Your thoughts on negative interest rates

[000]

It is a mistake to think that the markets owe you some "reasonable" return.

The markets don't owe you anything, but you owe something to yourself (e.g. not buying an unreasonable investment).

But what is "unreasonable?" Everything must be evaluated relative to some alternative, and if the risk is different there is no direct comparison.

All insurance depends on the proposition that we are willing to accept a negative return (the premiums exceed the expected claims) in order to reduce risk.

There is no rational basis to say we should always prefer a positive expected return, with high risk, to a negative expected return, with low risk.

To be sure, we should rationally prefer an investment that has both higher return and lower risk, so if we have available a bond X with negative return, and something that has both lower risk and non-negative return, like a no-fee bank account--then, sure, we owe it to ourselves to put our money in the bank instead of buying the bond.

Meanwhile, as I write this, Vanguard is showing 1.21% for the SEC yield of Total Bond. That's a long way from negative, and for the hypothetical situation in which Total Bond, in mirroring the bond market, is investing in bonds with an average coupon that is negative, I'm willing to say "I'll cross that bridge when I come to it."

Thanks for responding. All good points. For me, the concern is that bonds are not a hedge for the deep risk of stocks (like cash/gold/land/tangible property might be) and are a drag on returns at other times. Maybe the real value of a (negative yield) bond is as insurance for the case where stocks are modestly overvalued, but the underlying business (and society) are doing fine.

[qwertyjazz]

Folks,

I know that I know nothing. I am diversified. As for others that think they know something like "Negative interest rate = no bond or bond fund", I wish them the best of luck.

KlangFool

The question for me is: how low should one go while staying the course? -5%? -10%? -50%? Is there a lower limit where you would abandon bonds and reinvest maturing bonds elsewise?

000,

Why should that matter to you? It does not matter to me with an AA of 60/40. Unless you are 0/100, it does not matter to you either.

I invest in VBTLX (Total Bond Index) and VFIUX (Inter-mediate Term Treasury).

The bond fund will reinvest in the new bond automatically. And, I would rebalance based on my AA.

Please think this through. Unless you are 0/100, it does not matter.

KlangFool

The question was ridiculous, there's not going to be -50% yields. The answer that, "yes, you would accept -50% on 40% of your portfolio" is equally ridiculous.

I wouldn't invest in bonds at even -1%, but at least at that point one could argue that they could go even lower and the cap gains would make up for the negative yield. But at some point probably long before even -10%, let alone -50%, that's just not going to happen.

No one is going to pay $100K to get less than $25,000 in 10 years (-10% compounded).

I did not intend for the question to be ridiculous; rather, I am trying to understand at what point passive bond investors would make an (active, valuation-based decision) to eschew bonds. I appreciate your thoughts about -1% and -10%. I too think it is quite unlikely the investing public would accept negative double digits in real terms.

Why would they refuse it if there were no better safe alternatives? For millennia making sure no one stole your gold was a big deal. It still could be in the future. I have to save somehow. A risk free return is a relatively new concept. A defined risk return still is of value.

[Impatience]

Negative nominal rates are purely a psychological barrier. Does it really make a difference whether your bank account offers you 0.001% interest or -0.001%? Both are negative in real terms.

[000]

Why would they refuse it if there were no better safe alternatives? For millennia making sure no one stole your gold was a big deal. It still could be in the future. I have to save somehow. A risk free return is a relatively new concept. A defined risk return still is of value.

I guess I think a -10% real instrument is not itself a safe investment, so it doesn't matter what the alternatives are. Again, I don't think it's likely we'll get there, but based on results in this thread it seems some would actually accept such an investment, so maybe I am wrong.

[jeffyscott]

Folks,

I know that I know nothing. I am diversified. As for others that think they know something like "Negative interest rate = no bond or bond fund", I wish them the best of luck.

KlangFool

The question for me is: how low should one go while staying the course? -5%? -10%? -50%? Is there a lower limit where you would abandon bonds and reinvest maturing bonds elsewise?

000,

Why should that matter to you? It does not matter to me with an AA of 60/40. Unless you are 0/100, it does not matter to you either.

I invest in VBTLX (Total Bond Index) and VFIUX (Inter-mediate Term Treasury).

The bond fund will reinvest in the new bond automatically. And, I would rebalance based on my AA.

Please think this through. Unless you are 0/100, it does not matter.

KlangFool

The question was ridiculous, there's not going to be -50% yields. The answer that, "yes, you would accept -50% on 40% of your portfolio" is equally ridiculous.

I wouldn't invest in bonds at even -1%, but at least at that point one could argue that they could go even lower and the cap gains would make up for the negative yield. But at some point probably long before even -10%, let alone -50%, that's just not going to happen.

No one is going to pay $100K to get less than $25,000 in 10 years (-10% compounded).

I did not intend for the question to be ridiculous; rather, I am trying to understand at what point passive bond investors would make an (active, valuation-based decision) to eschew bonds. I appreciate your thoughts about -1% and -10%. I too think it is quite unlikely the investing public would accept negative double digits in real terms.

I really meant that about the scenario of -10%, -50%. I understand the point of the question, that surely there's some point at which anyone would reach their limit.

Maybe it's -100%, though. Or maybe not, think of the cap gains when yield goes to -105% .

[000]

Maybe it's -100%, though. Or maybe not, think of the cap gains when yield goes to -105% .

[megabad]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity). I do not agree that low nominal interest rates are a “slap in the face” for anyone. What I am doing and will do if rates go lower is nothing ignoring everyone else (or at least nothing different than what I already had planned).

[000]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity).

Absolutely.

[KlangFool]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity). I do not agree that low nominal interest rates are a “slap in the face” for anyone. What I am doing and will do if rates go lower is nothing ignoring everyone else (or at least nothing different than what I already had planned).

megabad,

As a person with an AA of 60/40, this is a good thing. While folks abandon the bond and buy the stock, I can sell the stock (Sell High) and buy the Bond (Buy Low). It is the reverse of what they did in March.

VTSAX -> Total Stock Index Fund -> YTD -3.40%

My portfolio YTD return is 3.35%. A difference of 6+%.

KlangFool

[Chicken Little]

Hard times happen. It is a mistake to think that the markets owe you some "reasonable" return.

Wouldn't we expect the equity risk premium to widen, though? ... So while you're right that equity risk premium shouldn't be expected to double, there might be a variety of strange effects that move it around, possibly widening it.

You'd generally expect low/negative rates forced by central banks trying to gin the economy to narrow the equity risk premium. A big part of the idea of a policy to not only keep short rates zero but actively push down long rates as various central banks having doing, is to skew non-central bank investment toward riskier assets including stocks, making stocks more expensive and hoping to increase aggregate demand through the wealth effect of more propensity for investors to spend those gains. But more expensive stock valuations mean lower expected returns, even a lower premium in expected return over riskless assets. If you look at credit spreads especially for poor credits those have tended to narrow over the general period of very easy money, and are a more directly visible cousin to the equity risk premium. Seems to me your argument based on taxes (a lot of investment money is in tax deferred individual accounts or pooled non-taxed accounts like pension fund and insurance co investments) is at most some limited offset to that.

Long term past long term US bond realized return was ballpark 2%, stocks near 7%. Now 1/CAPE of the S&P is around 3.3% (an indicator of real expected return), the 30yr TIPS -.30%. Many people here are more optimistic than that about stock returns (maybe not *because* their investment/retirement plans would look a lot better if so, but I think it's usually the case that they would) but you have to be pretty optimistic about stock expected return to think the equity risk premium now is even as high as the historical average.

I like this.

To have some fun with it, let’s look at a hypothetical 60/40 investor who goes 100/0 right when yields tick negative.

1. First of all, how much of the decision is just psychological? They didn’t do anything as yields decreased from 3 to 2 to 1 to 0, only when they went slightly negative.

2. Next, if the equity risk premium has narrowed, they’re stepping out of their comfort zone at precisely the wrong time.

3. Lastly...there’s a good chance they didn’t even make the decision. They were conditioned into it by policy makers pulling strings. They responded just as planners planned they would.

Vanguard is out defending 60/40 today.

[FIREchief]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity). I do not agree that low nominal interest rates are a “slap in the face” for anyone. What I am doing and will do if rates go lower is nothing ignoring everyone else (or at least nothing different than what I already had planned).

megabad,

As a person with an AA of 60/40, this is a good thing. While folks abandon the bond and buy the stock, I can sell the stock (Sell High) and buy the Bond (Buy Low). It is the reverse of what they did in March.

VTSAX -> Total Stock Index Fund -> YTD -3.40%

My portfolio YTD return is 3.35%. A difference of 6+%.

KlangFool

VTSAX at yesterday's close: 80.69
VTSAX at 12/31 close: 78.95 (adjusted for dividends)
YTD return: 2.2%

Where do you get -3.4%?

[KlangFool]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity). I do not agree that low nominal interest rates are a “slap in the face” for anyone. What I am doing and will do if rates go lower is nothing ignoring everyone else (or at least nothing different than what I already had planned).

megabad,

As a person with an AA of 60/40, this is a good thing. While folks abandon the bond and buy the stock, I can sell the stock (Sell High) and buy the Bond (Buy Low). It is the reverse of what they did in March.

VTSAX -> Total Stock Index Fund -> YTD -3.40%

My portfolio YTD return is 3.35%. A difference of 6+%.

KlangFool

VTSAX at yesterday's close: 80.69
VTSAX at 12/31 close: 78.95 (adjusted for dividends)
YTD return: 2.2%

Where do you get -3.4%?

https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool

[jeffyscott]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity). I do not agree that low nominal interest rates are a “slap in the face” for anyone. What I am doing and will do if rates go lower is nothing ignoring everyone else (or at least nothing different than what I already had planned).

megabad,

As a person with an AA of 60/40, this is a good thing. While folks abandon the bond and buy the stock, I can sell the stock (Sell High) and buy the Bond (Buy Low). It is the reverse of what they did in March.

VTSAX -> Total Stock Index Fund -> YTD -3.40%

My portfolio YTD return is 3.35%. A difference of 6+%.

KlangFool

VTSAX at yesterday's close: 80.69
VTSAX at 12/31 close: 78.95 (adjusted for dividends)
YTD return: 2.2%

Where do you get -3.4%?

Also seems to maybe be a misunderstanding, bond yields going down means prices are going higher not lower. While VTSAX is up about 2.2% YTD (per Vanguard and M*), bonds are up even more, VBTLX is up about 7.6% for example. If bond yields go lower still and continue on into negative yield territory, it's more likely rebalancing will mean selling bonds and buying stocks.

[ray.james]

Asset inflation.

[vineviz]

The mathematics are what they are. You can play all day long with backtests, collecting statistics, and try to build your own "expectations" about the future, it won't change the basic mathematical fact.

Your faulty conclusion has nothing to do with mathematics and everything to do with using an idiosyncratic and mistaken definition of the word "predict".

Indeed, the very claim that you're appealing to "mathematics" without relying on any ACTUAL mathematical tests is - at the very least - disingenuous.

I hope that anyone with even a rudimentary grasp of statistics can look at the following plot ad see the gulf between reality and your earlier claim that "the YTM of a bond fund doesn't predict its future returns".



On the x-axis we see the starting yield on intermediate Treasury bonds for each rolling 5-year period since 1992, and on the y-axis we see the subsequent annual return of Vanguard's intermediate-term Treasury fund (VFITX). Virtually all of the latter is explained by the former, +/- some noise. Taking into account the slope of the yield curve (to account for roll return) tightens the confidence interval even more.

[FIREchief]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity). I do not agree that low nominal interest rates are a “slap in the face” for anyone. What I am doing and will do if rates go lower is nothing ignoring everyone else (or at least nothing different than what I already had planned).

megabad,

As a person with an AA of 60/40, this is a good thing. While folks abandon the bond and buy the stock, I can sell the stock (Sell High) and buy the Bond (Buy Low). It is the reverse of what they did in March.

VTSAX -> Total Stock Index Fund -> YTD -3.40%

My portfolio YTD return is 3.35%. A difference of 6+%.

KlangFool

VTSAX at yesterday's close: 80.69
VTSAX at 12/31 close: 78.95 (adjusted for dividends)
YTD return: 2.2%

Where do you get -3.4%?

https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool

VTSAX as of 6/30: 76.26
VTSAX at 12/31 close: 78.95
YTD as of 6/30: -3.4%

You appear to be using old data.

[KlangFool]

I think low rates will cause (and have already caused) the average investor (retail and portfolio) to extend further out on the credit risk and duration curve (up to and including switching bond holdings to equity). I do not agree that low nominal interest rates are a “slap in the face” for anyone. What I am doing and will do if rates go lower is nothing ignoring everyone else (or at least nothing different than what I already had planned).

megabad,

As a person with an AA of 60/40, this is a good thing. While folks abandon the bond and buy the stock, I can sell the stock (Sell High) and buy the Bond (Buy Low). It is the reverse of what they did in March.

VTSAX -> Total Stock Index Fund -> YTD -3.40%

My portfolio YTD return is 3.35%. A difference of 6+%.

KlangFool

VTSAX at yesterday's close: 80.69
VTSAX at 12/31 close: 78.95 (adjusted for dividends)
YTD return: 2.2%

Where do you get -3.4%?

https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool

VTSAX as of 6/30: 76.26
VTSAX at 12/31 close: 78.95
YTD as of 6/30: -3.4%

You appear to be using old data.

FIREchief,

1) And, it still did not change my point about my 60/40 portfolio beating the 100/0.

2) I am reporting the number as reported by Yahoo finance.

KlangFool

[FIREchief]

megabad,

As a person with an AA of 60/40, this is a good thing. While folks abandon the bond and buy the stock, I can sell the stock (Sell High) and buy the Bond (Buy Low). It is the reverse of what they did in March.

VTSAX -> Total Stock Index Fund -> YTD -3.40%

My portfolio YTD return is 3.35%. A difference of 6+%.

KlangFool

VTSAX at yesterday's close: 80.69
VTSAX at 12/31 close: 78.95 (adjusted for dividends)
YTD return: 2.2%

Where do you get -3.4%?

https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool

VTSAX as of 6/30: 76.26
VTSAX at 12/31 close: 78.95
YTD as of 6/30: -3.4%

You appear to be using old data.

FIREchief,

1) And, it still did not change my point about my 60/40 portfolio beating the 100/0.

2) I am reporting the number as reported by Yahoo finance.

KlangFool

My numbers also come from Yahoo finance.

And yes, I agree, in the midst of a crisis when the market drops 30% and the fed drives rates to zero, it is reasonable to see some outperformance of bonds in the rear view mirror. Are you going to count on a crisis every year?

[Blue456]

Nothing, real rates are already negative.

Well you could just keep cash and have higher rate than negative. Or less negative rate than negative treasury rate

[dodecahedron]

Negative nominal rates are purely a psychological barrier. Does it really make a difference whether your bank account offers you 0.001% interest or -0.001%? Both are negative in real terms.

Indeed, it is all about framing. Back when I was young bank checking accounts paid zero interest, regulated by law. And there were typically fees of various sorts, certainly checks typically cost something.

Then in the mid 70s an ¨innovation¨ arose called a NOW (Negotiable Order of Withdrawal) account arose, which allowed the bank to pay up to 4% interest on your checking account. Of course, it was taxable and the inflation rate was much higher than 4%, so the after tax real return was quite negative.

But now I have a BoA checking account with no fees for checks, no monthly fees, no minimum, no fee for a safe deposit box, that is part of qualifying for all kinds of bonuses for opening credit cards, which in turn pay me an absurdly high rate of cash back (5.25% on multiple categories of my choice including online purchases, gas, restaurants, travel, and 2.625% on everything else.) (And yes, I do have to hold at least $100K in investments at Merrill Edge, but it costs me nothing to hold my Vanguard ETFs there vs. holding them at Vanguard or anywhere else) and they paid me thousands of dollars in bonuses for moving those ETFs into their custody.

And yes, my current checking account pays me a microscopic amount of interest, but I keep very little in it and I have gotten an amazing amount of ¨return¨ out of my banking relationship with BoA, almost all of which is tax free. (I got two $1,000 bonuses for moving two brokerage accounts there, one for Roth and one for taxable. The $1,000 bonus for Roth was taxfree, but the other was taxable. But all the credit card bonuses and cash bank and free perks like ATM reimbursement and free checks and free safe deposit box and free bill pay are not taxable.)

Absolutely surreal.

Truly an Alice in Wonderland banking world.

[FIREchief]

Nothing, real rates are already negative.

Well you could just keep cash and have higher rate than negative. Or less negative rate than negative treasury rate

Cash is negative real return at any time that inflation is positive.

[longinvest]

The mathematics are what they are. You can play all day long with backtests, collecting statistics, and try to build your own "expectations" about the future, it won't change the basic mathematical fact.

Your faulty conclusion has nothing to do with mathematics and everything to do with using an idiosyncratic and mistaken definition of the word "predict".

Dear Vineviz,

On our Canadian sister forum, I started a thread in 2016 to track of the actual total returns of an aggregate total-market bond index ETF, compared to an initial YTM measurement in 2014. Here's the latest entry, documenting returns 6 years since the initial yield measurement:

YTM vs returns -- Bond ETF 2 years later

It's time for an update:

VAB's YTM on January 31, 2014: 2.43% (average duration: 7.1 years)

VAB's 1-year return on January 31, 2015: 11.09%
VAB's 1-year return on January 31, 2016: -0.89%
VAB's 1-year return on January 31, 2017: 0.75%
VAB's 1-year return on January 31, 2018: 1.65%
VAB's 1-year return on January 31, 2019: 3.38%
VAB's 1-year return on January 31, 2020: 8.38%

=> VAB's annualized 6-year return on January 31, 2020:
((1 + 11.09%) X (1 + -0.89%) X (1 + 0.75%) X (1 + 1.65%) X (1 + 3.38%) X (1 + 8.38%))^(1/6) - 1 = 3.97%

$10,000 invested for 6 years at an annual 2.43% rate of return would have grown to $11,549.50 for a cumulative gain of $1,549.50.
$10,000 invested for 6 years in VAB would have grown to $12,633.70 for a cumulative gain of $2,633.70.
So far, VAB has gained 70% more.

Past returns are not indicative of future returns.

So far, the aggregate bond ETF has delivered 70% more in growth than apparently "predicted" by its initial YTM. This isn't even remotely close. I don't call this a prediction.

After 6 years, the annualized NAV return (calculated using a 6th root, hiding a huge discrepancy!) is 3.97%. Portfolio Visualizer which uses Market Price returns, instead, reports a 4.02% return for the same period. Someone might think that the 7th year, to match the initial ETF duration, hasn't been completed yet. But, if we extend the period until June 2020 (that's 6 years + 5 months), Portfolio Visualizer reports even higher annualized return, 4.45%. In other words, an $10,000 invested into VAB, instead of only accumulating $1,666 in growth according to its initial 2.43% YTM, has actually accumulated $3,225, so far. That 94% more.

A look at the annual returns is quite interesting. The bond ETF returned over 11% in the year terminated on January 31, 2015, despite the initial 2.43% YTM. This isn't a CD; it's a total-market bond ETF. Its initial YTM didn't predict such return. Yet, this was what the investor got. The investor could have sold at that point, or more likely, the investor could have rebalanced bonds with stocks.

An observer would have realized, by now, that this year's ongoing return has nothing to do with the initial YTM. The bond ETF contains many new bonds which weren't part of the ETF in 2014, and since then, many bonds it initially contained have been sold (and have already matured).

Total-market bond index funds and ETFs are extremely complex investments and their future returns can't be predicted using a single simplistic metric.

Best regards,

longinvest

[vineviz]

So far, the aggregate bond ETF has delivered 70% more in growth than apparently "predicted" by its initial YTM. This isn't even remotely close. I don't call this a prediction.

Here, again, we reach the root of the disagreement: you don’t seem to know the actual definition of the word “prediction” nor be familiar with the statistical tools necessary to test one.

Pontificate all you want, but the facts are your enemy. Not me.

[FIREchief]

[On our Canadian sister forum, I started a thread in 2016 to track of the actual total returns of an aggregate total-market bond index ETF, compared to an initial YTM measurement in 2014. Here's the latest entry, documenting returns 6 years since the initial yield measurement:

YTM vs returns -- Bond ETF 2 years later

$10,000 invested for 6 years at an annual 2.43% rate of return would have grown to $11,549.50 for a cumulative gain of $1,549.50.
$10,000 invested for 6 years in VAB would have grown to $12,633.70 for a cumulative gain of $2,633.70.
So far, VAB has gained 70% more.

Past returns are not indicative of future returns.

Would this be mostly attributable to the fact that interest rates have dropped significantly? Wouldn't we expect a much better alignment if rates had remained constant?

[KlangFool]

VTSAX at yesterday's close: 80.69
VTSAX at 12/31 close: 78.95 (adjusted for dividends)
YTD return: 2.2%

Where do you get -3.4%?

https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool

VTSAX as of 6/30: 76.26
VTSAX at 12/31 close: 78.95
YTD as of 6/30: -3.4%

You appear to be using old data.

FIREchief,

1) And, it still did not change my point about my 60/40 portfolio beating the 100/0.

2) I am reporting the number as reported by Yahoo finance.

KlangFool

My numbers also come from Yahoo finance.

And yes, I agree, in the midst of a crisis when the market drops 30% and the fed drives rates to zero, it is reasonable to see some outperformance of bonds in the rear view mirror. Are you going to count on a crisis every year?

FIREchief,

<< Are you going to count on a crisis every year?>>

Why does it matters to me? I have a fixed AA of 60/40. I make more money when the market is volatile. We are in a very bumpy time.

I have CASH, Gold/Silver, Bond, Stock, and the mortgage. I am diversified. I am prepared.

KlangFool

[Nightowl99]

I don't really understand how the Fed works, but it seems that they have raised interest rates in the past to control inflation, and inflation will probably increase again sometime in the future. Even though the Fed intends to keep interest rates low until the current situation improves (for an unknown period of time, or at least the next year or two), the way they tinker with interest rates seems cyclical. Eventually the opposite could occur; that is, interest rates will increase but then bond prices will fall.

But I don't know anything about it so I'm trying not to drift off course too much. I sold a chunk of bonds the other day and now I'm trying to figure out what to do with the proceeds. I don't like keeping money in cash so I may buy more bonds.

[longinvest]

[On our Canadian sister forum, I started a thread in 2016 to track of the actual total returns of an aggregate total-market bond index ETF, compared to an initial YTM measurement in 2014. Here's the latest entry, documenting returns 6 years since the initial yield measurement:

YTM vs returns -- Bond ETF 2 years later

$10,000 invested for 6 years at an annual 2.43% rate of return would have grown to $11,549.50 for a cumulative gain of $1,549.50.
$10,000 invested for 6 years in VAB would have grown to $12,633.70 for a cumulative gain of $2,633.70.
So far, VAB has gained 70% more.

Past returns are not indicative of future returns.

Would this be mostly attributable to the fact that interest rates have dropped significantly? Wouldn't we expect a much better alignment if rates had remained constant?

FIREchief, as it happens, I have kept track of the average YTM of VAB. During the 2014-2019 period, the average YTM fluctuated. But, on January 31, 2019, the YTM was 2.50%, higher than the initial January 31, 2014 2.43% YTM. In other words, interest rates went slightly up (if you want to look at it that way). Interesting, isn't it? Some myths don't resist contact with reality.

[mtmingus]

There is an alternative. Invest more in stocks, or at the very least in a 20/80 fund. A 20/80 fund will quickly become the new “fixed income” fund in such an interest rate environment.

-TheDDC

Fidelity Freedom® Index Income Fund FIKFX 20:80.

[FIREchief]

https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool

VTSAX as of 6/30: 76.26
VTSAX at 12/31 close: 78.95
YTD as of 6/30: -3.4%

You appear to be using old data.

FIREchief,

1) And, it still did not change my point about my 60/40 portfolio beating the 100/0.

2) I am reporting the number as reported by Yahoo finance.

KlangFool

My numbers also come from Yahoo finance.

And yes, I agree, in the midst of a crisis when the market drops 30% and the fed drives rates to zero, it is reasonable to see some outperformance of bonds in the rear view mirror. Are you going to count on a crisis every year?

FIREchief,

<< Are you going to count on a crisis every year?>>

Why does it matters to me? I have a fixed AA of 60/40. I make more money when the market is volatile. We are in a very bumpy time.

I have CASH, Gold/Silver, Bond, Stock, and the mortgage. I am diversified. I am prepared.

KlangFool

Yes. Absolutely. With 60/40 sometimes equities will win and sometimes fixed income will win. That point is perfectly clear. What confused me was your initial comment suggesting that bonds were beating equities by a significant margin. That appears to be true as of 6/30 but not today. None of which really matters. It's all hindsight. The only thing that is actionable is what we do going forward. I know you understand all this, but there appear to be some on the forum who want to take recent bond outperformance and project it into the future (perhaps as a rationalization for pulling out of stocks) without necessarily understanding that for recent performance to continue, interest rates will need to continue to drop.

[FIREchief]

[On our Canadian sister forum, I started a thread in 2016 to track of the actual total returns of an aggregate total-market bond index ETF, compared to an initial YTM measurement in 2014. Here's the latest entry, documenting returns 6 years since the initial yield measurement:

YTM vs returns -- Bond ETF 2 years later

$10,000 invested for 6 years at an annual 2.43% rate of return would have grown to $11,549.50 for a cumulative gain of $1,549.50.
$10,000 invested for 6 years in VAB would have grown to $12,633.70 for a cumulative gain of $2,633.70.
So far, VAB has gained 70% more.

Past returns are not indicative of future returns.

Would this be mostly attributable to the fact that interest rates have dropped significantly? Wouldn't we expect a much better alignment if rates had remained constant?

FIREchief, as it happens, I have kept track of the average YTM of VAB. During the 2014-2019 period, the average YTM fluctuated. But, on January 31, 2019, the YTM was 2.50%, higher than the initial January 31, 2014 2.43% YTM. In other words, interest rates went slightly up (if you want to look at it that way). Interesting, isn't it? Some myths don't resist contact with reality.

I'm confused, but that's okay. I should admit that I really haven't taken the time to fully read/comprehend this sub-discussion and was just reacting to the punch lines.

[SantaClaraSurfer]

As someone who is just starting to establish regular I-Bond (last 2 years) and EE Bond purchases (this year), why aren't these two investments mentioned in threads like this?

We're 20 years out from retirement. We don't count either I-Bonds or EE Bonds as our main fixed income investments, but they seem, at least to me, directly applicable to this situation. They both never go negative:

-I Bonds protect from Deflation and Inflation (Are guaranteed to maintain your CPI purchasing power)
-EE Bonds protect from Deflation but not Inflation (+ Are guaranteed to pay out at least 3.5% at maturity; so negative interest rates only increase the relative value of the guarantee)

Even at $10,000 a year (which is nothing to sneeze at for most investors) that's a great deal of insurance against exactly this environment.

Is there anyone out there who regularly purchased I Bonds and EE Bonds and is now in their retirement zone? Are you glad you did?

[protagonist]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

[KlangFool]

VTSAX as of 6/30: 76.26
VTSAX at 12/31 close: 78.95
YTD as of 6/30: -3.4%

You appear to be using old data.

FIREchief,

1) And, it still did not change my point about my 60/40 portfolio beating the 100/0.

2) I am reporting the number as reported by Yahoo finance.

KlangFool

My numbers also come from Yahoo finance.

And yes, I agree, in the midst of a crisis when the market drops 30% and the fed drives rates to zero, it is reasonable to see some outperformance of bonds in the rear view mirror. Are you going to count on a crisis every year?

FIREchief,

<< Are you going to count on a crisis every year?>>

Why does it matters to me? I have a fixed AA of 60/40. I make more money when the market is volatile. We are in a very bumpy time.

I have CASH, Gold/Silver, Bond, Stock, and the mortgage. I am diversified. I am prepared.

KlangFool

Yes. Absolutely. With 60/40 sometimes equities will win and sometimes fixed income will win. That point is perfectly clear. What confused me was your initial comment suggesting that bonds were beating equities by a significant margin. That appears to be true as of 6/30 but not today. None of which really matters. It's all hindsight. The only thing that is actionable is what we do going forward. I know you understand all this, but there appear to be some on the forum who want to take recent bond outperformance and project it into the future (perhaps as a rationalization for pulling out of stocks) without necessarily understanding that for recent performance to continue, interest rates will need to continue to drop.

And, how do you know that the interest rate will not go down further?

I know nothing.

KlangFool

[KlangFool]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

That didn't happen in Japan and Europe. So, why should that be true in the USA?

KlangFool

[protagonist]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

That didn't happen in Japan and Europe. So, why should that be true in the USA?

KlangFool

What didn't, Klang? Deflation?

OK, but whether it did or didn't, you are better off holding cash at 0% interest than cash at -1% interest. So unless you find a better investment, why would you deliberately choose a negative interest rate on any investment?

It seems like the equivalent of getting hired to work for somebody and paying them for the privilege instead of the other way around. Wouldn't you rather be unemployed?

Unless I am missing something (which is possible...)

[jarjarM]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

Based on Japan/EU experience, that hasn't happened. While retail customers can take out to hide in the mattress, the institutional entities like megacorp can't just take the money for the next pay check out and put in somewhere and they're the big customers

[KlangFool]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

That didn't happen in Japan and Europe. So, why should that be true in the USA?

KlangFool

What didn't, Klang? Deflation?

OK, but whether it did or didn't, you are better off holding cash at 0% interest than cash at -1% interest. So unless you find a better investment, why would you deliberately choose a negative interest rate on any investment?

It seems like the equivalent of getting hired to work for somebody and paying them instead of the other way around. Wouldn't you rather be unemployed?

We have negative interest rate at some of those countries. Folks still keep money in the bank.

KlangFool

[Robot Monster]

If you have to bet on the interest rate, you are not properly diversified.
KlangFool

True, I am not properly diversified. (Around here that's kinda like admitting to having herpes.) I have a lot of cash because I have psychological difficulty dealing with volatility. Because I'm sitting on a windfall, even the small percentage I have in stocks means that alone endured a six figure loss during the March plummet, and my TIPS also had a nice six figure loss, so honestly I already feel like my psychological limit is being stretched. That said, I will gradually be adding more TIPS to my portfolio, but honestly there's a limit how much TIPS I can withstand, so still I shall be left holding lots of cash, I'm afraid to say. (If you're wondering why volatility of a TIPS bond bothers me if I plan on holding it to maturity, I'll say it just does.)

[UpsetRaptor]

If negative rates happen, they happen. It won't be the end of the world, anymore than it has been in Europe.

I would guess that they won't happen this cycle, but in the next recession, whenever that may be, the US has a pretty good chance of seeing them. This advice/guess is worth what you paid for it.

[protagonist]

deleted

[protagonist]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

That didn't happen in Japan and Europe. So, why should that be true in the USA?

KlangFool

What didn't, Klang? Deflation?

OK, but whether it did or didn't, you are better off holding cash at 0% interest than cash at -1% interest. So unless you find a better investment, why would you deliberately choose a negative interest rate on any investment?

It seems like the equivalent of getting hired to work for somebody and paying them instead of the other way around. Wouldn't you rather be unemployed?

We have negative interest rate at some of those countries. Folks still keep money in the bank.

KlangFool

But why? I must be naive. I don't get the rationale.

[KlangFool]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

That didn't happen in Japan and Europe. So, why should that be true in the USA?

KlangFool

What didn't, Klang? Deflation?

OK, but whether it did or didn't, you are better off holding cash at 0% interest than cash at -1% interest. So unless you find a better investment, why would you deliberately choose a negative interest rate on any investment?

It seems like the equivalent of getting hired to work for somebody and paying them instead of the other way around. Wouldn't you rather be unemployed?

We have negative interest rate at some of those countries. Folks still keep money in the bank.

KlangFool

But why? I must be naive. I don't get the rationale.

protagonist,

1) I am not smart enough to know why. I just know that it is possible and it had happened.

2) I know that I know nothing. And, sometimes, crazy things could happen. For example, short-term deflation. Hence, I have CASH as one of my asset classes.

KlangFool

[KlangFool]

If you have to bet on the interest rate, you are not properly diversified.
KlangFool

True, I am not properly diversified. (Around here that's kinda like admitting to having herpes.) I have a lot of cash because I have psychological difficulty dealing with volatility. Because I'm sitting on a windfall, even the small percentage I have in stocks means that alone endured a six figure loss during the March plummet, and my TIPS also had a nice six figure loss, so honestly I already feel like my psychological limit is being stretched. That said, I will gradually be adding more TIPS to my portfolio, but honestly there's a limit how much TIPS I can withstand, so still I shall be left holding lots of cash, I'm afraid to say. (If you're wondering why volatility of a TIPS bond bothers me if I plan on holding it to maturity, I'll say it just does.)

Robot Monster,

1) If you are nervous enough, you should be buying some Gold/Silver.

2) I am pessimistic enough that I believe if the recession/market downturn lasted more than 5 years, money is no longer a problem.

KlangFool

[FIREchief]

FIREchief,

1) And, it still did not change my point about my 60/40 portfolio beating the 100/0.

2) I am reporting the number as reported by Yahoo finance.

KlangFool

My numbers also come from Yahoo finance.

And yes, I agree, in the midst of a crisis when the market drops 30% and the fed drives rates to zero, it is reasonable to see some outperformance of bonds in the rear view mirror. Are you going to count on a crisis every year?

FIREchief,

<< Are you going to count on a crisis every year?>>

Why does it matters to me? I have a fixed AA of 60/40. I make more money when the market is volatile. We are in a very bumpy time.

I have CASH, Gold/Silver, Bond, Stock, and the mortgage. I am diversified. I am prepared.

KlangFool

Yes. Absolutely. With 60/40 sometimes equities will win and sometimes fixed income will win. That point is perfectly clear. What confused me was your initial comment suggesting that bonds were beating equities by a significant margin. That appears to be true as of 6/30 but not today. None of which really matters. It's all hindsight. The only thing that is actionable is what we do going forward. I know you understand all this, but there appear to be some on the forum who want to take recent bond outperformance and project it into the future (perhaps as a rationalization for pulling out of stocks) without necessarily understanding that for recent performance to continue, interest rates will need to continue to drop.

And, how do you know that the interest rate will not go down?

I know nothing.

KlangFool

I must have read it somewhere.

[FIREchief]

If you have to bet on the interest rate, you are not properly diversified.
KlangFool

True, I am not properly diversified. (Around here that's kinda like admitting to having herpes.) I have a lot of cash because I have psychological difficulty dealing with volatility. Because I'm sitting on a windfall, even the small percentage I have in stocks means that alone endured a six figure loss during the March plummet, and my TIPS also had a nice six figure loss, so honestly I already feel like my psychological limit is being stretched. That said, I will gradually be adding more TIPS to my portfolio, but honestly there's a limit how much TIPS I can withstand, so still I shall be left holding lots of cash, I'm afraid to say. (If you're wondering why volatility of a TIPS bond bothers me if I plan on holding it to maturity, I'll say it just does.)

How could you have a six figure loss in TIPS when real rates have been steadily dropping? Mine have steadily increased in value.

[KlangFool]

My numbers also come from Yahoo finance.

And yes, I agree, in the midst of a crisis when the market drops 30% and the fed drives rates to zero, it is reasonable to see some outperformance of bonds in the rear view mirror. Are you going to count on a crisis every year?

FIREchief,

<< Are you going to count on a crisis every year?>>

Why does it matters to me? I have a fixed AA of 60/40. I make more money when the market is volatile. We are in a very bumpy time.

I have CASH, Gold/Silver, Bond, Stock, and the mortgage. I am diversified. I am prepared.

KlangFool

Yes. Absolutely. With 60/40 sometimes equities will win and sometimes fixed income will win. That point is perfectly clear. What confused me was your initial comment suggesting that bonds were beating equities by a significant margin. That appears to be true as of 6/30 but not today. None of which really matters. It's all hindsight. The only thing that is actionable is what we do going forward. I know you understand all this, but there appear to be some on the forum who want to take recent bond outperformance and project it into the future (perhaps as a rationalization for pulling out of stocks) without necessarily understanding that for recent performance to continue, interest rates will need to continue to drop.

And, how do you know that the interest rate will not go down?

I know nothing.

KlangFool

I must have read it somewhere.

And, folks have been saying the same thing for the last 10 years. The interest rate is low enough and it cannot go down further.

Some countries in Europe have negative interest rates. So, it should be possible in the USA too.

KlangFool

[jeffyscott]

If interest rates go negative, doesn't it just make common sense to pull all your money out of the bank? Hide it somewhere. Tin can buried in the yard. There is a good chance there would be deflation, so you would be getting a real positive yield. Whatever.
I'm not sure what else to think about that.

That didn't happen in Japan and Europe. So, why should that be true in the USA?

KlangFool

What didn't, Klang? Deflation?

OK, but whether it did or didn't, you are better off holding cash at 0% interest than cash at -1% interest. So unless you find a better investment, why would you deliberately choose a negative interest rate on any investment?

It seems like the equivalent of getting hired to work for somebody and paying them instead of the other way around. Wouldn't you rather be unemployed?

We have negative interest rate at some of those countries. Folks still keep money in the bank.

KlangFool

But why? I must be naive. I don't get the rationale.

This is kind of dated, but says: most banks are passing on negative rates only to institutions, companies or individuals with large deposits

https://www.google.com/amp/s/amp.ft.com ... c8d9dc6d84

I think European contributors here have said the same sort of thing, that most individuals can avoid paying for their bank deposits.

[Tejfyy]

Why must it be a slap? You have a choice - accept it or deflect it by taking action now. You can go out and lock in positive nominal rates for 30 years if you like. If you don’t like it, you can choose to not accept it and select another alternative. Your asset allocation is your liaison but you must take positive action in advance to reduce your risks of negative nominal rates.

What are your thoughts on where to allocate the funds?

My fixed assets are in CDs and fixed annuities, though when the CDs mature starting 2021 I'll see what's going on. I'll have no problem putting money in coffee cans in the freezer rather than paying to keep it in a bank. Likewise I like BND, i.e., index bond funds but I haven't needed them yet.

Retirement is 1-5 years off and my nest egg is modest, so I won't be taking on any more risk by moving my allocation off of the 50/50 mark.

[protagonist]

That didn't happen in Japan and Europe. So, why should that be true in the USA?

KlangFool

What didn't, Klang? Deflation?

OK, but whether it did or didn't, you are better off holding cash at 0% interest than cash at -1% interest. So unless you find a better investment, why would you deliberately choose a negative interest rate on any investment?

It seems like the equivalent of getting hired to work for somebody and paying them instead of the other way around. Wouldn't you rather be unemployed?

We have negative interest rate at some of those countries. Folks still keep money in the bank.

KlangFool

But why? I must be naive. I don't get the rationale.

This is kind of dated, but says: most banks are passing on negative rates only to institutions, companies or individuals with large deposits

https://www.google.com/amp/s/amp.ft.com ... c8d9dc6d84

I think European contributors here have said the same sort of thing, that most individuals can avoid paying for their bank deposits.

If I DID have a large deposit, that would be even more reason , I would think, to bury it in a can in the back yard.

[jhsu802701]

Negative interest rates will fuel an asset bubble. Of course, there's no way of predicting which asset prices will benefit.

I'm hoping for a bubble in international stocks, especially Japan and emerging markets. Yes, I have a vested interest.