Barron’s article on bonds

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dave1054
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Barron’s article on bonds

Post by dave1054 » Thu Jul 30, 2020 2:07 pm

Yes, I know there are multiple threads about bonds.
This may be slightly different twist and would love your opinions.

There was interview with Dan Fuss, one of most renowned bond guys for decades. Jist of article which I cannot copy is due to artificial low rates of bonds due to Fed intervention, he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.

Yes I know Vanguard mantra is total bond fund and forget about it. Bonds did well the past 10-20 years. What does that have to do with next decade.

All opposing viewpoints welcome.
Last edited by dave1054 on Thu Jul 30, 2020 3:21 pm, edited 1 time in total.

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Re: Baron article on bonds

Post by 50ismygoal » Thu Jul 30, 2020 2:11 pm

I’ve been shifting my bond fund money, which had been in BIV and BSV, to MM and Ally savings, since the start of the year. I’ve had a good run, and don’t mind potential missed opportunities if interest rates go lower. From what I’ve read, my cash won’t lag terribly behind inflation should inflation become a problem.

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Re: Baron article on bonds

Post by dbr » Thu Jul 30, 2020 2:29 pm

dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
Yes, I know there are multiple threads about bonds.
This may be slightly different twist and would love your opinions.

There was interview with Dan Fuss, one of most renowned bond guys for decades. Jist of article which I cannot copy is due to artificial low rates of bonds due to Fed intervention, he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.

Yes I know Vanguard mantra is total bond fund and forget about it. Bonds did well the past 10-20 years. What does that have to do with next decade.

All opposing viewpoints welcome.
The mantra is that you pays yer money and you takes yer choice. I would not make investment decisions because someone "feels" something about how risky something is. Certainly if bonds at low yields do not meet a person's objectives then that person has to do something else. We have seen examples of shift to stocks, work longer and spend less, for some people it actually doesn't matter, and so on.

You are correct that good returns in bonds over the last 10-20 years is not a reason to expect the same over the next ten years. On the other hand I would not be standing by a lot of certainty about what bonds will or won't deliver for the next 10 or 20 years.

Disclaimer: You can ignore my comments because I am in a situation where it doesn't matter.

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Re: Baron article on bonds

Post by cinghiale » Thu Jul 30, 2020 2:46 pm

May we assume your title points to an interview in Barron’s?

If yes, you do need to tidy up your title and spell the publication’s name correctly.

You may get better traffic for your post by doing so.
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Re: Baron article on bonds

Post by arcticpineapplecorp. » Thu Jul 30, 2020 3:05 pm

dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
There was interview with Dan Fuss, one of most renowned bond guys for decades. Jist of article which I cannot copy is due to artificial low rates of bonds due to Fed intervention, he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.
first a link to the article would be helpful so we don't pile on Dan Fuss erroneously if you say he said something he didn't actually.

that being said, if he did suggest high (quality?) dividend stocks are a suitable substitute for low yielding bonds, this has been explained so many times over bogleheads, but doesn't surprise me we have to keep talking about it. You can read more about it here: https://www.google.com/search?sitesearc ... d+of+bonds

stocks are not bonds.

say it with me.

stocks are not bonds.

say it again.

stocks are not bonds.

understand?

It's like saying, since red delicious apples aren't really so delicious anymore, I'm going to start eating lemons.

1. comparing stocks to bonds is as has been said, like comparing, well, apples to citrus.

2. stocks can go to zero. if and when they do, you've not only lost your dividend...you've lost your principle. sometimes return OF principle is more important than return ON principle.

As for "high quality" stocks, there's no such thing. I can name dozens of "blue chip" stocks that either went out of business or lost value over time. don't think it's true? look at how some of the biggest companies have changed over a 24 year period of time: https://americanbusinesshistory.org/lar ... 1994-2018/

3. this is called stretching for yield. You can look that up. It's also been said "More money has been lost stretching for yield than at the end of a gun."
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Baron article on bonds

Post by dave1054 » Thu Jul 30, 2020 3:20 pm

cinghiale wrote:
Thu Jul 30, 2020 2:46 pm
May we assume your title points to an interview in Barron’s?

If yes, you do need to tidy up your title and spell the publication’s name correctly.

You may get better traffic for your post by doing so.
Sorry. My mistake.

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Re: Baron article on bonds

Post by dave1054 » Thu Jul 30, 2020 3:25 pm

arcticpineapplecorp. wrote:
Thu Jul 30, 2020 3:05 pm
dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
There was interview with Dan Fuss, one of most renowned bond guys for decades. Jist of article which I cannot copy is due to artificial low rates of bonds due to Fed intervention, he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.
first a link to the article would be helpful so we don't pile on Dan Fuss erroneously if you say he said something he didn't actually.

that being said, if he did suggest high (quality?) dividend stocks are a suitable substitute for low yielding bonds, this has been explained so many times over bogleheads, but doesn't surprise me we have to keep talking about it. You can read more about it here: https://www.google.com/search?sitesearc ... d+of+bonds

stocks are not bonds.

say it with me.

stocks are not bonds.

say it again.

stocks are not bonds.

understand?

It's like saying, since red delicious apples aren't really so delicious anymore, I'm going to start eating lemons.

1. comparing stocks to bonds is as has been said, like comparing, well, apples to citrus.

2. stocks can go to zero. if and when they do, you've not only lost your dividend...you've lost your principle. sometimes return OF principle is more important than return ON principle.

As for "high quality" stocks, there's no such thing. I can name dozens of "blue chip" stocks that either went out of business or lost value over time. don't think it's true? look at how some of the biggest companies have changed over a 24 year period of time: https://americanbusinesshistory.org/lar ... 1994-2018/

3. this is called stretching for yield. You can look that up. It's also been said "More money has been lost stretching for yield than at the end of a gun."
Sorry I can’t post link to article. It is not permitted.

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Re: Baron article on bonds

Post by arcticpineapplecorp. » Thu Jul 30, 2020 3:30 pm

dave1054 wrote:
Thu Jul 30, 2020 3:25 pm
arcticpineapplecorp. wrote:
Thu Jul 30, 2020 3:05 pm
dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
There was interview with Dan Fuss, one of most renowned bond guys for decades. Jist of article which I cannot copy is due to artificial low rates of bonds due to Fed intervention, he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.
first a link to the article would be helpful so we don't pile on Dan Fuss erroneously if you say he said something he didn't actually.

that being said, if he did suggest high (quality?) dividend stocks are a suitable substitute for low yielding bonds, this has been explained so many times over bogleheads, but doesn't surprise me we have to keep talking about it. You can read more about it here: https://www.google.com/search?sitesearc ... d+of+bonds

stocks are not bonds.

say it with me.

stocks are not bonds.

say it again.

stocks are not bonds.

understand?

It's like saying, since red delicious apples aren't really so delicious anymore, I'm going to start eating lemons.

1. comparing stocks to bonds is as has been said, like comparing, well, apples to citrus.

2. stocks can go to zero. if and when they do, you've not only lost your dividend...you've lost your principle. sometimes return OF principle is more important than return ON principle.

As for "high quality" stocks, there's no such thing. I can name dozens of "blue chip" stocks that either went out of business or lost value over time. don't think it's true? look at how some of the biggest companies have changed over a 24 year period of time: https://americanbusinesshistory.org/lar ... 1994-2018/

3. this is called stretching for yield. You can look that up. It's also been said "More money has been lost stretching for yield than at the end of a gun."
Sorry I can’t post link to article. It is not permitted.
It is not permitted. And stocks are not bonds.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Barron’s article on bonds

Post by McGilicutty » Thu Jul 30, 2020 3:31 pm

The low rates are having the desired effect: pushing bond investors into stocks. I look forward to the day (probably when the market is 2x or 3x from here) when all investors are 100/0 stocks to bonds.

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Re: Barron’s article on bonds

Post by Hector » Thu Jul 30, 2020 3:32 pm

How is high-quality dividend stocks less risky than high-quality bond?
A bond is a contract in which you are given interest on regular intervals plus principal at the end of the term.
There is no contract that your high quality stock price won't be less than what you paid for after a certain term.
Last edited by Hector on Thu Jul 30, 2020 4:09 pm, edited 1 time in total.

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Re: Baron article on bonds

Post by palanzo » Thu Jul 30, 2020 3:38 pm

dave1054 wrote:
Thu Jul 30, 2020 3:25 pm
arcticpineapplecorp. wrote:
Thu Jul 30, 2020 3:05 pm
dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
There was interview with Dan Fuss, one of most renowned bond guys for decades. Jist of article which I cannot copy is due to artificial low rates of bonds due to Fed intervention, he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.
first a link to the article would be helpful so we don't pile on Dan Fuss erroneously if you say he said something he didn't actually.

that being said, if he did suggest high (quality?) dividend stocks are a suitable substitute for low yielding bonds, this has been explained so many times over bogleheads, but doesn't surprise me we have to keep talking about it. You can read more about it here: https://www.google.com/search?sitesearc ... d+of+bonds

stocks are not bonds.

say it with me.

stocks are not bonds.

say it again.

stocks are not bonds.

understand?

It's like saying, since red delicious apples aren't really so delicious anymore, I'm going to start eating lemons.

1. comparing stocks to bonds is as has been said, like comparing, well, apples to citrus.

2. stocks can go to zero. if and when they do, you've not only lost your dividend...you've lost your principle. sometimes return OF principle is more important than return ON principle.

As for "high quality" stocks, there's no such thing. I can name dozens of "blue chip" stocks that either went out of business or lost value over time. don't think it's true? look at how some of the biggest companies have changed over a 24 year period of time: https://americanbusinesshistory.org/lar ... 1994-2018/

3. this is called stretching for yield. You can look that up. It's also been said "More money has been lost stretching for yield than at the end of a gun."
Sorry I can’t post link to article. It is not permitted.
Why is it not permitted? Who told you that?

I guess that is why they invented the search engine.

https://www.barrons.com/articles/the-fe ... 1595615578

Perhaps now we can discuss what Dan Fuss actually said.

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Re: Barron’s article on bonds

Post by nix4me » Thu Jul 30, 2020 3:49 pm

Can’t read article unless signing up. Thus my opinion of the article and author is - ignore. But I do love stocks...

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Re: Barron’s article on bonds

Post by Van » Thu Jul 30, 2020 3:53 pm

Please everyone. When you are talking about invested money, it is princiPAL not principle.

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Re: Barron’s article on bonds

Post by LadyGeek » Thu Jul 30, 2020 3:55 pm

This thread is now in the Investing - Theory, News & General forum (general discussion).

You can link to articles. Posting article content violates the Barron's Terms of Use.
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Re: Barron’s article on bonds

Post by ResearchMed » Thu Jul 30, 2020 4:13 pm

nix4me wrote:
Thu Jul 30, 2020 3:49 pm
Can’t read article unless signing up. Thus my opinion of the article and author is - ignore. But I do love stocks...
I was able to just "X out" of the little window that suggested one should sign up.
And then read the post.

RM
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Re: Barron’s article on bonds

Post by cleosdad » Fri Jul 31, 2020 9:06 am

Van wrote:
Thu Jul 30, 2020 3:53 pm
Please everyone. When you are talking about invested money, it is princiPAL not principle.
Thank you, thank you!!

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Re: Barron’s article on bonds

Post by Robot Monster » Fri Jul 31, 2020 9:33 am

Hector wrote:
Thu Jul 30, 2020 3:32 pm
How is high-quality dividend stocks less risky than high-quality bond?
A bond is a contract in which you are given interest on regular intervals plus principal at the end of the term.
There is no contract that your high quality stock price won't be less than what you paid for after a certain term.
Well, with a bond you still have inflation risk, e.g. the Fed lets inflation overheat while suppressing yields. Currently the expected inflation over the next five years is 1.37% (going by the 5-yr breakeven), while the yield on a 5-yr Treasury is 0.23%, meaning an annual 1.14% loss to inflation. How high could the Fed allow inflation to cook up before raising rates? As things stand, it certainly would not want to raise rates in a high unemployment environment, but the Fed does have a dual mandate which includes a mandate for price stability. Seems highly unlikely the Fed would let inflation go above 3% without shifting gears to fight inflation?? Who knows, though.

Let's say there's a 3 percent annual loss to inflation with bonds...vaguely a 15% loss to inflation for the 5-yr Treasury...is that more risky than holding high-quality dividend stocks?
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: Barron’s article on bonds

Post by abuss368 » Fri Jul 31, 2020 9:37 am

"A Random Walk Down Wall Street" update also has dividend stocks replacing bonds. Not so sure about that. Looking at yield only I get it. The risk however is another matter.

Personally I am staying the course with Total Bond.
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Re: Barron’s article on bonds

Post by JackoC » Fri Jul 31, 2020 9:56 am

dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
2. ...he cannot find any value or mispriced bonds with significant upside potential. He has been purchasing high quality dividend stocks which he feels is less risky.

1. Bonds did well the past 10-20 years. What does that have to do with next decade.
1. Nothing. However that realization plus the realization that past realized stock returns from all different (generally lower than now) valuation starting points tell us perhaps less than nothing (high past stock returns from lower valuations tend to mislead many people IMO) about stock expected return from today's valuations...doesn't help much in formulating a strategy. Probably better to focus on risk, and in particular avoiding a risky asset allocation it turns out you can't actually stick with and end up bailing out near bottoms (various threads ca. March this year 'I just bailed out, what do you think?', this is a real danger).

2. The key assertion or assumption would be 'mispricing', what that actually means*, and why one believes that hasn't also found its way into stock valuations.

But assuming there isn't a greatly different level of 'mispricing' in stock v bond valuations, yeah, strong companies' (high/low dividend is pretty much irrelevant) stocks are still not anything like high grade bonds (or the best low risk investment now IMO, exceptionally high rate CD's) as to risk.

*a uniform rational reaction of asset markets to extraordinary central bank actions is not a 'mispricing'. Thinking of it as such leads to ridiculous excuses like 'asset prices behaved totally differently than I predicted, but that doesn't count because it was due to Fed action I didn't expect'. Again how do we know risk asset prices aren't equally affect by extraordinary CB actions, especially since that's the actual intention.

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Re: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 9:59 am

Unless interest rates fall even further, TBM is very likely to do no better than match inflation (before taxes) over the next decade, and there's a good chance that it won't even do that. Those buying bonds right now should be keeping that in mind.
JackoC wrote:
Fri Jul 31, 2020 9:56 am
*a uniform rational reaction of asset markets to extraordinary central bank actions is not a 'mispricing'. Thinking of it as such leads to ridiculous excuses like 'asset prices behaved totally differently than I predicted, but that doesn't count because it was due to Fed action I didn't expect'. Again how do we know risk asset prices aren't equally affect by extraordinary CB actions, especially since that's the actual intention.
Precisely. The Fed has been influencing interest rates for generations now. I don't see why so many are suddenly bemoaning that fact. You'd think that we had never seen bonds with negative real returns. Apparently 1941-1981 has been forgotten by many, when bonds lost out to inflation and even more so after taxes.
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Re: Barron’s article on bonds

Post by nisiprius » Fri Jul 31, 2020 10:11 am

dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
...There was interview with Dan Fuss, one of most renowned bond guys for decades...
I have no doubt he is famous in some circles, but, seriously, have you heard his name before and what can you tell us, from your own knowledge, about his philosophy and his reputation?

From web searches I have just learned that he's vice chairman of Loomis Sayles and manager of an actively-managed bond fund, LBFAX. To understand where Dan Fuss is coming from, I'm looking at the bond fund he manages. Morningstar tells me it has $9 billion in assets, a two-star rating on past performance (relative to category and taking risk into account), and an expense ratio of 1.170% (!!!!!!), which Morningstar describes as "above average." They consider it to have "low" credit quality and an average credit rating of "BB" which I think is below investment grade.

Image

It has far outperformed the Vanguard Total Bond Market Index Fund but--this is the point--only by taking on much more risk.

Source

Image

For example, it dropped an astonishing -29.15% in 2007-2009 while Total Bond dropped -3.99%. By the two measures of risk-adjusted return, it has had a lower Sharpe and Sortino ratio than Total Bond and thus investors were not well compensated for that risk.

This is not too surprising because Morningstar says Total Bond has "high" credit quality, and an average credit rating of AA. (It also has $277 billion in assets, an 0.05% expense ratio, and a past-performance star rating of four stars).

What does this mean to me? Whatever Dan Fuss means by "bond investing," it is something completely different from the kind of "bond investing" I do. This is not a bond fund I am interested in. This is a "bond fund" that invests 10% of its portfolio in stocks! I want bond funds that invest in bonds.

If Dan Fuss thinks that under present conditions Dan Fuss can do better picking stocks than picking mis-priced low-quality bonds, he is probably right, but it is not very relevant to me. This is a different world from mine.
...he cannot find any value or mispriced bonds with significant upside potential...
Well, that's not the way Bogleheads look at bonds.
...Yes I know Vanguard mantra is total bond fund and forget about it...
That's what I'm doing myself.
Bonds did well the past 10-20 years. What does that have to do with next decade.
"Stay the course" is not obvious and definitely not easy. It took most people who embrace the the Bogleheads investment philosophy a while to come to the conclusion that staying the course is as good as any other strategy, and better than most.

I feel pretty sure that stocks are stocks and bonds are bonds. And I feel pretty sure that dividend stocks are stocks, and that dividend stocks are not bonds, and never will be. And I feel pretty sure that bonds will continue to have lower volatility and risk than stocks. I know what my own risk tolerance is. My own murky crystal ball is one of lower returns for both stocks and bonds going forward. If that happens, I accept it. Hard times happen. I hate it when that happens, but I distrust anyone who suggests there's some easy way out.

There may be people out there whose risk tolerance increase in bad and chaotic times, but I am not one of them. I think it is just bizarre to suggest that people should take on more risk than they were willing to take on before.
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Re: Barron’s article on bonds

Post by duffer » Fri Jul 31, 2020 11:01 am

Robot Monster wrote:
Fri Jul 31, 2020 9:33 am
Hector wrote:
Thu Jul 30, 2020 3:32 pm
How is high-quality dividend stocks less risky than high-quality bond?
A bond is a contract in which you are given interest on regular intervals plus principal at the end of the term.
There is no contract that your high quality stock price won't be less than what you paid for after a certain term.
Well, with a bond you still have inflation risk, e.g. the Fed lets inflation overheat while suppressing yields. Currently the expected inflation over the next five years is 1.37% (going by the 5-yr breakeven), while the yield on a 5-yr Treasury is 0.23%, meaning an annual 1.14% loss to inflation. How high could the Fed allow inflation to cook up before raising rates? As things stand, it certainly would not want to raise rates in a high unemployment environment, but the Fed does have a dual mandate which includes a mandate for price stability. Seems highly unlikely the Fed would let inflation go above 3% without shifting gears to fight inflation?? Who knows, though.

Let's say there's a 3 percent annual loss to inflation with bonds...vaguely a 15% loss to inflation for the 5-yr Treasury...is that more risky than holding high-quality dividend stocks?
And the Fed has said that they are going to let inflation go over their 2% target and that they are going to keep interest rates low until unemployment recovers. Not a good scenario for bonds.

Most strong supporters of bonds are basing their beliefs on their experience of the strong bond bull market of the last 40 years, as interest rates continuously dropped from 18% to their present level. Most market economists think the bond bull has ended. Even Malkiel has changed his advice about bonds, replacing them with dividend stocks, which Jeremy Siegel also recommends.
Last edited by duffer on Fri Jul 31, 2020 11:12 am, edited 1 time in total.

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Re: Barron’s article on bonds

Post by Sufferlandrian » Fri Jul 31, 2020 11:12 am

Nisiprius hit the nail squarely on the head. My risk tolerance didn't change to favor risker investments in response to a crisis. I'll stay the course.
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Re: Barron’s article on bonds

Post by duffer » Fri Jul 31, 2020 11:13 am

Sufferlandrian wrote:
Fri Jul 31, 2020 11:12 am
Nisiprius hit the nail squarely on the head. My risk tolerance didn't change to favor risker investments in response to a crisis. I'll stay the course.
The question is whether bonds are now the riskier investment.

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Re: Barron’s article on bonds

Post by columbia » Fri Jul 31, 2020 11:17 am

I think the question is whether nominal treasuries are likely to return <0% real and does that bother one.
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Re: Barron’s article on bonds

Post by Robot Monster » Fri Jul 31, 2020 11:18 am

duffer wrote:
Fri Jul 31, 2020 11:01 am
...And the Fed has said that they are going to let inflation go over their 2% target...
Yeah, I remember hearing about something like that, but it's not formalized, it seems. Here's something I found doing a quick search (published a couple days ago):

"Before the pandemic hit, officials were close to agreeing on an important change to their formal statement of long-run goals. The change would effectively abandon the Fed’s longtime strategy of always raising rates pre-emptively to prevent inflation from rising above its 2% target.

Instead, officials would allow inflation to average 2% over time. This means periods of inflation below that level would be followed by periods in which they allow inflation to exceed it. The Fed currently doesn’t take past performance of inflation into account."
https://www.wsj.com/articles/fed-meetin ... 1596015001
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: Barron’s article on bonds

Post by Northern Flicker » Fri Jul 31, 2020 11:24 am

Which asset class is not like the others?

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Risk is not a guarantor of return.

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Re: Barron’s article on bonds

Post by nisiprius » Fri Jul 31, 2020 11:31 am

duffer wrote:
Fri Jul 31, 2020 11:13 am
Sufferlandrian wrote:
Fri Jul 31, 2020 11:12 am
Nisiprius hit the nail squarely on the head. My risk tolerance didn't change to favor risker investments in response to a crisis. I'll stay the course.
The question is whether bonds are now the riskier investment.
Unlikely, unless you define "risk" in some unusual way.

It is fundamentally important to distinguish between risk and return. Low return is not a form of risk, it is just low return. Risk has something to do with uncertainty about the amount of future return, not whether it is high or low.

A bond is an enforceable legal contract, often a contract to pay out specific numbers of dollars on specific calendar dates. If it is an investment-grade bond, then a ratings agency has judged that the issuer has enough of a safety margin that it is very likely to keep its contract, regardless of business ups and downs. A stock is an invitation to participate in the business fortunes of a company, with no guarantees of any kind. Stocks are fundamentally more risky than bonds. A sane investor can certainly decide that their personal values make the low returns of bonds intolerable to them, and that they would prefer to take more risk in the reasonable hope of getting higher return, but that doesn't make the bonds risky, just unappealing.
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Re: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 11:41 am

nisiprius wrote:
Fri Jul 31, 2020 11:31 am
duffer wrote:
Fri Jul 31, 2020 11:13 am
Sufferlandrian wrote:
Fri Jul 31, 2020 11:12 am
Nisiprius hit the nail squarely on the head. My risk tolerance didn't change to favor risker investments in response to a crisis. I'll stay the course.
The question is whether bonds are now the riskier investment.
Unlikely, unless you define "risk" in some unusual way.
If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.

Viewing risk as being equivalent to only volatility has never made sense to me. It seems to stem from a desire to apply certain mathematical techniques to one's analysis more so than it being a close approximation to the reality that investors actually deal with.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Barron’s article on bonds

Post by nisiprius » Fri Jul 31, 2020 11:44 am

From 1926 through 2018, the annual inflation-adjusted return on stocks has ranged from -37.4% to 53.4%, a range of 90.8%. For intermediate-term government bonds, -14.5% to 24.3%, a range of 38.8%.

From a common-sense point of view, in real (inflation-adjusted) terms, over a range of time that includes many business cycles, low and high interest rates, and low and high inflation, intermediate-term bonds have had a meaningful amount of risk, but clearly they have had lower risk than stocks.
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am
If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
TIPS have existed since 1997 and it is less than candid to talk as if they didn't.
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Re: Barron’s article on bonds

Post by Hector » Fri Jul 31, 2020 12:22 pm

Robot Monster wrote:
Fri Jul 31, 2020 9:33 am
Hector wrote:
Thu Jul 30, 2020 3:32 pm
How is high-quality dividend stocks less risky than high-quality bond?
A bond is a contract in which you are given interest on regular intervals plus principal at the end of the term.
There is no contract that your high quality stock price won't be less than what you paid for after a certain term.
Well, with a bond you still have inflation risk, e.g. the Fed lets inflation overheat while suppressing yields. Currently the expected inflation over the next five years is 1.37% (going by the 5-yr breakeven), while the yield on a 5-yr Treasury is 0.23%, meaning an annual 1.14% loss to inflation. How high could the Fed allow inflation to cook up before raising rates? As things stand, it certainly would not want to raise rates in a high unemployment environment, but the Fed does have a dual mandate which includes a mandate for price stability. Seems highly unlikely the Fed would let inflation go above 3% without shifting gears to fight inflation?? Who knows, though.

Let's say there's a 3 percent annual loss to inflation with bonds...vaguely a 15% loss to inflation for the 5-yr Treasury...is that more risky than holding high-quality dividend stocks?
If you are concerned about inflation and don't want to lose much of your principal than inflation bonds can be your answer.
Also if you are maintaining the ladder of Treasurys with no more than 5-year maturity, your new rungs will keep getting invested in a higher rate and it is unlikely that you will lose 15% to inflation with your short term bonds in the scenario that you mentioned.
Of course, the way rates are these days, TIPS produce a negative real return. And there are no assets that protect you from drawdown and can stay with inflation except I bonds.

For me, even in the scenario, you mentioned Treasurys are less risker than high-quality dividend stocks because I hold bonds so that I don't lose a lot from that portion of the portfolio.

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Re: Barron’s article on bonds

Post by Hector » Fri Jul 31, 2020 12:31 pm

duffer wrote:
Fri Jul 31, 2020 11:13 am
Sufferlandrian wrote:
Fri Jul 31, 2020 11:12 am
Nisiprius hit the nail squarely on the head. My risk tolerance didn't change to favor risker investments in response to a crisis. I'll stay the course.
The question is whether bonds are now the riskier investment.
I think they are. What are you going to do? Take more risk and increase stock allocation?
Last edited by Hector on Fri Jul 31, 2020 12:33 pm, edited 1 time in total.

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Re: Barron’s article on bonds

Post by peetsperk » Fri Jul 31, 2020 12:32 pm

nisiprius wrote:
Fri Jul 31, 2020 10:11 am
dave1054 wrote:
Thu Jul 30, 2020 2:07 pm
...There was interview with Dan Fuss, one of most renowned bond guys for decades...
I have no doubt he is famous in some circles, but, seriously, have you heard his name before and what can you tell us, from your own knowledge, about his philosophy and his reputation?

From web searches I have just learned that he's vice chairman of Loomis Sayles and manager of an actively-managed bond fund, LBFAX. To understand where Dan Fuss is coming from, I'm looking at the bond fund he manages. Morningstar tells me it has $9 billion in assets, a two-star rating on past performance (relative to category and taking risk into account), and an expense ratio of 1.170% (!!!!!!), which Morningstar describes as "above average." They consider it to have "low" credit quality and an average credit rating of "BB" which I think is below investment grade.

Image

It has far outperformed the Vanguard Total Bond Market Index Fund but--this is the point--only by taking on much more risk.

Source

Image

For example, it dropped an astonishing -29.15% in 2007-2009 while Total Bond dropped -3.99%. By the two measures of risk-adjusted return, it has had a lower Sharpe and Sortino ratio than Total Bond and thus investors were not well compensated for that risk.

This is not too surprising because Morningstar says Total Bond has "high" credit quality, and an average credit rating of AA. (It also has $277 billion in assets, an 0.05% expense ratio, and a past-performance star rating of four stars).

What does this mean to me? Whatever Dan Fuss means by "bond investing," it is something completely different from the kind of "bond investing" I do. This is not a bond fund I am interested in. This is a "bond fund" that invests 10% of its portfolio in stocks! I want bond funds that invest in bonds.

If Dan Fuss thinks that under present conditions Dan Fuss can do better picking stocks than picking mis-priced low-quality bonds, he is probably right, but it is not very relevant to me. This is a different world from mine.
...he cannot find any value or mispriced bonds with significant upside potential...
Well, that's not the way Bogleheads look at bonds.
...Yes I know Vanguard mantra is total bond fund and forget about it...
That's what I'm doing myself.
Bonds did well the past 10-20 years. What does that have to do with next decade.
"Stay the course" is not obvious and definitely not easy. It took most people who embrace the the Bogleheads investment philosophy a while to come to the conclusion that staying the course is as good as any other strategy, and better than most.

I feel pretty sure that stocks are stocks and bonds are bonds. And I feel pretty sure that dividend stocks are stocks, and that dividend stocks are not bonds, and never will be. And I feel pretty sure that bonds will continue to have lower volatility and risk than stocks. I know what my own risk tolerance is. My own murky crystal ball is one of lower returns for both stocks and bonds going forward. If that happens, I accept it. Hard times happen. I hate it when that happens, but I distrust anyone who suggests there's some easy way out.

There may be people out there whose risk tolerance increase in bad and chaotic times, but I am not one of them. I think it is just bizarre to suggest that people should take on more risk than they were willing to take on before.
+1
As usual, nisiprius brings thoughtful clarity to the discussion. Well done!

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Re: Barron’s article on bonds

Post by Sufferlandrian » Fri Jul 31, 2020 1:32 pm

willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.

Viewing risk as being equivalent to only volatility has never made sense to me. It seems to stem from a desire to apply certain mathematical techniques to one's analysis more so than it being a close approximation to the reality that investors actually deal with.
I view it like this:

Which asset class has the higher probability of being worth substantially less when I need it, stocks or bonds? Say there is a financial crisis that occurs right before I want to retire - I think stocks are much more likely to leave me in a difficult situation, so I don't feel comfortable diverting investments from TBM to dividend stocks.

This leaves me with a few choices: I can either divert investments from TBM to HYS, or I can keep buying TBM. Which I choose depends on whether or not I feel I am being adequately compensated for the extra risk of TBM. The HYS pays ~1%. The yield on FXNAX is 2.4%. I see no compelling incentive to move to cash, so I'm just going to keep buying FXNAX and stay my course.

I could certainly be wrong, and I'll find out in 20 years.
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Re: Barron’s article on bonds

Post by cheezit » Fri Jul 31, 2020 1:34 pm

nisiprius wrote:
Fri Jul 31, 2020 10:11 am
From web searches I have just learned that he's vice chairman of Loomis Sayles and manager of an actively-managed bond fund, LBFAX. To understand where Dan Fuss is coming from, I'm looking at the bond fund he manages. Morningstar tells me it has $9 billion in assets, a two-star rating on past performance (relative to category and taking risk into account), and an expense ratio of 1.170% (!!!!!!), which Morningstar describes as "above average." They consider it to have "low" credit quality and an average credit rating of "BB" which I think is below investment grade.

Image
Can any finance wizards explain how LBFAX has a year and a half longer average duration than the category average with about the same the same average maturity and coupon? I see the fund is buying at a ~3% discount relative to the category average, but I don't think that explains a difference of that magnitude. Also, plugging the maturity, yield and coupon numbers for the category into a duration calculator gives me a different duration than Morningstar is showing so obviously I'm missing something.

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Re: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 1:41 pm

nisiprius wrote:
Fri Jul 31, 2020 11:44 am
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am
If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
TIPS have existed since 1997 and it is less than candid to talk as if they didn't.
TIPS have a negative real return right now, so by definition won't keep pace with inflation, especially after taxes.
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Re: Barron’s article on bonds

Post by vineviz » Fri Jul 31, 2020 1:56 pm

willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
That's a very non-standard way to view risk and, since Warren Buffet owns more than five dozen insurance companies I suspect he knows this.
"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: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 2:19 pm

vineviz wrote:
Fri Jul 31, 2020 1:56 pm
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
That's a very non-standard way to view risk and, since Warren Buffet owns more than five dozen insurance companies I suspect he knows this.
I agree that it's non-standard, but I view it as a more important long-term risk than volatility.
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Re: Barron’s article on bonds

Post by Forester » Fri Jul 31, 2020 2:39 pm

I'd be interested to read bond bull & bear articles from the early 1970s. Was the commentariat weight more with one side or the other, what were the common arguments & rebuttals.

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Re: Barron’s article on bonds

Post by qwertyjazz » Fri Jul 31, 2020 3:00 pm

willthrill81 wrote:
Fri Jul 31, 2020 2:19 pm
vineviz wrote:
Fri Jul 31, 2020 1:56 pm
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
That's a very non-standard way to view risk and, since Warren Buffet owns more than five dozen insurance companies I suspect he knows this.
I agree that it's non-standard, but I view it as a more important long-term risk than volatility.
Outside of finance it is actually ‘standard.’ You ask risk of x event occurring. You do not say x has an intrinsic risk as part of its nature.
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Re: Barron’s article on bonds

Post by vineviz » Fri Jul 31, 2020 3:01 pm

willthrill81 wrote:
Fri Jul 31, 2020 2:19 pm
vineviz wrote:
Fri Jul 31, 2020 1:56 pm
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
That's a very non-standard way to view risk and, since Warren Buffet owns more than five dozen insurance companies I suspect he knows this.
I agree that it's non-standard, but I view it as a more important long-term risk than volatility.
Having a positive real return is a terrific goal, but it has NOTHING to do with risk. "Risk" isn't a synonym for "something bad happens". Risk means "something bad happens unexpectedly".

Imagine that you and I sign a contract in which I promise to give you $1 today and, in exchange, you promise to give me $0.90 tomorrow. The loss of $0.10 is not a risk for me: it's nearly certain. I fully expect to lose that amount because I signed a contract saying so. For whatever reason, that exchange is a good deal for me. Otherwise I wouldn't have signed the contract.

My risk, rather, is that you vanish after taking my $1 and never repaying me the $0.90 you owe me. That loss would be unexpected.
"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: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 3:08 pm

vineviz wrote:
Fri Jul 31, 2020 3:01 pm
willthrill81 wrote:
Fri Jul 31, 2020 2:19 pm
vineviz wrote:
Fri Jul 31, 2020 1:56 pm
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
That's a very non-standard way to view risk and, since Warren Buffet owns more than five dozen insurance companies I suspect he knows this.
I agree that it's non-standard, but I view it as a more important long-term risk than volatility.
Having a positive real return is a terrific goal, but it has NOTHING to do with risk. "Risk" isn't a synonym for "something bad happens". Risk means "something bad happens unexpectedly".

Imagine that you and I sign a contract in which I promise to give you $1 today and, in exchange, you promise to give me $0.90 tomorrow. The loss of $0.10 is not a risk for me: it's nearly certain. I fully expect to lose that amount because I signed a contract saying so. For whatever reason, that exchange is a good deal for me. Otherwise I wouldn't have signed the contract.

My risk, rather, is that you vanish after taking my $1 and never repaying me the $0.90 you owe me. That loss would be unexpected.
I mostly agree. But keep in mind that even so-called 'risk free' Treasuries are exposed to the risk of unexpected inflation, which pertains precisely to Buffett's definition of risk. We've already seen a 41 year period where such bonds lost money, presumably due to unexpected inflation. Granted, TIPS and I bonds are not exposed to this risk, but they are far less commonly used than nominal bonds.
Last edited by willthrill81 on Fri Jul 31, 2020 3:09 pm, edited 1 time in total.
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Re: Barron’s article on bonds

Post by Nate79 » Fri Jul 31, 2020 3:08 pm

Saying bonds won't keep up with inflation is just another way of saying their return is low. If you define risk as not being able to meet your goals having to much low return assets would be risky. But that doesnt inherently make a low returning asset risky.

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Re: Barron’s article on bonds

Post by qwertyjazz » Fri Jul 31, 2020 3:09 pm

vineviz wrote:
Fri Jul 31, 2020 3:01 pm
willthrill81 wrote:
Fri Jul 31, 2020 2:19 pm
vineviz wrote:
Fri Jul 31, 2020 1:56 pm
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
That's a very non-standard way to view risk and, since Warren Buffet owns more than five dozen insurance companies I suspect he knows this.
I agree that it's non-standard, but I view it as a more important long-term risk than volatility.
Having a positive real return is a terrific goal, but it has NOTHING to do with risk. "Risk" isn't a synonym for "something bad happens". Risk means "something bad happens unexpectedly".

Imagine that you and I sign a contract in which I promise to give you $1 today and, in exchange, you promise to give me $0.90 tomorrow. The loss of $0.10 is not a risk for me: it's nearly certain. I fully expect to lose that amount because I signed a contract saying so. For whatever reason, that exchange is a good deal for me. Otherwise I wouldn't have signed the contract.

My risk, rather, is that you vanish after taking my $1 and never repaying me the $0.90 you owe me. That loss would be unexpected.
But that logic of requiring unexpected would betting on dice have any risk? Unless someone decided to just rob the game (Dave Chapelle skit)

I think this needs to be defined in terms of the individuals goals. I am not sure if losing to inflation matters as you have to put money somewhere. I think also that asking about risk of bonds without considering amount of capital in all sources can become more theoretical than practical. ‘Invest we must’ But also maybe spend more now if compounding does not exist etc
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Re: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 3:13 pm

Nate79 wrote:
Fri Jul 31, 2020 3:08 pm
Saying bonds won't keep up with inflation is just another way of saying their return is low.
Not entirely. If you initially buy bonds with an expected real return of 3%, but due to subsequent unexpected inflation, they actually return 1% real, you still have at least maintained your inflation-adjusted capital. If the bonds have a 0% expected real return, then any unexpected inflation will result in you losing some amount of your inflation-adjusted capital. There's less margin to work with.
Nate79 wrote:
Fri Jul 31, 2020 3:08 pm
If you define risk as not being able to meet your goals having to much low return assets would be risky. But that doesnt inherently make a low returning asset risky.
There are at least two kinds of risk at work here: the risk of you not having the funds you need when you need them (which I view to be greatest risk that we face as investors) and the risk of an asset returning less than we expected it would.
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Re: Barron’s article on bonds

Post by petulant » Fri Jul 31, 2020 3:19 pm

Is this thread seriously turning into a semantics argument over whether nominal treasury bonds are exposed to inflation risk?

What kind of scholastic hoops would a person need to jump through to believe nominal treasury bonds are not exposed to inflation risk?

They are exposed. Broadly speaking, stocks are less exposed. If an investor is concerned about inflation, they can take negative TIPS or stocks.

You take your pick and take your chances.

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Re: Barron’s article on bonds

Post by ResearchMed » Fri Jul 31, 2020 3:20 pm

vineviz wrote:
Fri Jul 31, 2020 3:01 pm
willthrill81 wrote:
Fri Jul 31, 2020 2:19 pm
vineviz wrote:
Fri Jul 31, 2020 1:56 pm
willthrill81 wrote:
Fri Jul 31, 2020 11:41 am

If you view risk the way that Warren Buffett does, namely as the likelihood of not keeping pace with inflation, then yes, I'd say that bonds are riskier than stocks over the next decade, especially if you take taxes into account.
That's a very non-standard way to view risk and, since Warren Buffet owns more than five dozen insurance companies I suspect he knows this.
I agree that it's non-standard, but I view it as a more important long-term risk than volatility.
Having a positive real return is a terrific goal, but it has NOTHING to do with risk. "Risk" isn't a synonym for "something bad happens". Risk means "something bad happens unexpectedly".

Imagine that you and I sign a contract in which I promise to give you $1 today and, in exchange, you promise to give me $0.90 tomorrow. The loss of $0.10 is not a risk for me: it's nearly certain. I fully expect to lose that amount because I signed a contract saying so. For whatever reason, that exchange is a good deal for me. Otherwise I wouldn't have signed the contract.

My risk, rather, is that you vanish after taking my $1 and never repaying me the $0.90 you owe me. That loss would be unexpected.
Change this instead of a definite $.10 loss to: Dice are tossed, and if it comes up snake eyes, there is a loss of $X, otherwise <whatever else>.

There is nothing "definite" happening. There is, indeed a "risk" of your losing $X.
The actual probabilities are not important at this point.

RM
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Re: Barron’s article on bonds

Post by willthrill81 » Fri Jul 31, 2020 3:22 pm

petulant wrote:
Fri Jul 31, 2020 3:19 pm
Is this thread seriously turning into a semantics argument over whether nominal treasury bonds are exposed to inflation risk?

What kind of scholastic hoops would a person need to jump through to believe nominal treasury bonds are not exposed to inflation risk?

They are exposed. Broadly speaking, stocks are less exposed. If an investor is concerned about inflation, they can take negative TIPS or stocks.

You take your pick and take your chances.
That's why I cannot stand the term 'risk-free investment'. There's no such thing. It's merely a label someone placed on a specific instrument years ago as a matter of convenience. Even TIPS and I bonds are exposed to reinvestment risk, never mind the possibility, however slim we may think it may be, of the Treasury defaulting on them.
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Re: Barron’s article on bonds

Post by qwertyjazz » Fri Jul 31, 2020 3:26 pm

petulant wrote:
Fri Jul 31, 2020 3:19 pm
Is this thread seriously turning into a semantics argument over whether nominal treasury bonds are exposed to inflation risk?

What kind of scholastic hoops would a person need to jump through to believe nominal treasury bonds are not exposed to inflation risk?

They are exposed. Broadly speaking, stocks are less exposed. If an investor is concerned about inflation, they can take negative TIPS or stocks.

You take your pick and take your chances.
I think it is actually about how the different kids of risk interact in a new lower interest world. Nisiprius’ excellent point above that an active bond trader has different risks than an individual investor. Willthrills comments on expanding risk beyond standard deviation and inflation. We probably need to rethink event risk at an individual actionable level and not just worry about beating inflation or losing to it. The rules stay the same but the game has changed again (like it always does)

I am finding it very helpful.
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Re: Barron’s article on bonds

Post by Seasonal » Fri Jul 31, 2020 3:31 pm

In a somewhat rational world, investors wouldn't buy a riskier asset unless they thought there was a good chance they would be rewarded for taking risk. If a safer asset is viewed as likely to have higher returns, no one would buy the riskier asset, at least not without a large discount.

To suggest that stocks are likely to have higher returns than bonds and are safer than bonds is to suggest that markets are irrational and inefficient. That's not beyond the realm of possibility but is not something I'd bet on.

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