Bond alternatives

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jay22
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Re: Bond alternatives

Post by jay22 »

willthrill81 wrote: Wed Oct 14, 2020 10:16 am
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.
Agree 100% with you on this.
KlangFool
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Re: Bond alternatives

Post by KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 10:06 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
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.
willthrill81,

<<The Fed has already said that they aren't interested in negative interest rates. So that sets 0% as a lower bound. >>


The base assumption here is The Fed can control the interest rate in the future.


<<I don't know that neither of those things will happen, but the evidence we have very strongly indicates that they will not.>>


In order to believe this, you would need to have a leap of faith that we can print trillion of stimulus money, low interest rate, and low inflation at the same time. I could had said the same thing. The evidence that we have very strongly indicate we will not have "business as usual". It will change. How, where, and when? I have no idea.


I do not know what will happen next. But, "business as usual" is not likely to be true.

I know that I know nothing. I know that when EVERYONE believe something to be TRUE, it is likely to be FALSE. It is normal for EVERYONE to DISAGREE. It is abnormal for EVERYONE to AGREE.


KlangFool
UpperNwGuy
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Re: Bond alternatives

Post by UpperNwGuy »

willthrill81 wrote: Wed Oct 14, 2020 10:06 am 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.
What do you recommend we do?
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

KlangFool wrote: Wed Oct 14, 2020 10:19 am
willthrill81 wrote: Wed Oct 14, 2020 10:06 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

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.
willthrill81,

<<The Fed has already said that they aren't interested in negative interest rates. So that sets 0% as a lower bound. >>


The base assumption here is The Fed can control the interest rate in the future.


<<I don't know that neither of those things will happen, but the evidence we have very strongly indicates that they will not.>>


In order to believe this, you would need to have a leap of faith that we can print trillion of stimulus money, low interest rate, and low inflation at the same time. I could had said the same thing. The evidence that we have very strongly indicate we will not have "business as usual". It will change. How, where, and when? I have no idea.


I do not know what will happen next. But, "business as usual" is not likely to be true.

I know that I know nothing. I know that when EVERYONE believe something to be TRUE, it is likely to be FALSE. It is normal for EVERYONE to DISAGREE. It is abnormal for EVERYONE to AGREE.


KlangFool
I don't know what 'leap of faith' you're referring to since, as I noted in this recent thread, we've seen the money supply more than double since 2009 despite historically low interest rates and inflation. That's a fact, not my opinion. But if inflation does go up significantly, holders of nominal bonds will lose out significantly. That's just simple math.

Further, you have not offered any evidence as to why bonds should be expected to have a positive real return 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
KlangFool
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Re: Bond alternatives

Post by KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 10:16 am

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.


willthrill81,


My AA is 60/40. I am diversified. And, being diversified means that I would have an asset class with a lowered expected return at any point in time.


I would counter your point.

<<the likelihood of them earning something like 1% real over the next decade mathematically hinges on significantly negative interest rates and/or deflation.>>


I am 60/40. I do not need to be lucky. If the stock does well, I make money from the stock side. If the bond does well, I make money from the bond. I do not need to "market time" and predict the future as to whether the negative interest rate and/or deflation is possible.

I know that I know nothing. To bet against the bond is to assume that you know something and you can predict the future. I know that I cannot predict the future.


KlangFool
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

UpperNwGuy wrote: Wed Oct 14, 2020 10:19 am
willthrill81 wrote: Wed Oct 14, 2020 10:06 am 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.
What do you recommend we do?
For many, they should probably do nothing. It's historically normal for bonds to make between -1% and +1% real. From 1941-1981, intermediate-term Treasuries lost about 1.6% annually. If we were in 1981, many would have very different expectations of bonds.

1982-2012 was the biggest bond market in U.S. history, TMK. 2013-2018 saw basically zero real returns. The only reason that bonds have made any real returns since 2019 was falling interest rates, but that cannot last forever (not meaningfully at least).

It's never a bad time for investors to honestly ask themselves why their AA is what it is. In this vein, it's reasonable for an investor to ask why, for instance, he is holding 40% of his portfolio in bonds. Is a 30% portfolio decline (assuming -50% loss in stocks is a reasonable maximum for planning purposes) the most he believes he can tolerate? If so, then holding 40% in bonds or other fixed income instruments (e.g. HYSA, CDs, SVF) is still reasonable, even if the expected return is zero.

Many just have a hard time holding an asset that they believe will lose out to inflation. But it's better to lose 1% annually on one's bond holdings than to go too heavy on stocks and panic sell during a bear market.
“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
KlangFool
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Re: Bond alternatives

Post by KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 10:22 am

Further, you have not offered any evidence as to why bonds should be expected to have a positive real return over the next decade.
willthrill81,


I don't need to. The real world does not have to meet someone's expectations.


What is REAL and what is EXPECTED is rarely the same. The expectation is just a guess.


KlangFool
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

KlangFool wrote: Wed Oct 14, 2020 10:35 am
willthrill81 wrote: Wed Oct 14, 2020 10:22 am

Further, you have not offered any evidence as to why bonds should be expected to have a positive real return over the next decade.
willthrill81,


I don't need to. The real world does not have to meet someone's expectations.


What is REAL and what is EXPECTED is rarely the same. The expectation is just a guess.


KlangFool
So you're ignoring the simple math behind bonds (i.e. current yield vs. inflation)? If so, then no logical argument will persuade you otherwise, and there's no point in continuing this conversation.
“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
KlangFool
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Re: Bond alternatives

Post by KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 10:37 am
KlangFool wrote: Wed Oct 14, 2020 10:35 am
willthrill81 wrote: Wed Oct 14, 2020 10:22 am

Further, you have not offered any evidence as to why bonds should be expected to have a positive real return over the next decade.
willthrill81,


I don't need to. The real world does not have to meet someone's expectations.


What is REAL and what is EXPECTED is rarely the same. The expectation is just a guess.


KlangFool
So you're ignoring the simple math behind bonds (i.e. current yield vs. inflation)? If so, then no logical argument will persuade you otherwise, and there's no point in continuing this conversation.
willthrill81,


Unless you can predict the future, it is not logical to believe that you know the actual return rate of the bond in the future. You are just guessing.


The current yield tells us nothing about whether the interest rate will go up or down over the next few years. Aka, the future.


KlangFool
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

KlangFool wrote: Wed Oct 14, 2020 10:43 am Unless you can predict the future, it is not logical to believe that you know the actual return rate of the bond in the future. You are just guessing.
You do not have to know the future in order to get a very good, data-informed estimate of the future rate of return of bonds. It's far better than a random guess.
KlangFool wrote: Wed Oct 14, 2020 10:43 am The current yield tells us nothing about whether the interest rate will go up or down over the next few years. Aka, the future.
Interest rate changes don't really matter that much in this context (i.e. next decade's bond returns). Interest rates going up would improve future bond yields but make current bond principal lose value and vice versa.
“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 »

Isn't it possible to have very low bond rates and still have persistent deflation rather than inflation? Japan in the 90s and more recent decades for example? In such an environment wouldn't you expect bonds (even at these low yields) to significantly outperform stocks? Fed of course is targeting 2+% inflation but can one guarantee they will be successful?

Not saying I am a lover of bonds either at these levels. But I hold some anyway. I want to retire in the next few years and therefore can't afford a lost decade for stocks.
loukycpa
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Re: Bond alternatives

Post by loukycpa »

https://www.bloomberg.com/news/articles ... irus-world

Is this scenario as likely as inflation? I'm not smart enough to know.

What I do think is many US investors, probably myself included, are not psychologically prepared for a period for stocks like 1964-1981. Dow 800 at the beginning. Dow 800 at the end. 17 years is a long time to earn nothing but dividends. I'm pretty sure that was a negative "real" return 17 year period for stocks. I'm afraid we have forgot how risky stocks can be if one needs to spend the money in the next ten years (or even longer).

I don't mean to sound like a bear. I'm really not one.
antman50
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Re: Bond alternatives

Post by antman50 »

willthrill81 wrote: Wed Oct 14, 2020 3:49 pm
KlangFool wrote: Wed Oct 14, 2020 10:43 am Unless you can predict the future, it is not logical to believe that you know the actual return rate of the bond in the future. You are just guessing.
You do not have to know the future in order to get a very good, data-informed estimate of the future rate of return of bonds. It's far better than a random guess.
KlangFool wrote: Wed Oct 14, 2020 10:43 am The current yield tells us nothing about whether the interest rate will go up or down over the next few years. Aka, the future.
Interest rate changes don't really matter that much in this context (i.e. next decade's bond returns). Interest rates going up would improve future bond yields but make current bond principal lose value and vice versa.
https://advisors.vanguard.com/insights/ ... tocksbonds

Vanguard stating that the fake inflation numbers are greater than the return on treasuries...
GatorFL
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Re: Bond alternatives

Post by GatorFL »

I am getting 3% in a stable value fund. Would this be considered an alternative to BND? I like the fact that I am guaranteed the 3% along with principal preservation in this low interest rate environment.

Gator
antman50
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Re: Bond alternatives

Post by antman50 »

GatorFL wrote: Wed Oct 14, 2020 6:45 pm I am getting 3% in a stable value fund. Would this be considered an alternative to BND? I like the fact that I am guaranteed the 3% along with principal preservation in this low interest rate environment.

Gator
Sounds like things have worked out so far. Would you mind sharing the fund?
000
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Re: Bond alternatives

Post by 000 »

willthrill81 wrote: Wed Oct 14, 2020 10:06 am 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.
I agree.
000
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Re: Bond alternatives

Post by 000 »

For me, the only purpose of fixed income is for short/intermediate term liquidity, like an emergency fund or a spending fund for a retiree. I don't think fixed income is a growth asset and I don't think rebalancing to fixed income (or any depreciating asset) makes a lot of sense. My cursory research (and the much more thorough research of others on this board) suggests there has been little to no "rebalancing bonus" versus just having a higher stock allocation at start. Moreover, I am unwilling to rebalance beyond a floor in the liquidity fund, so it seems to make the most sense to just set my fixed income to that floor and invest the rest in productive assets.

But I don't put the whole growth portfolio in the US stock index. I am not quite at, but thinking I will permanently move to, a growth portfolio like this:
1/2 US stock index
1/4 Developed stock index
1/8 REITs
1/8 Gold

That would be in addition to X months of expenses in cash / bonds.
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Re: Bond alternatives

Post by willthrill81 »

loukycpa wrote: Wed Oct 14, 2020 6:09 pm https://www.bloomberg.com/news/articles ... irus-world

Is this scenario as likely as inflation? I'm not smart enough to know.

What I do think is many US investors, probably myself included, are not psychologically prepared for a period for stocks like 1964-1981. Dow 800 at the beginning. Dow 800 at the end. 17 years is a long time to earn nothing but dividends. I'm pretty sure that was a negative "real" return 17 year period for stocks. I'm afraid we have forgot how risky stocks can be if one needs to spend the money in the next ten years (or even longer).

I don't mean to sound like a bear. I'm really not one.
I've not heard any good arguments for coming deflation at any level. Most seem more concerned about inflation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
KlangFool
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Re: Bond alternatives

Post by KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 8:46 pm
loukycpa wrote: Wed Oct 14, 2020 6:09 pm https://www.bloomberg.com/news/articles ... irus-world

Is this scenario as likely as inflation? I'm not smart enough to know.

What I do think is many US investors, probably myself included, are not psychologically prepared for a period for stocks like 1964-1981. Dow 800 at the beginning. Dow 800 at the end. 17 years is a long time to earn nothing but dividends. I'm pretty sure that was a negative "real" return 17 year period for stocks. I'm afraid we have forgot how risky stocks can be if one needs to spend the money in the next ten years (or even longer).

I don't mean to sound like a bear. I'm really not one.
I've not heard any good arguments for coming deflation at any level. Most seem more concerned about inflation.
willthrill81,

I give you one from The Fed.


https://www.deflation.com/articles/the- ... -deflation

<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>


KlangFool
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

KlangFool wrote: Wed Oct 14, 2020 9:04 pm
willthrill81 wrote: Wed Oct 14, 2020 8:46 pm
loukycpa wrote: Wed Oct 14, 2020 6:09 pm https://www.bloomberg.com/news/articles ... irus-world

Is this scenario as likely as inflation? I'm not smart enough to know.

What I do think is many US investors, probably myself included, are not psychologically prepared for a period for stocks like 1964-1981. Dow 800 at the beginning. Dow 800 at the end. 17 years is a long time to earn nothing but dividends. I'm pretty sure that was a negative "real" return 17 year period for stocks. I'm afraid we have forgot how risky stocks can be if one needs to spend the money in the next ten years (or even longer).

I don't mean to sound like a bear. I'm really not one.
I've not heard any good arguments for coming deflation at any level. Most seem more concerned about inflation.
willthrill81,

I give you one from The Fed.


https://www.deflation.com/articles/the- ... -deflation

<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>


KlangFool
That sounds to me like an explanation for how deflation can occur, not an assessment of the likelihood of deflation actually occurring in a significant way.

The last year we had deflation exceeding 2009's .4% was 1949 when it reached 1.0%. 1930-1933 and 1920-1921 were the only periods since 1913 when the U.S. had meaningful deflation.
“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
KlangFool
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Re: Bond alternatives

Post by KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 9:08 pm
KlangFool wrote: Wed Oct 14, 2020 9:04 pm
willthrill81 wrote: Wed Oct 14, 2020 8:46 pm
loukycpa wrote: Wed Oct 14, 2020 6:09 pm https://www.bloomberg.com/news/articles ... irus-world

Is this scenario as likely as inflation? I'm not smart enough to know.

What I do think is many US investors, probably myself included, are not psychologically prepared for a period for stocks like 1964-1981. Dow 800 at the beginning. Dow 800 at the end. 17 years is a long time to earn nothing but dividends. I'm pretty sure that was a negative "real" return 17 year period for stocks. I'm afraid we have forgot how risky stocks can be if one needs to spend the money in the next ten years (or even longer).

I don't mean to sound like a bear. I'm really not one.
I've not heard any good arguments for coming deflation at any level. Most seem more concerned about inflation.
willthrill81,

I give you one from The Fed.


https://www.deflation.com/articles/the- ... -deflation

<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>


KlangFool
That sounds to me like an explanation for how deflation can occur, not an assessment of the likelihood of deflation actually occurring in a significant way.

The last year we had deflation exceeding 2009's .4% was 1949 when it reached 1.0%. 1930-1933 and 1920-1921 were the only periods since 1913 when the U.S. had meaningful deflation.
willthrill81,

Please take a look at our money velocity over the last few months.

https://fred.stlouisfed.org/series/M2V

KlangFool
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Re: Bond alternatives

Post by willthrill81 »

KlangFool wrote: Wed Oct 14, 2020 9:24 pm
willthrill81 wrote: Wed Oct 14, 2020 9:08 pm
KlangFool wrote: Wed Oct 14, 2020 9:04 pm
willthrill81 wrote: Wed Oct 14, 2020 8:46 pm
loukycpa wrote: Wed Oct 14, 2020 6:09 pm https://www.bloomberg.com/news/articles ... irus-world

Is this scenario as likely as inflation? I'm not smart enough to know.

What I do think is many US investors, probably myself included, are not psychologically prepared for a period for stocks like 1964-1981. Dow 800 at the beginning. Dow 800 at the end. 17 years is a long time to earn nothing but dividends. I'm pretty sure that was a negative "real" return 17 year period for stocks. I'm afraid we have forgot how risky stocks can be if one needs to spend the money in the next ten years (or even longer).

I don't mean to sound like a bear. I'm really not one.
I've not heard any good arguments for coming deflation at any level. Most seem more concerned about inflation.
willthrill81,

I give you one from The Fed.


https://www.deflation.com/articles/the- ... -deflation

<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>


KlangFool
That sounds to me like an explanation for how deflation can occur, not an assessment of the likelihood of deflation actually occurring in a significant way.

The last year we had deflation exceeding 2009's .4% was 1949 when it reached 1.0%. 1930-1933 and 1920-1921 were the only periods since 1913 when the U.S. had meaningful deflation.
willthrill81,

Please take a look at our money velocity over the last few months.

https://fred.stlouisfed.org/series/M2V

KlangFool
Take a look at the money supply. It's projected to increase by around $3 trillion.

Image
https://fred.stlouisfed.org/series/MABMM301USM189S
“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
KlangFool
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Re: Bond alternatives

Post by KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 9:26 pm
KlangFool wrote: Wed Oct 14, 2020 9:24 pm
willthrill81 wrote: Wed Oct 14, 2020 9:08 pm
KlangFool wrote: Wed Oct 14, 2020 9:04 pm
willthrill81 wrote: Wed Oct 14, 2020 8:46 pm

I've not heard any good arguments for coming deflation at any level. Most seem more concerned about inflation.
willthrill81,

I give you one from The Fed.


https://www.deflation.com/articles/the- ... -deflation

<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>


KlangFool
That sounds to me like an explanation for how deflation can occur, not an assessment of the likelihood of deflation actually occurring in a significant way.

The last year we had deflation exceeding 2009's .4% was 1949 when it reached 1.0%. 1930-1933 and 1920-1921 were the only periods since 1913 when the U.S. had meaningful deflation.
willthrill81,

Please take a look at our money velocity over the last few months.

https://fred.stlouisfed.org/series/M2V

KlangFool
Take a look at the money supply.

Image
https://fred.stlouisfed.org/series/MABMM301USM189S
willthrill81,


And, that is my point.


<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>

You cannot only look at the money supply.

KlangFool
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

KlangFool wrote: Wed Oct 14, 2020 9:29 pm
willthrill81 wrote: Wed Oct 14, 2020 9:26 pm
KlangFool wrote: Wed Oct 14, 2020 9:24 pm
willthrill81 wrote: Wed Oct 14, 2020 9:08 pm
KlangFool wrote: Wed Oct 14, 2020 9:04 pm

willthrill81,

I give you one from The Fed.


https://www.deflation.com/articles/the- ... -deflation

<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>


KlangFool
That sounds to me like an explanation for how deflation can occur, not an assessment of the likelihood of deflation actually occurring in a significant way.

The last year we had deflation exceeding 2009's .4% was 1949 when it reached 1.0%. 1930-1933 and 1920-1921 were the only periods since 1913 when the U.S. had meaningful deflation.
willthrill81,

Please take a look at our money velocity over the last few months.

https://fred.stlouisfed.org/series/M2V

KlangFool
Take a look at the money supply.

Image
https://fred.stlouisfed.org/series/MABMM301USM189S
willthrill81,


And, that is my point.


<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>

You cannot only look at the money supply.

KlangFool
I'm not. But deflation is not caused purely by the velocity of money any more than inflation is caused purely by the money supply.

You say you know nothing, but you're arguing a lot with the market's inflation expectations, which directly impact Treasury yields.
“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 KlangFool »

willthrill81 wrote: Wed Oct 14, 2020 9:30 pm
KlangFool wrote: Wed Oct 14, 2020 9:29 pm
willthrill81 wrote: Wed Oct 14, 2020 9:26 pm
KlangFool wrote: Wed Oct 14, 2020 9:24 pm
willthrill81 wrote: Wed Oct 14, 2020 9:08 pm

That sounds to me like an explanation for how deflation can occur, not an assessment of the likelihood of deflation actually occurring in a significant way.

The last year we had deflation exceeding 2009's .4% was 1949 when it reached 1.0%. 1930-1933 and 1920-1921 were the only periods since 1913 when the U.S. had meaningful deflation.
willthrill81,

Please take a look at our money velocity over the last few months.

https://fred.stlouisfed.org/series/M2V

KlangFool
Take a look at the money supply.

Image
https://fred.stlouisfed.org/series/MABMM301USM189S
willthrill81,


And, that is my point.


<< On a blog from 2014, the Federal Reserve Bank of St. Louis stated, "If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.>>

You cannot only look at the money supply.

KlangFool
I'm not. But deflation is not caused purely by the velocity of money any more than inflation is caused purely by the money supply.
willthrill81,

You asked me how deflation could be possible. I give you a possibility. As to whether it is really happening, I have no idea. Money velocity is an indication of money not being spent.

We have both: an increase in money supply and a decrease in money velocity. I have no idea which one is bigger. If the money velocity is much bigger than the money supply, we have a deflationary force.

https://www.deflation.com/articles/the- ... -deflation

<<The global economy has stopped and money is not being spent. This is a giant deflationary force.>>


KlangFool
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Re: Bond alternatives

Post by JnyVuko »

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.
+1. Nobody knows the future.

FWIW. I'm staying the course. 60, retired for about 3 years now.

I rebalanced and dialed back my AA from 60/40 earlier this year (pre-March) to 55/45. The 55% is TSM, combined between 401(k) and after tax accounts. The 45% is a mix of TBM and Int-term Bonds in 401(K) and tax free munis in my taxable accounts. I simplified my investments at the same time, getting rid of short-term bonds, TIPS, etc. It was too complicated for me. I find 55/45 in TSM and bonds is a sweet spot for me; I sleep well at night and am not touching a thing. Sometimes doing nothing is doing something.

Thank you Jack Bogle.
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Re: Bond alternatives

Post by JnyVuko »

KlangFool wrote: Wed Oct 14, 2020 10:30 am
willthrill81 wrote: Wed Oct 14, 2020 10:16 am

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.


willthrill81,


My AA is 60/40. I am diversified. And, being diversified means that I would have an asset class with a lowered expected return at any point in time.


I would counter your point.

<<the likelihood of them earning something like 1% real over the next decade mathematically hinges on significantly negative interest rates and/or deflation.>>


I am 60/40. I do not need to be lucky. If the stock does well, I make money from the stock side. If the bond does well, I make money from the bond. I do not need to "market time" and predict the future as to whether the negative interest rate and/or deflation is possible.

I know that I know nothing. To bet against the bond is to assume that you know something and you can predict the future. I know that I cannot predict the future.


KlangFool
+1
GaryA505
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Re: Bond alternatives

Post by GaryA505 »

For those here who say, "I know that I know nothing", if you really know nothing then how do you decide that you should own 60% stocks and 40% bonds, or 70% stocks and 30% bonds, or whatever? How do you decide that you will own stocks and bonds at all? By not holding REITS, or gold, oil, or managed futures, etc. aren't you assuming that you know something about those as well?

I'm just curious.
tibbitts
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Re: Bond alternatives

Post by tibbitts »

batpot wrote: Tue Oct 13, 2020 4:29 pm 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).
What is your SV fund yielding currently? How often is the yield reset?
tibbitts
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Re: Bond alternatives

Post by tibbitts »

antman50 wrote: Wed Oct 14, 2020 6:51 pm
GatorFL wrote: Wed Oct 14, 2020 6:45 pm I am getting 3% in a stable value fund. Would this be considered an alternative to BND? I like the fact that I am guaranteed the 3% along with principal preservation in this low interest rate environment.

Gator
Sounds like things have worked out so far. Would you mind sharing the fund?
I would only help to name the stable value fund if it's an option in a publicly-available annuity. If it's an employer-plan annuity/401k/etc. then it's not something anyone else can reproduce.
Northern Flicker
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Re: Bond alternatives

Post by Northern Flicker »

jay22 wrote: Wed Oct 14, 2020 9:29 am
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?
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.
Those are not bond yields, and nothing in there says the policy is locked in place for another 3-4 years. Rates staying this low for 3-4 years would be a possible outcome, but certainly is not guaranteed.
Risk is not a guarantor of return.
loukycpa
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Re: Bond alternatives

Post by loukycpa »

GaryA505 wrote: Wed Oct 14, 2020 10:11 pm For those here who say, "I know that I know nothing", if you really know nothing then how do you decide that you should own 60% stocks and 40% bonds, or 70% stocks and 30% bonds, or whatever? How do you decide that you will own stocks and bonds at all? By not holding REITS, or gold, oil, or managed futures, etc. aren't you assuming that you know something about those as well?

I'm just curious.
If you own total stock market you do own REITS. And oil stocks. You have indirect exposure to commodities. If you have separate positions in these assets you are overweight in them.
loukycpa
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Re: Bond alternatives

Post by loukycpa »

"the likelihood of them earning something like 1% real over the next decade mathematically hinges on significantly negative interest rates and/or deflation."

I agree with this. I also think negative "real" returns on bonds over the next decade are more likely than not. But I still have to own some bonds. To some extent because of the possibility of deflation. But even more so because of stock market risk. Money that is absolutely needed for spending in the next 5 years (and really 10 years or perhaps even a bit longer) doesn't belong in the stock market. If I was still in my 20s and 30s I wouldn't have much in bonds.

I really think it comes down to an expectation that has built over the last 35 years or so of generally good times. Yes we have had big corrections in the stock market (2000-2002, 2008-2009, 2020), but always followed by a recovery in stock prices within relatively short period of years (next 5 to 10 years). If you look further back in history however, or if you look at what has happened in other developed countries (Japan cited earlier as an example), you know you can't count on that.
aristotelian
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Re: Bond alternatives

Post by aristotelian »

GaryA505 wrote: Wed Oct 14, 2020 10:11 pm For those here who say, "I know that I know nothing", if you really know nothing then how do you decide that you should own 60% stocks and 40% bonds, or 70% stocks and 30% bonds, or whatever? How do you decide that you will own stocks and bonds at all? By not holding REITS, or gold, oil, or managed futures, etc. aren't you assuming that you know something about those as well?

I'm just curious.
I don't particularly like that saying but to be more specific, I do not know anything more than the market about current valuations. Therefore, I try to set my allocation according to a long term plan and don't change it in response to market conditions. I am not trying to time the market or outperform the market in any asset class.

I *do* know my risk tolerance and the historical risk/return of stocks and bonds. That is what my allocation is based on.

I hold REIT and oil through total market indexes.

I only invest in assets that I a) understand (that does not mean I know anything more than the market) and b) can buy cheaply. That pretty much excludes everything other than stocks and bonds, although I would not begrudge anyone who owns a bit of gold.
GatorFL
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Re: Bond alternatives

Post by GatorFL »

antman50 wrote: Wed Oct 14, 2020 6:51 pm
GatorFL wrote: Wed Oct 14, 2020 6:45 pm I am getting 3% in a stable value fund. Would this be considered an alternative to BND? I like the fact that I am guaranteed the 3% along with principal preservation in this low interest rate environment.

Gator
Sounds like things have worked out so far. Would you mind sharing the fund?
My cash is in TIAA's Traditional fund. The liquid version of the fund.
Gator
tibbitts
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Re: Bond alternatives

Post by tibbitts »

GatorFL wrote: Thu Oct 15, 2020 8:11 am
antman50 wrote: Wed Oct 14, 2020 6:51 pm
GatorFL wrote: Wed Oct 14, 2020 6:45 pm I am getting 3% in a stable value fund. Would this be considered an alternative to BND? I like the fact that I am guaranteed the 3% along with principal preservation in this low interest rate environment.

Gator
Sounds like things have worked out so far. Would you mind sharing the fund?
My cash is in TIAA's Traditional fund. The liquid version of the fund.
Gator
Even funds I add to my TIAA accounts (outside of employer contributions, which have the 3% guarantee ) only earn 1%, and for me to be able to add beyond employer contributions, I might have had to already have had TIAA available through an employer I'm not sure, since I did.) So we really have to specify, when we talk about stable value, whether it's a publicly-available annuity that someone can buy now, or not. I also have what was a publicly-available annuity with a 4% guarantee (not TIAA) and no restrictions, but I can't add more to it and it can't be purchased now, so there's no point in naming it.
belugawhale
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Re: Bond alternatives

Post by belugawhale »

willthrill81 wrote: Wed Oct 14, 2020 10:34 am
UpperNwGuy wrote: Wed Oct 14, 2020 10:19 am
willthrill81 wrote: Wed Oct 14, 2020 10:06 am 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.
What do you recommend we do?
For many, they should probably do nothing. It's historically normal for bonds to make between -1% and +1% real. From 1941-1981, intermediate-term Treasuries lost about 1.6% annually. If we were in 1981, many would have very different expectations of bonds.

1982-2012 was the biggest bond market in U.S. history, TMK. 2013-2018 saw basically zero real returns. The only reason that bonds have made any real returns since 2019 was falling interest rates, but that cannot last forever (not meaningfully at least).

It's never a bad time for investors to honestly ask themselves why their AA is what it is. In this vein, it's reasonable for an investor to ask why, for instance, he is holding 40% of his portfolio in bonds. Is a 30% portfolio decline (assuming -50% loss in stocks is a reasonable maximum for planning purposes) the most he believes he can tolerate? If so, then holding 40% in bonds or other fixed income instruments (e.g. HYSA, CDs, SVF) is still reasonable, even if the expected return is zero.

Many just have a hard time holding an asset that they believe will lose out to inflation. But it's better to lose 1% annually on one's bond holdings than to go too heavy on stocks and panic sell during a bear market.
...
Last edited by belugawhale on Sun Nov 08, 2020 8:49 pm, edited 1 time in total.
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

belugawhale wrote: Thu Oct 15, 2020 10:14 am
willthrill81 wrote: Wed Oct 14, 2020 10:34 am
UpperNwGuy wrote: Wed Oct 14, 2020 10:19 am
willthrill81 wrote: Wed Oct 14, 2020 10:06 am 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.
What do you recommend we do?
For many, they should probably do nothing. It's historically normal for bonds to make between -1% and +1% real. From 1941-1981, intermediate-term Treasuries lost about 1.6% annually. If we were in 1981, many would have very different expectations of bonds.

1982-2012 was the biggest bond market in U.S. history, TMK. 2013-2018 saw basically zero real returns. The only reason that bonds have made any real returns since 2019 was falling interest rates, but that cannot last forever (not meaningfully at least).

It's never a bad time for investors to honestly ask themselves why their AA is what it is. In this vein, it's reasonable for an investor to ask why, for instance, he is holding 40% of his portfolio in bonds. Is a 30% portfolio decline (assuming -50% loss in stocks is a reasonable maximum for planning purposes) the most he believes he can tolerate? If so, then holding 40% in bonds or other fixed income instruments (e.g. HYSA, CDs, SVF) is still reasonable, even if the expected return is zero.

Many just have a hard time holding an asset that they believe will lose out to inflation. But it's better to lose 1% annually on one's bond holdings than to go too heavy on stocks and panic sell during a bear market.
Why is this framed as either lose 1% annually on bonds or go heavy on stocks and panic sell?

If Total Bond is unlikely to beat inflation, as the data seems to indicate, split the fund into treasuries and corporates. Tilt heavier towards corporates and be rewarded for taking a bit of credit risk. When the hour is upon us, use treasuries to rebalance into equities. Your corporates will rebound much faster than your equity allocation. I view them as the bonds they are - not "half-way" to equities.
You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image
“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
belugawhale
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Re: Bond alternatives

Post by belugawhale »

willthrill81 wrote: Thu Oct 15, 2020 10:20 am
belugawhale wrote: Thu Oct 15, 2020 10:14 am
willthrill81 wrote: Wed Oct 14, 2020 10:34 am
UpperNwGuy wrote: Wed Oct 14, 2020 10:19 am
willthrill81 wrote: Wed Oct 14, 2020 10:06 am
What do you recommend we do?
For many, they should probably do nothing. It's historically normal for bonds to make between -1% and +1% real. From 1941-1981, intermediate-term Treasuries lost about 1.6% annually. If we were in 1981, many would have very different expectations of bonds.

1982-2012 was the biggest bond market in U.S. history, TMK. 2013-2018 saw basically zero real returns. The only reason that bonds have made any real returns since 2019 was falling interest rates, but that cannot last forever (not meaningfully at least).

It's never a bad time for investors to honestly ask themselves why their AA is what it is. In this vein, it's reasonable for an investor to ask why, for instance, he is holding 40% of his portfolio in bonds. Is a 30% portfolio decline (assuming -50% loss in stocks is a reasonable maximum for planning purposes) the most he believes he can tolerate? If so, then holding 40% in bonds or other fixed income instruments (e.g. HYSA, CDs, SVF) is still reasonable, even if the expected return is zero.

Many just have a hard time holding an asset that they believe will lose out to inflation. But it's better to lose 1% annually on one's bond holdings than to go too heavy on stocks and panic sell during a bear market.
Why is this framed as either lose 1% annually on bonds or go heavy on stocks and panic sell?

If Total Bond is unlikely to beat inflation, as the data seems to indicate, split the fund into treasuries and corporates. Tilt heavier towards corporates and be rewarded for taking a bit of credit risk. When the hour is upon us, use treasuries to rebalance into equities. Your corporates will rebound much faster than your equity allocation. I view them as the bonds they are - not "half-way" to equities.
You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image

...
Last edited by belugawhale on Sun Nov 08, 2020 8:50 pm, edited 1 time in total.
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willthrill81
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Re: Bond alternatives

Post by willthrill81 »

belugawhale wrote: Thu Oct 15, 2020 11:50 am
willthrill81 wrote: Thu Oct 15, 2020 10:20 am
belugawhale wrote: Thu Oct 15, 2020 10:14 am
willthrill81 wrote: Wed Oct 14, 2020 10:34 am
UpperNwGuy wrote: Wed Oct 14, 2020 10:19 am

For many, they should probably do nothing. It's historically normal for bonds to make between -1% and +1% real. From 1941-1981, intermediate-term Treasuries lost about 1.6% annually. If we were in 1981, many would have very different expectations of bonds.

1982-2012 was the biggest bond market in U.S. history, TMK. 2013-2018 saw basically zero real returns. The only reason that bonds have made any real returns since 2019 was falling interest rates, but that cannot last forever (not meaningfully at least).

It's never a bad time for investors to honestly ask themselves why their AA is what it is. In this vein, it's reasonable for an investor to ask why, for instance, he is holding 40% of his portfolio in bonds. Is a 30% portfolio decline (assuming -50% loss in stocks is a reasonable maximum for planning purposes) the most he believes he can tolerate? If so, then holding 40% in bonds or other fixed income instruments (e.g. HYSA, CDs, SVF) is still reasonable, even if the expected return is zero.

Many just have a hard time holding an asset that they believe will lose out to inflation. But it's better to lose 1% annually on one's bond holdings than to go too heavy on stocks and panic sell during a bear market.
Why is this framed as either lose 1% annually on bonds or go heavy on stocks and panic sell?

If Total Bond is unlikely to beat inflation, as the data seems to indicate, split the fund into treasuries and corporates. Tilt heavier towards corporates and be rewarded for taking a bit of credit risk. When the hour is upon us, use treasuries to rebalance into equities. Your corporates will rebound much faster than your equity allocation. I view them as the bonds they are - not "half-way" to equities.
You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image

This isn't a hard science - we are all expressing personal views. Personally, I would be hesitant to underpin a fact through portfolio visualizer backtests. Be that as it may, this visual is a decent approximation of the risk and return characteristics of an intermediate corp bond fund. About half of the spread over treasuries is accounted for by systemic stock risk, and less than a quarter by default risk. It's also a crude estimate of correlations. I wouldn't real-world allocate based on the above - it will vary depending on AA. It's obvious treasuries are a better fit at something like 80/20. But in the current environment, say someone who is running 50/50 would be better served getting some return from corporates.
Data going further back than that (available in the Simba backtesting spreadsheet) indicate that the 20/80 split has been a good approximation of intermediate investment grade bond's performance. To the extent that we expect this long standing performance to continue, there's really nothing unique about corporate bonds. You could have gotten identical returns and less volatility by just using a mix of stocks and intermediate-term Treasuries.

I really don't know how you can make informed AA decisions other than on the basis of long-term historic results of some form.
“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
belugawhale
Posts: 4
Joined: Thu Sep 24, 2020 7:36 am

Re: Bond alternatives

Post by belugawhale »

willthrill81 wrote: Thu Oct 15, 2020 12:03 pm
belugawhale wrote: Thu Oct 15, 2020 11:50 am
willthrill81 wrote: Thu Oct 15, 2020 10:20 am
belugawhale wrote: Thu Oct 15, 2020 10:14 am
willthrill81 wrote: Wed Oct 14, 2020 10:34 am

Why is this framed as either lose 1% annually on bonds or go heavy on stocks and panic sell?

If Total Bond is unlikely to beat inflation, as the data seems to indicate, split the fund into treasuries and corporates. Tilt heavier towards corporates and be rewarded for taking a bit of credit risk. When the hour is upon us, use treasuries to rebalance into equities. Your corporates will rebound much faster than your equity allocation. I view them as the bonds they are - not "half-way" to equities.
You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image

This isn't a hard science - we are all expressing personal views. Personally, I would be hesitant to underpin a fact through portfolio visualizer backtests. Be that as it may, this visual is a decent approximation of the risk and return characteristics of an intermediate corp bond fund. About half of the spread over treasuries is accounted for by systemic stock risk, and less than a quarter by default risk. It's also a crude estimate of correlations. I wouldn't real-world allocate based on the above - it will vary depending on AA. It's obvious treasuries are a better fit at something like 80/20. But in the current environment, say someone who is running 50/50 would be better served getting some return from corporates.
Data going further back than that (available in the Simba backtesting spreadsheet) indicate that the 20/80 split has been a good approximation of intermediate investment grade bond's performance. To the extent that we expect this long standing performance to continue, there's really nothing unique about corporate bonds. You could have gotten identical returns and less volatility by just using a mix of stocks and intermediate-term Treasuries.

I really don't know how you can make informed AA decisions other than on the basis of long-term historic results of some form.
...
Last edited by belugawhale on Sun Nov 08, 2020 8:51 pm, edited 1 time in total.
GaryA505
Posts: 800
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: Bond alternatives

Post by GaryA505 »

loukycpa wrote: Thu Oct 15, 2020 5:53 am
GaryA505 wrote: Wed Oct 14, 2020 10:11 pm For those here who say, "I know that I know nothing", if you really know nothing then how do you decide that you should own 60% stocks and 40% bonds, or 70% stocks and 30% bonds, or whatever? How do you decide that you will own stocks and bonds at all? By not holding REITS, or gold, oil, or managed futures, etc. aren't you assuming that you know something about those as well?

I'm just curious.
If you own total stock market you do own REITS. And oil stocks. You have indirect exposure to commodities. If you have separate positions in these assets you are overweight in them.
If we really "know nothing", then why not use something that holds the entire global universe of investable assets, like Meb Faber's GAA ETF?

https://www.cambriafunds.com/gaa

Full disclosure: I don't own any GAA, I have never owned it, and I don't plan to ever own it.
000
Posts: 4662
Joined: Thu Jul 23, 2020 12:04 am

Re: Bond alternatives

Post by 000 »

willthrill81 wrote: Thu Oct 15, 2020 10:20 am You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image
How does it look from Japan 1989 or even European investors recently?
User avatar
willthrill81
Posts: 23690
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Location: USA

Re: Bond alternatives

Post by willthrill81 »

000 wrote: Thu Oct 15, 2020 5:09 pm
willthrill81 wrote: Thu Oct 15, 2020 10:20 am You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image
How does it look from Japan 1989 or even European investors recently?
I don't know the tickers for such asset classes.
“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
000
Posts: 4662
Joined: Thu Jul 23, 2020 12:04 am

Re: Bond alternatives

Post by 000 »

willthrill81 wrote: Thu Oct 15, 2020 5:32 pm
000 wrote: Thu Oct 15, 2020 5:09 pm
willthrill81 wrote: Thu Oct 15, 2020 10:20 am You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image
How does it look from Japan 1989 or even European investors recently?
I don't know the tickers for such asset classes.
I have posited that under certain circumstances (e.g. equity market euphoria) a portfolio with corporate bonds can outperform the same portfolio with the corporates replaced by a 20/80 mix of stocks and treasuries. It seems patently obvious that this is possible over some time period if equities have negative returns and bonds are duration matched.

I think this claim about replicating corporates with 20/80 needs to be tested under more stressful circumstances than the US dual bull market.
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willthrill81
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Location: USA

Re: Bond alternatives

Post by willthrill81 »

000 wrote: Thu Oct 15, 2020 5:51 pm
willthrill81 wrote: Thu Oct 15, 2020 5:32 pm
000 wrote: Thu Oct 15, 2020 5:09 pm
willthrill81 wrote: Thu Oct 15, 2020 10:20 am You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image
How does it look from Japan 1989 or even European investors recently?
I don't know the tickers for such asset classes.
I have posited that under certain circumstances (e.g. equity market euphoria) a portfolio with corporate bonds can outperform the same portfolio with the corporates replaced by a 20/80 mix of stocks and treasuries. It seems patently obvious that this is possible over some time period if equities have negative returns and bonds are duration matched.

I think this claim about replicating corporates with 20/80 needs to be tested under more stressful circumstances than the US dual bull market.
The bull market for U.S. bonds basically ended in 2012. From 2013-2018, ITT lost -.45% annually. They got a bump in 2019 and 2020 from lower interest rates, but the party's over unless the Fed tries to implement negative rates. And U.S. stocks took a huge hit in 2008, but still the 20/80 came through that far better than corporate bonds.
“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
Northern Flicker
Posts: 7108
Joined: Fri Apr 10, 2015 12:29 am

Re: Bond alternatives

Post by Northern Flicker »

000 wrote: Thu Oct 15, 2020 5:09 pm
willthrill81 wrote: Thu Oct 15, 2020 10:20 am You can personally view corporate bonds any way you like, but the facts show that they have behaved largely like a mix of 20% stock and 80% intermediate-term Treasuries, although corporate bonds have been more volatile without a higher return.

Portfolio 1 is 20% TSM and 80% ITT, and Portfolio 2 is corporate bonds. The data come from Portfolio Visualizer.
Image
How does it look from Japan 1989 or even European investors recently?
Japan has not had that large of a corporate bond market. The first junk bond sale in Japan was in 2019. In 1989, I believe that commercial bank lending was the dominant method of corporate financing in Japan. And I think the 1990's were a time of zombie banks with opaque loan portfolios holding large tranches of non-performing loans in Japan.
Risk is not a guarantor of return.
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