For Young Investors, Why Not Long Term Bonds?

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JSPECO9
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For Young Investors, Why Not Long Term Bonds?

Post by JSPECO9 »

Hi Bogleheads,

Let's say a few things are true:

1-) You are a young investor far away from retirement (say 30-40 years).

2-) You are going to own three-fund portfolio for diversification (because nobody knows nothing).

3-) You are going to contribute regularly until retirement and rebalance (either annually or bands) AND increase bonds as you get closer to retirement.

Why should young investors not invest in a fund like BLV - Vanguard Long-Term Bonds ETF or VGLT - Vanguard Long-Term Treasury ETF instead of an intermediate one? Both of these funds have a negative correlation with the U.S. stock market, and I always thought that as long as you don't plan on withdrawing money before the duration, treasury bonds are as safe as it gets.

Thanks in advance for your answers.
Triple digit golfer
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Re: For Young Investors, Why Not Long Term Bonds?

Post by Triple digit golfer »

You may be interested in this thread: viewtopic.php?t=287627
AlohaJoe
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Re: For Young Investors, Why Not Long Term Bonds?

Post by AlohaJoe »

Here's a thread with over 1,000 posts discussing your question:

viewtopic.php?t=287627

By the time you've read all 1,143 posts you'll have reached enlightenment.

Edit: Triple Digit Golfer beat me by 45 seconds!!
Paradise
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Re: For Young Investors, Why Not Long Term Bonds?

Post by Paradise »

I get that you setup a hypothetical, but if we're talking in a person's teens and 20s, I would say 100% equities all the way. I just don't see the value of bonds for someone that early in accumulation phase.

If someone were to walk into a crash at that stage of their life, it would be the biggest blessing in disguise they could ever ask for.
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TurtleBeatsHare
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Re: For Young Investors, Why Not Long Term Bonds?

Post by TurtleBeatsHare »

Those are good threads (although I haven’t read all of the second one). If you want a shorter answer: (1) lower return than equities (although in some sequences/time periods they outperform); (2) significant interest rate and inflation risk and given the time frame, you might not be able to hold long enough to recover the price loss from interest rate shifts and benefit from the higher interest rate; (3) non-diversification—I’m not bullish on the dollar or the US’s creditworthiness and believe it’s mistaken to bet exclusively on the US (obviously wouldn’t apply to funds that invest beyond treasuries, but in recent years, treasuries account for 60-65% of the total bond fund); (4) if you’re young, bonds of any sort probably do not match any of your investing needs (ie being a negative correlation ballast that protects against forced equity sales during bad years or providing income to cover immediate expenses); and (5) potentially worse tax drag and potentially inefficient tax treatment—although bond payments have had different tax treatment relative to capital gains over the years.

I tend to think you should be entirely in equities until closer to retirement, and then have no more than what is required to cover your annual expenses, reduced by pension or SS coverage, through interest income (if you have a large estate) or, if that isn’t feasible, then enough in TIPS or maybe even short term TIPS such that you could sell them and live off them without having to sell equities for a 3-5 year period in which equities recover.
Last edited by TurtleBeatsHare on Wed Jul 21, 2021 11:28 am, edited 1 time in total.
patrick
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Re: For Young Investors, Why Not Long Term Bonds?

Post by patrick »

Right now, long term bonds have lower interest rates than other fixed income options available to individual investors. Here are some current yields:

2.53% - Long-term bonds based on Vanguard BLV (and it's even lower if you used treasuries only)
3% - Savings accounts from Porte and One Finance (max balance $15000 at Porte and max deposits 10% of pay at One)
3.5% - 10-year fixed annuity from Gainbridge (subject to penalty for withdrawing before retirement)
3.53% - EE Savings bonds held 20 years (max purchase $10000 per year) and they are even better if you account for their tax advantages
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birdog
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Re: For Young Investors, Why Not Long Term Bonds?

Post by birdog »

I wouldn't go near a bond if I were 30-40 years from retirement, especially with current rates. JL Collins, who wrote The Simple Path to Wealth, agrees.
Triple digit golfer
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Re: For Young Investors, Why Not Long Term Bonds?

Post by Triple digit golfer »

birdog wrote: Wed Jul 21, 2021 11:22 am I wouldn't go near a bond if I were 30-40 years from retirement, especially with current rates. JL Collins, who wrote The Simple Path to Wealth, agrees.
What if you were 15 years from retirement? How about just retired?
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birdog
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Re: For Young Investors, Why Not Long Term Bonds?

Post by birdog »

Triple digit golfer wrote: Wed Jul 21, 2021 11:24 am
birdog wrote: Wed Jul 21, 2021 11:22 am I wouldn't go near a bond if I were 30-40 years from retirement, especially with current rates. JL Collins, who wrote The Simple Path to Wealth, agrees.
What if you were 15 years from retirement? How about just retired?
Nope and yes.
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nisiprius
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Re: For Young Investors, Why Not Long Term Bonds?

Post by nisiprius »

Consider a thirty-year Treasury bought at issue and held to maturity. I would never want to take the risk of locking up money for thirty years at a fixed-dollar value and a fixed-dollar interest rate. The difference in risk between 5-10 years (as in Total Bond) and 20-30 years (as in long-term Treasuries) is significant. It's not inflation as such I worry about, but the unpredictability of inflation over that long a period--specifically the chances of a surprising rise. Note, of course the risk is bidirectional and it is also quite possible that you could win from unexpected deflation, but the point is that I don't want either big losses or big wins in my bond portfolio.

Total Bond being about 15% in bonds 15 years and longer, so personally I do hold some longer-term bonds. I shrug that off because it's sort of balanced by 48% in bonds 5 years and shorter. It's honestly beyond me to judge whether portfolio that is mixes widely different terms but is intermediate-term on average, is better or worse than a portfolio invested purely in intermediate-term bonds.

Obviously my objections don't apply to long-term TIPS.

I would say that you want to look long and hard at long-term bonds from each of two different viewpoints.

One is simply the risk and return characteristics of long-term nominal bonds, measured in real return. It's just too risky. I am happy enough to "take my risk on the equity side" and not go looking more than moderate risk elsewhere.

The second point of view is one that I personally do not agree with, but it is credible enough that you need to understand it and make your own decision. Alert, biased presentation ahead.

Image

For the last twenty years, stocks and bonds have had a strong negative correlation. In an asset class that has a decent return, negative correlation with stocks is simply magical, because it means you can erase or cancel out a lot of stock risk without cancelling out return at the same time. For the full SBBI data set going back to 1926, however, long-term correlation has been close to zero.

So you need to decide: going forward, do you believe that the correlation between long-term bonds and stocks will continue to be negative, or do you think it is more prudent to plan on it being like the historic average of about zero?

A zero correlation has a limited effect in cutting risk. It is much less powerful than negative correlation. The noise in a big restaurant is steadier than the noise in a small restaurant, but big noisy restaurants are still noisy despite low correlation between conversations.

In both cases, whatever effect the bonds have in reducing stock risk, you will get more of it if the bonds are more volatile.

So people who expect negative correlation going forward, and want bonds because they expect them to be volatile in a good way, actively opposing the fluctuations of stocks, want bonds with as much interest rate risk as possible. Long-term bonds. Zero-coupon long-term bond (EDV). Leveraged long-term bonds.

I don't think this style of investing is suitable for investors of any age unless they are willing and able to do their own financial engineering.
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Robot Monster
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Re: For Young Investors, Why Not Long Term Bonds?

Post by Robot Monster »

Triple digit golfer wrote: Wed Jul 21, 2021 10:33 am You may be interested in this thread: viewtopic.php?t=287627
That is indeed a vineviz classic, along with "A bond duration glide path for retirement investing" link as well as the very rough rule of thumb for TIPS/LTT allocation:

Code: Select all

Stocks	LTT	TIPS	STIG
100%	0%	0%	0%
90%	10%	0%	0%
80%	20%	0%	0%
70%	20%	10%	0%
60%	20%	20%	0%
50%	20%	30%	0%
40%	10%	40%	10%
30%	0%	50%	20%
LTT = Long-term Treasuries
TIPS = Broad TIPS fund (or Series I Savings Bonds or individual TIPS ladder)
STIG = Short-term investment grade corporate bond fund
source
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Paradise
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Re: For Young Investors, Why Not Long Term Bonds?

Post by Paradise »

birdog wrote: Wed Jul 21, 2021 11:27 am
Triple digit golfer wrote: Wed Jul 21, 2021 11:24 am
birdog wrote: Wed Jul 21, 2021 11:22 am I wouldn't go near a bond if I were 30-40 years from retirement, especially with current rates. JL Collins, who wrote The Simple Path to Wealth, agrees.
What if you were 15 years from retirement? How about just retired?
Nope and yes.
You'd have to have a large retirement account to try to 100% equities during retirement. I'd say at least 2x what you need to retire... but even then why play around if you're set? Bird in the hand and all of that stuff.

I bought my first share of BND 10 years out from retirement and am rebalancing towards my final allocation of 30% as the market dictates. 30-40 years out from retirement?? Yeah.. it's not a winning strategy at all... not even going to entertain the hypothetical.

I remember being a first time investor a few years leading up to the 08 crash and at the time I thought to myself that I've got to be the unluckiest person in the world... and then years later I realized that I was actually the luckiest getting that many years of discounted DCA.
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UpperNwGuy
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Re: For Young Investors, Why Not Long Term Bonds?

Post by UpperNwGuy »

TurtleBeatsHare wrote: Wed Jul 21, 2021 10:49 am I’m not bullish on the dollar or the US’s creditworthiness and believe it’s mistaken to bet exclusively on the US (obviously wouldn’t apply to funds that invest beyond treasuries, but in recent years, treasuries account for 60-65% of the total bond fund)
Seriously? If so, you're definitely a minority opinion around here.
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Beensabu
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Re: For Young Investors, Why Not Long Term Bonds?

Post by Beensabu »

JSPECO9 wrote: Wed Jul 21, 2021 10:30 am Hi Bogleheads,

Let's say a few things are true:

1-) You are a young investor far away from retirement (say 30-40 years).

2-) You are going to own three-fund portfolio for diversification (because nobody knows nothing).

3-) You are going to contribute regularly until retirement and rebalance (either annually or bands) AND increase bonds as you get closer to retirement.

Why should young investors not invest in a fund like BLV - Vanguard Long-Term Bonds ETF or VGLT - Vanguard Long-Term Treasury ETF instead of an intermediate one? Both of these funds have a negative correlation with the U.S. stock market, and I always thought that as long as you don't plan on withdrawing money before the duration, treasury bonds are as safe as it gets.

Thanks in advance for your answers.
People don't invest in long-term treasury funds because their perceived risk of increasing rates and/or inflation outweighs the benefits for them.

If this is something that you are interested in doing, then look into all of the arguments both against and for long-term treasuries. Really look into them. Look into the basis of the arguments that are made. Look into the data and see if it supports those arguments, and how so or to what extent. Determine for yourself whether those arguments are valid. Figure out how long-term treasuries work. Figure out how long-term treasury funds work. Figure out how their historical equivalents worked. In different market conditions. In changing market conditions. In different changing market conditions. How they work over 40-year periods. Not just the last 40 years. Other 40 years as well.

You need to believe in what you're doing when it comes to investing long-term. There is no staying the course if you don't believe your course will get you to your destination. The only way you can do that if deviating from total market indexing is by understanding what you hold, why you hold it, and what role it plays in your portfolio as a whole. To the point that you don't need to ask advice about it anymore. To the point where you can explain it, but you don't feel the need to defend it.

Just make sure you understand it first. Otherwise, you'll lose out shifting into and back out of it because it did something you didn't understand that scared you.
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tomsense76
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Re: For Young Investors, Why Not Long Term Bonds?

Post by tomsense76 »

Consider I Bonds and EE Bonds.
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TurtleBeatsHare
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Re: For Young Investors, Why Not Long Term Bonds?

Post by TurtleBeatsHare »

UpperNwGuy wrote: Wed Jul 21, 2021 1:25 pm
TurtleBeatsHare wrote: Wed Jul 21, 2021 10:49 am I’m not bullish on the dollar or the US’s creditworthiness and believe it’s mistaken to bet exclusively on the US (obviously wouldn’t apply to funds that invest beyond treasuries, but in recent years, treasuries account for 60-65% of the total bond fund)
Seriously? If so, you're definitely a minority opinion around here.
Over a 30-50 year time frame, which is the relevant period for the type of bond and the age specified in the hypothetical, yes I’m serious. I probably am a minority opinion, and I may be wrong (although I seriously doubt it over this time frame). I won’t derail the thread by going on a tangent about these issues, though.

I will emphasize, however, that most people on this forum agree that diversification is desirable for both reducing risk and increasing return. And it should be quite obvious that holding only long-term treasuries is highly non-diversified with respect to debtor, currency, inflation source, central bank policy, political system risk, ability to compel repayment, and holding period. While these risks may never materialize, holding solely long-term treasuries is non-diversified and highly susceptible to these risks regardless of your view about US creditworthiness, the US dollar or future long term inflation prospects.
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