cover inflation and deflation/disinflation it's a good idea to hold TIPS and quality straight bonds
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Re: Rekenthaler: Long Bonds Are for Fools

Post by KEotSK66 »

CULater wrote: Mon May 25, 2020 1:17 pm
HEDGEFUNDIE wrote: Mon May 25, 2020 11:21 am
CULater wrote: Mon May 25, 2020 11:15 am Bond investment risk has different definitions and depends on investment goals. If the goal is capital preservation, then short duration bonds are less risky than long duration bonds. That's because the market value of short bonds is less affected by changes in interest rates than long bonds. For example, if I have $1,000 nominal and I want to assure that I'll still have that $1,000 predictably at my disposal at any time I should consider such investments alternatives as cash, a money market fund, or T-bills. I would not consider longer-term bonds.

If the investment goal is targeted future consumption, then bonds with durations that precisely match consumption needs are less risky than short term bonds. For example, if my planned consumption need is to have $1,000 nominal to spend in 10 years then I should consider such investments as 10-year zero-coupon bond, a 10-year conventional bond, or a 10-year certificate of deposit. If the consumption goal was to have $1,000 per year available for 20 years beginning 10 years from now, then a bond ladder corresponding to this consumption pattern would be the default choice. I could also use bond funds with a duration-matching strategy to closely accomplish this objective. This is called a liability-driven investment strategy (LDI).

So, there's nothing wrong with asserting that bond risk varies with investment objectives; but it would be more precise to say that the riskiness of ones' bond investment strategy varies according to the fit between that strategy and investment objectives.

It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.

So, it's important to clarify your bond investment goals, implement an appropriate strategy, and stick with it. You have to pick which bull you want to ride and then try to stay on it until the horn sounds.
I like this framing a lot, but does capital preservation for its own sake ever make sense? Isn’t the point of having money to spend it at some point in the future? Whether that’s one day in the future or 20 years. Which turns one’s investment strategy inevitably into LDI, no?
I think you're correct. I see it as a continuum. I think another way it can be viewed is in terms of predictability of cash flow from near term to long term. Predictability corresponds to bond duration. Short duration bonds have high short term cash flow predictability but unpredictable long term cash flow predictability; while longer term bonds have the opposite.

You want to match bond duration to the duration of your cash flow needs. If you are buying bonds or bond funds to generate cash flow in retirement, implementing an LDI strategy is going to allow you to increase the predictability of the cash flow your portfolio can generate in retirement. Using short term bonds, which appear to be safer, actually degrades the predictability of your portfolio cash flow in retirement. IF you are investing in bonds with the plan of holding onto that investment until retirement without trading or rebalancing that allocation, then it makes sense to try to match the duration of that bond allocation to your retirement horizon as closely as possible. That's not to say that all of your bond investment would have to be managed that way.
you can't increase the predictability of the cash flows from a bond FUND that way because the duration remains fairly stable over time, in other words the bond fund value (nav x #shares) is always at risk due to interest rates

sure you can do it with individual bonds, and i'm assuming you're not talking about target date bond funds

as part of wellesley income i essentially own a bond fund with an effective intermediate duration so i will always be exposed to the corresponding amount of "intermediate" interest rate risk
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Re: Rekenthaler: Long Bonds Are for Fools

Post by anon_investor »

KEotSK66 wrote: Mon May 25, 2020 8:34 pm
CULater wrote: Mon May 25, 2020 1:17 pm
HEDGEFUNDIE wrote: Mon May 25, 2020 11:21 am
CULater wrote: Mon May 25, 2020 11:15 am Bond investment risk has different definitions and depends on investment goals. If the goal is capital preservation, then short duration bonds are less risky than long duration bonds. That's because the market value of short bonds is less affected by changes in interest rates than long bonds. For example, if I have $1,000 nominal and I want to assure that I'll still have that $1,000 predictably at my disposal at any time I should consider such investments alternatives as cash, a money market fund, or T-bills. I would not consider longer-term bonds.

If the investment goal is targeted future consumption, then bonds with durations that precisely match consumption needs are less risky than short term bonds. For example, if my planned consumption need is to have $1,000 nominal to spend in 10 years then I should consider such investments as 10-year zero-coupon bond, a 10-year conventional bond, or a 10-year certificate of deposit. If the consumption goal was to have $1,000 per year available for 20 years beginning 10 years from now, then a bond ladder corresponding to this consumption pattern would be the default choice. I could also use bond funds with a duration-matching strategy to closely accomplish this objective. This is called a liability-driven investment strategy (LDI).

So, there's nothing wrong with asserting that bond risk varies with investment objectives; but it would be more precise to say that the riskiness of ones' bond investment strategy varies according to the fit between that strategy and investment objectives.

It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.

So, it's important to clarify your bond investment goals, implement an appropriate strategy, and stick with it. You have to pick which bull you want to ride and then try to stay on it until the horn sounds.
I like this framing a lot, but does capital preservation for its own sake ever make sense? Isn’t the point of having money to spend it at some point in the future? Whether that’s one day in the future or 20 years. Which turns one’s investment strategy inevitably into LDI, no?
I think you're correct. I see it as a continuum. I think another way it can be viewed is in terms of predictability of cash flow from near term to long term. Predictability corresponds to bond duration. Short duration bonds have high short term cash flow predictability but unpredictable long term cash flow predictability; while longer term bonds have the opposite.

You want to match bond duration to the duration of your cash flow needs. If you are buying bonds or bond funds to generate cash flow in retirement, implementing an LDI strategy is going to allow you to increase the predictability of the cash flow your portfolio can generate in retirement. Using short term bonds, which appear to be safer, actually degrades the predictability of your portfolio cash flow in retirement. IF you are investing in bonds with the plan of holding onto that investment until retirement without trading or rebalancing that allocation, then it makes sense to try to match the duration of that bond allocation to your retirement horizon as closely as possible. That's not to say that all of your bond investment would have to be managed that way.
you can't increase the predictability of the cash flows from a bond FUND that way because the duration remains fairly stable over time, in other words the bond fund value (nav x #shares) is always at risk due to interest rates

sure you can do it with individual bonds, and i'm assuming you're not talking about target date bond funds

as part of wellesley income i essentially own a bond fund with an effective intermediate duration so i will always be exposed to the corresponding amount of "intermediate" interest rate risk
Couldn't you start to add in a short term bond fund in order to reduce the effective duration of your long term bond holdings to the desired duration and continue to shift funds accordingly? I think people do that all the time like a bond barbell.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by KEotSK66 »

yeah sure, but now you're talking about managing a bond portfolio when a single bond does the trick

besides, even if you swap from a long/int fund fully into a short fund over time you're still stuck with the corresponding level of "short" interest rate risk
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Re: Rekenthaler: Long Bonds Are for Fools

Post by middlemanager »

CULater wrote: Mon May 25, 2020 1:17 pm
HEDGEFUNDIE wrote: Mon May 25, 2020 11:21 am Bond investment risk has different definitions and depends on investment goals. If the goal is capital preservation, then short duration bonds are less risky than long duration bonds. That's because the market value of short bonds is less affected by changes in interest rates than long bonds. For example, if I have $1,000 nominal and I want to assure that I'll still have that $1,000 predictably at my disposal at any time I should consider such investments alternatives as cash, a money market fund, or T-bills. I would not consider longer-term bonds.

If the investment goal is targeted future consumption, then bonds with durations that precisely match consumption needs are less risky than short term bonds. For example, if my planned consumption need is to have $1,000 nominal to spend in 10 years then I should consider such investments as 10-year zero-coupon bond, a 10-year conventional bond, or a 10-year certificate of deposit. If the consumption goal was to have $1,000 per year available for 20 years beginning 10 years from now, then a bond ladder corresponding to this consumption pattern would be the default choice. I could also use bond funds with a duration-matching strategy to closely accomplish this objective. This is called a liability-driven investment strategy (LDI).

So, there's nothing wrong with asserting that bond risk varies with investment objectives; but it would be more precise to say that the riskiness of ones' bond investment strategy varies according to the fit between that strategy and investment objectives.

It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.

So, it's important to clarify your bond investment goals, implement an appropriate strategy, and stick with it. You have to pick which bull you want to ride and then try to stay on it until the horn sounds.
I like this framing a lot, but does capital preservation for its own sake ever make sense? Isn’t the point of having money to spend it at some point in the future? Whether that’s one day in the future or 20 years. Which turns one’s investment strategy inevitably into LDI, no?
Exactly, but LDI is also a capital preservation strategy so you could reframe the question to say do bonds ever make sense?

I see the AA / bond decision as two fold - how much of a premium are you willing to pay to preserve your capital (AA)? And how much of a premium are you willing to pay to have that capital immediately accessible vs. available at some guaranteed point in the future (ST bond vs. LT bond)? The answers to these questions 1. involve endless externalities (especially when we are talking about a 30 year time horizon) so we have no idea what the premiums will actually be - and the premiums could of course be negative 2. are highly personal.

Bogleheads have tried to answers these by creating the "do no harm" approach to investing. Buy a bunch of everything. ST average returns = LT outperformance. Not outperformance of the market, but outperformance of the externalities and outperformance of yourself.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

vineviz wrote: Mon May 25, 2020 7:40 am
Noobvestor wrote: Sun May 24, 2020 9:48 pm
vineviz wrote: Sun May 24, 2020 9:19 pm
Noobvestor wrote: Sun May 24, 2020 9:00 pm On some risk metrics, shorter bonds are indeed safer.
There's only one risk metric that matters to long-term investors, and short-term bonds aren't "safer" by that metric.
Strange. I'm a long-term investor and concerned with a variety of risks. Also fairly sure I'm not the only one ... :confused
Fine, name one risk metric by which short-term bonds are "safer" that should matter to long-term investors.
You're redirecting the conversation. Could you instead clarify what the 'one risk metric' is you were referring to in your post?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by KEotSK66 »

middlemanager wrote: Tue May 26, 2020 2:58 am
CULater wrote: Mon May 25, 2020 1:17 pm
HEDGEFUNDIE wrote: Mon May 25, 2020 11:21 am Bond investment risk has different definitions and depends on investment goals. If the goal is capital preservation, then short duration bonds are less risky than long duration bonds. That's because the market value of short bonds is less affected by changes in interest rates than long bonds. For example, if I have $1,000 nominal and I want to assure that I'll still have that $1,000 predictably at my disposal at any time I should consider such investments alternatives as cash, a money market fund, or T-bills. I would not consider longer-term bonds.

If the investment goal is targeted future consumption, then bonds with durations that precisely match consumption needs are less risky than short term bonds. For example, if my planned consumption need is to have $1,000 nominal to spend in 10 years then I should consider such investments as 10-year zero-coupon bond, a 10-year conventional bond, or a 10-year certificate of deposit. If the consumption goal was to have $1,000 per year available for 20 years beginning 10 years from now, then a bond ladder corresponding to this consumption pattern would be the default choice. I could also use bond funds with a duration-matching strategy to closely accomplish this objective. This is called a liability-driven investment strategy (LDI).

So, there's nothing wrong with asserting that bond risk varies with investment objectives; but it would be more precise to say that the riskiness of ones' bond investment strategy varies according to the fit between that strategy and investment objectives.

It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.

So, it's important to clarify your bond investment goals, implement an appropriate strategy, and stick with it. You have to pick which bull you want to ride and then try to stay on it until the horn sounds.
I like this framing a lot, but does capital preservation for its own sake ever make sense? Isn’t the point of having money to spend it at some point in the future? Whether that’s one day in the future or 20 years. Which turns one’s investment strategy inevitably into LDI, no?
Exactly, but LDI is also a capital preservation strategy so you could reframe the question to say do bonds ever make sense?

I see the AA / bond decision as two fold - how much of a premium are you willing to pay to preserve your capital (AA)? And how much of a premium are you willing to pay to have that capital immediately accessible vs. available at some guaranteed point in the future (ST bond vs. LT bond)? The answers to these questions 1. involve endless externalities (especially when we are talking about a 30 year time horizon) so we have no idea what the premiums will actually be - and the premiums could of course be negative 2. are highly personal.

Bogleheads have tried to answers these by creating the "do no harm" approach to investing. Buy a bunch of everything. ST average returns = LT outperformance. Not outperformance of the market, but outperformance of the externalities and outperformance of yourself.
if you're drawing in retirement...

i think preservation of and access to your capital are the same thing, ie some bonds

unless you believe the bond market will collapse, spending capital which will be replaced by reinvesting subsequent income is a game which can be played for a long time for reasonable inflation and reasonable TR

there is risk you could exhaust capital but locking in capital for 30 years for a nominal return is risky too, and i'm not sure tips solve the problem
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

Noobvestor wrote: Tue May 26, 2020 6:17 am You're redirecting the conversation. Could you instead clarify what the 'one risk metric' is you were referring to in your post?
Please stop playing games. You made the original claim ("On some risk metrics, shorter bonds are indeed safer.") and I'm simply asking you clarify what risks were referring to.

By definition, short-term bonds differ from long-term bonds in only one way: their duration. And we've already established that short-term bonds do NOT have less interest rate risk (which is the only risk we've discussed so far that is associated directly with duration) for a long-term investor.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

KEotSK66 wrote: Mon May 25, 2020 9:06 pm yeah sure, but now you're talking about managing a bond portfolio when a single bond does the trick
Maybe, you're also using as few as just two bond funds to manage your duration whereas as a cashflow matching strategy is going to require a number of bonds equal to the number of periods for which you're planning. Ideally, at least one bond maturing every year of retirement. The benefit of individual bonds is that it only needs to be set up once, in theory at least. But if the investor finds that they misestimated their consumption needs or otherwise needs to make a change, a portfolio of individual bonds is MUCH more complicated to adjust.

In reality, most DIY investors are rebalancing their portfolios every year anyway. Including two bond funds in that rebalancing session isn't much more work than including one bond funds.
KEotSK66 wrote: Mon May 25, 2020 9:06 pmbesides, even if you swap from a long/int fund fully into a short fund over time you're still stuck with the corresponding level of "short" interest rate risk
This isn't true: a gradual decrease in the allocation to your long-term bond fund with a corresponding increase in allocation to your short-term bond fund will not expose you to any significant amount of interest rate risk so long as you keep average duration of the bond funds in you portfolio matched to your updated time horizon.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by KEotSK66 »

vineviz wrote: Tue May 26, 2020 7:59 am
KEotSK66 wrote: Mon May 25, 2020 9:06 pm yeah sure, but now you're talking about managing a bond portfolio when a single bond does the trick
Maybe, you're also using as few as just two bond funds to manage your duration whereas as a cashflow matching strategy is going to require a number of bonds equal to the number of periods for which you're planning. Ideally, at least one bond maturing every year of retirement. The benefit of individual bonds is that it only needs to be set up once, in theory at least. But if the investor finds that they misestimated their consumption needs or otherwise needs to make a change, a portfolio of individual bonds is MUCH more complicated to adjust.

In reality, most DIY investors are rebalancing their portfolios every year anyway. Including two bond funds in that rebalancing session isn't much more work than including one bond funds.
KEotSK66 wrote: Mon May 25, 2020 9:06 pmbesides, even if you swap from a long/int fund fully into a short fund over time you're still stuck with the corresponding level of "short" interest rate risk
This isn't true: a gradual decrease in the allocation to your long-term bond fund with a corresponding increase in allocation to your short-term bond fund will not expose you to any significant amount of interest rate risk so long as you keep average duration of the bond funds in you portfolio matched to your updated time horizon.
you don't get to dictate what's significant, and you still don't get it
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

KEotSK66 wrote: Tue May 26, 2020 8:09 am you don't get to dictate what's significant, and you still don't get it
Don't be petty, please. This thread is contentious enough already.

When I say "significant" I mean it an objective sense, i.e. statistical significance. If you rebalance once a year, you can keep your weighted average bond fund duration matched to within six months of your investment time horizon. Rebalance monthly and you can keep it within two weeks. Whatever amount of interest rate risk you feel is acceptable dictates how often you rebalance, but objectively speaking once a year is plenty close.

No one here is pretending that is either possible or necessary to event REMOTELY approach that level of accuracy or precision when estimating our investment time horizon.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by middlemanager »

KEotSK66 wrote: Tue May 26, 2020 7:49 am if you're drawing in retirement...
Yes, when you are drawing in retirement is the time where it makes the most sense to pay the premium for capital preservation because you have known and immediate consumption. The upside of holding all stocks or LT bonds for this consumption is generally low compared to the downside of not being able to meet your consumption need. There are more intricacies regarding portfolio size vs. consumption needs, but this captures it generally.
KEotSK66 wrote: Tue May 26, 2020 7:49 am i think preservation of and access to your capital are the same thing, ie some bonds
I don't. There are many liquid capital instruments that are readily accessible, but don't guarantee any preservation of capital.
KEotSK66 wrote: Tue May 26, 2020 7:49 am unless you believe the bond market will collapse, spending capital which will be replaced by reinvesting subsequent income is a game which can be played for a long time for reasonable inflation and reasonable TR
Yes, but you're still expected to pay a premium for holding bonds of any kind instead of stocks. The premium is lower expected return. The benefit is higher expected preservation of capital. Of course, bonds could outperform stocks, but they are not expected to.
KEotSK66 wrote: Tue May 26, 2020 7:49 am there is risk you could exhaust capital but locking in capital for 30 years for a nominal return is risky too, and i'm not sure tips solve the problem
The expected risk curve on the long end looks something like this. People with long investment horizons should hold long instruments (stocks / LT bonds) because the biggest expected risk for people with long horizons is that they do not get enough return to meet their future needs. Stocks and, if you are going to hold bonds for long term investment needs, LT bonds have a higher expected returns than other instruments. ST bonds could outperform LT bonds, but they are not expected to.

I think what most people get hung up on is a couple of things. 1. Short term preservation of capital helps them execute the rest of their investment strategy (call it neutralizing behavior risk because they have their safe stash of "cash" or "total bond fund"). 2. Expected premiums to preserve capital can be negligible or even negative (bonds can outperform stocks, ST bonds can outperform LT bonds). We have lots of past data, but no one can say how much the premium will be or what the likelihood is of it being material or non-negative. So, holding bonds (or not), ST bonds, cash, LT bonds, or a basket of bonds could be right for you. Only you can decide that.
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Re: Rekenthaler: Long Bonds Are for Fools

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

CULater wrote: Mon May 25, 2020 11:15 am It's important to note that capital preservation and consumption liability are divergent objectives that cannot be interchanged. If the goal is targeted future consumption using the LDI strategy, then one has to accept possible high volatility of the continuous market value of longer duration bonds. It's possible that one could incur large capital losses if the LDI strategy is abandoned and long duration bond holdings are sold or traded. Conversely, if the goal is capital preservation, then one has to accept less predictability in future consumption cash flow.
It might help some folks to visualize this, so let me pose this thought experiment:

Each of the two graphs below represent the growth of $10,000 invested in a hypothetical bond fund. Assume your goal for this bond fund investment is to provide for $12,000 in consumption in the year 2040. Each line in the graph corresponds to one possible path that bond yields can take over the next 20 years: you know for sure that one of the lines will be the one you experience, but you can't know in advance which line it will be (the lines in both graphs represent that same yield curves).

Image

Which bond fund, A or B, should a rational investor choose?

Astute observers will be able to guess what the two bond fund strategies represent, but I'm curious to see which option people think is the more "foolish" choice.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by petulant »

Nobody in this thread is saying to fund a fixed nominal amount of consumption in 20 years with only bonds.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

petulant wrote: Tue May 26, 2020 3:01 pm Nobody in this thread is saying to fund a fixed nominal amount of consumption in 20 years with only bonds.
And nothing in my example requires the dollars to be nominal. If you'd rather think in terms of "real" dollars, then feel free to do so.

The question is the same with either real dollars or nominal dollars: which investment option, A or B, is the least risky way to fund consumption in the 20th year?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by petulant »

vineviz wrote: Tue May 26, 2020 3:08 pm
petulant wrote: Tue May 26, 2020 3:01 pm Nobody in this thread is saying to fund a fixed nominal amount of consumption in 20 years with only bonds.
And nothing in my example requires the dollars to be nominal. If you'd rather think in terms of "real" dollars, then feel free to do so.

The question is the same with either real dollars or nominal dollars: which investment option, A or B, is the least risky way to fund consumption in the 20th year?
And, of course, the main point of my post was that people have suggested to rely more on stocks for long-dated consumption needs. I'm not sure why you're fixating on a single word of my response.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

petulant wrote: Tue May 26, 2020 3:11 pm
vineviz wrote: Tue May 26, 2020 3:08 pm
petulant wrote: Tue May 26, 2020 3:01 pm Nobody in this thread is saying to fund a fixed nominal amount of consumption in 20 years with only bonds.
And nothing in my example requires the dollars to be nominal. If you'd rather think in terms of "real" dollars, then feel free to do so.

The question is the same with either real dollars or nominal dollars: which investment option, A or B, is the least risky way to fund consumption in the 20th year?
And, of course, the main point of my post was that people have suggested to rely more on stocks for long-dated consumption needs. I'm not sure why you're fixating on a single word of my response.
Rekenthaler wasn't arguing that ALL bonds are for fools, just that LONG bonds are for fools, so the question of stocks vs bonds in general is a question for another day.

The question HERE is long-term bonds vs short- or intermediate-term bonds for a long-term investor.

My example is a simplification, yes, because it is designed to focus the discussion on the actual question. Which is this: which bond fund option (A or B) seems like the safest choice and which is the more foolish choice? A and B are the options in front of you. There is no Option C (100% stocks) in my example.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Rekenthaler: Long Bonds Are for Fools

Post by petulant »

vineviz wrote: Tue May 26, 2020 3:57 pm
petulant wrote: Tue May 26, 2020 3:11 pm
vineviz wrote: Tue May 26, 2020 3:08 pm
petulant wrote: Tue May 26, 2020 3:01 pm Nobody in this thread is saying to fund a fixed nominal amount of consumption in 20 years with only bonds.
And nothing in my example requires the dollars to be nominal. If you'd rather think in terms of "real" dollars, then feel free to do so.

The question is the same with either real dollars or nominal dollars: which investment option, A or B, is the least risky way to fund consumption in the 20th year?
And, of course, the main point of my post was that people have suggested to rely more on stocks for long-dated consumption needs. I'm not sure why you're fixating on a single word of my response.
Rekenthaler wasn't arguing that ALL bonds are for fools, just that LONG bonds are for fools, so the question of stocks vs bonds in general is a question for another day.

The question HERE is long-term bonds vs short- or intermediate-term bonds for a long-term investor.

My example is a simplification, yes, because it is designed to focus the discussion on the actual question. Which is this: which bond fund option (A or B) seems like the safest choice and which is the more foolish choice? A and B are the options in front of you. There is no Option C (100% stocks) in my example.
No. What matters is the outcome of the portfolio for the investor. Long-term bond and short-term bonds can have different effects on the entire portfolio since they have different exposure to inflation and different volatility. This was described, and you responded to it previously, on multiple posts earlier in the thread. This is not the time for moving the goal posts again.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz »

petulant wrote: Tue May 26, 2020 4:04 pm Long-term bond and short-term bonds can have different effects on the entire portfolio since they have different exposure to inflation and different volatility.
These “different exposures” are what my example was a illustrating.

So far I’m still wondering whether you think A or B is the better choice for the investor in my example?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

vineviz wrote: Tue May 26, 2020 5:20 pm
petulant wrote: Tue May 26, 2020 4:04 pm Long-term bond and short-term bonds can have different effects on the entire portfolio since they have different exposure to inflation and different volatility.
These “different exposures” are what my example was a illustrating.
I'm genuinely confused. Petulant is talking about bonds as part of a portfolio. Your (vineviz) illustrations show bonds in isolation.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor »

vineviz wrote: Tue May 26, 2020 5:20 pmSo far I’m still wondering whether you think A or B is the better choice for the investor in my example?
It's a false binary choice for people who take a total-portfolio approach rather than viewing assets only in isolation.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Rekenthaler: Long Bonds Are for Fools

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