OK, Maybe I am Wrong on Bonds

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Leesbro63
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OK, Maybe I am Wrong on Bonds

Post by Leesbro63 » Tue May 08, 2012 3:06 pm

Ok, maybe I am wrong on bonds. Yeah, I'm the one arguing on numerous threads here that it's a bond bubble and admit that I sold my bond funds about 2 years ago with juicy gains...but missed out on even juicer gains and coupon interest since then. I also admit that I've considered that maybe the Rick Ferri/Larry Swedroe camp is right and I am wrong. I've been wrong before...just ask my wife and kids!! :oops: FWIW, I am a long term investor and hope to retire in 12 years on dividends and interest, which would equate to about a 2% SWR under today's scenario. I state this to as background for this bond conversation....my intention for my bond portion is to always be invested and never liquidate.

So a few thoughts to reconsider/consider:

1. Are there more of you, who lurk but don't speak up, who agree (with Dr. Bernstein, the Boglehead "guru" who "speaks to me" on this) that the risk/reward equation for anything longer than short term bonds appears to be a Pascal's Wager?

2. Even if I was wrong 2 years ago, does that change anything NOW? Missing out on the last 2 years is a sunk cost. What do I do from here?

3. If your rich uncle died and left you $1Million dollars today...or $5Million...and you were a Boglehead...would you have the guts to invest 40% of that in intermediate bonds paying 2 to 3 percent? (this is essentially the same as question number 2, but stated to provoke more emotion).

I appreciate the continued conversation about this. I hope many of you will also.

(P.S. If I DO capitulate and buy intermediate term bonds, BE SURE to protect yourself by selling immediately :wink: )
Last edited by Leesbro63 on Tue May 08, 2012 4:36 pm, edited 1 time in total.

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Cut-Throat
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Re: OK, Maybe I am Wrong on Bonds

Post by Cut-Throat » Tue May 08, 2012 3:17 pm

I am always wrong.....So, I have parked my portfolio in Target Retirement Income.

I am kind of in a similar position of receiving a lump Sum of $500K and I just parked it in Target Retirement Income, which is 70% Bonds,

So do I have Guts or Big Cajones? :mrgreen:

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Re: OK, Maybe I am Wrong on Bonds

Post by natureexplorer » Tue May 08, 2012 3:20 pm

Those who chased yield by extending duration have been rewarded handsomely.

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TheGreyingDuke
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Re: OK, Maybe I am Wrong on Bonds

Post by TheGreyingDuke » Tue May 08, 2012 3:22 pm

Leesbro63 wrote:3. If your rich uncle died and left you $1Million dollars today...or $5Million...and you were a Boglehead...would you have the guts to invest 40% of that in intermediate bonds paying 2 to 3 percent?
1) He did
2. I am
3. I did

Only because I don't know any better :happy
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livesoft
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Re: OK, Maybe I am Wrong on Bonds

Post by livesoft » Tue May 08, 2012 3:26 pm

I have to invest in intermediate bonds because those are the only decent bond choices in my 401(k) and my spouse's 401(k). So we have a good slug of those. In her IRA, we use Vanguard GNMA, but that's another intermediate-term bond fund. In our Roths, we use VCSH which is a short-term corporate bond index fund.

So I don't know about bonds either, but thankfully, I don't need to know.
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Raybo
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Re: OK, Maybe I am Wrong on Bonds

Post by Raybo » Tue May 08, 2012 3:27 pm

What are your other options?

Do you need the return to meet your goals?

I, too, am concerned about being at or near the top in bonds. But, I don't know so I have kept money in bonds and rebalanced when necessary (I'm retired so my rebalancing occurs with redemption) and managed to transfer/spend some of the gains of the past few years.

Frankly, you made a mistake and you have to decide if you are willing to stay your course or go against your beliefs and pile back into the (even more) "over-priced" bond market (to use your characterization).

What I would do would depend on where the money was now. If it was in CDs, I'd probably leave them there until they matured and then start buying bond funds whose duration was shorter than my need for the money. If it is in a savings account, I start buying bond funds. I split my bond money 3 ways: 50% Tips, 30% TBM, 20% short term. The short-term money is how I've fiddled with my own bond holdings, but that is because I am redeeming funds to get cash in retirement.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.

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Re: OK, Maybe I am Wrong on Bonds

Post by larryswedroe » Tue May 08, 2012 4:02 pm

I am not advocating buying long term, just recommending avoiding all "cash", having a 2-5 bond fund or a 8-10 year bond ladder would be perfectly fine, taking some, but not too much risk.
In other words, nothing different than usually recommend in "normal" times. Have your FI tailored to your situation and unless you have a very high equity allocation owning LT nominal bonds not the best strategy IMO.

Best wishes
Larry

Leesbro63
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Re: OK, Maybe I am Wrong on Bonds

Post by Leesbro63 » Tue May 08, 2012 4:41 pm

larryswedroe wrote:I am not advocating buying long term, just recommending avoiding all "cash", having a 2-5 bond fund or a 8-10 year bond ladder would be perfectly fine, taking some, but not too much risk.
In other words, nothing different than usually recommend in "normal" times. Have your FI tailored to your situation and unless you have a very high equity allocation owning LT nominal bonds not the best strategy IMO.

Best wishes
Larry
Thanks Larry. Truthfully I don't want to be bothered with buying individual bonds and have concluded (correctly?) that for the long term investor who reinvests dividends and matured bonds, (ME!), that the funds are the same long term as bond ladders without the hassle. So if I translate your "8-10 year bond ladder" correctly, that would equal an intermediate fund (in my taxable account/highish income so tax free bond fund). Right?

I get it that the bond ladder allows the investor to ignore bond price movement easier than the fund investor. But that's just a head game, no?

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Sammy_M
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Re: OK, Maybe I am Wrong on Bonds

Post by Sammy_M » Tue May 08, 2012 4:51 pm

Leesbro63 wrote: 1. Are there more of you, who lurk but don't speak up, who agree (with Dr. Bernstein, the Boglehead "guru" who "speaks to me" on this) that the risk/reward equation for anything longer than short term bonds appears to be a Pascal's Wager?
I agree. My fixed income is 75% in Stable Value, CDs and I-Bonds. The other 25% is 14 year TIPS at 0% real.
2. Even if I was wrong 2 years ago, does that change anything NOW? Missing out on the last 2 years is a sunk cost. What do I do from here?
You can't invest in yesterday's bond market. See above.
3. If your rich uncle died and left you $1Million dollars today...or $5Million...and you were a Boglehead...would you have the guts to invest 40% of that in intermediate bonds paying 2 to 3 percent? (this is essentially the same as question number 2, but stated to provoke more emotion).
Well, not sure I'd put only 40% in fixed income, but whatever I did put in FI, I'd buy a ladder consisting of CDs on the short end and TIPS on the long-end and hold to maturity.

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Re: OK, Maybe I am Wrong on Bonds

Post by DaveS » Tue May 08, 2012 4:52 pm

I am a good poker player. I don't play more than about 4 times a year. My significant other does not like it, so I only play when my job sends me to Vegas. I am astounded at how bad some players are. They make the stupidest bets. If it existed, those people need to play index poker. So if your tired of making bad bets in bonds, just index. Keep your duration at about 5, have some portion in TIPS, or if you want to diversify away from the dollar get the ETF WIP. Say one third to one half in Vanguard Total Bond, and split the rest between TIPS and WIP, and just stick to that. If interest rates go up which they will eventually because they are now at a historic low, you wont get clobbered too bad because your duration is low, if they don't go up soon, your at a fairly high point on the yield curve. One should not invest in bonds for a return, you have them to protect you from stock market crashes which occur periodically and unpredictably. The alternative is to keep making stupid bets till you learn a lesson. Dave

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greg24
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Re: OK, Maybe I am Wrong on Bonds

Post by greg24 » Tue May 08, 2012 4:54 pm

Leesbro63, if you sold out of bonds 2 years ago, what have you invested in instead?

I am somewhat concerned about bond prospects going forward. But I've been a little concerned for years now, and they keep blowing away all expectations. I'm constantly reminded that I don't know where the markets are going and that its best to stick to my asset allocation. Which is what I've done, using TBM for 39% of my portfolio.

That said, if $5M fell in my lap, I do think I'd be hesitant to put 40% (2M!) of it into TBM.

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Cut-Throat
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Re: OK, Maybe I am Wrong on Bonds

Post by Cut-Throat » Tue May 08, 2012 4:59 pm

greg24 wrote: That said, if $5M fell in my lap, I do think I'd be hesitant to put 40% (2M!) of it into TBM.
So let's say the $5M is in your lap. You are hesitant to put $2 Million into TBM. What do you do?

Do you sit there with it in your lap? Put it in a Savings Account?

So...............?

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FabLab
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Re: OK, Maybe I am Wrong on Bonds

Post by FabLab » Tue May 08, 2012 5:03 pm

greg24 wrote:
That said, if $5M fell in my lap, I do think I'd be hesitant to put 40% (2M!) of it into TBM.
Me too. My AA is 50/50, so I'd place $2.5M in TBM
The fundamental things apply as time goes by -- Herman Hupfeld

Leesbro63
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Re: OK, Maybe I am Wrong on Bonds

Post by Leesbro63 » Tue May 08, 2012 5:05 pm

greg24 wrote:Leesbro63, if you sold out of bonds 2 years ago, what have you invested in instead?
About 75% of my fixed income is now in Vanguard Limited Term Tax Exempt Bond Fund. 25% in Vanguard Short Term Tax Exempt Bond Fund. I have fixed income in my IRA that's similarly situated using Vanguard Treasury Bond funds.

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G-Money
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Re: OK, Maybe I am Wrong on Bonds

Post by G-Money » Tue May 08, 2012 5:06 pm

Leesbro63 wrote:1. Are there more of you, who lurk but don't speak up, who agree (with Dr. Bernstein, the Boglehead "guru" who "speaks to me" on this) that the risk/reward equation for anything longer than short term bonds appears to be a Pascal's Wager?

2. Even if I was wrong 2 years ago, does that change anything NOW? Missing out on the last 2 years is a sunk cost. What do I do from here?

3. If your rich uncle died and left you $1Million dollars today...or $5Million...and you were a Boglehead...would you have the guts to invest 40% of that in intermediate bonds paying 2 to 3 percent? (this is essentially the same as question number 2, but stated to provoke more emotion).
1. Not me. I'd stay the course.
2. I didn't change anything 2 years ago, and I'm not changing anything now. Stay the course.
3. Yes. Without hesitation. Bonds stink. Frankly, I don't think stocks are that much better right now on a relative basis. It could just be that there are no attractive asset classes right now.

But, and more to the point, I don't know anything the market doesn't. In fact, I know much, MUCH less.
Don't assume I know what I'm talking about.

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Re: OK, Maybe I am Wrong on Bonds

Post by winterescape » Tue May 08, 2012 5:08 pm

TheGreyingDuke wrote:
Leesbro63 wrote:3. If your rich uncle died and left you $1Million dollars today...or $5Million...and you were a Boglehead...would you have the guts to invest 40% of that in intermediate bonds paying 2 to 3 percent?
1) He did
2. I am
3. I did

Only because I don't know any better :happy
1) I I don’t have one, but if a bunch of money landed in my lap..
2) I am too!
3) I would (GNMA and TTL BND)

I had all of our FI in stable value funds, however, it was recently converted from a stable value fund to a short term bond fund. I rolled my FI to Vanguard and put it into Intermediate term bond funds…

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tfb
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Re: OK, Maybe I am Wrong on Bonds

Post by tfb » Tue May 08, 2012 5:11 pm

People must have had the same struggle in late 1990s. Valuation chart shot over the top. People who got out got ridiculed. Some may have reluctantly got in again to stay the course, only to catch the top at the right time.

People stayed away from gold face the same issue. Bogle warned about gold two years ago.
Bogle thinks gold is now the wrong place to invest. Most investors should stick with the chocolate and vanilla of the investment world -- U.S. stocks and bonds, he said. And, frankly, he thinks stocks (which make some investors queasy because of the last decade of rotten returns) have about twice the potential of bonds, even though bonds have done beautifully in that time too.
Source: Old-fashioned investing advice still applies

What happened since then? Gold went up by 50%. Long term bonds went up 50%.

It's OK to be wrong.
Harry Sit, taking a break from the forums.

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ofcmetz
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Re: OK, Maybe I am Wrong on Bonds

Post by ofcmetz » Tue May 08, 2012 5:22 pm

Leesbro63 wrote:
1. Are there more of you, who lurk but don't speak up, who agree (with Dr. Bernstein, the Boglehead "guru" who "speaks to me" on this) that the risk/reward equation for anything longer than short term bonds appears to be a Pascal's Wager?

2. Even if I was wrong 2 years ago, does that change anything NOW? Missing out on the last 2 years is a sunk cost. What do I do from here?

3. If your rich uncle died and left you $1Million dollars today...or $5Million...and you were a Boglehead...would you have the guts to invest 40% of that in intermediate bonds paying 2 to 3 percent? (this is essentially the same as question number 2, but stated to provoke more emotion).
1. I'm lucky to be able to have about 75% of my bond money in Stable Value Funds (TIAA Traditional and a Louisiana State one) that pay 3% and 3.3% respectively. Other 25% is in TBM and Harbor Bond. I think Dr. Bernstein makes a compelling case, but he himself has missed out on returns with short term bond funds. It's not that he's not right, its that his timing is off. ;)

2. You could stay where you are at. You could move a portion to an intermediate fund and keep the rest invested short term. You could buy Facebook stock at IPO prices. :D

3. If my rich uncle died and left me $5,000,000. I'd probably go 50/50 with my bonds. Half in intermediate and half in short term funds. Would try to time the short term funds into TIPS's fund later on when yields returned to 0%. TBM would lose some value when yields rose, but I'd drink :sharebeer to the higher yields I was getting.

Good luck on your decision.

Jeff
Never underestimate the power of the force of low cost index funds.

Leesbro63
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Re: OK, Maybe I am Wrong on Bonds

Post by Leesbro63 » Tue May 08, 2012 5:33 pm

ofcmetz wrote: If my rich uncle died and left me $5,000,000. I'd probably go 50/50 with my bonds. Half in intermediate and half in short term funds.
Which is more or less the formula for the Vanguard Limited Term Bond Fund.

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ofcmetz
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Re: OK, Maybe I am Wrong on Bonds

Post by ofcmetz » Tue May 08, 2012 5:57 pm

Leesbro63 wrote:
ofcmetz wrote: If my rich uncle died and left me $5,000,000. I'd probably go 50/50 with my bonds. Half in intermediate and half in short term funds.
Which is more or less the formula for the Vanguard Limited Term Bond Fund.
Maybe you are where you want to be. Or maybe very close.
Never underestimate the power of the force of low cost index funds.

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Re: OK, Maybe I am Wrong on Bonds

Post by MathWizard » Tue May 08, 2012 6:19 pm

I may also be wrong, but I feel the same as you do, it also sounds
like I'm around the same age.

I am delaying decreasing my equity asset allocation until the
bond bubble pops, and I'm staying in short-term bonds.

Yes, some may call that market timing. I prefer "strategic allocation".
I'm not day-trading or loading up on individual stocks, but I just can't
stomach what appears to me to be an expected low risk-adjusted return for
long term bond funds.

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Re: OK, Maybe I am Wrong on Bonds

Post by floydtime » Tue May 08, 2012 6:44 pm

Every day, I wonder vaguely if I should hold fewer bonds.
Every day, I wonder vaguely if I should hold fewer stocks.
Every day, I wonder vaguely if I have too much in cash reserves.

But since I really don't know, I just stick to my asset allocation and rebalance as needed.

If I were the OP, I would also just ignore the past 2 years. As you said, that's done. Figure out what your risk tolerance and corresponding allocation should be, and then JUST DO IT. Then you can relax. :beer
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas

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steve roy
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Re: OK, Maybe I am Wrong on Bonds

Post by steve roy » Tue May 08, 2012 6:55 pm

Since I'm 2- 5 years from retirement, I am 70% bonds and 30% stocks. I have (mainly) followed Larry Swedroe's advice:

I'm 45% in Vanguard TIPS fund (aiming for 55%.)

I'm 25% in Vanguard Short Term Federal.

I'm 20% in Vanguard Intermediate Term Bond.

The other 10% of my bonds is in Tax Exempt. Excepting TIPS, I aim for about a 4-5 year duration.

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BigD53
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Re: OK, Maybe I am Wrong on Bonds

Post by BigD53 » Tue May 08, 2012 7:21 pm

I don't see anything wrong at all with having money in the Limited-Term Tax-Exempt muni fund. I have a large lump of cash to invest, and I plan to put 50% in Limited-Term, and the other 50% in my state-specific Intermediate-Term muni fund.

And then just enjoy all that tax-free income. I'm tired of paying taxes.

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Re: OK, Maybe I am Wrong on Bonds

Post by peppers » Tue May 08, 2012 8:28 pm

Back in the day, Globalmegacorp's 401k bond fund selection was "lacking". So, my wife's and my TIRA and Roth's at Vanguard hold the Total Bond Index and GNMA. We have been with Vanguard a long time.
"..the cavalry ain't comin' kid, you're on your own..."

Leesbro63
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Re: OK, Maybe I am Wrong on Bonds

Post by Leesbro63 » Tue May 08, 2012 9:02 pm

BigD53 wrote:I don't see anything wrong at all with having money in the Limited-Term Tax-Exempt muni fund. I have a large lump of cash to invest, and I plan to put 50% in Limited-Term, and the other 50% in my state-specific Intermediate-Term muni fund.

And then just enjoy all that tax-free income. I'm tired of paying taxes.
At less than 1%, I'm not sure that "all that income" applies

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Cut-Throat
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Re: OK, Maybe I am Wrong on Bonds

Post by Cut-Throat » Tue May 08, 2012 9:06 pm

Leesbro63 wrote:
BigD53 wrote:I don't see anything wrong at all with having money in the Limited-Term Tax-Exempt muni fund. I have a large lump of cash to invest, and I plan to put 50% in Limited-Term, and the other 50% in my state-specific Intermediate-Term muni fund.

And then just enjoy all that tax-free income. I'm tired of paying taxes.
At less than 1%, I'm not sure that "all that income" applies
+ 1 .......My thoughts exactly !

I for one love taxes......It means I have Income !........Income has been pretty scarce the last couple years.

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Re: OK, Maybe I am Wrong on Bonds

Post by jginseattle » Tue May 08, 2012 9:18 pm

steve roy wrote:Since I'm 2- 5 years from retirement, I am 70% bonds and 30% stocks. I have (mainly) followed Larry Swedroe's advice:

I'm 45% in Vanguard TIPS fund (aiming for 55%.)

I'm 25% in Vanguard Short Term Federal.

I'm 20% in Vanguard Intermediate Term Bond.

The other 10% of my bonds is in Tax Exempt. Excepting TIPS, I aim for about a 4-5 year duration.
I would be surprised to learn that Larry Swedroe recommends Vanguard's Short-term Federal fund. That fund holds a lot of Mortgage-Backed Securities.

Do you mean you follow his advice regarding duration?

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Re: OK, Maybe I am Wrong on Bonds

Post by zotty » Tue May 08, 2012 9:18 pm

How about the Vanguard TIPS Fund? Holy Cow! TBM doesn't unsettle me, but this fund does make me nervous.

I really don't know what to make of that, but am thankful i don't have to decide on whether to make new contributions to it. It's locked away in IRA which i don't add to.

I double checked the symbol to be sure it's not Inflation Protected iPad, or Inflation Protected Facebook or something.

If I was given a million dollars right now, it would not go into the TIPS fund. This, of course, is a very bullish sign for the tips fund.
Nadie Sabe Nada

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William Million
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Re: OK, Maybe I am Wrong on Bonds

Post by William Million » Tue May 08, 2012 9:32 pm

No one buys at the very bottom and sells at the very top. Your sale of bonds 2 years ago might turn out to be a decent decision if bonds tank in the next few years. And of course, if you invested more heavily in stocks 2 years, you made a good move any way.

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Re: OK, Maybe I am Wrong on Bonds

Post by bombcar » Tue May 08, 2012 9:34 pm

$5 million is enough that I'd put the entirety of it into a TIPS ladder and never worry about money again.

Well, that's not entirely true, but a huge percentage would be in bonds.

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greg24
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Re: OK, Maybe I am Wrong on Bonds

Post by greg24 » Tue May 08, 2012 9:44 pm

Leesbro63 wrote:
greg24 wrote:Leesbro63, if you sold out of bonds 2 years ago, what have you invested in instead?
About 75% of my fixed income is now in Vanguard Limited Term Tax Exempt Bond Fund. 25% in Vanguard Short Term Tax Exempt Bond Fund. I have fixed income in my IRA that's similarly situated using Vanguard Treasury Bond funds.
TBM 1.96% yield
VLTTEBF 0.70%
TTTBF 0.41%

Given the tax impact, you're giving up around one percent? As they say in Vegas, good luck. :D

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steve roy
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Re: OK, Maybe I am Wrong on Bonds

Post by steve roy » Tue May 08, 2012 11:39 pm

I would be surprised to learn that Larry Swedroe recommends Vanguard's Short-term Federal fund. That fund holds a lot of Mortgage-Backed Securities.

Do you mean you follow his advice regarding duration?
Ach! I didn't even think about this. I used to have Short Term Bond Index and then flipped into Federal because I wanted government paper. I should have investigated a bit more deeply.

You learn something new every day. (Maybe I should move the money into short term corporate or short term treasuries.)

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Re: OK, Maybe I am Wrong on Bonds

Post by jginseattle » Tue May 08, 2012 11:49 pm

steve roy wrote:
I would be surprised to learn that Larry Swedroe recommends Vanguard's Short-term Federal fund. That fund holds a lot of Mortgage-Backed Securities.

Do you mean you follow his advice regarding duration?
Ach! I didn't even think about this. I used to have Short Term Bond Index and then flipped into Federal because I wanted government paper. I should have investigated a bit more deeply.

You learn something new every day. (Maybe I should move the money into short term corporate or short term treasuries.)

I wouldn't worry too much about it. You're not going to get burned in that fund. I think you have a very good fixed income mix, and your allocation to MBS is relatively small.

It can get exhausting constantly jumping from fund to fund.

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BigD53
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Re: OK, Maybe I am Wrong on Bonds

Post by BigD53 » Wed May 09, 2012 1:14 am

Re: Income from muni funds

Hi Leesbro. I already own the CA Intermediate-Term Tax-Exempt fund, Admiral shares. My Feb, March, and April distribution yield was 3.41%. I'm getting over $700 of interest each month, tax free. (I realize that's just "pocket change" to you rich guys!) But that $700 pays all my utilities, car gas, and food bill. I couldn't be happier. :happy

There was a long thread over on Morningstar which discussed "distribution yield" vs "SEC yield." I was confused too, so I wrote to Vanguard. They said the distribution yield is the one I should look at.

I'm very happy with my tax free 3.41 percent. (I'm aware the yield will vary a bit). As long as CA doesn't go bankrupt, I'm good to go. :beer I may be adding the more diversified Limited-Term fund, per a suggestion I saw from Taylor. More nationwide diversity, and a combo of the 2 funds will lower the overall duration somewhat.

I was very fortunate to receive a nice inheritance. I need to park this money somewhere, while reducing taxes too. I have no need or desire to take on more stock risk. Good luck with your bond choice.
Last edited by BigD53 on Wed May 09, 2012 8:38 am, edited 2 times in total.

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Re: OK, Maybe I am Wrong on Bonds

Post by grayfox » Wed May 09, 2012 1:36 am

Leesbro63 wrote:Ok, maybe I am wrong on bonds. Yeah, I'm the one arguing on numerous threads here that it's a bond bubble and admit that I sold my bond funds about 2 years ago with juicy gains...but missed out on even juicer gains and coupon interest since then. I also admit that I've considered that maybe the Rick Ferri/Larry Swedroe camp is right and I am wrong. I've been wrong before...just ask my wife and kids!! :oops: FWIW, I am a long term investor and hope to retire in 12 years on dividends and interest, which would equate to about a 2% SWR under today's scenario. I state this to as background for this bond conversation....my intention for my bond portion is to always be invested and never liquidate.

So a few thoughts to reconsider/consider:

1. Are there more of you, who lurk but don't speak up, who agree (with Dr. Bernstein, the Boglehead "guru" who "speaks to me" on this) that the risk/reward equation for anything longer than short term bonds appears to be a Pascal's Wager?

2. Even if I was wrong 2 years ago, does that change anything NOW? Missing out on the last 2 years is a sunk cost. What do I do from here?

3. If your rich uncle died and left you $1Million dollars today...or $5Million...and you were a Boglehead...would you have the guts to invest 40% of that in intermediate bonds paying 2 to 3 percent? (this is essentially the same as question number 2, but stated to provoke more emotion).

I appreciate the continued conversation about this. I hope many of you will also.

(P.S. If I DO capitulate and buy intermediate term bonds, BE SURE to protect yourself by selling immediately :wink: )
It sounds like you outsmarted yourself by trying to predict interest rates. :oops: Unfortunately, interest rates move wherever the market decides they should move, and it is quite unpredictable. When will everyone finally understand this?

So in order to curb your predilection for prognosticating, I think you might be a good candidate for some kind of balanced fund. For example, Vanguard has Target retirement funds.

You say that in 12 years, you want to retire on interest and dividends. Maybe Wellesley income would be a good fund for you when you hit retirement. Wellesley invests in 61% investment grade bonds and 38% stocks. Let Wellesley's management decide what the best bond strategy should be. VXINX currently yielding 2.66%

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Ice-9
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Re: OK, Maybe I am Wrong on Bonds

Post by Ice-9 » Wed May 09, 2012 7:47 am

Thank you to the OP for posting this thread. Over the last year I have indeed changed my behavior with respect to my fixed income allocation.

My AA to bonds had been 50/50 TBM and the TIP ETF for some time. I stopped making new contributions to both several months ago, instead investing new money into 5-yr CDs with similar yield as the TBM fund and individual 10-yr TIPS with less negative real yield than the ETF, but I left my existing funds alone.

Then I decided that since my emergency fund in 1.6% fixed I-bonds was handily outperforming the TIP ETF's negative real yield, I would instead consider the I-bonds my TIP allocation, sell some equity funds in a taxable account to become my new emergency fund, and sell the TIP ETF in my 401 to replace the equity fund allocation.

Then about two months ago I got so fed up with the low yields and potential bubble relative to the 0% fixed rate + inflation offered by I-Bonds that I decided to make no new contributions to bonds in my retirement accounts for now. Since my portfolio is only 30% fixed income and (unfortunately) my income is low enough that my total annual contributions to fixed income is less than $10k anyway, I decided why risk any new money in the bond market at all. So instead I make a contribution at the end of each month to I-bonds.

Sure it's possible TBM yield will go even lower and TIP ETF real yield will go even more negative and it may turn out that it would have been better to stick with my original plan. But in my position, I figure why not play it safer with I-bonds for a better yield, at least for now.
Last edited by Ice-9 on Wed May 09, 2012 7:52 am, edited 1 time in total.

FinanceFun
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Re: OK, Maybe I am Wrong on Bonds

Post by FinanceFun » Wed May 09, 2012 7:51 am

I'm not wrong. Just not right .. Yet.

Do I have a future on CNBC or what?

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camper
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Re: OK, Maybe I am Wrong on Bonds

Post by camper » Wed May 09, 2012 8:34 am

I'm glad we followed the "stay the course" mantra.

aac74
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Re: OK, Maybe I am Wrong on Bonds

Post by aac74 » Wed May 09, 2012 8:51 am

Why not stay the course and protect yourself at the same time ?

REITs focused on yield are the new bonds. They are about as far from a bubble as you can get.

Betting against REITs means you are betting against 200 years of European and American history - i.e. the 18/20 year credit/property cycle.

YES you can time the market - but only the property market. Fred Harrison predicted the UK property peaks of 1990 and 2007 in his 1983 book (based on 200 years of property data).
Because the property market in the UK always peak in Q3 you can even time it down to a few weeks (18 years ahead of time !)

Harrison engaged in a correspondence with Dr Homer Hoyt the leading expert on US land price cycles in the 1970s. Hoyt claimed he no longer believed that the 19th century land cycle existed in modern america - the subject of his Phd. This may have had something to do with his assertion that land speculation played a value added role in society.

Harrison was sceptical because not only had land speculation made Hoyt a millionaire but all his buys and sells seemed to correspond with the 18/20 year cycle. Often selling to larger property investors just at the peak.

http://www.businesscycles.biz/chartsbus ... _oct08.pdf

http://www.youtube.com/watch?v=irR785WAYd8

http://www.youtube.com/user/geophilos

http://www.amazon.co.uk/The-Power-Land- ... 412&sr=1-1

http://www.amazon.co.uk/Boom-Bust-Price ... gy_b_img_b

http://www.amazon.co.uk/The-Silver-Bull ... 391&sr=8-2

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Cut-Throat
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Re: OK, Maybe I am Wrong on Bonds

Post by Cut-Throat » Wed May 09, 2012 10:16 am

larryswedroe wrote:I am not advocating buying long term, just recommending avoiding all "cash", having a 2-5 bond fund or a 8-10 year bond ladder would be perfectly fine, taking some, but not too much risk.
Best wishes
Larry
Why would you avoid all "cash"?.. What exactly do you mean?...........How about some 'opportunity Cash' in Market downturns for stocks and bonds. IOW - A hedge.

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steve roy
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Re: OK, Maybe I am Wrong on Bonds

Post by steve roy » Wed May 09, 2012 10:58 am

jginseattle wrote:
steve roy wrote:
I would be surprised to learn that Larry Swedroe recommends Vanguard's Short-term Federal fund. That fund holds a lot of Mortgage-Backed Securities.

Do you mean you follow his advice regarding duration?
Ach! I didn't even think about this. I used to have Short Term Bond Index and then flipped into Federal because I wanted government paper. I should have investigated a bit more deeply.

You learn something new every day. (Maybe I should move the money into short term corporate or short term treasuries.)

I wouldn't worry too much about it. You're not going to get burned in that fund. I think you have a very good fixed income mix, and your allocation to MBS is relatively small.

It can get exhausting constantly jumping from fund to fund.
Went back and looked at the short-term funds' various holdings. Short Term Federal has 25% government-backed mortgages, the rest treasuries and agency bonds. I can live with 25%.

Besides, I don't want to, as you say, leap from short-term fund to short-term fund. The yield on short-term corporates is higher, but 30% of their holdings are in "finance," another area I try to avoid. (Don't trust the banks' stability.)

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ofcmetz
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Re: OK, Maybe I am Wrong on Bonds

Post by ofcmetz » Wed May 09, 2012 11:10 am

aac74 wrote:Why not stay the course and protect yourself at the same time ?

REITs focused on yield are the new bonds. They are about as far from a bubble as you can get.

Betting against REITs means you are betting against 200 years of European and American history - i.e. the 18/20 year credit/property cycle.

YES you can time the market - but only the property market. Fred Harrison predicted the UK property peaks of 1990 and 2007 in his 1983 book (based on 200 years of property data).
Because the property market in the UK always peak in Q3 you can even time it down to a few weeks (18 years ahead of time !)
Off topic^ :oops:

And besides if you could time real estate so well why not just become a bazillionare yourself. Keep your strategy a secret.
Never underestimate the power of the force of low cost index funds.

Leesbro63
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Re: OK, Maybe I am Wrong on Bonds

Post by Leesbro63 » Wed May 09, 2012 1:31 pm

aac74 wrote: Harrison was sceptical because not only had land speculation made Hoyt a millionaire but all his buys and sells seemed to correspond with the 18/20 year cycle. Often selling to larger property investors just at the peak.
I am the original poster which has nothing to do with my comment, but just for reference. The 18/20 year cycle thing reminds me of the a comment on another current thread (I forget which one) about the 20 year Presidential Death In Office cycle. Every Prez elected in a year ending in zero...every twenty years...since Lincoln had died in office. As did Reagan...ALMOST... But he didn't. And neither did Bush2. I guess the point is that cycles often end...especially when YOU (ME) invest based on one! :(

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1210sda
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Re: OK, Maybe I am Wrong on Bonds

Post by 1210sda » Wed May 09, 2012 1:45 pm

Another vote for "Stay the course"....

Total Stk Mkt 35%
Total Intnl Stk 15%
Tot Bond Mkt 50%

Cash not considered part of my portfolio

1210

aac74
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Re: OK, Maybe I am Wrong on Bonds

Post by aac74 » Wed May 09, 2012 2:38 pm

The difference is that we know exactly what is driving the cycle in land and property prices i.e. expansions/contractions in credit and shifts in lending toward property across the business cycle.

Land is fundamentally inelastic. Its price must rise if the economy grows. As soon as there is any rise in land prices banks are more willing to lend to property companies, land speculators and home buyers. But rises in land prices, property prices and rents makes companies less profitable and so more lending shifts into the property sector, further raising prices.

This has been going on for hundreds of years.

We also know what will stop it or damp it down:
An end to fractional reserve banking or at least a massive increase in reserve requirements (hell could also freeze over ?)
or
Massive increases in land taxation based on land values (politicians couldn't get elected with this policy and they are property owners and would be hurting themselves)
or
An end to QE and zero rates leading to a long deflation (the US would default on its debt)

The point is that the above are very unlikely to happen any time soon. Thus there is a very high probability that property prices are near the bottom (they may fall a little further in terms of gold). The chance of a 20% plus fall from here is very low while the chance of large price rises over the next 15 years in very high.

Thus you are not trying to time a cycle but rather take a share of future economic growth, same as long term stock investing.

zotty
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Re: OK, Maybe I am Wrong on Bonds

Post by zotty » Wed May 09, 2012 2:51 pm

aac74 wrote: Land is fundamentally inelastic. Its price must rise if the economy grows. As soon as there is any rise in land prices banks are more willing to lend to property companies, land speculators and home buyers. But rises in land prices, property prices and rents makes companies less profitable and so more lending shifts into the property sector, further raising prices.

This has been going on for hundreds of years.
Be careful. Home prices are the same, in real terms, as 1895. Real estate isn't a free lunch over short or long time frames. (Nor is the stock market)

http://www.smartmoney.com/spend/real-es ... tromessage
Nadie Sabe Nada

yukon50
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Re: OK, Maybe I am Wrong on Bonds

Post by yukon50 » Wed May 09, 2012 3:29 pm

Ice-9 wrote:Thank you to the OP for posting this thread. Over the last year I have indeed changed my behavior with respect to my fixed income allocation.

My AA to bonds had been 50/50 TBM and the TIP ETF for some time. I stopped making new contributions to both several months ago, instead investing new money into 5-yr CDs with similar yield as the TBM fund and individual 10-yr TIPS with less negative real yield than the ETF, but I left my existing funds alone.

Then I decided that since my emergency fund in 1.6% fixed I-bonds was handily outperforming the TIP ETF's negative real yield, I would instead consider the I-bonds my TIP allocation, sell some equity funds in a taxable account to become my new emergency fund, and sell the TIP ETF in my 401 to replace the equity fund allocation.

Then about two months ago I got so fed up with the low yields and potential bubble relative to the 0% fixed rate + inflation offered by I-Bonds that I decided to make no new contributions to bonds in my retirement accounts for now. Since my portfolio is only 30% fixed income and (unfortunately) my income is low enough that my total annual contributions to fixed income is less than $10k anyway, I decided why risk any new money in the bond market at all. So instead I make a contribution at the end of each month to I-bonds.

Sure it's possible TBM yield will go even lower and TIP ETF real yield will go even more negative and it may turn out that it would have been better to stick with my original plan. But in my position, I figure why not play it safer with I-bonds for a better yield, at least for now.
I have a similar opinion and in a similar situation. Feel like I-Bonds, with a 0% real rate, are better deal than most fixed income alternatives right now. Also provides opportunity to place I-Bonds into taxable and stocks into Roth IRA and hopefully get some good growth in Roth IRA, which will be useful when interest rates are higher in the future.

protagonist
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Re: OK, Maybe I am Wrong on Bonds

Post by protagonist » Wed May 09, 2012 5:25 pm

Leesbro63 wrote:
1. Are there more of you, who lurk but don't speak up, who agree (with Dr. Bernstein, the Boglehead "guru" who "speaks to me" on this) that the risk/reward equation for anything longer than short term bonds appears to be a Pascal's Wager?
Pascal's wager!! There's a concept I haven't thought about in a long time. Isn't that the idea that it is better to believe, than to disbelieve, in God, because in Pascal's logic you have everything to gain and nothing to lose if he exists? The obvious fallacy there is you are not really covering all bases, since you are also assuming that you can second-guess God's thought processes, and that you know that God rewards believers over non-believers. What if the opposite were true? Then you would be screwed. "You can't touch the master, but you can tickle his creatures." -Thomas Pynchon, Gravity's Rainbow.

Oh, wait....I'm getting off topic. Sorry. It's just so much fun. Never mind......

protagonist
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Re: OK, Maybe I am Wrong on Bonds

Post by protagonist » Wed May 09, 2012 5:26 pm

protagonist wrote:
Leesbro63 wrote:
1. Are there more of you, who lurk but don't speak up, who agree (with Dr. Bernstein, the Boglehead "guru" who "speaks to me" on this) that the risk/reward equation for anything longer than short term bonds appears to be a Pascal's Wager?
Pascal's wager!! There's a concept I haven't thought about in a long time. Isn't that the idea that it is better to believe, than to disbelieve, in God, because in Pascal's logic you have everything to gain and nothing to lose if he exists? The obvious fallacy there is you are not really covering all bases, since you are also assuming that you can second-guess God's thought processes if he (she, it) exists, and that you know that God rewards believers over non-believers. What if the opposite were true? Then you would be screwed. "You can't touch the master, but you can tickle his creatures." -Thomas Pynchon, Gravity's Rainbow.

Oh, wait....I'm getting off topic. Sorry. It's just so much fun. Never mind......

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