Bond alternatives

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jay22
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Bond alternatives

Post by jay22 »

Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
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Re: Bond alternatives

Post by Elysium »

jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
It really depends on what your overall goals are and what your overall portfolio looks like. Is this your retirement account? short term savings goals? college funds? why do you have bonds for? all that matters before a meaningful response can be formed. That said you can accomplish similar returns/risk profile using low beta stock strategies such as Dividend Growth/Appreciation. Although not clear this would matter for overall risk/return profile. For instance, you could have 80% low-beta/quality Dividend Growth index and 20% Total Bond, or you can have 75% Total Stock Index/25% Total Bond. Both may end up at same place from a risk adjusted returns perspective, no clear answer.
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Re: Bond alternatives

Post by rob »

It's market timing... but I've maxed out several stable value funds available to me. That will work in the short term but I don't have a longer term solution because I cannot by CD's in most of my tax advantaged accounts.
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Re: Bond alternatives

Post by jay22 »

Elysium wrote: Sat Oct 10, 2020 6:51 pm
jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
It really depends on what your overall goals are and what your overall portfolio looks like. Is this your retirement account? short term savings goals? college funds? why do you have bonds for? all that matters before a meaningful response can be formed. That said you can accomplish similar returns/risk profile using low beta stock strategies such as Dividend Growth/Appreciation. Although not clear this would matter for overall risk/return profile. For instance, you could have 80% low-beta/quality Dividend Growth index and 20% Total Bond, or you can have 75% Total Stock Index/25% Total Bond. Both may end up at same place from a risk adjusted returns perspective, no clear answer.
15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
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Re: Bond alternatives

Post by Explorer »

jay22 wrote: Sat Oct 10, 2020 7:05 pm
Elysium wrote: Sat Oct 10, 2020 6:51 pm
jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
It really depends on what your overall goals are and what your overall portfolio looks like. Is this your retirement account? short term savings goals? college funds? why do you have bonds for? all that matters before a meaningful response can be formed. That said you can accomplish similar returns/risk profile using low beta stock strategies such as Dividend Growth/Appreciation. Although not clear this would matter for overall risk/return profile. For instance, you could have 80% low-beta/quality Dividend Growth index and 20% Total Bond, or you can have 75% Total Stock Index/25% Total Bond. Both may end up at same place from a risk adjusted returns perspective, no clear answer.
15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
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Re: Bond alternatives

Post by Northern Flicker »

The problem is that alternatives to bonds and bonds are both priced as a risk premium on top of the risk-free rate. The main problem with bond rates is that the risk-free rate is 7-8 basis points. Other assets priced that way have the same issue.
Risk is not a guarantor of return.
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Re: Bond alternatives

Post by willthrill81 »

There are some good stable value funds out there still paying around 3%.
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jay22
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Re: Bond alternatives

Post by jay22 »

Explorer wrote: Sat Oct 10, 2020 7:44 pm
jay22 wrote: Sat Oct 10, 2020 7:05 pm
Elysium wrote: Sat Oct 10, 2020 6:51 pm
jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
It really depends on what your overall goals are and what your overall portfolio looks like. Is this your retirement account? short term savings goals? college funds? why do you have bonds for? all that matters before a meaningful response can be formed. That said you can accomplish similar returns/risk profile using low beta stock strategies such as Dividend Growth/Appreciation. Although not clear this would matter for overall risk/return profile. For instance, you could have 80% low-beta/quality Dividend Growth index and 20% Total Bond, or you can have 75% Total Stock Index/25% Total Bond. Both may end up at same place from a risk adjusted returns perspective, no clear answer.
15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
I get what you are saying, trust me. But, when we know that the rates are not going to go up for the next 3-4 years, and the yield is not going to even beat inflation, shouldn’t alternatives that would not make sense in normal times be at least considered?
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Re: Bond alternatives

Post by jay22 »

willthrill81 wrote: Sat Oct 10, 2020 7:54 pm There are some good stable value funds out there still paying around 3%.
Which ones? I thought stable funds are only under 401 plans, but that might just be my ignorance on this matter.
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Re: Bond alternatives

Post by oldlongbeard »

[/quote]

15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
[/quote]

Can you say "General Electric"? Can you say "Exxon"? Can you say "Ford"? Can you say "Pacific Gas and Electric"? Keep your bonds.

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Re: Bond alternatives

Post by UpperNwGuy »

I am continuing to hold my intermediate-term bonds as I always have. I see no reason to panic. Malkiel changes his tune frequently, so I've lost all confidence in him.
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Re: Bond alternatives

Post by Explorer »

jay22 wrote: Sat Oct 10, 2020 7:54 pm
Explorer wrote: Sat Oct 10, 2020 7:44 pm
jay22 wrote: Sat Oct 10, 2020 7:05 pm
Elysium wrote: Sat Oct 10, 2020 6:51 pm
jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
It really depends on what your overall goals are and what your overall portfolio looks like. Is this your retirement account? short term savings goals? college funds? why do you have bonds for? all that matters before a meaningful response can be formed. That said you can accomplish similar returns/risk profile using low beta stock strategies such as Dividend Growth/Appreciation. Although not clear this would matter for overall risk/return profile. For instance, you could have 80% low-beta/quality Dividend Growth index and 20% Total Bond, or you can have 75% Total Stock Index/25% Total Bond. Both may end up at same place from a risk adjusted returns perspective, no clear answer.
15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
I get what you are saying, trust me. But, when we know that the rates are not going to go up for the next 3-4 years, and the yield is not going to even beat inflation, shouldn’t alternatives that would not make sense in normal times be at least considered?
In simplest terms, the answer is NO you should not consider alternatives to investment grade bonds in a portfolio that is supposed to have a % allocated to bonds.

As I said above, at least 3 factors come to mind: diversification away from equities, income and capital preservation. Take for example dividend stocks, they are still stocks so there is no diversification benefit; they do not preserve capital; they might provide income. Take high yield (junk) bonds, they also share the same risk attributes as stocks. Only investment grade bonds/funds provide the diversification and capital preservation.

Income is dependent on interest rate environment - which is zero-bound right now - and not a whole lot you can do about it.

If your investment plan calls for x% bonds, please invest that in either treasuries and/or TBM like bond funds. It is that simple.
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Re: Bond alternatives

Post by aristotelian »

Do you seek alternatives to stocks when they seem overvalued?
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Re: Bond alternatives

Post by Elysium »

jay22 wrote: Sat Oct 10, 2020 7:05 pm 15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
What about the other 85%, how's that invested? Like I said earlier, you could go 90% low-beta/quality 10% bonds, or you could do 85% market-beta 15% bonds, both could end up similar risk/reward profile. If you are looking to increase equity allocation by replacing some of your bonds then you aren't getting the same benefits as bonds. Again, it is a question of what the overall portfolio is going to look like, not the components in isolation.
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Re: Bond alternatives

Post by aristotelian »

Explorer wrote: Sat Oct 10, 2020 7:44 pm
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
Agreed, except I am not sure that low yields changes anything regarding income generation. With inflation expectations currently low, arguably the expected real return of bonds has not changed even as yields have gone to zero.
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Re: Bond alternatives

Post by Explorer »

aristotelian wrote: Sat Oct 10, 2020 9:55 pm
Explorer wrote: Sat Oct 10, 2020 7:44 pm
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
Agreed, except I am not sure that low yields changes anything regarding income generation. With inflation expectations currently low, arguably the expected real return of bonds has not changed even as yields have gone to zero.
Low yield = low income, right? that is my point. Ideally, I would rather own bonds that yield higher than they are doing today to get more income; but I hold bonds for at least their diversification and capital preservation benefits. Don't know if this makes any sense to you.
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Re: Bond alternatives

Post by 000 »

If the goal is to get the same level of USD volatility as bonds, there is really no replacement other than cash/CDs.

If the goal is to get diversification from equities while accepting more volatility, REITs (because real estate as an asset class is underrepresented in the index), precious metals, or commodities could be considered.

Dividend stocks and other stock tilts likely provide some diversification from the top-heavy index, but ultimately stocks are stocks.
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Re: Bond alternatives

Post by jay22 »

aristotelian wrote: Sat Oct 10, 2020 9:51 pm Do you seek alternatives to stocks when they seem overvalued?
Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
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Re: Bond alternatives

Post by jay22 »

Elysium wrote: Sat Oct 10, 2020 9:53 pm
jay22 wrote: Sat Oct 10, 2020 7:05 pm 15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
What about the other 85%, how's that invested? Like I said earlier, you could go 90% low-beta/quality 10% bonds, or you could do 85% market-beta 15% bonds, both could end up similar risk/reward profile. If you are looking to increase equity allocation by replacing some of your bonds then you aren't getting the same benefits as bonds. Again, it is a question of what the overall portfolio is going to look like, not the components in isolation.
Pretty simple portfolio. 80/20 US/Int. US equities are 70% VTI, 20% QQQ, 10% ARKK. Int is all TISM.
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Re: Bond alternatives

Post by aristotelian »

jay22 wrote: Sat Oct 10, 2020 10:04 pm
aristotelian wrote: Sat Oct 10, 2020 9:51 pm Do you seek alternatives to stocks when they seem overvalued?
Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
You don't know the future with bonds any more than with stocks.
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Re: Bond alternatives

Post by aristotelian »

Explorer wrote: Sat Oct 10, 2020 9:59 pm
aristotelian wrote: Sat Oct 10, 2020 9:55 pm
Explorer wrote: Sat Oct 10, 2020 7:44 pm
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
Agreed, except I am not sure that low yields changes anything regarding income generation. With inflation expectations currently low, arguably the expected real return of bonds has not changed even as yields have gone to zero.
Low yield = low income, right? that is my point. Ideally, I would rather own bonds that yield higher than they are doing today to get more income; but I hold bonds for at least their diversification and capital preservation benefits. Don't know if this makes any sense to you.
In real terms, income is the same if inflation is low.
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Re: Bond alternatives

Post by jay22 »

aristotelian wrote: Sat Oct 10, 2020 10:40 pm
jay22 wrote: Sat Oct 10, 2020 10:04 pm
aristotelian wrote: Sat Oct 10, 2020 9:51 pm Do you seek alternatives to stocks when they seem overvalued?
Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
You don't know the future with bonds any more than with stocks.
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
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Re: Bond alternatives

Post by Kevin M »

aristotelian wrote: Sat Oct 10, 2020 9:55 pm <snip>
With inflation expectations currently low, arguably the expected real return of bonds has not changed even as yields have gone to zero.
This definitely is not true. Here is the 10-year TIPS (real) yield for the maximum time period available at FRED.
Image

Note that the 10-year real yield is in the -1% ballpark, which is lower than most of the last 16+ years.

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Re: Bond alternatives

Post by Elysium »

jay22 wrote: Sat Oct 10, 2020 10:06 pm
Elysium wrote: Sat Oct 10, 2020 9:53 pm
jay22 wrote: Sat Oct 10, 2020 7:05 pm 15% of my overall portfolio is in BIV and is all in IRAs. I am in mid 30s, so don’t need this money anytime soon. No clear answers here but Malkiel’s point about high dividend, blue chip stocks stuck with me.
What about the other 85%, how's that invested? Like I said earlier, you could go 90% low-beta/quality 10% bonds, or you could do 85% market-beta 15% bonds, both could end up similar risk/reward profile. If you are looking to increase equity allocation by replacing some of your bonds then you aren't getting the same benefits as bonds. Again, it is a question of what the overall portfolio is going to look like, not the components in isolation.
Pretty simple portfolio. 80/20 US/Int. US equities are 70% VTI, 20% QQQ, 10% ARKK. Int is all TISM.
Okay. Given this you have to calculate the expected return of this portfolio with expected risk. One simple way to do that is to use an average of the estimates available from various sources such as Blackrock, Vanguard, Research Affiliates, so on. Risk can be measured using SD for similar weighted portfolio. Let's say then BIV return perhaps 1%-1.5% given current yield, VTI about 5%-6%, and TISM about the same. Let's say SD is about 10% for this portfolio. How will you improve this by adding a Dividend oriented stocks fund? Are you thinking of taking away from 20% bonds and buying a Dividend ETF? If so, all you are going to do is increase the risk of your portfolio in return for increase returns. There is no improvement in Sharpe at all here. You could also go 100% Dividend stocks instead of VTI and increase equity exposure, but for lower overall risk/returns. There is no magic bullet here.

See here an example:
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Re: Bond alternatives

Post by Explorer »

aristotelian wrote: Sat Oct 10, 2020 10:41 pm
Explorer wrote: Sat Oct 10, 2020 9:59 pm
aristotelian wrote: Sat Oct 10, 2020 9:55 pm
Explorer wrote: Sat Oct 10, 2020 7:44 pm
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
Agreed, except I am not sure that low yields changes anything regarding income generation. With inflation expectations currently low, arguably the expected real return of bonds has not changed even as yields have gone to zero.
Low yield = low income, right? that is my point. Ideally, I would rather own bonds that yield higher than they are doing today to get more income; but I hold bonds for at least their diversification and capital preservation benefits. Don't know if this makes any sense to you.
In real terms, income is the same if inflation is low.
Inflation is not low - how govt calculates inflation may show that number to be low.
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Re: Bond alternatives

Post by willthrill81 »

Explorer wrote: Sun Oct 11, 2020 5:47 pm
aristotelian wrote: Sat Oct 10, 2020 10:41 pm
Explorer wrote: Sat Oct 10, 2020 9:59 pm
aristotelian wrote: Sat Oct 10, 2020 9:55 pm
Explorer wrote: Sat Oct 10, 2020 7:44 pm
In my humble opinion, dividend paying stocks are NOT an alternative for bonds. Investment grade bonds serve at least 3 factors in your portfolio: diversification, income generation, and capital preservation. The low interest rate environment practically reduces/eliminates income generation factor. But the other two factors are intact.

If you are in/approaching retirement, please do not discard bonds in your allocation. They will save your livelihood one day.
Agreed, except I am not sure that low yields changes anything regarding income generation. With inflation expectations currently low, arguably the expected real return of bonds has not changed even as yields have gone to zero.
Low yield = low income, right? that is my point. Ideally, I would rather own bonds that yield higher than they are doing today to get more income; but I hold bonds for at least their diversification and capital preservation benefits. Don't know if this makes any sense to you.
In real terms, income is the same if inflation is low.
Inflation is not low - how govt calculates inflation may show that number to be low.
I've heard this very often, but when I've asked for other means of calculating inflation, people either point to stocks and bonds being expensive, which is not what CPI is intended to capture (i.e. consumer price index, not investor price index), or nothing at all. So I'll refer to a couple of alternative measures of consumer inflation.

The Billion Prices Project uses completely different methods than those used to measure CPI but has come to largely the same result.
Daily price indices, monthly, and annual inflation rates for Argentina and the US. Monthly data with annual inflation rates for Argentina, Brazil, China, Germany, Japan, South Africa, UK, US, 3 US sectors, and global aggregates (including Eurozone). Daily PPP series for Argentina and Australia. The data were used in the paper titled “The Billion Prices Project: Using Online Data for Measurement and Research” – Journal of Economic Perspectives , 31(1) (Spring 2016).
Image
Daily prices for all goods sold by 7 large retailers in Latin America and the US: 2 in Argentina, 1 in Brazil, 1 in Chile, 1 in Colombia, 1 in Venezuela, and 4 in the US. Used in the paper titled “Scraped Data and Sticky Prices” - Review of Economics and Statistics (2016 - Forthcoming)
Image
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Re: Bond alternatives

Post by NoRegret »

jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
The plural in the subject line is important although I don’t think you meant it that way. My own “bond replacement” strategy consists of two components to synthetically achieve the two objectives most people want from bonds: income and negative correlation to equities.

That said both components are mentioned here from time to time and neither is BH approved.

Point is to think outside the box and quit trying to find a single replacement for 5% yielding US treasuries. You may as well invent a time machine.
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Re: Bond alternatives

Post by 000 »

NoRegret wrote: Sun Oct 11, 2020 8:37 pm
jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
The plural in the subject line is important although I don’t think you meant it that way. My own “bond replacement” strategy consists of two components to synthetically achieve the two objectives most people want from bonds: income and negative correlation to equities.

That said both components are mentioned here from time to time and neither is BH approved.

Point is to think outside the box and quit trying to find a single replacement for 5% yielding US treasuries. You may as well invent a time machine.
Let me guess... precious metals and mortgage REITs?
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Re: Bond alternatives

Post by 22twain »

jay22 wrote: Sat Oct 10, 2020 7:05 pm I am in mid 30s
jay22 wrote: Sat Oct 10, 2020 7:54 pm But, when we know that the rates are not going to go up for the next 3-4 years
Why are you worried about the next 3-4 years? Are you aiming to FIRE at 40 or something like that?

Also, this is only 15% of your portfolio.
Last edited by 22twain on Mon Oct 12, 2020 6:59 am, edited 1 time in total.
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Re: Bond alternatives

Post by NoRegret »

000 wrote: Sun Oct 11, 2020 8:39 pm
NoRegret wrote: Sun Oct 11, 2020 8:37 pm
jay22 wrote: Sat Oct 10, 2020 6:42 pm Let me preface this post with this: I am no expert on bonds and have them in my portfolio (15% all invested in Intermediate-Term Bond ETF) for better risk-adjusted returns and because. But, with the low-interest environment now (which are unlikely to go up in the next few years), are folks here thinking of alternatives to bonds? Cash, CDs? There doesn't seem to be a good answer here that would beat inflation and provide a decent yield. I recently heard a podcast where Malkiel suggested that a dividend ETF with blue-chip funds might be an alternative to look at. Thoughts?
The plural in the subject line is important although I don’t think you meant it that way. My own “bond replacement” strategy consists of two components to synthetically achieve the two objectives most people want from bonds: income and negative correlation to equities.

That said both components are mentioned here from time to time and neither is BH approved.

Point is to think outside the box and quit trying to find a single replacement for 5% yielding US treasuries. You may as well invent a time machine.
Let me guess... precious metals and mortgage REITs?
50% right
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade
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quisp65
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Re: Bond alternatives

Post by quisp65 »

I figure one bond alternative is to drop your withdrawal rate down a few tenths of a percentage points and be more aggressive with your allocation. For example someone pulling 2% would only be pulling 4% if the market dropped 50% and the market never stays down long. Say you were thinking of retiring at 4% withdrawal at 60/40 allocation but fixed income is awful now so you decide to go 80/20 allocation and start out retirement at 3.2% withdrawal rate.

I guess this is another topic though, but I would think it makes higher equity percentages just as safe as cookie cutter plans.
Plan: stock index/roughly 7 years cash investments, one-way balance market highs, slide withdrawal rate for comfort
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jay22
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Re: Bond alternatives

Post by jay22 »

22twain wrote: Sun Oct 11, 2020 8:49 pm
jay22 wrote: Sat Oct 10, 2020 7:05 pm I am in mid 30s
jay22 wrote: Sat Oct 10, 2020 7:54 pm But, when we know that the rates are not going to go up for the next 3-4 years
Why are you worried about the next 3-4 years? Are you aiming to FIRE at 40 or something like that?

Also, this is only 15% of your portfolio.
Not sure what you mean. 15% of the portfolio is still a significant amount of money (for me). Why won't I try to be efficient with it?
patrick
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Re: Bond alternatives

Post by patrick »

You can currently get higher yields on FDIC insured bank accounts than safe bonds:

HMBradley pays 3% on balances up to $100,000 in checking accounts. They require direct deposit every month (payroll or government benefits) and saving at least 20% of deposits (i.e. total withdrawals no more than 80 percent of total deposits), evaluated quarterly.

Porte Bank pays 3% on balances up to $15,000 in savings accounts. They require $1000 of deposits in a month (an ACH push from another of your own accounts seems to qualify) to open the account.
hoops777
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Re: Bond alternatives

Post by hoops777 »

The best alternative I have seen are MYGA’s. Period.
K.I.S.S........so easy to say so difficult to do.
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Stinky
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Re: Bond alternatives

Post by Stinky »

hoops777 wrote: Tue Oct 13, 2020 2:12 pm The best alternative I have seen are MYGA’s. Period.
Agreed.
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Quaestner
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Re: Bond alternatives

Post by Quaestner »

In answer to your question, and depending on your time horizon, you might stash (taxable) cash investments in EE-bonds and/or I-bonds. The EE-bonds are earning a tax deferred (and state tax free) annual rate of 3.5% if held for 20 years. (Yeah, there's a limit of how much you can buy.) The I-bond rate varies with inflation.
Northern Flicker
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Re: Bond alternatives

Post by Northern Flicker »

jay22 wrote: Sat Oct 10, 2020 11:04 pm
aristotelian wrote: Sat Oct 10, 2020 10:40 pm
jay22 wrote: Sat Oct 10, 2020 10:04 pm
aristotelian wrote: Sat Oct 10, 2020 9:51 pm Do you seek alternatives to stocks when they seem overvalued?
Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
You don't know the future with bonds any more than with stocks.
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Risk is not a guarantor of return.
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batpot
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Re: Bond alternatives

Post by batpot »

What would normally be bonds in typical 3-fund portfolio I split 50/50 between the bond fund and stable value fund.
The only bond fund available in my 401k includes ~26% corporate bonds.
The stable value has averaged about 2.2% over the past decade (with ER factored in).
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
jay22 wrote: Sat Oct 10, 2020 11:04 pm
aristotelian wrote: Sat Oct 10, 2020 10:40 pm
jay22 wrote: Sat Oct 10, 2020 10:04 pm
aristotelian wrote: Sat Oct 10, 2020 9:51 pm Do you seek alternatives to stocks when they seem overvalued?
Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
You don't know the future with bonds any more than with stocks.
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.
“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
loukycpa
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Re: Bond alternatives

Post by loukycpa »

Not easy to replicate but I had an opportunity to help a friend back in January who wanted to buy a condo in the city. Planning to sell main home outside the city in a two years after the youngest graduates. Friend could only come up with 50% of the purchase price of 200k. So I bought the condo and we did a contract for deed. I got the 50% down payment back immediately and then will get the balance in a balloon payment at the end of 2022 plus 3.65% interest. Friend pays all expenses. Property doesn't transfer until balloon payment is made and if friend defaults I can sell the property to get paid.

Wish I could find more of these.
Last edited by loukycpa on Tue Oct 13, 2020 5:59 pm, edited 1 time in total.
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

loukycpa wrote: Tue Oct 13, 2020 5:49 pm Not easy to replicate but I had an opportunity to help a friend back in January who wanted to buy a condo in the city. Planning to sell main home outside the city in a two years after the youngest graduates. Friend could only come up with 50% of the purchase price of the 200k. So I bought the condo and we did a contract for deed. I got the 50% down payment back immediately and then will get the balance in a balloon payment at the end of 2022 plus 3.65% interest. Friend pays all expenses. Property doesn't transfer until balloon payment is made and if friend defaults I can sell the property to get paid.

Wish I could find more of these.
You may want to look into 'hard money lending'. Jim discusses it at his blog, the White Coat Investor, and has been generally successful with it. You have to be an accredited investor though, TMK.
“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: Bond alternatives

Post by Broken Man 1999 »

Treasury index bond funds did what I expecterd during the market swoon. Provided some short-term capital gains as well.

I bought my treasury bond funds for safety, yield was secondary.

14.4% of our bonds/bond funds are I-bonds, all at fixed rates of 3.0% - 3.6%.

Broken Man 1999
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Northern Flicker
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Re: Bond alternatives

Post by Northern Flicker »

willthrill81 wrote: Tue Oct 13, 2020 5:30 pm
Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
jay22 wrote: Sat Oct 10, 2020 11:04 pm
aristotelian wrote: Sat Oct 10, 2020 10:40 pm
jay22 wrote: Sat Oct 10, 2020 10:04 pm

Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
You don't know the future with bonds any more than with stocks.
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.
S/he also claimed to know that rates would not go up for another 3-4 years. Nobody knows that.

The 6-year expected real return of TBM is probably negative. The same is true of intermediate TIPS.

I care about portfolio real return.
Risk is not a guarantor of return.
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jay22
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Re: Bond alternatives

Post by jay22 »

Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
jay22 wrote: Sat Oct 10, 2020 11:04 pm
aristotelian wrote: Sat Oct 10, 2020 10:40 pm
jay22 wrote: Sat Oct 10, 2020 10:04 pm
aristotelian wrote: Sat Oct 10, 2020 9:51 pm Do you seek alternatives to stocks when they seem overvalued?
Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
You don't know the future with bonds any more than with stocks.
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Looks like you haven't been following the news.

https://www.federalreserve.gov/newseven ... 00916a.htm

Also watch Powell's interview with NPR a few weeks back.
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jay22
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Re: Bond alternatives

Post by jay22 »

willthrill81 wrote: Tue Oct 13, 2020 5:30 pm
Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
jay22 wrote: Sat Oct 10, 2020 11:04 pm
aristotelian wrote: Sat Oct 10, 2020 10:40 pm
jay22 wrote: Sat Oct 10, 2020 10:04 pm

Not really. Seem overvalued is subjective - the returns may or may not be higher. That's not the case with bonds. I know I am not getting anything more than what the yield is.
You don't know the future with bonds any more than with stocks.
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.
Yep, exactly. I don't know about others, but I don't want 15% of my portfolio to lose value over the course of the next few years.
KlangFool
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Re: Bond alternatives

Post by KlangFool »

jay22 wrote: Wed Oct 14, 2020 9:35 am
willthrill81 wrote: Tue Oct 13, 2020 5:30 pm
Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
jay22 wrote: Sat Oct 10, 2020 11:04 pm
aristotelian wrote: Sat Oct 10, 2020 10:40 pm
You don't know the future with bonds any more than with stocks.
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.
Yep, exactly. I don't know about others, but I don't want 15% of my portfolio to lose value over the course of the next few years.
jay22,

You have a choice:


A) Accept that you and others cannot predict the future.


B) You and others can predict the future.


If you believe in (A), it means the following. You do not know what will happen next.

<<Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.>>

How do you or anyone know that the interest rate will not fall further? I had heard the same sound and dance since 2009. The interest rate is low enough and cannot fall further.


If you believe in (B), then, the following is possible.

<< I don't want 15% of my portfolio to lose value over the course of the next few years.>>


(A) or (B). If you believe in (B), I wish you the best of luck. How is that logical and rational, I have no idea?


Please be consistent in your thought process.

I know that I cannot predict the future.


KlangFool
bi0hazard
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Re: Bond alternatives

Post by bi0hazard »

loukycpa wrote: Tue Oct 13, 2020 5:49 pm Not easy to replicate but I had an opportunity to help a friend back in January who wanted to buy a condo in the city. Planning to sell main home outside the city in a two years after the youngest graduates. Friend could only come up with 50% of the purchase price of 200k. So I bought the condo and we did a contract for deed. I got the 50% down payment back immediately and then will get the balance in a balloon payment at the end of 2022 plus 3.65% interest. Friend pays all expenses. Property doesn't transfer until balloon payment is made and if friend defaults I can sell the property to get paid.

Wish I could find more of these.
Lending to friends and family is a “less-than-ideal” idea in my opinion, and charging friends interest may strain the relationship, to put it very nicely.

You may want to look into online peer to peer lending, which I’ve been doing for about 3 years. Interest is usually 7-9 %, and you avoid the frankly extreme hassle of your scheme.
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

KlangFool wrote: Wed Oct 14, 2020 9:44 am
jay22 wrote: Wed Oct 14, 2020 9:35 am
willthrill81 wrote: Tue Oct 13, 2020 5:30 pm
Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
jay22 wrote: Sat Oct 10, 2020 11:04 pm
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.
Yep, exactly. I don't know about others, but I don't want 15% of my portfolio to lose value over the course of the next few years.
jay22,

You have a choice:


A) Accept that you and others cannot predict the future.


B) You and others can predict the future.


If you believe in (A), it means the following. You do not know what will happen next.

<<Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.>>

How do you or anyone know that the interest rate will not fall further? I had heard the same sound and dance since 2009. The interest rate is low enough and cannot fall further.


If you believe in (B), then, the following is possible.

<< I don't want 15% of my portfolio to lose value over the course of the next few years.>>


(A) or (B). If you believe in (B), I wish you the best of luck. How is that logical and rational, I have no idea?


Please be consistent in your thought process.

I know that I cannot predict the future.


KlangFool
The Fed has already said that they aren't interested in negative interest rates. So that sets 0% as a lower bound. TBM has a duration of 6.5 years and is currently yielding 1.17% (30 day SEC yield), so that dropping to zero would result in a 7.6% appreciation in existing bonds' principal value. That's the maximum potential principal gain from TBM at this point unless the Fed completely changes its stated direction.

On the yield side, TBM's current 1.17% yield is .52% lower than the market's expected inflation over the next decade of 1.70% and .82% lower than the Fed's targeted 2% inflation.

Acting as though none of this is real and that bonds will still somehow have a positive real return does not help anyone. Maybe inflation will be zero for the next decade. Maybe the Fed will change its direction and implement negative interest rates. I don't know that neither of those things will happen, but the evidence we have very strongly indicates that they will not. Betting that bonds will have a positive real return over the next decade is just that: a bet. It's not even speculation; it's gambling since the expected return is negative.

Note that I'm not saying that everyone should run out and sell all of their bonds. Bonds are still very likely to act as effective ballast in a portfolio otherwise comprised of stocks and other volatile assets. But let's not stick our head in the sand and act as though bonds will perform very well from where we are now.
Last edited by willthrill81 on Wed Oct 14, 2020 10:10 am, edited 1 time in total.
“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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jay22
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Re: Bond alternatives

Post by jay22 »

KlangFool wrote: Wed Oct 14, 2020 9:44 am
jay22 wrote: Wed Oct 14, 2020 9:35 am
willthrill81 wrote: Tue Oct 13, 2020 5:30 pm
Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
jay22 wrote: Sat Oct 10, 2020 11:04 pm
Well, I do know that the current yield will not even beat inflation, and the interest rates are not going up for another 3-4 years.
You know this, how?
Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.
Yep, exactly. I don't know about others, but I don't want 15% of my portfolio to lose value over the course of the next few years.
jay22,

You have a choice:


A) Accept that you and others cannot predict the future.


B) You and others can predict the future.


If you believe in (A), it means the following. You do not know what will happen next.

<<Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.>>

How do you or anyone know that the interest rate will not fall further? I had heard the same sound and dance since 2009. The interest rate is low enough and cannot fall further.


If you believe in (B), then, the following is possible.

<< I don't want 15% of my portfolio to lose value over the course of the next few years.>>


(A) or (B). If you believe in (B), I wish you the best of luck. How is that logical and rational, I have no idea?


Please be consistent in your thought process.

I know that I cannot predict the future.


KlangFool
No, I cannot predict the future with absolute, 100% certainty. But I can definitely consider the current economic and market conditions and place a reasonable bet on what the next 3-4 years are going to be. As I said above, when it is pretty apparent that the rates are not going to go up for the next 3-4 years, and the yield is not going to even beat inflation, shouldn’t alternatives that would not make sense in normal times be at least considered and discussed?
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

jay22 wrote: Wed Oct 14, 2020 10:09 am
KlangFool wrote: Wed Oct 14, 2020 9:44 am
jay22 wrote: Wed Oct 14, 2020 9:35 am
willthrill81 wrote: Tue Oct 13, 2020 5:30 pm
Northern Flicker wrote: Tue Oct 13, 2020 3:42 pm
You know this, how?
Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.
Yep, exactly. I don't know about others, but I don't want 15% of my portfolio to lose value over the course of the next few years.
jay22,

You have a choice:


A) Accept that you and others cannot predict the future.


B) You and others can predict the future.


If you believe in (A), it means the following. You do not know what will happen next.

<<Well, he doesn't know it in the sense that it absolutely will occur, but unless inflation falls to under current bond yields and/or interest rates fall further, bonds (e.g. TBM) will lose out to inflation over the next decade.>>

How do you or anyone know that the interest rate will not fall further? I had heard the same sound and dance since 2009. The interest rate is low enough and cannot fall further.


If you believe in (B), then, the following is possible.

<< I don't want 15% of my portfolio to lose value over the course of the next few years.>>


(A) or (B). If you believe in (B), I wish you the best of luck. How is that logical and rational, I have no idea?


Please be consistent in your thought process.

I know that I cannot predict the future.


KlangFool
No, I cannot predict the future with absolute, 100% certainty. But I can definitely consider the current economic and market conditions and place a reasonable bet on what the next 3-4 years are going to be. As I said above, when it is pretty apparent that the rates are not going to go up for the next 3-4 years, and the yield is not going to even beat inflation, shouldn’t alternatives that would not make sense in normal times be at least considered and discussed?
IMHO, this is one of the drawbacks of the 'stay the course, absolutely no matter what' idea. It can lead people to think that since we cannot know the future with precision that planning is useless, all possibilities are equally likely to occur, any road will take you where you want to go, etc.

As I replied to KlangFool, I've never said that bondholders should be rushing for the exits. But they shouldn't expect their bonds to even keep pace with inflation over the next decade. Maybe they'll get really lucky and come out even on a pre-tax basis, but the likelihood of them earning something like 1% real over the next decade mathematically hinges on significantly negative interest rates and/or deflation.

Some people just refuse to believe that bond performance is fairly predictable, much more so than that of stocks. Changes in interest rates and, in the case of nominal bonds, inflation/deflation are the only real unknowns when it comes to Treasuries at least.

Those buying individual TIPS right now know (or should) for a fact that unless the Treasury defaults, they will lose out to CPI. But at least they know exactly how much they will lose out to CPI and can plan accordingly. They are acting as though positive real returns will magically appear.
Last edited by willthrill81 on Wed Oct 14, 2020 10:18 am, edited 1 time in total.
“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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